On July 30, 2015, the Ninth Circuit issued one of the most significant appellate opinions regarding standard essential patents (SEPs) subject to commitments to license on fair, reasonable and non-discriminatory (FRAND, or simply RAND) terms. In Microsoft Corp. v. Motorola, Inc. (Case No. 14-35393), the Court upheld determinations by U.S. District Court Judge James Robart (W.D. Wash.) as to (i) when a member of a Standard Setting Organization (SSO) is obligated to license that member's SEP on FRAND terms, (ii) what the proper methodology is for calculating a FRAND royalty rate, and (iii) what remedies are available for breach of an obligation to license a SEP on FRAND terms. The affirmance represents a major victory for Microsoft and other SEP licensees, and provides significant guidance regarding future FRAND disputes.
The Microsoft v. Motorola case involves a breach of contract action, filed by Microsoft after it concluded that Motorola's proposed licensing terms under the Motorola IEEE 802.11 and ITU-T H.264 SEP patent portfolios (respectively covering wireless local area network standards and video compression standards) were excessive and violated the FRAND obligations for SEPs, which obligations Motorola assumed as a member of the IEEE and ITU-T. Motorola initially sent Microsoft two letters offering to license its SEPs for 2.25% of the price of the end product incorporating each standard. (The end products included Microsoft's xBox game consoles and PCs running Microsoft Windows.) Microsoft claimed that Motorola's license offerwhich amounted to over $4 billion per yearwas in breach of Motorola's obligation to license its SEPs on FRAND terms. Shortly thereafter, Motorola initiated patent infringement proceedings in U.S. District Court, the International Trade Commission, and Germany seeking injunctions to exclude Microsoft's allegedly infringing products incorporating certain of those SEPs.
Microsoft prevailed at the district court, where Judge Robart conducted an initial bench trial on FRAND. After modifying several factors in the Georgia-Pacific analysis for determining reasonable royalty patent damages to account for the special circumstances surrounding FRAND-encumbered SEPs, Judge Robart calculated a FRAND royalty rate well below 2.25% per unit, resulting in a royalty amount of only $1.8 million per year. Microsoft's breach of contract claim was then tried to a jury, and Judge Robart's FRAND royalty calculations and underlying findings of fact were introduced as evidence at the jury trial. Microsoft argued to the jury that Motorola's initial licensing offer, as well as Motorola's conduct...