Sunday, November 6, 2011

German lawyers say Apple urgently needs (and will probably get) a temporary suspension of Motorola's injunction

On Friday, the Landgericht Mannheim (Mannheim Regional Court) handed a default judgment in favor of Motorola Mobility against Apple in a patent infringement matter, ordering an injunction and determining that Apple owed damages. As I pointed out when I published the court document, a company with Apple's quality and quantity of resources is less likely to fail to defend itself properly than to make a default judgment part of some tactical plan, and a default judgment can be reversed with substantive arguments. However, there has been some debate since the publication of that document over the actual business impact this may have, given that Apple's German subsidiary is not mentioned in the document.

I received the ruling at 9:04 PM local time on Friday. It was still in the afternoon by U.S. time, and this was significant enough to publish and report on before rather than after the weekend, but it was too late in the day over here to contact local sources. Meanwhile I have had the chance to discuss this with German lawyers and can now explain the risks and opportunities for Apple as well as the likely next steps much more specifically, even though there are still some important unknowns.

The big question I raised yesterday is what the words "at this time" mean in Apple's claim that the ruling "does not affect [its] ability to do business or sell products in Germany at this time". After all, "not ... at this time" is an unspecified period that could end the next second, day, hour, week, month, whatever. The short answer is that, contrary to widespread misbelief, the Friday decision will have business impact -- in my view, within weeks -- if Apple fails to persuade the court to suspend the enforcement of the injunction, but Apple is fairly likely to achieve a temporary suspension until a second, substantive, court decision. That substantive decision can be appealed to a higher regional court and possibly all the way up to the Federal Court of Justice of Germany, and during such an appeals process (which can take years), the appellate courts would again have to decide whether to allow the injunction to be enforced or whether to suspend it until the next ruling.

So this is neither a guaranteed, immediate doomsday scenario for Apple nor a ruling that's unable to affect Apple's business in the very near term just because it doesn't name the German subsidiary. While Apple is fairly likely to get the injunction suspended, this is in the court's discretion and can go either way, so Cupertino can take a deep breath only after the grant of a temporary suspension.

We'll just have to keep an eye on the continuation of the proceedings in Mannheim, where Apple will have to file its objections to the default judgment within two weeks (and may file a motion for a temporary suspension even ahead of that deadline), and, subsequently, in Karlsruhe, the city in which both the competent higher regional court and the Federal Court of Justice are based. There may also be some relevant proceedings in Munich before the Federal Patent Court of Germany, relating exclusively to the validity of Motorola's patents-in-suit.

The default judgment per se has financial implications that are not reimbursable, no matter what the final outcome of the entire lawsuit will be. Since the court will have to hold another hearing due to Apple's tactics, Apple will have to bear all of the costs of the default judgment. Also, if Apple is granted a temporary suspension of the default judgment, it will have to give bail. From a strategic point of view, given what's at stake in the German market, let alone in the worldwide dispute between Apple and Motorola, those costs are obviously of rather limited relevance.

Input from German lawyers

The first lawyer to contact me about the possibility of a temporary suspension of the injunction was Tilman Winkler, a German attorney-at-law from the Black Forest region. He authorized me to name him; otherwise I keep my sources confidential, and other German lawyers I talked to were also incredibly helpful but preferred to stay in the background.

All of the lawyers I talked to had consistent positions. In particular, all of them agree with me that the default judgment against Apple Inc. of Cupertino would have very near-term business impact unless Apple wins a suspension. They all agree that in one way or another, Apple's German business also depends on Apple Inc. being unrestricted to do business in Germany. And they all concur that Apple is more likely than not to win a temporary suspension (for the period until a substantive decision following a second hearing by the same court). "More likely than not" is a conservative consensus position. An unnamed one of them told me he can't imagine any other outcome.

Regarding the question of whether an injunction against Apple Inc. without an injunction against Apple GmbH (the German subsidiary) has teeth, I outlined (in an updated version of my first blog post on this topic) at least three ways in which Apple's German business also depends on actions by Apple Inc. that raise serious issues under the injunction. A particularly important point in this context is that according to Article 278 BGB (Bürgerliches Gesetzbuch, the German Civil Code) those who owe something to another party are liable for what is called "Erfüllungsgehilfen" in German, a broad term that relates to proxies, agents, or subcontractors. German courts routinely apply this obligation not only to obligations to pay or do something but also to the obligation to comply with court injunctions. Here's a related ruling (see paragraphs 16 and 17) by the Munich Regional Court (one of numerous possible examples). Even economically independent third parties can be "Erfüllungsgehilfen" for whom the enjoined party is liable. It's even easier to make this case with an organization like "Apple Sales International" in Cork, Ireland, which ships goods to Germany on Apple Inc.'s behalf.

