Wednesday, April 25, 2018

Supreme Court SAS ruling: higher principles decide, patent review efficiency suffers collateral damage

Someone wrote on Twitter that patent holders had something to celebrate yesterday: After the Supreme Court's Oil States (7-2 confirming constitutionality of PTAB inter partes review) and SAS (5-4 holding that PTAB must render decision on all challenged patent claims after granting review), patent holders were allegedly in a stronger position than before, which--as the same tweeter (I forgot the name) noted--is rarely the case when the Supreme Court overrules the Federal Circuit as it did in SAS.

Classical spin doctoring? A comparison of the number of amicus briefs filed shows where most of the attention was. 54 briefs in Oil States vs. only in SAS. If patent holders at large had cared a lot about SAS, more of them than just the Intellectual Property Owners Association (amicus brief, PDF) would have chimed in. However, many of those who'd have preferred to have done away with PTAB IPR in the first place presumably welcome anything that adversely affects PTAB's operational efficiency--and even when (as is the case here) it's not easy to predict the fallout, someone who hates PTAB probably just thinks it can hardly get worse from that particular vantage point.

It is perfectly plausible that many experts believe the USPTO, which on average grants IPR under the America Invents Act with respect to not even half of all the claims that are challenged, may now have to hand down decisions on twice as many claims and may, in order to keep its workload at the same level, simply deny a lot of petitions that might have previously succeeded because they raised issues worthy of review with respect to one or more, but not all, challenged claims.

That would be understandable, but not desirable. At the same time, under a Republican administration and a Republican Congress it would be hard for PTAB to get a whole lot more resources. Unfortunately, some of what's going on politically aims to weaken PTAB.

The PTAB IPR timeline is tight. The AIA says a final written decision must come down within one year of instituting a review. For good cause, this can be extended by up to six months. That framework doesn't lend itself to simply taking twice as much time per case while waiting for more resources.

Whether PTAB will need to spend about twice as much time per review is, however, far from clear:

First, if challenges to claims are so weak that those claims wouldn't have been reviewed in the past, the average per-claim effort to uphold those claims on review should be less--the question is, however, how much less--than a rejection decision. Also, while the number of claims to rule on may (more than) double, all challenges already had to be looked at in the past to form an initial opinion. More work for PTAB for sure--but probably not twice as much.

Second, a much bigger factor than the previous one. It's not a static environment where all players will behave just as before, except that PTAB has to make an all-or-nothing review decision. Different types of petitioners will pursue different tactics, and as PTAB reactively (but probably rather quickly) adapts to the effects of numerous tactical decisions, the players will adjust their tactics.

In the "smartphone patent wars" I've seen some of the most extreme stalling efforts one could imagine. There was one Android device maker that had hardly any patents (especially not patents of the kind that would scare anyone) to countersue, but its lawyers were stalling artists on both sides of the Atlantic. Then there was Apple, which generally had a great deal of urgency in cases in which it was the only part asserting offensive claims, or was asserting more or potentially more impactful ones, while taking its time when defending itself--but nowhere near as extreme as some Android companies. Microsoft was pretty unique because it tried to accelerate pretty much everything (except maybe ITC proceedings in which it was the respondend). For an example, Microsoft went to a UK court to obtain a quick ruling on a Motorola patent in order to influence some German decisions, and it obtained an antisuit injunction to prevent Motorola from enforcing two German patent injunctions (arguably, an antisuit injunction is a form of stalling, but unlike traditional stalling, it requires speed in one jurisdiction).

PTAB IPR petitioners are also diverse. Some primarily want to slow down infringement proceedings, which often get stayed. Others are more focused on strategically striking down certain claims.

Some "stallers" may like parallel proceedings where they challenge some claims before PTAB and others in district court. Post-SAS, if more claims of a patent are reviewed than would have been reviewed before, litigation estoppel may result in some consolidation. That was a policy argument made by those advocating all-or-nothing. In my opinion, that was a far weaker policy argument than efficiency, especially in light of all the positive effects of PTAB on "patent hygiene," but we'll get to what the case turned on in a moment.

Statistics will show some SAS effects, but I'm quite sure many petitioners will now choose more wisely--especially once the percentage of granted petitions goes down. No one will act in the interest of the collectivity of all petitioners; as always in litigation, each party will do what serves its own interests. But sometimes that does, in the end, also serve a greater good.

If even outsiders like me can sometimes (especially if we take the necessary time for research) figure out which invalidity contentions are relatively strongest, petitioners and especially their counsel should have a clear idea of realistic priorities in most cases. Probably not immediately, but after a year or two, I guess the number of claims challenged on a per-patent basis will drop significantly.

PTAB efficiency wasn't really the Supreme Court majority's primary concern here. The Supreme Court does usually promote balance in patent litigation. But here, the efficiency impact of the procedural question at issue was of limited importance, and absolutely not outcome-determinative (as the result shows).

In Oil States, the Supreme Court had only two dissenters (Justice Gorsuch, joined by Chief Justice Roberts). All others supported PTAB IPR, with some left-wingers (Justice Breyer, joined by Justices Ginsburg and Sotomayor) filing additional thoughts in concurrence. By contrast, SAS resulted in an ideological 5-4 right-left split. The tweeter I mentioned further above would undoubtedly have preferred it the other way round: a 5-4 decision against PTAB in Oil States (then SAS would have been moot).

