Tuesday, April 22, 2014

May 7 hearing at Federal Patent Court of Germany critical for Google's Motorola: injunction looms large

While Motorola Solutions (the non-handset part of the former Motorola) has taken an Android- and Chrome-related patent license from Microsoft, Google's (and soon Lenovo's) Motorola Mobility has not. In my post on the Microsoft deal with Motorola Solutions I mentioned a preliminary injunction hearing that took place in Munich on Thursday. Friday and Monday were bank holidays in Germany, and today I found out that Judge Dr. Zigann of the Munich I Regional Court has scheduled an announcement on a Microsoft motion for a German preliminary injunction against various Motorola Mobility products (including but not necessarily limited to the Moto&nbxp;X, the Moto G, and the Razr product line) for June 12, 2014.

As a result of this scheduling order, and in light of how the hearing (which lasted four hours) on Thursday went, Google's Motorola Mobility faces a fairly high risk of a preliminary injunction coming down in June unless the Bundespatentgericht (Federal Patent Court of Germany) invalidates Microsoft's EP1304891 on "communicating multi-part messages between cellular devices using a standardized interface" in its entirety, including not only its granted form but also both of Microsoft's proposed sets of amended claims. This is one possible outcome, but it's also quite possible that the patent will survive in the form of the second set of amended claims, and in that case a preliminary injunction is very likely. In fact, the Munich I Regional Court indicated rather clearly on Thursday that it believes that the patent is valid in the form of Microsoft's second set of amended claims. Even if the Federal Patent Court rejected the proposed amendments, it would still be possible (and there is an important precedent in Germany, Olanzapin, under which an injunction can issue if the basis on which the Federal Patent Court invalidates a patent is deemed erroneous).

The procedural sitaution is a bit complicated, but it's similar in some ways (except that bifurcation -- separate proceedings concerning infringement and nullity -- is a German peculiarity) to what would happen in the U.S. if a court finds that an alleged workaround does not fall within the scope of an original ruling on the merits but may or may not constitute an infringement. If you are interested in how patent enforcement works in different jurisdictions, then I recommend that you read on (and in that case I also recommend very strongly Professor Thomas Cotter's Comparative Patent Remedies blog).

Microsoft originally won a permanent injunction over this patent in May 2012 from the same court, even the same chamber (division), but with three different judges on the panel at the time. It immediately enforced the injunction, as a result of which Motorola Mobility was unable to sell any Android devices in Germany for four months. And about a year ago, the appeals court (the Munich Higher Regional Court) affirmed the injunction and, like the court below, was unconvinced of Motorola Mobility's claim that the patent would ultimately be invalidated.

After those four months during which Motorola Mobility was unable to sell Android phones in Germany, Motorola announced (see the "update" section in this post) in October 2012 that it was again distributing such devices (particularly the Razr HD) in Germany.

While this patent was found by two courts to read on the way the Android operating system provides certain text messaging-related functionality to apps, it's not a standard-essential patent, so it can be worked around. The question is, however, whether it can be worked around without requiring a rewrite (as well as recompliation and redeployment) of all Android apps capable of receiving or sending text messages (SMS).

It turned out at the Thursday hearing that Microsoft disagreed with Motorola Mobility's position that it had worked around the patent. Microsoft did what every prevailing patent plaintiff would do in that case: it brought a motion for contempt sanctions. Those proceedings were not public, which is why I found out only on Thursday. Microsoft's contempt motion was granted in part and denied in part: contempt fines were imposed on Google's Motorola Mobility for offering infringing devices, but not for actually selling them. The conclusion was that the modified software on those devices was what would be defined in the U.S. as "more than colorably different" from the original ruling on the merits: the fact that an infringement had been identified based on a previous version of the software does not necessarily mean that the new version infringes as well. But, just like in the U.S., the question of whether the modified products still infringe (i.e., infringe in a different way than before) does not have to be reached.

Within a month of finding out that the original injunction was not enforceable against the modified Motorola Mobility products, Microsoft concluded that it needed a new ruling on the merits, and in order to obtain one as quickly as possible, it brought the preliminary injunction motion that was heard on Thursday.

At the outset of the hearing, Judge Dr. Zigann indicated the court's inclination at the time (the court's positions can obviously change during and after a hearing), according to which the purported workaround is still considered to constitute an infringement, and not just of the original form of the patent but also based on Microsoft's second set of proposed amended claims, a basis on which the court tends to believe the patent is valid. The Federal Patent Court of Germany had communicated to the parties a preliminary position on validity in advance of the May 7 hearing, and that preliminary ruling was negative with respect to the originally-granted claims as well as a first set of amended claims. But the second set of amended claims raises different issues.

If the Federal Patent Court upholds the patent in the form of the second set of amended claims, I believe a preliminary injunction will come down in June. At least there was no indication during the hearing that Google's Motorola Mobility was making any headway with its non-infringement and invalidity contentions. The court also expressed the preliminary opinion that Microsoft's preliminary injunction motion was timely because it was reasonable to initially move for contempt sanctions and to request a new ruling on the merits only after it turned out that modified products have to be adjudged.

