Friday, October 31, 2014

Samsung asks court to declare it can terminate its Android patent license agreement with Microsoft

A new filing was made on Thursday in the Southern District of New York in the contract dispute between Microsoft and Samsung over a 2011 Android/Chrome patent license agreement (redacted versions of the two contracts at issue, the patent license agreement on the one hand and a closely-related business collaboration agreement on the other hand, became publicly accessible last week). While seeking a stay pending arbitration, Samsung has (since the motion hasn't been adjudicated yet) timely filed its answer to Microsoft's amended complaint (published earlier this month, it revealed that Samsung paid more than a billion dollars in Android/Chrome patent royalties to Microsoft between mid-2012 and mid-2013) and its counterclaims.

Microsoft wants the court to hold that Microsoft's acquisition of Nokia's mobile devices business does not give Samsung the right to unilaterally terminate the patent license agreement (though the two agreements are undoubtedly interconnected). It also says that the case shouldn't be stayed since any termination, if allowed (which in Microsoft's opinion it's not), would affect only future royalty reports and not the royalties Microsoft says Samsung owes for the period between mid-2013 and mid-2014). Samsung's key counterclaim is now a request for a judicial "declaration that Samsung may terminate the [business collaboration agreement] and [patent license agreement] pursuant to BCA Sections 9.7 and 8.5." (emphasis added)

If Samsung obtained such a declaration (by the court in New York or by an arbitration panel), it would be in a position to renegotiate the terms of the patent license agreement. Since the signing of that contract more than three years ago, smartphone patent assertions by all of the major players have been largely unsuccessful (less than 10% had merit based on final or interim results):

Microsoft has, to put it diplomatically, not outperformed the others so far:

But for now, there is no indication of Samsung actually having provided notice of termination. It appears that Samsung prefers to negotiate with Microsoft from the position of having the option, but not the obligation, to terminate the existing contracts. There could be different reasons for that approach. To me, the most likely reason is that Samsung wants to avoid further escalation of the controversy not for fear of Microsoft's patent assertions (the results in court speak for themselves and some of Microsoft's relevant patents have expired) but because of an interest in continuing to build Windows-based devices.

That interest, however, is not heightened by the fact that Microsoft has become a mobile device maker through the acquisition of Nokia's handset business. For example, Samsung's filing says the following:

"After the Nokia DSB Merger, the agreements, now between competitors, invite charges of collusion. No reasonable business would knowingly undertake the risk of contractually obligating itself to coordinate and collaborate with a competitor—particularly, as here, with respect to setting third-party incentives and controlling the 'out of box' experience of a competitor's products."

Samsung's lawyers even raise antitrust concerns over this kind of horizontal cooperation:

"Additionally, the sharing of product roadmap information, which the BCA contemplates (Sections 2.1 and 2.2 of Exhibit B), now takes on a new and dangerous meaning when viewed through the lens of antitrust law: these provisions could give rise to accusations that two handset competitors, Microsoft and Samsung, are engaged in market allocations in terms of how and when products are developed and distributed to the market. This problem did not exist prior to Microsoft's merger with Nokia['s handset business]."

If you're interested in further detail, here's Samsung's filing:

14-10-30 Samsung Answer to Microsoft Contract Complaint by Florian Mueller

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Friday, October 24, 2014

Here's a redacted version of Microsoft's Android/Chrome patent license agreement with Samsung

The Microsoft-Samsung contract dispute in the Southern District of New York over the implications of Microsoft's acquisition of Nokia's wireless device business for the parties' 2011 Android/Chrome patent license agreement has already exceeded my expectations concerning transparency. Three weeks ago this case brought to light that Samsung forked over more than a billion dollars in patent royalties on its Android/Chrome devices to Microsoft in the 12-month period from July 2012 to June 2013. Last week, a Samsung motion to compel arbitration explained certain interdependencies between the parties' Android/Chrome patent license agreement and a second contract, a Windows- and Windows Phone-related business collaboration agreement.

Here comes the latest and greatest revelation, which in certain respects is of even greater interest than the billion-dollar figure: yesterday, Samsung's counsel in the New York case had to file a public redacted version of the declaration supporting Samsung's motion for referral to arbitration, including the key exhibits--the patent license agreement and the business collaboration agreement.

The following PDF document contains the declaration and the redacted versions of the two contracts (this post continues below the document):

Redacted version of Microsoft's 2011 contracts with Samsung.pdf by Florian Mueller

These contracts are interesting from different angles. One of them is Samsung's motion to compel arbitration. At first sight (and I will have to look at it more closely and think about it some more) it does appear that the two contracts, both of which were concluded within a couple of months of each other, are indeed closely connected. The business collaboration agreement was signed first but already referred to credits (based on Samsung's success with Windows devices) against Android/Chrome-related license fees. Technically they both have the same date: July 1, 2011.

