Microsoft Corp. v. Motorola, Inc.

• Decision Date: 25 April 2013
• Docket Number: CASE NO. C10-1823JLR
• Court: U.S. District Court — Western District of Washington
• Parties: MICROSOFT CORPORATION, Plaintiff, v. MOTOROLA, INC., et al., Defendants. MOTOROLA MOBILITY, INC., et al., Plaintiffs, v. MICROSOFT CORPORATION, Defendant.

MICROSOFT CORPORATION, Plaintiff, v. MOTOROLA, INC., et al., Defendants.

MOTOROLA MOBILITY, INC., et al., Plaintiffs, v. MICROSOFT CORPORATION, Defendant.

CASE NO. C10-1823JLR

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE

Dated: April 25, 2013

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

This is a breach of contract case between Microsoft Corporation ("Microsoft") and Motorola, Inc., Motorola Mobility, Inc., and General Instrument Corporation (collectively, "Motorola"). Microsoft claims that Motorola has an obligation to license patents to Microsoft at a reasonable and non-discriminatory ("RAND") rate, and that Motorola breached its RAND obligations through two offer letters. (See generally Am. Compl. (Dkt. # 53).) Microsoft sued Motorola for breach of contract in this court in November, 2010. (See id.)

At this stage of the case, Microsoft and Motorola are attempting to decipher the meaning of Motorola's RAND licensing obligation.¹ Without a clear understanding of what RAND means, it would be difficult or impossible to figure out if Motorola breached its obligation to license its patents on RAND terms. The parties disagree substantially about the meaning of RAND. Thus, to resolve the dispute, the court held a bench trial from November 13-20, 2012, with the aim of determining a RAND licensing rate and a RAND royalty range for Motorola's patents.

These findings of fact and conclusions of law represent the culmination of the court's and the parties' efforts to calculate a RAND rate and range. To establish a context for these findings and conclusions, the court will briefly outline the details of Motorola's RAND obligation, the patents at issue in this case, and the nature of the dispute between Microsoft and Motorola.

Motorola's RAND commitment arises out of its and Microsoft's relationship with two international standard-setting organizations ("SSOs"), the Institute of Electrical Electronics Engineers ("IEEE") and the International Telecommunication Union ("ITU"). These organizations create standards for use in designing and manufacturing technology products. These and other SSOs play a significant role in the technology market by allowing companies to agree on common technological protocols so that products complying with the standards will work together.

The standards at issue in this case involve wireless communications, commonly known as "WiFi," and video coding technology. More specifically, this case involves two standards: an IEEE wireless local area network ("WLAN") standard called the "802.11 Standard" and an ITU² advanced video coding technology standard called the "H.264 Standard."

Both of these standards incorporate patented technology. Thus, in order for a company to practice the standard, it is necessary for that company to utilize technology that is covered by one or more patents. Patents that are essential to the standard (in that they must be practiced to accomplish the standard) are called standard essential patents, or "SEPs." The existence of SEPs is a common problem in the world of technology standards. To deal with this problem, SSOs have devised a solution. To make it easier for companies to practice their standards, SSOs seek commitments from the owners ofSEPs to license their patents to standard-users on RAND terms. Motorola owns patents that are essential to the 802.11 and H.264 Standards and has committed to license them on RAND terms.

Microsoft claims that Motorola breached its RAND obligation by making an unreasonable offer in a negotiation to license Motorola's 802.11 and H.264 SEPs. On October 21, 2010, Motorola sent Microsoft a letter offering to license Motorola's 802.11 SEPs. Motorola offered to license its patents at what it considered the RAND rate of 2.25 % of the price of the end product:

This letter is to confirm Motorola's offer to grant Microsoft a worldwide non-exclusive license under Motorola's portfolio of patents and pending applications having claims that may be or become Essential Patent Claims (as defined in section 6.1 of the IEEE bylaws) for a compliant implementation of the IEEE 802.11 Standards. . . . Motorola offers to license the patents under reasonable and non-discriminatory terms and conditions ("RAND"), including a reasonable royalty of 2.25 % per unit for each 802.11 compliant product, subject to a grant back license under the 802.11 essential patents of Microsoft. As per Motorola's standard terms, the royalty is calculated based on the price of the end product (e.g, each Xbox 360 product) and not on component software (e.g., Windows Mobile Software).

