In two weeks from today, the Microsoft v. Motorola FRAND contract trial will begin (in the Western District of Washington). This morning by local time, Judge James Robart, the federal judge presiding over the case, issued a ruling on the parties' recent summary judgment motions. Either party won a subset of what it asked for, narrowing the case a little bit (but not massively) for the jury. One subissue requires further briefing, and most items will be put before the jury because factual issues remain to be addressed.
When Judge Robart wrote his now-famous FRAND rate-setting opinion, he knew he was the first judge, at least in the U.S. and possibly in the world, to resolve this kind of question. He chose a conservative approach, adhering to the Georgia-Pacific factors for reasonable royalty determinations in a patent damages context to the greatest extent possible, modifying them only where necessary. This morning's summary judgment ruling is consistent with that conservative approach. The closest thing to a matter of first impression in this new ruling relates to a claim for attorneys' fees in connection with an allegation of a breach of the duty of good faith and fair dealing relating to a FRAND pledge. The ruling has other interesting parts, including that Google's alleged refusal to honor a grant-back commitment under a license agreement with MPEG LA is not going to be at issue in the trial because Microsoft sued only Motorola but never added Google to this litigation. But after showing you the document, I'll start with the question of attorneys' fees because I believe it's likely to come up in various other FRAND contract disputes in the years ahead.
13-08-12 Microsoft v. Motorola Summary Judgment Ruling
Attorneys' fees as damages
Microsoft incurred legal fees due to Motorola's alleged breach of its FRAND contract. It had to bring this FRAND contract action, and it had to defend itself against infringement lawsuits over standard-essential patents (SEPs) in the U.S. and Germany.
Google's Motorola wanted Microsoft's attorney's fee damages claim (actually, even the whole case) thrown out. It argued with the Noerr-Pennington doctrine, which lends some immunity to someone's assertion of legal rights in court, and with the "American rule" (non-recoverability of fees except under narrow circumstances). Judge Robart has rejected the Noerr-Pennington theory, just like Judge Barbara Crabb in the Western District of Wisconsin had also held (in an Apple v. Motorola case) that it doesn't apply to contract-based claims. With the "American rule" it's more complicated, and the parties got a mixed result:
"Thus, it will be necessary to instruct the jury that it may not award attorney's fees as damages unless it finds that Motorola violated its duty of good faith and fair dealing specifically by seeking injunctive relief. If the jury finds only that Motorola's general course of conduct, but not its efforts to seek injunctive relief, violated the good faith duty, attorney's fees will be unavailable as damages."
Judge Robart could not find a Washington (state) case that has addressed the question of whether there should be an exception (from the "American rule") for violation of a covenant not to sue. Judge Robart analyzed the legal framework and predicted that Washington courts would recognize this exception. His rationale includes, among other things, certain policy reasons meant to protect the standard-setting system itself:
"Potential implementers would be less likely to adopt the standard if doing so would expose them to bad faith injunctive relief claims and they were forced to absorb the cost of defending themselves. Conversely, faced with no legal consequences, SEP holders would not think twice about bringing claims for injunctive relief (even in bad faith) to gain leverage in licensing negotiations."
Other courts may arrive at different legal conclusions when analyzing this issue under the contract laws of different states, but Judge Robart's policy argument will likely be influential because the courts generally strive to safeguard the standardization system, to encourage the adoption of industry standards, and to discourage abuse.
Grant-back clause in Google-MPEG LA H.264 license agreement
Microsoft has previously (even prior to the rate-setting decision) argued that Google's acquisition of Motorola Mobility entitles Microsoft as an MPEG LA H.264 pool contributor to a grant-back license at the per-patent pool rate. An affidavit by patent pool firm MPEG LA's chief executive Larry Horn supported this theory.
Judge Robart made only a cursory reference to this in his rate-setting opinion. Basically, he considered the fact that Google had signed such an agreement as an indication of terms on which a major, sophisticated player (and now Motorola Mobility's corporate parent) is willing to license H.264-related patents. But the existence of that grant-back clause was not outcome-determinative.