The aspect I found most interesting is all about exclusions. While the license agreement is not limited to a particular list of patents, it's no total-portfolio license either. There are two key limitations: "Excluded Technologies" and "Excluded Software" (any software licensed under an "Excluded License").

As for excluded technologies, Microsoft did not license to Samsung any of its patents relating to

  1. Kinect-style gesture-based functionality (this exclusion has nothing to do with touchscreen gesture control, as the contract clarifies),

  2. Virtual Reality, and

  3. "Information Worker Software": a software or a service "designed or offered as a replacement" of Microsoft's office applications, with OpenOffice and LibreOffice being specifically mentioned as replacements for one or more Office components.

The definition of "Excluded License" includes any version of the GPL, LGPL, Mozilla Public License, and Common Public License, or similar licenses with a copyleft (share-alike) feature. This exclusion, however, relates only to "Other Samsung Products" and not to Samsung's Android and Chrome devices, where the only excluded license is the GPLv3. In other words, the license agreement does cover the GPLv2 parts of Android, such as the GNU operating system and the Linux kernel. This might spark some debate in Free Software circles. It also reminds me of what I said four years ago when there was a debate raging in Europe over "open standards" and the compatibility of free and open source software with FRAND (fair, reasonable and non-discriminatory) licensing terms. I said that patent royalties are paid on free and open source software, including GPLv2 software such as Linux, all the time, also by such companies as Red Hat. The now-public terms of the Microsoft-Samsung patent license agreement are another example.

Besides the actual exclusions I mentioned, there's also a mechanism in the contract that can lead to the exclusion of a category of devices. There are special rules in the contract for a "Deferred Android Device," defined as "an Android/Chrome Device that (a) does not have voice communication as a primary functionality, (b) has web browsing as a primary functionality and (c) has a display screen no larger than 6.25 inches across its diagonal." For such devices, the contract requires the parties to take certain steps for the purpose of agreeing on a license fee on such a device, but if the parties couldn't agree on a fee, then such devices would just not be covered by the license agreement.

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Wednesday, October 22, 2014

Deadline for Oracle's response to Google's Supreme Court petition extended by one month (now 12/08)

In July, the Supreme Court of the United States granted Google a two-month extension of its four-month deadline to file a petition for writ of certiorari (i.e., Supreme Court review of the Federal Circuit's copyrightability finding in Oracle's favor). The deadline was extended from August 7 to October 6, and on that day, Google filed its petition. Originally, Oracle's response would have been due a month later, on November 7. The Supreme Court website now indicates an "[o]rder extending time to file response to petition to and including December 8, 2014." This means Oracle got an additional month.

Since Google has, after its defeat in the appeals court, apparently modified its strategy (regrettably to the effect that it is now trying to raise the standard for software copyrightability as a whole to an unreasonable and unmanageable level as opposed to just arguing that API-related code is subject to special rules), I'm not surprised that Oracle's lawyers, who are (just like Google's) very busy, wanted a bit more time so they can respond carefully.

It could also be that Oracle will have to respond to some amicus curiae briefs in support of Google's petition. On my Twitter feed I can see that key players in the Google-aligned camp are still unhappy about the Federal Circuit ruling, but they don't appear to be excited about Google's petition either. I don't have the kind of access to filings with the Supreme Court that I have in connection with district court and Federal Circuit cases, so it may take time to find out about that.

A few days ago I published a blog post on the (eight) most widespread misconceptions surrounding this case.

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Sunday, October 19, 2014

The most widespread misconceptions about the Oracle-Google Android-Java copyright dispute

After Google's recent--and expected (this blog was first to report that it was coming)--petition to the Supreme Court of the United States for writ of certiorari (i.e., for a review of the Federal Circuit's decision in Oracle's favor, see my refresher Q&A after the appellate decision), I have seen a couple of articles that described the state of affairs and quoted observers on what all of this meant. In addition, I've seen all sorts of tweets. I don't want to link to them and criticize websites, authors, tweeters, and analysts (some of whom I actually like), but I do see a need to highlight the fundamental flaws in some of the commentary out there. Since the current state of the case--with Oracle being on the winning track--is consistent with what this blog has been saying for years no matter what the mainstream thought and claimed, I feel a certain responsibility to point out some important facts.

These are the most "popular" misconceptions (click on any one of them to jump directly to further detail):

  1. Misconception: the stakes in this case are $1 billion.
    Reality: the strategic value to Oracle of bringing Android back into the Java fold, as opposed to Java being hijacked forever by Android, is a whole lot greater.

  2. Misconception: this is about the right to write applications for platforms, including the right to write interoperable cloud services.
    Reality: it's only about partial or complete clones of platforms.

  3. Misconception: third-party, independent implementations of APIs would become illegal unless the Federal Circuit ruling was reversed.
    Reality: copyrightability is only the first of several criteria that must be met in order for an independent API implementation to be unlawful. Many roads lead to Rome, i.e., API freedom.

