Thursday, November 15, 2012

Google's Motorola tells court it lost four months of German sales waiting for patent workaround

While a Microsoft v. Motorola Mobility FRAND contract trial is underway in the United States, the parties also met in a German appeals court today. The purpose of two consecutive hearings at the Munich Higher Regional Court was to discuss two Microsoft motions to reduce the amount the Munich I Regional Court had determined for the bond or deposit Microsoft had to provide as security in order to enforce, during an ongoing appeal, a couple of German patent injunctions granted in May over a multi-part text messaging layer patent. There are technically two injunctions, one against Motorola's German subsidiary (and its co-defendant, a distribution organization) and another one against the U.S. parent company, whose parent company, in turn, is Google.

The total amount of the bond or deposit required under the lower court's ruling was 121 million euros ($154 million) per case, or 242 million euros ($308 million) in total. The purpose of such a bond is to guarantee that a defendant who must obey an injunction that is lifted on appeal can recover damages for premature enforcement even if the plaintiff goes out of business or if cross-border enforcement fails. In each case, an injunction was granted over four different claims from the patent-in-suit, and for the enforcement of each claim the per-case bonding requirement was 25 million euros ($32 million), accounting for the largest part of the total amount. For a recall of infringing products from retail, the per-case bonding requirement was 10 million euros ($13 million), and the same for the destruction of infringing goods in defendant's possession before as well as after recall from retail. Furthermore, one million euros ($1.3 million) per case was the bonding requirement for the enforcement of Motorola's obligation to provide details on its acts of infringement, particularly details on which customers were provided with how many units of infringing products.

Today's hearing was not going to affect the question of whether or not the injunction is enforced. Enforcement began in June, despite the huge amount Microsoft had to guarantee. But the Munich I Regional Court has ordered injunctions against Motorola over five patents (three Apple and two Microsoft patents), and the per-claim bonding requirements were the same in most of these cases, and even higher in one case, making the appeals court's position on bonding relevant far beyond the multi-part text messaging layer patent. And this is just the right context to find out in open court about the actual economic impact of these smartphone patent lawsuits.

If you're not interested in too much detail on how the bonding requirement was adjusted, let me just tell you in a nutshell that the total was, at Microsoft's request, reduced from 242 million euros ($308 million) to 18.5 million euros ($23.6 million), which is less than 8% of the original figure -- and by clicking on this link you can jump right to the business information I gleaned in court today.

Details on the adjustment of the bonding requirements

Judge Dr. Peter Guntz, who presided over the lower court proceedings that resulted in the injunctions in question and has meanwhile been recruited by the European Patent Office for one of its Boards of Appeal, wasn't defendant-friendly in all respects but certainly very generous when setting the amounts of the bonds required for enforcement during an ongoing appeal. Judge Konrad Retzer, who is now presiding over the various appeals of Dr. Guntz's rulings, said very clearly at the outset of today's hearings that the amounts seemed "excessive to put it conservatively" and "beyond justification", and noted that the lower court's rulings didn't provide much of a rationale for them. At recent hearings over which Dr. Guntz's potential successor, Judge Dr. Matthias Zigann, presided, I actually got the impression that the Munich I Regional Court is now paying closer attention to the question of bonding, even at the early stages of new litigations, and I believe its future rulings will explain the derivation of bond amounts.

Judge Retzer, who is one of Germany's most well-respected patent infringement judges, encouraged the parties to reach an agreement. In a technical sense, today's hearings didn't result in stipulations, but the court ultimately ordered what the parties' counsel declared themselves in agreement with. Also, the parties waived their right to receive a written statement of reasons.

An agreement was reached relatively smoothly on the case in which Motorola's German subsidiary is a defendant. The parties accepted (as they later did in the other case) that the court would set only one bond amount for the enforcement of injunctive relief regardless of whether one or more claims are enforced, as opposed to the lower court's per-claim approach. In its motion, Microsoft had proposed that the total bonding requirement for that case, including injunctive relief, recall, destruction and access to sales data, should be 5 million euros ($6.4 million). The wholly-owned Google subsidiary cautiously suggested that the amount should be a bit higher. Judge Retzer said that he wasn't going to be too strict if the amount had to be increased by a million or so, but it would have to be within reason. Microsoft then accepted Google's (Motorola's) counterproposal, which was 5 million euros ($6.4 million) for the enforcement of injunctive relief (regardless of the number of claims), 250,000 euros ($320,000) for access to sales data, and 500,000 euros ($640,000) each for a recall and for destruction of infringing material, or 6.25 million euros ($8 million) in total -- only about 5% of the amount set by the lower court.

