Microsoft and Google Take $4 Billion Patent Dispute to 9th Circuit

Scott Graham

The Recorder

09-11-2012

SAN FRANCISCO — The U.S. Court of Appeals for the Ninth Circuit doesn't get to hear many patent cases. But on Tuesday, it got a doozy.

Microsoft v. Motorola, 12-35352, featured two of the country's leading appellate advocates arguing for two of the world's largest technology companies. At issue were a demand for $4 billion in royalties, a U.S. court's authority to block a German court's injunction and — the likely dispositive issue — whether federal judges can impose licensing terms on companies that issue standards-essential patents.

Motorola Inc. attorney Kathleen Sullivan argued that a Seattle federal judge has wrongly asserted authority "to create a global license from scratch" for Motorola patents on wireless networking and video coding. Not only that, the judge issued "an extraordinary and unprecedented" order that blocks Motorola from enforcing a German court injunction against Microsoft Corp.'s infringement.

But Carter Phillips, representing Microsoft, said the problem was Motorola's "outrageous" $4 billion royalty demand, despite its promise to license at a reasonable and nondiscriminatory rate. "It has agreed to license its products on a global basis," he said. "It didn't agree to do it everywhere except in Germany."

Patent appeals are normally heard in the Federal Circuit. But the dispute over Motorola's patents, now owned by Google Inc., is before the Ninth Circuit because it's technically a contract case. Microsoft and Motorola are parties to standards-setting organizations like the Institute of Electrical and Electronics Engineers and the International Telecommunication Union. Members agree to license patents essential to the technology on a reasonable and nondiscriminatory, or RAND, basis.

Motorola claims Microsoft has infringed its patents in Xbox, PC and smartphone software. In October 2010 it offered to license the technology to Microsoft for $4 billion annually. Microsoft responded the next month by suing in Seattle federal court, and U.S. District Judge James Robart ruled in February that the standards-setting agreements created a contract, with Microsoft a third-party beneficiary. Robart has set a trial on a reasonable global license for November.

In the meantime, Motorola sued Microsoft in Germany in July 2011 to enjoin sales of Microsoft products in that country. A German court entered an injunction last December. But Microsoft persuaded Robart to enjoin Motorola from enforcing that judgment until Robart resolves the parties' licensing dispute.

On Tuesday, Sullivan, of Quinn Emanuel Urquhart & Sullivan, called Robart's ruling flawed and erroneous. "The United States does not set patent law for the world," she told the Ninth Circuit. "Patent law, like copyright and trademark law, is territorial."

But she quickly ran into challenging questions from all three Ninth Circuit judges.

"Judge Robart was very careful not to enjoin the German courts," Judge Sidney Thomas said, noting that his order only blocked Motorola from enforcing it.

"Inherent in the RAND commitment is not having an injunction," Judge Marsha Berzon told Sullivan, adding that Judge Richard Posner of the Seventh Circuit reached a similar conclusion in litigation between Apple Inc. and Motorola.

"This is exactly where the offense to comity comes in," Sullivan replied. "Germany does not agree with Judge Posner. Judge Posner was not addressing foreign patents."

That may be true, Berzon said, but the comity argument "starts evaporating when the contract-based nature of the case that we're dealing with here is taken into account."

Sullivan disputed that any contract had been formed, but that if so the remedy is for the parties to negotiate terms. Motorola made "an opening offer" with its $4 billion request "as is conventional in essential patent license negotiations. Instead of a counteroffer, we got a lawsuit."

Now, Sullivan said, Microsoft wants a license. "But they want it set by a court in Seattle rather than by a court in Mannheim."

Phillips, of Sidley Austin, faced equally tough questioning.

Imposing license terms would be "an extraordinary thing to have a court do," Berzon told him. "This is a contract without a price in it."

"You may feel that $4 billion is a little high," Senior Judge J. Clifford Wallace said. "But there's been no response from Microsoft, there's been a lawsuit filed. Doesn't that indicate that Microsoft is taking a bad faith position?"

Phillips said Motorola's offer wasn't even in the ballpark of reasonableness, asserting that all other members of the standards-setting group had licensed the same technology for $6 million. "Money we can take care of," Phillips told the court. "But it shouldn't be extorted out of us" through injunctions.

What if Judge Robart decides that $5 billion is the right price, Wallace asked. If that is the outcome, Phillips acknowledged, Microsoft might be back asking the Ninth Circuit to "take a hard look at it."

But it sounded as if the case may never come back to the Ninth Circuit at all, as both sides hinted that — despite all the bluster — settlement negotiations are ongoing.

"Remember that a lot of times these cases do settle," Sullivan told the court. "And the way that Motorola tried to work it out here was through negotiation. So there's no guarantee that the trial has to go forward."

"I think it is wholly premature," Phillips said, "for the court to try to figure out ultimately what will be the remedy after the judge makes a decision."