  4. Misconception: this is about control over the Java programming language, which Sun had said was free (or, by extension, any other programming language).
    Reality: the commands of the Java programming language are not, and never were, at issue. Google used the "free Java" promise as an equitable defense, which failed in district court and which Google didn't even try to resuscitate on appeal.

  5. Misconception: this is about open-source implementations of the Java APIs.
    Reality: this case changes nothing at all about everyone's freedom to develop free and open-source Java API implementations under the GPL. Even Google never claimed so in court. Android is not published under the GPL.

  6. Misconception: definitions of basic functions such as a Math.Max (greater of two values) method would become copyrightable.
    Reality: this is about the overall creativity that went into 37 Java APIs, which contain many definitions of great complexity, and their structure, sequence and organization, not about simple, isolated lines of code.

  7. Misconception: the district judge got it all right because he learned to program Java, thus the appeals court must be wrong.
    Reality: not only is the Federal Circuit ruling legally stronger but it is also more accurate in technical terms.

  8. Misconception: a certain "G" blog was, while it was active, a reliable source of information on this case.
    Reality: while that blog did a great job on a different copyright case a long time ago, it was off-base on Oracle v. Google.

Now the more detailed explanations.

Misconception: the stakes in this case are $1 billion.
Reality: the strategic value to Oracle of bringing Android back into the Java fold, as opposed to Java being hijacked forever by Android, is a whole lot greater.

It's not unique to this case but a general problem with litigation reporting that the claims formally brought and taken to trial (and, such as in patent cases against smartphone makers, the products formally accused) can be stated in ways that are not inaccurate in the narrowest sense of the word but don't reflect a plaintiff's strategic priorities.

I've come up with a new analogy: during the 2008 electoral campaign, it would have been numerically correct--but would have missed the point, which is why no one did it in that context--to describe the objective of the Obama campaign as "a senator from Illinois seeking a pay raise from $174,000 to $400,000 per year." In reality, Barack Obama would have been happy to become president for an annual salary of $1 (he was making millions from book royalties anyway). Mischaracterizations of this kind, which would be unthinkable in political journalism, occur on a daily basis in legal journalism.

Here, Oracle itself made very clear at a key juncture in the district court proceedings that its #1, #2, #3, #4 and #5 objective was a copyright injunction. Obviously, either company's--and any other company's--CFO will care about a billion-dollar amount going in or going out. But if the only net effect of this protracted litigation was a billion-dollar payment from Google to Oracle, and maybe some reputational implications for the convicted infringer, none of us (besides those companies' CFOs) would really have to care.

The remedies the statutes allow are just a means to an end. In some ancient cultures you could have asked the judge or king for anything to right a wrong, and the decision-maker had unlimited leeway, including the option of telling Google to make Android Java-compatible. Not so now, where we have statutory law and a rich body of binding case law. The prevailing (or likely-to-prevail) right holder will then sit down with the other party and work out a solution, but needs monetary and, even more so, non-monetary remedies to have leverage.

In my refresher Q&A after the appellate ruling, I already said that this case was not really about a billion dollars.

Misconception: this is about the right to write applications for platforms, including the right to write interoperable cloud services.
Reality: it's only about partial or complete clones of platforms.

I've previously criticized that certain amicus briefs (and campaigns to orchestrate support for amicus briefs) overbroadly and insolubly vaguely referred to the "use" of APIs.

The most common use of APIs is simply to write applications for a platform, or applications that communicate with cloud services, where APIs are communications protocols. That's what zillions of programmers do every day. Compared to that most common use of APIs, there's only a very small, almost negligible number of companies and developers that create partial or complete clones of platforms.

No app or cloud developer needs to worry that Oracle's enforcement efforts against Google have anything to do with the most common form in which APIs are used. This is not about Google having written Java apps.

If a company makes the APIs of its platform or cloud service available to third-party developers, it will normally be estopped (precluded because of its own actions) from enforcing API copyrights against those who reasonably rely on the right holder's interest in attracting developers to a platform. Developers would also be able to raise a "fair use" defense. But all of this is very theoretical because, in practice, a platform maker won't suddenly turn around against developers: it will continue to court them.

Misconception: third-party, independent implementations of APIs would become illegal unless the Federal Circuit ruling was reversed.
Reality: copyrightability is only the first of several criteria that must be met in order for an independent API implementation to be unlawful. Many roads lead to Rome, i.e., API freedom.

The Oracle v. Google case is a pretty good showcase of the various defenses an alleged copyright infringer can raise. That's why it's all the more misguided that some people look at the legality of third-party API implementations exclusively through the (non-)copyrightability lens.

The Federal Circuit remanded the case to the district court for a new trial on "fair use." That defense was not adjudicated at the first trial. The jury was hung, which meant that the issue needed to be revisited unless the material at issue wouldn't have been copyrightable, which would be dispositive in its own right (and which is what Judge Alsup thought but the Federal Circuit disagrees with). In this particular case, I don't think Google's "fair use" argument has merit, but there could be other cases in which independent implementers of APIs could prevail on the grounds of fair use.

