United States: F/RAND – The Economic Incentives And A Discussion Of Microsoft V. Motorola

Last Updated: September 12 2013
Article by Jennifer Vanderhart

The importance of technical standards has grown tremendously over the past two decades with the increase in the communications and information technology industries for which standards are critical. Formal national and international standard setting organization (SSO) have, in many cases, been replaced or supplanted by informal SSOs or industry consortia, but, whether established formally or informally, the benefits of standardization are readily apparent. It certainly would be inefficient if, for instance, various electrical appliances all had differently shaped plugs or if mobile phones made by various manufacturers could not call one another.

Most standards, and in particular those covering modern communications and information technology, embody patented intellectual property (IP), and SSOs require that the owner of the patented technology commit to licensing patents on fair, reasonable and non-discriminatory (F/ RAND) terms.1,2 F/RAND does not mean that a patent owner gives up the rights to patented IP. However, if the IP is established as a standard essential patent (SEP), then, as the name implies, a third party that wishes to produce a product that embodies the standard will be required to commit to a license for the SEP. The rationale behind the F/RAND requirements is twofold in that it is meant to ensure that essential technology that has been embodied in a standard is available to the industry while, at the same time, providing that the holders of the IP are fairly and adequately compensated.

The definition of F/RAND is not clearly defined and is hotly debated, but the intent is generally understood. The patent owner should be willing to negotiate in good faith. The owner should not refuse to license or offer a license so high as to essentially be refusing to license. Fair and reasonable are generally accepted as the same concept, with the use of "fair" being more common in the European Union. The U.S. Federal Trade Commission ("FTC") has stated that "Courts should apply the hypothetical negotiation framework to determine reasonable royalty damages for a patent subject to a RAND commitment. Courts should cap the royalty at the incremental value of the patented technology over alternatives available at the time the standard was defined."3 While the FTC has summarized the generally accepted belief that the ceiling of the royalty should be no higher than what the patent owner would have earned prior to the IP being incorporated into a standard in order to avoid the holdup problem (discussed further below), it also is generally accepted that a non-discriminatory royalty typically does not mean that every licensee must be given the same rate.

Because participation in an SSO is voluntary, IP owners must be allowed to seek adequate compensation if they are to remain involved in the standard setting process and are willing to contribute their valuable IP to the SSO. The policies of the majority of the SSOs do not specify particular licenses or royalty amounts in order to ensure the availability of the technology to the broadest possible audience. While this ensures the flexibility of licensing under F/RAND, it introduces a degree of indefinitiveness to the licensing process. Different parties will have varying ideas as to what constitutes a F/RAND royalty, and this often gives rise to substantial litigation.

Economists have called for SSOs to reform their intellectual property policies in a way that would reduce the burden on the courts.4 Proposals include putting into place steps that must be taken by the parties involved in the dispute prior to the patent owner commencing formal litigation or seeking an injunction or exclusion order. Possibilities include arbitration and alternative dispute resolution within the SSO and, depending on the particulars of a specific situation, might include defining the royalty base or stipulating other factors. In this way, an arbitrator or panel would more quickly be able to assess whether a proposed royalty is F/RAND, reducing the time and cost involved from that normally needed to resolve a patent dispute in the courts.

If a patent is not part of a standard, the usual process of licensing would be known as an arms-length transaction, in which two unrelated, well-informed parties acting independently from one another come to an agreement on the royalty to be paid. A licensor will not agree to a royalty amount that is more than the incremental benefit that an entity will receive from obtaining the license, and a licensee will not agree to an amount that is more than the cost of providing the license plus any additional amount an entity gives up (such as lost sales) in providing a license. Typically, a licensee can look to the next best option available and compare the cost and value of that next best option with that of the license being negotiated. In the case of a standard, however, there may not be a next best option, and one concern is that the owner of a patent that covers technology embodied in a standard might engage in what is known as holdup behavior, in which the owner approaches a firm practicing the standard with an unreasonable demand. Because the firm likely would not have another alternative, it would be forced to pay or exit the industry or sue.

MICROSOFT V. MOTOROLA

On April 25, 2013, Judge James L. Robart issued his opinion in Microsoft v. Motorola.5 The case was a breach of contract matter in which Microsoft alleged that Motorola breached its F/RAND obligations by making unreasonable offers to license two of its SEPs. Both SEPs were portfolios of patents covering Wi-Fi and video compression technology. Motorola contended that it was entitled to a royalty rate of 2.25 percent of the net selling price of Microsoft's Windows and Xbox products for both its SEP portfolios. On a $200 Xbox, this would result in a payment of $4.50. Microsoft claimed (Motorola disputes this claim) that this would result in annual royalty payments that would exceed $4 billion per year. Microsoft argued that it should have to pay only pennies per product, or approximately $0.5 million per year.