Justice Gorsuch has now been on the opposite side of my desired outcome in three cases (Dimaya, Oil States, and SAS) in short succession. I still like his judicial style very much--including his highly explanatory writings that others mock as #GorsuchStyle. He's an independent thinker, and despite his great background (including his family) and career, he's absolutely not an "elitist" of the kind that Trump supporters like me view skeptically. I wouldn't describe him as anti-elitist, but his take on Chevron (deference to government agencies) shows that he has less trust in unelected elites in government agencies than in elected lawmakers. And that's what SAS ended up being about more than anything else.

The Ginsburg-Breyer style is reflected by their dissenting opinions: the majority's literal reading of the statute in question is deemed "wooden," the statute is allegedly "difficult" (while to Justice Gorsuch and his entire camp its language is crystal clear), the USPTO should have the wiggle room to second-guess lawmakers (it's not just "what" Congress wanted and "why," and it comes across as extremely liberal when they suggest judges should simply take the position of "reasonable" legislators). By contrast, the majority opinion, while the outcome is inefficient, is a principled one. It's almost like saying "stupid but constitutional" (three words that Justice Scalia told his clerks and other jurists). The first Chevron hurdle requires a lack of clarity: lawmakers' intent must not be discernible. Only then can a government agency adopt its own rules, provided those are reasonable.

I honestly wish the intent of Congress had not been perfectly discernible in this context. Then the more efficient PTAB approach (reviewing only claims that face a credible challenge) could have been affirmed. But while I agree with the left wing on policy, after reading everything I can appreciate why no conservative judge would have been prepared to concur for a different set of reasons with the left camp and affirm the Federal Circuit majority.

The sole linguistic argument for a lack of clarity was centered around the reference to claims challenged in the "petition" in one place and "by the petitioner" in the relevant statute here, but that is a small difference and justified by the fact that initially there's a petition, but later the petitioner might have dropped challenges (under a settlement). The legislative record provides a few quotes from Capitol Hill lawmakers that really support the idea that all claims challenged by a petitioner should be reviewed, or none at all.

Ultimately it came down to how high the first Chevron hurdle should be. No conservative judge could have set the hurdle low enough for affirmance in SAS without spill-over effects on numerous other cases in which government agencies set their own rules.

Justice Gorsuch has a history of expressing a critical perspective on Chevron. The following passage from page 11 of yesterday's SAS decision is more than telling:

"But whether Chevron should remain is a question we may leave for another day. Even under Chevron, no affirmance]."

It's just an occasional remark, so it may not mean too much that no member of the majority dissented from it. But imagine a patent ruling in which the Supreme Court would say: "But whether eBay should remain is a question we may leave for another day. Even under eBay, [...]"

Chevron may be history at some point as the friends of Big Government and DC elites don't have a majority on the current Supreme Court. With such a strategic target in mind, there was no way that conservative justices could have widened the applicability of Chevron in a patent case that wasn't really about life or death of the innovation economy (unlike eBay, or even the Samsung design patent damages case, by way of comparison).

Justice Gorsuch has finally positioned himself as the thought leader of the Chevron-critical movement. What's remarkable is that Chevron upheld an air quality standards regulation by the Environmental Protection Agency (EPA), which at the time was headed by Anne Gorsuch Burford, Justice Gorsuch's mother. The Chevron opinion by the Supreme Court refers, in the context of the history of the case, to Natural Resources Defense Council, Inc. v. Gorsuch, an appeal (of an EPA decision, thus Mrs. Gorsuch was formally the defendant) decided by the United States Court of Appeals for the District of Columbia.

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Monday, April 16, 2018

Samsung obtains U.S. antisuit injunction barring Huawei from enforcing two Chinese SEP injunctions

Friday the 13th wasn't Huawei's lucky day, but it went well for Samsung: in accordance with an inclination he expressed at a recent motion hearing, Judge William H. Orrick of the United States District Court for the Northern District of California decided to enjoin Huawei from enforcing two Chinese standard-essential patent (SEP) injunctions against Samsung until a breach-of-contract question has been adjudicated in the U.S., where a trial is scheduled for December (this post continues below the document):

18-04-13 Order Granting Samsung Antisuit Injunction Against Huawei by Florian Mueller on Scribd

As I had already predicted on the basis of the motion, Judge Orrick concluded that any differences between the fact pattern of Huawei v. Samsung and that of Microsoft v. Motorola (a previous case in which a district court in the Ninth Circuit barred a litigant from enforcing a foreign SEP injunction) weren't relevant in terms of outcome-determinative in the present context. I called this Samsung-Huawei dispute "Microsoft v. Motorola Reloaded, an assessment that is validateed by the order, which discusses that precedent at great length. However, the order acknowledges that there are "undeniable and important differences," and I guess Huawei will try to capitalize on that when appealing this order to the Ninth Circuit.

One of the potentially "important"--though, as per the order, "irrelevant"--differences relates to the extent to which the Chinese court analyzed FRAND claims in Huawei v. Samsung vs. what the German Microsoft v. Motorola court did. Based on what I've read, I have serious doubts that there is the kind of huge difference in this regard that Huawei claims there is. In any event, I published an unofficial English translation of Presiding Judge Dr. Kircher's 2012 Mannheim Microsoft v. Motorola ruling six years ago.

The following passage will play a role--maybe not on appeal, but with respect to the further proceedings:

"I am at a loss as to how I (or a jury) could decide the breach of contract claims. [...] If I take Samsung’s reasoning to its logical conclusion, I see no end to this case, and certainly no way for this action to dispose of the parties' foreign patent actions."

Different judges have different styles. Many, if not most, other district judges would have made this decision (where an appeal is extremely likely) as appeal-proof as possible. Judge Orrick, however, has a very honest and forthcoming writing style, which is very likable but the next best thing to inviting Huawei to appeal.

