Microsoft verdict could slash tech patent royalty costs


A decision in one of the many tech patent battles could severely limit the amount companies can charge in royalty fees. It’s a big step towards settling one of the key issues behind the patent wars.

The case in question involves Microsoft violating Motorola patents when creating the Xbox and Microsoft smartphones. Since the dispute began, Motorola was taken over by Google, adding some extra flavor to the battle.

It’s a slightly unusual case as Microsoft admits using the patented technology but argued it had the right to do so because Motorola wouldn’t license it at a reasonable price.

In most cases it’s entirely up to a patent holder whether to license technology and at what price. However, these patents came out of work across the industry to establish technical standards.

There’s a long-standing principle that, to encourage firms to work on standards, companies that register such patents must make them available through a license that is “reasonable and non-discriminatory” (sometime with “fair” added at the start.) Motorola said it complied with this principle by offering the license in return for 2.25 percent of the sale price of the resulting products.

Microsoft objected on two grounds. Firstly it said the actual numbers quoted were too high to be considered reasonable. Secondly, it said any royalty rate should not be based on the total price of the product (such as an entire Xbox) but rather reflect what proportion of the product’s components and design actually used the technology in question. That’s an issue that’s been raised in several other high-profile patent battles.

To say these two approaches had different results is an understatement. Microsoft argued that a reasonable royalty fee for the way it used the patented technologies was around one million dollars a year. Motorola argued that its 2.25 percent figure worked out at around four billion dollars.

The judge in the case has now come up with what he calls a reasonable rate for each technology in question, running between 0.55 cents and 16.389 cents per unit. On that basis, Microsoft will have to pay $1.8 million a year.

Officially the judge has come up with a figure based on the going market rates for licensing technology and the benefit they brought Microsoft. In practical terms, the figure seems to be as “reasonable” as possible without simply giving Microsoft exactly what it asked for. In effect, Microsoft pays a fair market price but pays a little extra to reflect the fact that it did use the patents without permission.

The next stage of the case will look at whether Motorola breached the law by refusing to offer a fair deal in the first case. Given the money at stake it’s almost certain that once that verdict is in, we’ll get a series of appeals. By the end of the process, though, we should have some solid ground rules about how patent holders must calculate royalties for standards-related patents.