Motorola (now owned by Google, Inc.) and Microsoft Corp. are the latest high-tech companies to square off in the so-called “patent wars.” In the lawsuit, Microsoft alleged Motorola tried to excise excessive licensing fees, while Motorola claimed that Microsoft infringed its standard-essential wireless technology patent.
Standard-essential patents are integral to the tablet and smartphone industry because they form the backbone of the basic technology they need to operate. While most owners of these patents have voluntarily pledged to grant licenses to other companies on “reasonable and nondiscriminatory” (RAND) terms, it is often easier said than done.
In a recent decision, U.S. District Judge James Robart established some useful guidelines for determining reasonable royalties for standard essential patents (SEPs). Since his opinion runs over 207 pages, it is impossible to outline all of them here. However, there are a few key takeaways.
To arrive at “reasonable” royalty, Robart conducted a hypothetical, bilateral negotiation between the parties. In doing so, the judge highlighted the need to consider the importance of the SEPs to the standard as well as the importance of the standard and the SEPs to the products at issue. The specific “economic guideposts” he cited included the following:
- A RAND royalty should be set at a level consistent with the standard setting organization promoting widespread adoption of their standards.
- In the context of a dispute concerning whether or not a given royalty is RAND, a proper methodology used to determine a RAND royalty should therefore recognize and seek to mitigate the risk of patent hold-up that RAND commitments are intended to avoid.
- Likewise, a proper methodology for determining a RAND royalty should address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer.
- To induce the creation of valuable standards, the RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property.
- From an economic perspective, a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.
In the end, Robart’s RAND calculations more closely matched those urged by Microsoft. However, the methodology employed was that favored by Motorola. Overall, the case highlights that standard essential patent cases continue to raise challenging issues.