This does not mean to say that I believe an appeal is going to succeed. There's a whole lot in the order that will presumably enable Samsung to defend the decision at the next level, such as holding that Samsung's Chinese manufacturing operations would really face a major threat or a quote from a speech by a Huawei vice president explaining that patent injunctions in general, and in the Huawei v. Samsung case in particular, are just meant to be bargaining chips in disputes that are just about money:

"Today, the number of disputes is on the rise, but we see fewer cases of injunction. Perhaps judges are quite reluctant to hear injunction cases because of its staggering impact on the market. Sure enough, the core issue is price; 90% or even 99% of the patent disputes are about price. Even if injunction order were to be enforced, does Huawei really want to kick Samsung out of China? Is it possible? Of course not. And is it possible for Apple to kick Samsung out of the US? No. That being said, when faced with potential licensees who are negotiating in bad faith, unwilling to pay fair royalties, you may want to file an injunction order with the court. At the end of the day, your purpose is to get the royalties in return, while using legal action as a bargaining chip. This is how things have changed over time."

The part I'm personally happiest about is that Judge Orrick attached some importance to the fact that Huawei itslf had chosen to make its U.S. filing the previous calendar day. For an example, the docket text says: "Huawei should not seek to enforce those [Chinese patent injunction] orders until the [U.S.] Court has the ability to determine the breach of contract claim it chose to present in this action prior to filing the Chinese actions."

In my initial analysis, and as I was following the process, I always thought this could play a role. In other cases, including the most similar one (Microsoft v. Motorola) as well as some bearing only a high-level resemblance to this one, the sequence of filings and its legal significance was a bigger issue between the parties than here. In comparable situations, the moving party often repeats the term "earlier-filed case" like a mantra. When it didn't happen here, I was starting to worry whether my recollection of the relevant types of facts had been wrong. But as Judge Orrick's order explains, this is indeed relevant in connection with international comity (i.e., deference to the foreign jurisdiction). Additionally, it's a psychological factor: Huawei made its bed and now has to lie in it.

As you might imagine, I'm proud of having accurately predicted the decision (based on the motion and Ninth Circuit precedent). I'm now predicting affirmance by the Ninth Circuit. For a final "See I Told You So," I'd like to note that last month the Federal Circuit completely vindicated my longstanding "fair use is a fairy tale" position on Oracle v. Google. I'm not going to talk about the merits here anymore. I wrote so much about it from 2010 to 2016 that there's no point in reiterating and rehashing all of that old stuff. All sorts of people who bashed me in earlier years were simply wrong: I didn't take those positions for any other reasons than wholeheartedly believing in them, and those positions can't have been as unreasonable as my detractors alleged. Otherwise, a Federal Circuit panel wouldn't have supported my positions unanimously in two separate decisions. That said, should Google file a petition for writ of certiorari (request for Supreme Court review), which is a given absent a settlement, I'd really like the top U.S. court to provide definitive clarity on some key software copyright issues. I'd hope for affirmance there as well, but I really believe the issues are important enough for the software industry at large that cert would be warranted.

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Thursday, April 12, 2018

One month prior to yet another Apple v. Samsung trial, old and new disagreements on design patents surface

On May 14, Apple and Samsung will square off in court again. It's going to be the third trial in their first California case alone. What makes it interesting is that it will involve a design patent damages determination (damages in this case amounting to a disgorgement of infringer's profits) following a Supreme Court ruling in the same case. The exact amount of money that will change hands between Apple and Samsung won't impact the parties' positions in the smartphone market. However, it will be a signal to other design patent holders, including patent trolls. Should Apple be awarded a huge amount that Samsung could ultimately afford but the equivalent of which would potentially put many other companies out of business, design patents would be used in aggressive, extortionate ways.

Last week, Judge Lucy Koh ruled on the parties' Daubert motions. Daubert motions and rulings are hard to figure out from the outside unless they're just about numbers (such as damages claims that a court does or does not permit) because one would need to know the related expert reports to really understand the context. What became clear to me from Judge Koh's ruling, however, is that she gave Apple various opportunities beyond the test proposed by the United States government in 2016 to argue that the relevant article of manufacture for a disgorgement of design patent infringer's profits in this case is an entire phone, not just a casing. While Judge Koh adopted the broad lines of the DoJ's proposed test, her Daubert order explicitly and intentionally declines to apply parts of what the DoJ had argued in its amicus curiae brief to the Supreme Court.

This week, Apple and Samsung filed their motions in limine. Judge Koh allowed either party to bring three such motions for excluding evidence from the upcoming trial. Motions in limine are more instructive for third-party observers like you and me because one can largely understand their meaning without having access to the parties' expert reports, and because it's often very telling what kinds of evidence a party believes would be particularly prejudicial to its case.

Apple's motions in limine

Apple's first motion in limine appears to be its strongest one. The court previously excluded evidence relating to smartphone designs independently developed by Samsung before the iPhone--which nevertheless looked a lot like the iPhone--except in the context of invalidity and infringement. This slide shows some examples on the left, and the first iPhone on the right (click on the image to enlarge):

Let's see how Samsung will respond to this motion, but it won't be easy to persuade Judge Koh that this kind of evidence should be admitted now in the article-of-manufacture context if it was excluded from the previous damages retrial. It's not that it isn't interesting or powerful. In fact, if the jury saw this, it could have a major impact in Samsung's favor. But Judge Koh's cherished "Groundhog Day" principle is that what wasn't allowed at previous Apple v. Samsung trials won't be allowed next time.

