Tuesday, November 29, 2011

How will HTC work around the enforced patent without losing the benefit of IPCom's FRAND declaration?

Yesterday I reported and commented on HTC's claim that it has worked around the IPCom patent underlying the German injunction, making its current products non-infringing. I expressed my skepticism.

Subsequently, one of the numerous companies that have not yet reached an agreement with IPCom on the terms of a possible license told me that no network operator ever implemented the UMTS feature covered by IPCom's patent. This was a serious and very professional source, and I promised to take a closer look at this question.

Later, someone sent me an anonymous message via my contact form making a similar claim. I will comment on that one -- and generally on the kinds of anonymous messages I get all the time -- in the final part of this posting. But let's start with the real issue.

As I noted yesterday (and showed based on an excerpt from a different ruling), the Mannheim Regional Court concluded that the related feature is a mandatory part of the UMTS standard. This leaves two theoretical options for steering clear of infringement of the patent-in-suit:

  1. A compliant workaround would implement the mandatory feature while navigating around the scope of the asserted patent. If such a workaround is not only possible but also viable for all reasonable implementations of the standard, then the patent would not be essential to the standard in a strict sense, but participants in standard-setting processes generally prefer to err on the side of essentiality and it therefore does happen that someone comes up with a way to comply with a standard without infringing a particular patent that used to be considered essential.

  2. A non-compliant workaround would, in its simplest form, throw out the patented feature altogether. In that case, the infringement issue would go away. If one assumes for the sake of the argument that no carrier makes use of the related feature on the side of the network, then customers would never notice a difference, making the modified products equally marketable.

    But even if there was no loss of market potential (which may very well be true), this strategy would trade the infringement issue relating to one patent in for a FRAND issue relating to many other patents. FRAND licensing promises typically benefit only those who implement a standard in full. 100%. No supersets, no subsets, no deviations. That is, by the way, also the case with respect to Java, and since Android's Dalvik virtual machine doesn't implement Java in a compatible fashion, Google is currently not entitled to a license from Oracle on FRAND terms, and Oracle is fighting hard for an injunction against Android.

    If an implementer of the standard has license agreements in place with any owners of essential patents who grant a license based on full compliance with the standard, he may lose his benefits under those agreements. To the extent he doesn't even have an agreement in place with one or more holders of essential patents, he may lose his entitlement to a license on FRAND terms and expose himself to hold-up.

IPCom's FRAND declaration

In December 2009, IPCom made a FRAND declaration based on which the European Commission was satisfied that there was, at the time, no need for a full-blown investigation of IPCom's use of the patents it acquired from Bosch. As a result of a complaint brought by Nokia (which was, according to a court document, asked to pay 12 billion euros for a license), there had been "informal discussions" between the EU's competition enforcement agency and IPCom.

Section 5 of IPCom's declaration is a FRAND licensing commitment, and the availability of a FRAND license is conditioned on full compliance with the relevant standards (in the quote below, I have underlined the references to full compliance):

IPCom hereby irrevocably declares that it is prepared to grant irrevocable licenses under the essential intellectual property rights of its Bosch Mobile Telecommunication Patent Portfolio on fair, reasonable and non-discriminatory terms and conditions to the following extent:

  • production of any system or device fully conforming to a mobile telecommunication standard, including the right to make or have made customized components and sub-systems to the licensee's own design for use in such production;

  • sell, lease or otherwise dispose of any system or device fully conforming to a mobile telecommunication standard so produced;

  • repair, use or operate any system or device fully conforming to a mobile telecommunication standard; and

  • use any method or operation fully conforming to a mobile telecommunication standard.

A closer look at different possibilities and permutations

It's very hard to estimate probabilities of different outcomes. But even the limited information that is available in the form of court rulings provides some indications.

Obviously, court decisions aren't always right. But in my analysis I always attach more weight to the findings of judges than to any input I get from companies or individuals, let alone from anonymous sources. A solid majority of court rulings is upheld on appeal.

Is a compliant workaround possible?

So far, no court has seen a definitively-compliant workaround. HTC withdrew its appeal instead of presenting a workaround to the Karlsruhe Higher Regional Court. Nokia presented six devices to the High Court of England and Wales that the court declared to be non-infringing, but the compliance issue was not addressed. IPCom asked the court to "include a statement to the effect that the products are not compliant with the UMTS standard", but the court was not satisfied that such declaration would "serve a useful purpose". The court was concerned that such a declaration could be misinterpreted by third parties as meaning that "a device could not lawfully be sold". But in paragraph 212 of the ruling, the judge nevertheless said that he tried to made clear in his decision "the reasons why the [new] devices do not infringe, and the respects in which they differ from the devices specified in the UMTS standard". (This article sums up the controversy arising between the parties after the ruling over its meaning and effect.)

If I were in the shoes of the companies being sued by IPCom over this patent, I would really try to resolve the issue rather than get into that compliance debate that could have all sorts of negative consequences.

