Sunday, November 27, 2011

IPCom injunction has potential to force HTC out of German market for years, possibly until 2020

HTC just experienced a Black Friday, literally, with its surrender to patent holding firm IPCom in the form of a withdrawal of an appeal to a German second-instance court. While many observers believe that HTC wouldn't do this if it didn't think that it can avoid negative business impact in Germany, the timing (on the last business day before the appellate hearing, at which a decision might have come down), the circumstances and Germany's rigid legal framework suggest to me that HTC acted out of desperation. It was most likely on the losing track with its appeal.

Its official explanation (claiming that this appeal had become "redundant" due to a parallel nullity proceeding) makes no sense whatsoever. Realistically, there is no near-term window of opportunity for the nullity (patent invalidation) proceeding to affect the enforcement of the permanent injunction. If HTC truly believed that the Federal Patent Court's (BPatG) ruling of December 1, 2010 eliminates the problem, it would have withdrawn its appeal against the infringement ruling shortly after the BPatG decision, not a year later. But that BPatG decision hasn't taken effect because it was appealed (by both sides, in fact) and is now before the Federal Court of Justice (BGH). The BGH won't rule on this for about two years. In the meantime, IPCom can and will enforce.

By comparison, the theory that HTC wanted to avoid a substantive ruling on two other patents from the same patent family, which were granted only during the appeal and injected into the ongoing litigation at that stage, is far more plausible.

Faced with a high probability of being found to infringe two or three patents, possibly as early as Monday (November 28, 2011), HTC picked the slightly -- really only slightly -- lesser evil of enabling IPCom to enforce one patent.

In other words, HTC acted out of desperation but now tries to portray its decision as a confident choice.

What many people are interested in now is how soon, and for how long, HTC's German business will be affected. I've done some more research on this whole situation over the weekend. The short version is that HTC appears very unlikely to be able to block enforcement during the next couple of years; thereafter, if the patent is finally found invalid in its entirety, HTC could solve the problem quickly, but if it survives in part, it might take a few more years to find out whether HTC still infringes it, and enforcement might or might not be suspended while a new lawsuit clarifies that question; and if HTC can't solve the problem at all, it will have to wait until the patent expires in 2020.

HTC will now have to negotiate with IPCom against that background. If it had lost the appeal, two other patents from the same patent family would have been somewhat likely to be deemed infringed, and in that case, HTC would have needed more time to possibly have those patents invalidated. Tough choice, really. IPCom is in a very strong position now to receive a substantial amount of money from HTC. Here in Germany I know and see lots of people using HTC phones, so it is a pretty good market for them.

Business impact is probably just a matter of weeks

Anything can happen, but it's going to be extremely difficult -- if not practically impossible -- for HTC to prevent the near-term enforcement of the Mannheim Regional Court's February 2009 ruling.

That ruling cites the enforced patent claim as it was granted and as it is still found in the patent register. The ruling won't be overturned by an appellate court since HTC withdrew its appeal. Therefore, it's enforceable. Further below I'll discuss what HTC can try to block the enforcement, and why that's unlikely to work out.

IPCom already filed at least one "Bestrafungsantrag" ("motion for punishment") in 2009. It may file a new one any moment. The Mannheim Regional Court will then ensure compliance.

In its press release, IPCom said that business impact would be a matter of weeks, not months. It will take some paperwork, but after HTC's withdrawal of its appeal the Karlsruhe Higher Regional Court no longer has to provide a substantive reasoning. This is just a minor administrative matter that should be processed swiftly.

At this stage, HTC's German resellers, especially some of the major carriers, probably have enough merchandise in their warehouses that they can meet demand for some more time. However, those mobile devices are fast-moving goods, and they are frequently updated (such as to fix security holes). Those supplies won't last too long.

IPCom will have to prove that HTC sells 3G-compatible products. Then the court can impose a fine, and every time that a new violation is shown, the fine gets higher. The limit is EUR 250,000 per violation. (If HTC preferred even the highest fines over compliance, which is very hard to imagine, then the court could also order imprisonment.)

Based on my research, the court is very unlikely to impose low fines just because of the state of the nullity proceeding. The amount of those fines will be commensurate with the scope of whatever violation is shown, and in HTC's case we're talking about a significant business volume.

