Wednesday, November 30, 2011

David Boies joins Barnes & Noble's legal team in Microsoft ITC case

One of the United States' most famous lawyers filed his notice of appearance on Barnes & Noble's behalf in the ITC investigation of Microsoft's patent infringement complaint: David Boies, the chairman of the Boies, Schiller & Flexner law firm, which happens to be one of the two firms representing Oracle against Google.

Here's an excerpt from his notice of appearance, which was filed with the ITC yesterday and entered the public record today:

Boies joins a legal team led by Cravath, Swaine & Moore, a law firm that is particularly close to IBM (and vice versa), and Kenyon & Kenyon, a firm focused on intellectual property and especially ITC cases. That team has just recently been complemented by two lawyers from Quinn Emanuel Urquhart & Sullivan, a high-profile litigation firm that also represents Google as a third party in this investigation and the three leading Android device makers (Samsung, HTC and Motorola) against Apple as well as Motorola against Microsoft.

In connection with the technology industry, Boies is particularly well-known for his representation of

  • the Department of Justice in the Microsoft antitrust case (in which Boies pushed for a breakup) and

  • his representation of the SCO Group (and still of SCO's bankruptcy estate) in its unsuccessful legal crusade against Linux, which certain members of the open source community claimed was funded by Microsoft.

Outside of IT his most recent high-profile case is the representation of NBA players in the lockout fight.

Microsoft sued Barnes & Noble in March 2011. The bookseller and Android device maker probably doesn't own patents with which it could effectively countersue Microsoft and has been trying ever since to accuse Microsoft of anticompetitive practices in connection with its efforts to resolve Android's alleged infringement of its patents through license agreements.

I guess the primary reason for which Boies is becoming involved is to give this matter a higher profile, but ultimately Barnes & Noble's allegations will be judged on their merits. The ITC staff (the Office of Unfair Import Investigations, which participates in many ITC investigations as a third party defending the public interest) supported a Microsoft motion to dismiss Barnes & Noble's "patent misuse" defense even without any discovery.

In this context, the OUII (ITC staff) pointed out that patent holders do not have an obligation under patent law to grant a license to anyone: they can always refuse to do so. Microsoft, however, appears to be willing to sign license deals with every Android device maker. Recently it announced that 55% of the Android market is now licensed.

Microsoft recently expressed, in a motion filed with the ITC, a belief that there may be a Google hand in Barnes & Noble's defense. I don't know what led Microsoft to think so, but there are indeed only two possible explanations for the huge amounts of money Barnes & Noble's appears to be spending on legal fees in light of the fact that, in strictly financial terms, it's unlikely to recover those fees through lower license fees anytime soon. Either Barnes & Noble's management pursues this as a matter of principle regardless of whether this makes economic sense, which wouldn't be very business-like and therefore appears less likely, or someone else is contributing funds in order to make this litigation reasonably affordable to the embattled company.

Barnes & Noble has complained about the five patents Microsoft is asserting in the ITC investigation. However, Microsoft is also asserting more than 20 different patents against Motorola Mobility, and only one of those overlaps with the Barnes & Noble case. On Scribd you can find a PDF file that visualizes the history of Microsoft's litigation with Motorola Mobility between October 2010 and August 2011, and includes reference lists of the various cases and the asserted patents (pages 15-21). I haven't had time to update that document in almost four months, but it still serves the purpose of showing the diversity of Microsoft patents that are actually being asserted against Android in court. In less than three weeks, an Administrative Law Judge of the ITC will make his initial determination on seven Microsoft patents asserted against Motorola.

While Barnes & Noble has every right to defend itself vigorously, with or without help from someone with a far greater economic interest in this, I'm concerned that some people may be trying to give a fundamentally good thing -- the concept of patent licensing as a constructive solution to infringement issues that spurs competition and promotes innovation -- a bad name without proposing a viable alternative to licensing.

Barnes & Noble argues that Microsoft lost its right to enforce any of its patents against Android due to "patent misuse". In other words, Barnes & Noble takes the extreme position that it doesn't have to pay a cent regardless of whether if it is ultimately found to make use of technologies Microsoft invented and patented. If Barnes & Noble advocated the abolition of software patents, I could see why, but as long as those rights exist, they must be respected. If patent holders are cooperative and reasonable, there isn't a competition issue in my view.

