On Friday I watched a Motorola Moblity v. Apple hearing in Mannheim and reported that Apple is actually requesting a multiple of two billion euros (the latter is just a yearly estimate), possibly six times that amount, as a bond in case MMi seeks to enforce any ruling that is being or could still be appealed. I also promised a follow-up report on the hearing for the next day, but yesterday the ruling on Apple's motion for a preliminary injunction against Samsung in the US was the more urgent topic. I didn't see any reporters at the Mannheim hearing, so this is likely going to be the only public report anyway.
The hearing on Friday was actually the third one scheduled between Motorola and Apple in Mannheim. Each hearing relates to a different litigation:
Apple's lawyers didn't show up for the first one, resulting in a non-final default judgment against Apple Inc. (the Cupertino-based parent company) and a new hearing date (scheduled for February 3, 2012).
The second hearing took place in mid-November and went very well for Motorola against Apple Sales International, an Apple subsidiary based in Ireland that supplies customers from many countries including Germany.
That Ireland-based Apple entity is also the defendant in the case that was discussed at the hearing on Friday.
Those three German Motorola v. Apple actions are the only ones I'm aware of. It appears that Motorola isn't suing any German Apple subsidiary, which is another indication of the fact that one doesn't necessarily have to sue a local subsidiary. In this case, Apple's request for a substantial bond shows that the enforcement of those injunctions against the Irish organization would have business impact.
Court is unconvinced of the merits of Motorola's case
The outcome of the litigation discussed on Friday is unclear. Motorola may not be able to prove that Apple infringes a valid patent, and even if it did, Apple's FRAND defense might work in this litigation. Let's start with the part concerning validity and infringement.
Motorola claims that Apple infringes EP1053613 on a "method and system for generating a complex pseudonoise sequence for processing a code division multiple access [CDMA] signal". MMI is asserting a system claim (I believe it's claim 16, I'm not 100% sure). Judge Andreas Voß, the judge presiding over this litigation, pointed out in his introductory remark that he and his colleagues have not yet fully understood Motorola's allegations and stressed the complexity of this patent.
It usually bodes well for a defendant if a court struggles to get the message. In case of doubt, the defendant should not be held liable. But between now and February 10 (the date on which the ruling will be pronounced), the court still has a lot of time to reach its conclusions.
The literal meaning of the asserted patent claim is too broad even for this court's taste. It would cover any device that calculates a certain binary code (the pseudonoise sequence, or "PN sequence") that must be suitable for a certain technical purpose (reducing the number of occurrences of a certain technically undesirable event during the radio transmission) if it is used as a key for binary operations. Reducing the number of occurences of that event basically makes for smoother operation. In its literal sense, the patent would turn any generation of such a code into an infringement regardless of the ways in which the code is ultimately used and the input data provided before it is generated. But Judge Voß said clearly that the court aims to identify a more reasonable scope than the literal one. It appears that the court wants to take into consideration the circumstances and purpose of this code generation process.
One important question is whether the code is used for another purpose called spreading, or whether spreading is performed prior or, as it may or may not be the case here, subsequently to the binary operation designed to avoid, not entirely but to a great extent, the aforementioned technical event. It appears that the outcome of the validity and infringement analysis will hinge on this for the most part.
Apple argued that its narrower interpretation would result in a finding of non-infringement of a valid patent while Motorola's broader interpretation would result in a finding of infringement of an invalid patent. There's a prior art contention based on which Apple argues the patent-in-suit would be invalid for lack of novelty. The court showed a tendency to agree with this, though there was also some discussion of a technical or actually mathematical issue in this context that was unclear to me. Anyway, if the court ultimately agrees with Apple "exclusive or" type of logic (the patent is either valid or infringed but not both at the same time), then Apple, then Motorola will definitely lose this case.
What I call an "exclusive or" logic frequently comes up in patent litigation. Broad patents are more likely to be infringed but also more likely to be invalidated. A patent holder needs a patent that's just in the corridor in which it is infringed but cannot be invalidated.
Motorola has until December 23 to respond to Apple's latest pleading (filed a week before the hearing). It can still win this case, but it won't be easy.
By the way, the corresponding U.S. Patent No. 6246697 will be discussed at an ITC hearing (investigation no. 337-TA-745 of Motorola's complaint against Apple) starting on Thursday (December 8, 2011).
