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PUBLIC VERSION UNITED STATES INTERNATIONAL TRADE COMMISSION Washington, D.C.

In the Matter of CERTAIN GAMING AND ENTERT AINMENT CONSOLES, RELATED SOFTWARE, AND Inv. No. 337-TA-752

COMPONENTS THEREOF

RECOMMENDED DETERMINATION

ON REMEDY AND BONDING

Administrative Law Judge David P. Shaw Pursuant to a notice of investigation, 75 Fed. Reg. 80843 (2010), this is the Recommended Determination on remedy in Investigation No. 337-TA-752. For the reasons

stated herein, it is recommended that the Commission enter a limited exclusion order against infringing Microsoft products. It is further recommended that the Commission issue a cease and desist order. Additionally, it is recommended that Microsoft be required to post a bond for importation of accused products during the Presidential review period.

PUBLIC VERSION

I.

Procedural Background
The Commission's Rules provide that subsequent to an initial determinatien on the

question of violation of section 337 of the Tariff Act of 1930, as amended, 19 U.S.C. § 1337, the administrative law judge shall issue a recommended determination containing findings of fact and recommendations concerning: (1) the appropriate remedy in the event that the Commission finds a violation of section 337, and (2) the amount of bond to be posted by respondents during Presidential review of Commission action under section 337(j). 19 C.F.R. § 210.42(a)(1)(ii). On April 23, 2012, an initial determination ("ID") issued in this investigation, finding that a violation of section 337 of the Tariff Act, as amended, has occurred in the importation into the United States, the sale for importation, or the sale within the United States after importation, of certain gaming and entertainment consoles, related software, or components thereof that infringe asserted claims 1 and 12 of U.S. Patent No. 6,069,896; asserted claims 7,8, and 10 of : U.S. Patent No. 7,162,094; asserted claim 2 of U.S. Patent No. 6,980,596; and asserted claims 12 and 13 of U.S. Patent No. 5,357,571. II. Remedy A. Limited Exclusion Order
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The Commission has broad discretion in selecting the form, scope, and extent of the remedy in a section 337 proceeding. Viscofan, S.A. v. United States Int 'l Trade Comm 'n, 787

The complainants are Motorola Mobility, Inc. of Libertyville, Illinois and General Instrument Corporation of Horsham, Pennsylvania (collectively, "Motorola"). ID at 1. The respondent is Microsoft Corporation of Redmond, Washington ("Microsoft"), Id. Although the Commission named the Office of Unfair Import Investigations ("OUII") as a party in the investigation, OUII withdrew from participation in accordance with the Commission's Strategic Human Capital Plan. See 75 Fed. Reg. 80843 (2010); Letter from OUII to the Administrative Law Judge (Mar. 3, 2011):
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PUBLIC VERSION

F.2d 544, 548 (Fed. Cir. 1986).2 A limited exclusion order directed to respondents' infringing products is among the remedies that the Commission may impose. See 19 U.S.C. § 1337(d). In this investigation, Motorola seeks a limited exclusion order. Motorola argues that the proper remedy is a limited exclusion order against Microsoft, barring from entry into the United States all gaming and entertainment consoles, related software, and components thereof that infringe one or more of the asserted claims of the patents-in-suit. Motorola requests that the limited exclusion order apply not only to Microsoft, but also to its "affiliated companies, parents, subsidiaries, or other related business entities, or their successors or assigns." Compls. Br. at 293. Microsoft argues that "it would be contrary to the public interest for any remedy against the Xbox and related accessories to issue," citing "only two primary competitors to Microsoft's Xbox gaming system: the Sony Playstation and the Nintendo Wii." Resp. Br. at 287. Microsoft's argument that it would be contrary to the public interest to issue an exclusion order against Microsoft's Xbox products is not persuasive. On November 26,2010, the Commission issued "Notice of Receipt of Complaint; Solicitation of Comments Relating to the Public Interest." 75 Fed. Reg. 72838 (2010). Microsoft did not file a response to the solicitation. Additionally, it has not been alleged or shown that Sony or Nintendo would fail to meet the demand for consumer video gaming consoles in the event that an exclusion order issued. Moreover, there is a strong public interest in enforcing intellectual property rights; not enforcing those rights in light of a potential economic impact occurs only in exceptional

2 In determining whether to issue an exclusion order or a cease and desist order, the Commission must consider statutory public interest factors. Certain Ground Fault Circuit Interrupters and Products Containing Same, Inv. No. 337-TA-615 ("GFCIs"), Comm'n Op. at 21 (Mar. 26, 2009).

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PUBLIC VERSION

circumstances.

See Certain Baseband Processor Chips and Chipsets, Inv. No. 337-TA-543,

Comm'n Determination, 2011 ITC LEXIS 2613, at *238-41, *257-68 (Oct. 2011). Accordingly, in the event that a violation of section 337 is found, it is recommended that the Commission issue a limited exclusion order. Additionally, it is recommended that the limited exclusion order contain a certification provision in order to facilitate proper enforcement.
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B.

