Thursday, February 9, 2012

Mannheim court continues to weaken the FRAND defense -- bad news for Apple, Nokia, HTC, others

With four different FRAND statements showing up yesterday (Apple, Cisco, Microsoft, Google), my coverage of the Mannheim court session on Tuesday (four trials organized as one) has been delayed a bit. So far I only got to report on Motorola's position that a single standard-essential patent is a license to kill. But something else that happened there may be even more important (though more difficult for laypeople to understand) than Motorola's "one bullet to kill" statement.

As I explained before, particularly in this post on Apple's struggle to keep its products available in Germany, a FRAND defense only works under current German case law (unless a European court restores sanity in the future) if the implementer of a standard makes a binding offer to procure a license on terms that are so good that the patent holder cannot refuse them without breaching his FRAND licensing obligations and, even prior to the acceptance of that offer, starts to act as though the proposed license agreement were in place, with the Orange-Book-Standard ruling addressing the possibility of immediate royalty payments or a bond covering whatever those FRAND royalties may be.

In Mannheim, there are two "Zivilkammern" ("civil law chambers") that adjudicate patent cases. The General Instrument Corp. (i.e., Motorola Mobility) v. Microsoft H.264 case is before the Second Civil Law Chamber, whose presiding judge is Dr. Holger Kircher. All of the Mannheim cases involving Apple, as well as all of the IPCom cases that I'm aware of, were or are before the Seventh Chamber headed by Judge Andreas Voss. Within five days, either chamber came up with ways to interpret Orange-Book-Standard that further weaken the FRAND defense:

  • As I explained a few days ago (look for item 8 toward the end of this section of a blog post on Apple's tribulations in Germany), the Seventh Chamber, at least temporarily, expressed the opinion that the option of a bond (instead of direct royalty payments) didn't provide for the possibility of an excess amount (if a court later determines that the appropriate FRAND royalty is less than the amount of the bond) being returned to the licensee. In my opinion, the only way that the bond makes sense within the Orange-Book-Standard logic is, however, that it is meant to protect the patent holder against the risk of the licensee's potential bankruptcy. I am convinced that the Federal Court of Justice would otherwise have required immediate payments, period, and I think it's fairly likely that the court actually found the related arguments by Apple's counsel persuasive.

  • On Tuesday, the Second Chamber effectively obligated Microsoft to weaken (if not practically waive) its invalidity defense in order for the court to even consider its FRAND defense, with no guarantee that giving up on invalidity would make the FRAND defense work (the court said it would be a close call, but in order for it to even be a close call, Microsoft had to stay two parallel lawsuits in which it is seeking the invalidation of Motorola's asserted FRAND patents).

    I will discuss this in more detail in the following paragraphs. In my view, this is a much greater concern than the previous issue. Microsoft has accepted this and decided to move on, so nobody has to worry about them at this stage -- but Apple, Nokia, HTC and probably many others (my own focus is only on smartphones and tablet computers) still have to defend themselves against standard-essential patents in Mannheim and may now also face the tough choice of either contesting the validity of a patent during the ongoing proceedings or having a chance to succeed on a FRAND defense.

I personally can't imagine that the Second Chamber's extreme position on this would withstand an appeal (as I'll explain further below), but time is of the essence if someone can enforce an injunction against you in such a large market as Germany, and that's why the lower court has a great deal of leverage, right or wrong.

In the public interest, however, I hope someone will sooner rather than later pick a fight over this and take this at least to the Karlsruhe Higher Regional Court, or the Federal Court of Justice, or the Court of Justice of the EU if need be.

The take-away for the short term is that regulatory intervention is even more urgent now than ever. If Brussels doesn't take forceful action against those who leverage the unfortunate German situation for anticompetitive purposes, the situation will get worse with pretty much every high-profile decision here.

The root cause of this problem is the Orange-Book-Standard ruling, as I explained in the aforementioned blog post on Apple's challenges in Germany. To the extent that it provides clarity, it strongly favors the interests of patent holders (including FRAND abusers with potentially invalid patents) over the public interest in competition and innovation. It's also ignorant of the fact that most patents are invalid as granted. But the problem is not just the original ruling. In addition, I see a worrying trend that the goalposts are continuing to move -- always in favor of FRAND abusers and owners of potentially invalid patents, and so far I haven't seen even one case in which they moved in favor of the public interest.