If there's no case, it doesn't matter how famous someone's lawyers may be. I can't think of a better example than SCO.

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Australian appeals court lifts Galaxy Tab ban and restores sanity in patent enforcement down under (which benefits Apple, too)

Earlier today, Samsung succeeded with its appeal against an Australian preliminary injunction banning the Galaxy Tab 10.1 over the suspected infringement of two Apple patents.

Apple might appeal this decision, but local observers appear skeptical of the possibility of the ban staying in force. Realistically, Apple will now have to focus on the main proceeding, which could still result in a permanent injunction. Today's decision only affects the preliminary injunction that was granted (and now lifted) on the fast track. The regular track -- the main proceeding -- will continue.

For Samsung, this is great news, and the Australian subsidiary of the Korean electronics giant has already said that it "is pleased with today's unanimous decision". But this decision is important way beyond the fact that the Galaxy Tab 10.1 is now likely going to become available to Australian resellers and consumers without restrictions. I think it's a decision that restores much-needed sanity in Australian patent enforcement and prevents what could otherwise have become a disaster of enormous proportions. Seriously. If the preliminary injunction had been upheld, Australia would have been the jurisdiction with the lowest hurdle of all jurisdictions I know for any plaintiff seeking to shut down an alleged patent infringer in a fast-track proceeding.

As odd as it may seem, I think that even Apple should actually welcome (even if not publicly) this ruling. Cupertino looks like a loser today, but if that injunction had been upheld, the underlying legal standard, which was just too low, would have come back to haunt Apple down under. In fact, Samsung is asserting patents against various Apple products and requested a preliminary injunction against the iPhone 4S. But there are countless other companies who might have chosen Australia as a strategic battlefield, which in each case would have affected Australian consumers and in some cases could have hurt Apple itself.

I have read today's lengthy ruling in detail and will now share some of my observations, focusing mostly on two issues: the overall standard applied to patent-related preliminary injunction requests in Australia, and the likely outcome of the main proceeding between Apple and Australia with respect to the two patents on which the preliminary injunction was based. Note that Apple asserts several more patents in the main proceeding, but it picked those two for its preliminary injunction request.

Resounding rejection of the methodology and standard applied by the first-instance judge

The appellate decision is very harsh on the primary judge. Even though I believe that it was imperative, from a policy point of view, to raise the bar for patent-based preliminary injunctions well above the standard applied by the first-instance judge, I think she didn't do quite as bad a job as today's ruling suggests. The appellate decision says that "[a]ll that her Honour did was to set out the competing contentions of the parties on infringement and invalidity without assessing those contentions as she was required to do."

In its defense of the original ruling, Apple apparently argued that the judge had in fact considered the probability of the outcome of the final case but (which is not what Apple necessarily wrote, just my interpretation) perhaps not expressed all of her probability assessments clearly in writing. That is also my impression. I think the judge gave quite a bit more thought to this but refrained from taking unambiguous positions in writing on some of this because her overall feeling was that neither party was clearly right.

The mistake she made was that she didn't require Apple to demonstrate a case strong enough to justify the substantial damage a preliminary injunction inflicts to Samsung's short-term sales and longer-term market position in Australia. But that doesn't mean that she failed to do her job of analyzing the factors determining the likely outcome.

The appeals ruling also criticizes her for basically using as a tie-breaker (again, that's just my way to put it) Samsung's initial unwillingness to proceed to an expedited trial ("early final hearing" in Australian terminology). Here's a related passage from today's ruling:

"[...] it is unfortunate that [Samsung's] refusal to adopt that suggestion was to become a significant feature in her Honour's reasons for resolving the dispute in a way which was very unfavourable to that party. [...] we fear that the disinterested bystander may well have suspected that Samsung was punished for failing to adopt the approach recommended by the primary judge."

