Wednesday, November 30, 2011

HTC's most detailed statement to date on the IPCom situation

Yesterday, Reuters obtained a confirmation from a court spokeswoman of IPCom's ability to now enforce a 2009 ruling against HTC, and meanwhile HTC has issued its most detailed substantive comments on this situation.

I think it's great that HTC now talks about this in far more specific terms than in its first two sets of comments. It's important that both sides of the argument explain their views in public so that independent third parties like me can form an opinion. While I still disagree with some of HTC's representations, this is not a black-or-white situation at all and the immediate impact of the enforceability of the 2009 ruling is really a function of HTC's willingness to take certain risks (which is part of life, and especially part of business). I continue to believe that they should try hard to settle this in the very near term, but then my nature is risk-averse.

I am particularly happy to see that HTC's new statement effectively confirms the theory I presented right on Friday (when news of HTC's withdrawn appeal broke): the withdrawal was a tactical move on HTC's part to avoid a ruling on two other patents from the same patent family than the one that IPCom is now allowed to enforce. HTC's new statement talks a lot about those two patents and why it was good for HTC and bad for IPCom to prevent the appellate court from ruling on them.

But it would have been better if HTC could have been more forthcoming from the start. The news on Friday didn't strike them unexpectedly. They had made a conscious decision to withdraw their appeal, so they had plenty of time to prepare their initial statement.

Also, by avoiding a ruling of the Karlsruhe Higher Regional Court on the #100A patent, HTC doesn't stall the process for too long. On March 22, 2012, the Düsseldorf Regional Court will hold a hearing on IPCom's complaints against T-Mobile and Vodafone -- Germany's two leading carriers and almost certainly HTC's two largest German customers -- relating to that particular patent.

"There have been a lot of claims made by IPCom over the last few days and we want to set the record straight. While IPCom has continued to try to position recent events as a win for them, the events actually represent a setback for IPCom and their efforts to provide returns to their investors."

I don't think the word "setback" is applicable here. If the appellate court had agreed with HTC and thrown out the ruling, that would really have been a setback for IPCom. If the appellate court had decided to stay the case for a couple of years, it would at least have been a setback in terms of a stalled process. But if HTC had been confident of its chances of winning the appeal or getting a stay, then it would have done just that. Howveer, it withdrew its appeal on the last business day before the decisive hearing. At that stage, it had already made 99% of the effort that the whole appeals process required. HTC only had to send a few lawyers to a court session of a couple of hours to get a decision, and didn't want to.

The fact of the matter is that HTC felt forced to make a move that has provided IPCom with a fully enforceable court ruling. That ruling entitles IPCom to various things, and quite importantly, HTC now has to provide all of its sales reports in Germany (regardless of whether products are technically infringing or not) to IPCom. And IPCom is now in the driver's seat as far as the enforcement of the injunction is concerned. Even if HTC ultimately convinced the court that its current products are no longer infringing, the price for that may be high. The price may be non-compliance with the 3G/UMTS standard and a loss of all FRAND licensing commitments and license agreements tied to full conformity to the standard.

"They are currently leaning on a weak finding from 2009 for which HTC has a design around that does not fall within the claim of the patent as it was defined by the Mannheim Court."

What they call a "weak finding" is now a legally enforceable ruling. If they mean "weak" in terms of HTC being able to work around the technical scope of the ruling, one can have doubts about it. In particular, HTC could have presented a workaround to the appellate court, but somehow wasn't willing or able to do so.

"HTC remains convinced that this case will have NO material impact on our business."

I don't want to dismiss such statements too easily. As a publicly-traded company, HTC has a duty to inform actual and prospective shareholders accurately, and some lawyers must have provided them with a statement based on which they can go out with this "NO material impact" claim.

I try not to underestimate HTC. It's a very successful company so far, even though they are now facing significant challenges (which they appear to be quite aware of and ready to tackle).

A claim of "NO material impact" could also mean that they are determined to address the problems presented by this particular ruling and weaken their entitlement to FRAND licenses to UMTS-essential patents not only from IPCom but also from other parties. In that case, the business impact could be quite material, but it would be an indirect effect.

"The facts remain:

  • Had HTC continued with the appeal of the #100 patent, it is unlikely the Karlsruhe Court of Appeal would have reinstated an injunction based on the #100 patent given that the claim of the patent had been found invalid by the FPC, and that IPCom had conceded during the appeal that the amended claim was not infringed."

For the first part of the "facts" section, this is not a good start. They somehow try to still justify what they said in earlier statements, even though they now make other, more credible points as well.

