In a recent decision, the Ninth Circuit affirmed a jury verdict awarding Microsoft $14.5 million for Motorola's breach of its obligation to offer Microsoft reasonable and non-discriminatory (RAND) licenses for certain standards essential patents. The Ninth Circuit also affirmed the district court's decision regarding the applicable RAND royalty rate for Motorola's standards essential patents.
Background of the Case
In October 2010, Microsoft sued Motorola in the Western District of Washington (W.D. Wash.) and in the U.S. International Trade Commission, alleging infringement of certain smartphone patents. As part of potential cross-licensing discussions, Motorola sent Microsoft two letters offering to license certain standard essential patent portfolios at 2.25 percent of the price of the end product.
In response, Microsoft filed an action in the W.D. Wash., alleging that Motorola had breached its RAND commitments to the applicable standards organizations and that Motorola's offer letters constituted a refusal to license standards essential patents on RAND terms. Motorola then filed a series of actions against Microsoft seeking, among other things, injunctive relief as to certain of Microsoft's standards compliant products. Microsoft eventually amended its W.D. Wash. complaint to allege that Motorola's filing of injunctive actions constituted a breach of contract because the obligation to offer RAND licenses allegedly prohibited seeking injunctions for the covered patents.
In a series of orders, the W.D. Wash. district court held that: (1) "RAND commitments create enforceable contracts between Motorola and the respective [standard-setting organization]"; (2) "Microsoft—as a standard-user—can enforce these contracts as a third-party beneficiary"; (3) "Motorola's commitments to the [standards setting organizations] . . . requir[e] initial offers by Motorola to license its [standards essential patents] to be made in good faith," but that "initial offers do not have to be on RAND terms so long as a RAND license eventually issues"; and (4) Motorola was not entitled to injunctive relief for patent infringement by Microsoft's standards compliant products.
The district court then conducted a bench trial for purposes of setting the RAND royalty rates applicable to Microsoft's standards compliant products. The case subsequently proceeded to a jury trial regarding whether or not Motorola had breached its contractual commitments to the standards setting organizations. In September 2013, the jury returned a verdict in favor of Microsoft with damages of $14.5 million. Motorola appealed.
The Ninth Circuit's Analysis
As a threshold issue, the Ninth Circuit held that Motorola had waived its argument that the district court lacked the authority to decide the RAND rate in a bench trial because Motorola's counsel had stipulated to the proceeding. The Ninth Circuit then addressed whether the district court's RAND determination, which it concluded was undertaken with both parties' consent, was legal error or clearly erroneous due to not using the Georgia-Pacific factors, relying on patent pools as relevant indicators, and disregarding historical licenses.
With regard to not using the Georgia-Pacific factors, Motorola argued that the district court's RAND analysis violated Federal Circuit patent damages law, particularly by taking into account the present-day value to Microsoft of Motorola's patents and finding that a third-party valuation of Motorola's standards essential patents was only somewhat probative given that, at the time of the valuation, Motorola's standards essential patent portfolio was much larger than the portfolio "as it exists today." The Ninth Circuit found that the court's analysis was not error because: (1) the Federal Circuit has "never described the Georgia-Pacific factors as a talisman for royalty rate calculations"; (2) Motorola never specified the past date that the district court should have used; (3) it would have been impracticable for the court to consider only such evidence as could pinpoint the value of Motorola's patents to Microsoft at a precise point in time; and (4) Motorola has not shown that it was prejudiced by the court's analysis.
With regard to the district court's reliance on patent pools as relevant indicators, the Ninth Circuit agreed that such patent pools were reliable indicators of RAND rates, including because they mirrored the objectives of the RAND agreements at issue. Moreover, the patent pools' patents and Motorola's patents were essential to the same technical standards. The court also found that Motorola provided no evidence that its patents were more valuable than the other patents in the pools and that, if anything, they were on average less valuable. Further, because parties generally license at lower rates in a patent pool due to receiving value from pool membership that goes beyond royalty payments, the court had multiplied the rates by three.
As to the district court's disregard for historical licenses showing higher royalty rates, the Ninth Circuit agreed that Motorola's licenses were not probative since those portfolios had been licensed as part of broader settlement agreements, were formed under threat of litigation, included monetary caps, and/or provided licenses for Motorola patents that expired before the hypothetical negotiation. Lacking comparable licenses for comparison, the district court properly made its determination of RAND rates based on other factors.
Regarding the jury verdict for breach of contract, the Ninth Circuit found that the record contained substantial evidence supporting the damages against Motorola. In particular, the Ninth Circuit found that five different experts' testimony was significant evidence from which the jury could conclude that Motorola's actions violated a duty of good faith and were intended to induce hold-up, i.e., pressuring Microsoft into accepting a higher RAND rate than objectively merited. For example, according to the court, the evidence that the rates Motorola sought were significantly higher than the RAND rate found by the court suggested that Motorola sought to capture more than the value of its patents; the timing of the injunctive actions were indicative of bad faith; the injunctive actions were not motivated by a fear of irreparable harm since payment of the RAND rate pursuant to the stipulated rate-setting procedure would have eliminated any such harm; and the pendency of a Federal Trade Commission (FTC) investigation against Motorola that ultimately resulted in a consent decree was evidence of Motorola's knowledge that pursuing an injunctive action could breach its duty of good faith and fair dealing. While the Ninth Circuit found that testimony about the FTC investigation raised a risk of prejudice to Motorola, as a consent decree is not an admission of liability, Motorola had failed to object to other similar testimony, so there was no additional prejudice in its admission.