When I saw that this issue of an expedited trial turned out to be outcome-determinative, I was also wondering for a moment to what extent the judge's disappointment with Samsung's refusal of her proposal could have played a role. However, I doubted that this was an emotional thing. It appeared rather clear to me that the judge was so torn with respect to whether or not Apple had a sufficiently strong case that she was desperately looking for indications of who may be right. By refusing to have an expedited trial, Samsung looked weak. I think the judge also saw that Samsung had previously agreed to two delays of the launch of its product in Australia. All in all, Samsung appeared -- also to me -- to be very afraid of the outcome (to a hugely greater extent, in fact, than I got the impression of the judge being miffed because Samsung didn't accept an early trial).

Apple definitely appeared more confident than Samsung. It's a different corporate culture, different executives, different lawyers. None of that should ever have been a substitute for a stronger set of facts supporting Apple's case.

Samsung became the victim of a dangerously low standard

One of the various legal considerations on which the appellate court totally disagrees with the first-instance judge is that she was overly concerned about a possible "frustration of the Court's process" if she had denied a preliminary injunction, given that the product would have reached, more or less, the end of its shelf life by the time of a final decision (without an expedited trial).

That was the wrong approach, and a dangerous one. The fact of the matter is that Samsung could not have played a cat-and-mouse game with Apple forever. Maybe a decision would have been too late to have much impact on the Galaxy Tab 10.1, but if Apple had proven the validity and the infringement of its patents in court, it would then have been much more reasonable to grant preliminary injunctions against future products showing essentially the same infringement pattern.

The appellate court didn't take my kind of position, but it arrived at the same conclusion:

"We doubt whether the grant of interlocutory relief in the present case avoids frustration of the Court’s process. When one keeps in mind that the Court must seek to do justice to both parties, such a consequence for Samsung can hardly be described as other than a frustration of the Court’s process. In our view, the task facing her Honour was not simply to grant or refuse an injunction. The task was to protect the Court’s process from frustration, as best as could be done in the circumstances, [...]"

The last part means: the judge made it too easy for Apple to frustrate due process by getting a quick decision that was not well-considered and enabled Apple to get, with respect to the Galaxy Tab 10.1, the full benefit even on doubtful grounds.

The appellate decision leaves no doubt that in a case like this, only a "relatively strong case" can justify a preliminary injunction:

"In this case, given that the grant or refusal of interlocutory injunctive relief was going to have the practical consequence of deciding Apple's claims for final injunctions and thus deciding the commercial fate of the Galaxy Tab 10.1, Apple was required to demonstrate a relatively strong case."

Again, looking beyond this particular case, due process and a reasonably high standard for preliminary injunctions is also in Apple's own best interest.

Apple's Australian decision-makers and lawyers had the job to win, and they did what they could to win. They had to argue in favor of a low hurdle for a preliminary injunction in order to win one, just like Samsung had to argue for a high bar. But if Apple had defended the same views in a policy context, it would have made a poor choice.

Implications for impending decision on motion for US-wide preliminary injunction

I always felt that Apple pursued those international cases in no small part for the purpose of creating a more favorable climate for a preliminary injunction in other jurisdictions, especially in the United States.

Now the opposite is the case: the judge in California is likely to hear about today's Australian decision, and even though the two patents asserted in that Australian case are unrelated to the four intellectual property rights Apple asserts in its motion for a preliminary injunction in the United States, this outcome partly contradicts the story that Apple told in footnote 1 on page 1 of its reply brief in support of its motion in California.

Validity and infringement analysis

The appellate court's views on the likelihood of the asserted patent claims being both valid and infringed (anything less wouldn't do) is quite important with a view to the further process. Even though the first-instance judge will be free to arrive at whatever conclusion at the end of the main proceeding, the opinions taken by a higher court will affect her thinking for sure.

I think the course of events resulting from Apple's decision to shoot for a preliminary injunction, which was granted but lifted, has made it even harder (though definitely not impossible) for Apple to successfully enforce those two patents in the main proceeding. The judge won't like to be overruled again, especially if it can be avoided. And there's a significant probability of the appellate court later overturning any infringement finding concerning the two relevant patents.

I discussed those two patents after the injunction was granted.

The appellate court said this about the Heuristics Patent (whose inventors include Steve Jobs):

"On the present state of the evidence we are unable to see that Apple has established a prima facie case of infringement of either claim 1 or claim 55 of the Heuristics Patent."

There appears to be quite some doubt over whether Samsung indeed infringes it. Therefore, the appellate court didn't even have to elaborate on the validity of that patent.