The asserted patent claim was not found "invalid" in its entirety. It was found valid in a modified form, and while the modified version contains additional limitations, those additional limitations were copied over from another patent claim that a UK court considered essential to the UMTS standard. The modification of the claim in the invalidation proceeding wouldn't have rendered the 2009 ruling useless: there would simply have had to be another analysis as to whether there's still an infringement, or whether IPCom could have prevailed over another claim of the same patent.

I think what HTC might indeed have achieved with respect to the originally-asserted patent is that the appellate court might have stayed the case with respect to that patent for the duration of the invalidation proceeding.

Concerning IPCom's alleged concession "during the appeal that the amended claim was not infringed", it would be helpful if HTC could present any document that shows this. If HTC had allowed the appellate court to decide, then the ruling would have mentioned this, but HTC didn't want that ruling to come down.

  • "The UK part of the same patent (having the same claim) was found invalid by the English Court in the corresponding Nokia case and revoked in its entirety. IPCom did not appeal the finding of invalidity but sought to amend the patent on appeal – a tacit acceptance that patent claim as granted was invalid."

The German Federal Patent Court was provided with a copy of the UK ruling and commented on it but respectfully disagreed.

And again, as far as the near-term enforcement of the 2009 ruling is concerned, the pending invalidation proceeding in Germany won't have any effect for the next two years or so.

  • IPCom is now seeking to enforce rights in a patent claim that it knows to be invalid.

Again, this claim doesn't help HTC in the slightest.

"Despite almost four years of litigation, IPCom has failed to achieve one significant victory against Nokia or HTC and failed to secure any damages."

Patent litigation takes time and has a high drop-out rate. For example, Apple and Nokia were suing each other for almost two years before they settled, and at that stage, neither party had scored any victory of any kind, no matter how small. All of the cases were still pending at that stage, and to the extent that any preliminary ITC determinations had been made, those proposed the dismissal of the related complaints.

I think IPCom's perseverance is very frustrating for HTC.

The sentence quoted above does not take into account that IPCom is now indeed entitled to damages based on the 2009 ruling. Ultimately, injunctions are the leverage a patent holder needs, not damages -- especially in Germany. But this is a demonstrably false claim. IPCom will receive some money based on the 2009 ruling now, and HTC was required (back in 2009) to post a 7.5 million euro bond.

"On the contrary, IPCom is liable to both HTC and Nokia for substantial sums in legal costs resulting from its many losses."

In terms of what's going to decide the outcome of this dispute, injunctions are at least 100 times more important than damages, let alone legal fees. It seems that IPCom has licensing income from other companies who decided to pay up, and it's using that money to pursue its many lawsuits. That may be very frustrating for HTC, but it's not going to be a solution.

IPCom is funded by a private equity fund. If HTC hoped that IPCom's investors will lose their patience and shut down the operation, they would probably misassess the situation. Even if Fortress, the private equity fund that financed IPCom, thought this was taking too long and wanted to exit from this investment, they would simply sell their shares to some other buyer who might invest in even more aggressive enforcement activities. HTC should ask itself what would happen if Apple bought IPCom...

"1. Actions under the so-called #173 and #006 patents were dismissed by the Mannheim court, actions under the #44, #90#, #99, #120 were withdrawn by IPCom because the cases were unsustainable, actions under #28 EP, #28DE, #107 and #100Utility Model are stayed pending resolution of respective validity proceedings."

I will over time check on those other cases as well. I do know that some of IPCom's actions went nowhere, but like I said further above, that's the way the patent enforcement business works. So far it's not clear that IPCom's portfolio is unusually weak, and if cases are stayed, it just means a delay and not that IPCom is necessarily wrong.

HTC actually knows very well what it's like when you bring patent infringement claims and lose. To the extent that HTC's and S3 Graphics' initial complaints against Apple have been decided so far, none of the nine asserted patents yielded a result. Nevertheless HTC keeps defending itself against Apple (as it should).

The problem for HTC -- and any other defendant, for that matter -- is that IPCom has more than 1,000 patents from about 160 patent families. They won't get enforceable, non-appealable rulings overnight. They will take some hits and suffer some setbacks. But they don't need a huge number of wins to be in a position to command very significant royalties.

"2. IPCom's 'victory' over HTC under the #100 in the District Court of Mannheim in 2009 can hardly be called a victory when the patent claim found to be infringed by the court was subsequently found invalid in the Federal Patents Court. HTC is confident that the German Supreme Court will ultimately uphold this finding."

I explained in previous postings that the invalidation proceeding won't affect the enforceability of the 2009 ruling for at least a couple of years, and in my opinion, HTC is likely to continue to have a problem with enforcement even after that process unless it can achieve the complete invalidation of the #100 patent (all claims), which would be a much bigger win for HTC than the outcome of the Federal Patent Court case.