The Federal Circuit also mentioned, in a footnote, the possibility of a compulsory license on FRAND terms. In cases of extreme market power, this is a last--but often effective--resort.

In a case in which a platform maker encourages widespread adoption of an API (and not just of the commands of a programming language), equitable defenses could also tip the scales in a defendant's favor. (Google's equitable defenses in this case failed, and Google didn't even try to revive them on appeal.)

It's unsophisticated at best and intellectually dishonest at worst to limit the question of independent API implementations to copyrightability, which is an extremely coarse filter because it does not enable fact-specific case-by-case determinations.

Misconception: this is about control over the Java programming language, which Sun had said was free (or, by extension, any other programming language).
Reality: the commands of the Java programming language are not, and never were, at issue. Google used the "free Java" promise as an equitable defense, which failed in district court and which Google didn't even try to resuscitate on appeal.

Sun encouraged everyone to implement the Java language. Its commands and keywords and syntax. But even the district court (whose non-copyrightability finding Google's supporters love so much) stated clearly that Google had failed "to prove an overt act by Oracle and/or Sun relaying its intent to abandon rights as to the specific elements asserted here." Relatively speaking, a 2007 blog post by then-Sun-CEO Jonathan Schwartz was Google's best argument, and even that one fell far short of what would have helped Google with respect to the intellectual property rights Oracle actually asserted in court.

The Federal Circuit was aware (as its ruling indicated) that there may be material in 3 of the 37 Java APIs at issue that one could describe as being inextricably linked to the Java language--but only 3 out of 37.

It speaks volumes that Google didn't try to get the appeals court to revive those equitable defenses.

Misconception: this is about open-source implementations of the Java APIs.
Reality: this case changes nothing at all about everyone's freedom to develop free and open-source Java API implementations under the GPL. Even Google never claimed so in court. Android is not published under the GPL.

A long time ago, Sun made certain Java material available under the GPL (GNU General Public License), a free and open-source software license. The key characteristic of the GPL is the "copyleft" principle: if you obtain a program under the GPL and modify it, you're not allowed to publish your modified version under a license that would deprive others of the freedoms the GPL had afforded you in the first place. In the Creative Commons universe, this principle is called "share-alike": share on the same or substantially similar terms as the ones you benefited from.

Google never opted for the GPL route. Otherwise it would have had to publish Android as a whole under the GPL. As a result, device makers would have had to publish their proprietary extensions (things like Motoblur, HTC Sense, Samsung TouchWiz etc.) under the GPL as well. This would have made it practically impossible for OEMs to differentiate through proprietary Android extensions. So none of the key players in the Open Handset Alliance would have liked the idea.

With or without the Federal Circuit copyrightability determination, the GPL applies, always has applied, and always will apply, to the open-sourced parts of Java. But that is not a commercial option for Google. For the open-source community it would be, and actually is, an option. After Oracle sued Google, the Free Software Foundation actually reminded people of the fact that Google could have avoided the whole problem by using Java on GPL terms.

API copyrightability makes the GPL's copyleft feature even stronger, but it's pretty strong in any event.

Google mentioned open source a lot in the early stages of this dispute. But it never raised a contract-based (license-based) defense. Not pursuing the equitable defenses on appeal was weak, but never even raising a GPL-based defense was weaker than weak. The smokescreen nevertheless worked with people who don't know how the GPL works and with some who did but intentionally misled the rest.

Misconception: definitions of basic functions such as Math.Max (greater of two values) method would become copyrightable.
Reality: this is about the overall creativity that went into 37 Java APIs, which contain many definitions of great complexity, and their structure, sequence and organization, not about simple, isolated lines of code.

What Oracle is asserting in this case is a body of 37 Java APIs with a total of approximately 7,000 lines of declaring code. Neither Oracle's theories nor the Federal Circuit ruling suggested that the threshold for copyrightability would be lowered to the point at which the definition of a Math.Max function would have become copyrightable in its own right. The hurdle isn't high, and the Federal Circuit threw out Google's attempts to have items like the nine-line RangeCheck function declared uncopyrightable. But if you want to get a single line of program code protected by copyright, you better present something reasonably expressive and creative.

A week ago I explained, toward the end of a blog post on how Google's argument has become an all-out attack on all software copyright (rather than a surgical strike against API copyrights), that Google misportrays the Federal Circuit's rationale by suggesting that anything that can be written in more than one way would automatically be copyrightable. I also looked at it mathematically. Even if one looked at only 70 (1% of 7,000) of the lines of declaring code at issue and assumed only an average of 3 alternatives per line (way too low), the number of possible combinations would have more than 30 zeros, not even counting possible permutations because different lines could be assigned to different packages, and for any given code there could be many different numbers of packages.

Misconception: the district judge got it all right because he learned to program Java, thus the appeals court must be wrong.
Reality: not only is the Federal Circuit ruling legally stronger but it is also more accurate in technical terms.