By contrast, Apple's second motion in limine appears overreaching at least in key parts (this post continues below the document):

18-04-09 Apple Motion in Limine Against Unasserted Patents by Florian Mueller on Scribd

In that second motion in limine, Apple seeks to preclude Samsung from referring to "unasserted patents." If you scroll through the above PDF document, you'll see that the term "unasserted patents" relates to a wide array of rather disparate references to other patents. The question Judge Koh will ask herself is whether or not the probative value of any evidence is outweighed by prejudicial jury confusion. I'd be surprised if she agreed with Apple on each and every part of that motion. For an example, Apple argues that patents not asserted in this case are irrelevant to the determination of the relevant article of manufacture. However, I can't see how the existence of other smartphone-related patents (utility patents as well as design patents) would not have probative value: the single strongest argument for a narrowly-defined article of manufacture (just the casing) simply is that there is so much more in and on a smartphone than just a very few, narrow designs. Therefore, if the unapportioned profits made by Samsung with entire devices were to be disgorged, everything else would be deemed to have no commercial value at all (which would be a ridiculous proposition, of course).

Just like I would probably grant Apple's first motion in limine at first sight, I'd largely or completely deny the second one because Samsung must have the chance to argue to the jury--not only, but also on the basis of other patents--that other patents cover other elements of smartphones.

There's one thing in that entire PDF that I think shouldn't be shown to the jury. On PDF page 111 there is the following user comment:

"The most idiotic source of much of Apple's patent litigiousness has been the design patents -- almost all of the claims being totally farcical. For example, they claimed 'rounded corners' on rectangular phones. Hope you discuss that."

That would indeed be unfair to Apple. This blog has previously debunked the "rounded corners" myth; but that still doesn't mean that anyone could reasonably support a disgorgement of infringer's profits generated with entire devices.

Apple's third motion in limine is hard to analyze from the outside; let me say that for now I'm unconvinced of it. It's about evidence from after the period relevant to the damages determination the jury will have to make. For an example, Samsung provided some screenshots from Amazon's website that show replacement smartphone casings (with a screen) that are sold separately and at a price much lower than that of an entire phone. If the point Samsung wants to make is that casings are sold separately, I'm not sure the exact date matters. It certainly can't matter if the underlying facts (such as the availability of such replacement parts) was already true during the damages period.

Samsung's motions in limine

Samsung's first motion in limine seeks to "preclud[e] Apple from offering evidence, testimony, or attorney argument that improperly implies that Samsung's increased market share was caused by the introduction of features found to infringe in this lawsuit," such as the claim "that Samsung’s market share increased because of the introduction of features found to infringe."

Samsung says such evidence was previously allowed because it was relevant to an analysis of profits that Apple lost, but it isn't relevant now that it's all about the article of manufacture and Samsung's related profits.

For now it is indeed unclear to me how that kind of evidence would help--and not just confuse--the jury with respect to the article-of-manufacture determination. Let's see how Apple will respond.

Just like Apple's second motion in limine is the broadest one, so (though by far not equally broad, and clerly stronger in my view) is Samsung's second motion "for an order prohibiting Apple from presenting evidence or argument suggesting that this Court, the prior jury, or the U.S. Patent and Trademark Office ('PTO') has already determined the articles of manufacture to which Samsung applied the patented designs."

One of the things Apple would like to do is highlight to the jury how often the words "an electronic device" appear in the design patent documents. I agree with Samsung that the United States Patent & Trademark Office didn't accept or reject certain claim language with a view to an article-of-manufacture determination in a future damages case. No matter how often a patent says "an electronic device," it may nevertheless just relate to a component.

Samsung's third motion in limine relates to the '915 pinch-to-zoom API patent. The asserted claim was rejected by the USPTO on reexamination, and the Federal Circuit (which salvaged other Apple patents in other cases) affirmed the USPTO's decision. The way I understand Samsung's motion is that the disagreement between Apple and Samsung is not about whether the '915 patent is relevant to the damages determination in the upcoming retrial. Instead, the disagreement is whether the related adjustments made by Apple and its experts were sufficient.

There's nothing spectacular about those motions in limine, but they do raise some interesting issues. I'll comment again when Apple and Samsung have responded to each other's motions--particularly to each party's second motion.

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Thursday, April 5, 2018

Microsoft's Shared Innovation Initiative and its evolving approach to intellectual property rights

Microsoft has announced a "new IP strategy for a new era of shared innovation," giving customers ownership of new patents and design rights resulting from their collaboration with Microsoft, with Microsoft merely getting a license to use those technologies for the improvements of certain "platform technologies" such as Azure, Office, and Windows. Microsoft is even willing to support contributions to open source projects at a customer's request.

I haven't done any consulting for Microsoft in more than four years, and even while I was doing some work for them (such as on standard-essential patents), I never received any confidential information about their strategies or the terms of their license agreements. Whatever I know, I know from publicly-accessible court filings, one of which indicated that Samsung at some point paid north of $1 billion in Android patent royalties to Microsoft during a 12-month period.

As an anti-software-patent campaigner (2004/2005), I was profoundly worried about Microsoft using its patents against Linux and other free and open source (FOSS) software. A few years later, I realized three things:

  1. In certain contexts (such as the i4i case), Microsoft actually took pro-defendant positions.

  2. While I understand that many people disliked the idea of Microsoft charging patent license fees to Android device makers, there was no exclusionary use of patents. To the extent Microsoft sought injunctive relief, it merely wanted to bring Android OEMs to the negotiating table in order to reach a license agreement. Depending on the specific terms, licensing can also be anticompetitive, but by now we all know that none of this prevented Android from succeeding, and dozens of companies (many of which would have the resources and sophistication to defend themselves in court) chose licensing over litigation.