Apple made offer to take license on FRAND terms but Motorola demands non-FRAND compensation for past infringement
The patent-in-suit relates to CDMA, which is part of the 3G/UMTS standard. For several years, Apple didn't need a separate license to Motorola's 3G patents until Motorola, in light of the wider dispute between the two companies, terminated one or more license agreements with baseband chipset providers with respect to Apple as the buyer of those chips. This way, Apple cannot argue with exhaustion, and Motorola can sue Apple. In my opinion, this behavior is somewhat questionable from a competition point of view. If Motorola allows a given chipset maker to supply everyone else with a fully-licensed product but excludes Apple, this could be a case of discrimination, and an abuse of standards-related patents as strategic weapons. I have previously said that Motorola's actions may get the attention of the European Commission.
But Apple can't make itself dependent on regulatory intervention and also knows that German courts are receptive to FRAND defenses only under special circumstances.
In the Orange-Book-Standard case, the German Federal Court of Justice held that a defendant cannot succeed with a FRAND defense unless he takes certain steps to procure a license on FRAND terms and to post a bond for the royalties he owes. German courts don't generally find that it's anticompetitive per se to seek an injunction based on a FRAND-pledged patent, but if the patent holder fails to accept a FRAND offer from a would-be licensee, then that behavior constitutes serious enough a competition issue to stand in the way of an injunction.
In order to comply with those rules and avoid an injunction, Apple made an offer and posted a bond. But Motorola rejected Apple's offer, arguing that Apple can't expect to receive a FRAND license for the future as long as the parties haven't agreed on damages for past infringement (the period that started with Motorola's termination of certain agreements with baseband chipset vendors with respect to Apple and would end with the conclusion of a FRAND license agreement). Motorola says that no reasonable licensor would grant someone a license without resolving, at the same time, any disagreement over past infringement.
Motorola says that damages for past infringement must be agreed upon or else Apple won't be licensed going forward. Motorola claims those damages are not subject to FRAND since there would otherwise be an incentive for infringers: if they don't get sued, they get to use the patent for free, and if they do get sued, the maximum rate they pay is FRAND. Furthermore, Motorola doesn't want Apple to retain the right to challenge the validity of the licensed patents.
Motorola's motivation is obvious: it hopes to use litigation in Germany in order to get leverage, through injunctions in such a major market, in worldwide settlement negotiations with Apple. Motorola isn't really interested in those damages: it wants the flexibility to make prohibitive demands in order to preserve its right to seek an injunction.
There's no doubt that Motorola has developed a sophisticated strategy for taking advantage of the exceedingly patent-holder-friendly tendency, and lack of specificity, of the Orange-Book-Standard ruling (which many reasonable people in the tech industry have viewed skeptically ever since it was handed). But there are at least three reasons for which Motorola's strategy might fail nevertheless:
Motorola's termination of license agreements with baseband chipset providers only for the purpose of being able to sue Apple over those patents appears highly problematic to me. It might trigger regulatory intervention and could affect the analysis of this situation by courts. If FRAND patent holders got away with this, those using a certain standard on a fully-licensed basis could be forced out of the market anytime.
Under German competition law, there's also doubt about whether patent holders should be allowed to prevent a licensee from challenging the validity of a licensed patent. In this case, Apple would want to reserve the right to challenge the validity of the patent with a view to past infringement (its offer to take a license for the future is independent from the outcome of any invalidation proceeding or any finding by a court on whether there actually is an infringement). If MMI uses its leverage as a holder of a potentially standards-essential patent to dictate a potentially anticompetitive business term, it can make things worse.
The court, or otherwise an appellate court, may very well realize that Motorola's proposed course of action would allow FRAND patent holders to reduce the meaning of the Orange-Book-Standard to the point of near-uselessness. Without a FRAND framework for damages (even if one agreed with Motorola that damages for past infringement could be potentially greater than license fees), patent holders could make exorbitant demands to derail any negotiations and seek injunctions. And with an injunction, their leverage would be hugely greater than their formal FRAND licensing obligation.
In this particular action, Apple has a decent chance of proving the patent-in-suit invalid and/or not infringed. In any of those cases, the FRAND defense won't even be relevant. But there's another Motorola FRAND patent at issue in another Mannheim action (the one with the default judgment and the new hearing date on February 3, 2012). Regardless of how things play out between Apple and Motorola, the importance of this issue transcends this dispute. Various lawyers who advise and represent other industry players were in the audience and may advise their own clients to try similar tricks. Until there's definitive clarity about this, this issue will resurface sooner or later, and probably repeatedly.
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