11 Mar
2019

Foxconn failed to report Android dues for years, Microsoft tells court

In 2013, Microsoft and Hon Hai Precision Industry (trading as Foxconn) inked a royalty-bearing patent licence agreement, part of the US company's then-burgeoning Android IP monetisation efforts. But a lawsuit filed by Microsoft on Friday in California’s Northern District alleges that Foxconn has failed to meet the terms of that contract for the last five years, resulting in a “complete failure to make royalty payments to Microsoft when due”.

The accusations in the suit provide interesting context to Microsoft’s decision last October to join the Open Invention Network, meaning it will provide a royalty-free cross-licence covering Android and Linux-related technologies to other OIN members (the group is free to join).

The deal, announced in April 2013, was hailed as a step forward for Microsoft and bad news for Google. At the time, Foxconn reportedly assembled 40% of the world’s consumer electronics. The two sides said that the agreement covered devices running Android and Chrome OS, and that Hon Hai would pay royalties, but few other details were revealed.

The lawsuit filed by Microsoft last week clarifies a few other things about the licensing arrangements, though the document itself is sealed:

  • The agreement, which became effective on 1st January 2013, provided Hon Hai with a worldwide licence to Microsoft’s entire portfolio of patents for certain “covered products” in exchange for negotiated per-unit royalties.
  • Under the agreement, certain products manufactured by Hon Hai were classed as “Unlicensed Devices” – unlike “Covered Products”, Hon Hai owed no royalties on these.
  • There were provisions to prevent double-paying of royalties: “Hon Hai is not obligated to pay a royalty, or gets a credit against its royalty obligations, if one of Hon Hai’s Brand Name Customers has already paid a royalty on a device unit or if such a customer enters into its own appropriate license with Microsoft during the Agreement’s term.”
  • Hon Hai was supposed to submit royalty reports semi-annually, disclosing information including units sold in each category and the total amount of royalties due.

Microsoft is claiming that the problems began in just the second year of the agreement. For the 2014 royalty period, the company says it received “inaccurate” reports from the Taiwan-based manufacturer. From 2015 right through to 2018, it says it received no royalty reports at all, resulting in “complete failure to make royalty payments to Microsoft when due”. Microsoft doesn’t say outright that it has received no payments whatsoever for the last four years, but it seems possible.

According to the complaint, Foxconn has essentially stonewalled attempts to redress the situation. Microsoft says it asked for a formal audit under the contract in March 2017 and Foxconn agreed to the appointment of Deloitte in October. With auditors making little headway, Microsoft says it then sent a required “escalation notice” in March 2018 which ultimately made this litigation possible.

A Microsoft representative told CNBC over the weekend: “This legal action is simply to exercise the reporting and audit terms of a contract we signed in 2013 with Hon Hai. Our working relationship with Hon Hai is important and we are working to resolve our disagreement.”

Foxconn’s non-payment of royalties is, of course, also playing a central role in the dispute between Apple and Qualcomm over patent fees. Along with three other contract manufacturers from Taiwan, Foxconn has withheld royalties owed on Apple products, a move Qualcomm claims has been coordinated by the iPhone maker.  

The accusations are interesting in light of the rise and fall of Microsoft’s Android licensing programme. Estimates have claimed that the mobile ecosystem was worth $2-$3 billion (or even up to $6 billion) to Microsoft at its height. To the extent that those estimates counted on assumed payments from Foxconn, they may be in need of revision.

By 2016, the first full year after Foxconn allegedly stopped reporting sales and paying fees, reports suggested the company’s licensing revenues were in decline. It is hard to say what impact, if any, the dispute with Foxconn would have had on the overall business – a significant share of the devices churned out in Foxconn's Chinese assembly plants may have been subject to separate agreements between Microsoft and the branded device seller.

All of that provides additional context to Microsoft’s decision last year to join OIN, effectively signaling its departure from the Android licensing game (the alliance is free to join, and provides a royalty-free cross licence to Linux and Android-related technologies). But it’s now clear that the move does not mean Microsoft is going to let past and present contract obligations slide.

While we still need to hear Foxconn’s side of this story, this could be a case that reveals much about the licensing market’s past and present.

Jacob Schindler

Author | Asia-Pacific editor

[email protected]

Jacob Schindler