Patent Litigation Risk Drives Microsoft to Move European Distribution Center

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Microsoft is moving its European distribution center from Germany to the Netherlands due to ongoing patent litigation, a company spokesman confirmed Monday.

The move is prompted by a lawsuit filed by Motorola against Microsoft over the H.264 video standard. "The problem is that Motorola isn't living up to its promises about its patents," Microsoft spokesman Thomas Baumgärtner said.

Microsoft uses the H.264 standard in Windows 7 and the Xbox, among other products. A ruling favorable to Motorola by the court in Mannheim, Germany, on April 17 could mean injunctions against Microsoft products in Germany, effectively excluding the company from that market.

That is the main reason for the move, which the company decided to undertake more than a month ago, according to Baumgärtner. "I would call it a prudent move," he said.

Baumgärtner said he did not know where the Dutch distribution center will be located.

Motorola recently refused a $300 million bond offer from Microsoft to postpone enforcement of potential German injunctions. That is why Microsoft asked the U.S. District Court for the Western District of Washington for a temporary restraining order and a preliminary injunction preventing Motorola from enforcing any legal victory in its case, which is being heard in Mannheim, until a U.S. lawsuit over the same patent is decided.

Both court cases involve standard-essential patents, which must be licensed under so-called fair, reasonable, and nondiscriminatory (FRAND) terms. To compete in the market, technology companies have to use standardized technologies such as the H.264 codec. And if they do, they automatically infringe on those patents. That is why the FRAND system exits. Holders of standard-essential patents are required by the standard-setting organizations that adopt their patented technologies to license those technologies to other companies for a reasonable price. In its recent court filing, Microsoft called Motorola's proposal "the antithesis of reasonable."

According to patent expert Florian Mueller, the German legal system lends itself to abuse of standard-essential patents. Germany's statutory law grants injunctions to any patent holder that wins a court case, he said in a blog post. He also said that patent plaintiffs benefit from what is known as the Orange Book Standard, "which allows the owners of such patents to make even extortionate demands because an injunction is denied only if the implementer of a standard makes an offer that is so lucrative that its refusal constitutes an antitrust violation," Mueller wrote.

Microsoft's Baumgärtner praised its long-term partnership with Arvato, a Bertelsmann subsidiary that was operating Microsoft's distribution business in Europe. According to Microsoft the decision to move the distribution center was due entirely to patent litigation in Germany. Arvato declined to comment.

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