I can only shake my head when I read in certain articles that people were sooooooo impressed by the judge saying he learned Java, as he told Oracle's counsel in open court, and that he had programmed, in different languages, something like rangeCheck many times. Sorry, but that's not the way to distinguish between right and wrong decisions. If a judge, or a panel of judges, never programmed one line of code in Java or any other language, but correctly applies the basic rules of U.S. copyright law and correctly interprets the statute (particularly § 102) and the case law (including the Sega and Sony stuff Google's cert petition doesn't even cite to, despite references to multiple decisions by appeals courts, including other decisions by the Ninth Circuit), then that's what matters. And nothing else.

People also forget about the significance of a unanimous decision by a three-judge panel (at the Federal Circuit) as compared to a single judge's opinion.

Judge Alsup was right that programmers perform range checks all the time. Just this year I've written code of that kind on several different occasions. But rangeCheck, which Judge Alsup also deemed copyrightable (a fact some people seem to have forgotten; affirmed by the Federal Circuit, by the way), is not at the heart of this case. The declaring code of the 37 Java APIs is, and the Federal Circuit judges, who never claimed to have learned Java or any other programming language, accurately noted that apart from maybe 3 APIs, those are separate from the Java language, while Judge Alsup conflated language and API issues.

If the measure is whether someone has programming experience, the same people who were behind Judge Alsup's apotheosis after the erroneous 2012 non-copyrightability ruling would actually have had to trust me to a greater extent than a non-programmer paralegal's blog. I've done a lot of programming; it's what I'm doing again (and will go back to right after this post). I wrote 10 computer books, mostly on programming topics, while in high school. One of them was a commented version of the assembly (machine) language code of an entire operating system and language interpreter, of which I can show you a small excerpt (click on the image to enlarge):

So let's please go back to the facts and to what the law says and not make it a question of whom we want to trust, and let's especially not be misled by our enthusiasm for the idea of a judge ruling on a tech case having actual programming knowledge, no matter how much we like the notion.

Misconception: a certain "G" blog was, while it was active, a reliable source of information on this case.
Reality: while that blog did a great job on a different copyright case a long time ago, it was off-base on Oracle v. Google.

Checking in one's brain at the wardrobe in exchange for uncompromised allegiance to Judge Alsup (because he said he learned Java) is a major mistake. What's far worse is blind faith in a (no longer active) blog that wanted the world to believe it was an open discussion forum representative of the sentiment of open-source folks while having been convicted of a particularly malicious form of censorship whenever its own users disagreed with the propaganda and party line.

Further above I've explained why Google never had and never even tried to raise an open-source defense. It's unbelievable that a blog claiming to advocate open-source interests suggested that Google was in the clear thanks to Sun's decision to open-source certain Java material.

At this stage, Oracle v. Google is a copyright-only case, but initially various patents were at issue, and that blog totally blew out of proportion the significance of first Office actions formally "rejecting" patent claims. Most of the time, first Office actions mean very little, and if they are issued by an examiner who (as was the case for some examiners based on a sample that academics studied) initially "rejects" 100% of the challenged claims. A first Office action can be reasonably meaningful if it issues, as it happened in connection with an Apple autocomplete patent, about a year after a decision to reexamine. In that case, the examiner didn't routinely "reject" all claims but must have arrived at a reasonably well-considered conclusion. So one must look carefully at non-final USPTO actions so as not to jump to conclusions, as a certain "G" blog did just because it liked this. One of the initially-"rejected" Oracle patents was actually affirmed by the USPTO right after the start of the 2012 trial, but too late to still be presented to the jury.

The archives of that source of confusion and misinformation are certainly not a good place to start one's research (though I think that blog could have made some useful contributions to other recent debates, such as the way this year's Apple v. Samsung trial in California went).

I've taken consistent positions on API copyright in general and Oracle v. Google in particular at different stages, starting more than ten years ago (when I had a debate at a conference with an EFF staff lawyer on interface copyrights in connection with Blizzard v. bnetd) and even shortly after fighting against Oracle's acquisition of Sun. And I'll continue to defend those beliefs going forward. I'm very confident that the Supreme Court will either deny cert or will otherwise affirm the Federal Circuit. The Supreme Court won't get confused the way parts of the general public, the media, and industry observers apparently do.

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Saturday, October 18, 2014

Internet giants urge Federal Circuit to ensure file downloads can't be prohibited by the ITC

Less than week after I said I found myself in agreement with Google on many issues (software copyright being the key exception), there's a new cause on which I concur with them. While I come down on Google's side in the sense that the United States International Trade Commission (USITC, or just ITC) should not have jurisdiction over Internet data tranfers such as file downloads, my position is slightly more nuanced--but not to a determinative extent.

