Published: 7/30/15
This decision established FRAND royalty rates for the use of Motorola’s FRAND-encumbered SEPs that were essential to the H.264 video compression standard and the 802.11 (Wi-Fi) wireless local area networking standard. The court applied a modified version of the Georgia-Pacific methodology for establishing royalties in patent cases, which is based on a hypothetical negotiation between the parties, to prevent patent hold-up and royalty stacking. The court ruled that “the parties in a hypothetical negotiation would set RAND royalty rates by looking at the importance of the SEPs to the standard and the importance of the standard and the SEPs to the products at issue.” Based on this approach, the court rejected Motorola’s demand for a royalty of 2.25% based on the price of Microsoft’s Xbox video game console and Windows operating system. The court concluded that the FRAND royalty rates for Xbox and Windows were $0.00555 for Motorola’s H.264 SEP portfolio and $0.03471 for Motorola’s 802.11 SEP portfolio. Granting Motorola’s 2.25% royalty request, by contrast, would have resulted in a royalty of $6-8 for those products. One of the key findings that the court made in determining the importance of the SEPs at issue was that “[t]he development of the 802.11 Standard dealt primarily with the implementation of well-known technologies rather than innovation. As such, the majority of the technologies available to and/or adopted by the 802.11 drafters were in the public domain and not covered by patents.”
The Ninth Circuit affirmed on appeal. The court rejected Motorola’s claim that the 15-part Georgia Pacific test should apply in its entirety to the setting of a RAND royalty, including in particular the use of the date of the infringement as the date on which a hypothetical negotiation of a reasonable royalty rate would occur. Relying on the Federal Circuit’s ruling in Ericsson v. D-Link, the Ninth Circuit stated that “many of the Georgia-Pacific factors are ‘contrary to RAND principles.’” The Ninth Circuit further held that that the district court reasonably concluded that licenses entered into by Motorola that “were formed under the threat of litigation,” or that involved patents not comparable to those at issue in this litigation, were not relevant to the setting of the RAND royalty. It also held that it was reasonable for the district court to consider the terms of licenses granted by patent pools in setting the RAND rate, noting that the district court had duly accounted for the fact that patent pools “generally license at lower rates than might be achieved in a bilateral agreement.”