Microsoft Corp. v. Motorola, Inc.

795 F.3d 1024

116 U.S.P.Q.2d 1001

MICROSOFT CORPORATION, a Washington corporation, Plaintiff–Appellee

v.MOTOROLA, INC.; Motorola Mobility, Inc.; General Instrument Corporation, Defendants–Appellants.

No. 14–35393.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 8, 2015.

Filed July 30, 2015.

Kathleen M. Sullivan (argued), Quinn Emanuel Urquhart & Sullivan, LLP, New York, N.Y.; Brian C. Cannon, Quinn Emanuel Urquhart & Sullivan, LLP, Redwood Shores, CA, for Defendants–Appellants.

Carter G. Phillips (argued), Sidley Austin LLP, Washington, D.C.; David T. Pritikin, Sidley Austin LLP, Chicago, IL; Arthur W. Harrigan, Jr., Calfo Harrigan Leyh & Eykes LLP, Seattle, WA; T. Andrew Culbert, Microsoft Corporation, Redmond, WA, for Plaintiff–Appellee.

Wayne P. Sobon, Arlington, VA, and and for Amicus Curiae American Intellectual Property Law Association.

Richard S. Taffet, Bingham McCutchen LLP, New York, N.Y.; Patrick Strawbridge, Bingham McCutchen LLP, Boston, MA; Stephanie Schuster, Bingham McCutchen LLP, Washington, D.C., for Amicus Curiae Qaulcomm Incorporated.

Xavier M. Brandwajn, Alston and Bird LLP, East Palo Alto, CA, for Amici Curiae Nokia Corporation and Nokia USA Inc.

Charles Duan, Washington, D.C., as and for Amicus Curiae Public Knowledge.

Mark S. Davies, Orrick, Herrington & Sutcliffe LLP, Washington, D.C.; Christopher J. Cariello, Orrick, Herrington & Sutcliffe LLP, New York, N.Y., for Amicus Curiae Apple Inc.

Lauren B. Fletcher, William F. Lee, Joseph J. Mueller, Timothy D. Syrett, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, MA; James L. Quarles III, Brittany Blueitt Amadi, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C.; Matthew R. Hulse, Intel Corporation, Santa Clara, CA, for Amici Curiae Intel Corporation, Aruba Networks Inc., Dell Inc., Hewlett–Packard Company, Newegg Inc., SAS Institute Inc., VIZIO, Inc., and Xilinx, Inc.

Robert F. Krebs, Ronald F. Lopez, Karl Belgum, Nixon Peabody, LLP, San Francisco, CA, for Amicus Curiae Sierra Wireless Inc.

Christy G. Lea, Knobbe, Martens, Olson & Bear, LLP, Irvine, CA; Christopher C. Kennedy, Knobbe, Martens, Olson & Bear, LLP, Washington, D.C.; Mauricio A. Uribe, Knobbe, Martens, Olson & Bear, LLP, Seattle, WA; Alice C. Garber, John J. Murphy, T–Mobile USA, Inc., Bellevue, WA, for Amicus Curiae T–Mobile USA, Inc.

Appeal from the United States District Court for the Western District of Washington, James L. Robart, District Judge, Presiding. D.C. Nos. 2:10–cv–01823–JLR, 2:11–cv–00343–JLR.

Before: SIDNEY R. THOMAS, Chief Judge, and J. CLIFFORD WALLACE and MARSHA S. BERZON, Circuit Judges.

OPINION

BERZON, Circuit Judge:

We live in an age in which the interconnectivity of a wide range of modern technological products is vital. To achieve that interconnection, patent-holders often join together in compacts requiring licensing certain patents on reasonable and non- discriminatory (“RAND”) terms. Such contracts are subject to the common-law obligations of good faith and fair dealing.

At issue in this appeal are two patent portfolios, formerly owned by Appellants Motorola, Inc., Motorola Mobility, Inc., and General Instrument Corp., (“Motorola”), both of which are subject to RAND agreements.¹ Appellee Microsoft, a third-party beneficiary to Motorola's RAND commitments, sued Motorola for breach of its obligation to offer RAND licenses to its patents in good faith. Motorola, meanwhile, brought infringement actions in a variety of fora to enjoin Microsoft from using its patents without a license.

We previously upheld, in an interlocutory appeal, an anti-suit injunction preventing Motorola from enforcing in a German action any injunction it might obtain against Microsoft's use of certain contested patents. Microsoft Corp. v. Motorola, Inc., 696 F.3d 872 (9th Cir.2012) (“Microsoft I ”). We did so after determining that there was, in the “sweeping promise” of Motorola's RAND agreements, “at least arguably[ ] a guarantee that the patent-holder will not take steps to keep would-be users from using the patented material, such as seeking an injunction, but will instead proffer licenses consistent with the commitment made.” Id. at 884.