The Internet Association--whose members include the likes of Airbnb, Amazon, AOL, eBay, Expedia, Facebook, Google, Groupon, LinkedIn, Netflix, Rackspace, Salesforce.com, TripAdvisor, Twitter, Uber, Yelp, and Yahoo!--has filed an amicus curiae brief (press release, brief (PDF)) with the United States Court of Appeals for the Federal Circuit urging the reversal of the ITC ruling in the Digital Models case. The short name of the case says it all: it's not about tangible products that U.S. customs officers could seize at the time of importation (which is what the ITC's IP enforcement is typically understood to be about) but involves digital models (of dental repositioning appliances) sent over the Internet (from Pakistan to the U.S.).

While no smartphones are accused in this particular case, the implications of the ITC's expansionism would be far-reaching and certainly affect mobile devices and mobile application software if the Federal Circuit didn't establish the clear limits Google and its allies (including some of its key competitors) propose.

Bloomberg's Susan Decker wrote an excellent summary of the case after the final ITC ruling in April. The aforementioned Bloomberg article mentions that the Motion Picture Association of America and the Association of American Publishers supported the complainant, hoping that this would make the ITC a suitable copyright enforcement venue for them as they combat pirated media content (movies, music, books, magazines, etc.), while Google backed the respondent because it wants the ITC to focus on import bans that can be enforced by U.S. Customs.

The ITC later stayed enforcement of its cease-and-desist order. It clarified that the stay was not ordered because of doubts over the correctness of the decision. I do, however, believe that the ITC has realized that this is a decision reasonable people, such as ITC commissioner David Johanson (who wrote a dissenting opinion), can disagree with.

While I disagree with its support of the ITC's stance, I do want to recommend this write-up by two Morrison & Foerster lawyers because it summarizes the issues in the case very well and makes a fairly compelling case for giving the ITC jurisdiction (or for why, in the opinion of the authors, the ITC has always had jurisdiction) over patent-infringing Internet data transfers. Messrs. Busey and Sigmon argue that "[h]ad the Commission found that it had no jurisdiction over electronic transmissions, then importers in certain industries--such [as] the software industry--would have been invited to circumvent the reach of Section 337 [the statute governing the ITC's unfair import investigations and exclusion orders] through use of the Internet." They also believe that 3D printing and similar technologies make it "important that the Commission continue to assert jurisdiction over modern forms of importation to prevent the erosion of the protection of intellectual property under Section 337."

I agree with the MoFo lawyers to a certain, limited extent. There is a risk of an end run around IP enforcement with the help of the Internet. In this particular case, the respondent, ClearCorrect, may very well have set up a certain operation in Pakistan to use technology there (in the generation of digital models for dental repositioning devices) that Align appears to have patented in the U.S. and some other jurisdictions, but not in Pakistan. It then imports a device into the U.S. market that is non-infringing per se, but which is a key part of an overall activity that would be infringing if conducted entirely in the United States (and if one agreed with the ITC's infringement and validity determinations). So this is, arguably, a circumvention case.

This background is the reason for which I wouldn't want to engage in ITC bashing. It's normal for judges--and the ITC has quasijudicial authority--to look for ways to enforce the law against attempts to circumvent it. I've seen it elsewhere. For example, the Munich I Regional Court at some point last year was inclined to order an injunction against Google Maps because the presiding judge felt it wouldn't have been the right outcome to hold no one responsible for an infringement, and only doubts about the validity of the Microsoft patent-in-suit, which was declared invalid this year, saved Google Maps in Germany. That said, I disagree with the ITC on Digital Models and I find it odd that on the one hand its Administrative Law Judges complain repeatedly about the trade agency's huge patent case load while on the other hand the ITC consistently declines to discourage the filing of certain categories of complaints that it could and should deem to be outside of its jurisdiction. Standard-essential patents, for example, do not belong there. Nevertheless the ITC has done as much as it could (despite the Obama Administration's veto of an import ban Samsung had won against Apple) to give SEP holders hope that they may still be able to win import bans over FRAND-pledged patents. And now, in Digital Models, the ITC is trying to open the floodgates. Over the years, the logic applied in that case could result in numerous ITC complaints targeting websites, cloud computing services, file sharing services, and in a worst-case scenario, small app developers. Defending oneself in the ITC is more expensive than in district court.

The Internet Association argues that cases involving digital data transfers belong in district court. For this type of issue, district courts indeed appear to be the more appropriate forum, though the juries that decide factual questions in that type of forum are, with a very few exceptions, much less competent than any reasonably experienced ITC judge.

While I can understand that the ITC doesn't want to let ClearCorrect get away with its circumvention tactics, there will never be a set of rules (or interpretation of a given set of rules) that can't be abused by at least one side (complainants seeking undue leverage or respondents circumventing U.S. law). The decisive question is whether, on balance, one set of rules, or one interpretation of the rules, is better policy than the other. Here, Align (the complainant against ClearCorrect) may have a reasonably good story to tell, but if it succeeded, patent trolls would leverage the ITC and harm not only the Internet industry but also Internet users (and potentially even small app developers, though I know I've just repeated myself for an obvious reason).