(10/21/10 Offer Ltr. (Dkt. # 79-5) at 2.) On October 29, 2010, Motorola sent a similar letter offering to license its H.264 SEPs on similar terms. The letter again offered a royalty rate of 2.25 % of the end product price:

Motorola offers to license the patents on a non-discriminatory basis on reasonable terms and conditions ("RAND"), including a reasonable royalty, of 2.25 % per unit for each H.264 compliant product, subject to a grant back license under the H.264 patents of Microsoft, and subject to any Motorola commitments made to JVT in connection with an approved H.264 recommendation. As per Motorola's standard terms, the royalty is calculated based on the price of the end product (e.g., each Xbox 360 product, each PC/laptop, each smartphone, etc.) and not on componentsoftware (e.g., Xbox 360 system software, Windows 7 software, Windows Phone 7 software, etc.).

(10/29/10 Offer Ltr. (Dkt. # 79-6) at 2.)

Eleven days later, on November 9, 2010, Microsoft initiated this breach of contract action against Motorola based on Motorola's two offer letters, claiming that the letters breached Motorola's RAND commitments to the IEEE and the ITU. In a previous order, the court held that these RAND commitments create enforceable contracts between Motorola and the respective SSO. (2/27/12 Order (Dkt. # 188).) The court has also held that Microsoft—as a standard-user—can enforce these contracts as a third-party beneficiary. (See id.) In a separate prior order, the court interpreted Motorola's commitments to the ITU and IEEE as requiring initial offers by Motorola to license its SEPs to be made in good faith. (6/6/12 Order (Dkt. # 335) at 25.) However, the court has also held that initial offers do not have to be on RAND terms so long as a RAND license eventually issues. (Id., see also 10/10/12 Order (Dkt. # 465).)

To decide whether Motorola's opening offers were in good faith, a fact-finder must be able to compare them with a reasonable RAND royalty rate and, because more than one rate could conceivably be RAND, a reasonable RAND royalty range. However, as the court ruled on October 10, 2012, the RAND royalty rate is a heavily disputed, fact-sensitive issue that must be resolved by a finder of fact. (10/10/12 Order at 22.) Accordingly, the court held a bench trial to determine: (1) a RAND royalty range for Motorola's SEPs; and (2) a specific RAND royalty rate for Motorola's SEPs. The purpose of this is to enable a fact-finder in a later trial to determine whether Motorola'soffer letters breached Motorola's RAND obligation to offer a license for its patents in good faith.

During the November 13-20, 2012, bench trial, the court heard testimony from eighteen witnesses: Mr. John Devaan, Mr. Garrett Glanz, Dr. Kevin M. Murphy, Dr. Gary Sullivan, Ms. Jennifer Ochs, Mr. Leonard Del Castillo, Dr. Jerry Gibson, Dr. Timothy Shncoe, Dr. Matthew Lynde, Dr. Ajay Luthra, Dr. Timothy J. Drabik, Dr. Michael Orchard, Dr. Tim Arthur Williams, Dr. Richard Schmalensee, Dr. Ramairtham Sukumar, Mr. Michael J. Dansky, Mr. Kirk Dailey, and Mr. Charles R. Donohoe.

Unless stated herein, the court credits the testimony of each of these witnesses. More often than not, the court found that the testimony of the witnesses was not in conflict. Where conflict exists, the court uses law, reason, and logic to resolve the conflict in an effort to determine a reasonable royalty rate and range for Motorola's 802.11 and H.264 SEPs.

In these Findings of Fact and Conclusions of Law, the court uses the evidence the parties presented at trial to set forth a methodology for determining a RAND royalty rate and range. The court then applies this methodology to determine a RAND royalty rate and range between Microsoft and Motorola for Motorola's 802.11 and H.264 SEP portfolios. The court's methodology is necessarily dictated by the circumstances of this litigation—a dispute between an SEP owner and a standard-user over a reasonable royalty rate. The court recognizes that real-world negotiations involving patents committed to the RAND obligation might include layers of complexity beyond determining monetary royalty rates. However, this litigation is limited in scope by thepleadings and evidence provided to the court, and the court is therefore likewise constrained to detemining what constitutes a reasonable royalty rate for Motorola's SEP portfolio under the RAND obligation.³ (See generally Am. Compl. (Dkt. # 53); Motorola Answer (Dkt. # 68).)

The court's analysis proceeds in six parts. First, the court introduces the parties and their relation to one another. Second, the court provides background on standards, SSOs, and the RAND commitment. Third, the court develops a framework for assessing RAND terms. Specifically, the court adopts a modified version of the Georgia-Pacific factors to recreate a hypothetical negotiation between the parties. See Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). Importantly, the court determines that the parties in a hypothetical negotiation would set RAND royalty rates by looking at the importance of the SEPs to the standard and the importance of the standard and the SEPs to the products at issue. These considerations are central to the court's analysis. Fourth, after establishing a framework for assessing RAND terms, the court introduces the H.264 Standard and Motorola's ...