Wednesday, February 26, 2020

Nokia's choice of software patents asserted against Daimler exposes pretext for refusing to license automotive suppliers

PaRR's EU antitrust reporter Khushita Vasant received information from two sources according to which a third round of mediation talks--after the first two, held in January and February, failed--might take place between Nokia and Daimler as well as many (though not all) of its suppliers of telematics control units (TCUs). Knowing how these things work, I guess the situation is now simply one in which the European Commission remains hesitant, for purely political reasons, to take action, and is playing for time, as is Nokia, whose patent portfolio is going down the tubes with every month that passes.

Commissioner Margrethe Vestager is even way tougher than her famous predecessor in office "Steelie Neelie" was when it comes to enforcement against U.S. companies, but (so far, so bad) soft as a jellyfish on Nokia. She and Nokia might just hope that the patent infringement ruling scheduled by the Munich I Regional Court for April 9, 2020 would scare Daimler into a settlement. It's hardly a coincidence that the rumored new round of mediation talks has the same target date...

Regardless of that latest disgraceful development, I was taking a closer look at Nokia's ten patents-in-suit against Daimler from the perspective of whether there is a scintilla of doubt about Nokia acting abusively by refusing to license Daimler's TCU suppliers. There is not.

As Daimler's lead counsel in the German infringement cases accurately noted last fall, cellular standard-essential patents (SEPs) cover techniques that are essentially embodied in the baseband chip. From a car maker's vantage point at the bottom of the supply chain, that's a tier 3 product, which gets incorporated into a (tier 2) network access device (NAD; one might also call this a connectivity module, which in turn resides in a TCU (tier 1). In other words, TCUs already contain a whole lot more hardware than is actually needed to exhaust the patentee's rights by licensing the upstream.

The European Commission employs an elite of public servants. There's no way the Commission's experts wouldn't have figured out during all of that time since Daimler's 2018 (!) complaint that Nokia's allegation of a TCU not actually practicing the standard is, euphemistically so as to avoid an analogy to bovine excrements, a pretext.

The Golden Rule of patent law: the name of the game is the claim. "Claim" in the sense of a patent claim, not a claim in terms of a (mis)representation.

The patent claims determine the scope of protection a patent enjoys. When looking at the claims of Nokia's patents-in-suit, and even when looking at the specifications (whose sole purpose in litigation is to help interpret the claims), it becomes clear that Nokia's patents don't cover end products such as a car (quite often, the Nokia-Daimler dispute is misleadingly referred to as a "connected vehicle" dispute, though none of Nokia's wireless SEPs have anything to do with what sets cars apart from phones).

In fact, seven (70%) out of Nokia's ten patents-in-suit against Daimler are even officially declared to be software patents (which the remaining three are as well, as I'll explain in a moment). That is so because they come with computer program claims--patent claims covering software without any hardware being required to infringe. As a former anti-software-patent campaigner, I'm particularly sensitive to this, and I believe the European Patent Office granted those claims in violation of the European Patent Convention, but they do come in handy now as they belie Nokia's anti-antitrust-enforcement narrative. You can find the claims toward the end of each patent specification, and I'll give an example of one program (in terms of software) claim per patent:

  • claim 5 of EP2797239 on "a method and a telecommunication device for selecting a number of code channels and an associated spreading factor for a CDMA transmission"

  • claim 15 of EP2087626 on "additional modulation information signaling for high speed downlink packet access"

  • claim 15 of EP2981103 on an "allocation of preamble sequences"

  • claim 7 of EP2286629 on a "method and apparatus to link modulating and coding scheme to amount of resources"

  • claim 8 ("computer-readable storage medium comprising software instructions" is a computer program by any other name) of EP2145404 on a "method and apparatus for providing control chanels for broadcast and paging services"

  • claim 31 of EP1929826 on an "apparatus, method and computer program product to request data rate increase based on ability to transmit at least one more selected data unit"

  • claim 22 of EP2087629 on "a method of transmitting data within a telecommunications system"

The software that controls data transfers over a cellular model resides in a baseband chip. That's the mastermind of the whole operation. It determines what is sent out via the antenna, and it interprets what is received.

