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Judge Cuts Google’s Motorola Royalty Demand to Microsoft

Photographer: Jin Lee/Bloomberg

Dennis Woodside, CEO of Motorola Mobility, during a news conference in New York, on Sept. 5, 2012. Microsoft demanded that Motorola Mobility pay patent royalties on its mobile phones that run on Google’s Android operating system. Close

Dennis Woodside, CEO of Motorola Mobility, during a news conference in New York, on... Read More

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Photographer: Jin Lee/Bloomberg

Dennis Woodside, CEO of Motorola Mobility, during a news conference in New York, on Sept. 5, 2012. Microsoft demanded that Motorola Mobility pay patent royalties on its mobile phones that run on Google’s Android operating system.

Google Inc. (GOOG)’s Motorola Mobility unit isn’t entitled to the potentially billions of dollars it sought for its patents on technology used throughout the electronics community, a federal judge ruled in a victory for Microsoft Corp. (MSFT)

Microsoft should pay about a half-cent per unit for video- decoding technology and 3 1/2 cents for wireless technology, U.S. District Judge James Robart in Seattle said in a decision made public yesterday. That equals about $1.8 million a year, Microsoft said, far less than the 2.25 percent of the retail price on Microsoft products Motorola Mobility initially demanded.

The ruling marks a rare instance in which a U.S. court has set guidelines on how patent owners should value inventions on industrywide standards developed so devices running on different platforms can work together. Participants in these groups promise to license patents on “fair, reasonable and non- discriminatory” terms, an issue that has prompted inquiries by antitrust regulators on three continents involving companies such as Samsung Electronics Co. and InterDigital Inc. (IDCC)

“People are not going to stop participating in standardization because of this -- it’s too important to the market,” said Jorge Contreras, an associate law professor at American University in Washington. He said the ruling will help bring some “disputes to a speedier close, potentially.”

Standards Patents

Companies meet to develop standards so, for instance, data can be sent to any smartphone no matter the manufacturer, or a video sent from one type of device can be watched on another. Companies that help establish the criteria gain an advantage in having their technology included in standards.

“This decision is good for consumers because it ensures patented technology committed to standards remains affordable for everyone,” David Howard, deputy general counsel for Microsoft, said in a statement.

The next step in the case is a trial in August to determine whether, based on the ranges set by Robart, Motorola Mobility met its contractual obligation to license its patents on fair terms.

“Motorola has licensed its substantial patent portfolio on reasonable rates consistent with those set by others in the industry,” Matt Kallman, a spokesman for Motorola Mobility, said in a statement after the ruling.

Among the factors that must be considered, Robart decided, is what would be the total rate charged to manufacturers when added to amounts paid to other patent owners on the standard, and whether that would meet the goal of ensuring a standard gets wide acceptance.

Public Interest

“He acknowledges the public interest aspect of these calculations,” Contreras said. “It’s not just two companies going to a back room and coming up with whatever they want to.”

The judge also considered how valuable the patents are to the standard, and how valuable the standard is to the products involved in the dispute, the professor said.

Robart said the proper royalty range for the video-decoding technology, used in both the Xbox video-gaming system and Windows operating system, should be no more than 16.4 cents per unit.

Motorola Mobility’s portfolio “only constitutes a sliver of the overall technology incorporated” into the standard, Robart said in his 207-page opinion. For the Wi-Fi portfolio, applicable to the Xbox, the upper rate would be 19.5 cents per unit, he said.

Dispute’s Origins

The dispute between Microsoft and Motorola Mobility, then a standalone company, began in 2010, when Redmond, Washington- based Microsoft demanded that Motorola Mobility pay patent royalties on its mobile phones that run on Google’s Android operating system.

Motorola Mobility, which helped establish standards for technologies such as video decoding and Wi-Fi, responded by demanding that Microsoft pay royalties on the Windows operating system and Xbox. It sent letters in October 2010, demanding 2.25 percent on the retail price of the products. Microsoft, which reported $73.7 billion in 2012 revenue, has said the royalties would total more than $4 billion a year, a figure Motorola Mobility disputes.

At trial, Robart’s decision says, Motorola Mobility’s expert testified that, when possible cross-licensing deals were taken into account, Microsoft would pay $36 million to $54 million in fiscal 2011, or a per unit rate of as much as $4.50 for the Wi-Fi technology in each Xbox. For the video-decoding patent, Motorola Mobility’s expert said the net payment would cap at no more than $125 million a year, or as much as 63 cents a unit, according to Robart’s decision.

Patent Pools

While Motorola Mobility focused on the possible outcome of negotiations between the two companies, Microsoft urged the judge to compare the rate charged by patent pools, in which a large number of companies get together and establish a single licensing rate for everyone. Robart mostly sided with Microsoft on this issue.

Microsoft had argued that, based on the different pools for those two standards patents, the proper royalty rate would be pennies per product, with the royalties on the standard for video compression totaling no more than $521,000 a year. It also contended the rate for wireless technology should be based on what it calls the smallest salable unit, meaning the Marvell Technology Group Ltd. (MRVL) chips, which cost about $3.

Xbox Demand

Microsoft argued the games -- not wireless technology -- drive demand for the Xbox. Motorola Mobility contended sales of the device fell when Microsoft failed to include Wi-Fi before 2010.

Motorola Mobility said it had originally charged licensees a flat rate of $9 per unit, and converted that to the 2.25 percent royalty at the request of companies that said falling phone prices were pushing the rate up. It said Microsoft refused to make a counteroffer, instead filing the breach-of-contract suit on which Robart ruled.

Apple Inc. (AAPL) made similar breach-of-contract allegations against Motorola Mobility in a case in federal court in Wisconsin. U.S. District Judge Barbara Crabb threw out the case last year after Apple said it wouldn’t abide by any royalty rate she set. Apple has filed an appeal.

Google, which bought Motorola Mobility last year, reached an agreement with the U.S. Federal Trade Commission that it wouldn’t seek to block sales of products that comply with industry standards. European regulators also are investigating Google’s use of the Motorola Mobility patents in litigation.

The case suit is Microsoft Corp. (MSFT) v. Motorola Mobility Inc., 10cv1823, U.S. District Court for the Western 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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