by Mercedes Cook
The Honorable Judge James L. Robart recently took on the
challenging task of determining a reasonable and non-discriminatory ("RAND")
royalty rate for Motorola's standards-essential patents ("SEP"). Microsoft
Corp. v. Motorola, Inc., 2013 U.S. Dist. LEXIS 60233, No. C10-11823 (W.D.
Wash. Apr. 25, 2013)[an enhanced version of this opinion is available to lexis.com
subscribers]. This decision comes after a two-year patent war between
Microsoft and Motorola. In November 2010, Microsoft filed a breach of contract
suit, alleging Motorola breached its obligation to license its SEP at a RAND
Motorola owns patents essential to
complying with standards 802.11 of the Institute of Electrical Electronics
Engineers ("IEEE") involving WiFi and H.264 of the International
Telecommunication Union ("ITU") involving video coding. Microsoft requires
licenses to comply with these standards for its Xbox 360 gaming console.
Motorola offered to license each of the patents at a RAND royalty rate of 2.25%
of the price of the end product. This would mean that Microsoft would owe
Motorola approximately $4 billion per year for licensing its patents. However,
the court disagreed and found that this rate did not fall within the range of
RAND royalties. The court undertook a methodical analysis to knock the amount
down to about $1.8 million. In determining the RAND royalty rate for Motorola's
802.11 SEP, the court first determined that the appropriate RAND royalty range
is between .555 and 16.389 cents per unit. The court found that the RAND
royalty rate is .555 cents per unit for Xbox products. In determining the RAND
royalty rate for Motorola's H.264 SEP, the court determined that the
appropriate RAND royalty range is between .8 cents and 19.5 cents per unit. The
court found that the RAND royalty rate is 3.471 cents per unit for Xbox
In its 207-page opinion, the court came to its
conclusion, in part, by looking to the policy reasons behind RAND and the
importance of providing a reasonable royalty rate to licensees.
Upholding Competition and Innovation in the
The purpose of RAND is to ensure that SEP owners do not
unfairly hinder innovation or competition by unreasonably increasing the
royalty rates of licensing their patents. SEP owners are in a powerful position
to manipulate the market. For example, one of the purposes of RAND is to
prevent "hold-up" - where an SEP owner demands more value than the patented
technology or demands the total value of the standard, thereby effectively preventing
the licensee from licensing the patent. Additionally, the court noted that
hold-ups may also harm other firms that hold SEPs and cannot obtain royalties
because the product is not being developed.
Where there are reasonable royalties, healthy competition
is less hindered. Gaming companies, in particular, are competing for the best,
most appealing console to consumers. One possible roadblock to this goal is
licensing a patent necessary to comply with industry standards. When a gaming
company cannot afford to obtain a necessary license that would contribute in
making the system competitive with other systems, the product is less likely to
be created. This decreases the marketplace of innovations.
Moreover, where there are reasonable royalties on
essential patents, companies are less constrained in their innovation. A gaming
console that seeks to set itself apart from the competition will likely require
the use of multiple patented technologies and compliance with multiple
standards. The court noted that "a RAND royalty should be set at a level
consistent with the S.S.Os' (standard setting organizations) goal of promoting
widespread adoption of their standards."
The court's decision in this case, at the very least,
gives guidance for companies in negotiating RAND rates, and also guides courts
when parties are unable to come to a resolution.
articles at Sheppard Mullin Intellectual Property Law Blog.
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