Royalty Rates for Standard-Essential Patents: District Court Determines “RAND” Royalty Rate for Motorola Patents Using a Modified Georgia-Pacific Analysis Looking to Comparable Standard-Essential Patent Pool License Agreements

Sullivan & Cromwell LLP - April 30, 2013

Many patents that are essential to a technological standard — so-called “standard-essential patents” — are subject to a commitment that they be licensed on “reasonable and non-discriminatory” (“RAND”) terms. Last week, in the first decision of its kind, a district court in Microsoft Corp. v. Motorola, Inc., determined a RAND royalty rate for two of Motorola’s (now Motorola Mobility) standard-essential patent portfolios. The court set out a methodology based on the widely used Georgia Pacific factors modified to account for the nature of Motorola’s RAND commitments and the importance of its patents to the standards and to Microsoft’s implementation of the standards. Finding that the most relevant comparable royalty rates were found in patent pool licenses for the same standards, the court concluded that a fixed per-unit royalty rate was more appropriate than the percentage-of-selling-price rate offered by Motorola — and that the amount of the RAND royalty was substantially less than 1% of the rate that Motorola had originally sought. The decision sets the stage for a trial on Microsoft’s claim that Motorola’s original royalty offer was not made in good faith, and thus constituted a breach of Motorola’s RAND commitment.