Wednesday, April 27, 2011

Barnes & Noble's answer to Microsoft's complaint raises more questions than it answers

Two days ago Barnes & Noble filed its answer to Microsoft's patent infringement complaint of March 21, 2011 with the U.S. District Court for the Western District of Washington. Barnes & Noble is the first defendant to reply. Its foreign manufacturers Foxconn and Inventec have yet to do so.

On April 19, 2011, the US International Trade Commission had instituted an investigation of Microsoft's corresponding complaint related to the same patents and products (investigation no. 337-TA-769). What happens all the time in such situations is that the federal lawsuit is stayed for the duration of the corresponding ITC investigation. I've seen it happen between Apple and Nokia, Microsoft and Motorola, and in other disputes. Therefore, Barnes & Noble's answer in the Western District of Washington lawsuit may not play a practical role anytime soon, and if the dispute is settled, it will likely be over before the federal case ever goes on trial.

No infringement counterclaims

The first thing I always look at when companies respond to infringement complaints is whether they assert any patents of their own as counterclaims. Barnes & Noble didn't do so, which is what I expected since I had previously seen a letter dated April 7, 2011, to the ITC, in which Barnes & Noble made the following claim:

"Barnes & Noble in particular was targeted by Microsoft because it is primarily a bookseller and not an electronics manufacturer, so it has no stable of defensive patents to use against Microsoft."

If that is so, how come the first Android device maker Microsoft sued is Motorola? That company has many thousands of patents, and has indeed asserted 21 of them against Microsoft in various counterclaims and countersuits.

While Barnes & Noble describes itself as a bookseller, financial investors increasingly view it as a mobile device maker because of the success of the Nook e-reader.

Barnes & Noble believes that a "stable of defensive patents" is needed in the mobile device market, and presumably Barnes & Noble held this belief all along but took its chances by entering the market even without a sufficiently strong patent portfolio. That was Barnes & Noble's own business decision. Maybe they thought they'd be the first mobile device maker never to pay patent royalties to anyone. If that's what they thought, it wasn't a realistic assumption. If they knew that patent royalties are simply a cost of doing business in this field, then it doesn't make sense that they now portray royalty demands by patent holders as a fundamental threat to the industry at large.

If it were up to me, software ideas wouldn't be patentable in the first place and companies like Barnes & Noble would never have to defend themselves against software patents. Even in that scenario they would still need to license hardware patents. However, the claim that they don't have a "stable of defensive patents" doesn't look like a realistic approach to the problem. If they want a different intellectual property framework, why didn't I ever see them take any political action to bring about change?

Additional Microsoft patents mentioned in Barnes & Noble's filing

Paragraph 24 of Barnes & Noble's answer talks about the patents that Microsoft offered to license to them:

"The proposed license would have covered the ’372,’780, ’522, ’551, and ’233 patents asserted in this action, along with other previously identified Microsoft patents, including U.S. Patent Nos. 5,579,517 ('the ’517 patent'), 5,652,913 ('the ’913 patent'), 5,758,352 ('the ’352 patent'), 6,791,536 ('the ’536 patent'), and 6,897,853 ('the ’853 patent')."

I have checked on those five patents and saw that four of them were previously asserted by Microsoft against Motorola (in different complaints). One of them is new: U.S. Patent No. 5,652,913 on a "system for providing intercommunication of I/O access factors stored in a shared data structure, accessed and maintained by both file system and device driver."

Broad accusations of anticompetitive conduct

A substantial part of Barnes & Noble's filing focuses on allegations that Microsoft leverages its patents "to render the Android™ Operating System and other open source operating systems uncompetitive and unpalatable vis-à-vis Microsoft’s own operating systems" (quote from paragraph 43 of the answer to the complaint). Two paragraphs later, Barnes & Noble mentions Microsoft's patent agreement with HTC as an example. However, the HTC example clearly contradicts Barnes & Noble's theory of Android becoming "uncompetitive und unpalatable": earlier this month, HTC's market capitalization surpassed that of Nokia (and previously that of RIM). If a patent license deal with Microsoft rendered Android uncompetitively expensive like Barnes & Noble claims, how come HTC is so very profitable?

Another paragraph later, Barnes & Noble mentions that its competitor pays patent royalties to Microsoft. With it's harder to tell how profitable the Kindle business unit is because the company is so diversified, but there are no indications that the need to license patents is driving Amazon out of that particular business.

I'm personally against any anticompetitive abuse of patents. If the way a company uses its patents crosses the line between reasonable monetization efforts and the destruction of legitimate competition, it has to be stopped. But if companies cry foul over allegedly anticompetitive conduct even though a reasonable license deal is proposed, it only becomes harder to make the case when there really is a need to present a competition argument.

The way Barnes & Noble argues just doesn't convince me, at least not at this stage. The broad accusations that Barnes & Noble makes aren't supported by evidence. Some of what Barnes & Noble plans to present may just not be suitable for the public record, such as the exact amount of the royalties Microsoft asked for or the restrictions Microsoft allegedly wanted to impose. However, I've just given some examples of claims that can be controverted just with publicly available information, such as the fact that HTC is doing phenomenally well regardless of a license deal with Microsoft, which makes it hard for me to believe that Microsoft is driving those Android device makers out of business.

If Android ever faces a competitiveness problem because of patents, it's not going to happen because of just one company. There are large corporations like Apple (most recently against Samsung, previously against HTC and Motorola), Microsoft and Oracle asserting their rights in connection with Android; medium-sized ones like Gemalto; and a large and growing number of smaller players. All in all, 41 Android-related infringement suits have been filed already by my count. The combination of all of them is a significant Android cost factor, but as long as software patents exist, companies like Barnes & Noble will have to pay royalties on some of them. That's the name of the game.

Cravath (IBM's primary law firm) working for Barnes & Noble on this case

Barnes & Noble's answer to the complaint was filed by the Seattle-based law firm of Hillis Clark Martin & Peterson in conjunction with Kenyon & Kenyon and, very interestingly, Cravath, Swaine & Moore. New York-based Cravath is closer to IBM than any other law firm (even though some others, such as Quinn Emanuel Urquhart & Sullivan, also do a fair amount of work for Big Blue). Eben Moglen also practiced law at Cravath.

Even though Cravath is mentioned only in the third place, it's possible that they did most of the work on Barnes & Noble's answer to the complaint since it's a much larger firm than the other two and its primary client, IBM, is the world's number one patent bully, so they presumably do a lot of work in connection with patent licensing and litigation.

Next steps

Like I said before, the federal lawsuit could be stayed for the duration of the ITC investigation. I will keep an eye on that one as it unfolds. Having read Barnes & Noble's answer to the federal complaint, I wouldn't be surprised if this was settled well ahead of any trial and if Barnes & Noble only sought sweeter deal terms.

It seems to me that Barnes & Noble tries to be the most unpleasant defendant it possibly can be without bringing an infringement countersuit. Its answer to the federal complaint and also its previously mentioned letter to the ITC smack of mudslinging. It's like they try to show Microsoft that they can say nasty things and try to make Microsoft look very bad. It's similar to what Google tried against Oracle, but even more aggressive and the arguments are even further-fetched. Oracle kept pursuing its strategy nevertheless (and that case may now go on trial before the end of the year). My guess is that Microsoft will also proceed irrespectively of the tone and content of Barnes & Noble's court filings. And as one of the very next steps it will be interesting to see Microsoft's answer to Barnes & Noble's answer to the complaint.

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