Microsoft Counters Motorola Mobility’s $4 Billion Demand

Microsoft Corp. urged a federal judge in Seattle today to rule that Motorola Mobility Holdings Inc. (MMI) unfairly demands as much as $4 billion in annual patent royalties.

Microsoft said Motorola Mobility failed an obligation to offer fair licensing terms on some patents. Motorola Mobility filed suit in the U.S. and Europe to ban Microsoft products, saying the software maker refuses to pay to use inventions essential to industry standards for Wi-Fi and video technology. U.S. District Judge James Robart said he’ll rule later.

“The court is well aware it is being used as a pawn in a global, industrywide business negotiation,” Robart said, according to the Seattle Times.

A ruling for Microsoft may support a similar complaint against Motorola Mobility at the European Commission, and help avoid a ban on sales of its products in Germany. Such a decision could bolster Microsoft’s arguments in a trade dispute that the Asia-made Xbox shouldn’t be barred from the U.S., where it was the top-selling gaming system last year.

“It could take a lot off the table,” said Michael Carrier, a professor at Rutgers Law School in Camden, New Jersey, who specializes in intellectual property and antitrust issues. “It could affect what’s going on in both the courts and the agencies.”

Royalty Dispute

The hearing today centered on whether Motorola Mobility fulfilled its obligation to make a fair offer to Microsoft for use of its patents that relate to industry standards. The judge also is considering if Microsoft lost the right to complain because it made no counteroffer to letters Motorola Mobility sent in October 2010 asking for 2.25 percent in royalties on the retail price of Microsoft products.

That rate would equal about $4 billion a year in royalties, Microsoft contends. Motorola Mobility disputes that figure. Should he reject Microsoft’s arguments, a trial is scheduled for November that would determine the appropriate royalty rate.

Motorola Mobility said in a statement it has established cross-licensing relationships with more than 50 companies. Not all of the patents it’s asserted against Microsoft are related to industry standards.

‘Aggressive Litigation’

“Microsoft has refused to negotiate and has instead initiated and continued to pursue an aggressive litigation strategy aimed at attacking Motorola Mobility and the Android platform,” Jennifer Erickson, a company spokeswoman, said in the statement. “Regardless of their transparent tactics, we are focused on resolving this matter in a way that fairly compensates Motorola Mobility for the use of our valuable IP and protects the interests of our stakeholders.”

A ruling for Microsoft may limit Motorola Mobility’s ability to strike back in patent-infringement disputes with Apple Inc. (AAPL) involving phones that run on Google Inc. (GOOG)’s Android operating system. Google, in offering $12.5 billion to buy Motorola Mobility, has cited the handset manufacturer’s history and trove of patents as a bulwark against litigation meant to slow the growth of Android.

The ITC is scheduled to announce May 18 a final decision in Microsoft’s case against Motorola Mobility over Android phones.

Sales Bans

Microsoft and Apple have pledged not to use standard- essential patents to block competitors’ products and demanded that other companies follow suit. They retain the right to seek import or sales bans on products that infringe patents that aren’t part of any industry standard.

Motorola Mobility and Google, in letters to U.S. and European regulators, have said they wouldn’t seek a ban on the use of standard-essential patents as long as there are licensing talks under way. In court papers, Motorola Mobility said neither Microsoft nor Apple will negotiate fairly.

Robart blocked Motorola Mobility on April 12 from taking steps to implement a ban on Microsoft products in Germany until he rules on the contract issue, a decision Motorola Mobility is appealing.

David Howard, deputy general counsel for Microsoft, said the company is pleased that order remains in place and “we look forward to seeing Judge Robart’s decision on today’s hearing.”

European Commission Inquiry

The European Commission is investigating patent-misuse complaints filed by Microsoft and Apple against Motorola Mobility.

A different judge with the U.S. International Trade Commission rejected similar arguments Microsoft made in a case that may result in a ban on imports of the Xbox gaming system. That case is under consideration by the six-member commission in Washington.

The ITC judge found that Microsoft infringed four Motorola Mobility patents, while a second trade judge found that Apple infringed a different Motorola Mobility patent related to 3G technology. Apple has its own breach-of-contract suit pending against Motorola Mobility.

Limiting the power of standard-essential patents may mean lower royalty payments on them. Mobile-phone chipmaker Qualcomm Inc. (QCOM), which gets more than a third of its revenue from licensing, has said the high-profile nature of the fight may push regulators and courts to make sweeping rules that hurt the industry.

‘Unforseen Circumstances’

It also could discourage companies from working together to ensure products work across platforms, Carrier said.

The regulators or judges “could set a broad rule that could really have unforeseen circumstances considering how fragile a lot of these arrangements are,” Carrier said. “Standard-essential patents should have special obligations, but those obligations should stem from the rules of the organization.”

The question of limits on standard-essential patents has more urgency for Microsoft now that it faces the possibility it won’t be able to bring the Xbox into the U.S. from manufacturing plants in Asia.

Motorola Mobility has called Microsoft’s objections “a competitive tool rather than a principled objection.” Last year, in a written statement to the U.S. Federal Trade Commission, Microsoft supported the right to assert standard- essential patents at the ITC.

Competition Concern

“I don’t think the agency looks upon itself as being in the position to grant a compulsory license,” said Tom Scott, a patent lawyer with Goodwin Procter in Washington, who handles ITC cases.

In a March 15 letter to the Justice Department and the ITC, the Senate Judiciary Committee said it was concerned “that patent holders may choose to seek an exclusionary order from the ITC in a manner that would threaten competition, rather than simply dispute the reasonable terms of the license in court in a way that would allow continued use by competitors.”

While the largest companies spend millions of dollars in legal fees, the fight hurts small businesses that may want to enter the market, said Carl Howe, an analyst with Boston-based research firm Yankee Group.

“There are some broad questions about what the future of these patents holds,” Howe said. “Maybe the idea of having industry standards has gone by. A patent is no longer something to promote innovation, but simply a weapon to be used in a court of law.”

The U.S. case is Microsoft Corp. (MSFT) v. Motorola Inc., 10cv1823, U.S. District Court for the District of Washington (Seattle).

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

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