Tuesday, February 28, 2012

After German FRAND setback, Google and Motorola should pursue licensing, not litigation

Yesterday's provisional denial of injunctive relief sought by Motorola against Apple in Germany is not just a procedural kind of reprieve. Instead, the Karlsruhe Higher Regional Court's press release (which I translated) shows that it's based on a preliminary assessment of the merits by a panel of very senior judges who have been looking at this case and different licensing proposals submitted by Apple since December. It furthermore indicates that there comes a point at which even Deutschland is part of FRANDland.

There are still various options for Google and MMI, and I will look at some of those below. But in practical terms, they're not going to shut down any Apple products in Germany with FRAND patents for a year or so, and even further down the road, it's probably not going to happen. If Google's and Motorola's strategy was "mutually assured destruction" (and there are strong indications that that's where they wanted to get), they have to re-evaluate their plan at this critical juncture.

For the sake of the argument, I will now assume that Google is soon going to own Motorola Mobility. It's been telling investors all the time that it expects to close the deal in early 2012. I don't mean to be disrespectful of regulatory agencies that have yet to approve the deal and have every right to form their own opinion, but as MMI's stock price shows, this acquisition looks like a done deal from a statistical perspective.

The combined "Googlorola" entity is going to leverage its combined patent holdings. A year ago, Google's own patent portfolio was extremely weak. In the meantime, Google has acquired more than 2,000 patents from IBM as well as various patents from smaller sellers, including some failed startups. Last summer, Google was finally able to give (on whatever commercial basis) nine patents to HTC, which it didn't hesitate to assert against Apple.

When Google announced the merger agreement with MMI in August, its stated objective was "to better protect Android from [allegedly] anti-competitive threats from Microsoft, Apple and other companies".

So what should Google try to accomplish, after closing the MMI deal, with respect to the two companies it named?

In the headline I already expressed my opinion: I think that licensing is a better choice than escalation or protracted litigation. In Apple's case, a license deal may not cover all of the patents that Google would like to implement in Android, but intellectual property sometimes involves exclusivity. Google will have to respect those rules sooner or later. But I try hard to be realistic, and after paying out $12.5 billion to MMI's selling shareholders and creating doubts about a level playing field among Android device makers, Google's management may be led by the desire to prove the aforementioned official logic of the deal to its own shareholders. Some senior executives at Google may soon be scrambling to somehow extract value out of the deal just because they don't dare to tell their CEO that the boldest decision he made in his second term so far was not necessarily a good one. Still, I stand by my opinion that Google would be well-advised to be constructive sooner rather than later.

Googlorola is relatively late to the party

By the time the Googlorola deal closes, Apple's patent enforcement activities against Android will have been going on for more than two years. They started in early March 2010 with Apple's first ITC complaint and federal lawsuit against HTC.

According to his official biography, Steve Jobs told Google's then-CEO Eric Schmidt right at the beginning that he considered Android a stolen product. It's amazing that Apple's actions and Steve Jobs's clear message in early 2010 weren't sufficient to create a real sense of urgency in Mr. Schmidt to address Google's patent problem. But that's another story.

Google is somewhat lucky that Apple hasn't yet dealt a legal knock-out blow to Android. With some better choices of when and where to litigate, Apple could have made a whole lot more headway already. But by now Apple has won some rulings (and I don't mean preliminary injunctions that got lifted anyway, but regular decisions following full-blown proceedings) and it has already identified some winning patents. And just as important: Apple continues to be granted new patents (based on applications that were filed a few years back) that appear quite valuable. Four of the eight patents Apple is asserting in its latest U.S. lawsuit against Samsung have a number starting with "8", meaning they were granted during the last few months. Also, just like Google, Apple has acquired patents from third parties. Unlike MMI, Apple won't seek injunctions based on standard-essential patents, but it has also bought many non-FRAND patents.

As far as Microsoft is concerned, it's hard to see what Google believes it can accomplish at this stage. Microsoft recently announced that more than 70% of all Android devices sold in the U.S. have a (presumably royalty-bearing) license to its patent portfolio. Motorola Mobility is the only major Android device maker not to have taken a license, and if Google had not agreed to acquire MMI, there's a high probability that MMI would by now also have reached an agreement with Microsoft.