The appeals court is also unconvinced that the Touch Screen Patent is infringed:

"It is sufficient for us to express the view that, on the present state of the evidence, there is a real and substantial prospect that the importation into and supply in Australia of the Galaxy Tab 10.1 will not infringe claim 6 of the Touch Screen Patent. We have referred to a number of difficulties that confront Apple in making good its case on infringement. It may well be that, on a final hearing, Apple will meet these difficulties. But difficulties they are. Whilst we would not be prepared to say that Apple’s case on infringement is not open to be argued, the difficulties to which we have referred do affect the assessment at the present time of the probability that, if on a final hearing the evidence remains the same, Apple will be found to be entitled to final injunctive relief for infringement of that claim. If Apple has established a prima facie case at all (which we doubt), it is founded upon a construction argument which, if the evidence remains as it is, is unlikely to succeed at trial."

The above sounds like Apple has quite some work to do if it wants to prove Samsung's alleged infringement of the Touch Screen Patent.

While the appeals court didn't really have to comment on the validity of the Touch Screen Patent, it nevertheless pointed out that neither of Samsung's two prior art contentions was convincing:

"In our view it follows from that state of affairs that Samsung has not established a prima facie case that the Leeper Article anticipates the touch panel claimed in claim 6 of the Touch Screen Patent."

"Once again it follows that, in the present state of the evidence, and in light of the limited way in which Samsung's case on invalidity has been advanced, no prima facie case has been established that the Mulligan patent application contains a disclosure that anticipates the touch panel claimed in claim 6 of the Touch Screen Patent."

This means Samsung also has some more homework to do if it wants to convince the court of the invalidity of that patent. After I saw the detailed version of the original Australian decision, I also felt that Samsung's prior art wasn't necessarily good enough at this stage. But it seems that Samsung's search for prior art continued.

Permutations and probabilities

Not only did the appeals court believe that the first-instance judge didn't make the necessary assessment of the probability of Apple prevailing at the end of the process but it also disagreed with the judge's approach to the fact that Apple had, in her view, a prima facie case with respect to two entirely different patents:

"As to the question of there being two patents rather than one, we do not see any way in which that can strengthen Apple's case. That consideration says nothing about the construction of the patents for infringement purposes. Whether it has any relevance to the allegation of want of novelty depends upon the assessed strength of that allegation. In the circumstances of this case no weight should be given to the fact that there were two patents."

On this item, I actually tend to side with the first-instance judge. From a statistical point of view, a plaintiff who asserts two unrelated patents against the same product with a given probability of success is, all other things being equal, much more likely to prevail on at least one of those patents than one who asserts only one patent of that probability -- provided that the aforementioned probability is sufficient.

If the appeals court says that there's "[no] way in which that can strengthen Apple's case", it appears to defy mathematical logic at first sight. Maybe the appellate court just wanted to say that this is not a substitute for a probability assessment with respect to each patent on its own. That would make sense. Even 100 patents of a low probability of success wouldn't matter. Also, the problem is that if a preliminary injunction is based on multiple patents, it becomes even harder for the defendant to engineer around those two or more patents, but if there had been two separate lawsuits over those patents, maybe none of the patents would have been deemed valid and infringed if the argument that two or more patents might be infringed justifies an injunction.

If one considers the workaround challenge, the logic of the first-instance ruling was basically that someone who is reasonably likely to be found to infringe at least one patent deserves to be punished, even if that punishment may go too far because it relates to both patents at once. It's possible that this approach is also part of what the appellate court rejected. But I can see why the first-instance judge felt that in a balance-of-hardship context, an increased likelihood of Samsung having committed at least one infringement could be a (minor) factor.

Generally speaking, the right approach for courts in these cases would indeed be to look at this in terms of permutations and to draw up a probability tree. I don't mean to say that the rulings should include such a diagram (that would be unusual), but it would be a useful exercise for the courts to do this for their own purposes and maybe there are many judges who do this (but obviously wouldn't talk about it).

Neither the original ruling nor the appellate decision present a probability assessment clearly based on the combined probability of a given patent claim being both valid and infringed (only that combination counts), or the combined probability of multiple attacks on a given patent. For example, in the context in which Samsung presented two pieces of prior art, it's possible that neither one appeared likely to succeed on its own, but if both were somewhat likely to succeed, Samsung might be reasonably likely to prevail with just one of those, which is all it would take to defeat the patent.

