In our December post “A FRANDlier Realm” we discussed emerging law relating to patents that are essential to technological standards, like 3G wireless telecommunications. What happens when patent owners and product makers cannot agree on fair, reasonable and nondiscriminatory (FRAND) terms? We said then that, rather than issuing injunctions, American courts “are more likely to attempt to force the parties to come to a monetary settlement or to set the terms of a FRAND royalty themselves.”

American courts had expressed a willingness to set FRAND royalty rates but had not had occasion to do so until now. In an April 25 opinion, Judge James L. Robart told Microsoft and Motorola what FRAND royalty rates for Motorola’s standard-essential patents would be. Motorola’s H.264 video compression standard patents are worth 0.555 cents per unit and its 802.11 WiFi standard patents are worth 3.471 cents per unit, Judge Robart found – numbers that are a small fraction of what patentee Motorola had sought. “This appears to be the first time any court anywhere has selected and published a specific FRAND royalty rate  – much less a rate calculated to the thousandth of a penny,” says Alison Tucher, a partner in Morrison & Foerster’s Intellectual Property Group. It goes beyond what the FTC attempted in the Rambus case.

The court detailed its royalty calculation process in a record-shattering, three-page, single-spaced footnote. The court based its FRAND royalty on the rates that members of existing video compression and WiFi patent pools would have charged in a hypothetical world where all owners of standard patents had joined the pools. It found that companies get two kinds of value from being pool members: the value of a license to use pooled patents and the value of royalty revenue from the patents they contribute to the pool. The court pegged the license value at twice the royalty value, based on data from Microsoft’s participation in the video compression patent pool. Reasoning that a FRAND royalty should capture both kinds of value, the court calculated Motorola’s FRAND royalty as three times the hypothetical pool royalty value.

Judge Robart also calculated the “upper bounds” of what a FRAND royalty offer might have been. Why?  “Breach of contract,” says Jason Barlett, a partner in Morrison & Foerster’s Intellectual Property Group. “If Motorola failed to offer Microsoft a royalty that was at least in the ballpark of reasonableness, then it could be liable to Microsoft for damages.”

The upper bounds as calculated by Judge Robart were 16.389 cents for the video compression patents and 19.5 cents for the WiFi patents, or just shy of 36 cents per unit. Motorola wanted five bucks a pop. They demanded 50 to 63 cents per unit for video compression and three to four-and-a-half dollars per unit for WiFi. As a result, the court concluded that the royalty rates sought by Motorola “did not fall within the range of FRAND royalties.” The deck is now stacked against Motorola at the trial for breach of contract and damages scheduled to begin on August 26, 2013. (See page 3 of the opinion)

If nothing else, the court’s 207-page order proves that simple legal standards such as “fair and reasonable” can be horrifically complex to apply. The Motorola–Microsoft dispute was tried in the court by agreement of the parties. MoFoTech wonders who will be the first to ask a jury to follow in Judge Robart’s footsteps?