Qualcomm and Others May Soon Sing The FRAND Licensing Blues
July 30, 2015 (Mimesis Law) — Back in April, we discussed the potential ramifications to Qualcomm, and other big licensors of standard-essential patents (SEP’s) (see here and here) of a pending 9th Circuit appeal involving Motorola (whose patents are owned by Google, as a result of a multi-billion dollar purchase years ago) and Microsoft (a big patent licensor itself, but an unwilling licensee in this case). The patents at issue are relevant to certain wireless standards, and Motorola was seeking 2.25% per product royalty under the FRAND scheme in place worldwide for SEPs. Microsoft had successfully convinced the District Court Judge to set the royalty at a much lower rate, for an effective rate of under $.04 all in per end product for a license to all products. All told, the District Court said Microsoft could get a license to all of the Motorola patents at issue for pennies on the dollar. Motorola appealed, and in a long complicated decision, the 9th Circuit affirmed the low royalty award, and more importantly, the District Court’s method for determining the RAND rate. By doing so, the 9th Circuit has essentially held that for companies that are in the business of licensing SEP patents (standard-essential patents), such as Motorola, Qualcomm, Nokia, Alcatel-Lucent, this companies will be held to a higher standard to meet their RAND commitments. The net effect could be lower FRAND rates for SEPs overall.
The 9th Circuit made a number of important findings. First, SEP licensors cannot rely upon prior licenses to justify a proposed FRAND rate if those licenses were negotiated in the context of litigation, included lots of other irrelevant patents, and were not representative of prior bilateral RAND negotiations. This takes away leverage from SEP patent holders because it will make it harder for them to point to prior licenses at a certain rate to justify demanding the same rates in bilateral negotiations.
Second, rates charged in a patent pool can be a good indicator of the FRAND rate if multiplied by a factor of 2 or 3. (Pool rates are typically understood to be lower than rates negotiated in a bilateral context because the SEP licensor gains additional benefits from participation in the pool itself, which justifies licensing its SEP patents at a lower rate.) This takes away leverage from SEP patent holders because it will be harder for them to argue that rates charged in patents pools, which are typically lower, are not relevant.
Third, a FRAND rate will depend upon how valuable the licensed patents are to the standard. This is a critical factor that could hurt a lot of SEP licensors. This gives every patent licensee (such as Apple) a basis to argue that just being standard-essential is no longer enough to justify a fixed FRAND rate — rather, non-“critical” patents must be set at a lower rate to meet FRAND obligations. This, in effect, robs licensors of SEPs (such as Qualcomm) of leverage in their negotiations.
The case also stands for the proposition (which is scary for companies that license standard-essential patents) that making certain demands that are inconsistent with FRAND obligations can subject them to liability. In many ways, Motorola did what a lot of similarly-situated companies would have done. It demanded royalty rates that were standard in the industry, and when Microsoft refused to pay, it sued for infringement and injunctions from using its patents. The 9th Circuit has called that entire strategy into question. Motorola’s demands not only violated its FRAND obligations, but its tactics of moving for an injunction to enforce those patents (simply to gain leverage in its negotiations with Microsoft) was improper. The bottom line is that this robs companies, such as Qualcomm, of negotiating leverage. That should in theory reduce royalty rates they can charge.
There were a lot of amici briefs filed in this case by standard-essential patent holders (including Qualcomm), who argued that if the 9th Circuit affirms the district court, that will hurt companies that are in the business of innovation. By contrast, other companies argued that if the 9th Circuit does not affirm the lower court, that will allow patent holders to keep charging exorbitant rates. (Qualcomm apparently gets $4 for every iPhone sold). It appears that the 9th Circuit sided with the companies that take licenses of patents — Apple, Samsung, etc. And it sided against the innovators, such as Qualcomm, Motorola, Nokia, etc. It will be interesting to see how this story unfolds, but investors in companies that license SEPs may need to contend with a more difficult road ahead.
The Week(s) Ahead — Expected Events
- Parkervision and Marvell CAFC decisions – TBD
Zachary is a founding partner at Kroub Silbersher & Kolmykov PLLC
Disclosures and Disclaimers:
Nothing in this material is intended to constitute legal or investment advice of any kind, nor is any of this material based on any non-public information of any kind. In addition to my work at Markman Advisors, I am also a name partner at a NYC-based intellectual property litigation boutique firm, Kroub Silbersher & Kolmykov PLLC (www.kskiplaw.com). Markman Advisors is affiliated with a Houston-based investment management firm, Perdix Capital Management, which may have existing or potential positions relating to situations discussed in this material. Markman Advisors also provides consulting services to buy-side investors, including hedge funds and family offices, that may also have or enter into positions relating to situations discussed in this material.