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Could Federal Circuit Decision Weaken FRAND Defense?

On Monday, May 5, 2014, the Court of Appeals for the Federal Circuit, by transferring the Microsoft v. Motorola case to the Court of Appeals for the Ninth Circuit, issued an order which may significantly impact the ability of participants in standard-setting organizations (“SSOs”) to obtain relief for patent infringement.

The Microsoft v. Motorola case, first filed in the W.D. Washington, has been closely observed by the patent community for some time.  Microsoft and Motorola had been engaged in licensing discussions when Microsoft sued Motorola, alleging that Motorola broke its promise as a member of the ITU and IEEE SSOs by refusing to offer Microsoft a license to its standard-essential patents on what Microsoft considered fair, reasonable, and non-discriminatory (“FRAND”) terms. Motorola, a unit of Google, Inc., then countered by suing Microsoft for patent infringement, and the two cases were consolidated.

While these cases were pending, in a related proceeding between Microsoft and Motorola, a German court enjoined the sale of Microsoft’s Xbox and certain Windows products in Germany.  The Western District of Washington preliminarily enjoined Motorola from enforcing the German court’s injunction on the basis that Microsoft’s contract action would resolve whether injunctive relief is an appropriate remedy for infringement of Motorola’s standard essential patents. Motorola appealed the preliminary injunction to the Ninth Circuit which found that Microsoft’s complaint was based on contract, therefore giving the Ninth Circuit jurisdiction.

The U.S. District Court Judge James Robart held a bench trial to decide what a FRAND rate for Motorola’s patents would be, and issued an opinion finding that the patents were worth about four cents a patent for a total of about $1.8 million.

Judge Robart’s opinion was hotly discussed both because it was the earliest district court opinion determining a FRAND rate and because the discrepancy between what Motorola had  sought (2.25 percent of the sale price of the Xbox products for a total of about $4 billion) and what the judge found lead some observers to state that standard essential patents would lose value, and that this loss in value might in turn trigger a reluctance of patent holders to either participate in SSOs or to seek patent protection in the first place.

After determining the RAND rate, Judge Robart held a jury trial that found that Motorola had breached its FRAND obligation and issued a final judgment on the RAND rulings.  The portion of the case relating to Motorola’s infringement allegations was stayed, and Motorola appealed the RAND rulings to the Federal Circuit.  Microsoft then filed a motion to transfer the appeal to the Court of Appeals for the Ninth Circuit.

On May 5, 2014, the Federal Circuit granted the motion to transfer the appeal to the Ninth Circuit, finding that Microsoft’s complaint that Motorola breached its FRAND obligations was not a case “arising under” the patent law.

Important Implications
Though this ruling seems at first glance to be purely procedural, it could have important implications for those seeking to assert standard essential patents and those facing charges of infringing such patents.  The discussion of whether participants in SSOs should be able to seek injunctive relief for standard essential patents has been heated, and those arguing against the ability of patentees to assert standard-essential patents have often supported their positions using arguments relating to public policy and the uniquely important position patents play in today’s innovation economy.  In this context the Federal Circuit’s ruling that Microsoft’s allegation of a breach of FRAND obligations is not a unique issue of patent law is significant.

When Microsoft’s case is before the Ninth Circuit, it will be analyzed using traditional rules of contract interpretation, making it highly likely that future allegations of violation of FRAND commitments will be judged using the same analysis.  This could significantly impact the viability of the FRAND defense.  The FRAND commitments entered into by many participants in SSOs often fail to include some or all of the elements of an enforceable contract, such as royalty rate, product base, and term.  Therefore, a judicial analysis viewing FRAND commitments through a contract law lens could result in many of the commitments being found to be unenforceable, and a considerable weakening of FRAND as an affirmative defense against charges of patent infringement.

Further, the fact that FRAND obligations are being viewed under a contract lens means that accused infringers who wish to raise a FRAND defense but lack a strong contract law basis for doing so, such as a written agreement explicitly agreeing to license the patents on FRAND terms may be facing an uphill battle.  Thus, patentees who never agreed to license their patents on FRAND terms, but hesitated to assert their patents due to a fear that they would be estopped by a finding that their patents were standard essential, should find this decision reassuring.


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