The key battleground here is validity. The Federal Patent Court almost always announces a decision at the end of a nullity hearing, but it typically takes several months before the detailed written ruling becomes available. So the Munich I Regional Court will know about the basic outcome of the May 7 Federal Patent Court hearing when making its June 12 decision, but it won't have the benefit of the detailed written ruling. If the patent survives at least in an amended form, a preliminary injunction is rather likely. If the Federal Patent Court rejected even the second set of amendments, despite the fact that both infringement courts (regional court and higher regional court, comparable to a district court and regional circuit court in the U.S.) were unconvinced of invalidity, then Microsoft would appeal the Federal Patent Court ruling to the Federal Court of Justice and the Munich I Regional Court could still issue an injunction if it believed that the Federal Court of Justice would, as it frequently does, reverse the Federal Patent Court's decision. In the Olanzapin case mentioned further above, the Dusseldorf Higher Regional Court granted a preliminary injunction after a negative ruling by the Federal Patent Court because it believed that the nullity decision was clearly erroneous. And a few months later, the Federal Court of Justice agreed (with the Dusseldorf court, not with the Federal Patent Court).

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The Apple-Samsung jury will have to decide on (in)validity based on a myth, not the truth

There are many reasons for which authorities doubt that patent infringement and validity questions should be put before layperson juries. For example, Judge Posner wrote: "Judges have difficulty understanding modern technology and jurors have even greater difficulty, yet patent plaintiffs tend to request trial by jury because they believe that jurors tend to favor patentees, believing that they must be worthy inventors defending the fruits of their invention against copycats [...]"

Apple is a good example of those patent plaintiffs who like jury trials. In front of professional judges in neutral jurisdictions, the track record of Apple's patent assertions against Android is rather poor. In other words, Apple's success is reversely proportional to the competence (and neutrality) of those who render a decision.

Late on Monday, Judge Koh issued an order that may be consistent with U.S. case law on admissible evidence in jury trials but once again favors Apple's interest in preventing that those who make the decision -- the jurors -- know too much. Shortly before the trial, Apple withdrew its invalidity challenges to Samsung's patents-in-suit, and during the trial it has consistently stressed that the USPTO was right with its decisions to grant those Apple patents -- including a patent on an invention that all ten European judges who looked at did not deem patentworthy, a patent of which the USPTO itself has already invalidated the broadest claims, and a patent with respect to which the USPTO itself has realized that there is a substantial new question of patentability that requires another look and, potentially, invalidation. Samsung would have liked to counter Apple's efforts to fool the jury into believing that the USPTO is infallible by pointing to Apple's own invalidity challenges to Samsung's patents (though Apple dropped those shortly before the trial).

Judge Koh reaffirmed her previous decision that Apple's dropped invalidity defenses to Samsung's patents-in-suit must not be mentioned to the jury. Again, I'm not saying that this was the wrong decision under U.S. law, but it shows that Apple's best bet is to hide important facts from the decision-makers.

Under those same rules for admissible evidence in jury trials, Samsung was obviously not allowed to inform the jury of the fact that the slide-to-unlock invention has become a laughing stock in European courts or that the USPTO itself is doubting its original decision to grant the autocomplete patent.

Samsung also can't tell the jury how high the rate of invalidation of patent claims is in USPTO reexaminations, especially in this field of technology. It's true that statistical information on how many claims are invalidated can mislead a jury because those laypeople may not fully understand that statistics relating to other patents don't necessarily apply to the patents before them. But wherever these cases are put before professional judges (i.e., everywhere but in the United States), the decision-makers do know that patent offices make mistakes, they will see decisions made in other jurisdictions (which are not binding precedent but can be very persuasive), and they do see when the USPTO itself starts to doubt a past decision to grant a patent.

On the one hand, there's no shortage of Apple fans out there who think that Apple is doing the morally right thing, and waging a "holy war" as Steve Jobs called it. On the other hand, competent and neutral judges have so far been largely unimpressed by Apple's patent assertions, and Apple wants to withhold from juries various important facts that cast serious doubt on the validity of Apple's patents-in-suit. Someone who appeals to jurors' national bias, tries to obtain favorable decisions on an uninformed or misinformed basis with respect to the fact that an issued patent can be totally invalid if the patent office was unaware of some relevant prior art when it made its original decision -- and is lobbying against much-needed patent reform that would help Main Street businesses and small app developers (including especially iOS app developers!), only in an effort to ensure that bogus patents can be enforced -- is not really standing on higher moral ground.

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Motorola Solutions (but not Motorola Mobility) takes Microsoft's 24th Android patent license

This morning I read on Twitter that "Motorola" had taken a license to Microsoft's patents covering Android and Chrome devices. At first sight it appeared to be a settlement, which surprised me because I had attended a Microsoft v. Motorola Mobility preliminary injunction hearing in Munich on Thursday, where counsel for either party was unaware (when the court asked about the prospects for a settlement) of substantive progress toward a license agreement. Counsel for Motorola Mobility said that his client "might perhaps take a royalty-free license", which is hardly the basis on which Microsoft would settle the case.