All ten of Nokia's patents-in-suit against Daimler could also be called "protocol patents": they describe how two ends of a wireless connection communicate--what A has to tell B to cause B to do something, or vice versa. It's like I say "hello, how are you?" and you respond "fine, how are you?"

That kind of communication is, of course, implemented in software (it already has been for a very long time).

There's nothing in those Nokia's patents that has to do with superior hardware. I ran full-text searches over the patent specifications, and looked closely at the device (or "apparatus") claims to identify any references to the types of hardware components that Nokia claims aren't part of TCUs:

  • Eight (80%) out of the ten patents-in-suit contain not a single occurrence of at least one the following words: antenna, microphone, loudspeaker, power.

  • EP'626 refers to "antenna weights" and mentions the presence of an electrical power source (without claiming to invent anything new relating to electrical power supply). The patent covers bits (zeroes or ones) that are sent and received, and the apparatus claims don't require any specific hardware but merely refer to "means for interpreting ... bit[s]" and "means for coding." That, too, is a typical software patent.

  • DE'446 (the German equivalent of EP'234) only mentions "power" in the sense of "power control" as a numerical parameter. Here, again, it's instructive to look at the apparatus claims, which as opposed to claiming specific hardware relate to a "medium access control layer configured to encapsulate packets."

  • The means-plus-function structure found in EP'626 and EP'234/DE'446 is also found in the other patents. Nokia's patent attorneys obviously optimized those claims for scope, and that's why they don't claim specific hardware elements such as an antenna, but instead focus on functionality. However, as long as there isn't a need for some very specific (and inventive!) hardware, but it merely suffices that something be around to do a certain job, the baseband chip as the controller of the data transfer operation is where the claimed inventive steps are implemented.

Those ten patents are the ones Nokia's litigators--among the very, very best in the industry--selected from the company's huge portfolio because they thought they'd be their strongest weapons. We could look at dozens or even at hundreds of additional cellular SEPs owned by Nokia or other companies, and the findings would be materially consistent with this sample of ten Nokia "star" patents.

It's time to get real. There's no justification for not licensing automotive suppliers, especially not under the CJEU's Huawei v. ZTE case law.

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Friday, February 21, 2020

French court may hold ETSI FRAND declarations to be binding contracts to the benefit of third parties: cross-jurisdictional ramifications

Two weeks ago, the Tribunal judiciaire de Paris (TJP), which was known as the Tribunal de Grande Instance (TGI) until the turn of the year, handed down an order in TCL v. Philips & ETSI, a case that has the potential to affect cellular standard-essential patent (SEP) jurisprudence throughout and beyond the rest of Europe. That's because the European Telecommunications Standards Institute (ETSI) is based in Sophia Antipolis in the south of France, and the FRAND licensing pledges made by participants in cellular standard-setting to ETSI must be interpreted under French law wherever on this planet a party invokes an ETSI FRAND declaration by a patent holder.

I don't see a potential impact on how U.S. courts adjudicate cellular SEP licensing disputes as they have consistently recognized third-party beneficiary rights in connection with FRAND licensing pledges. However, on the other end of the spectrum there are those extremely biased German courts that have for many years stopped at pretty much nothing in their quest to favor patent holders over implementers, and as part of that have denied third-party beneficiary rights. Continuing to deny the existence of third-party beneficiary rights in connection with ETSI FRAND pledges will be quite problematic (to say the least) if and when the French court to which all French patent disputes are assigned has provided clarification with respect to a FRAND declaration that indisputably must be interpreted under French law. For implementers of standards it would definitely be a positive to be able to rely not only on antitrust law (abuse of dominant market position) but, additionally, on contract law (as defendants to U.S. SEP cases do all the time).