  3. I considered many free and open source software activists hypocritical because they criticized Microsoft over almost anything it did in connection with open source while giving the rest of the industry a free pass and intentionally turning a blind eye to some other players' clearly abusive conduct. Just like other companies orchestrated antitrust complaints against Microsoft, Microsoft was in some cases proven and in other cases merely suspected to be behind initiatives targeting other large players. But if there were things that deserved to be criticized, who cares? In the information and communications technology sector, lobbying entities and NGOs that raise issues serve an important hygienic function, provided there really is fire and not just smoke.

During the "Smartphone Patent Wars" it happened for the first time that Microsoft faced the threat of injunctive relief as a result of litigation brought by another large corporation: Motorola Mobility. That kind of adversary, which at some point belonged to Google, wasn't just the kind of troll that you can pay to go away (and that usually won't satisfy the eBay standard for patent injunctions). "Googlorola" wanted to gain so much leverage over Microsoft that it would have been forced to cease and desist from all litigation against Android device makers. Even during the early stages of its dispute with Motorola, Microsoft still made an often-cited filing with the Federal Trade Commission in which it advocated, or at an absolute minimum appeared to advocate, injunctions over standard-essential patents (SEPs). But that changed not much later, and by now most major players, except for mostly failed businesses that increasingly rely on patent monetization, agree that SEP injunctions shouldn't be granted. Two years ago, Google joined the Fair Standards Alliance, which promotes SEP licensing on FRAND terms.

I had already done some work for Microsoft when I first took a clear "no SEP injunctions" position on this blog. I knew that Microsoft's standards group wasn't taking the same position at the time, but no one even tried to discourage me from voicing my position on this.

In recent years, Microsoft's IP-related positions and priorities have apparently evolved further.

The emphasis in announcements of patent license agreements between Microsoft and Android device makers appeared to shift to bundling deals: Microsoft was apparently very interested in getting companies to preinstall certain Microsoft Android apps, such as Skype. The derogatory term for this is "bloatware," and no one knows by how much Microsoft lowered those license fees, but analysts speculated that Android device makers saved a ton of money by bundling Microsoft's apps.

Meanwhile, Windows Phone has been discontinued, so Microsoft has surrendered to Apple and Google with respect to mobile operating systems. It still has the Windows desktop and server business, but its growth strategy is centered around apps and services. So far, Wall Street loves that new focus, but it remains to be seen over the years whether Microsoft can fend off competition in markets in which it won't have the benefit of making the underlying operating system. I don't mean to be negative, but the jury is still out on this.

The most surprising and--to me--most disappointing indication of Microsoft now being more interested in apps and services than in its own operating system platforms was when it filed an amicus curiae brief last year with Red Hat and HP, supporting Google against Oracle with respect to "fair use." Parasitic Red Hat and Oracle-obsessed HP had previously sided with Google on copyrightability; Microsoft hadn't. But with respect to "fair use" (which Android's use ofthe Java APIs isn't according to the United States Court of Appeals for the Federal Circuit), Microsoft actually sided with the weak-IP camp.

I don't understand why. Maybe Microsoft would like some more freedom with respect to its own use of the Java APIs (in some enterprise applications and on the Azure cloud); maybe Microsoft is more interested in a constructive relationship with Google (unlike Oracle, Microsoft stopped funding various industry groups accusing Google of abusing its search engine monopoly); maybe Microsoft wanted to curry favor with the open source community this way; or maybe Microsoft is interested in "balance of power" (the historic British take on continental European politics) and is afraid of Apple being or becoming too powerful, so it may not want Android's success to be compromised by the Java copyright situation.

Whatever the reason or combination of reasons may have been, I'd never have expected Microsoft to support Google against Oracle on "fair use." By way of contrast, the Federal Circuit concluded: "There is nothing fair about taking a copyrighted work verbatim and using it for the same purpose and function as the original in a competing platform." The "old" Microsoft--the Windows-centric one--would have been interested in reasonably strong protection of its intellectual property in APIs. The new Microsoft is apparently more interested in access to other companies' APIs.

I interpret yesterday's announcement of the Shared Innovation Innovative as an indication of Microsoft continuing to modify its approach to intellectual property. It's still far from advocating the abolition of software patents, but it appears to be trying hard to be part of the sharing economy in some other ways.

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Sunday, April 1, 2018

Radicalization of European politics: growing chorus of calls for Facebook breakup

I wish this were just an April Fool's Day post, but sadly it's true that politicians in the EU are making ever more radical proposals concerning U.S. Internet giants. While I don't expect anything extreme to actually happen in the near term, calls for or speculation about breakups of large corporations contribute to a climate in which it becomes increasingly hard to find reasonable solutions, and to focus on actual wrongdoing by abusers of dominant market positions. It's a climate of thoughtlessness.

About a week ago, EU competition commissioner Margrethe Vestager, more descriptively named Activistager, told the Telegraph that a breakup of Google into multiple smaller entities would have to remain on the table as an option for competition enforcement. No one seriously believes this would be the outcome, but just mentioning the possibility is a kind of saber-rattling that appears totally disproportionate. One may or-as the U.S. Federal Trade Commission concluded in 2013--may not consider any of Google's business practices anticompetitive. But even if one agreed with the EU Commission's charges, one can't seriously think about a breakup. Maybe some minor remedies and limited fines, but that's the maximum extent of it.

Unfortunately, socialist anti-business radicalism is on the rise in Europe. The European political coordinate system has always been clearly to the left of American politics. By way of comparison, even someone like Hillary Clinton would be clearly to the right of the center of European politics--and on some issues even closer to parties considered "far-right" by European standards than to Merkel's Christian Democratic Union, which is conservative in name only, or Macron's En Marche, a movement in the tradition of French statism. But in the past there still was a huge difference between the more egalitarian, statist European approach and what would sooner or later result in five-year plans.