This reminds me of an op-ed by a former ITC commissioner that the Wall Street Journal published about a year ago, entitled "The International Trolling Commission." The subhead said that "[p]atent trolls find a friend in a federal agency that has drifted from its original mission." Affirmance of the cease-and-desist order in Digital Models would exacerbate this problem, possibly to an extent that is beyond anyone's imagination at this stage. I don't have much sympathy for the respondent in this case (despite being impressed by ClearCorrect having been described as America's fastest-growing health company a few years ago). Nevertheless, with a view to the overall public interest in reasonable IP enforcement, I concur with the Internet Assocation's amicus brief and hope that circuit judges with a particularly balanced approach will have a majority on the panel hearing this incredibly important appeal.

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Thursday, October 16, 2014

German IP lawyers evaluate litigation results, ask whether patents are merely 'paper tigers'

There is growing attention for the fact that information and communications technology patents are hard to enforce in court, and more and more questions are asked about what should be done about the problem that most patent infringement assertions don't ultimately succeed. Two weeks ago I presented my analysis of 222 smartphone patent assertions by large players and showed that, based on final or latest results, less than 10% had merit. In that post I also mentioned a study by two Munich-based academics, Professor Joachim Henkel and Ph.D. candidate Hans Zischka, one of the key findings of which is this: "For Germany, thus, more than 75% of all active patents are latently invalid, either fully or partially."

Those findings are further supported by an article, based on extensive empirical research, written by two German attorneys whose firm has been involved (on Apple and Microsoft's behalf) in various ones of the lawsuits I analyzed and has also done work for other major clients such as Amazon and Qualcomm: Bardehle Pagenberg's Peter Hess (patent attorney) and Dr. Tilman Mueller-Stoy (attorney at law). The article itself is available only to the subscribers to Mitteilungen der deutschen Patentanwälte (a bulletin published by the leadership of the German patent bar). I have read it and was impressed by the depth of the study, which examines patent validity rulings by the Federal Patent Court and the Federal Court of Justice by industry and even by senate (panel of judges).

The Bardehle lawyers analyzed all German patent validity determinations in 2010-2013: 392 rulings by the Federal Patent Court and 173 appellate rulings by the Federal Court of Justice. They found that during that four-year period, almost 44% of all patents that came to judgment in the Federal Patent Court were declared invalid in their entirety (i.e., even any proposed amendments were rejected). The complete-invalidation rate is higher for the software and telecommunications sector, where it was closer to 60%. An additional 35% of all patents (or 30% of all software and telecommunications patents) were invalidated in part (i.e., narrowed). This means that almost 80% of all patents and approximately 90% of all software and telecommunications patents were declared invalid in whole or in part.

Appellate decisions slightly modified the picture. The Federal Court of Justice affirmed approximately 60% of the rulings of the Federal Patent Court and modified approximately 40% of them. Since roughly two thirds of all appellate decisions favored the patentee, one could cautiously conclude that the patent-specialized panel of the Federal Court of Justice is "patentee-friendlier" than the Federal Patent Court.

I'd also like to state, for the sake of precision, that those percentages relate only to those cases in which the Federal Court of Justice ultimately ruled on an appeal from the Federal Patent Court. It's difficult to know what would have happened to those cases in which no one appealed, or in which an appeal was withdrawn. In my opinion, it's perfectly reasonable to focus on the cases in which the appellate decision actually came down (i.e., the completed experiments), implicitly assuming that the affirmance and reversal rates would have been more or less the same if all other decisions had been reviewed by the appeals court.

The authors discuss different possible reasons for the high rate of invalidations. Patent examiners may sometimes make mistakes; relevant prior art may not be known during the initial examination; and the legal standards applied by the patent offices on the one hand and the patnet courts on the other hand might also differ. But the focus is not on the reasons. The key message of the article is that--whatever the reasons may be--such high rates of patent invalidations are not acceptable, neither for patentees nor for the general public.

If a patent is granted that shouldn't be granted, others may at some point have to make a costly and time-consuming effort to do away with it in order to be free to market their (legitimate) products. The authors conclude that patent holders suffer to an even greater extent because their expectation of being afforded intellectual property protection is not met and the enormous effort to describe a patent for the purpose of a patent filing (a disclosure that benefits the general public since the patent will expire one day) is in vain if the patent is later invalidated in court.

The most provocative--or one might say, most damning--issue highlighted by the article is that the current situation basically makes it appear sound advice to tell a company to infringe a given patent held by a competitor because there's a high probability of the patent being declared invalid. The headline of the article asks the question of whether patents are merely "paper tigers."