Risk resulting from a removal of the patented feature

Based on the documents and reports I saw, it may very well be that a variety of network operators have confirmed to courts that they don't make use -- and never did make use -- of the patented feature. But things are not that simple.

The decision by operators not to use the feature doesn't change anything about the fact that all network operators must send certain values across the network because it's required by the UMTS protocol, and those values include a threshold value (which is practically irrelevant if the operator doesn't really use the feature) and a so-called AC/ASC (Access Class and Access Service Class) mapping. T-Mobile told the Mannheim court that it always sends out an ASC value of zero. For that value, the threshold value is, like I said, irrelevant. But each UMTS-compatible device must still process those values and make a determination on whether or not to process the threshold value.

An apparatus patent claim covers a device capable of certain performing certain processes, and is therefore infringed even if certain parts of those processes never come to bear due to the data sent from the operator. That's why the Mannheim court found that T-Mobile's representations "do not matter" in the infringement analysis.

Even if no known operator in the whole world used the feature today, it is part of the UMTS standard and if a device is not prepared to deal with the scenario it covers (a scenario in which access to a particular channel depends on a somewhat more sophisticated process than otherwise), it may not work.

So the risk of a workaround is that it may either fail to achieve its objective (non-infringement) or result in actual or potential incompatibilities, and non-compliance.

I guess IPCom would prefer a quick win: faced with the choice of having to exit the German market, HTC would presumably pay up rather soon. But if HTC solved the infringement problem in exchange for a non-compliance problem and presented such a workaround in order to prevent the enforcement of the injunction against its current products, IPCom would need to prevail on just one (other) patent that HTC cannot work around, and then HTC will surely want to benefit from IPCom's FRAND declaration.

IPCom appears to be persistent and perseverant in its efforts. It already has some licensing income from those who signed up so far, and those revenues may very well cover the cost of its numerous ongoing lawsuits. Many of its patents are still a long way from expiration, so IPCom will probably keep suing and suing for some more time until the alleged infringers take a license. IPCom will have to honor its FRAND commitment, and if Nokia had to pay 12 billion euros, that would hardly be FRAND the way I see it, but IPCom is purportedly willing to enter into license agreements based on terms that a court of law would determine to be FRAND. That, however, is presumably subject to full conformity with the relevant standards.

A final remark on anonymous messages

As I mentioned further above, I received a message from an anonymous sender claiming that "[t]he RAHC [sic] related patent that IPCom 'won' on against HTC has NEVER repeat NEVER been even used by the networks" (the message twice stated "RAHC" though the correct acronym is "RACH" for "Random Access CHannel"). Not only the consistent mispelling of the term but also an offensive sender pseudonym, a fake email address (consistent with the pseudonym) and a very emotional writing style show that the unknown sender may need professional help in some respects.

I get anonymous messages all the time, also from dubious Twitter accounts, and while I take a quick look at all of them, I never attach any weight to them. I am repeatedly asked to write shorter blog posts or start with the key message, but I'm not going to oversimplify my positions -- at the risk of then being quoted out of context as making demonstrably false claims -- only to please a few unreasonable people. If any investment professional doesn't have the time to dig into all of these issues, I'm gladly available on a consulting basis to provide digested versions of anything in private conversations.

I also consistently ignore messages from those who want to push certain stocks or promote the sale of the portfolios of privately-held companies.

I'm sure that most if not all of the messages of the kinds I just described come from people with some kind of financial interest in the issues I report on: mostly amateur stock traders, I suspect. I know that my blog is often referenced in discussion forums used by amateur traders, and I actually like that audience for the most part. I also did a certain amount of non-professional stock trading in the past, though I don't touch tech stocks anymore because I don't want to run into any conflict of interest.

Some of those messages, including the one I got yesterday about the IPCom situation, may also come from investment professionals. I have many clients in the financial services industry, and all of them are definitely reasonable. But I have also experienced a fair amount of unreasonableness from some members of that community. There are some who freak out when their trades don't work out according to plan, and then they attack people like me simply for raising issues and commenting on them. They're not going to discourage me in any way from saying what I want to say, when I want, and the way I want.

Whatever the background of those anonymous senders may be, I want to point out that I'm always receptive to information from industry players and their lawyers. There is no major company in the industry that I wouldn't be happy to listen to as long as it provides relevant and reliable information, and I always protect my sources. I have had background discussions with a variety of major players and will continue to engage in such conversations, provided that one can have reasonable exchanges and also, if necessary, agree to disagree.

IPCom's patent enforcement has almost an entire industry concerned, and by extension, it worries many investors. Most of the time, these issues are ultimately resolved through license agreements, and I'm optimistic that HTC will be able to work out a solution with IPCom. But in the event Apple wins an import ban against HTC in a week from today (December 6 is the target date for the final ITC decision on Apple's first complaint against HTC), a license to Apple's core patents may not be available anytime soon. Also, the U.S. market is about three to four times as large as the German one.

The much greater threat that Apple's lawsuits pose is another reason for which I think HTC should put the whole IPCom issue to rest sooner rather than later.

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