The European debate over Internet giants and the power they accumulate--and the way they leverage their reach and their network effects--needs more reasonableness. The current trend is worrying. Mrs. Activistager should be isolated. But the "nuclear option" of breaking up companies comes up way too often in the European debate.

Just this weekend, two senior German politicians said in interviews that a Facebook breakup may be necessary as a last resort. Robert Habeck, the co-chair of the German Green Party, told a newspaper that governmental intervention is warranted where there isn't enough competition. Mr. Habeck described Facebook as a "data superpower" that owns too many services, including WhatsApp, and aggregates all of their data. Therefore, he believes competition law needs to evolve in order to be able to break up such giants.

In Europe, the Greens are more influential than anywhere else in the world. They regularly join government coalitions in different European countries, and in the European Parliament they sometimes have the power to tip the scales in narrow votes. Most of the time they side with center-left parties, but sometimes also with European conservative-in-name-only parties. Merkel and her closest circle of allies and advisers tried to form a government with the Greens last year, but failed because the somewhat libertarian Free Democratic Party didn't just want to provide the missing votes to Merkel's strategic alliance with the Greens.

The reason I described the Free Democratic Party as "somewhat libertarian" is that it, too, increasingly adopts left-wing populist positions. For instance, the FDP supports Activistager's "state aid" case against Apple and the EU Commission's "digital tax" plans. And the vice chair of the FDP group in the German parliament, Michael Theurer, told Germany's leading financial daily, Handelsblatt, that a corporate breakup would be a "massive governmental intervention and, besides governmental regulation, a last resort"--but even he, while preferring to explore ways to build competitive pressure through innovation, didn't want to rule out a breakup of Facebook.

Mr. Theurer says that the "platform economy" has a tendency to result in monopolies and "a high concentration of power." Therefore, the libertarian-in-name-only politician, like the Green leader I mentioned before, believes competition law as it exists is insufficient to address the digital economy and urges its "further evolution."

While former Pirate Party leader and social democrat Christopher Lauer is far less influential, the leading Berlin newspaper, Der Tagesspiegel, published an op-ed of his last week in which he demanded the "nationalization" of Facebook.

Whatever conclusions Facebook may have to draw from the Cambridge Analytica affair, politicians in Europe, and especially in the largest EU member state, should be more careful about the measures they propose. Radical ideas, even if described as a last resort by some (not all) of their proponents, distract from real issues (such as Europe's abysmal failure in the digital platform economy) and from the quest for real solutions, and are particularly unhelpful on the brink of a trade war.

Europe should try to stay in the global competition enforcement mainstream. But in the Age of Activistager, that may be too much to ask for.

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Monday, March 26, 2018

EU competition commissioner Activistager going off the deep end with Google break-up talk

In Europe, there's already an abundance of signs of a continent in decline, with no realistic hope for a turnaround. Yet the EU--especially its executive government, the European Commission--keeps the bad signs coming. Here's the latest, courtesy of The Telegraph:

Give me a break. While Google's market share in the EU search market is a fact, it's not a result of any wrongdoing. There simply isn't enough innovation in Europe. Otherwise some European company could have built a great search engine with a focus on European languages and websites. Last year, the EU's "digital" commissioner (from Bulgaria, the least advanced but highest-crime country in the 28-member bloc) said in an interview that Europe didn't need its own Google. But apparently some people in Brussels believe they cannot leave Google alone either.

Breakups are the most extreme antitrust remedy. They're talked about far more often than actually ordered. But below a certain threshold it's simply inappropriate to mention the possibility of a breakup. Whatever charges the EU has brought against Google to date fall far short--"far" in terms of lightyears--of where a breakup could even be contemplated.

Apart from the Qualcomm case, where the EU Commission--for a change--joined the global competition enforcement mainstream, it's really hard to make sense of that multi-level crusade against American tech companies. Some alibi action taken against European companies such as IKEA aside, the EU is clearly applying double standards. In connection with state aid, that's particularly extreme:

  • When the Italian government bails out banks, it's not "state aid." Obviously, the eurozone's largest debtor country must be allowed to do this, though it won't help that uncompetitive country in any sustainable way.

  • Today a Dutch guarantee scheme named "Extended Growth Facility", under which the government of the Netherlands takes 50% of the risk of new loans to certain types of companies, was cleared by Brussels. It's no "state aid" to those bEUrocrats because the Commission argues the Dutch government would receive "an appropriate remuneration level" and the system would (which can obviously be based only on projections) be "self-financing." I know exactly how those schemes work because Germany had something similar in place in the 1990s--the tbg (Technologie-Beteiligungsgesellschaft der Deutschen Ausgleichsbank). A startup I had co-founded in 1996 received investments, and tbg made a promise of 50% risk coverage to our investors, and it gave us a loan (without any surety provided) of the same amount. We repaid tbg with a 30% premium (on top of ongoing interest payments) after we sold out to Telef√≥nica, and they never had to cover our investors, so I'm not saying it never happens that this kind of thing can be self-financing. But venture capitalists told me about the huge number of bankruptcies that occurred because investors made high-risk "other people's money" types of bets. Let's be realistic: no government would provide guarantees, even if in the Dutch case limited to "medium and large companies" (not startups), if those companies could receive money on the same terms from private-sector lenders, as the Commission incorrectly claims. There's no shortage of money, especially in the eurozone with the European Criminal Bank being just out of control and continuing to flood the markets with euros. Also, there's no shortage of insurance policies for credits in the private sector. The only reason a government would do this is because it wants to provide state aid.