Once again, China's TCL, a company that expanded from TV sets into other segments of the consumer electronics market (though I can't remember ever having seen any of their products in a store, neither in the U.S. nor in Germany), is party to an important SEP case. A couple of months ago, the Federal Circuit vacated in part, reversed in part and remanded TCL v. Ericsson to the Central District of California. What the Federal Circuit took issue with is that Ericsson was denied a jury trial regarding a release payment (past infringement damages by any other name) for past unlicensed sales.

The dispute between Philips--an aggressive SEP enforcer that miserably failed in the mobile handset business just like Ericsson and Nokia--and TCL didn't originally appear to be remarkable in any way. TCL refused to bow to Philips's royalty demands (as had others before TCL), so Philips sued TCL in the UK for infringement of two select SEPs (in 2018). But then came the French connection: almost exactly a year ago, TCL brought a complaint under contract law against Philips and ETSI in France--ETSI's legal domicile.

The objective is to get Philips to make a FRAND licensing offer to TCL, which would be reviewed or, if Philips fails to make an offer, simply be determined by the French judiciary. ETSI itself does not hold patents, but TCL wants ETSI to make a contribution to the process. That sounds vague (as Philips's attorneys accurately note). It's easy to see why ETSI--or any other standard-setting organization--wouldn't want to be drawn into that kind of dispute.

The decision that came down in Paris earlier this month is basically the equivalent of a U.S. court order denying a motion to dismiss (this post continues below the document):

20-02-06 TJP Order in TCL v... by Florian Mueller on Scribd

Philips wanted to get rid of the French case and instead just have any FRAND licensing matters resolved, to the extent this would obviously be necessary before an injunction could come down, by the England & Wales High Court. But pointing to the fact that the UK case is the earlier-filed one wasn't enough.

What crystallized at this early stage of proceeding is that TCL and Philips have divergent views on the legal significance of the ETSI FRAND licensing pledge signed by the participants in its standards-development processes. Philips described it as merely a precontractual matter, while TCL insisted that it constitutes what is called a "stipulation pour autrui"--a covenant benefitting a third party, i.e., a contract that can be enforced by anyone implementing a standard such as 3G/UMTS or 4G/LTE (thus also by non-ETSI members).

TCL's related prayer for relief is "juger que les déclarations d’essentialité faites par les sociétés PHILIPS à l’ETSI constituent une promesse de concéder une licence à des conditions FRAND aux sociétés membres du groupe TCL, portant sur l’ensemble des brevets des sociétés PHILIPS déclarés essentiels pour les normes UMTS et LTE." My unofficial translation: "declare that the essentiality declarations made by the Philips entities to ETSI constitute a covenant to grant a license on FRAND terms to TCL entities, covering the entire portfolio of patents declared by the Philips entities to be essential to the UMTS and LTE standards"

At this stage, the court has not entered (declaratory) judgment yet. However, it has denied Philips's request for dismissal in its entirety and allowed the case to go forward (with a caveat I'll explain in a moment). It's slightly--but legitimately--speculative to say that the case would probably have been dismissed if Philips had succeeded in persuading the court that TCL didn't have a hard contract case.

I've seen at least one commentary, by a group of three French lawyers, who interpret the order as "the first time that a French court rules that the promise made by the owner of SEPs as per ETSI's IPR Policy governed by French law constitutes a 'stipulation pour autrui'." But my reading of the decision is more conservative. Outside the sections in which the court summarizes the parties' pleadings without stating its own opinion, it mentions the key term "stipulation por autrui" only once (the bottommost paragraph on page 10):

"Si les fondements juridiques des demandes dirigées contre l'ETSI et les sociétés PHILIPS sont différents (les premières sont fondées sur le contrat d’association qui régit les rapports entre l'ETSI et ses membres et les secondes sur la stipulation pour autrui par laquelle les sociétés PHILIPS se sont engagées à consentir des licences à des conditions FRAND issues des règles de fonctionnement de l'ETSI), il ne s'agit pas d'un obstacle à la reconnaissance d'une identité de situation de droit, ainsi que l'a jugé la Cour, ce d'autant moins qu'en l'occurrence les demandes sont toutes expressément soumises à la loi française ainsi que le prévoient les règles de procédure élaborées par l'ETSI." (emphasis added)