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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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Tuesday, November 29, 2011

Motorola not allowed to attack iPhone 4S, iCloud and iTunes in ongoing litigation in the Southern District of Florida

Today the United States District Court for the Southern District of Florida granted an Apple motion to strike Motorola Mobility's supplemental infringement contentions, i.e., accusations of infringement that Motorola brought into the game at a rather late stage.

Motorola filed those contentions on October 28, 2011. The document didn't enter the public record, but Apple filed a motion to strike, Motorola replied to it (too late), and the court issued an order. From the pleadings, I've gathered that Motorola's supplemental contentions not only raised new issues with respect to certain originally-accused products but also brought three new products into that lawsuit: the iPhone 4S, the iCloud, and iTunes.

In its (belated) opposition brief, Motorola Mobility said that "[i]f the motion to strike were granted [as it now has been], Motorola seemingly would have to file an entirely new case against Apple to claim that these products infringe exactly the same patents at issue here". MMI furthermore complained that it "would risk having its new case heard before a new Court lacking in familiarity with claim construction principles or the technology at hand—in other words, Motorola would have to present its case all over again, and risk an inconsistent verdict on claim construction and other legal and factual questions".

We will see what the outcome of this litigation is. The trial is scheduled for August 2012. There are ways in which rulings concerning the infringement of a given patent with a given kind of technology can also affect more recent products. It's possible that MMI somewhat overstated the impact of Apple's motion to strike, but there's no doubt that it would have been in MMI's interest to inject those new issues into this ongoing litigation.

While today's court order is favorable to Apple's interests, previous case management orders worked out better for MMI. In particular, Apple couldn't get this Southern Florida lawsuit transferred to the Western District of Wisconsin, and, more recently, the court denied an Apple motion to stay this litigation pending the consummation of Google's proposed acquisition of MMI.

With respect to the ability of a party to attack new products at a late stage in a lawsuit, there are clearly differences between the various jurisdictions in which those two companies are litigating. In Mannheim, Germany, injunctions are typically phrased in a way that does not name particular products. Apple is still trying to convince the court that the iPhone 4S does not infringe two Samsung baseband patents, and the judge is willing to take a look at a brief that Apple will file until December 23. Motorola, however, appears fairly likely to win an injunction against Apple in Germany that will probably affect the iCloud.

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Apple asked German court to ban Galaxy Tab 10.1N, hearing scheduled for December 22

In recent months, Apple won preliminary injunctions in Germany against three different form factors of Samsung's Android-based tablet computer: the Galaxy Tab 10.1, the Galaxy Tab 8.9, and the Galaxy Tab 7.7. And Cupertino is now shooting for its fourth German Galaxy Tab injunction:

Dow Jones Newswires reports that Apple has filed a motion for a preliminary injunction against Samsung's Galaxy Tab 10.1N, and the Düsseldorf Regional Court has scheduled a hearing for December 22, 2011.

The Galaxy Tab 10.1N has the same technical specifications as the banned Galaxy Tab 10.1, but a different design that appears to have been created by Samsung's designers in close collaboration with their German lawyers.

Quite apparently, Apple believes that Samsung's design modifications didn't go far enough. Presumably, Apple will argue on the basis of both a design-related right (a so-called Community design) and rules against unfair competition. Apple did both of that in the summer, but after the court found Apple's asserted Community design infringed, it didn't have to analyze Apple's unfair competition claims. I think there's a greatly increased likelihood that those competition claims will be discussed at the December 22 hearing.

Without a doubt, Samsung will have filed a "Schutzschrift" ("protective pleading"), a document that enables a party expecting a motion for a preliminary injunction from a rival to prophylactically inform the court of its legal position. Samsung also did that in the summer, but based on what I heard from attendees of the hearing and read in a press release issued by the court, that pleading was presumably not too useful. It apparently failed to raise some important arguments. However, I'm sure Samsung's lawyers did a better job this time around.

