A federal judge’s ruling last week that Google Inc. (GOOG:US) can’t wield some patents to block the sale of Microsoft Corp. (MSFT:US) products may point toward resolution of a fundamental question underlying the global smartphone wars -- what constitutes a fair and reasonable royalty?
In cases across the U.S. and Europe, Google, Microsoft and other companies are battling over the power of patents used in industrywide standards for technologies, such as Wi-Fi, that let competing products work together. Patent owners who help set those specifications pledge to license their inventions on “fair, reasonable and non-discriminatory terms.”
No court has defined that concept, helping spark conflict when companies can’t agree on a fee. U.S. District Judge James Robart in Seattle may become the first.
“There is so much litigation going on trying to determine what a reasonable royalty is,” said James Kulbaski, a patent lawyer with Oblon Spivak in Alexandria, Virginia. “Everyone has agreed to pay it, but no one knows what it is.”
Robart ruled on Nov. 30 that, because Google’s Motorola Mobility had agreed to license its standard-essential patents, it was only entitled to seek fair royalties from Microsoft, not to ask the court to forbid sales of Microsoft products that use standards including those patents. The judge’s next step is to figure out what fees Microsoft should pay.
That threshold question is bedeviling the U.S. Federal Trade Commission, the European Commission, the U.S. International Trade Commission and courts on four continents. While the concept of fair and reasonable royalties for essential technologies has been around for decades, the debate heated up with the global legal actions over smartphones and tablet computers.
“Somehow, this judge is going to have to define fair and reasonable,” Kulbaski said. Defining what’s reasonable “is a key question to all patents related to standards” and will “be an important step in future license negotiations.”
Google paid $12.5 billion to buy Motorola Mobility, an early pioneer in the mobile phone market, in part to get access to its patents on industry-standard technologies. The FTC, in a broad-ranging probe of Google, is looking at whether the Mountain View, California, company is improperly using those patents to stifle competition.
Most of the patents in the smartphone wars don’t relate to industry standards. Still, defining fair and reasonable -- eliminating that contentious issue -- could be a springboard for resolving lawsuits over other patents.
“The litigation we’re seeing, which is costing hundreds of millions, if not billions of dollars, is inefficient and it would be good to reduce the litigation if possible,” said Jorge Contreras, an associate law professor at American University in Washington.
When a company agrees to license its patents on fair terms, “the patent holder has told the market that it does not need exclusivity and is willing to accept money in return,” Contreras said. “The only question is how much money it is owed, a question that the court should answer soon.”
Apple Inc. (AAPL:US), based in Cupertino, California, and Redmond, Washington-based Microsoft argue owners of standard-essential patents shouldn’t be able to obtain orders that block the use of inventions, a position backed by Robart’s decision.
Limits on the patents could discourage companies from participating in groups that set specifications that make electronics work more efficiently, said Adam Mossoff, a George Mason University law professor.
“The people who are saying it’s a problem have dominated the public discourse to the point where everyone says there’s a problem, but the facts on the ground don’t support that,” Mossoff said. The companies “are using the legal system to get away with infringement at a lower cost.”
Mossoff said these types of disputes have been around for decades, and companies decide what’s fair without governmental intervention.
“There is zero evidence of any actual harm to consumers,” Mossoff said. “We all have our smartphones, tablets exist and there is amazing technology that comes out every week.”
Motorola Mobility contends it met its obligations and neither Microsoft nor Apple would bargain. The Libertyville, Illinois-based handset maker made an opening request for 2.25 percent of the retail price of Apple and Microsoft products, a figure both companies called exorbitant as they filed breach-of- contract claims.
Apple’s case in Wisconsin was thrown out after the iPhone maker said it would agree to a court-determined royalty only if it was less than $1 per unit. Microsoft, which has agreed to pay a royalty rate set by Robart, has told the judge that an appropriate figure would be for pennies per unit, or less than $1 million a year.
ITC Judge David Shaw is scheduled to hear arguments this week in a dispute between Motorola Mobility and Microsoft over some of the same patents that are involved in the Seattle federal-court lawsuit.
The agency, which has the power to block U.S. imports of products that infringe American patents, is considering whether it should issue bans on products based on standard-essential patents in a case filed by Samsung Electronics Co. against Apple. At the same time, Samsung is accused by Ericsson AB of refusing to pay fair royalties on wireless standards.
The Federal Trade Commission and members of Congress have argued that patent owners shouldn’t be able to use the threat of a U.S. import ban as a weapon in disagreements about royalty payments.
The FTC has signaled it wants a greater role in determining what’s fair and reasonable. The agency, in a 3-2 decision Nov. 26, forced Robert Bosch GmBh to make standard-essential patents for air conditioners available to competitors as a condition for approving acquisition of the patent owner.
“The FTC is right to take a look at this because we don’t have any overarching group looking at the standard-setting organizations,” said Robert Stoll of Drinker Biddle in Washington. “The consumer is harmed if the other companies can’t use those standards. The purpose of ‘fair and reasonable’ is to give everyone an even playing field.”
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