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Microsoft Given a Break on Motorola Royalties

(CN) - Google-owned Motorola cannot force Microsoft to pay it $4 billion a year for wireless technology, a federal judge ruled, finding that the licenses are worth less than half that.

U.S. District Judge James Robart's order adds a new wrinkle in the acrimonious battle between the two tech giants, which sued each other over royalties for Motorola's wireless patents. Microsoft claimed Motorola demanded exorbitant licensing fees in breach of industry-wide agreements, while Motorola cried patent infringement against Microsoft over the disputed technology.

Agreements with the Institute of Electrical and Electronics Engineers (IEEE) and International Telecommunication Union (ITU) require both companies to license high-demand, essential technology on a reasonable and nondiscriminatory (RAND) basis. Microsoft argued that Motorola's proposed royalty of $2.25 per unit for use of its patents was unreasonable and amounted to a breach of the RAND agreement.

At a hearing on the issue last year, Robart chided both sides for being "arrogant" and profit-driven throughout the proceedings.

"The court is well aware that it is being played as a pawn in a global industry-wide business negotiation," Robart said this past spring, as reported by tech blog GeekWire. "The conduct of both Motorola and Microsoft has been driven by an attempt to secure commercial advantage and, to an outsider looking in, it has been arbitrary, it has been arrogant and frankly it appears to be based on hubris."

Robart decided months ago that Motorola's agreements with IEEE and ITU entitled Microsoft to a license. A German judge further complicated the case then by finding finding that Microsoft had breached its licensing agreement with Motorola and would have to pull the Xbox 360 from the market there.

This led the Seattle-based Robart to issue a restraining order that would let Microsoft sell its products in Germany, and the two companies next landed in the 9th Circuit. That court expressed its discomfort over being dragged into what it deemed a patent dispute since such issues are normally reserved for the Federal Circuit.

In the end, the 9th Circuit ruled Motorola couldn't enforce the German injunction barring Microsoft from marketing its Xbox 360, Windows 7 and other products. Robart ended Motorola's further attempts at barring Microsoft's sales worldwide late last year.

Robart's latest attempt at settling the dispute over the licensing of Motorola's H.264 and 802.11 patents "adopts a modified version of the Georgia Pacific Corp. v. United States Plywood Corp. factors to recreate a hypothetical negotiation between the parties," according to the opinion.

"Importantly, the court determines that the parties in a hypothetical negotiation would set RAND royalty rates by looking at the importance of the SEPs [standard essential patents] to the standard and the importance of the standard and the SEPs to the products at issue," Robart wrote.

Microsoft - which offered Motorola $1 million annually to use the patents - had suggested using an incremental value approach, or focusing on the period before the standard was adopted and implemented and comparing alternatives that could have been written into the standard. Robart noted, however, that neither IEEE or ITU require settling RAND terms that way and in fact avoid doing so because of antitrust concerns.


He instead recommended framing a bilateral negotiation on a modified version of the 15 Georgia Pacific factors, adjusted to account for the companies' RAND commitments. Specifically, Motorola's RAND agreement obligates the company to license its technology to its competitors and limits how much it can demand in royalties.

Furthermore, Motorola's work on the H.264 standard began years after other tech companies pioneered the innovation. The company currently holds 16 U.S. patents that are essential to the H.264 standard mostly related to video interlacing, Robart found.

Though the 206-page opinion emphasizes the value of Motorola's work, it ultimately finds that a $4 billion demand is unjustified since so many Microsoft products no longer support interlaced H.264 video.

"Motorola offered evidence that some AT&T U-verse content is interlaced and could be received on the Xbox after special software was added," Robart wrote by way of example. "But that software is no longer available and was installed by only 10,000 to 11,000 users when it was available. For purposes of comparison, over 35 million Xbox units have been sold."

Robart also noted that Motorola's parent company, Google, does not support interlaced H.264 video in any of its products.

"[Motorola's] approach thus reflects an improper attempt to capture the value of the H.264 standard itself as opposed to a royalty on the actual economic value of its patented technology," Robart wrote, adding that such an approach is contrary to its RAND agreement.

The company also came late - by more than two decades - to the 802.11 standard involving wireless technology, with much of it in the public domain and without patents. And the field of companies claiming to own essential 802.11 patents is broad: 92 companies and 350 patents since 1994, according to the ruling.

Motorola claimed that 24 of its patents are essential to the 802.11 standard, but Robart said the company "presented scant evidence that its patents are essential."

"Thus, the court concludes that even though the parties to a hypothetical negotiation would examine Motorola's patents for their importance to the 802.11 standard and to Microsoft's products, their value would be diminished by the lack of evidence regarding their relevance," the ruling states.

What's more, only the Xbox uses Motorola's 802.11 SEPs, and only uses 11 of the 24 at that, the judge noted. Therefore, Microsoft only needed to seek licensing for what it uses - and none of the 11 patents contribute essentially to the standard, thereby dooming Motorola's demand of $4 billion annually.

The court also cited concerns over "stacking," an aggregate royalty rate that destroys innovation and runs contrary to RAND commitments.

Microsoft suggested using patent-pool rates - where patent holders license their wares to a group of licensees at a low, no-haggle rate to deter litigation and increase innovation - as a way to set the RAND royalty rate. Google belongs to the same MPEG H.264 patent pool as Microsoft since its 2012 acquisition of Motorola, making it the logical place to start, according to the ruling.

Based on formulas for similar pools, Robart calculated the high end of a RAND royalty for Motorola's H.264 portfolio - applicable to Windows and Xbox products - at 16 cents per unit. And given the lack of importance Motorola's 802.11 SEPs have in Microsoft products, Robart capped that royalty at the low-bound rate of just 0.8 cents per unit sold.

ZDNet estimates Microsoft owes Motorola about $1.8 million a year, but notes the ruling is another blow for Google, which has so far paid $13 billion for Motorola's 17,000 patents - and has suffered a string of legal defeats over them since.

Last week, the U.S. International Trade Commission threw out the last of Motorola Mobility's claims that Apple swiped patented technology to develop the iPhone. The two companies remain locked in bitter disputes on multiple fronts. A Miami federal judge presiding over one of the cases called both "obstreperous and cantankerous" for using the courts as a business strategy instead of resolving their differences.

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