HTC's 7.5 million euro bond will contribute to IPCom's funding

Ironically, HTC is effectively going to pick up the bill for IPCom's continued efforts.

In order to get the enforcement of the injunction suspended in 2009, HTC had to post a 7.5 million euro bond. IPCom can now collect damages and legal fees against that bond (and against HTC's other property).

Since the enforcement suspension was granted in early 2009, HTC has done a huge amount of business in Germany, so IPCom can demand a substantial amount of money in license fees, and since HTC withdrew its appeal, the "loser pays" system we have in Germany requires HTC to pay all of IPCom's legal fees since the start of this dispute. IPCom could use some of this money to further pursue the dispute with HTC (and others). It doesn't need that money because it's well-funded, but I'm just trying to explain the irony of money going from HTC to IPCom while IPCom spends money to go after HTC.

Why HTC can hardly block enforcement in the near term

As long as HTC's appeal was on the table, the hurdle for blocking enforcement was relatively low. The Mannheim ruling was only "preliminarily enforceable", but it is now definitively enforceable.

Having withdrawn its appeal, there are only two things that HTC can do against the injunction, and the first one is not a near-term option:

  1. HTC could bring a "Restitutionsklage" ("restitution lawsuit") pursuant to Art. 580 of the German Civil Code of Procedure (ZPO) as a means of "resuming" the original litigation in order to get a new ruling based on things that changed since the first ruling.

    My research shows that German courts don't allow "restitution lawsuits" in patent infringement cases until there's a final (not appealed or no longer appealable) ruling on the validity of the asserted patent that declares the relevant claim invalid or results in its modification. The German legal system is designed to ensure that rulings remain in force and effect unless there's a really good reason to take a second look at them. That makes sense, in principle. But it means HTC can't go for "restitution" too soon. The appellate part of the nullity proceeding is going to take about two more years.

    Also, Art. 582 ZPO limits a "restitution lawsuit" to issues that the requesting party was unable to raise in the original litigation, "especially by means of an objection or appeal or joining an appeal". In other words, a "restitution lawsuit" is not meant to be an opportunity for belated arguments, or a substitute for an appeal. Since HTC withdrew its appeal, it can't base a "restitution lawsuit" on anything that it could have raised as part of its appeal. This includes the December 1, 2010 BPatG decision.

  2. The other procedural option is a "Vollstreckungsabwehrklage" ("enforcement defense lawsuit") in accordance with Art. 767 ZPO.

    The scope of an "enforcement defense lawsuit" is limited to objections concerning the remedy ordered by the court (in this case, the injunction against HTC's 3G products), and such objections must be based on facts that came into being after trial.

    There's a reasonably high hurdle for an enforcement defense lawsuit to succeed. Maybe HTC would argue that IPCom acts in bad faith by seeking enforcement. But if that is so, HTC could have presented any such reasons in the appeal. The enforcement defense lawsuit is not meant to be an alternative to an appeal. In this litigation, an enforcement defense lawsuit would have to be brought before the Mannheim Regional Court (since it handed the ruling that is going to be enforced), not an appellate court.

    The BPatG decision is not a suitable basis for an enforcement defense lawsuit because it hasn't formally changed the valid scope of the patent. Even if the BGH affirmed it, it wouldn't be sufficient. HTC would really need the BGH to invalidate the entire patent. Since this is an issue for both possible types of action available to HTC at this stage, I'll explain this separately in the subsequent section of this post.

Before I now go into more detail on what HTC needs to achieve in the nullity proceeding to have a case for a restitution lawsuit or enforcement defense lawsuit at a later stage, I'd just like to reiterate that neither of these two types of action is designed to be an alternative to an appeal. Those types of action serve distinct purposes. HTC didn't take a shortcut, or opt to lose a battle in order to win the war. HTC took a decision that's apparently going to have rather serious consequences, but it probably didn't expect anything good to come out of the hearing scheduled for Monday (November 28, 2011).

