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Seattle federal judge rules that developing standards is pretty much worthless

Imagine you are a company who has the expertise and experience to develop and patent crucial technologies that are subsequently embraced by your market segment.  You'd think that'd be the ticket to big royalties.  But you'd likely be wrong.

I. Local Judge Deals Big Win for Microsoft

In a ruling this week Federal Judge James Robart of the U.S. District Court, Western District of Washington ruled that Microsoft Corp. (MSFT) had to pay next to nothing -- a mere $1.8M USD -- to license Google Inc. (GOOG) subsidiary Motorola's portfolio of video and wireless patents, which likely cost tens of millions (if not more) to develop.  

At a courthouse in Seattle, just 16 miles east of Microsoft's Redmond campus, the home-court judge dealt the big win for Microsoft on Thursday.  The royalties ruling comes nearly in line with Microsoft's requested figure -- $1M USD -- and falls far from the $4B USD Google Inc. (GOOG) was hoping for.

Microsoft demands much higher royalties from phonemakers who use Google's Android platform.  In Q1 2013 Samsung Electronics Comp., Ltd. (KSC:005930) shipped 70.7 million Android smartphones, and reportedly paid a toll of $15 USD per handset -- indicating that Samsung alone may have paid Microsoft over a billion dollars in licensing royalties for the quarter.

Windows Phone movies
Microsoft has to pay virtually nothing to license Google's video codec patents, yet can demand billions from Android OEMs. [Image Source: WP Central]

Add in royalties from LG Electronics, Inc. (KSC:066570), ZTE Corp. (SHE:000063), and HTC Corp. (TPE:2498) -- the second, fourth, and fifth largest Android phone sellers, respectively -- and Microsoft is likely making $1-1.5B USD or more from royalties alone.

While one can certainly argue the respective merits over Microsoft's largely API and UI based operating system portfolio versus Motorola's mobile firmware and codec centered patent portfolio in terms of good versus better, the court's ruling does not compare the portfolios in relative terms -- it gives Google orders of magnitude less.

One might argue that the Android OEMs should have challenged Microsoft's high licensing fees and took the case to court.  But Samsung learned first hand that outcome is often just as bad.  It was ordered to pay Apple, Inc. (AAPL) over a billion dollars in a Calif. jury verdict for three utility and three design patents.

II. Punish Those Who Cooperate

On the surface this all seems to suggest that Motorola and its fellow Android phonemakers' patents are pretty much worthless, while Microsoft and Apple have tapped some sort of special brilliance.  But on a deeper level it appears to be that the judge's ruling -- combined with Apple's Californian court win over Samsung -- give an effective ruling that cooperating among companies via the development of patented standards is basically worthless.

Historically patents developed as part of a standard and licensed under fair-reasonable and non-discriminatory (FRAND) terms have had lower royalty rates, so there's no arguing that the amounts in question do have a historical basis.  What has changed, though, is the tremendous inflation in valuation of non-FRAND patents.  Decades ago non-FRAND patents might be worth up to 10 times more than FRAND patents, but carried risk in that you had to take the infringer to court and win.  Now with the value of non-FRAND patents worth around 1,000 times more than FRAND patents, that risk is essentially a moot point.

Every man for himself
Recent federal rulings have pretty much told the phone industry to adopt an "every man for himself" model and abandon cooperation. [Image Source: 123rf]

If FRAND patents are being licensed for approximately 1,000 times less than non-standards patents, it basically means that a company would be insane to cooperate with its peers.  It's an issue that we've discussed here before, and it's an issue that remains very real and provocative.

David Howard, Microsoft's Deputy General Counsel, bragged in a statement, "This decision is good for consumers because it ensures patented technology committed to standards remains affordable for everyone."

But ultimately if this precedent sticks in the U.S., the long-term outcome may be that there will be no more standards work and no more standards patents in the mobile industry (and potentially other industries as well).

That's bad news for Google, a company who has promoted cooperation and exchange of ideas in the smartphone industry.  The recent federal court verdicts seem to send a clear message to the smartphone industry -- every man for himself.  Google doesn't fit with that model, and is being punished to the tune of billions for trying to promote cooperation and equal licensing rates.

Because according to this and other recent rulings, FRAND patents are pretty much worthless, with similar patents not developed as part of a standard being around 1,000 times more valuable.

Google is appealing the decision.

Source: Reuters

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Frand is a special type of license
By ptmmac on 4/26/2013 6:18:05 PM , Rating: 4
I don't know why it has to be explained to you that Frand patents are patents that have given away property rights to a standards body so that they can be put together and made into a standard. The purpose of the standard is to lower costs for everyone rather than fighting over how to make several devices work together (such as a radio that functions as a telephone in a network). Motorola set up the system that Google is now trying to manipulate for their own benefit. Google is not synonymous with good. Motorola knew that they had made a serious business mistake by not creating some patents that were not standards essential that were necessary for a phone to operate. The problem is that 2 types of businesses have converged into the same market: cell phones and computers. Computers began their market with out a network built into the system. It was added later and thus many of the patents created for computers were not given to a frand consortium like most of Motorola's patents.

You are so sure that nothing Google does is wrong and nothing Microsoft or Apple have done is right that you missed the forest for the trees. Microsoft and Apple don't sell information about their customers to other businesses and governments. Google does do this. This doesn't matter as far as the law is concerned but it is one example of how Google does do "evil". I only mention this because your whole argument is based on the idea from a school yard argument that the law is somehow "Just not fair" because your team is losing this game.

Google does not get to rewrite the rules of the game just because it doesn't like them. Frand patents as offensive weapons in a battle of standards is just plain not allowed by long established practice in the cell phone and other technical businesses. The other red herring is the idea that somehow Apple and Microsoft are not innovating and so don't deserve the money they are getting from their non frand encumbered patents. Both Apple and Microsoft built the computer business for consumers and businesses over the last 30 years. They didn't use frand type patent constructs to streamline their business, they simply cross licensed all of their patents to each other instead. This was something that was a brilliant idea and has left both of them unencumbered with a broader type of patent license system. Google has been dumping free software in the market, not because they are high minded wonderful people. They did this to cut off income to their most obvious competitors. The idea that no one will ever add a patent to a Frand type of pool is silly. Some economic problems cannot be solved any other way. Just because your imagination can't figure out how someone can make money from a Frand licensed patent does not mean it can't be done. Google and Red Hat figured out 2 different ways to make money off of free software and no one thought that could be done back in the '90's.

I know that what I am saying is not going to change any minds here. I follow this website to see a different viewpoint and sometimes I get some good analysis. This is not one of those times. Frand is what it was made to be: a compromise among a large group of companies that created the cell phone industry. Google is going to have to live with this just like Apple and Microsoft have to live with Google's control of search. Reality and the law are what they are. Get over it and find some other cause to champion where you are not just barking at the moon.

"If a man really wants to make a million dollars, the best way would be to start his own religion." -- Scientology founder L. Ron. Hubbard

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