I don't know what Google expects to achieve. Does it believe that it can have so much leverage over Microsoft at some point that the existing license agreements with large parts of the Android industry would have to be turned into royalty-free arrangements? I don't think that's even remotely realistic.

While the public may never find out how much of a hand Google had in Barnes & Noble's "patent misuse" allegations against Microsoft (which were mostly antitrust-related accusations and conspiracy theories), neither the ITC staff (which acts as a third party to certain proceedings, protecting the public interest) nor an Administrative Law Judge at the ITC felt that B&N had a case for "patent misuse". Even when all of B&N's claims were viewed in the light most favorable to the Nook maker, its allegations weren't held to amount to anticompetitive behavior or other forms of patent misuse. An all-star team of lawyers couldn't even convince the judge that those claims deserved to be discussed at trial. This preliminary outcome is, of course, a major vindication of Microsoft's licensing-oriented approach to Android's patent issues.

Like in Apple's case, it's accurate to say that Microsoft hasn't yet had a decisive legal victory that would really force MMI to give up its resistance. But in my opinion, that's only a matter of time.

Google can't "pull an Oracle" against Apple and Microsoft

Google's efforts to defend Android against Oracle's patent assertions even without countersuing over any patents of its own have, so far, been absolutely admirable. In my view, a tipping point has been reached with the USPTO's rejection of all of the asserted claims of the "James Gosling patent" (not a final decision, but statistically likely to be affirmed). Oracle may now be forced to drop its patent infringement allegations (with prejudice) in order to take the copyright part to trial in the near term.

At the outset of that litigation, I wouldn't have thought that a year and a half later, pretty much nothing would be left of the seven patents Oracle initially asserted. But almost all of the asserted claims have been found invalid based on Google's reexamination requests, and while a first claim construction ruling went well for Oracle, a more recent, supplemental, claim construction order suggests to me that Google has excellent chances of not being found to infringe even a single valid patent claim asserted by Oracle. Again, I didn't expect this because general patent litigation statistics would have suggested a different outcome. I'm not aware of any high-profile case like this in which a heavyweight like Oracle asserted seven patents only to see them go down the tubes during the course of the litigation. Congratulations to Google and, especially, its lawyers on this outstanding work.

Even Oracle's case is not lost yet (and Oracle may find other patents to assert in a subsequent round of litigation). Google failed with a motion for summary judgment against the copyrightability of Oracle's asserted material, which is mostly about API-related source code. It will be up to a jury to decide whether this is expressive material worthy of copyright protection. Those are dozens of files. A printout for the jury will likely span hundreds of pages. All of that was undoubtedly created by human beings, and it will be quite difficult for Google to convince a jury that such a large body of code is devoid of any protection.

Whatever may happen on the copyright side of that case, the more general question is whether the strategies employed by Google against Oracle could also be effective against Apple and Microsoft.

Applying the approach from the Oracle case to those companies, Google would fight hard to have as many of the asserted patents as possible declared invalid, hoping to avoid a finding of infringement with respect to the surviving patent claims and ultimately planning to work around anything that is deemed both valid and infringed. Moreover, Google was trying to have Oracle's lawsuit delayed, though it obviously denied any such intention.

While Oracle as a company plays in the same league as Apple and Microsoft, it's important to consider that the Oracle patents against which Google is fighting so very successfully are former Sun Microsystems patents. I never thought highly of Sun, to be honest. I think there was a lot of make-believe and window-dressing at that company. There were some good ideas and innovative achievements there, but a geeky image isn't a substitute for serious, professional work. The fact that several of the most important ones of Sun's Java-related patents turned out to have been improperly granted calls into question that Sun really was cutting-edge in the field of virtual machines and operating systems. In my view, it's a safe assumption that Apple's patents (except perhaps from a period of a few years when it was in terrible shape) and Microsoft's patents are, on average, much stronger than those former Sun patents.

Even if Apple's and Microsoft's patents were considered, on average, similarly strong as the ones that used to belong to Sun, the success of Google's invalidation campaign against those Java patents is statistically unlikely to be replicated. Google will always do a great job searching for prior art and arguing against the patentability of a claimed invention, but it can't always have such an absolutely unbelievable hit rate. Even if Oracle sued Google over another seven Java patents, Google would hardly achieve the same result again.