The official announcement of the Microsoft-Motorola deal referred only to Motorola Solutions, and did not mention Motorola Mobility (the mobile devices company that spun off of the original Motorola corporation and later sold to Google, with the other part now being known as Motorola Solutions). So it's not a Microsoft-Google (or Microsoft-Lenovo, since Lenovo will soon own Motorola Mobility's handset business) settlement. But it is yet another Android patent license deal for Microsoft -- number 24 for Microsoft, and number 30 if deals between Android device makers and other patent holders than Microsoft are included (there may be some additional agreements that were struck but never announced).

Yesterday's announcement doesn't mention royalties, but I have no doubt that Motorola Solutions did not get a free lunch.

Here's an updated list of all known deals:

  1. April 27, 2010: Microsoft Announces Patent Agreement With HTC

  2. June 27, 2011: Microsoft and General Dynamics Itronix Sign Patent Agreement ("Agreement will cover General Dynamics Itronix devices running the Android platform.") (FOSS Patents coverage)

  3. June 29, 2011: Microsoft and Velocity Micro, Inc., Sign Patent Agreement Covering Android-Based Devices (FOSS Patents coverage)

  4. June 30, 2011: Microsoft and Onkyo Corp. Sign Patent Agreement Covering Android-Based Tablets (FOSS Patents coverage)

  5. July 5, 2011: Microsoft and Wistron Sign Patent Agreement ("Agreement will cover Wistron's Android tablets, smartphones and e-readers.") (FOSS Patents coverage)

  6. September 8, 2011: Microsoft and Acer Sign Patent License Agreement ("Agreement will cover Acer's Android tablets and smartphones.") (FOSS Patents coverage)

  7. September 8, 2011: Microsoft and ViewSonic Sign Patent Agreement ("Agreement will cover ViewSonic's Android Tablets and smartphones.") (FOSS Patents coverage)

  8. September 28, 2011: Microsoft and Samsung Broaden Smartphone Partnership ("Under the terms of the agreement, Microsoft will receive royalties for Samsung's mobile phones and tablets running the Android mobile platform.") (FOSS Patents coverage)

  9. October 23, 2011: Microsoft and Compal Electronics Sign Patent Agreement Covering Android and Chrome Based Devices

  10. January 12, 2012: Microsoft and LG Sign Patent Agreement Covering Android and Chrome OS Based Devices (FOSS Patents coverage)

  11. April 25, 2012: Microsoft and Pegatron Corp. Sign Patent Agreement Covering Android- and Chrome-Based Devices

  12. April 30, 2012: Barnes & Noble and Microsoft Form Strategic Partnership to Advance World-Class Digital Reading Experiences for Consumers" ("Barnes & Noble and Microsoft have settled their patent litigation, and moving forward, Barnes & Noble and Newco will have a royalty-bearing license under Microsoft's patents for its NOOK eReader and Tablet products.") (FOSS Patents coverage)

  13. July 9, 2012: Microsoft and Aluratek Inc. Sign Patent Agreement Covering Android and Chrome Based Devices

  14. July 9, 2012: Microsoft and Coby Electronics Sign Patent Agreement Covering Android and Chrome Based Devices ("Although the contents of the agreement have not been disclosed, the parties indicate that Microsoft will receive royalties from Coby under the agreement.")

  15. November 7, 2012: Microsoft Signs Licensing Agreements for exFAT With Sharp, Sigma, NextoDi, Black Magic and Atomos Global ("The agreements cover Sharp Android tablets, Sigma and NextoDi high-end cameras and accessories, and Black Magic and Atomos Global broadcast-quality video-recording devices.")

  16. November 11, 2012: HTC and Apple Settle Patent Dispute (FOSS Patents coverage)

  17. December 11, 2012: Microsoft and EINS Sign Android Patent Agreement ("EINS manufactures Android tablets under the Cat brand in Germany.") (FOSS Patents coverage)

  18. December 11, 2012: Microsoft and Hoeft & Wessel AG Sign Patent Agreement ("Agreement will cover Hoeft & Wessel devices running the Android platform.") (FOSS Patents coverage)
  19. February 21, 2013: Microsoft and Nikon Sign Android Patent Agreement ("Agreement covers certain Nikon cameras running the Android platform.") (FOSS Patents coverage)

  20. April 16 (U.S.)/17 (Asia/Europe), 2013: Microsoft and Foxconn Parent Hon Hai Sign Patent Agreement For Android and Chrome Devices ("Agreement provides broad coverage under Microsoft's patent portfolio to manufacturer of more than 40 percent of the world's consumer electronics.") (FOSS Patents coverage)

  21. April 23 (U.S.)/24 (Asia/Europe), 2013: With ZTE, Most Major Android Makers Choose Licensing ("Under the agreement, Microsoft grants ZTE a license to Microsoft’s worldwide patent portfolio for ZTE phones, tablets, computers and other devices running Android and Chrome OS") (FOSS Patents coverage)

