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Originally published April 26, 2013 at 7:35 PM | Page modified April 27, 2013 at 7:12 AM

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Judge favors Microsoft in deciding value of disputed Motorola patents

In a ruling that could have far-reaching impacts in the industry, some key technologies used in Xbox and Windows will cost Microsoft about $1.8 million a year instead of the $4 billion originally asked by Google.

Seattle Times technology reporter

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A federal judge in Seattle, in a case that has potentially wide-reaching impact on tech companies worldwide, has issued a ruling favorable to Microsoft in its ongoing patent battle with Google’s Motorola.

U.S. District Judge James Robart on Thursday made public his ruling determining how much would be fair for Motorola to ask Microsoft to pay for using certain patented Motorola technologies in Microsoft products.

The amount, based on the rates Robart set, is very close to what Microsoft had proposed as reasonable, and is far less than Motorola had asked for.

Motorola had asked initially for 2.25 percent of the sale price of each Xbox and Windows — a rate that Microsoft said would amount to paying Motorola $4 billion annually.

Microsoft had said $1.2 million annually might be a reasonable amount to pay Motorola.

Robart set royalty rates, according to Microsoft, that mean the company would pay about $1.8 million annually to Motorola.

“This decision is good for consumers because it ensures patented technology committed to standards remains affordable for everyone,” David Howard, Microsoft’s deputy general counsel, said in a statement.

A Google spokesman issued a statement saying that “Motorola has licensed its substantial patent portfolio on reasonable rates consistent with those set by others in the industry.”

Robart’s ruling is another in a string of recent blows to the strength of Motorola’s patent portfolio. Google cited Motorola’s patents as one of the reasons it purchased the company last year for $12.5 billion.

Earlier this week, the U.S. International Trade Commission (ITC) sided with Apple in a patent dispute with Motorola. The commission ruled that a Motorola patent related to phone-sensor technology was invalid. Last month, an ITC judge issued an initial ruling that Microsoft’s Xbox console doesn’t infringe on a Motorola patent.

The patents in the case before Judge Robart involve so-called “standard-essential patents” — patents for technologies deemed so essential that they have become standard use in the industry.

This case has wide ramifications for the tech industry because it’s the first time a federal judge has ruled on what is a reasonable royalty rate or range for such standard-essential patents. Probably more important, it also outlined his process for reaching that decision.

The patents in the case involve technologies used in the H.264 standard for video compression and the 802.11 standard for wireless connectivity. Microsoft uses those technologies in Windows and Xbox products.

The trial, which ran for about a week in November, stemmed from Microsoft’s contention that Motorola Mobility, now owned by Google, was asking too much for use of some of Motorola’s industry patents, breaching a commitment it had made to provide its standard-essential patents on “fair and reasonable” terms.

Motorola said during the trial that the 2.25 percent royalty rate it sought had been intended as an opening offer toward further negotiations. It argued that bilateral negotiations would have been the way to arrive at a reasonable rate.

In post-trial briefs, Motorola said it was willing to cap annual Microsoft payments at between $100 million and $125 million for the H. 264 patents alone. In addition, Motorola said Microsoft should pay a royalty rate of 1.15 to 1.73 percent of the sale price of each Xbox 360 for Motorola’s 802.11 patents.

Microsoft came up with a much lower figure, saying that $1.2 million annually might be reasonable, based on comparable patent-pool benchmarks.

Microsoft also argued that looking at patent pool rates would be the best way of determining reasonable royalty rates for the Motorola patents at issue.

In his ruling, Robart set a royalty range where he thought reasonable discussion between the two companies on a payment amount should have begun. He also set a royalty rate where he believes the parties would have ended those discussions.

He set a royalty rate for Motorola’s H. 264 standard-essential patent portfolio at 0.555 cents per unit, with a royalty range of 0.555 cents to 16.389 cents per unit.

He set the rate for Motorola’s 802.11 standard-essential patent portfolio at 3.471 cents per unit, with a range of 0.8 cents to 19.5 cents per unit.

What is likely to have wider ramifications within the tech industry is how Robart determined the rates and ranges. He looked at the value of the individual patent to the standard, and then looking at the value of the standard to the technology as a whole. He also said real-world bargaining was key to reaching a reasonable rate, but that such bargaining would take into account patent pool rates.

Robart’s ruling this month marks only the end of part one of the trial.

The second part is scheduled to start Aug. 26, with a trial focused on whether Motorola actually did breach its contract to provide those standard-essential patents on fair and reasonable terms, given that Robart has determined what such fair and reasonable terms are.

Janet I. Tu: 206-464-2272 or jtu@seattletimes.com. On Twitter @janettu.

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