Googlorola's remaining options in Germany

Germany was a key part of Motorola's litigation strategy against Apple and Microsoft (it sued both companies in Germany before those took the disputes overseas, and it chose Germany as the only jurisdiction outside of the United States to file claims in) as well as Google's plan related to the acquisition. In a letter to standards bodies that was meant (but failed) to make regulators comfortable with Google's plans for the post-acquisition use of MMI's patents, Google advocated, without mentioning Germany, the German Orange-Book-Standard case law on the FRAND defense as its worldwide approach (see item 8 of Google's statement and my paragraph-by-paragraphy commentary). Google obviously didn't advocate the more recent Dutch approach (a judge in The Hague threw out a Samsung motion for an injunction against various Apple products because he held Samsung to have failed to comply with its FRAND licensing obligations since it asked for a 2.4% royalty, which the Dutch judge thought was "out of step" with FRAND). No, Google definitely wanted the German approach, which places the heaviest burden of all the jurisdictions I know on defendants invoking FRAND.

As I explained yesterday, the Karlsruhe Higher Regional Court might still agree with one or more of MMI's objections to Apple's proposal at the end of the full-blown appellate proceedings. But yesterday's decision suggests that Apple is more likely than not to succeed with its appeal, and a "realistic worst-case scenario" for Apple would be the need to make one or more concessions of minor relevance in order to prevent MMI from obtaining injunctive relief.

MMI also has three lawsuits going in Düsseldorf against Apple Retail Germany GmbH, the operating company of the official German Apple Stores. The same three patents were previously asserted in Mannheim against other Apple legal entities. Assuming Motorola also convinces the Düsseldorf court that one of its standard-essential patents is infringed (and is not too probable to be invalid), that other court would have to rule on Apple's FRAND defense. From the Düsseldorf Regional Court, that matter could be appealed to the Düsseldorf Higher Regional Court -- a different circuit than the one of the Karlsruhe appeals court.

The Düsseldorf courts would be free to reach their own conclusions. But Apple will certainly inform them of the preliminary assessment of the Karlsruhe court, and that fact will bear considerable weight even in a different circuit (and even though case law is less relevant under German law than Common Law).

Motorola could also try to assert new standard-essential patents against Apple in different courts. For example, Munich is another court and part of a circuit that doesn't always agree with the Karlsruhe and Düsseldorf circuits. In Munich, Apple and Microsoft have already sued MMI (in February, Apple already won a first ruling there), but I'm not aware of any assertions by MMI itself in that court.

With new patents, MMI would theoretically even have a new chance in the Karlsruhe circuit, if it can come up with arguments concerning Apple's FRAND defense that are new.

But all of this is going to be an uphill battle. Yesterday's ruling is a strong indication that, as I thought all along, the German Orange-Book-Standard framework, however patent-holder-friendly it may be, was nevertheless meant to give implementers of industry standards a somewhat reasonable chance to claim that they're entitled to a compulsory license, which in turn rules out injunctive relief.

Injunctions based on standard-essential patents will be a long shot for MMI against Apple in Germany (and also against Microsoft, which could solve the problem by using the same defense as Apple, especially since they also use the same law firms in Germany against MMI). What MMI can try to do now are two things. They can bring more assertions of non-standard-essential patents (they are already enforcing the only standard-unrelated patent they asserted in their initial round of German lawsuits against Apple). And they can try to maximize the royalties that Apple and Microsoft will have to pay under German FRAND rules as well as the damages they will seek for past infringement.

Theoretically, they could seek very substantial damages, and there's no doubt that Apple was previously somewhat (though not extremely) concerned about that possibility. But Google's own claim that a smartphone implements about 250,000 patented inventions would be held against MMI post-acquisition in connection with the apportionment of damages to the patents at issue in a particular litigation. After all, it's pretty obvious that a couple of patents, or even hundreds of patents, represent only a limited part of the total commercial value of a computing device or an operating system.

I believe it's unlikely that Googlorola can achieve FRAND royalty rates and/or damages for past infringement that will be so substantial that Apple and Microsoft will come under pressure to drop their patent claims against Android. Google may be able to get a slightly better outcome in financial terms, but not a fundamentally different result than without the German FRAND stuff.