Why HTC really needs to prove the asserted patent invalid in its entirety rather than just in part

A "restitution lawsuit" would be a slam dunk for HTC, and an enforcement defense lawsuit might also be an option, in a scenario in which the enforced patent gets invalidated in its entirety at the end of the nullity proceeding. In that case, the enforcement of the injunction would be suspended immediately, and it would be a foregone conclusion that a "restitution lawsuit" succeeds.

But even the BPatG decision didn't find the patent invalid in its entirety. Both sides are still fighting for their vision: HTC and Nokia want the entire patent to be invalidated, while IPCom would like it upheld in its original form (at least as far as granted claims 1, 2 and 11 are concerned), though the way in which the asserted claim would be amended if the BPatG ruling became the final one might also work for IPCom's purposes.

In the event that the BPatG ruling is affirmed, HTC's "restitution lawsuit" would therefore require a more complex analysis. The court would have to look at whether or not HTC's 3G products infringe the modified claim. That analysis would be performed by the Mannheim Regional Court, and could be appealed to the Karlsruhe Higher Regional Court, and potentially (if an important legal question is raised) all the way up to the Federal Court of Justice (BGH). So we talk about a process that takes several more years, and during those years the old injunction might remain enforceable. If the injunction remained enforceable during the "restitution lawsuit", this process would end not too long before the patent expires anyway.

The purpose of a "restitution lawsuit" is to give a party the ruling that it would have achieved in the first place based on new facts. One tricky thing here is different from patent enforcement in the United States: this what-would-the-outcome-have-been analysis would not be limited to the asserted patent claim but also involve claims that the patent holder might have asserted alternatively. In other words, the benefit of 2020 hindsight is given not only to the defendant but also to the plaintiff. Had IPcom known that claim 11 was invalid, it would probably have asserted claim 2 (which it used in a UK action anyway). Claim 2 effectively also survived the BPatG process. While the entire patent was found invalid by a UK court, the BPatG looked at the UK decision and respectfully disagreed. So might the BGH.

Assuming that claim 2 survives the whole nullity proceeding in Germany, I guess HTC still has an infringement problem. In the UK, claim 2 was also (like claim 11) found to be essential to the 3G standard.

Claim 2 basically contains claim 1 with an additional limitation (basically a group of limitations) relating to the concept of a "user class" ("user" in terms of mobile phone users). Claim 11 was an independent claim but had major overlaps with claim 1. However, in the amended version that IPCom proposed to the BPatG (which in turn accepted it), IPCom essentially incorporated the additional limitations of claim 2 into both claim 1 and claim 11. (For my own use and those of my clients who are interested in it, I created a color-coded version of the relevant claims to show the differences between the preliminary outcome of the nullity proceeding and the form in which this patent was originally granted.)

All in all, it's hard to see how anything other than the invalidation of the asserted patent in its entirety would result in a patent devoid of any claim that is essential to the 3G standard.

By the way, in my first post on this matter I already mentioned that IPCom injected into this litigation a divisional patent derived from the originally asserted patent as well as a German patent from the same family. The divisional was also an interesting tactical move by IPCom because it basically took the first two claims of the original patents but narrowed them to the specific use case of a UMTS network. Therefore, the divisional is legally narrower and, as a result, harder to invalidate than the original patent, but in economic terms, it's equally devastating. The divisional and the German patent wouldn't play a role in a restitution lawsuit. IPCom would have to start new proceedings to enforce those. But this shows what HTC was afraid of in the appellate proceeding, in which those two additional patents from the same family were at issue.

Maybe HTC could have persuaded the appellate court to stay the case with respect to the originally-asserted patent for the remainder of the nullity proceeding. But as early as tomorrow (Monday, November 28, 2011), it could have received an unfavorable ruling with respect to those other patents from the same family.

HTC found itself between a rock and a hard place and decided to take the rock. IPCom's patent filing and litigation tactics were too sophisticated. The law firm behind IPCom knows its stuff. Now we may see some kind of cat-and-mouse game as HTC may try to somehow generate revenues in Germany despite the injunction, but in that game, HTC will have to outmaneuver not only IPCom but also Judge Voß of the Mannheim Regional Court. In other words, one of Germany's leading patent law firms and one of Germany's best patent judges are going to ensure that HTC complies.

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