  • The Madeira tax avoidance scheme is accepted by Brussels, too. Portugal is not as big a problem for the eurozone as Italy, just by virtue of being far smaller, but it's one of those strategically-lost Mediterranean countries, so obviously the Commission doesn't cry "state aid."

  • But when Apple simply follows international tax rules, including longstanding structural differences in global corporate taxation between the U.S. and Europe, the Commission feels that "state aid" comes in handy as a competition tool that can be misused to advance a political agenda, as the new "digital tax" proposal shows.

I'm way past the point at which I could understand the EU's absurd actions and inconsistent decisions. What I am concerned about is that the EU is continuing, and apparently even accelerating, its descent into madness.

Just like my favorite political commentator, Rush Limbaugh, who refers to Sen. Schumer as "Chuck-U Schumer" and to Sen. Graham as "Grahamnesty," I'm now going to give certain EU politicians new names.

I'll just call that left-wing political activist (disguising as a competition enforcer) "Activistager." There's the term "judicial activism," and it's what the EU court in Luxembourg is known for. Unfortunately, there is now some regulatory activism, too. It's like Attac designing the competition agenda for Europe...

The commissioner who presented the digital tax plans last week was a member of a Trotskyist group, and Trotskyism is the most radical, most oppressive and most violent form of communism. He may have distanced himself from such extremism, but he's so far left of the center that he's a "communissioner" rather than just a commissioner.

At the top of the organization there's a man whom another senior EU politician described as a "heavy smoker and drinker" in a TV talk show. A Polish politician described the problem in more drastic terms. YouTube videos like this one have raised questions. 12 years ago I was in Luxembourg for some meetings and a journalist told me about what kinds of beverages were spotted at press conferences even in the morning. Another Luxembourgian said that no one in that tiny country wanted to take the risk of libel lawsuits, but they do exercise their freedom of political speech by calling him "Jean-Claude Bokassa" and everyone understands what is meant. With the greatest respect, I'll just refer to him as "Dr. Uncker"--a rather subtle message.

There was a time when the EU's competition enforcement activity was constantly enhancing its reputation. America, not Europe, is the cradle of antitrust, but Europe appeared to take some actions, such as in the Microsoft cases (though I disagreed with the specific charges there), that other jurisdictions took note of. With respect to technology policy, Europe was seen as more open-source-friendly than other developed economies. But now that it is talking of a Google breakup without any such thing as a reasonable basis, that it is reducing the term "state aid" to absurdity by rubberstamping traditional state aid while manufacturing "state aid" cases out of thin air, and that it is at its wit's end with respect to innovation policy and focusing just on new tax schemes, the EU can't be a thought leader or a beacon for the rest of the world. Except in cases in which its decisions are consistent with other jurisdictions, the EU Commission can, at best, be considered backwards-oriented, and I increasingly doubt that the label "oriented" can be applied to it in any combination.

It's a different field of policy, but the EU is also arbitrary and capricious with respect to certain "autonomy" questions. Apart from Spain, the bloc wants to recognize and incorporate Kosovo; while Bulgaria is the most corrupt and highest-crime EU member state at the moment, it's not even playing in the same criminality league as Kosovo... Then the EU is the number one funder of the Palestinian Authority, thus also the largest contributor, through the "Martyrs Fund" (misnomer!), to the families of suicide terrorists. But when a Russian-speaking majority of autochthonous Crimeans unsurprisingly preferred to join the Russian Federation, the EU opposes this because it wants all of Ukraine, including Crimea (though this isn't going to happen), to join the bloc one day. And just yesterday, exiled Catalan ex-president Carles Puigdemont, who never advocated violence, was arrested in Germany. The EU consistently sides with the Spanish government, which is responsible for nearly 100% of the violence committed in connection with the Catalan conflict, and I'm convinced it's largely because even senior EU politicians such as Manfred Weber (leader of the "conservative"--in name only--group in the European Parliament) warned that the Catalan conflict could precipitate the next euro sovereign debt crisis (Spain could get into serious financial trouble, more serious than the one it already is in, without Catalan taxes; this could set off a chain reaction, especially with hedge funds placing bets against other countries, and could make the inherently unstable eurozone collapse).

In elections held earlier this month, roughly 50% of Italian voters supported strongly EU-skeptical parties, and another 20% supported parties that are somewhat EU-critical. It's not that hard to understand.

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Thursday, March 22, 2018

The EU's digital tax bill would burden COUNTLESS tiny app developers around the globe

I couldn't google a single article or statement higlighting the two ways in which even small mobile app developers will be affected by the digital tax the European Commission proposed on Wednesday (see yesterday's post and an October 2017 piece), so I'll just explain the problem here.

Most of the reporting and commentary on yesterday's Commission initiative is limited to one of the two proposals that were made simultaneously: the interim bill. On the EU Commission's website you can see that the March 21 announcement involved TWO DIFFERENT "Proposal[s] for a COUNCIL DIRECTIVE." The first one is a bill "on the common system of a digital services tax on revenues resulting from the provision of certain digital services" (PDF), and I'll refer to this as the "interim bill" so as to distinguish that short-term transitional set of rules from the actual mid-term plan, which is a bill "laying down rules relating to the corporate taxation of a significant digital presence" (PDF). The interim bill is intended to be replaced by the actual bill whenever the latter takes effect--and the EU wants its member states to begin working on both immediately.

At yesterday's Commission press conference, and in most of the media coverage, the focus was just on the interim bill. The interim bill is narrower than the actual bill in the following two ways:

  1. The interim bill has very high revenue thresholds, which all by themselves limit the number of companies potentially affected. We're talking about (as a power of ten) a hundred companies.

