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Sunday, April 28, 2013

Court Ruling Takes a Stand on Essential High-Tech Patents

The high-tech patents wars are fed by the value of patents as weapons for extracting rich sums from companies and competitors.

But courts are blunting the patent weapon, at least for the kinds of patents deemed vital for communications and data-handling in devices like smartphones, tablets and online game consoles. That trend took another step with an opinion issued last Thursday by a judge for the United States District Court in Seattle.

In his 207-page ruling, Judge James L. Robart took on the issue of pricing for so-called standard-essential patents. These are patents that their corporate owners have pledged to license to others on terms that are “reasonable and nondiscriminatory,” often known as RAND. All well and good, but what is reasonable to the owner might seem like extortion to the licensee, depending on the price. That kind of standoff becomes more likely if the two companies negotiating are rivals in the marketplace.

With clear prose and some clever math, Judge Robart concluded that when a company has made a RAND commitment to an industry standards organization, the price should be low. That is especially important, he said, for the intellectual property in complex digital devices that are bundles of many hardware and software technologies.

The ruling, according to Arti K. Rai, a professor at the Duke University School of Law, “fits into a long line of recent cases in which courts are squarely rejecting attempts by patentees to claim high reasonable royalty figures when the patent in question is a just a small piece of the product.”

The case in federal court in Seattle is a breach-of-contract dispute between Microsoft and Motorola, whose mobile phone unit, Motorola Mobility, Google bought in 2011 for $12.5 billion. Google picked up 17,000 patents in the deal, which closed last year.

In essence, Microsoft argued that Motorola bargained in bad faith by initially offering outlandish terms to license its patents on a wireless communication standard, 802.11, and another standard for video compression, H264.

Microsoft contends that Motorola’s first offer, if applied to a wide range of Microsoft products, might result in royalty payments of more than $4 billion a year. Motorola has replied in court that opening offers are nearly always negotiated down substantially, and that Motorola was mainly seeking a license deal on Microsoft’s Xbox video console rather than Microsoft’s wider product portfolio.

Still, Judge Robart determined that a reasonable rate for licensing the Motorola patents would be just under $1.8 million a year. That is not far from what Microsoft was offering as reasonable, about $1.2 million a year.

In his ruling, the judge set out some basic principles. An important one, he said, is that “a RAND royalty should be set at a level consistent with the S.S.O.s’ (standard setting organizations) goal of promoting widespread adoption of their standards.”

Later, Judge Robart explained the problem with relatively high royalties on standard-essential patents. He noted that at least 92 companies and organizations hold patents involved in the 802.11 standard for wireless communication. If they all sought the same terms as Motorola, he wrote, “the aggregate royalty to implement the 802.11 standard, which is only one feature of the Xbox product, would exceed the total product price.”

Judge Robart’s ruling covers only one part of one patent case â€" a price for reasonable licensing terms on Motorola’s patents. And the case is continuing. But his opinion, said Jorge L. Contreras, an associate professor of law at American University, detailed “some overarching principles that apply in cases like this. He emphasized that there was a social good that should be taken into account, and what is good for the whole market, not just for the two parties involved in the litigation.”

The ruling, Mr. Contreras added, “makes the big picture a lot clearer.”