I don't want to take a position on whether patentees or those facing royalty demands and lawsuits over patents that should never have been granted suffer more. There's no doubt that both sides do suffer. I agree that the issues raised by the article are rather serious. For example, a proper disclosure of an invention (in the description part of a patent application) takes a lot of hard work, and legitimate inventors should be rewarded. Since only a small minority of all cases in which someone wields a patent against someone else end up in court (most of the time, an agreement is negotiated), the harm suffered by third parties may even outweigh the issues patent holders have to deal with. Whoever is most strongly affected by the problem, there's no denying the problem. Action is indeed required.

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Microsoft's billion-dollar patent royalty stream from Samsung hinges on a second contract

Earlier this month it became known that in fiscal year 2012 (mid-2012 to mid-2013) alone, Samsung paid Microsoft more than $1 billion in Android patent royalties. Samsung is only one, but presumably by far the largest, of Microsoft's 27 Android patent licensees. While Microsoft's patent licensing effort has been tremendously succesful, litigation results (after more than four years of suing Motorola) suggest that Samsung could get a deal on far better terms, or opt to defend itself in court for years (the Motorola way), if the royalty rate had to be negotiated again. A zero-zero cross-license would be a real possibility considering that Microsoft is now a device maker and Samsung holds many patents essential to cellular telecommunications standards.

I've said it before on Twitter: Android isn't free in light of substantial royalties changing hands, but Motorola has so far proven that Android could have been free if every Android device maker had decide to take their chances in court and modify products as needed.

For Microsoft's Android patent licensing business it's now key to hold Samsung for as long as possible (2018) Samsung to the terms of the existing license agreement. Presumably Samsung would be prepared to settle the case if Microsoft substantially lowered the royalty rate. But for now, it's an all-or-nothing proposition: either Samsung still has to comply with the 2011 contract or it doesn't have to.

Samsung has initiated an arbitration proceeding under ICC (International Chamber of Commerce) rules, and a week ago it brought a motion to compel arbitration and to stay the case in the Southern District of New York (this post continues below the document):

14-10-10 MOL Samsung motion to arbitrate Microsoft case.pdf by Florian Mueller

Without access to all the terms of the agreements in question, it's impossible to form an opinion as to which party's contract interpretation is more convincing. The above memorandum of law at least sheds some light on Samsung's argument.

There are two contracts (which was known before, but in less detail): a patent licensing agreement and a business collaboration agreement. The latter related to Samsung's role as a Windows device maker. The patent license agreement requires disputes to be resolved in the Southern District of New York, where Microsoft brought its suit. The business collaboration agreement, however, appears to be even more confidential and, according to Samsung's filing, "specified that [the parties] would arbitrate certain disputes in Japan under the Rules of Arbitration of the International Chamber of Commerce ('ICC Rules')." Under ICC Rules, even the question of arbitrability (i.e., whether a dispute falls under an arbitration clause) must be arbitrated.

Samsung's filing shows that Microsoft's objective was not merely to collect patent royalties on Android devices but also to provide an additional incentive for Samsung by promising Success Credits and Collaboration Credits in connection with Windows phones and tablets as well as Microsoft search services. At the end of the year, Samsung pays the balance between the royalties due under the patent license agreement and the credits under the business collaboration agreement. At least based on Samsung's lawyers' representation of the contractual situation, the business collaboration agreement enjoys priority over the patent license agreement with respect to royalty reports:

"Under the [business collaboration agreement], the 'Royalty and Credit Calculation Report . . . will be deemed to constitute, include, supersede and be in lieu of any 'Royalty Report' otherwise due under Section 4.2.3 of the [patent license agreement].'"

This already lends quite some credibility to Samsung's claim that the two agreements (and a third one, which is just a non-disclosure agremeent) are "interconnected." According to Samsung, the business collaboration agreement allows it to terminate the patent license agreement "in the event that Microsoft breaches Section 9.7 of the BCA." And that section allegedly "prohibits either party from assigning "any rights or obligations hereunder, whether by operation of law, contract or otherwise, including by way of a change of Control." An acquisition wouldn't necessarily be an assignment and Microsoft pointed to a clause in the license agremeent that makes it apply to whatever business may be acquired later. But Samsung now says the following about the business collaboration agreement:

"As relevant here, where the 'assignment is to a competitor of the other party,' the 'assignment' is defined to include any 'merger of a party with a third party.' Part of the parties' dispute about the Annual Invoice concerns whether Microsoft's acquisition of Nokia's Devices and Services business and subsequent integration of that business into its existing operations constitutes a 'merger' with a Samsung competitor within the meaning of Section 9.7."

Nokia's handset division undeniably was and continues (under the Microsoft umbrella) to be a Samsung competitor.

With the greatest caution due to the fact that the agreements themselves are sealed, my impression at this stage is that Microsoft has strong arguments under the patent license agreement per se, but Samsung has a strong point under the business collaboration agreement, and it appears that the business collaboration agreement has more weight in the overall (and rather complex) contractual relationship between these parties. My guess is that the matter will have to be referred to arbitration at least for the purpose of establishing arbitrability. But let's await Microsoft's response to Samsung's motion.

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