After our decision, a jury determined that Motorola had indeed breached its RAND good faith and fair dealing obligations in its dealings with Microsoft. In this appeal, we address (1) whether the district court overstepped its bounds by determining, at a bench trial preceding the jury trial on breach of contract, a reasonable and non-discriminatory rate, as well as a range of rates, for Motorola's patents; (2) whether the court erred in denying Motorola's motions for judgment as a matter of law on the breach of contract issue; (3) whether the court erred in awarding Microsoft attorneys' fees as damages in connection with Motorola's pursuit of injunctions against infringement; and (4) whether the district court abused its discretion in two contested evidentiary rulings.

I. BACKGROUND

A. Standard–Setting Organizations and Standard–Essential Patents

When we connect to WiFi in a coffee shop, plug a hairdryer into an outlet, or place a phone call, we owe thanks to standard-setting organizations (“SSOs”). See generally Mark A. Lemley, Intellectual Property Rights and Standard–Setting Organizations, 90 Calif. L.Rev. 1889 (2002). SSOs set technical specifications that ensure that a variety of products from different manufacturers operate compatibly. Without standards, there would be no guarantee that a particular set of headphones, for example, would work with one's personal music player.See id. at 1896.

Standardization provides enormous value to both consumers and manufacturers. It increases competition by lowering barriers to entry and adds value to manufacturers' products by encouraging production by other manufacturers of devices compatible with them. See id. at 1896–97 ; Amicus Br. of American Intellectual Property Law Ass'n (“IPLA”) at 6; Amicus Br. of Apple Inc. at 2. But because SSO standards often incorporate patented technology, all manufacturers who implement a standard must obtain a license to use those standard-essential patents (“SEPs”).

The development of standards thereby creates an opportunity for companies to engage in anti-competitive behavior. Most notably, once a standard becomes widely adopted, SEP holders obtain substantial leverage over new product developers, who have little choice but to incorporate SEP technologies into their products. Using that standard-development leverage, the SEP holders are in a position to demand more for a license than the patented technology, had it not been adopted by the SSO, would be worth. The tactic of withholding a license unless and until a manufacturer agrees to pay an unduly high royalty rate for an SEP is referred to as “hold-up.” Ericsson, Inc. v. D–Link Sys., Inc., 773 F.3d 1201, 1209 (Fed.Cir.2014). “Royalty stacking” refers to the risk that many holders of SEPs will engage in this behavior, resulting in excessive royalty payments such that (1) the cumulative royalties paid for patents incorporated into a standard exceed the value of the feature implementing the standard, and (2) the aggregate royalties obtained for the various features of a product exceed the value of the product itself. Id.; see also Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 Tex. L.Rev.1991, 2010–13 (2007); Amicus Br. of Public Knowledge at 11–20.

To mitigate the risk that a SEP holder will extract more than the fair value of its patented technology, many SSOs require SEP holders to agree to license their patents on “reasonable and nondiscriminatory” or “RAND” terms.² Under these agreements, an SEP holder cannot refuse a license to a manufacturer who commits to paying the RAND rate.

For example, International Telecommunications Union (“ITU”), one of the SSOs at issue in this case, has established a Common Patent Policy. That Policy provides that “a patent embodied fully or partly in a [standard] must be accessible to everybody without undue constraints.” ITU, Common Patent Policy for ITU–T/ITU–R/ISO/IEC, http://www.itu.int/en/ITU-T/ipr/Pages/policy.aspx (last visited June 15, 2015) [hereinafter ITU, Common Patent Policy]. Any holder of a patent under consideration for incorporation into an ITU standard is required to submit a declaration of its commitment to “negotiate licenses with other parties on a non-discriminatory basis on reasonable terms and conditions.” Id.; see also Microsoft I, 696 F.3d at 876. “If a ‘patent holder is not willing to comply’ with the requirement to negotiate licenses with all seekers, then the standard ‘shall not include provisions depending on the patent.’ ” Microsoft I, 696 F.3d at 876 (quoting ITU, Common Patent Policy).

The two standards underlying this case are the H.264 video-coding standard set by the ITU and the 802.11 wireless local area network standard set by the Institute of Electrical and Electronics Engineers (“IEEE”). The H.264 standard pertains to an efficient method of video compression. The 802.11 standard regards the wireless transfer of information using radio frequencies, commonly referred to as “WiFi.” The H.264 standard is incorporated into Microsoft's Windows operating system and into its Xbox video game console. The 802.11 WiFi network standard is incorporated into Xbox.

B. History of the Present Dispute

In October 2010, Microsoft sued Motorola in both the U.S. International Trade Commission (“ITC”)³ and the Western District of Washington for alleged infringement of certain smartphone patents. The parties thereupon engaged in a series of discussions concerning, among other matters, the possibility of a cross-licensing agreement granting Motorola licenses to Microsoft's smartphone patents in exchange for licenses to any of Motorola's patents Microsoft's products may have been infringing.

On October 21st and 29th, Motorola sent Microsoft two letters offering to license its 802.11 and H.264 SEP portfolios at 2.25% of the price of...