I don't think the outcome of the December 22 hearing is predictable in any way. Samsung clearly upped the ante with its modified design, but even the 10.1N still makes a very iPad-like impression, at least based on the pictures I saw. Anything can happen. From a tactical point of view, it would make sense for Samsung to take a certain calculated risk and find out where the court draws the line. They wouldn't have launched the 10.1N if they didn't see a decent chance of this one being approved by the court, but if it takes them yet another iteration (or more than one) to get to the point of legal certainty, it's worth it with a view to future product generations.

Conversely, it also made a whole lot of sense for Apple to attack the 10.1N. Apple, too, needs clarification from the court as to what falls within the scope of its exclusive rights and what doesn't.

In order to have any chance of winning a preliminary injunction in Germany, it's generally recommended to bring a complaint within one month of acquiring knowledge of an actual or impending infringement. Some courts, including the Düsseldorf Regional Court, are more flexible and will consider extending that period to eight weeks or even beyond (in exceptional cases), but a plaintiff taking more time than four weeks will have to show good cause. Apple is clearly within the four-week window in this case anyway. With the original Galaxy Tab 10.1, Apple took more time.

Only two days before this hearing on the Galaxy Tab 10.1N, the Düsseldorf Higher Regional Court -- the appellate court right above the Düsseldorf Regional Court -- will hold a hearing on Samsung's appeal against the original Galaxy Tab 10.1 injunction. That first hearing could influence the second one in Samsung's favor. Should the appellate court throw out the original injunction, then the Galaxy Tab 10.1N should be fairly safe. But I think Samsung is more likely to defend the 10.1N than to successfully appeal the ruling on the 10.1.

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Apple and Motorola each filed a pre-hearing brief of more than 800 pages with the ITC

On December 8, 2011 (Thursday of next week), the hearing in the ITC investigation of Motorola's October 2010 complaint against Apple will (finally) start. Unlike district court trials, ITC hearings mark only about the middle of the process. A couple of months after the hearing, the Administrative Law Judge (ALJ) makes an inital determination, and a review by the Commission (the six-member decision-making body at the top of the ITC) typically takes several more months. Nevertheless, an ITC hearing is an important milestone, especially (but not only) for the presentation of testimony.

Both parties have filed their pre-hearing briefs. As a result, ALJ Thomas Pender feels overwhelmed and inundated, and I can see why. In an order entered yesterday, he notes that "[t]he parties in this investigation have each filed a pre-hearing brief in excess of 800 pages" and reminds them of the fact that he has "scheduled only six days for this hearing (not including Dec. 8), which leaves roughly three days each for [Motorola] and [Apple] to put on their cases". The ALJ asks, quite unerstandably, "how the parties can expect to prove the arguments set forth in such breathtakingly large briefs under such time constraints", and he furthermore stresses that they cannot "expect that [he] can review and make sense of the over 1600 pages of briefs (not including the supporting documents) in preparation for the upcoming hearing".

More than 800 pages per party without supporting documents is really huge. But I have seen initial determinations by ALJs that were also hundreds of pages long, not including attachments. Those are complex cases, and in this particular investigation, there's a whole lot at stake.

As I write this, Apple's and Motorola's lawyers are presumably working on executive summaries of their briefs, which the ALJ ordered them to file on or before December 1 (Thursday). Each executive summary has a page limit of 50 pages.

The order also recalls that Motorola recently moved to drop one of its six originally asserted patents (U.S. Patent No. 5,359,317 on a "method and apparatus for selectively storing a portion of a received message in a selective call receiver". But this is still a huge case.

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Apple won preliminary injunctions in Germany against three different Galaxy Tabs

The preliminary junction that the Düsseldorf Regional Court granted Apple against the Galaxy Tab 10.1 on August 9, 2011, became known that same day. Less than a month later, Samsung was forced to remove the Galaxy Tab 7.7 from a trade show booth, a fact that was attributed to a separate injunction. What was not previously known is the fact that Apple also obtained a preliminary injunction against the Galaxy Tab 8.9.

That information was revealed late last night when Apple filed, with the U.S. District Court for the Northern District of California, a redacted version of its September 30, 2011 reply to Samsung's opposition to Apple's motion for a US-wide preliminary injunction. Here's footnote 1 of that filing (click to enlarge):

That footnote also references the preliminary injunction Apple won in the Netherlands against three Samsung Galaxy smartphones and the dispute that resulted in an Australian preliminary injunction two weeks after Apple's reply brief.

