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Jury ruled that Motorola's use of FRAND patents was illegal, Google subsidiary must pay $14M+ in damages

While chic designs like the Moto X suggest that there's still hope for Google Inc. (GOOG) to turn a profit on its $12.5B USD Aug. 2011 acquisition, Motorola Mobility, Google's hopes of leveraging Motorola's seeming formidable patent portfolio as an offensive or defensive tool appear to be fading fast. 

I. A Big Jury Win for Microsoft in its "Home Court"

On Wednesday, in a closed-door ruling in Microsoft Corp.'s (MSFT) "home court" in Seattle, a federal jury ruled that Microsoft would get effectively a free license of Motorola's patents and ordered Motorola to pay modest damages to Microsoft after it was found to have breached its licensing obligations concerning video and smartphone patents.

The case was the second in lawsuit saga between the two firms.  Federal Judge James Robart of the U.S. District Court, Western District of Washington in Seattle last year ruled that Motorola was required to license its portfolio of video and wireless patents -- standards essential patents (SEP) bound by "fair reasonable and nondiscriminatory" (FRAND) licensing terms -- to Microsoft at a rate of $1.8M USD -- far less than the $4B USD Google at one point had hoped to squeeze from Microsoft. 

Google on Motorola
Google's subsidiary Motorola lost a major case this week. [Image Source: TechnoBuffalo]

After that victory, Microsoft filed a second suit against Motorola, claiming it had breached its FRAND obligations by asking for such a high license rate.  Microsoft argued that Motorola essentially gave it to "unreasonable" licensing options -- either pay a large sum ($4B USD) or give Android OEMs free licensing of Microsoft portfolio.

A jury this week ruled in agreement with Microsoft's lawyers that neither of these options was "fair" or "reasonable".  They thus decided that Motorola should be forced to give Microsoft basically a free license for its abuse.  Microsoft will pay Motorola $1.8M USD, but the jury ruled that Motorola must pay Microsoft $14.5M USD, essentially nullifying Microsoft's licensing fee.

Seattle Washington Wide
The case is being tried in Seattle, Washington, just 16 miles from Microsoft's headquarters.  The local court has handed Microsoft two major wins. [Image Source: Foreclosure Listings]

The verdict was reported by MLex reporter Curtis Cartier via Twitter:
The jury ruling reportedly involved $3M USD for Microsoft's court fees, as it was found in the right and $11.5M USD to cover the costs of Microsoft moving a warehouse in Germany to prevent its Windows and Xbox stock from being destroyed.

The verdict is slightly less than the $23M USD that Microsoft sought, but nonetheless is a massive win for Microsoft.  Microsoft can now move forward with its efforts to ban Motorola's products from the market if Motorola refuses to pay Microsoft's exorbitant licensing fee demands.

II. Android OEMs Face Microsoft Milking

A Microsoft spokesperson confirmed the ruling to Reuters cheering the verdict, stating, "This is a landmark win for all who want products that are affordable and work well together."

The "affordable" part may be somewhat subjective.

Microsoft has driven up the prices of devices that run Google's Android platform by demanding substantial per-device royalties.  In Q1 2013 Samsung Electronics Comp., Ltd. (KSC:005930shipped 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.

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 in Q1 2013, respectively -- and Microsoft is likely making $1-1.5B USD or more from royalties alone.

Google's FRAND loss to Microsoft may force it to begrudgingly pay Microsoft licensing fees.  Motorola is the last major OEM not to tap out and agree to pay Microsoft.
Android licensing
Android OEMs are paying boatloads of cash to Microsoft. [Image Source: Shutterstock] 

Ultimately, Android OEMs are finding there's no free lunch.  After fleeing Windows Mobile and Microsoft's operating system license fees for Google's free Android based platform, they're now finding themselves paying significant royalties -- typically $10 USD or more per device -- to Microsoft anyways.  

In some OEMs cases like HTC, ZTE, and Huawei, they are too young and have too little intellectual property to fight Microsoft's patent demands via countersuits.  In the case of LG, Motorola, and Samsung, the underlying problem is that much of their patents were licensed cooperatively as part of industry standards.  This has played to the advantage of companies like Microsoft and Apple, Inc. (AAPL) who refused to cooperate with their fellow firms, as federal courts have now ruled their patents are up to 10,000 times more valuable than the Android OEMs FRAND patents.

