Federal Court Determines Fair, Reasonable and Non-Discriminatory (RAND) Rate for Standard-Essential Patents
The U.S. District Court for the Western District of Washington became the first U.S. court to set fair, reasonable and non-discriminatory (FRAND or RAND) royalty rates and range for standard-essential patents (SEPs). Microsoft v. Motorola, 2:10-cv-01823-JLR (W.D. Wash. Apr. 25, 2013) (Robart, J.) The suit stems from Microsoft’s allegation that Motorola’s offers to license certain Wi-Fi and video compression SEPs violated Motorola’s contractual commitments to license its standard-essential patents on FRAND terms.
As a matter of first impression, the district court first developed a framework to assess FRAND terms for SEPs. In terms of basic principles, the court stated that “a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.” The court proceeded to employ a modified version of the Georgia-Pacific “reasonable royalty” calculation, which courts have routinely used to calculate damages in patent infringement actions. The court modified the first Georgia-Pacific factor (royalties received by the patentee for the patent(s) at issue) to include consideration only of royalties “comparable to RAND licensing circumstances,” including both “license agreements where the parties clearly understood the RAND obligation, and  patent pools,”; ruled the fourth Georgia-Pacific factor (the licensor’s policy and marketing program to maintain its patent monopoly via selective licensing), “is inapplicable in the RAND context because the licensor has made a commitment to license on RAND terms and may no longer maintain a patent monopoly by not licensing to others”; and concluded that for the final factor (a hypothetical negotiation), “reasonable parties in search of a reasonable royalty rate under the RAND commitment would consider the fact that, to induce the creation of valuable standards, the RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property.”
Based on that framework, the court proceeded to analyze the specific factual evidence offered at trial. Concluding that several of Motorola’s patents provided only minimal contribution to the standards and played only minor importance in the overall functionality of some of Microsoft’s products, and that the characteristics of a similar patent pool (of which Microsoft and Google, the later being Motorola’s parent) are members “closely align with all of the purposes of the RAND commitment,” the court set a RAND royalty rate for Motorola’s portfolio of H.264 patents of 0.555 to 16.389 cents per Microsoft product and a RAND rate for Motorola’s portfolio of 802.11 patents of 0.8 to 19.5 cents per Microsoft product. In particular, the court rejected Motorola’s proposed 1.15 percent 1.73 percent rate of the Microsoft product, finding that such a rate if adopted by all standard-essential patentees would result in a royalty exceeding the cost of the product and that “a royalty rate that implicates such clear stacking concerns cannot be a RAND royalty rate because such a royalty rate does not stand up to the central principle of the RAND commitment—widespread adoption of the standard.”
The case is slated to proceed to trial later this year on the issue of whether Motorola’s offer violated its RAND obligations.