I said a few months ago that Apple was collecting those international victories (not only, but to some extent) as trophies in order to make it psychologically and politically easier for an American court to grant a preliminary injunction as well. The fact that Apple highlighted those international achievements in footnote 1 on page 1 of its reply brief in the U.S. lawsuit confirms this assessment.

Interestingly, the jury is still out on the actual business impact of those foreign preliminary injunctions:

  • In Germany, Samsung has meanwhile launched the Galaxy Tab 10.1N, a redesigned version that may (or may not) work around Apple's asserted design-related right.

    On December 20, there will be an appellate hearing on the original preliminary injunction, but the more interesting question at this stage is whether Apple will also attack the 10.1N.

  • The Dutch injunction didn't take immediate effect. Samsung had enough time to modify its operating software. As a Samsung Galaxy user, I, too, noticed the change as a result of an update, but I doubt that many "average users" (average in terms of not being particularly interested in patent issues) even took note.

  • On Friday, an Australian judge heard Samsung's appeal and indicated that the injunction may be lifted over concerns that the initial decision "looks terribly fair to Apple and not terribly fair to Samsung".

Apple may very well win a preliminary injunction of some scope

It's difficult to estimate what the decision in California will be, and when it will come down. Two weeks ago I already wrote that the decision appears overdue (it certainly does now, approximately seven weeks after the hearing), but I also said that it's not possible to conclude from the delay what the inclination of the judge may be.

I looked at the redacted versions of Apple's reply brief and its exhibits. Despite tons of missing information, my overall impression is that Apple is not at all unlikely (though very far from certain) to win a preliminary injunction in the United States. At the October 13 hearing, Samsung's own lead counsel had problems telling a Galaxy Tab from an iPad at a certain distance, which impressively supports any theory of confusing similarity. I also feel that a few of the things that Samsung's own experts said in their depositions are useful ammunition for Apple. There may be validity issues with some of Apple's asserted design patents, but if the judge concludes that one or more of those are valid, then I think Samsung is in trouble because Apple has a strong infringement case here and Samsung's public interest argument (including the public interest statements Verizon and T-Mobile submitted) doesn't appear too convincing, even more so since the passage of time has reduced the relevance of all Christmas Selling Season-related arguments (the most important shopping weekend, Thanksgiving Weekend, was last weekend).

Yesterday, Judge Lucy Koh was quite active. She entered several administrative orders. I sense we're now really very close to a decision.

If Apple wins, what remains to be seen is whether Samsung can design around the scope of an injunction like it tried (and possibly succeeded) in Germany. For example, the Galaxy Tab 10.1N might also have to be considered non-infringing under US law.

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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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Monday, November 28, 2011

HTC claims it has engineered around IPCom patent enforced in Germany

I have obtained a new statement from HTC on the IPCom injunction in Germany. While it contains a claim I didn't find plausible in HTC's immediate reaction, one that misrepresents the scope of the injunction and another one that misrepresents the legal dynamics of how the injunction re-enters into force, its final sentence claims that HTC has worked around the asserted patent, which would make a fundamental difference in HTC's favor if true. But for the time being I'm also somewhat skeptical of that claim, given that the Mannheim court stated in another ruling that the related feature is a mandatory part of the 3G/UMTS standard.

I'll quote HTC's new statement sentence by sentence and comment right below each sentence:

"On November 25, 2011, HTC withdrew its appeal in the IPCom EP1186189 case, finding that the appeal had become redundant since the German Federal Patent Court had previously held the relevant claim of the patent to be invalid."

As I explained in my previous posts, the Federal Patent Court (BPatG) ruling they refer to was handed on December 1, 2010. It hasn't taken effect since (due to appeals by both sides), and it won't for approximately another two years (the estimated remaining duration of the appellate proceedings). That's why "redundant" doesn't make sense. If HTC had considered the appeal against the infringement ruling a waste of time and money, it would have withdrawn its appeal shortly after the BPatG ruling, i.e., almost exactly a year ago.

A withdrawal so shortly before the hearing means to me that HTC was afraid of its expected outcome.