Motorola's spokesperson William Moss sounded resigned about the decision commenting to Reuters, "We're disappointed in this outcome, but look forward to an appeal of the new legal issues raised in this case.  In the meantime, we'll focus on building great products that people love."

III. Motorola v. Microsoft Contrasted to Samsung v. Apple -- Different Facts, Same Outcome

With the most recent ruling Motorola has essentially lost to Microsoft in the U.S. pending appeal.

Elsewhere, in Germany it has scored a minor win, forcing some Microsoft products off the market, although Microsoft has forced Motorola into similar warehouse relocations as Motorola smartphones have also been pulled.  

This outcome is not necessarily indicative of which company will ultimately win -- Microsoft seems to have a least a minor edge given the U.S. outcome -- but rather a testament to Germany's strange intellectual property systems which typically starts cases with a ban (effectively an assumption of guilt) later removing the ban if the infringement claims prove untrue.  For German consumers this means that they now have to go to neighboring countries to pick up some Motorola and Microsoft products involved in the case (e.g. the Moto RAZR MAXX or Microsoft's Xbox 360).

Dusseldorf court
Microsoft and Motorola both scored bans on each others' products in Germany.
[Image Source: All About Samsung]

Motorola didn't manage much better against Apple.  Federal courts are now essentially ignoring the pair's spat.  Apple v. Motorola -- a case in which each company accused the other of patent infringement -- has been dismissed with prejudice not once, not twicebut three times.

The Washington verdict is arguably the second major blow to Android OEMs on FRAND grounds.  In August President Obama's trade secretary rejected a decision by the U.S. International Trade Commission.  

Obama pointin
Obama's trade appointee shot down a ban on iPhones and iPads, despite a preliminary finding by the ITC that Apple willfully stole Samsung's FRAND IP and refused to pay for licensing it.
[Image Source: Sodahead]

That case, however, was very different.  Whereas Motorola was found to have been abusive in its licensing request, Samsung was found to have asked for reasonable licensing rates.  Apple refused to pay Samsung -- anything -- hence the ITC ruled on grounds of "reverse-holdup" that in this special case Samsung could sue Apple for a product ban using FRAND products, as Apple appeared to be effectively willfully stealing and refusing to pay for Samsung's IP.

The Obama administration ignored these facts, siding with Apple, whose late CEO direct President Barack Obama's digital media campaign in the 2012 election.  The administration's decision set an alarming precedent in that it signaled that companies can now essentially willfully, openly steal FRAND IP and refuse to pay anything for licensing (as the ITC ruled Apple did), so long as they do favors for the President.

Sources: Twitter, Reuters

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By Tony Swash on 9/5/2013 3:37:07 PM , Rating: -1
Whereas Motorola was found to have been abusive in its licensing request, Samsung was found to have asked for reasonable licensing rates. Apple refused to pay Samsung -- anything -- hence the ITC ruled on grounds of "reverse-holdup" that in this special case Samsung could sue Apple for a product ban using FRAND products, as Apple appeared to be effectively willfully stealing and refusing to pay for Samsung's IP.

That not an accurate or complete account of the situation. There's a surprise.

The issue with Samsung's claim was that

a) It tried to double dip, that is Samsung had licensed SEP IP to a component manufacture and the universal practice in the tech world is for that license to cascade down to the purchasers of that component. In the Samsung- Apple case Samsung had revoked the cascaded license in relation to just Apple. That's discriminatory and is barred under the FRAND framework.

b) Then Samsung muddied the waters of any license fee negotiation wanted a percentage of the total iPhone price as a license fee rather than a percentage of the price of the component containing the IP. That's discriminatory and is barred under the FRAND framework because nobody else pays such a ration based on total product costs.

Apple stated that it was willing to pay Samsung FRAND rates for its UMTS portfolio, comparable to what it paid to license technologies like H.264. However, it was only prepared to pay a total of 5-7 percent royalties for baseband chip patents, and only on the value of the chip itself. Samsung's share of those total royalties would have to be proportional to its contribution. In return, Apple would offer Samsung a reciprocal arrangement on its own UMTS patents. Samsung didn't like any of this.

