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Patent Ruling No Longer Pending

It calls into question the licensing business models of many companies.
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During what I have come to call the gauntlet of earnings season, investors tend to be so laser focused on company earnings reports -- who beat? who missed? who said what and how is that good or bad for whom? -- that if we aren't careful we can miss other important developments that can shape the fate of certain companies.

I'm talking about the ruling yeterday in Seattle by a U.S. district judge that changes how companies can be compensated for contributing their development efforts and patents to industry standards. District Judge James Robart presided over the case of Microsoft (MSFT) v. Motorola (GOOG).

In the suit, Microsoft claimed that Motorola had an obligation to license patents to Microsoft at a "reasonable and non-discriminatory (RAND) rate."

Motorola's argued that companies that join standards bodies should be compensated based on the contribution of their patents to the standard. Motorola had been asking for up to $4 billion in annual royalties from Microsoft surrounding the use of certain technologies in wi-fi and video coding.

The dollar amount aside, as patent battles have heated up over the last several quarters, we've seen companies use their patent contributions as ammunition. You know the names of these players: Apple (AAPL), Samsung, Nokia (NOK), Research in Motion (BBRY), Google, HTC and more. Companies tend to argue that they are willing to license their patents at "reasonable rates."

What Judge Robart's ruling does is change the notion of what "reasonable and non-discriminatory" means. Robart provided a specific rate and range that Motorola would receive:

  • For Motorola's H.264 patent portfolio, Microsoft will have to pay 0.555 cent per unit, for products like Windows and XBox. The range will be from 0.555 cent to 16.389 cent per unit.
  • For Motorola's 802.11 patent portfolio, Microsoft will have to pay 3.471 cents per product. The range will be from 0.8 cent to 19.5 cents per unit.

That's a far cry from the $9 per unit that Motorola originally charged and the 2.25% royalty it later converted to. This cuts the $4 billion that Motorola was looking for from Microsoft to something in the low, low millions. That's not only a win for Microsoft, but it calls into question the licensing business models of companies like InterDigital (IDCC), Vringo (VRNG), Acacia Research (ACTG) and others.

This puts another cloud on the horizon for InterDigital's outlook given the rolloff of key licensing contracts like the one with Samsung and rising litigation costs associated with cases involving Samsung, Nokia, Huawei, ZTE and LG. From a fundamental investor perspective, the outstanding litigation makes the InterDigital story a tricky one and for that reason alone I'd recommend Real Money Pro subscribers stay on the sidelines with this one, even though the WCDMA and LTE markets continue to grow. Add in the ruling and my inclination is for those investors that bought IDCC shares last summer to book some of those big profits and look for more fertile opportunities

At the time of publication, the author had no positions in any of the securities mentioned.