Google's Motorola has now prevailed on summary judgment to the effect that Microsoft, not because its claim doesn't have merit but simply because it never added Google to the litigation though it could have, cannot allege a breach by Motorola because of Google's alleged failure to honor its grant-back obligation. Judge Robart has just held that Microsoft can't hold Motorola responsible for what Google does, given that Motorola doesn't control Google (just the other way round).
This is not a huge loss for Microsoft. It could still sue Google separately if necessary. At a hearing (earlier this year, I believe) counsel for Microsoft said that Microsoft didn't want to involve Google in this case because of the delay it would have caused. Microsoft would, if I understood that statement correctly, rather take the Motorola case to trial at the earliest opportunity.
Marvell
Marvell supplies the WiFI (IEEE 802.11) chip Microsoft incorporates into its Xbox gaming console. One of Microsoft's breach theories in this case is that Motorola refused to grant Marvell a license to its IEEE 802.11 SEPs on FRAND terms that, in turn, would have benefited Microsoft. According to Microsoft's allegations, Motorola's licensing offer to Marvell explicitly excluded Microsoft (and only Microsoft) as a Marvell customer who would be licensed by extension. The jury will be allowed to consider this in its analysis of whether Motorola acted in bad faith. Motorola's summary judment motion relating to this item was denied.
The parties will have to submit some further briefing on the question of whether a Motorola license to Marvell would have resulted in exhaustion of Motorola's patent rights (i.e., Motorola could not have accused Microsoft of infringement in that scenario) until August 16 (Friday).
No partial summary judgment on breach
Microsoft would ideally have liked to have the court hold Motorola to have breached its duty of good faith and fair dealing, leaving to the jury only the determination of damages. Microsoft argued that Motorola's initial royalty demand was just as exorbitant as demanding $54 million for a standard Ford Taurus, so no reasonable jury could possibly find that Motorola complied with its FRAND pledge.
Judge Robart doesn't say that Motorola's original demand was reasonable in any way, but he doesn't believe the issue can be resolved just on the basis of a comparison of Motorola's initial demand and the court-determined FRAND rate. Judge Robart believes that there's a lot more involved, such as "examination and interpretation of the language in the letters themselves", "the circumstances surrounding Motorola’s October [2010] offer letters", etc.
The summary judgment ruling also lays out the court's thinking on the duty of good faith and fair dealing in this context. While Google's Motorola doesn't like this FRAND litigation at all and has been less than constructive, it really can't complain about the judge (even though it certainly doesn't like the outcome of his rate-setting analysis). Judge Robart has adopted and applied a standard that actually provides Google's Motorola with plenty of opportunity at the trial to argue that despite its initial demand, no matter how exorbitant, it did not commit a breach.
Counterclaim and affirmative defenses
Microsoft has prevailed on its summary judgment motion targeting several affirmative defenses and a counterclaim. A month ago Motorola had already dropped one counterclaim and three affirmative defenses" voluntarily (though it reserved the right to raise them again on appeal). Judge Robart has thrown out the second counterclaim and several affirmative defenses, all of which "turn on Motorola's argument that Microsoft should have negotiated in good faith and/or applied for a license rather than filing this lawsuit", an issue that the court already adjudicated last year.
In a February 2012 partial summary judgment ruling Judge Robart had already held that it's perfectly acceptable for an implementer of a FRAND standard to take a dispute over royalty rates to court.
Today's summary judgment ruling is not even the last one in this case because, as I mentioned above, a subissue of the Marvell license issue requires further briefing. And it's not the first. Besides the February 2012 decision I just mentioned, there was a June 2012 ruling denying certain motions filed by both parties, and in late November 2012 Judge Robart determined that Motorola is not entitled to injunctive relief (anywhere in the world) over the SEPs at issue in this dispute.
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