Ceaseand DesistOrder

Section 337 provides that in addition to, or in lieu of, the issuance of an exclusion order, the Commission may issue a cease and desist order as a remedy for a violation of section 337. 19 U.S.C. § 1337(f)(1). The Commission "generally issues a cease and desist order only when a respondent maintains a commercially significant inventory of infringing products in the United States." GFCIs, Comm'n Op. at 24. Motorola argues that a cease and desist order is warranted because Microsoft "is maintaining a 'commercially significant' inventory of infringing products in the United States, the sale of which could undercut the effect of any exclusion order." Compls. Br. at 294. Microsoft argues that Motorola "did not sustain its burden of demonstrating that Microsoft holds a commercially significant amount of infringing inventory in the U.S:' at 291. The evidence shows that Microsoft maintains significant inventories of the accused Resp. Br.

3 An exclusion order may contain a provision that permits entities whose products are potentially excludable under the Commission's order to certify, pursuant to procedures to be specified by U.S. Customs and Border Protection, that they are familiar with the terms of the order, that they have made appropriate inquiry, and thereupon state that, to the best of their knowledge and belief, the products being imported are not excluded from entry under the order. Certain Semiconductor Chips with Minimized Chip Package Size or Products Containing Same, Inv. No. 337-TA-605, Comm'n Op. at Section II.D.2. (July 29, 2009).

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PUBLIC VERSION

products in the United States. Microsoft bas two distribution centers in the United States - one in [ ] and another in [ ]. CX-652C (Rossini Dep. Tr.) at 42-43; CX-572C; CX-

573C; see CX-714C (Leonard WS) at 48. Microsoft's general practice is to fill orders for Xbox hardware, including any accessories, via these two distribution centers and to replenish the inventory stock with products imported from China .. CX-652C (Rossini Dep. Tr.) at 43,47-48, 75-76; CX-572C; CX-573C; see CX-714C (Leonard WS) at 48. As of April 22, 2011, Microsoft's United States inventory of two accused products, the Xbox 360 S 4GB Console and the Xbox 360 S 250GB Console, totaled [ 12; see CX-714C (LeonardWS) [ ] units. CX-631 C, Interrogatory Response No.

at 48. The market value of this inventory is approximately

]. Id. In addition to these inventories, Microsoft also undertakes significant sales

activities in the United States related to the accused products. CX-714C (Leonard WS) at 49. Accordingly, in the event that a violation of section 337 is found, it is recommended that the Commission issue a cease and desist order.

C.

Bond

The administrative law judge and the Commission must determine the amourit of bond to be required of a respondent, pursuant to section 3370)(3), during the 60-day Presidential review period following the issuance of permanent relief, in the event that the Commission determines to issue a remedy. The purpose of the bond is to protect the complainant from any injury. 19 U.S.C. § 13370)(3); 19 C.F.R: §§ 21O.42(a){l)(ii), 210.50(a)(3). When reliable price information is available, the Commission has often set the bond by eliminating the differential between the domestic product and the imported, infringing product. Certain Microsphere Adhesives, Processes for Making Same, and Products Containing Same, Including Self-Stick Repositionable Notes, Inv. No. 337-TA-366, Comm'n Op, at 24 (1995). In 5

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other cases, the Commission has turned to alternative approaches, especially when the level of a reasonable royalty rate could be ascertained. Certain Integrated Circuit Telecommunication

Chips and Products Containing Same, Including Dialing Apparatus, Inv. No. 337-TA-337, Comm'n Op. at 41 (1995). A 100 percent bond has been required when no effective alternative existed. Certain Flash Memory Circuits and Products Containing Same, Inv. No. 337-TA-382, USITC Pub. No. 3046, Comm'n Op. at 26-27 (July 1997) (a 100% bond imposed when price comparison was not practical because the parties sold products at different levels of commerce, and the proposed royalty rate appeared to be de minimis and without adequate support in the record). Motorola argues that "[b ]ecause there is a wide range of prices for the infringing articles, bond should be set at 100% of the entered value of the infringing articles." Motorola asserts that "[tjhe evidence in this Investigation demonstrates that 100% of the entered value of the Microsoft devices is appropriate for setting the bond; setting a lower bond would unjustly reward Microsoft for its infringement to the detriment of Motorola." Compls. Br. at 296. In the

alternative, Motorola argues that for the '712, '571, '596, and '094 patents, the bond should be set at a reasonable royalty rate of "2.25% of the price of the end products." Id. For the '896 patent, it is argued that the bond should be set at [ issue." Id. at 297. Microsoft argues that the bond should be set at zero inasmuch as "[Motorola] failed to offer evidence at the Hearing that any consumer purchased an Xbox gaming console in lieu of purchasing a [Motorola] Droid mobile device or a set-top box:' Resp. Br. at 292. In the alternative, Microsoft argues that any bond should be "capped at a reasonable royalty" on reasonable and non-discriminatory ("RAND") terms, where the "RAND royalty should be ] of the wholesale price of the products at

