Court will decide how much patent cash Motorola gets from Microsoft - Ars Technica (blog)

Google and Motorola will get a few stacks like this from Microsoft. But how many?

How much is a patent really worth? That’s one of the most contentious questions in the technology patent wars. And it can be especially difficult to answer when the patent is one that’s tied to an industry standard.

The question of what's fair to charge for a license to a standards-essential patent may finally get an answer in a trial beginning at 9 a.m. PT today in Seattle federal court. The US District Court case stems from a lawsuit Microsoft filed against Motorola (now owned by Google) on November 9, 2010 (PDF). The company accused Motorola of violating the promises it made to standards organizations to license patents at fair and reasonable rates.

Motorola Mobility bases much of its patent litigation and licensing strategy on H.264 video and Wi-Fi patents that are incorporated into industry standards codified by groups such as the IEEE (Institute of Electrical and Electronics Engineers) and the ITU (International Telecommunications Union).

This makes it easier to get licensing fees from competitors, because companies are obligated to comply with industry standards and thus, out of necessity, use Motorola’s patented technology. Motorola has struck deals with more than 50 companies including Nokia, Ericsson, RIM, Samsung, LG, and HTC.

Motorola attempts to charge a standard rate of 2.25 percent of the retail cost of a device, but that likely gets negotiated downward. Microsoft and Apple have both refused to pay license fees on the iPhone, Windows PCs, and the Xbox, saying Motorola's 2.25 percent demand violates its commitments under the FRAND (fair, reasonable, and non-discriminatory) principle. In exchange for having its patents included in industry standards, Motorola is required to license them on non-discriminatory terms, and at rates that are fair and reasonable.

The company’s stance has not changed in the months since it was purchased by Google, which acquired Motorola largely because of its patent portfolio. That's not surprising, as Google has argued that Apple and Microsoft have attacked Android with bogus patents and may want to level the playing field. Apple, of course, won a $1 billion judgment against Samsung for patent infringement in Android phones, and Microsoft collects regular licensing fees from nearly every Android vendor except Motorola. There are also various pending lawsuits in which Microsoft accuses Motorola of infringing its patents.

Neither Microsoft nor Apple base their assault on patents subject to FRAND restrictions, and each says Motorola is abusing the standards process. Both companies sued Motorola claiming it has violated its obligations to standards bodies, but last week Apple’s suit was thrown out after the iPhone maker suggested it may not be willing to abide by a court-defined licensing rate if it’s not low enough. The FTC is also looking into whether Google is misusing standards-based patents through its ownership of Motorola.

Microsoft is proposing to pay $1.21 million per year to Motorola, but seems ready to accept whatever rate the court says is fair and reasonable. In part, that's because any court-ordered rate won't be as high as Motorola wants. Microsoft has complained Motorola’s 2.25 percent demand would amount to $4 billion a year. In June, Motorola offered to lower its price to 50 cents per Windows PC, but did not budge on its demand of 2.25 percent for the Xbox 360. Microsoft says the demands are still too high, and points to MPEG LA, a patent pooling organization that charges Microsoft only two cents per unit for licenses to use H.264 technology in Windows.

The trial has two parts. The first is scheduled to last from today until November 21 and focus on setting a reasonable rate for Motorola’s patents. In the weeks or months after its conclusion, Judge James Robart will decide on a number, or perhaps a formula for determining a fair license rate. The second part of the trial, expected to be held in the spring, will decide whether Motorola violated its agreements with standards bodies.

As noted by the Wall Street Journal, Robert “could set a percentage, a formula or a set of factors to define a reasonable and nondiscriminatory patent royalty.” While the decision would only have an immediate effect on Microsoft and Motorola, it could help provide guidance to other companies in future FRAND negotiations and lawsuits.

With the trial getting underway today, let’s take a closer look at the two sides’ arguments. We’ll start with Microsoft.

Microsoft: These patents are barely used in Windows and Xbox

Microsoft argues that charging 2.25 percent of the retail cost of a device is unreasonable because Motorola’s patented technology is used in only limited ways in Windows and the Xbox 360.