  22. October 24, 2013: LG agrees to pay Vertical Computer Systems for another Android patent license (FOSS Patents coverage)

  23. January 21, 2014: Huawei settles with Rockstar Consortium, will pay for Android's infringement of ex-Nortel patents (FOSS Patents coverage)

  24. January 27, 2014: Ericsson and Samsung reach agreement on licensing terms (FOSS Patents coverage)

  25. February 7, 2014: Nokia and HTC signed a patent and technology collaboration agreement (FOSS Patents coverage)

  26. February 13, 2014: Microsoft and Voxx Electronics sign patent agreement for Android devices

  27. February 20, 2014: Microsoft and Hop-on sign patent agreement for Android and Chrome devices ("[T]he parties indicate that Microsoft will receive royalties from Hop-on under the agreement")

  28. March 21, 2014: Samsung settles with Vertical Computer Systems

  29. March 26, 2014: Microsoft and Dell sign patent licensing agreement ("Under the terms of the agreement, they agreed on royalties for Dell's products running the Android or Chrome platforms and on consideration to Dell for a license from Microsoft for Xbox gaming consoles.") (FOSS Patents coverage)

  30. April 21, 2014: Microsoft and Motorola Solutions sign licensing agreement ("The license provides worldwide coverage under Microsoft's patent portfolio for Motorola Solutions' devices running the Android platform and Chrome OS operating system.")

This list is inevitably non-exhaustive: most deals are never announced. Also, one could make an argument that Intellectual Ventures' license agreements with the likes of Samsung and HTC should be added to the list. IV is claiming in its dispute with Motorola Mobility (where a mistrial lately occurred in Delaware, but that's not the end of the story) that Android infringes some of its countless patents. It's rather conservative not to list those IV deals here, but the moment IV proves any infringement of an Android patent in court or announces a license deal that involves Android or settles litigation that targets Android, I'll add those deals to the list.

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Friday, April 18, 2014

Apple's counsel stresses USPTO's independence -- but the USPTO doubts the autocomplete patent

The Apple v. Samsung II trial continues today with Samsung's challenges to Apple's asserted patents. In this context, Apple's counsel attacked the credibility of a Samsung expert witness, as journalists including MLex' Mike Swift (on Twitter) reported, by pointing out that he was paid $220,000 for Samsung for his work (by comparison, one of Apple's two damages experts made ten times that amount) unlike the examiners of the United States Patent and Trademark Office (USPTO).

While it's obvious that either party's experts take their client's position, one doesn't have to be paid by Samsung to doubt the validity of Apple's patents.

None of the ten European judges who deemed slide-to-unlock invalid was on Samsung's payroll (a certain retired UK judge was not involved with that case). Not one judge has so far considered this patent valid, other than Judge Koh, of course.

And Morrison & Foerster's Harold McElhinny (whose Apple v. Samsung trial track record is impressive) obviously didn't tell the jury that the vaunted, neutral USPTO is having second thoughts that may very well result in the invalidation of claim 8 of the '172 autocomplete patent -- the claim Apple is asserting in this trial and which Judge Koh found (on summary judgment) to have been infringed. In this trial, invalidity is Samsung's only defense to the autocomplete patent. Samsung has credible invalidity challenges to all five Apple patents-in-suit, but in the case of the autocomplete patent it is a fact that the USPTO found an anonymous requester (almost certainly Samsung, Google, or both) had raised a substantial new question for patentability.

Substantial new question for patentability -- that's exactly why the jury should ignore Mr. McElhinny's comment about the independence of the USPTO's examiners. No one would question the independence of the examiners anyway. But they can only decide based on the prior art available to them when they make their original decision. If other prior art is presented later and is considered to raise a substantial new question for patentability, the issue is not whether the original decision to grant the patent was made independently because it was made on the basis of incomplete knowledge -- and the same independent USPTO has found that it needs to take another very close look.

Here's the procedural history of this reexamination. In June 2013, anonymous reexamination requests (again, I can't imagine that Samsung and/or Google would not be behind this) against two Apple patents including U.S. Patent No. 8,074,172 on a "method, system, and graphical user interface for providing word recommendations" became discoverable. On August 1, 2013, the USPTO issued an order to reexamine most claims of this patent (including the claim asserted against Samsung), but on August 19, a "revised" order came down and ordered reexamination only of claims 21-38. A month later, the anonymous requester petitioned for a decision by the Director of the USPTO to overrule the examiner and order reeamination of the other challenged claims. On January 13, 2014, the Director granted the request in (large) part, particularly also with respect to claim 8, the one at issue in the ongoing California trial. On March 21, more than two months after the director's decision, Apple asked the USPTO to vacate the (large) parts of the director's decision adverse to Apple's interests. The anonymous requester responded two weeks ago (on April 4) and argued that Apple's petition was filed out of time (there's a non-extendible two-month deadline and Apple filed about a week after that deadline) and, in any event, lacked merit. The USPTO has not yet decided, but I guess it will affirm the Director's decision, which means that Apple's asserted claim of the autocomplete patent remains under reexamination pressure.