The highlighted part means "the covenant to the benefit of a third party by which the Philips Entities have promised to grant licenses on FRAND terms further to ETSI's by-laws." I can see why some would read this as a holding by the court that the relevant passage of the ETSI FRAND declaration (Article 6.1) indeed constitutes a contract to the benefit of a third party. There would be a grammatical argument here: the court could have used "seraient" instead of "sont" in order to distance itself, by means of indirect speech, from TCL's assertion. Imagine "seraient" as being the same as "sont," but with the equivalent of "allegedly" before it. I am sensitive to that grammatical difference because there was a time when I did a whole lot of work on EU policy matters, and when French, Belgian or Luxembourgian politicians gave speeches, the grammatical form indicated whether they stated a fact or merely restated someone else's account. But in this case I'm still hesitant to view this as a judicial conclusion. The reason for my conservative approach is the context. Not only is the wider context an order on a motion to dismiss, but the highlighted passage merely appears in parentheses in a conditional subclause ("Si" = "If").

The order is not a declaratory judgment, but a denial of a motion to dismiss, so it would be a dictum at best. But for the reasons stated above, I believe the context calls into question that the grammatical form alone indicates a judicial holding regarding third-party beneficiary rights.

While Philips's motion to dismiss has failed for the time being, ETSI's still requires further analysis. The court will hold a hearing in June on the question of whether ETSI is properly named as a defendant. Further briefing will be provided by the parties in the meantime.

Now there's a tricky procedural aspect. In order for the French court to find that the French contract case can go forward despite the UK patent infringement case having been filed earlier, there had to be a close connection between the claims against Philips (which is neither a French nor a UK party) and ETSI (a French organization). The court found that ETSI's role in monitoring the implementation of its licensing rules would be sufficiently closely related to Philips's obligation (at least as alleged by TCL) to extend a FRAND license to TCL. Such a close relationship is sufficient to establish French jurisdiction as ETSI is a French defendant. But what if the further proceedings resulted in a holding that there are no justiciable claims here against ETSI?

I can't predict whether French procedures would result in a dismissal of the case against Philips, too, given that suing ETSI was key to TCL's theory for French jurisdiction. But, at a minimum, such a holding would raise the bar for other parties who may bring French contract cases in the future against holders of patents declared essential to ETSI standards.

At this stage, the court has merely found that ETSI may be properly named as a defendant. But the actual decision on whether ETSI remains in the case will be made later this year. And thereafter we may see a declaratory judgment on the ETSI declaration, a prospect that makes this a case worth watching as it has the potential to provide much-needed clarification (which in some less conservative people's eyes it already has!).

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Friday, February 14, 2020

Mediation between Nokia and Daimler as well as its suppliers fails definitively: European Commission must act swiftly and forcefully

This afternoon I broke the news on Twitter that the mediation process between Nokia and Daimler as well as various of its suppliers failed definitively:

A first round of talks had failed in January for the reasons I mentioned then. The fact that the supposedly super-secretive mediation process was pretty transparent to me--thanks to certain sources--even sparked a peripheral controversy at last week's Nokia v. Daimler trial in Munich.

A second round of talks was held this week, and went nowhere--for the very same reasons that the first round had failed. Nokia simply wouldn't consider extending an exhaustive component-level license to Daimler's suppliers, and Nokia continued to refuse to put highly relevant SEP license agreements with smartphone makers on the table.

Let's give the mediator the benefit of the doubt: he gave this another try just because he was unrealistic, not because it helped produce billable hours.

The European Commission's request that the parties engage in mediation--instead of doing the job European citizens pay them for--was a bad idea in the first place. It set a terrible precedent and made Mrs. Vestager, who earned herself a reputation as a determined competition enforcer during the first time, appear very weak.

Interestingly, the fact that last week's Munich trial went very well for Nokia didn't bring the parties closer to a deal. Maybe no one believes that the Munich court will seriously interpret a key sentence in the Court of Justice of the EU's Huawei v. ZTE ruling as if "and" meant "or." It's also possible that Nokia's piecemeal injunction strategy--with an explicit carve-out for Samsung subsidiary Harman Becker for the time being--means even a ruling in Nokia's favor on April 9 wouldn't give the failed handset maker much leverage.

