Wednesday, November 28, 2012

RIM loses arbitration, has to agree with Nokia on royalties or stop selling WiFi products

Nokia has announced filings with courts in the United States (Northern District of California, to be precise), the UK and Canada to enforce an arbitration award against BlackBerry maker Research In Motion (RIM). I have downloaded the petition filed with the U.S. court.

The arbitration proceeding took place in Sweden. I was aware of it because it was mentioned twice in open court in Munich. At a mid-August Nokia v. RIM hearing, a judge was markedly skeptical of RIM's motion to stay the case pending the arbitration proceeding, and three months later, his successor didn't appear to be convinced of the merits of RIM's arbitration-related claims either. What Nokia's filing says about the outcome of the arbitration proceeding validates the apparent inclinations of the Munich judges. RIM lost with respect to WiFi-essential patents, and in Munich it even wanted to defend itself against non-standard-essential patents by pointing to the arbitration clause under the existing (SEP) license agreement.

Nokia's petition says that the parties previously entered into a patent license agreement under the laws of Sweden. The agreement has a binding-arbitration clause, and arbitration awards can be enforced worldwide, without restrictions.

Nokia and RIM have been negotiating for some time but couldn't agree on license fees. RIM mistakenly thought it would benefit from triggering an arbitration proceeding, which it did in April 2011. This backfired. After a nine-day arbitration hearing in September (which was also mentioned obliquely in the Munich court), an arbitration award was issued on November 6. Nokia says that "[t]he Tribunal found unanimously for Nokia on all but one of its requests for declaratory relief, and denied all but one of RIM's requests for declaratory relief", and "required RIM to bear the costs of the arbitration and compensate Nokia for the majority of its legal fees".

My intepretation of Nokia's representation of the terms of the license agreement in its U.S. petition is that this agreement has a mechanism according to which it must either be renewed at some point or the licensee (RIM) must stop implementing the relevant standard. This is a patentee-friendly deal structure: it eliminates the need for infringement proceedings after the expiration of the agreement. The license agreement leaves no doubt that there will be an infringement once the agreement expires before the relevant patents expire. One of the arbitration tribunal's findings is that "RIM has not contested that it manufactures and sells products using WLAN [WiFi, IEEE 802.11] in accordance with Nokia's WLAN patents", and on this basis it was determined that RIM is "not entitled to manufacture or sell products compatible with the WLAN Standard without first agreeing with Nokia on the royalty to be paid for its manufacture and/or sale of Subscriber Terminals compatible with such Standards".

Nokia's petition avers that the parties "have not agreed on the royalty to be paid for the manufacture and/or sale of RIM Subscriber Terminals compatible with WLAN", and Nokia now asks the U.S. court for declaratory judgment, an award of litigation costs, and "such other and further relief as this Court deems just and proper, including but not limited to such relief as may be necessary or proper to give effect to the declaratory judgment sought". This final prayer for relief suggests to me that Nokia reserves the right to request, if all else fails, entry of an injunction barring RIM's sale of WLAN-capable products in the United States. The way Nokia phrased this prayer for relief suggests to me, however, that it would much prefer to RIM to take a license on FRAND terms.

In my view, there can be no question that RIM is entitled to a license on FRAND (fair, reasonable and non-discriminatory) terms to Nokia's WiFi SEPs. But at this point there is no indication of Nokia having made any demand in excess of FRAND, and any FRAND issues may have been discussed in the arbitration proceeding.

In July, RIM filed a letter with the ITC that I considered quite outrageous and argued vehemently in favor of injunctive relief based on standard-essential patents. That RIM letter is in the public record and definitely increases the likelihood of an injunction being ordered against it. RIM may finally get to savor the impact of the SEP injunctions its legal department advocated this summer (unless it reaches an agreement with Nokia in time).

RIM faces some fundamental problems, and now it's coming under very serious pressure after the arbitration proceeding it initiated worked out in its rival's favor. Nokia also has its challenges, but it's definitely doing very well in litigation (I'm following all of its enforcement efforts closely and will, by the way, attend a Nokia v. ViewSonic patent infringement hearing in Munich in a few hours) and I also saw some news indicating that the Lumia 920 is selling very well. Compared to RIM, Nokia is in a relatively stronger position in all respects, and especially as far as intellectual property issues are concerned.

It's worth noting that HTC is in a structurally similar position vis-à-vis Nokia as RIM. In the ITC investigation of Nokia's complaint against HTC, a motion was brought to refer one of the patents to arbitration. Of course, the terms of the Nokia-HTC agreement could be more favorable to HTC than the terms of the Nokia-RIM agreement are to RIM, but there's no particular reason to assume that HTC had more leverage when negotiating with Nokia than RIM did. Relatively speaking, RIM's patent portfolio is actually less weak than HTC's. I don't know when there will be any decision in a Nokia-HTC arbitration proceeding, but if and when there is one, I'm sure it will be announced by the prevailing party.

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