Here's the January 2014 USPTO decision, which explains why the patent office now doubts the validity of (among others) claim 8:

14-01-13 Apple '172 Autocomplete Reexamination Decision by Florian Mueller

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Judge Koh's boss finds Rockstar's scare tactics advance Apple's interests against Android

In the ongoing Apple v. Samsung II trial in the Northern District of California, Apple's lawyers try hard to downplay Google's role, though it's blindingly obvious that Google is the true target of Apple's second California lawsuit against Samsung. Usually a twelve-mile drive (from Cupertino to Mountain View) is more convenient than a twelve-hour flight (from San Francisco to Seoul), but in this case, Apple seeks to benefit from the statistically-established bias of U.S. jurors against foreign companies. Also, the fact that Samsung sells actual devices is an opportunity for Apple to disingenuously make damages claims that run counter to its own, repeatedly-stated position on the proper royalty base for patent licenses and damages. The proper royalty base for Apple's asserted patents in the ongoing trial is Google's Android.

Maybe Apple's counsel can fool a jury, but Apple for sure can't fool Judge Koh's boss ("boss" in a nominal more so than managerial sense). The Chief District Judge of the Northern District of California, Claudia Wilken, wrote in an order (handed down yesterday) that the Rockstar Consortium's "'scare the customer and run' tactic advances Apple's interest in interfering with Google's Android business" and made various other findings relating to Apple's anti-Google/anti-Android agenda.

Before I quote the entire Apple-related passage from Chief District Judge Wilken's order denying a Rockstar motion to dismiss or move out of California a declaratory judgment action brought by Google to protect Android and the Android OEMs Rockstar sued on Halloween 2013, I'd like to defend Apple to some extent here, or to at least give it the benefit of the doubt. I agree with Judge Wilken's conclusion that Apple, since it contributed 58% of Rockstar's funding and has strategic interests relating to Android, has created a situation in which Rockstar has continuing obligations to Apple -- obligations to monetize those patents. However, the fact that Apple is (likely) a majority shareholder does not necessarily mean that Apple has a majority of the voting rights. It's actually unlikely that Apple holds a majority of the votes: its partners are large players like Microsoft and Ericsson, who would hardly have accepted to be (collectively!) Apple's junior partner in terms of control. And if my assumption is right and Apple does not have a majority, then it is possible that Apple participated in the Nortel patent-buying effort only to clear the market of those patents (so as to avoid that Google would use them against it) but perhaps never wanted Rockstar to go out and sue the world including non-smartphone companies like cable operators using Cisco equipment. Maybe Apple even voted consistently against litigation, but wasn't able to singlehandedly prevent it from happening.

Further discovery in the now-continuing California declaratory judgment action could shed some light on Apple's role. Until there is more evidence of Apple being the driving force, I will give it the benefit of the doubt, though Chief District Judge Wilken obviously had to make a decision based on the facts in the record and Apple's majority contribution to Rockstar's funding is indeed a good reason to find that there are continuing obligations that Rockstar has vis-à-vis Apple. The existence of continuing obligations with a company domiciled in the Northern District of California is separate from the question of whether Rockstar is an Apple front to sue Google and its Android partners. Apple tops the list of answers to the "cui bono?" question -- but again, there's a need for more transparency about the decision-making process at Rockstar. It would be utterly unjust if Apple was perceived as the primary culprit if it just got outvoted when trying to prevent this mess (and maybe couldn't sell its shares in this company without its partners' approval), so there's a need for more clarity on Apple's influence and the positions it took whenever the shareholder voted on litigation-related issues.

Here's the full text of the Apple-related passage of the order:

"Google contends that Defendants have accepted substantial obligations to Apple, a forum resident, which require Defendants 'to defend and pursue any infringement against' their patents. [...] Google alleges that Apple is a majority shareholder of Defendants and exerts substantial control over them, and as a result Defendants are obliged to act on Apple's behalf in a campaign to attack Google’s Android platform.

In support of this allegation, Google submits strong evidence that Apple is indeed the majority shareholder of Defendants based on Apple’s majority investment in Rockstar’s predecessor entity, Rockstar Bidco.7 Currently, Rockstar is a Delaware limited partnership which lists'“Rockstar Consortium LLC' located in New York as general partner. [...] But Apple contributed $2.6 billion, or fifty-eight percent of the $4.5 billion total investment in Rockstar Bidco. [...] Although Rockstar Bidco reorganized itself to become Rockstar, it does not appear that any ownership interests changed, nor do Defendants assert otherwise.

Even if Apple is a majority shareholder of Rockstar, if Defendants were able to demonstrate that Apple is a mere passive shareholder and takes no part in patent assertion strategy, then the relationship between Apple and Defendants might not be sufficient to uphold specific jurisdiction. [...] Google alleges that Apple's role extends beyond the mere receipt of profits. Rockstar’s CEO Veschi stated that he does not talk to its shareholders about potential licensing partners or infringement suits, but admitted that he has to show them 'progress and that real work is being done.' [...] Veschi holds periodic calls and meetings with the owners, primarily with their intellectual property departments, and Veschi acknowledges that they 'work well together.' [...] Although Veschi states they avoid talking about details, it does appear at least telling that Veschi speaks directly and periodically with the owners' intellectual property departments to demonstrate that 'work is being done.' [...]

