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Apple Fee Case Against Google Fails to Find Middle Ground

Apple Inc. (AAPL)’s unwillingness to commit to a patent royalty set by a federal court prompted a judge yesterday to throw out its breach-of-contract claims against Google Inc. (GOOG)’s Motorola Mobility unit.

U.S. District Judge Barbara Crabb canceled a trial that was scheduled to begin yesterday in Madison, Wisconsin, over the fees Motorola Mobility could reasonably charge Apple for using patents related to industry-standard technology. Apple said it wouldn’t license the patents unless the judge set the rate at $1 or less for each iPhone.

The judge’s action shows how entrenched Apple, Google, Microsoft Corp. and other competitors are in their global legal battle over patent rights and licensing agreements over smartphones, tablet computers and gaming devices.

“Companies like Microsoft and Motorola have signed thousands of agreements,” said Erin-Michael Gill, managing director of MDB Capital Group LLC, a Santa Monica, California- based investment bank that specializes in patent issues. “It seems strange that these companies can no longer figure out what is fair and reasonable.”

The Wisconsin dispute is one of two, in courtrooms 2,000 miles apart, in which judges were to hear complaints from Apple and Microsoft that Motorola Mobility is demanding excessive royalties on patents deemed essential to standards for how electronic devices function and work with one another. Regulators in the U.S. and Europe are investigating whether Motorola Mobility is misusing those patents to curb competition in the $219 billion smartphone market.

Licensing Obligations

The cases were to be the first in which courts were asked to define licensing obligations of patent owners who help create technological specifications.

The focus now turns to the trial in Microsoft’s complaint against Google, scheduled to start next week in Seattle, said Jorge Contreras, an associate law professor at American University in Washington.

U.S. District Judge James Robart in Seattle has said he will set a range for what is the appropriate rate, so a jury could later determine if Motorola Mobility’s offer was fair.

The Wisconsin trial was sidetracked on the issue of whether any decision by the judge would resolve the companies’ dispute about what amount of royalty would fit the definition of fair and reasonable -- the standard for payments on standard- essential patents.

Crabb on Nov. 2 questioned the need for a trial if Apple wouldn’t pledge to license the Motorola Mobility patents on a rate she set. Apple, in a filing yesterday, said Motorola Mobility’s failure to make a fair offer “was, in Apple’s view, the single greatest impediment to a successful negotiation of a worldwide license.”

Kristin Huguet, an Apple spokeswoman, said the company had no comment.

Reaching Agreement

“We’re pleased that the court has dismissed Apple’s lawsuit,” Jennifer Erickson, a Motorola Mobility spokeswoman, said in an e-mailed statement. “Motorola has long offered licensing to our extensive patent portfolio at a reasonable and non-discriminatory rate in line with industry standards. We remain interested in reaching an agreement with Apple.”

Related patent-infringement claims between Apple and Motorola Mobility, originally filed before Crabb, were thrown out by Circuit Judge Richard Posner in June after he rejected each company’s damages theories. That decision is on appeal. Other patent claims are pending in federal court in Miami, with trial scheduled for 2014.

Apple and Microsoft raised the breach-of-contract claims based on demands for royalties of 2.25 percent on the retail price of each product, which Motorola Mobility has said was its standard opening offer. The company has said neither Microsoft nor Apple would negotiate.

Dollar Dispute

Microsoft, in court papers, said that would amount to $4 billion a year in royalties on sales of the Xbox and Windows operating system, a figure no company would agree to pay. Apple, in its own case, said the technology is worth at most $1 per unit.

Not all of the patents asserted by Motorola Mobility at the ITC or in district court involve standard-essential patents, and none of the patent claims Microsoft and Apple asserted against Motorola Mobility involve industry standards.

Still, resolving the issue of the standard-essential patents could alter the dynamics in Google’s effort to use the Motorola Mobility patents as a bulwark against Apple’s claims that Google’s Android operating system for wireless devices copied the iPhone. Apple’s largest smartphone competitor, Samsung Electronics Co., uses Android.

Gaining Leverage

“These patents are very important and, if they can make Apple and Microsoft pay them something, it can give them a lever,” Tom Scott, a patent lawyer with Goodwin Procter in Washington, sid of Google.

The legal wrangling, prompted by the world’s embrace of smartphones, has prompted congressional hearings and investigations by the European Commission and the U.S. Federal Trade Commission. One in seven people worldwide has a smartphone, with the number exceeding 1 billion in the third quarter, according to an Oct. 17 report by researcher Strategy Analytics. While it took 16 years to reach that milestone, the research group estimates another billion people will have smartphones within the next three years.

Standard-setting boards, rather than courts or regulators, may have to resolve the dispute, said Robert Stoll, former commissioner of patents at the U.S. Patent and Trademark Office and now with Drinker Biddle in Washington.

“There should be a standard-setting body that oversees standard-setting bodies,” Stoll said. “They should also be able to determine what the values of all these things are, and that doesn’t seem to happen. They just say ‘fair and reasonable’ and leave it at that. The devil is in the details.”

The cases are: Apple Inc. v. Motorola Mobility Inc., 11cv178, U.S. District Court for the Western District of Wisconsin (Madison); and Microsoft Corp. (MSFT) v. Motorola Mobility Inc., 10cv1823, U.S. District Court for the Western District of Washington.

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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