United States: Ninth Circuit Affirms RAND Rate And Damages For Breach Of RAND Commitment

Abstract

After discussions for a potential cross-licensing agreement broke down, Microsoft sued Motorola, alleging Motorola breached its obligation to offer its standard-essential patents ("SEPs") on reasonable and nondiscriminatory ("RAND") terms. Using patent damages law as guidance, the district court determined the RAND rate for Motorola's patents. Subsequently, the jury found that Motorola breached its RAND commitments and awarded Microsoft over $14 million in damages. The United States Court of Appeals for the Ninth Circuit affirmed the district court's RAND-rate analysis and found sufficient evidence supported the jury's verdict.

Essential for evolving technology to practical function in the modern world, standard-setting organizations (SSOs) set standards for technical specifications allowing products of different manufacturers to be compatible. SSOs often require holders of Standard Essential Patents (SEPs)—patents essential to the practice of the technical standard—to agree to license their patents on reasonable and nondiscriminatory (RAND) terms. Thus, an SEP holder cannot refuse to license its SEPs to an implementer who agrees to pay the RAND rate.

In Microsoft Corp. v. Motorola, Inc.,¹ Microsoft sued Motorola, alleging that Motorola breached its obligation to offer RAND licenses to two of its SEP portfolios. The United States Court of Appeals for the Ninth Circuit affirmed the district court's determination of a RAND rate for Motorola's patents and found that substantial evidence supported the jury's verdict that Motorola breached its RAND obligations.

Background

Microsoft sued Motorola, alleging infringement of certain smartphone patents. Microsoft's suit initiated discussions between the parties, including a potential cross-licensing agreement. As part of the discussions, Motorola offered Microsoft a license on two of its SEP portfolios. Motorola's offer translated to Microsoft paying Motorola 2.25 percent of the selling price of its Xbox game console or any computer running Microsoft Windows. In response, Microsoft filed suit against Motorola, alleging that Motorola breached its RAND commitments.

Motorola also filed other suits—one in the United States District Court to enjoin Microsoft from using one of its SEP portfolios; one in the United States International Trade Commission to enjoin Microsoft from importing into the United States its Xbox consoles; and one in Germany to enjoin Microsoft from selling products compliant with one of Motorola's SEP portfolios. Because Germany served as Microsoft's distribution center for all Xbox and Windows products in Europe, Microsoft relocated its distribution center to the Netherlands.

In Microsoft's suit against Motorola for breach of its RAND commitments, the District Court determined a RAND rate and range for Motorola's two SEP portfolios, and the jury returned a verdict for $14.52 million for Microsoft's costs to relocate its distribution center and its attorneys' fees and litigation costs. Motorola asked the district court to set aside the jury's verdict, which the district court declined to do. Motorola appealed.

The Motorola Decision

On appeal, Motorola challenged the district court's authority to determine a RAND rate. Because Motorola consented to having the judge, not the jury, determine the RAND rate, the court found that Motorola waived the right to challenge on appeal the district court's authority. Thus, the court noted that it need not consider whether, absent consent, a jury should have made the RAND determination.

The court next addressed Motorola's contentions that a RAND analysis must follow patent damages law set forth by the United States Court of Appeals for the Federal Circuit. Although the court acknowledged that patent damages law can serve as guidance in contract cases, the court found that determination of a RAND rate in a breach-of-contract action requires flexibility and need not strictly follow patent damages law.

In fact, the court noted that the Federal Circuit itself has observed that many factors relevant to a patent-damages analysis are contrary to RAND principles. Specifically, Motorola argued that the district court erred by considering the present-day value of its patents, rather than the value when the alleged infringement began, as is used in the patent-damages context. The court rejected Motorola's argument for four reasons: 1) Microsoft alleged that Motorola's breach was ongoing, so consideration of Motorola's patents' present-day value was reasonable; 2) Motorola failed to offer a date the court should have used; 3) given the volume of data both parties introduced, it would have been impractical for the district court to limit its analysis to one precise point in time; and 4) Motorola failed to show any prejudice resulted from the district court's analysis.

Similarly, the court rejected Motorola's objection to the district court's reference to rates charged by patent pools but discount of Motorola's past licenses in its RAND analysis. Motorola's patents were part of patent pools—whereby two or more SEP holders package and license their SEPS collectively. The district court found the patent-pool rates relevant to the RAND analysis, but it also accepted Motorola's experts' testimony that the license rates in patent pools are typically lower than rates achieved in two-party agreements and tripled the pool rate.

On the other hand, the district court gave little weight to Motorola's past licenses because the past licenses included other patents not at issue, were entered into to resolve litigation, and/or were subject to monetary caps. Because the district court relied on the patent-pool rates as only one of several considerations in its RAND analysis and offered reasonable explanations for discounting Motorola's prior licenses, the court found no error in the district court's analysis.

Finally, the court found that sufficient evidence supported the jury's verdict. The court observed that the rates Motorola sought from Microsoft were much higher than the RAND rate established by the District Court, suggesting that Motorola was using litigation to improperly drive-up the license rate for its SEPs.

Next, the court found that the timing of Motorola's lawsuits against Microsoft—only 21 days after the acceptance window included in its letter offers expired—could support a conclusion that Motorola's real motivation was to induce Microsoft to agree to rates higher than RAND rates. Last, the court noted that one could conclude that Motorola knew its suits for injunctive relief could breach its RAND commitments, because of an investigation by the Federal Trade Commission, yet Motorola continued to pursue its suits. Accordingly, the court concluded that the jury had sufficient evidence to find that Motorola breached its RAND commitments.

Strategy and Conclusion

This case illustrates how courts are viewing the licensing of standard essential patents, enforcing RAND commitments, and assessing damages for breach of those commitments.

Endnotes

1 The Motorola decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2015/Microsoft v Motorola.pdf.

Previously published by LES Insights

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.