Tuesday, January 31, 2012

ITC throws out Barnes & Noble's antitrust claims against Microsoft ahead of trial: no signs of wrongdoing

Barnes & Noble's primary line of defense against Microsoft's allegations of patent infringement by the bookseller's Android-based devices has collapsed in its entirety. An Administrative Law Judge at the ITC today granted a Microsoft motion to dismiss, even ahead of the evidentiary trial that will start next Monday (February 6), Barnes & Noble's "patent misuse" defense against Microsoft.

The detailed order is not publicly available, but the headline of the following docket entry leaves no doubt at all about the outcome (click on the image to enlarge):

Here's the headline again:

Initial Determination Granting Microsoft's Motion for Summary Determination of Respondents' First Affirmative Defense of Patent Misuse

"Initial Determination" is the term for a decision by an Administrative Law Judge. It can be reviewed by the Commission, the six-member decision-making body at the top of the ITC, but I haven't recently seen an ITC review of any ALJ order comparable to this one (findings of violations are a different story). The ALJs are really the masters of this stage of the investigation.

Prior to the ALJ, the ITC staff -- or more precisely, the Office of Unfair Import Investigations (OUII), which participates in many investigations as a third party representing the public interest -- already supported Microsoft's motion all the way. The OUII basically concluded that even if all of what Barnes & Noble said about Microsoft's use of patents against Android was accurate, it would fall far short of the legal requirements for a patent misuse defense. For example, Barnes & Noble claimed that Microsoft asked for excessively high patent license fees, but the OUII quoted passages from U.S. law (statutory as well as case law) that clearly said that patent law doesn't require a patent holder to grant a license on any terms. I quoted from the OUII document here. (FRAND-pledged standards-essential patents are a different kind of issue because they raise issues under competition law, starting with the standard-setting process itself.)

Today's decision is important in multiple ways (the order of the items below is not meant to indicate any prioritization):

  1. Barnes & Noble bet heavily on its patent misuse defense. It stressed this one by making it its First Affirmative Defense, and it invested heavily. It even brought former Microsoft antitrust foe David Boies on board. Based on today's order, Mr. Boies is very unlikely to get to complete any unfinished business he may have with Microsoft. More importantly, it's hard to see how Barnes & Noble can gain serious leverage against Microsoft. It doesn't have any such thing as a significant patent portfolio that it could use. Playing the "antitrust" card was its only chance to bring any counterclaims at all.

  2. Barnes & Noble also complained to the United States Department of Justice, an antitrust regulator, about Microsoft's patent assertions against Android. Like the DoJ, the ITC is a U.S. government agency. If Barnes & Noble failed to meet the ITC's requirements for a valid legal theory and for evidentiary support, it's also unlikely to impress competition enforcers. At this stage, Barnes & Noble was allowed to conduct wide-ranging discovery of Microsoft. Even Microsoft CEO Steve Ballmer had to testify at some point (though he wouldn't have had to appear personally at next week's trial anyway). If Barnes & Noble can't state a claim that the ITC considers credible after a large-scale fishing expedition, it just doesn't seem to have a case at all.

  3. As a result, Microsoft's intellectual strategy has, essentially, received a stamp of approval by a government agency. While Barnes & Noble claimed that Microsoft was seeking to eliminate Android as a competitive threat and brought all sorts of conspiracy theories, it's a fact that Microsoft has successfully concluded patent license agreements covering more than 70% of all Android devices sold in the U.S. market, a level of acceptance that wouldn't be possible if Microsoft's terms were as unreasonable as Barnes & Noble alleged. The commercial success of Microsoft's Android patent licensing program and the wholesale dismissal of Barnes & Noble's accusations are a meaningful combination. By contrast, Barnes & Noble's claims now look like bogus borne out of desperation and possibly other emotions.

  4. I believe Barnes & Noble probably knew that its First Affirmative Defense was, at best, a long shot, but it may have hoped that Microsoft would settle on sweet terms just to avoid the harassment and the risk of issues coming up at a (partly) public ITC hearing -- issues that might not have much legal relevance anyway but that could be embarrassing. Following today's order, none of the evidence that Barnes & Noble's lawyers obtained in recent months will be presented at the trial starting next week. Also, Barnes & Noble's quest for further information, such as an attempt to force Nokia, through an international process, to disclose additional material and make its CEO Stephen Elop available for a deposition, has now come to an abrupt end.

  5. There was a time when Microsoft had serious antitrust worries in the U.S. and in Europe, but like other companies that experienced similar situations, it got over the learning curve. It didn't back down out of scare when Barnes & Noble screamed "antitrust!" but kept pursuing its claims and executing its licensing-centric intellectual property strategy.

  6. It's an interesting coincidence that Microsoft's Android patent licensing program gets cleared by an ITC judge on the same day on which the European Commission announced a formal investigation of Samsung's suspected abuse of FRAND-pledged standards-essential patents against Apple.

I also have a few opinions and observations to share. Back in April 2011, when Barnes & Noble first tried to play the patent misuse and "antitrust" card, I already expressed my doubts. Some of the claims, such as the allegation of Microsoft having claimed to "control" Android, were hard to understand, and some of the numbers (market shares etc.) flew in the face of what I know about the smartphone market. I was not only skeptical but also, in one particular way, concerned. My concern was that Barnes & Noble's "defense" was actually an assault on the very concept of patent licensing. In my view, licensing on commercially reasonable terms is a good thing. If Microsoft really wanted to destroy Android (which is what Barnes & Noble pretty much alleged to be the objective), it would seek injunctions against Barnes & Noble's and other vendors' Android-based devices instead of selling licenses to more than 70% of the market.

Simply put, as much as I understand that Barnes & Noble wants to defend itself vigorously, the tactics it chose to employ could have discouraged patent holders in general (not thinking of any particular company) from cooperative, licensing-oriented IP strategies.

Procedural history of this motion

Microsoft initially brought this motion on June 6, 2011, arguing that "Barnes & Noble's First Affirmative Defense [of patent misuse, including antitrust allegations] is deficient as a matter of both substantive law and applicable pleading requirements".

On June 15, 2011, the OUII (ITC staff) supported Microsoft's motions (as I mentioned above).

Nevertheless, the ALJ didn't want to grant the order prior to discovery. I don't know the exact date on which it was denied because it's not in the public record, but based on other documents in the public record that reference it, it must have come down in late September 2011 or in early October 2011.

While Microsoft's original intention may very well have been to have Barnes & Noble's "patent misuse" allegations stricken as early as possible (even prior to discovery, which is always somewhat burdensome on companies), the fact that the ALJ thew out Barnes & Noble's accusations at this stage means that even an extensive discovery process didn't establish a case for wrongdoing on Microsoft's part.

The trial starting on Monday is now going to be focused on patent validity, infringement and domestic industry questions. In order to allow an efficient trial, Microsoft recently dropped many of its originally-asserted patent claims from the investigation.

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