November 12, 2012, 7:59 PM — Microsoft and Motorola Mobility will face off in court on Tuesday for the start of a patent trial that could help establish how royalty rates are calculated for standards-essential patents.
Microsoft sued Motorola's smartphone division, which is now part of Google, two years ago, claiming it demanded an unreasonable royalty rate for the use of its patents related to the 802.11 wireless and H.264 video standards.
Standards are important because they can lead to lower costs, by increasing manufacturing volumes, and increase competition, by making it easier for consumers to switch to a rival company's product.
But companies often own technology patents related to industry standards, complicating their implementation. To ease matters, patent holders agree to license these essential patents on "fair, reasonable and nondiscriminatory terms," which is what Motorola committed itself to do with the patents in this case, court records show.
Motorola now wants too much money for the use of the patents, Microsoft says. Motorola wants Microsoft to pay 2.25% of the price for each product that implements the standards, including its Xbox 360 game console and Windows OS.
Microsoft says that's far too much. For the 802.11 patents, for example, it says it should pay only $0.05 on each product it sells. It cites several arguments, including one based on a "stacking" theory, which says that if every company contributing patents charged as much as Motorola, the standard would be too expensive to use.
Since Microsoft and Motorola can't reach agreement, Judge James Robart, of the U.S. District Court in Seattle, has decided he has no choice but to step in and determine a royalty rate for them.
The trial will be in two parts. In the first, Robart will calculate a royalty rate for Motorola's patents. He'll make that decision on his own, without a jury. In the second part, expected to begin next spring, a jury will use that rate to decide whether Motorola is in breach of contract by overcharging Microsoft.
It won't be the first time a judge has determined a FRAND royalty rate for patents, said Mark McKenna, a law professor at Notre Dame Law School. But Robart's decision nevertheless could set a precedent, both in a narrow sense and potentially in a broader sense too.
In the narrow sense, his decision will establish a royalty rate for Motorola's standards-essential patents that could be applied to other cases involving the same technology. For example, the 802.11 patents were part of a case that was dismissed last week between Motorola and Apple.