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PUBLIC VERSION

calculated by reference to the flat, per-unit royalty rates charged by various patent pools containing other patents deemed essential to implementing the 802.11 and H.264 standards." Id. at 293. It is argued that the 2.25% royalty rate is "roughly forty-five times the maximum rate charged by all licensors in the H.264 patent pool,and sixteen times the maximum rate charged by the five licensors in the 802.11 patent pool." Id. at 263 (emphases in original) (citing RX-31SC (Murphy WS) at 7-8; Murphy Tr. 2063-2064). With respect to the patent pools relied upon by Microsoft, Motorola replies that "because these pools do not contain Motorola's patents (among other reasons), they are irrelevant." Compls. Reply Br. at 100. Indeed, the patent pools may not provide a true picture of reasonable royalty in this instance. Furthermore, it is not evident from Microsoft's arguments what specific rate respondent would have the Commission consider. It is clear from the parties' arguments that with respect to the patents subject to RAND licensing obligations, Microsoft argues that a royalty of2.25% is too high for the accused devices, and Motorola has presented no argument or evidence that a reasonable royalty would exceed that amount. On the other hand, Microsoft has left unanswered Motorola's argument that with respect to the '896 patent (which is not the subject of Microsoft's RAND defense, and as to which infringement has been found in the ID), bond should be set at [ ] of the wholesale

price of the products at issue." See Compls. Br. at 297; Resp. Br. at 292-93; Resp. Reply Br. at 98. Thus, a reasonable royalty rate under the '896 patent would be [ ] of the wholesale price of the products at issue. Such a rate would also likely [ ] any reasonable royalty rate for the

RAND-related patents. See CX-631C at 7-10; CX-714C (Leonard WS) at 50; Compls. Br. at 296 . . Accordingly, in the event that a violation of section 337 is found, it is recommended that

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PUBLIC VERSION during the Presidential review period, Microsoft be required to post a bond of seven percent of the wholesale price of the products at issue.

ID.

Recommended Determination
It is the RECOMMENDED DETERMlNATION

("RD") of the administrative law judge

that in the event a violation of section 337 is found, the Commission should issue a limited exclusion order, and a cease and desist order. Further, should the Commission impose a remedy that prohibits importation, it is recommended that the Commission subject respondent's importations during the Presidential review period to a bond. To expedite service of the public version, each party is hereby ORDERED to file with the Commission Secretary by no later than May 14,2012, a copy of this RD with brackets that show any portion considered by the party (or its suppliers of information) to be confidential, accompanied by a list indicating each page on which such a bracket is to be found. At least one copy of such a filing shall be served upon the office of the undersigned, and the brackets shall be marked in red. If a party (and its suppliers of information) considers nothing in the RD to be confidential, and thus makes no request that any portion be redacted from the public version, then a statement to that effect shall be filed. So ordered.

David P. Shaw Administrative Law Judge

Issued: May 7, 2012

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CERTAIN GAMING AND ENTERTAINMENT AND COMPONENTS THEREOF

CONSOLES,

RELATED SOFTWARE, 337-TA-752

PUBLIC

CERTIFICATE

OF SERVICE has
_

I, Lisa R. Barton, hereby certify that the attached RECOMMENDED DETERMINATION been served upon the following parties as indicated, on _Ma y__18_,_20_1_2 __ __ ~

,~-~------------------'",,-"~Lisa R. Barton, Acting Secretary
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U.S. International Trade Commission 500 E Street SW,Room 1I2A Washington, D.C. 20436

FOR COMPLAINANT MOTOROLA MOBILITY, INC. AND GENERAL INSTRUMENT CORPORATION: Stephen J. Rosenman, Esq. ROPES & GRAY LLP One Metro Center 700 12thSt., N.W., Suite 900 Washington, D.C. 20005 FOR RESPONDENT MICROSOFT CORPORATION: ( ) Via Hand Delivery {>if Via Overnight Mail ( ) Via First Class Mail ( ) Other: _ ( ) Via Hand Delivery IX) Via Overnight Mail ( ) Via First Class Mail ( ) Other: _

Brian R. Nester, Esq. SIDLEY AUSTIN LLP 1501 K Street, N.W. Washington, D.C. 20005

CERTAIN GAMING AND ENTERTAINMENT AND COMPONENTS THEREOF

CONSOLES, RELATED SOFTWARE, 337-TA-752

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( )Via Hand Delivery ( , ) Via Overnight Mail CX)Via First Class Mail ( )Other:. _ ( )Via Hand Delivery ( )Via Overnight Mail (~)Via First Class Mail ( )Other: _