Google demonstrates a direct link between Apple's unique business interests, separate and apart from mere profitmaking, and Defendants' actions against Google and its customers. Google and Apple's rivalry in the smartphone industry is well-documented. Apple's founder stated that he viewed Android as a 'rip off' of iPhone features and intended to 'destroy' Android by launching a 'thermonuclear war.' [...] Defendants' litigation strategy of suing Google's customers in the Halloween actions is consistent with Apple’s particular business interests. In suing the Halloween action defendants, Defendants here limited their infringement claims to Android-operating devices only, even where they asserted a hardware-based patent. [...] This 'scare the customer and run' tactic advances Apple's interest in interfering with Google's Android business. [...]"

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Tuesday, April 15, 2014

After 3 years of patent litigation, Apple and Samsung should settle for $3 and $1 per unit

Three years ago to the day, Apple filed its original California patent infringement complaint against Samsung. On the occasion of this anniversary, here's a scan of the cover sheet with the date stamp (click on the image to enlarge; this post continues below the document):

I've been watching this dispute for three years. I downloaded countless filings from electronic dockets in the U.S. and attended well over a dozen German Apple v. Samsung and Samsung v. Apple trials, plus an injunction hearing in France. And I can't tell you how tired I am of this.

After three years and dozens of filings in at least 10 countries, there is still no endgame in sight. Later today, these two companies will square off again in the San Jose court, where a jury will have to render a verdict that, no matter the outcome, won't have the potential to resolve this global dispute.

A couple of weeks ago I made a call for input concerning the terms on which it would make sense for both parties to settle their global dispute. A large part of the feedback I received was non-numerical and came down to saying that Apple should sue Samsung forever and keep pursuing injunctions. Some of the messages I received specified potential royalty rates, some of which basically fell into the previous category of replies.

In this post I'm now going to lay out and explain my own thinking, not influenced by anyone (in fact, I did not tell or indicate to anyone beforehand what numbers I had in mind, nor did anyone request or suggest that I take a particular position).

At the current juncture (and the ongoing trial is unlikely to have a material effect on this assessment), these are the terms I would propose if I were a mediator:

  • Apple should pay $1 per cellular device to Samsung.

  • Samsung should pay $3 per device to Apple.

  • This is more favorable to Apple than it appears at first sight because Samsung's volumes are higher.

  • These terms should also apply retroactively to the last 36 months.

  • Samsung should additionally make a one-time payment of $750 million to settle any past infringement issues relating to design patents (basically, the first California case). Design patents would not be licensed going forward.

  • There should be an anti-cloning provision (something that most of the readers who gave my input stressed), but it would have to be very reasonable.

  • This proposal is a "package deal", so these two parties might very well make rather different demands in licensing negotiations with third parties.

Obviously, if the parties agreed that these are the right terms, they would already have entered into a settlement on that basis and the current California trial wouldn't have to be held anymore. Still they presumably talk all the time. I will now explain how I would defend this proposal against both parties' likely objections (if I were, in a parallel universe, their mediator), but before I do that, I'll say something about many people's fundamental misconceptions regarding the strategic and financial value of patents in a situation like this.

Jury trials are circus events, but the name of the game is not whether someone's internal benchmarking documents suggest "copying" (a term that makes sense in connection with copyright, not patent law) or whether someone revolutionized a market (there is no intellectual property right that protects market share or rewards a company for persuading consumers to use small portable touchscreen devices). The name of the game is that a patent is worth the difference between the scope of its valid claims and the best non-infringing alternative (i.e., workaround). It's about the impact on someone else's business if they are required to work around the patent.

I have recently highlighted the limited scope of Apple's patents-in-suit (and in retrospect I think I should have talked about this a lot more in the months before, though I still believed until last summer that Apple could still gain some decisive leverage at some point). I had been very patient with Apple's effort to prove the strength of its patents in court. Certain reactions to the conclusions I had to draw have focused on conspiracy theories and on evidence of "copying", all of which is pretty simple stuff, but none of the feedback I received was specific to the strength of the relevant patent claims relative to workarounds. None of those who disagreed with me pointed to Apple's exclusive ownership of particular features. Let's please not forget about the name of the game.

With the foregoing in mind, I will now outline how I as a mediator would explain the rationale behind my proposed terms to the parties.

I would tell both of them that the money they spend on lawyers is little if you compare it to the size of the relevant market, but given that those patents have turned out to be non-nuclear, costs are too high.

Another message to both of them would be that they should consider the value of a business partnership in certain areas (manufacturing of components). Companies can do business while being embroiled in litigation, but that is not the ideal climate. If those patents were much stronger than they have turned out to be, I would recommend to both of them to regard the benefits of a commercial partnership as far less important than what is strategically at stake. But that's not the case.