In addition to the lawyers I talked to, the German law firm of Scherer & Körbes stated on its blog (already on Friday) that Apple's supply of devices to its German subsidiary "could in [the lawyer's] opinion probably be prohibited" by the injunction. Thomas Stadler a German attorney who runs a blog on Internet law, also points out that Apple Inc. can't simply ignore the decision. He furthermore notes that it will take a few days before the Friday ruling is formally delivered to Apple.

I hereby challenge everyone who disagrees with me (and thinks the decision is barely worth the paper it's written on) to present even one German attorney-at-law willing to go on the record saying that the default judgment per se most likely wouldn't affect Apple's German business even if Apple failed to get its enforcement suspended.

I furthermore encourage everyone with doubts about this to ask themselves why Motorola would have sued Apple Inc. in the first place if this wasn't going to matter -- and why Apple itself sues foreign parent companies of local subsidiaries of its rivals in a variety of jurisdictions, including Germany.

This is totally hypothetical, but if Apple had the choice between getting an injunction against, for instance, either Samsung's Korean parent company or against the German subsidiary, it would actually have to choose the one against the parent company in order to cut the supply lines right at the source of it all, even if some products still in the local warehouse might be sold off in the meantime.

Enforcement against the U.S. company is not a problem either. For contempt of an injunction, the court can order fines of up to 250,000 euros for each case, and it can collect those fines from whatever money Apple makes in Germany (for example, intercepting any payments going from the local subsidiary to Cupertino). It could even seize Apple's domain, which belongs to Cupertino but is registered in Germany, if all else failed. German courts have done such things before. In a hypothetical worst-case scenario (it definitely wouldn't get there because Apple is a law-abiding company that would comply, but the law would theoretically allow it if necessary), the court could order the imprisonment of Apple CEO Tim Cook for up to six months for each act of contempt. The United States might not extradite a citizen in such a case, but then he'd have to be careful about not traveling to any country that might do it. I just explained this to make it clear that this injunction is not like a parking ticket in a country where you spend a vacation and which you know won't ever be able to collect it from you.

Procedural rules for a temporary suspension

Based on the input I received and my own further research, I can now explain the procedural rules and put them into the context of this particular case. The relevant law is the German Code of Civil Procedure, the "Zivilprozessordnung", abbreviated as ZPO.

Given that the November 4 decision references an October 21 hearing and states Apple Inc.'s counsel (the top-notch patent law firm of Bardehle Pagenberg), it's a safe assumption that Apple did indicate to the court that it wanted to defend itself, and filed an answer to Motorola's complaint, but Apple's outside counsel either didn't show up at the October 21 hearing (the presence of Apple employees would not have counted given the nature and amount in dispute in this case) or refused to make an oral pleading, which is tantamount to a no-show. In accordance with Article 331 ZPO, Motorola Mobility's counsel then presumably moved to enter default judgment against Apple.

Regardless of the fact that there must have been some written pleadings before the hearing, a party whose counsel doesn't plead at the hearing is in default and, therefore, gets a default judgment entered against it. The court performs only a minimal "plausibility check" on the plaintiff's claims. Sometimes parties hope that even if they don't show up, the court may dismiss a complaint, but it's hard to imagine that Motorola Mobility wasn't able to state a claim good enough to win a default judgment.

It's still unclear why this happened. Here are a few possible reasons:

  • Like I said, it's hard to imagine that a company like Apple -- with so many talented people on board, internally and externally -- fails to show up. But it's not entirely impossible. Maybe Apple's counsel got stuck in a traffic congestion. Maybe some secretary confused the date and thought it was on a different day.

  • According to Article 132 ZPO, any new representations of fact or other substantively new pleadings must be sent to the court at least a week before the decisive hearing date. The purpose of that requirement is to give the court enough time to forward the documents to the other party (unlike in the United States, where parties have to serve documents, German courts take care of distribution) and to allow the other party to prepare ahead of the hearing. Parties that discover something very important in the week between that deadline and the hearing sometimes resort to default in order to preserve their ability to inject such material into the process.