As a pre-trial brief filed by Microsoft last week argues (PDF), Motorola's wireless and video patents are used by Microsoft in ways that are barely noticed by an average user of the Xbox 360 or Windows. Out of 16 Motorola patents essential to the H.264 standard, 14 cover interlaced video, Microsoft states.

“Computers display video in progressive format, meaning that the entire picture is created line by line,” Microsoft states. “Progressive content is encoded by processing a picture’s even and odd lines together (‘frame coding’). An alternative format is ‘interlaced video,’ which involves encoding odd and even lines separately (‘field coding’).”

The upshot according to Microsoft is that “Interlaced video is a relic of analog over-the-air broadcast television, where there were advantages in capturing and displaying the even and odd lines of the picture separately. Interlaced video is rarely transmitted over the Internet, but in order to be fully compliant with certain profiles and levels of H.264, a product must support both progressive and interlaced video." Microsoft products like Windows and Xbox support both formats, but interlaced video is rarely encountered.

As for Windows, Microsoft said “Motorola and its experts have gone to great length to try to find examples of interlaced content, such as from pirate Web sites and obscure test clips, that Windows can play.” On the Xbox, video games and standard DVDs do not use H.264. Microsoft acknowledged use of interlaced video on the Xbox through AT&T’s U-verse TV service, but said “only a tiny percentage of Xbox users ever obtained the software for U-verse."

There are two H.264 patents from Motorola not limited to interlaced video, but one of them has expired and the other expires four months from now, Microsoft wrote. “Like the interlaced patents, these patents simply involve choices... for which alternatives existed that could have been implemented in the standard instead,” Microsoft wrote.

On the wireless side, Motorola asserts 24 patents related to the 802.11 Wi-Fi standards, 11 of which are allegedly used by the Xbox. “However, even the larger group of 24 contains no patent that has much value, as there were available alternatives that the drafters of the 802.11 standard could have adopted instead of these patents,” Microsoft wrote. “Moreover, these patents are either not used by Microsoft’s Xbox or are not relevant to its normal operation.”

Xbox consoles were equipped only with wired Ethernet between 2001 and 2010, although a separate adapter allowing Wi-Fi connections from the Xbox was sold beginning in 2004. A new version of the 360 that launched in June 2010 contained wireless connectivity through a Marvell chipset without need for an adapter.

802.11n wireless adapter for the Xbox 360.

The 11 wireless patents that apply to the Xbox include two that have expired, two relating to peer-to-peer communication, three related to security, one related to the current 802.11n standard, and three related to earlier 802.11n standards, Microsoft said.

Peer-to-peer communication “is not used in normal operation when an Xbox connects to a wireless access point,” Microsoft says. The three security patents are likewise called irrelevant because the “Xbox implements its own end-to-end encryption of any sensitive data, independent of any security provided by the 802.11 standards.” As for the other 802.11 patents, only the one specifically related to 802.11n holds any significant value to the Xbox console. That Motorola patent covering 802.11n technology used in the Xbox expires in May 2013, Microsoft said.

Despite its argument that Motorola’s patents are barely relevant to Windows and Xbox, Microsoft is offering to pay $1.21 million to cover license fees for the year 2012. In coming up with its estimate, Microsoft points to the prices charged by the MPEG LA patent pool and the Via Licensing Corporation patent pool covering 802.11 patents, which includes a handful of companies including NTT and LG. Microsoft also notes the $3 to $4 price for Marvell chips while arguing that Motorola's attempt to calculate a royalty based on the entire price of an Xbox is unreasonable.

Microsoft proposes paying Motorola $474,000 for its H.264 patents and $736,231 for its wireless patents. “For 2012, Microsoft has paid $13 million in royalties to the MPEG LA H.264 pool,” Microsoft says. “If Motorola were a licensor in the MPEG LA H.264 pool, Motorola’s share of the 2012 pool royalties paid by Microsoft would have been $474,000.”