Either of them would argue that their patents are worth much more than I propose. In fact, my proposal comes down to almost exactly one-tenth of what both have demanded (Samsung wants 2.4% of Apple's sales for a cash-only license to its wireless SEPs (i.e., $12 on a $500 device), and Apple approached Samsung in 2010 with a $30-per-unit licensing proposal. My proposal comes down to slashing their demands by a factor of 10.

I believe Apple would probably not have a problem with the $1-per-unit fee for Samsung's patents. In 2012 Apple told a U.S. court that it would accept a FRAND royalty determination of up to $1 per iPhone to secure a license to Motorola's patents (and it didn't rule out paying more, but in that case it wanted to reserve the right to continue to litigate). I don't think Apple would claim that Samsung's patents are less valuable than Motorola's. And it has turned out that antitrust regulators are not inclined to impose sanctions on Samsung for its SEP assertions against Apple.

Samsung would probably still want a lot more than $1 per device, but I would encourage Samsung to look at this rate in the greater context of a comprehensive cross-license agreement.

I don't know how Samsung would react to the idea of paying $3 per Android device to Apple, nor whether Google would somehow contribute financially to such a settlement. Of course, Samsung could argue that Apple doesn't have any serious leverage and will ultimately get nothing, or next to nothing, out of all of these lawsuits. Conversely, Apple could also argue that it believes it would have more leverage further down the road. But on that basis they would both never settle and keep litigating forever.

By far and away the biggest obstacle to an agreement on these proposed terms would be the reality distortion field surrounding Apple's perspective on the value of its patents. This bullet point from Apple's 2010 proposal to Samsung shows just how unrealistic Apple was at the outset and still might be (click on the image to enlarge or read the text below the image):

"Since Apple's paradigm of an advanced smartphone won -> Apple's portfolio will become the most important and most valuable part of the IP stack for the next decade."

The "Since" part is true, the conclusion from it is not. Apple does not own a market because it created the market: it merely owns any technology it created, and since essentially all of the relevant technology existed before the iPhone, Apple can't claim ownership of an entire category. So far its proven ownership is limited to rubber-banding...

Apple has now been litigating against Android device makers for almost 50 months. It has tried everything. Hardware patents. Software patents. iPhone-era patents. Pre-iPhone Mac patents. And the only complete feature that it has been able to force Android device makers to remove from their devices is the overscroll bounceback.

If litigation drags on and on and on, Apple will over time be granted new patents that it may assert in litigation. But that is also true of Samsung. Both can also make patent acquisitions anytime. On that basis, they would never settle.

If Apple thought $3 was too little, I'd remind them of their own position on an appropriate royalty base (given that most of their patents-in-suit against Samsung are software patents) and tell them that based on the leverage they presently have in litigation, a royalty-free cross-license would make a lot of sense, and if Apple didn't settle now on these proposed terms, a zero-zero deal could easily be the ultimate outcome.

If Samsung thought $3 was too much to pay to someone who doesn't have serious leverage, I would tell Samsung to consider that as long as there is no settlement, Apple will keep trying to gain leverage, and there is some economic value in eliminating the remaining uncertainty. While I would agree with Samsung that Apple's current non-leverage does not justify $3 per device, there could also be a situation further down the road (not as a result of the ongoing trial, but later on) in which a per-unit royalty of $5 or more (though always below $10 as long as the U.S. is the only jurisdiction in which Apple, which has not scored a single lasting win over Samsung in Europe, can prevail on anything other than rubber-banding) would be the correct outcome.

These are the key messages I would have for them. I would also be able to go into much more detail with them on the results (or absence of results) of three years of litigation, the scope of claims, and the workaround options. But in this post I just wanted to focus on my conclusions from having watched this dispute for three long years and having finally arrived at the conclusion that Apple can basically just score symbolical wins. So far at least. If Apple came up with a "killer patent" and proved it in court, then we could talk again. I doubt it.

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Sunday, April 13, 2014

Apple's damages claim, Windows freebie raise question of patent royalty base for Android

In all the patent cases I watch, the only defendant with which I have sided (and continue to side) against two different right holders (Samsung and Google/Motorola Mobility) is Apple. By comparison, I've sided with others against only one plaintiff each (BlackBerry against Mformation, Marvell against CMU, Micromax against Ericsson, Microsoft against Google's Motorola, and now Samsung against Apple in connection with the ongoing trial).

When I became aware of Apple's $40-per-device damages claim last month, the first reaction is that I was thoroughly disappointed because Apple's positions up to that point had been reasonably consistent (design patent damages have a different legal framework). Not just disappointed but even angry. Angry because I had called for antitrust sanctions against Samsung because of its SEP royalty demand of approximately $12 per device (for a whole portfolio of wireless SEPs), which I still think is way too much but which now looks cheap compared to Apple's demand of $40 for only five Android-related patents. Apple is actually seeking damages for just one patent (the '647 patent) -- more than $12 per unit -- that are at a level with Samsung's total SEP royalty demand. It didn't take me even one second to figure out that I would now have to side on this key issue with Samsung for basically the same reasons for which I still side with Apple in two other disputes -- even more so in light of Samsung's voluntary withdrawal of two standard-essential patents-in-suit from the second California case, as a result of which Samsung went into the retrial with a perfectly consistent position on patent damages.