There was more of a need for oral argument over the other case, in which Motorola Mobility LLC (previously Motorola Mobility Inc.) is the defendant. This matter was more difficult for substantive reasons -- the U.S. parent company allegedly and plausibly makes more money with its German sales than its local subsidiary -- as well as for procedural ones (a delay affecting the delivery of information by the lower court to the appeals court). But ultimately the parties agreed, with help from Judge Retzer, on 11 million euros ($14 million) for the enforcement of injunctive relief, and the same amounts for the other remedies as in the case involving the German subsidiary, resulting in a total (for the case in which the U.S. entity is the defendant) of 12.25 million euros ($15.6 million). In the aggregate of both cases, Microsoft's litigators, led by Dr. Tilman Mueller-Stoy from the Bardehle Pagenberg firm, achieved that the bonding requirements were slashed by a factor of 13.

With the guidance the parties received from the appeals court at today's short hearings (both hearings combined took only about 45 minutes), they may be able to agree on an adjustment of the bond required in another Munich case Microsoft won against Motorola Mobility.

Economic data points discussed in court today

Motorola's German business isn't huge, and what makes Apple and Microsoft's German injunctions against Motorola much more interesting than their direct economic impact is the fact that the infringement of certain patents by Android-based devices is proven in court, especially against a wholly-owned Google subsidiary.

Motorola claimed today that its German subsidiary generated (presumably pre-tax) earnings of 3.58 million euros ($4.56 million) in 2011, and the U.S. entity allegedly made profits of 8.9 million euros ($11.3 million) on its German sales. For 2012, the year in which Apple and Microsoft's various injunctions kicked in, Motorola claims that it had projected an operating income of 6.6 million euros ($8.4 million) for the German subsidiary and of 50.7 million euros ($64.6 million) at the level of the U.S. entity (with respect to the German market), on originally-projected 2012 sales of slightly less than 300 million euros ($380 million). But due to various factors including the impact of the aforementioned injunctions, projections for the German subsidiary's operating profit have been reduced to 1.43 million euros ($1.82 million), and the U.S. entity allegedly expects to lose 21 million euros ($27 million) on its German sales.

In the bonding context Motorola obviously had a motivation to inflate, or at least not to understate, the loss it would suffer if improperly-granted injunctions were enforced. But even based on Motorola's own numbers it's clear that the bond amounts set by the lower court in the hundreds of millions of euros were far too high.

Motorola argued that its damages go beyond the loss of sales it could otherwise generate. It pointed to the cost of relaunching products and to the adverse effect on its reseller relationships from the need to stop selling products for some time. But no particular numbers were discussed in this regard.

Motorola's counsel said that it took several months -- from Microsoft's enforcement of the injunctions in question, which began in June, until last month -- to relaunch the accused products after implementation of a workaround. In early October I reported on the fact (first reported by a local mobile news site) that Motorola Mobility had pulled all of its Android-based devices from the German market. Motorola claims that it has modified its products in a way that the multi-part text messaging layer patent is no longer being infringed. Whether this will lead to an enforcement dispute remains to be seen. It wouldn't be the first time that a patent holder disagrees that an alleged workaround truly steers clear of infringement. Also, other injunctions have come down in the meantime.

The most surprising number that came up at today's hearing is that, according to Microsoft's counsel, Motorola reported that it had recalled only about 300 smartphones from German resellers as a result of Microsoft's enforcement. That's really a ridiculously low quantity, even though Motorola's German business is of a somewhat limited size. I don't want to speculate at this point but I would have thought that German resellers had more than 300 infringing devices on their shelves and in their warehouses at any given point in time, including when Microsoft's enforcement began.

The more interesting question is going to be when Google will realize that Android device makers, including its own subsidiary, need to license a variety of third-party patents. 15 Android patent license deals have been announced already, and many more will happen, such as a Nokia-HTC deal. Google can't change the way this industry works and addresses intellectual property matters. It will have to p(l)ay by the same rules as everyone else.

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