Whatever the reasons may be, if the European Commission respects itself, it just can't let Nokia obtain an injunction on a highly illegal basis--refusing to license Daimler's suppliers is a clear violation of EU antitrust law. In December 2012, the Commission pressured Samsung into dropping any pending requests for SEP injunctions against Apple. If the Commission doesn't put the same pressure on Nokia with a view to the Munich ruling scheduled for April 9, it will lose much of its credibility as an antitrust watchdog.

This has been a bad week for Nokia. On Tuesday, it lost a case against Daimler in Mannheim. On Thursday, one of its privateers, Conversant, lost a case against LG in Munich (over a Nokia patent). Plus, it failed to bully Daimler and its suppliers into a deal.

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Nokia and its trolls are losing left and right: LG defeats Conversant case in Munich over Nokia patent two days after Nokia itself lost to Daimler

This is a dreadful week for Nokia on the patent assertion front. A pathetic Nokia patent was held non-essential (thus non-infringed) by the Mannheim Regional Court on Tuesday, and yesterday (Thursday) afternoon, the 7th Civil Chamber (Presiding Judge: Dr. Matthias Zigann) of the Munich I Regional Court threw out a Conversant v. LG case over a Nokia patent (click on the image to enlarge; this post continues below the image):

The patent-in-suit, EP1173986 on a "method and arrangement for managing packet data transfer in a cellular system," was incorrectly alleged to be essential to the 4G/LTE cellular standard. Nokia's privateer asserted its broadest method claim (claim 1) and two apparatus claims of similar breadth, but to no avail. The court concluded that the transmission of a traffic volume indicator (TVI) in accordance with the LTE specification does not involve a direct selection of a channel as claimed by the patent. As a result, the LTE standard does not require any technical step going beyond the prior art.

The Nokia patents transferred to Conversant, which is basically acting as a licensing agency for the Finnish failed handset maker, have generally performed very poorly in litigation. Last month the Munich I Regional Court held an early first hearing in a Conversant v. Daimler case, and that patent doesn't appear to have impresssed anyone either.

Nokia failed on Tuesday (Mannheim), indirectly (because it used Conversant as its front) failed on Thursday (Munich), and we'll probably hear very soon that mediation with Daimler and its suppliers failed this week, too.

The mostly Nordic protectionists in the European Commission who are preventing the Directorate-General for Competition (DG COMP) from formally investigating Nokia's unFRANDly refusal to license component makers need to wake up. If anyone still thinks that Nokia is "the Pride of Europe" in terms of wireless innovation, the performance of its patents in litigation shows that it's not. It would be a far smarter decision for Europe to focus on opportunities in connected cars and the wider Internet of Things (IoT). Nokia is basically fin(n)ished.

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Thursday, February 13, 2020

Qualcomm is one undecided judge away from getting FTC's antitrust win reversed by Ninth Circuit: observations on today's hearing

The United States Court of Appeals for the Ninth Circuit heard oral argument in FTC v. Qualcomm this morning. Just as I expected, Qualcomm went into that hearing on a far stronger basis than the one on which last year's trial had ended. The purpose of this post is to share some observations. So shortly after the hearing, it obviously can't provide an in-depth analysis.

The FTC, Qualcomm, and the DOJ (intervening on Qualcomm's side) all faced tough questions, but from different judges and of varying relevance to the forthcoming decision. For instance, the fact that the panel is somewhat skeptical of the DOJ's national security argument (though a remand to consider national security was also mentioned as a procedural possibility) doesn't have a bearing on the underlying merits of the antitrust case. It would just be about tailoring the injunction. One has to weight the questions--and there's always a possibility of a judge asking a party tough questions to encourage it to present its best arguments, but I don't think that happened today.