U.S. litigations

Most of the litigation between Motorola and Apple (or, respectively, Microsoft) is taking place in the United States. Motorola's potentially most devastating U.S. patents-in-suit are also subject to FRAND licensing obligations.

In the U.S., winning an injunction is very difficult at any rate, even before a FRAND defense is raised. Also, the position taken by the United States Department of Justice on Google's FRAND statement in connection with the MMI deal shows that standard-essential patents raise just the same antitrust concerns in the United States as they do in Europe.

Globalizing the disputes may not be a good idea

If MMI didn't face certain resource constraints, it might already have tried Samsung-style worldwide scattershot litigation. With Google's money, that would be an affordable option, but not necessarily a good one. Despite suing Apple in nine different countries, Samsung has so far not won a single ruling against Apple (though it made a few bids for preliminary injunctions). This shows that breadth is not a substitute for depth.

Stalling merely delays the inevitable, but gives Android more time to grow its market share

Patent litigation is slow, and the drop-out rate of smartphone-related patents has been relatively high, at least at the ITC, which some players initially thought was going to be the most important venue in these disputes.

Google would certainly have the ability to delay a resolution of the ongoing disputes, but a "stalling" strategy comes with considerable risk. In particular, Apple has some patents in action that are very powerful, such as the multipoint touchscreen ('607) patent, the touchscreen heuristics ('949) patent, or the real-time API ('263) patent. I also think that a couple of the patents it is asserting against Samsung in the latest lawsuit (especially in the related motion for a preliminary injunction) could have major impact, such as the Siri patent. While it's possible that only less powerful patent claims will be successfully enforced against Android in the near term, there's always the risk of a decision coming down in the second half of this year somewhere (such as in the Apple v. Motorola Chicago action) that could suddenly give Apple massive leverage.

In a similar way, Microsoft's assertions against Motorola could at some point be fairly impactful.

If "stalling" worked out, Google might gain another year or two or even more during which Android can continue to grow its market share. Google's latest Android activation numbers (which don't even include such "renegade" devices as the Amazon Kindle Fire or Barnes & Noble Nook since those aren't totally Google-aligned) are above 850,000 devices per day. It's likely that Android will in the near term hit a million units a day even based on Google's (incomplete) count. Also, as Oracle pointed out in a recent court filing, Android is making inroads into other market segments than smartphones and tablet computers.

Again, my personal advice to Google would be to negotiate agreements with Apple and Microsoft sooner rather than later, and I think that by the second half of this year this position may be validated in different ways, but if Google determines that time is on Android's side, we may all have to be patient.

Theoretically, a "stalling" strategy could work out if the current paradigm of multi-touch touchscreens was superseded by something else (gestures, voice control etc.) within a couple of years. In that case, the patent landscape could look different again. But as far as Apple and Microsoft are concerned, Google will most likely still want access to some of their patents. Those players are investing large amounts of money in research and development not only related to today's but especially also to tomorrow's technologies.

The political cost of Google's current strategy

Looking beyond Google's particular interests in connection with Android, I really wonder whether it makes sense for Google to behave in problematic ways only to "protect Android".

For example, it was nothing short of astonishing that the United States Department of Justice felt forced to criticize Google for an "ambiguous" statement on the use of standard-essential patents while pointing out that Apple and Microsoft had taken clear positions (such as "no injunctions"). Google, which claims to be an advocate of open source and open standards, would usually be expected to at least match Apple's and Microsoft's proposals for a reasonable use of standard-essential patents, or even to go beyond what those "proprietary" technology companies do. But Google chose to take a rogue position that promotes uncertainty and advocates aggressive behavior.

There are people out there who believe that the end (of "protecting Android") justifies the means, but there are many other people, especially opinion leaders and key decision-makers, who definitely take note of Google's attitude toward the use of standard-essential patents.

Other large companies have learned before Google that it's not a good strategy to provoke antitrust intervention on different fronts at the same time, or in short succession. Google has enough antitrust worries, and it's now buying a company that in the preliminary opinion of high-ranking German judges appears to be committing an ongoing antitrust violation.

All things considered, Google as a whole may be better off by acting reasonably and cooperatively on the Android patent front.

The coming months, or years, will show how far Google is willing to go only to fight for the right to infringe third-party patents.

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