The "patent infringement" that Samsung asserted in order to win its original (now vetoed) U.S. import ban against certain GSM versions of Apple's iPhone 4 and iPad 2 models isn't a matter of Apple copying technology that Samsung invented, and then refusing to pay Samsung for the use of it.

Samsung claimed infringement of a radio technique implemented in low level code and related to the GSM / UMTS 3G networking standard. That code was sold to Apple as part of a finished product, embedded in the PMB9801 baseband chips it purchased from Infineon to solder into the logic boards of its iPhone 4 and iPad 2.

On the iPhone 4 and iPad 2 models Samsung was targeting, Apple's iOS runs the A4 Application Processor (AP) while a second, embedded operating system RTOS, sold by Mentor Graphics) runs the Baseband Processor (BP). The two chips communicate like a PC connected to an external modem via a serial cable.

The Application Processor is the main SoC, such as the iPhone 4's A4, which incorporates an ARM CPU core, a PowerVR GPU core and additional integrated logic. This "brain" also has RAM attached to it externally.

The Baseband Processor is a computer unto itself which handles the device's mobile radio and analog audio processing. On the GSM iPhone 4 and iPad 2, this is Infineon's PMB9801, branded as "X-GOLD 616" and identified as 337S3833 on the chip itself. It has its own ARM microcontroller, RAM and integrated ROM firmware and talks to the AP, the antenna's radio chip and the SIM card.

In 2010, iSuppli estimated the iPhone 4's A4, which is manufactured by Samsung, to cost $10.75, while it estimated its Infineon baseband chip to cost $11.72.

In its hardball negotiations with Apple last year, Samsung demanded a 2.4 percent royalty to cover the use all of its Standards Essential Patents (SEPs) pertaining to 2G/3G GSM/UMTS technologies used in the baseband chip.

Apple had a few problems with this, as noted in an April 30, 2012 letter from Apple's intellectual property licensing director Boris Teksler, addressed to Seongwoo Kim at Samsung. First, it disputed whether Samsung's SEPs were even valid. Second, it doubted whether they were even in use within the components it was buying. Third, the baseband components Apple was buying, initially from Infineon and later Qualcomm, had already licensed Samsung's technologies on behalf of their customers.

This "first sale" doctrine means that if you buy a product from a company that has legitimately licensed the use of the technologies it employs, the original patent owner can't go "double dipping" and demand more patent royalties from the end user, just as a landowner can't lease their property to a hotel chain, then come back and demand rent from anyone who comes to stay there.

Most egregiously, however, Samsung wasn't just demanding a double-dipping royalty for questionable patent claims on the baseband chip. It was demanding a royalty percentage of the full retail price of the finished product. With an average selling price of $660 in 2012, that amounted to around $15.84 per iPhone and iPad Apple was selling, that is more than the cost of the component containing the disputed Samsung feature.

RE: Correction
By Reclaimer77 on 9/5/2013 3:56:47 PM , Rating: 4
Sorry but Apple is breaking the law, and everyone keeps trying to avoid that fact. Especially you, but that's the facts.

What Obama's ruling did was to specifically allow Apple to keep breaking the law until Samsung is forced to accept whatever Apple is willing to pay them. If anything!

Apple has gone years without paying one cent, while making billions off the devices. Nowhere in FRAND law can you decide to just continue to use the patents if a settlement hasn't been reached, but that's exactly what Apple continues to do.

RE: Correction
By Reflex on 9/5/2013 4:53:05 PM , Rating: 2
Actually, a court will decide what Apple has to pay, just as they have with Microsoft/Motorola recently. And it will be something, it will be based likely on the same formula used in that case, and what others are paying for similar uses of the same patents. Which is how FRAND is supposed to work.

And no, challenging the terms is not 'breaking the law'. Apple actually has an explicit right to challenge this in court, and they are doing so.

RE: Correction
By ritualm on 9/6/2013 1:22:24 PM , Rating: 2
The judge has the final say on what rates he/she will set, yet Apple takes offense at THAT mere suggestion, because Cupertino does not want to pay a single cent to a competitor. That is not "challenging the terms", that is called being belligerent and disrespectful to the court system. Civilians doing that will earn them a Contempt of Court charge, companies doing that will earn them a full case dismissal with prejudice.