  2. The interim bill also defines the types of taxable revenues far more narrowly. That's why its title refers to "certain digital services" (emphasis added). Basically, the interim bill requires companies to sell user data or provide an advertising interface. It doesn't mention subscription revenues, for instance.

There's an "impact assessment" in either proposal, but I couldn't find any reference to mobile app developers. However, either bill specifically lists apps among the types of "digital interface" the tax proposal relates to. Article 2(3) of the interim bill and Article 3(2) of the actual bill are identical:

"'digital interface' means any software, including a website or a part thereof and applications, including mobile applications, accessible by users" (emphasis added)

Also, either bill defines user as "any individual or business."

Contrary to just targeting the likes of Google and Facebook, a huge number of app developers around the world will be affected by what the EU is trying to do. (Whether the EU will ultimately get anything done remains to be seen and is doubted by some.)

There are two ways in which even countless small app developers would be affected if the EU got its way. The first way requires you to have a significant (but not huge) number of users, and then the money you will have to spend on accounting and tax advice services will hurt most of you even more than the actual tax. The second way will affect many of you regardless of the exact number of users you have in the EU because Apple and Google would most likely pass certain costs on to you. The second way doesn't place an administrative burden on you, but it, too, costs you money.

  1. The actual bill would (if passed) affect you if your app has more than 100,000 users during a fiscal year in a particular EU member state. There are many apps out there that have more than 100,000 users in a country like Germany (more than 80 million inhabitants), France, or Italy (the latter two each have more than 60 million people).

    If you have more than 100K people using your app in a given year (as the sum of first-time users who just downloaded and recurring users from previous years), the bill would (if passed) apply to you even if your revenues were minimal! Article 4(3) of the actual bill defines a "significant digital presence" (the basis for falling under the new EU digital tax) as existing if "one or more of [three] conditions is met," so it's sufficient if (regardless of the other two thresholds, which relate to revenue levels and the number of formal business contracts) "the number of users of one or more of those digital services who are located in that Member State in that tax period exceeds 100 000."

    You know what this means in practice? You would have to file a tax declaration with the tax authorities of one or more EU countries such as Germany, France, Italy, whatever. For small app developers, the administrative effort of having to do this, in a foreign jurisdiction and language, and the potential cost of requiring expert advice (from accountants, tax advisers, or tax lawyers) would be a very significant burden.

    This fact alone shows that the EU's proposal is half-baked at best, insane at worst, and displays gross incompetence and an anti-business ideology. That's why I found it so telling that the EU commissioner who appeared at yesterday's press conference used to be a member of a radical communist group. His Trotskyist (that's the most radical denomination of communism) friends must be proud of Mr. Moscovici.

  2. Even if you don't have 100,000 users in a given EU member state during a fiscal year, and even under the interim bill, the EU's proposal(s) would (if passed) cost you money!

    That's because of how Apple and Google will be affected directly, with us app developers being affected indirectly. What's explained in the remainder of this post is unrelated to your number of users or your own revenues.

    • Under the actual bill, Apple's App Store and Google's Play Store revenues (whatever users pay for paid apps or in-app purchases) would be subjected to the EU tax.

      Just like we are paid our 70% (or 85% for qualifying subscriptions) of ex-sales-tax/ex-VAT revenues, the EU tax will then further reduce the revenues of which we receive 70% or 85%.

    • Under both the actual bill and even the interim bill, those of us generating in-app advertising revenues through Google AdMob would be affected, whether we're Android or iOS developers.

      I love Google's mobile advertising services, both as a great vehicle for acquiring users (I have an amazingly attractive cost per acquisition through Google AdWords because of a very effective HTML5-based playable ad, which Google uniquely empowers me to run) and as an app monetization vehicle (all ads shown in my app--banners, interstitials, videos, playable ads--are served by Google). I'm so grateful for the great support I've received from Google that I won't comment publicly on Oracle v. Google anymore (my positions on API copyright are still the same but I won't reiterate them).

      Google is the number one target of the EU's digital tax plans, so if the EU got its way, my own ads in the EU and my revenues generated through showing ads in my app to EU users would be affected.

      My ads in the EU would become more expensive, and my ad income in the EU would be reduced. Again, even under the interim bill, not just the actual bill.

    • What I just explained would affect not only Android, but also iOS, app developers relying (like I do) on Google's advertising services. In addition, iOS app developers would be affected with respect to their placement of Apple Search Ads. I don't know whether Apple's Search Ads business alone meets the revenue thresholds in the interim bill (50 million euros a year in the relevant market), but it undoubtedly would fall under the actual bill (the number of App Store users alone would take care of that, and the related revenue threshold would only be 7 million euros). So Apple would have to pay the EU digital tax on its European Search Ads revenue. It appears (based on comments on discussion boards) that Apple Search Ads are already a key part of the advertising mix of many app developers. I tried them for a short while and for my app they worked out a lot better than non-interactive Facebook ads and AdWords text ads, but I'm not using them anymore since Google AdWords delivers several times better results thanks to the playable ad format, which Apple doesn't support. But my situation is almost unique. For most app developers it's actually a heaven-sent opportunity to advertise their apps directly on the App Store, and that advertising vehicle would become 3% more expensive as a result of the EU's plans.

What the EU has in mind is bad for app developers everywhere in the world, whether they're based in the EU or outside. At the end of the day, this will affect EU consumers. But I can't think of a single pro-consumer initiative the EU has ever taken apart from the laudable exception of abolishing mobile phone roaming charges...

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