It's obviously imperative to distinguish between the criteria for reasonable royalty rates (and royalty-type damages) on the one hand and the consequences of excessive demands on the other hand (remedies, antitrust fines etc.). Absent a FRAND commitment and what is called a license of right, it's not impossible but far more difficult to allege violations of competition law. And patents are, in principle, exclusionary rights, so someone who does not have a FRAND licensing obligation due to a FRAND pledge or some other valid reason can elect to withhold a license altogether. But that does not make the sky the limit for non-SEP royalties in the context of Georgia-Pacific royalty-type damages: a damages theory that is all about what royalty rate the parties would have agreed upon at the end of a reasonably-led negotiation. The way to enforce exclusivity is through injunctions.

One key aspect of a reasonable royalty is the appropriate royalty base. It's often the most important question. More than two years ago, I published a letter that Apple had sent to standard-setting organization ETSI with suggestions to ensure that right holders honor their FRAND licensing commitments, and I supported Apple's advocacy of a "common royalty base" for wireless baseband patents: "This common base, as between two negotiating parties, should be no higher than the industry average sales price for a basic communications device that is capable of both voice and data communications."

About a year ago Apple made this argument again in a filing with the ITC (in its efforts to avoid an import ban, which was ultimately vetoed). It argued that the proper royalty base for Samsung's wireless SEPs is the price of a baseband chip, i.e., approximately $10. Apple frequently compares (as do defendants against SEP damages claims and royalty demands all the time) the royalties sought by Samsung and Google to the price of the baseband chip, and on that basis (rightly in my opinion!) finds those royalty demands excessive.

But what's good for the goose is good for the gander.

Apple's patents-in-suit in the ongoing trial are software patents relating to Android. Four of them are just about Android, and the fifth one, slide-to-unlock, is a feature all Android device makers add to "stock Android" (and it involves mostly Google's program code as well). I'm unaware of any explanation by Apple of why the total cost of patent licenses relating to Android should not be limited to a percentage of the contribution that Android makes to the market value of a smartphone or tablet computer.

Only because Judge Koh is much more permissive with respect to damages claims than Judge Alsup (in the same district), Apple apparently didn't have to explain this striking contradiction between its "royalty base" position and its damages claims in the ongoing trial. The apportionment question came up in Oracle v. Google, and in that case it was not about the difference between the operating system and the complete device but just about the part of the Android mobile operating system that Oracle's asserted intellectual property rights represent. (I have said repeatedly that I consider the most likely next step in that case to be a remand to the district court, so there will likely be a damages trial.) Judge Alsup made very clear, however, that a zero royalty -- just because Google gives Android away for free -- was out of the question. Oracle was allowed to base claims on the mobile advertising revenue generated by Google and even the indirect network effects of Android benefitting Google's non-mobile businesses.

It would also be preposterous, of course, to argue (which no one has tried in any of the disputes I watch) that Apple should not be entitled to any royalty-type damages relating to Android because Google gives Android away for free. But Apple can't ignore -- and the court should never ever have allowed Apple to ignore -- the fact that mobile operating systems do not account for sky-high percentages of the entire market value of a smartphone or tablet computer. The fact that Microsoft now grants royalty-free Windows licenses to makers of small devices (anything with a screen smaller than 9") -- a decision by Microsoft that makes a lot of sense to me and is procompetitive -- makes it even clearer that Apple is out of touch with reality as far as reasonable royalties (and damages) relating to Android are concerned.

There's no shortage of right holders asserting patents against Android, so this question is going o continue to be an important one.

Last summer I found out that a replacement screen for the phone I used then (the Note 2, but I then bought the Galaxy Mega 6.3 instead of having it repaired) would cost me almost 300 euros ($400). The replacement would not have been limited to the screen: the spare part contained various other hardware components. Still this is one of various indications of the non-operating-system components of the total cost and market value of a smartphone (or tablet). Apple can't just ignore the value of all the high-end hardware that goes into these devices when making royalty demands over software patents.

On the other hand, the price at which a component lacking key patent licenses (whether it's an operating system or a baseband chip) is sold is not a sufficient royalty base because infringement can't have the effect of devaluing intellectual property. That is another reason why the royalty-free Windows deal for smaller devices is so interesting. Microsoft does secure patent licenses it needs, and shields its customers from patent assertions. The combination of Microsoft and Google's operating system-related pricing decisions is relevant. Apple should not turn a blind eye to such market parameters.

The purpose of this post was to raise a question and to highlight some key facts in this context, not to give a definitive answer on a highly complex issue. I will address this question on more occasions going forward and will, over time, take reasonably firm positions. But that is not necessary to establish the unjustifiability of Apple's damages claim in the Samsung case. On Tuesday I mentioned several experts who agree with me on Apple's damages claim in the ongoing trial. I still haven't become aware of anyone supporting it, but I have Rutgers Law School's Professor Michael Carrier to add to the list based on this interview with Bloomberg Law.

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