Circuit Judge Consuelo Callahan appears to be strategically lost for the FTC's purposes. Some of her questions were clearly designed to support Qualcomm as opposed to looking for answers. In a way, Qualcomm had three different lawyers arguing its case: Thomas C. Goldstein (absolutely world-class), Michael Murray from the DOJ's Antitrust Division, and... Judge Callahan, who made such points as saying that Qualcomm's business practices may be capitalistic, but not necessarily anticompetitive, and stressed that being unique in an industry shouldn't be conflated with being anticompetitive. Nobody would disagree with the distinctions, but this case is about line-drawing.

Assuming that Judge Callahan is indeed totally on Qualcomm's side, the chipmaker just needs one more judge to join her--maybe not on all counts, but on some.

Judge Rawlinson appears open-minded and undecided. Her questions to both sides were very balanced and reflected a genuine effort to develop a better understanding of what she noted in closing is a challenging case for the court to resolve. Once I obtain a transcript and re-read it, I may find that Judge Rawlinson has a certain inclination, but just based on watching the livestream of the hearing, I think she hasn't formed a definitive opinion yet.

Judge Murphy III (from the Eastern District of Michigan, sitting by designation) appeared most deferential to the district court, and relatively speaking, more likely to support affirmance than the other members of the panel. But "more likely" doesn't mean that that's what he's going to do. He just seemed somewhat more receptive to certain parts of the FTC's theory, such as the point that Qualcomm's licensees can't practically challenge Qualcomm's patents in court when they depend on uninterrupted chip supplies.

One factor that is clearly working out in Qualcomm's favor is that the FTC's decision not to defend Judge Lucy H. Koh's holding of an antitrust duty to deal under Aspen Skiing created a vacuum. The FTC's special counsel, Professor Brian Fletcher (who talked very fast, a habit I'm also known for, but wasn't very persuasive except for the last few minutes), mentioned United Shoe.

If Judge Rawlinson joins Judge Callahan on one or more of the fundamental issues, it may be "game over" for the FTC. Otherwise, I guess Judge Murphy III is more likely to join Judge Rawlinson than Judge Callahan. In that event, Judge Callahan's Plan B appears to be to get a remand of the summary judgment on chipset licensing because of triable issues. That remand would be mission-critical for the FTC because its alternative theory for affirmance of the chipset-licensing decision depends on the contractual duty established on summary judgment.

It's not even certain that the Ninth Circuit will ever have to adjudge the case, as the Federal Trade Commission might consider a settlement with Qualcomm. The way today's hearing went certainly encourages the parties to give serious consideration to a settlement. The FTC will have to take into consideration that whatever the Ninth Circuit affirms may still be challenged (and potentially successfully) by Qualcomm, with the Supreme Court being very likely to hear the case--but whatever the FTC loses at this point, it may not even be able to appeal to the Supreme Court (and if so, there would be the potential issue of the DOJ representing the FTC, though that would be the Solictor General's--not the Antitrust Division's--job).

The FTC had a very strong trial. But the appellate game is different. It's of a nature that favors Qualcomm. And Qualcomm has one judge firmly on its side. There is hope for the FTC with respect to the other two members of the panel. But none of the judges defended the district court's judgment the way Judge Callahan attacked it.

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Tuesday, February 11, 2020

Nokia loses first German patent infringement case against Daimler: weak patent not essential to LTE

The devaluation of a dying company's overrated patent portfolio has begun today. At 9 AM local time, the Mannheim Regional Court announced its final judgment in the first of ten German Nokia v. Daimler patent infringement cases to have been adjudicated. As expected, the court with by far the best technical understanding of cellular standards in the world tosses Nokia's complaint over EP2286629 on a "method and apparatus to link modulating and coding scheme to amount of resources." Contrary to Nokia's assertion, the patent is a far cry from being essential to the 4G/LTE standard.

Industry insiders know that Nokia, which failed in the mobile handset market because it was more focused on saving costs than delivering a great user experience, had already lost many of its best engineers when most 4G/LTE-related patents were filed. In its official communications, Nokia talks about the tens of billions of euros it invested in research and development in years and, especially, decades past. But the 2010s were the decade when Nokia took a definitive downturn from which it's not going to recover, short of a Finnish Steve Jobs emerging somewhere.