  • Similarly, parties that don't have such material in time but believe that the delay caused by a default judgment and subsequent second, substantive, hearing enables them to obtain something very useful also consider resorting to default, despite the costs and risks it involves. For example, if Apple believes that it can present material based on which the court will have even more doubts about the validity of Motorola's patents (since validity issues are handled by a different court in Germany than infringement cases), that could be such a reason.

  • A reader of my blog, Tim Nash, believes it's quite possible that Apple might have wanted to avoid a ruling at this stage in order to have the European Commission start its preliminary investigations into Samsung's FRAND-related conduct (given that at least one of Motorola's two patents-in-suit is definitely a FRAND-committed patent) and to hope that the Mannheim court would be more sensitive to the FRAND issues involved if there's a Commission inquiry going on. That's somewhat plausible.

  • Others believe Apple was just stalling and trying to delay a likely, if not inevitable, defeat.

  • Apple might have wanted to synchronize this action with another case (I'll address that further below).

The great unknown relating to all of these theories about tactics is that, according to what Apple told at least one journalist, Apple's German subsidiary is also a defendant over the very same patents and defending itself vigorously. The default judgment does not mention Apple GmbH at all. If there's more than one defendant, the court gives them numbers, as you can see in my translation of a recent ruling against Samsung. More importantly, the lawyers I talked to concur that the title of the default judgment would have included the world "partial" ("Teil-Versäumnis-Urteil" instead of "Versäumnis-Urteil").

From a judicial efficiency point of view, it doesn't seem to make sense that the court would discuss the very same two patents and infringement accusations involving the very same products in two separate proceedings: one case for Apple Inc. and a separate one for Apple GmbH. But none of the lawyers I talked to can rule out that there are two cases, either because Motorola Mobility filed two different lawsuits or because the court decided to sever (split up).

If there are two parallel cases, possibly even in different courts, Apple might have wanted to delay the case related to Apple Inc. just to avoid negative effects on another case. I mentioned that possibility above.

Whatever the motive may be, the lawyers I talked to can't see any circumstances, based on what's known so far, that suggest Apple defaulted for no fault of its own. For the sake of simplicity, let's assume at this stage that Apple is responsible for the default (that even includes the traffic congestion scenario). Article 719(1) ZPO requires a party that defaults for its own fault to give bail if it wins a suspension (to ensure a possible compensation of the plaintiff) unless it can prove that the criteria for a default judgment weren't met (which is again a possibility for which there's no indication so far).

According to Article 705 ZPO, Apple's objection to the default judgment (it's not an appeal to a different court but a way to make the current proceedings continue in the same court) prevents the default judgment from becoming the final judgment. Article 339 ZPO gives Apple two weeks (counting from the date of the official delivery of the default judgment) to object. It has declared its intent to do so.

But even without becoming a final judgment, the default judgment remains preliminarily enforceable. That's why Apple is virtually certain to move, simultaneously with its objections to the default judgment, for a temporary suspension of the enforcement of the then-contested default judgment in accordance with Article 719(1) ZPO.

Article 707 ZPO says that "the court can [order a suspension] further to a motion". The word "can" means that this is in the professional discretion of the judge. Discretion means that the court will review the specific situation in this litigation, but it doesn't mean that it's totally arbitrary. Apple is entitled to fair treatment.

The criteria that come into play include (but are not limited to) the harm caused to either party in the event of a default judgment having been wrong or being suspended despite being the right decision, and, very importantly, the likelihood of success of Apple's objection to the default judgment. If Apple presented arguments that the court believes aren't sufficiently likely to have the default judgment overturned, then there won't be a suspension. But the lawyers I talked to believe that this kind of litigation is rather complex and Apple should be able to generate sufficient doubt about the outcome. But one of them pointed out that a decision by the court to deny Apple's motion for a suspension might not be contestable, which is however a contentious issue among German lawyers. Still, let's be realistic: if Apple (contrary to what we expect to happen) doesn't win a suspension, it's in serious trouble.

If the IT industry's most valuable company couldn't sell its flagship products in Europe's largest market during the Christmas Selling Season, Apple would suffer major harm, and compared to that, the court might feel that Motorola Mobility can always be compensated adequately in the form of monetary damages. But Motorola would argue that it's also a competitor to Apple and shouldn't have to compete with allegedly infringing products.