In this particular case, the idea that Microsoft would have to immediately suspend its invalidity proceedings in order for the court to even consider its FRAND defense wasn't even a demand by Motorola. I haven't seen Motorola's pleadings, but I know for sure. The judge spoke for 45 minutes at the beginning of the session, a significant part of which was devoted to this FRAND-or-invalidity issue, and clearly portrayed this as the idea of the court, not an objection by MMI. Microsoft's counsel said they were "surprised" (and the court readily granted a 10-minute break for their deliberations), but if MMI had requested this before, it would have been known. Furthermore, it wasn't among MMI's nine objections to an Apple FRAND proposal discussed last Friday.

Obviously judges have the right to be proactive and imaginative. It's not a bad thing per se. In a way, they can feel encouraged by the fact that Microsoft, after the 10-minute break, accepted this deal. I guess it's a matter of prioritization. Microsoft may be more interested in fighting over the exact royalty rate, and who knows how they assessed the chances of their nullity actions. The way I view it, Judge Dr. Kircher interprets MMI's patent claims extremely broadly, and if the same broad interpretation was applied in connection with validity, there might be some prior art that anticipated these patents or over which they're obvious. But again, Microsoft has apparently moved on anyway. I just want to discuss this here because I believe this is of concern to others in the industry, such as the ones I mentioned in the headline.

Under Orange-Book-Standard, implementers of a standard have to make decisions under quite some duress even without the Second Chamber's legal innovation. They basically have to decide at some point whether they fight all the way against the infringement assertion (including any challenges to the validity of an asserted patent) or take a license under which they won't ever get a refund if the patent is later invalidated by someone else. For a non-standards-essential patent, that would be a different thing: companies could still work around it (as HTC has shown after Apple won an ITC ruling over a non-essential patent). But the problem with patents on standards is that one can work around them only before a standard-setting consortium, which is typically a cartel (though not necessarily of the illegal kind as long as FRAND commitments are made and honored), makes the related techniques a mandatory part of a standard. Once such a patent represents a mandatory part of a standard, there's no more workaround. And that's why the whole Orange-Book-Standard approach is lopsided.

Whatever shortcomings Orange-Book-Standard may have, there's a right way and a wrong way to interpret it. It does not say that those implementing a standard have no rights at whatsoever under antitrust law. In my opinion, the decision contains clear indications that the interests of a patent holders are favored over the interests of implementers only to a certain extent. Orange-Book-Standard doesn't come with a template for a license agreement that solves the problem -- drafting entire agreements is the responsibility of parties, not of the courts. Orange-Book-Standard certainly leaves room for reasonable people to disagree on what the terms of a FRAND agreement (FRAND in the sense that its refusal by the patent holder is an antitrust violation) should be, especially since some of this can vary from case to case. There can also be an argument over what exactly it means that a would-be licensee has to act as though the proposed license agreement were already in force and effect. But in my opinion it's the wrong approach to answer any of the infinite number of questions it doesn't address in the patent holder's favor -- though Orange-Book-Standard still does recognize that there a FRAND defense against injunctive relief must be available in principle.

The position the Second Chamber took on Tuesday is that continuing to pursue a nullity action while the infringement proceedings are ongoing is irreconcilable with the idea of honoring the proposed license agreement as though it were in force. Judge Dr. Kircher compared his idea of staying any nullity proceedings (he indicated that even a complete withdrawal might be resaonably required, which may come up in future cases in that court or any other German court) to the fact that Orange-Book-Standard sets forth that a licensee has to make payments or at least post a bond that covers them. He described this as "Vorleistungen", a German term that applies to advance payments as well as concessions and partial deliveries. He also put this into the context of gestures that inspire confidence int he would-be licensee's sincerity.

I believe this position goes beyond Orange-Book-Standard.

Orange-Book-Standard doesn't refer to totally unspecified "Vorleistungen". The word does not appear even once in the entire ruling. Instead, the emphasis is on the idea of the would-be licensee acting as if already bound ("gebunden") by the proposed agreement, given that he's already using the patent.

