A U.S. Court Issues First Analysis of an Appropriate Royalty that a Patentee Could Obtain after Promising to License its Patent on Reasonable and Nondiscriminatory (RAND) Terms (Microsoft v Motorola)
e-Competitions Bulletin, No 51802, 2013
5 Pages Posted: 11 May 2013
Date Written: May 9, 2013
On April 25, 2013, Judge James L. Robart of the U.S. District Court for the Western District of Washington offered the first analysis by a U.S. court of an appropriate royalty that a patentee could obtain after promising to license its patent on reasonable and nondiscriminatory (RAND) terms. Microsoft had sued Motorola for breach of contract, claiming that Motorola had breached its RAND obligation through two offer letters that (in seeking 2.25% of the net selling price of end products) would have required Microsoft to pay $4 billion.
In an exhaustive, 207-page opinion, Judge Robart constructed a framework for determining an appropriate RAND rate and applied it to reach a result that, according to Microsoft, would require it to pay only $1.8 million. This 5-page article first recounts the court’s adjustment of the 15 “Georgia-Pacific” factors for determining reasonable royalties to account for the RAND context. It then describes the standards at issue: H.264 (video compression) and 802.11 (Wi-Fi). And it articulates the court's framework for determining royalties: a “hypothetical bilateral negotiation” between the two parties.
In this framework, the court rejects Motorola’s suggested royalties because of the different context of settlement in which they arose. But it accepts Microsoft’s suggestion of rates received in patent pools even though such rates could be on the “low end” of the royalty range.
The article concludes that, as the first determination of RAND terms by a U.S. court, Judge Robart’s opinion will garner much attention. But it may not be replicated so easily as it benefited from the availability of a range of comparable rates and was able to isolate the discrete minor contribution that Motorola offered to the standards. Finally, the ruling increases the hurdles faced by owners of standard essential patents (SEPs), who confront investigations by competition agencies on both sides of the Atlantic for seeking injunctions after promising to abide by RAND obligations.
Keywords: RAND, FRAND, patents, royalties, standards, licensing, SEP
JEL Classification: K21, L40, L41, L63, O31, O34
Suggested Citation: Suggested Citation