"IPCom's original injunction covered only one HTC handset, which is now obsolete and is no longer sold in Germany."

This is downright unbelievable. It contradicts not only the court ruling but also HTC's own interpretation of that ruling in a filing with the Taiwan Stock Exchange back in March 2009, issued right after the injunction was formally served on HTC. In that filing, HTC said that "[t]he court ruled that HTC products are infringing on the specified patent" and "[o]nce effective, the injunction will prevent HTC from selling or importing its mobile devices into Germany".

I previously published the injunction as well as an English translation provided to me.

The injunction is absolutely positively NOT related to any particular product. Instead, it relates to all HTC phones implementing the 3G/UMTS standard. You can verify this if you look at the "reasoning" ("Entscheidungsgründe") part of the ruling. It explicitly refers to mobile phones (plural), makes it clear that IPCom argued based on the UMTS standard, and the ruling refers, on multiple occasions, to what the standard requires.

A particular HTC product, the "T-Mobile MDA Touch Plus", is referred to as the "attacked embodiment", but only as an example shown to the court, as opposed to a strict limitation of the scope of the litigation. Under German law, it's key to show an actual or impending infringement in order to enable the court to take action for the purpose of eliminating the risk of repeated infringement.

Besides the language of the ruling it's also important to take into account the amount of the bond. HTC was required to post a 7.5 million euro bond in exchange for a suspension of the enforcement pending the appellate proceeding. That amount corresponded to approximately 3.5% of HTC's revenues for an 18-month period (the standard duration of an appeal) based on HTC's German 2009 revenues of 180 million euros (in 2011, HTC's German business is more likely to amount to somewhere between 250 and 300 million euros, if not more, but the bond was determined based on 2009 revenues).

"Furthermore, HTC has modified its implementation of the UMTS standards, so even in the unlikely case that the Mannheim court reinstates an injunction, it will have no impact on HTC's sales in Germany."

This is the workaround argument I mentioned at the outset.

HTC can try to tell the court that its current products don't infringe anymore. If the court believes that argument is reasonably likely to be meritorious, then this could result in substantial delays, but if the court doesn't buy this, then it won't help much.

Given that the same judge had based his ruling largely on the specifications of the 3G/UMTS standard, HTC will have to come up with very convincing non-infringement arguments.

And the very same judge, Andreas Voß, ruled on an IPCom lawsuit against Nokia on February 18, 2011, relating to the divisional patent I mentioned in my previous posts on the IPCom/HTC dispute, and stated the following on the very same infringement claims raised by IPCom (at this stage I'm not authorized to publish the decision as a whole, but I can show this section):

A quick summary: the first sentence says that the court disagrees with the defendants' denial of the mandatoriness ("Verbindlichkeit"), and characterization as a "mere implementation proposal", of a drawing in the UMTS specifications that describes the relevant technology. You may also take note of the expression "[d]er zwingende Charakter", which means "the compulsory nature".

What furthermore calls into question the viability of a workaround is the fact that HTC already announced in its aforementioned March 2009 statement that it was "working with its chipset supplier to identify an alternative solution". HTC would have had every opportunity to present a workaround to the Karlsruhe Higher Regional Court during the appellate proceeding. It could have shown one today at the hearing, which was canceled only because HTC surrendered.

IPCom's CEO told German news agency dpa that HTC is making a "massive attempt to mislead the general public"

Today IPCom announced that it has sent a formal notice to HTC demanding an immediate halt to the sale of all of its 3G-compatible smartphones (in other words, all of its smartphones) in the German market. Should HTC fail to comply, IPCom will ask the Mannheim Regional Court on December 5 to impose sanctions.

In its report on the latest escalation of this dispute, German news agency dpa (Deutsche Presse-Agentur) quoted Bernhard Frohwitter, IPCom's CEO, as saying that IPCom considers HTC's statement quoted above "a massive attempt to mislead the general public". He stressed that the patent is valid as granted (the nullity proceeding hasn't been concluded yet) and that the ruling is "absolutely unambiguously comprehensive in scope" as opposed to limited to one particular patent as HTC claimed.

In light of the court-established essentiality of the relevant invention to the UMTS standard, IPCom believes it is "very, very hard" to work around.

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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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