Patent case could shift power balance in tech industry

A US appeals court is set to hear a landmark patent case on Wednesday that could change the way royalty rates are set for commonly used intellectual property in the tech industry.

The case, pitting Microsoft against Google, has already involved a lower court in setting patent rates for the first time, in a move that critics warn will upend the balance of power between leading tech companies.

Microsoft brought the case in 2010 against Motorola Mobility, the handset maker later acquired by Google. The search company sold Motorola's operating business to Lenovo last year but kept its patents and has now taken the case to the court of appeals.

The dispute centres on so-called standard-essential patents, which cover technology that is included in industry-wide technology standards. Since others have to use the technology if they want their own products to meet an industry standard, the companies that submit their patents for approval by standards bodies are required to license them out on "reasonable and non-discriminatory", or RAND, terms.

Microsoft sued Motorola after the handset maker asked for 2.25 per cent of the final product price for use of several of its patents that are included in standards for WiFi and video compression technology. Microsoft said the demand would have cost it $4bn a year. Judge James Robart, in a federal court in Seattle, laid out a different method for calculating the royalties that would instead cost Microsoft less than $2m a year.

If upheld, Judge Robart's approach could tilt the balance of power in negotiations away from companies that own large portfolios of commonly used patents and instead favour those - like Microsoft or Apple - whose businesses are based more on implementing technology standards in their products.

"It's going to be very significant indeed. Nobody quite understands what the term [RAND] means," said Alexander Poterack, chief executive of General Patent Corp, a US intellectual property firm.

In its appeal brought in Motorola's name, Google has argued that the judge was wrong to take up Microsoft's complaint in the first place, since the Motorola royalty demand was only the opening shot in a negotiation that should have been left to run its course. The court could have ruled on Microsoft's breach of contract complaint without getting involved in the thorny issue of rate-setting, it claims.

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Some in the tech industry also argue that, if the ruling stands, companies will not be as willing to allow their technology to be included in industry standards, since it would rob them of much of their negotiating leverage.

The calculation method that Judge Robarts came up with "would conceivably apply to lower the reasonable royalty available to every single [standard-essential patent]", the American Intellectual Property Law Association wrote in an amicus brief to the court.

Companies who have joined the opposition to the ruling include Qualcomm, many of whose patents cover mobile communications technologies that have been adopted in industry standards. The calculation method is a "one-sided directive that advances only implementers' interests in obtaining licences at the lowest possible cost," it said in a court filing supporting Motorola's position.

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