Judge Robart ultimately favored Motorola's methodology of a simulated hypothetical bilateral negotiation under the RAND obligations over Microsoft's proposal, which required an analysis of the incremental value of the patented technology as compared with the alternatives that existed at the time and could have been written into the standard when it was adopted. However, the judge's opinion on the amount of the royalty rates resulted in Microsoft paying just over $1 million per year, which has been noted as being about $560,000 above what Microsoft proposed and about $4 billion below what Motorola wanted.

Although the final amount of the decision was of interest given the chasm that existed between the opinions that had been proffered by the parties the more important element was the way the judge reached that decision in his 207-page findings of fact and conclusions of law. The court created a hypothetical negotiation between the parties by applying a modified Georgia-Pacific analysis. Judge Robart considered each of the relevant 15 Georgia-Pacific factors and provided a detailed discussion of each one as the court believed it should be interpreted in the context of the RAND obligations.

The Georgia-Pacific factors are well-established in patent law, and any damages analysis that calculates a reasonable royalty will address each factor, even if only to note that it doesn't apply. However a typical hypothetical negotiation assumes that the date of the negotiation occurs just before the first infringement, recognizes that there usually are alternatives to the patented technology and allows for an impact on the royalty rate depending on the relationship between the parties (i.e., if they are competitors or not). In addition, if the patentee has a policy of not negating licenses for the IP at issue, that also can be a factor in the determination of the royalty. Georgia-Pacific factors 4 and 5, thus, were determined by the court not to apply to a hypothetical negotiation under F/RAND obligations.

Judge Robart then went through the remaining Georgia-Pacific factors, addressing each in turn.6 I will not go through a detailed discussion of each here; however, certain findings were of particular interest. The court opined that the royalties received by patent pools could serve as indicators of a rate that is "consistent with the RAND commitment." In addition, the court opined that alternatives that could have been written into the technology instead of the SEPs-in-suit should be considered. Also relevant would be the customary practices of businesses licensing RAND-committed patents as opposed to those licensing patents that were not obligated under any RAND commitments. As to Georgia-Pacific factor 13, the portion of the realizable profit that should be credited to the invention, Judge Robart addressed the holdup concerns discussed above, noting that "As with many of the other factors, in the RAND context, it is critical to consider the contribution of the patented technology apart from the value of the patent as the result of its incorporation into the standard, the latter of which would properly reward the SEP owner for the value of the standard itself."

The ultimate influence of the methodology employed by Judge Robart is not yet certain, but his decision almost certainly will influence litigation regarding RAND rates and obligations. In the case of Microsoft v. Motorola, the ultimate decision favored Motorola. However, the importance of the Microsoft SEPs was shown to be less valuable than other patents essential to the standards, especially for Motorola's purposes. Other decisions, using the same methodology, might lead to a decision favoring the plaintiff. It remains to be seen whether a better road map will result in less litigation or less costly litigation of RAND royalty commitments.

Footnotes

1. The acronyms F/RAND and RAND both are used, and there does not appear to be any difference in meaning between the two terms.

2. It often is the case that a standard will embody technology covered by numerous patents owned by many different parties. One way to address this situation is to establish a patent pool. A pool normally will allow a licensor to use the pooled patents upon payment of a license fee and will allocate to each member of the pool a portion of the licensing fees. This has the effect of likely increasing market entry by avoiding the need for each licensor to negotiate multiple licenses (although it may raise competitive concerns).

3. "The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition," Federal Trade Commission Report, March 2011.

4. Kai-Uwe Kahn, Fiona Scott Morton and Howard Shelanski, "Standard Setting Organizations Can Help Solve the Standard Essential Patents Licensing Problem," Competition Policy International Antitrust Chronicle, March 2013.

5. Microsoft Corporation v. Motorola Mobility Inc., 10cv1823, U.S. District Court for the Western District of Washington (Seattle), filed April 25, 2013.

6. The court did not directly address Georgia-Pacific factors 2, 3 or 14, although it did consider certain elements relevant to those factors.

The views expressed herein are those of the author and do not necessarily represent the views of FTI Consulting, Inc. or its other professionals. (c)FTI Consulting, Inc., 2013. All rights reserved.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.