Apple plays fast and loose with the court system, and you're perfectly okay with it. You've gone full on retard.

RE: Correction
By Reflex on 9/6/2013 2:48:02 PM , Rating: 2
Where are you making this stuff up? Like Microsoft, Apple knows they will be paying FRAND terms for the patents they have been ruled to be infringing. They will have to pay for past infringement, current use, and future use. They will not 'get away' with anything, they will simply have to pay a fair, court decided rate for them.

That is how it just worked out in the Microsoft case, that is how it will work out in any Apple related FRAND patent cases.

RE: Correction
By Reclaimer77 on 9/6/2013 3:01:45 PM , Rating: 2
Wow you really do not get this stuff at all. Why don't you shut the fuck up and stop lying, or do you like all your posts being red?

RE: Correction
By WhatKaniSay on 9/5/2013 4:33:07 PM , Rating: 1
Well said Tony. I have Never understand the case this way. But unfortunately DT audience are more interested in Apple bashing than facts/reasoning...

Reading from other Apple related responses I’ve seen on DT, for you to get a proper/civil dialog on this issue, you must first replace Apple with Google and repost your argument then you will likely get avalanche of positive/constructive responses.

RE: Correction
By sprockkets on 9/5/2013 5:09:16 PM , Rating: 3
Or we could read the ITC's decision itself which garnered me a 6 the last time I posted it:

Which shows that just about every long winded argument that you just posted is just bull sht.

RE: Correction
By WhatKaniSay on 9/5/13, Rating: -1
RE: Correction
By Reflex on 9/5/13, Rating: 0
RE: Correction
By Reclaimer77 on 9/5/2013 7:51:25 PM , Rating: 3
All sprockets did was quote the ITC! He didn't inject any bias. And since you chickenhawks are too brainwashed to inform yourselves, I'll just quote it myself right here.

"Apple also criticizes Samsung for tying some of its license offers to the settlement of litigation. We find Apple's argument to be somewhat hypocritical. The following sentence from Apple's submission to the Commission on April 10, 2013, indicates that Apple has no intention of paying Samsung any royalties until after the conclusion of litigation:
If the Commission were to determine that the '348 patent is valid, infringed, and enforceable -- and it should not for all the reasons the ALJ found and Apple previously briefed -- and if that judgment were affirmed on appeal, Apple would stand ready to pay FRAND royalties.
Resp. Apple Inc.'s Reply Submission at 20 (April 10, 2013) (public version April 12, 2013).
Apple's position illustrates the potential problem of so-called reverse patent hold-up , a concern identified in many of the public comments received by the Commission.20 In reverse patent hold-up, an implementer utilizes declared-essential technology without compensation to the patent owner under the guise that the patent's owner's offers to license were not fair or reasonable. The patent owner is therefore forced to defend its rights through expensive litigation. In the meantime, the patent owner is deprived of the exclusionary remedy that should normally flow when a party refuses to pay for the use of a patented invention….

Samsung can hardly be accused of patent hold-up when it has licensed its declared-essential patents -- including the '348 and '644 patents -- to more than 30 companies.

Apple and some public commenters have also argued that issuing a remedy for a patent owner that has breached its FRAND obligation would result in patent hold-up, undermine SSOs, and thereby harm competitive conditions in the U.S. economy and U.S. consumers. Whatever the merits of such arguments, they are inapt to the facts of this investigation. As we have determined above, Apple has not proved that Samsung violated a FRAND obligation, and Samsung has widely licensed the '348 patent. We need not decide here whether some future investigation showing evidence of patent hold-up or of harm to SSOs would require a different analysis"

And the judge in the Moto vs MS case said:

"As discussed above, in certain circumstances seeking injunctive relief may constitute a breach of the RAND commitment, whereas in other circumstances such conduct may be proper. "

RE: Correction
By Reflex on 9/5/13, Rating: -1
"I'm an Internet expert too. It's all right to wire the industrial zone only, but there are many problems if other regions of the North are wired." -- North Korean Supreme Commander Kim Jong-il

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