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Ninth Circuit Upholds First District Court Determination of FRAND Licensing Rate and Affirms $14.5 Million Damage Award

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The Ninth Circuit has affirmed Microsoft’s $14.5 million jury verdict against Motorola, upholding the first federal bench trial decision setting a fair, abortion reasonable, and non-discriminatory (FRAND) licensing rate. Armed with the court’s FRAND guidance, the jury found Motorola violated its commitment to license its H.264 (video encoding) and 802.11 (WiFi) standard-essential patents (SEPs) under FRAND terms. We previously discussed SEPs and FRAND here.

Motorola offered to license its H.264 and 802.11 SEP portfolios to Microsoft at 2.25% of the end-product price. Microsoft found that rate unreasonable and promptly sued Motorola, claiming status as a third-party beneficiary to Motorola’s FRAND commitment to the standard-setting organizations. Motorola responded by suing Microsoft in many jurisdictions, including Germany, seeking to stop Microsoft from selling products like the Xbox and the Windows operating system. Faced with the risk of a continental shutdown, Microsoft relocated its distribution center from Germany to the Netherlands.

Paving new ground, the district court conducted a bench trial to formulate the FRAND rates that would help the jury determine whether Motorola violated its commitments. On appeal, Motorola argued that the jury should have decided the rates and that the district court’s royalty analysis violated Federal Circuit patent damages law. The Ninth Circuit rejected both arguments. Motorola had consented to the bench trial and, though this was not strictly a patent case, Federal Circuit patent law “can serve as guidance,” and the district court “properly adapted that guidance to the current context.” (It is interesting that in Oracle America, Inc. v. Google Inc. (2014) the Federal Circuit recently applied Ninth Circuit copyright law, while here, the Ninth Circuit applied Federal Circuit patent law.)

The jury awarded Microsoft $11.5 million to compensate for relocating the distribution center as a result of Motorola’s overseas legal battle. The other $3 million was for the legal fees Microsoft incurred in fighting Motorola’s various attempts to get an injunction. Motorola challenged the fee award because, under the American rule, litigants normally must pay their own legal fees.

Applying Washington law, the Ninth Circuit upheld the fee award. It reasoned that Microsoft was not awarded fees merely for prevailing against Motorola. Rather, the jury compensated Microsoft for the damages Motorola caused by seeking injunctions in breach of its FRAND commitments and the duty of good faith and fair dealing.

Following Microsoft v. Motorola, a business owner who believes an SEP holder has not upheld its FRAND commitments has an avenue to recover legal fees as damages if litigation becomes necessary. SEP holders also have an increased incentive to carefully consider their initial FRAND offers to potential licensees. And all parties should pay close attention to Judge Robart’s methodology in reaching a proper FRAND rate.