In connection with "gebunden halten", the decision talks very specifically about two ways to address the question of money: the would-be licensee has to make actual payments (even before the offer is accepted by the other party) or post a bond. If the Federal Court of Justice had furthermore had really believed that a would-be licensee has to withdraw nullity actions before the agreement is accepted, I believe it would have said so.

The obvious counterargument is that it somehow kept the door open for other reasonable requirements of what someone should do to honor an agreement before the offer is even accepted. But since Orange-Book-Standard is meant to give guidance as to the circumstances under which a FRAND defense should be available (even though it's fairly patent holder-friendly, it is still a ruling in favor of a potential defense argument), and knowing that parallel nullity actions against patents-in-suit are almost always involved, the fact that the Federal Court of Justice didn't address this while it did elaborate on payments should, in my view, constitute a reasonably high hurdle for the justifiability of any other important concessions expected of a would-be licensee prior to the acceptance of his offer.

The fact that the decision doesn't elaborate on nullity while it goes into a lot of detail on payments is just an indication, but there are stronger reasons in my opinion for which the analogy between advance payments and a stay of nullity actions doesn't work.

The purpose of Orange-Book-Standard was not merely to provide reasons for the dismissal of a FRAND defense but also to establish guidelines under which it should be available. The Federal Court of Justice did not even have to do the latter: in that particular case, it could have easily dismissed the appeal just on the grounds of the licensing proposal having been conditioned upon a subsequent infringement finding by a court.

In light of that clear intention, I believe it's necessary to look at the question of reasonably required actions on the defendant's part prior to the acceptance of the offer from the angle of what the minimum requirements are for the defendant to have access to the FRAND/antitrust defense. With respect to license fees, Orange-Book-Standard provides for the possibility of direct payments or a bond. The commercial reality is that hardly anyone will ever opt to pay if the alternative of a bond is available. So even though Orange-Book-Standard firstly talks about payments and then about bonds as an alternative, the lower hurdle (and therefore the only relevant hurdle in connection with new ideas for precontractual obligations) is a bond.

What does the bond really do? It eliminates the risk of the defendant's potential bankruptcy. It also provides easier access to money once the agreement is accepted. Those are the benefits to the patent holder (benefits in terms of minimizing the downside of not having an actual agreement in place that is being honored). But the important question here is: what is the downside to the defendant as compared to the scenario of an actual license agreement being in place that he has to comply with on an ongoing basis? There isn't anything that the defendant has to give that he wouldn't have to give anyway if the agreement were in force and effect.

And that's the respect in which the suspension of nullity actions is a very different story. Even though it is (i) a usual clause of license agreements to withdraw them after an agreement is accepted and (ii) currently the line of German courts that any future nullity action would allow the patent holder to terminate the license agreement at that point, even a stay of a nullity action does come with a very important downside for the defendant. It is tantamount to waiving the invalidity defense because under Germany's bifurcated system, a court can only stay an infringement case for the duration of a nullity proceeding, and if there isn't any ongoing one, it's hard to see how any infringement court will stay on the basis of that defense.

By contrast, bonds covering royalty obligations have no effect at all on a party's ability to defend itself in the infringement proceeding.

The obligation to pay for the use of a (valid or recognized-as-valid) patent is there all the time, with or without the agreement being in place. But the obligation to withdraw pending nullity actions depends on the acceptance of the proposed agreement.

Another difference is that if a licensee instigates a nullity action a while after the conclusion of the agreement, the patent holder can merely terminate the license agreement. However, if a licensee stopped paying, the patent holder would still be entitled to collect the money he is owed, as opposed to merely being able to terminate the agreement going forward. This is another strong indication of payment obligations being fundamentally worthier of protection at the precontractual stage than the obligation to withdraw, after the acceptance of the proposed agreement, any pending nullity actions.

Treating the obligation to withdraw nullity actions in a similar way as the obligation to make payments appears wrong to me (for the reasons outlined herein), and as a result, this approach puts the cart before the horse. It will be interesting to see how other companies respond when faced with this kind of choice. Microsoft's acceptance in one particular situation doesn't preclude anyone else from refusing to stay his nullity actions, or from trying his luck with counterproposals (such as a bank guarantee over contractual penalties for the event that the would-be licensee fails to comply with the obligation to withdraw pending nullity action after the acceptance of the agreement).

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