"3. IPCom might also claim a victory in the so-called #100a (divisional of the #100) against Nokia in the District Court of Mannheim and the English High Court. However, these decisions are currently under appeal, and at the same time the UK court found six alternative implementations of the UMTS standard not to infringe the #100a patent."

I commented on that UK case in detail in yesterday's post on IPCom/HTC.

While it's true that the UK court held six implementations to be non-infringing, it's unclear on which scale those were ever incorporated into actual products. The court also refused to take a definitive position on the compliance of those implementations with the official UMTS specifications. IPCom wanted the court to make a declaration on (non-)conformity, but the court held that IPCom wasn't entitled to a decision on that matter.

  • "HTC is respectful of the intellectual property rights of others and has concluded licences with many other essential patent owners. However, HTC considers IPCom's royalty demands to be disproportionate and unjustifiable given the weakness of the patents in its portfolio and the minor importance of the associated inventions to the UMTS standards"

I don't want to be too nit-picky, but the word "other" before "essential patent owners" is actually an admission that IPCom does hold essential patents.

That said, it's true that HTC has done license deals with others in the industry, not only other handset makers but also Microsoft. I, too, wouldn't claim that HTC are generally reckless infringers. However, I wonder why HTC doesn't make a legally binding, irrevocable offer to IPCom to take a license based on a FRAND royalty rate, leaving the determination of that FRAND royalty rate to the court if the parties cannot reach an agreement. Under German law, HTC could do so while still denying that IPCom's patents are valid and infringed. The FRAND royalty rate would ultimately have to be reflective of that.

The 2009 Mannheim ruling says that HTC offered to take a worldwide, perpetual license to all IPCom patents -- the FRAND-commmitted ones as well as all others -- in exchange for a one-time payment of $10 million. Judge Voß, however, held that IPCom rightfully rejected that offer since it involved patents with respect to which IPCom did not have any FRAND licensing obligation at all.

Between IPCom and HTC it's hard to see that IPCom is a FRAND abuser, at least based on what's in the official documents.

"IPCom's current strategy is one of desperation because it has been legally outmanoeuvred. It made a significant tactical mistake by introducing the #100a and #100DE directly into the appeal proceedings and now has to start from scratch with those patents in one of the German district courts."

In my understanding, IPCom had to introduce the #100A (divisional) and #100DE patents into the appellate proceeding due to Article 145 of the German Patent Act (PatG), which requires a patent holder to assert all patents from a given family in the same proceeding if there's a procedural possibility to do so. Those patents were granted at a time when the case was on appeal, and IPCom therefore injected them into the process. If IPCom had not done so, it would have risked its ability to assert those patents against HTC.

It looks like HTC is on the run, especially from the #100A patent. But it doesn't gain much of a reprieve. On March 22, 2012 the Düsseldorf Regional Court will hold a hearing on IPCom's lawsuit against T-Mobile and Vodafone -- Germany's two leading carriers and almost certainly HTC's two largest resellers in this country -- over that patent.

IPCom is suing those companies over the sale of HTC's products, and HTC is an intervenor in those cases.

"We reiterate our position that the original injunction relates to only one, now-obsolete, handset. HTC's position is supported by earlier rulings of the Court of Appeal in Karlsruhe in other related IPCom cases."

I addressed this in a previous post and pointed to HTC's March 2009 statement to the Taiwan Stock Exchange, which contains a clear admission that the ruling would affect all of its mobile phones.

  • "We reiterate our position that we have an alternative implementation of the standard in place, which does not infringe the interpretation given to the #100 patent by the Mannheim Court ."

I had previously talked about this. They announced a non-infringing implementation in early 2009 and have yet to show it. Once they do show something to the Mannheim Regional Court, it remains to be seen what the court finds and whether such an implementation is still compliant and compatible with all UMTS networks.

  • "These two points will now have to be argued before the LG Mannheim if IPCom initiates its ‘Zwangsgeldverfahren’."

That is correct, and there may be a really interesting hearing in Mannheim in about six months.

  • "Based on comprehensive legal advice from some of the best patent lawyers in Germany, HTC is confident that District Court of Mannheim, will find in its favour. Meanwhile, HTC has planned for all contingencies."

Actually, I saw various court documents that indicate that IPCom also works with some of the best patent lawyers in Germany, including a major global player. Ultimately, the court will decide based on the merits, and in the coming months I believe there will be some interesting developments on this front.

But there could also be a settlement anytime.

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