Because they are based in France and EU does not recognize software patents. If you are using VLC in US/Japan, it is your responsibility to pay the fee.

>EU does not recognize software patents

This is entirely incorrect. Despite the wording of the EPC disallowing patenting of software "as such". That little couple of words on the end means that you can patent software - the old term was that it required a "technical contribution" or "technical effect" though there have been decisions on this since I was working in the field (particularly Aerotel/Macrosan in the UK).

http://www.ipo.gov.uk/p-policy-computer.htm is a reasonable and short summary.

Is there a reason Mozilla cannot work this way?

It is does not solve Mozilla's problem with fees paid by authors and publishers. Do you want to pay license fees for videos you will put on your webpage? Thought so...

There is another advantage VLC has: it is academic project, sponsored by University. Even in US, you can use patented technologies for research without license.

Again, VLC's distribution is not for academic purposes it is a commercial offering (yes, even though it is free).

In your last sentence you are right, you can but you can't pretend you are aiding others to do their own research as a cover for commercial activity as that would be contributory infringement.

So why not support both and the people who DO want to support h264 and pay the fees can do so?

Then the browsers that don't support Theora are the ones that only have a subset of support.

Embrace, extend, extinguish and all that.

Just because they don't pay a fee, doesn't mean they don't have to. However, they seem to be passing on the responsibility to the end users:

"... Hence there is not need to obtain any patent licenses for VideoLAN software within the European Union. In other venues, please check any applicable law." http://www.videolan.org/support/faq.html

The VideoLan organisation may be based in the EU, but there are a number of companies in the US whose servers act as VLC mirrors. Would they be potential targets if the MPEG-LA decided to do something about VLC being unlicensed? With its widespread popularity it can hardly have gone unnoticed.

I'm sure they don't want the negative press as they are trying to convince everyone to adopt their codec into HTML5. VLC's mirror servers could be shutdown but would they make money on a lawsuit? Do the VLC distributors have enough to make it worth while, not until they've managed to weasel into HTML5 implementations in all the top browsers - after that every video app using 264 will be a worthy target I'd have thought as the less apps not paying license fees the more sales of those that are.

It's going to be GIF all over again, oh joy.