Earlier this year, the Karlsruhe Higher Regional Court (which would also hear an appeal -- after a second, substantive, decision in Mannheim -- in this case) denied a suspension in a case involving Nokia and IPCom. In that ruling, the appellate court stated clearly that courts have to take into consideration the lawmakers' intent to generally assign a higher priority to the interests of the party that is entitled to enforcement (over the interests of the party a decision is enforced against). That was related to a suspension during an appeals process, not to a default judgment, but it reflects a certain philosophy that is part of the remaining risk Apple faces.

Assuming Apple wins a temporary suspension, it's unlikely that the court will order any fines, let alone imprisonment, in the meantime. But Apple will have to move quickly.

Why can't Samsung get a suspension of the Galaxy Tab 10.1 injunction?

Shortly after I published this post, an Android fan asked me on Twitter why the court would probably give Apple a temporary suspension in this case but not to Samsung in the Galaxy Tab 10.1 case.

A key difference is that the Samsung injunction was a substantive ruling (on a preliminary injunction, but still substantive), while the Motorola-Apple decision is a default judgment unrelated to the merits.

If Motorola had won a preliminary injunction using the same procedure as Apple used against Samsung, the situation would be the same, and the standard would be the same.

The Motorola case is about technical patents while the Samsung case is about a design-related intellectual property right.

Samsung appealed its case to a higher regional court. A hearing will take place there a few days before Christmas.

Final words on the standard of reporting

Friday's news and the fallout from it raised, not for the first time and not for the last, the question of the standard one should apply before reporting on these kinds of issues.

In my view, a preliminarily enforceable injunction against Apple's core products is far too important not to publish and report on. If I get such a thing on a Friday, I publish it the same day and not just after the weekend.

I don't know which party provided it to me from an anonymous email account. It was sent to an email address that's not my primary one, but there are people at both Apple and Motorola to whom I had communicated that address.

I report on everything that's relevant, and I try to do it quickly. The exact scope and validity of those decisions can sometimes keep the court busy for years, while I process such information within a very few hours.

By the time I received the document, the parties must have had it in their hands for at least several hours. Most likely, the court entered this judgment before noon local time, in which case the parties had this one 9-12 hours before I did, so they had enough time to formulate a position. When I contacted both parties and asked for comment, I didn't get a reply for a couple of hours and at some point published it.

Should I have drawn certain conclusions that Apple GmbH wasn't mentioned in the document? In retrospect, I should have mentioned it. The reason I didn't mention it is that it looked like a lawsuit filed against only Apple Inc., and as I explained in this follow-up post, German lawyers are also surprised that there appear to be two separate cases involving the same patents and products.

As I explained in detail, the notion that a judgment against the worldwide parent company is of no practical value is simply wrong. It may slightly delay the full impact of the decision, but what Apple really needs now is a temporary suspension and, finally, a favorable substantive ruling.

The very first version of my posting had pointed out that I attributed this default judgment, as the most likely scenario, to procedural tactics. I explained from the beginning the concept of "resorting to default judgment", and I also pointed out in my original post that there could be some "workaround" for the near term.

Unfortunately, German court proceedings aren't as transparent as American ones. With a copy of the original complaint and access to other filings, I'd know a whole lot more, and I could have researched the case history. In this case, all I received was one document, late on a Friday evening. Delaying a report was not an option. The parties likely wouldn't have said much more even if I had waited twice as long.

These issues are very complicated. I caution everyone following these matters against going from one extreme to another.

I was first to publish the ruling, first to explain the ways in which Apple's German business can be affected even without a ruling against the German subsidiary, and first to explain what the next steps are going to be in all likelihood -- and that Apple will probably (but not necessarily) get the enforcement of the injunction temporarily suspended.

I was, however, not first to receive a statement and other background information on this from Apple. I can't force them to provide me with one. I can only ask. But those who get those statements from any company should always pay attention to such scope-restricting terms as "at this time", and take into consideration that a publicly traded company will comply with its duty to inform the market while trying not to appear weak in a major legal dispute. That's often achieved by making statements that are very confident at first sight but contain legally relevant restrictions such as "at this time". Again, that's the case with every company, not just Apple.

All of the debate over this injunction story happened shortly after the Spanish tablet case. But I'm not against Apple, just like I'm not against Android or anything or anyone else.

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