As I mentioned in my previous post (on a Munich case that Nokia can only "win" if the court is happy to be overruled within a couple of months at the most), Nokia's SEP portfolio is largely untested. The only judgment I remember was one that Nokia lost in Mannheim to a tiny rival (ViewSonic). In a recent conversation, a German patent litigator who has asserted SEPs for different plaintiffs on numerous occasions told me that Nokia itself presumably doesn't even have a clue as to the strength of its cellular SEPs, just because they've typically always settled before decisions came down.

So far, the SEP litigation score is "Defendants 2, Nokia 0."

It's fairly possible that Nokia, if it can't settle with Daimler (which Daimler shouldn't do because Nokia owes its suppliers an exhaustive FRAND license), will lose all of its ten pending SEP cases against Daimler when all appeals (including the nullity cases before the Federal Patent Court) have been exhausted. In the meantime, Nokia will have to negotiate renewals with various major licensees in the smartphone segment, and those licensees are probably watching what happens in those automotive cases--and wondering what they're actually paying Nokia for (though they all pay a fraction on a per-unit basis of what Nokia wants from Daimler in contravention of EU antitrust law).

The next round of mediation talks (unreasonably requested by a European Commission shirking its competitoin enforcement duty so far) will take place now, and most likely, nothing will come out of it. The fact that Nokia's ten SEPs-in-suit may not inclde a single valid patent that is actually essential to a cellular standard won't help.

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Sunday, February 9, 2020

Nokia's piecemeal injunction strategy against Daimler's demand of €4.5 billion bond or deposit: what's Nokia's objective in auto patent battle?

This is my third post on Thursday's Nokia v. Daimler patent infringement trial in Munich. I've previously commented on Nokia's intentional misinterpretation of the Court of Justice of the EU's Huawei v. ZTE ruling and reported on the fact that this blog's publication of leaked information from secretive mediation talks between Nokia and the automotive industry gave rise to a peripheral controversy in court.

Toward the end, counsel for Nokia mentioned that Daimler asked for security to the amount of 4.5 billion euros (that's more than 4.9 billion U.S. dollars) in the event Nokia would seek to enforce a hypothetical injunction while an appeal would be pending. The likelihood of an injunction depends primarily on whether the court will adopt Nokia's utterly unreasonable misreading of CJEU case law. If the court does side with Nokia on this one, I don't have the slightest doubt that the appeals court would reverse (and probably faster than it usually does). Another question is whether the case will be stayed as an earlier wireless data communication standard (GSM-based EDGE) apparently came with exactly the selection strategy Nokia later claimed to have invented in connection with 3G/UMTS.

In both contexts, all I heard in court was one party's argument. Daimler presented its invalidity theory, which appeared to be a pretty strong case of non-novelty, but Nokia, despite Daimler asking them to respond, was evasive. And when Nokia argued that security to the amount of € 4.5 billion wasn't needed because Daimler could continue to source telematics control units (TCUs) from Samsung subsidiary Harman, and furthermore because Daimler could just deactivate 3G/UMTS support (leaving them with 2G/GSM and 4G/LTE), the court terminated the hearing without allowing counsel for Daimler (or the intervenors) to respond.

As counsel for Nokia explained, they are not asking for an injunction that would force Daimler to hold its manufacturing. Their prayer for injunctive relief is specific to German sales, and limited to Daimler cars that come with TCUs from certain suppliers (most likely, the direct suppliers among the intervenors in this action, who are Continental, Bosch, TomTom, Valeo subsidiary Peiker, and BURY), with Samsung subsidiary Harman being explicitly excluded for the time being, though Nokia does reserve the right to bring a new complaint targeting Daimler cars equipped with Harman TCUs.

