May 11, 2012Business
Microsoft v. Motorola: using or abusing the legal system?

Bill Gates poses with Christopher Galvin, then CEO of Motorola, in 1998. Now, nearly fifteen years later, the two companies are on less agreeable terms.There is no end in sight to the corporate patent wars in the courts today.  A few months ago I wrote about the ongoing battle between Motorola and Apple and Samsung and Apple.  These cases were centered primarily around the possible misuse of FRAND patents, in both infringement and as a legal tactic. While patent infringement should be discouraged, the issue here is that the major technology companies are using these patents as a legal tactic because not only is there much at stake financially for each party, neither company wants its products taken out of the market. In recent news, Motorola and Microsoft have also been battling it out in courts both here and abroad, with a ruling given in Germany and an initial ruling in Washington D.C. The challenge in the Motorola/Microsoft cases is how to align all of the rulings so that a clear precedent is set for similar types of cases. This also may deter companies from using the courts in a similar manner because the “gray area” will be more defined.

To provide a quick background, FRAND patents are not novel but have recently been called into question in these patent wars. If a company has a patent on something that is declared essential for an industry standard, then the company must license the patent to third parties under FRAND terms, that is, fair, reasonable and non-discriminating terms. Any companies that hide their essential patented technology and use it to hinder competition entering the market or to extract high license fees can be guilty of antitrust violations.  Basically, the patent holder cannot pick and choose which companies can use essential technologies because otherwise the company would gain an unfair advantage over the entire industry. The company must try to charge about the same amount to each party requesting a license. The FRAND concept is one way to prevent the abuse of power in an industry. 


When Microsoft approached Motorola for the use of patents involving technologies such as a standard video format, Motorola asked for royalties of 2.25 percent on the price of each Xbox and Windows PC sold.  Microsoft said this would amount to $4 billion annually, believed this to be an outrageous rate and filed a lawsuit in a U.S. federal court in Seattle in November of 2010.  Motorola contends that this was just its initial offering and that Microsoft did not attempt to negotiate the terms but instead just filed a lawsuit.  Microsoft contends that Motorola's patents form a very small percentage of the Windows operating system and that this unreasonable royalty rate was demanded by Motorola. Motorola believes that it honored its FRAND commitments because it has cross-licensed with more than 50 other companies with no hitches. In the lawsuit with Apple, Motorola also offered the company a royalty rate of 2.25 percent.

In Mannheim, Germany, the judge in a regional court ruled that Microsoft's Xbox and Windows doIf the German injunction is upheld, Microsoft could be forced to stop importing Xboxes from its overseas manufacturers. infringe on some of Motorola’s patents.  The judge also granted Motorola's request for an injunction against the sales of Windows 7, Xbox 360, Internet Explorer and Windows Media Player 12 in Germany. However, the judge in the Seattle case had issued a temporary restraining order in the last month, preventing the injunction from being enforced until he has reached a final decision in the case before him.

In the U.S., Motorola and Microsoft also have a case before the U.S. International Trade Commission (ITC) in Washington, D.C. Motorola claims the Xbox infringes on some of Motorola's FRAND patents and has asked for an injunction preventing Microsoft from importing Xbox consoles, made in China, into the U.S. An ITC judge made an initial ruling that Microsoft violates four of those patents but a six-member commission is needed to make the final ruling on any injunction.

The court in Seattle is the last one to deliberate on the issue. Judge James Robart of the U.S. District Court of Western Washington was supposed to decide the case on May 7 but will reserve his judgment on the motions as he needs more time to consider the arguments. The judge’s decision should be in line with the outcomes of the cases in Germany and before the ITC, and his decision may help define what reasonable terms are for FRAND patents, specifically the licensing rates that Microsoft would pay Motorola in order to keep selling Xbox and Windows products worldwide. It will also determine whether the injunctions will be enforced or not.

Sony was in a similar position last year in Europe when LG alleged Sony was violating certain patents related to the handling of Blu-ray technology. All PlayStation 3 shipments to the Netherlands (where all European PS3 imports arrive) were seized but shortly thereafter, the systems ended up being freed and months later the parties reached a settlement. That case was the first time a patent had been used to obtain a console importation ban.

Judge Robart said his preliminary view is that he will likely deny Microsoft's motion that Motorola breached its contract, and that he would likely deny as well Motorola's motion that Microsoft gave up its right to licenses under reasonable terms. However, the judge made some critical statements: "The court is well aware it is being used as a pawn in a global, industry-wide business negotiation,” and that the legal fees alone "could finance a small country."

Judge Robart’s statements highlight the problem with these types of cases. The major technology companies have unlimited legal funds to use the courts to their advantage to ensure that their products stay in the market, and ultimately are purchased by the consumer. This is the tangible outcome felt by the public: if the Xbox 360 could be even temporarily import banned in the US, this would have a huge impact on the gaming industry. While a patent infringer should not go unpunished, the current case between Motorola and Microsoft highlights the way patents, and more specifically FRAND patents, can be abused due to lack of clear guidelines.  With more defined patent standards and a clear precedent set, this should curtail major technology companies from playing chess with the court system.  

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