Google Inc., (GOOG) which spent $12.5 billion to buy handset manufacturer Motorola Mobility and its more than 17,000 patents, now has to defend what critics say is its acquisition's hard-nosed licensing tactics.
Federal judges 2,000 miles apart will hear complaints from Apple Inc. and Microsoft Corp. that Motorola Mobility is demanding excessive royalties on patents deemed essential to standards for how electronic devices function. The trials are scheduled to start today in Madison, Wisconsin, and next week in Seattle, as regulators in the U.S. and Europe investigate whether Motorola Mobility is misusing those patents to curb competition in the $219 billion smartphone market.
Together, they mark the first time courts will seek to define licensing obligations of patent owners who help create technological specifications.
"The judge may step in and say, 'Motorola Mobility, you have to grant a license and here's the royalty rate and some other terms,'" said Jorge Contreras, an associate law professor at American University in Washington.
"This would be the first time this has ever been done. I get the feeling these two judges feel there is no chance these parties will come to a reasonable conclusion on their own and the judges want some finality."
Apple and Microsoft raised breach-of-contract claims in federal court in response to separate patent-infringement cases Motorola Mobility filed at the U.S. International Trade Commission in Washington, which could ban on imports of Apple Inc.'s iPhone and Microsoft Corp. (MSFT)'s Xbox video-gaming system.
An ITC judge is considering whether Microsoft, based in Redmond, Washington, violated two patents for video decoding and a non-essential patent for a way to establish communication between the Xbox and accessories.
The agency in August said Cupertino, California-based Apple didn't infringe Motorola Mobility patents for standard wireless technology, while ordering a trade judge to review a patent for a sensor that prevents accidental hang-ups.
The two trials probably won't end the litigation among the companies. Not all of the patents asserted by Motorola Mobility at the ITC or in district court involve standard-essential patents, and none of the patent claims Microsoft and Apple asserted against Motorola Mobility involve industry standards.
Still, the cases could alter the dynamics in Google's effort to use the Motorola Mobility patents as a bulwark against Apple's claims that Google's Android operating system for wireless devices copied the iPhone. Apple's largest smartphone competitor, Samsung Electronics Co., uses Android.
Mountain View, California-based Google has said it bought Motorola Mobility in part because of its history of innovation in mobile phones.
"These patents are very important and, if they can make Apple and Microsoft pay them something, it can give them a lever," said Tom Scott, a patent lawyer with Goodwin Procter in Washington.
Motorola Mobility had asked for royalties of 2.25 percent on the retail price of each product, which it has said was the standard opening offer it makes. It has said neither Microsoft nor Apple would negotiate.
Microsoft, in court papers, said that would amount to $4 billion a year in royalties on sales of the Xbox and Windows operating system, a figure no company would agree to pay. Apple, in its own case, said the technology is worth at most $1 per unit. None of the companies would comment for this story.
U.S. District Judge Barbara Crabb, who is presiding over the Wisconsin case, said Apple won't commit to license the Motorola Mobility patents at a rate she sets unless it's less than $1 per phone. In an order issued Nov. 2, the judge questioned why she should bother holding a trial, though she told the companies to prepare to begin trial.
A non-jury trial on Microsoft's claim against Motorola Mobility is scheduled to begin Nov. 13 before U.S. District Judge James Robart in Seattle. Robart has said he will set a range for what is the appropriate rate, so a jury could later determine if Motorola Mobility's offer was fair.
Motorola Mobility's licensing program has been criticized before. Research In Motion Ltd. (RIM), maker of the BlackBerry, accused the company of refusing to offer fair licensing terms in 2008, when the two were embroiled in a fight over wireless technology. The issue was never resolved by the courts because the companies settled in 2010.
To allow products from different manufacturers to work together, companies get together in standard-setting groups to determine, for example, how data will be transmitted over airwaves or what plug will be used to recharge phones and electronic readers. Because companies may benefit from having their own ideas adopted for industrywide use, they pledge to license any relevant patents on fair and reasonable terms without discriminating against rivals.
One in seven people worldwide has a smartphone, with the number exceeding 1 billion in the third quarter, according to an Oct. 17 report by researcher Strategy Analytics. While it took 16 years to reach that milestone, the research group estimates another billion people will have smartphones within the next three years.
As a result, the Motorola Mobility disputes, as well as the global fight between Apple and Samsung, have prompted congressional hearings and investigations by the European Commission and the U.S. Federal Trade Commission.
Standard-setting boards, rather than courts or regulators, may have to resolve the dispute, said Robert Stoll, former commissioner of patents at the U.S. Patent and Trademark Office and now with Drinker Biddle in Washington.
" There should be a standard-setting body that oversees standard-setting bodies," Stoll said. "They should also be able to determine what the values of all these things are, and that doesn't seem to happen. They just say 'fair and reasonable' and leave it at that. The devil is in the details."
The cases are: Apple Inc. (AAPL) v. Motorola Mobility Inc., 11cv178, U.S. District Court for the Western District of Wisconsin (Madison); and Microsoft Corp. v. Motorola Mobility Inc., 10cv1823, U.S. District Court for the Western District of Washington.