What Nokia didn't specify is an amount that they would consider reasonable. The purpose of such security is only to ensure Daimler can still enforce a hypothetical future wrongful-enforcement damages award even if Nokia went bankrupt in the meantime. What Daimler will actually get may differ greatly from the amount of the security. Technically, Nokia could choose between either posting a bond or making a deposit. I guess they would have to make a deposit for an amount this large. A bond would be costly, and with Nokia's business being in decline, it's unclear whether any bank would vouch for Nokia to the tune of billions of euros without Nokia actually making a deposit with the same bank (in which case Nokia might as well put the money in a German court's bank account, which wouldn't charge fees).

Nokia's argument that enforcement damages would be mitigated by Daimler disabling 3G isn't convincing. There are some mobile telephone networks in Germany that still rely on 3G in wide swaths of the country (such as Telefónica's O2 service). Also, I don't know whether any carrier would certify a 4G end-user device (such as a connected car) without being backwards-compatible to 3G. That might leave Daimler with 2G.

As for Harman's ability to just supply enough TCUs, I don't know to what extent Harman itself can do it, or whether the powerful Samsung group as a whole could enable Harman to do so.

There's no reason to assume Nokia will ever license Harman, except under antitrust pressure (such as from the European Commission, or as per a court order). So this looks like a peacemeal resolution strategy: by means of a carve-out for Daimler cars with Harman TCUs, Nokia tries to make it easier for the court to grant an injunction (in the middle of the German patent reform debate, where the proportionality of injunctive relief is the #1 topic of debate), and probably hopes that the European Commission won't take decisive action before an injunction comes down. When Samsung was pursuing injunctive relief against Apple almost a decade ago, the Commission at some point put so much pressure on Samsung that all injunction requests over SEPs were withdrawn EU-wide. The Commission's hesitance to strike down on Nokia's clear abuse of EU antitrust law is already making the agency look very bad. Its dual standards are already more than obvious. But at the point where Nokia would enforce a SEP injunction agianst Daimler, enabled only by Nokia's refusal to license Daimler's suppliers, the Commission would either be exposed as the Western world's least credible and least independent competition authority--or it would have to call Nokia off, as it once did in the Samsung case.

If Nokia brought a follow-on complaint targeting Daimler cars with Harman TCUs, the Munich court could adjudicate that one pretty quickly. I'm not sure they would even hold their usual two hearings in that case. However, they couldn't resolve it faster than the appeals court would most likely overturn the original decision.

While it's easy to see how Nokia hopes its tailored injunction strategy may persuade the court to just go ahead and grant an injunction, and dissuade the Commission from intervening, it's harder to tell from the outside what Nokia really intends to achieve here.

It wouldn't make sense for Nokia to obtain an injunction against Daimler cars incorporating TCUs from half a dozen suppliers as long as Daimler has other sources. A follow-on complaint would be a given. And at that point (though I don't think Nokia could formally win a second case before the appeals court tosses a hypothetical first win), Nokia would likely have to make a multi-billion euro deposit. Last summer its cash reserves amounted to approximately 7 billion euros, but it's another question how comfortable Nokia's shareholders would be with half or more of that amount being deposited in a German court's bank account.

Nokia would need a German injunction that bites and lasts. A tailored injunction might just be an annoyance to Daimler without forcing a settlement. And even an injunction that can't be worked around logistically would matter only if it was more than ephemeral.

With its current strategy, Nokia is jeopardizing the reputation of the Munich I Regional Court (by asking it to misinterpret Huawei v. ZTE in an outrageous way) and of the European Commission, whose call for mediation suggested that it is a purely political organization as opposed to a regulator that truly cares about safeguarding competition. The grand prize Nokia is hoping for is a settlement with Daimler, and I don't see that happening anytime soon. This could become Nokia's Vietnam. On Tuesday, the Mannheim Regional Court will most likely hold a Nokia patent non-infringed. Nokia's SEP portfolio is largely untested in litigation. If the patents-in-suit I've seen so far are Nokia's strongest weapons, then they are in serious trouble. At the end of the Daimler dispute, Nokia's SEP portfolio might be totally devalued, and we're just about a couple of years away from the next round of renewals of Nokia license deals in the smartphone industry, where I predict they're going to get far less money than last time.

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