Thursday, February 7, 2013

HTC's tactics in dispute with Nokia validate key concern over FTC-Google patent agreement

There's still some lively debate over the proposed FTC-Google consent decree relating to standard-essential patents. Yesterday I listened to a Law Seminars International telebriefing on the subject, and last week the Federal Trade Commission announced an extension of the public comment period through February 22, 2013 (18 days after the original date) made "[a]t the request of several members of the public".

Litigations (Motorola's assertions of standard-essential patents (SEPs) against Apple and Microsoft) gave rise to the investigation. Litigation is the field in which the agreement ultimately has to prove its worth. That's why looking at actual, ongoing litigation is one of the best ways to understand what could and should still be improved about the FTC-Google agreement.

The number one concern is that the "defensive use" exception could ultimately harm consumers if two competitors duke it out with SEPs. As I wrote last month, the situation between Ericsson and Samsung, who are seeking U.S. import bans against each other at the ITC, is a current and high-profile example of what will go wrong if the "defensive use" exception isn't dropped (apart from general policy concerns over the Wild West-style idea of letting companies take the law into their own hands).

But the Ericsson-Samsung spat isn't even the worst-case scenario: at least it's undisputed between these two companies that both assert SEPs against each other at the ITC despite having declared them essential to industry standards and having promised to license them on FRAND terms. What I would be even more concerned about is a scenario in which a company asserts non-SEPs but the other party then retaliates with SEPs, alleging baselessly that some of its rival's asserted patents are also SEPs.

This is not a hypothetical concern. It's a very real concern. And for better or worse there's so much litigation going on in this industry that it's possible to find present examples of almost every problem. For the problem of spurious claims of being sued over SEPs (when that's clearly not the case), a pretty good example would be what HTC is doing in its transatlantic patent dispute with Nokia. The dispute started last year when Nokia filed an ITC complaint against HTC and sued it in a United States district court (District of Delaware) and in three German courts; now there's also litigation pending in the UK.

On Tuesday I attended a patent trial in Mannheim, Germany over two patents, one of which is a power-saving patent that Nokia is also asserting against HTC in the US and the UK. I'll quote the passage from my report that's relevant in this context:

HTC points to an arbitration clause in an existing license agreement, and some arbitration proceeding between the two companies is ongoing, but it only relates to standard-essential patents (SEPs). Judge Dr. Kircher is most probably not even going to have to look at the question of whether this patent is standard-essential (Nokia says it's not) because the court will have to look at the question of preclusion based on Nokia's pleadings, not HTC's defenses. In the alternative, the judge noted, HTC would be able to stall any Nokia enforcement action, even if Nokia asserted patents on beeswax melting machines (the Mannheim court had a case over related patents last week, obviously involving different parties).

The German judge got something absolutely right that the FTC still has every opportunity to get right as well. If it's all up to what a defendant alleges, somewhere, somewhen, someone could even try to allege with a straight face that a patent on a beeswax melting machine is essential to a wireless standard. But even if it doesn't get to that point, it's bad enough if a clearly non-standard-essential wireless patent is claimed to be an SEP only in order to retailiate with an undisputedly FRAND-pledged SEP.

In the German action, HTC is doing this only in order to stall the lawsuit for the duration of an arbitration proceeding. In the United States, HTC could on the basis of the very same allegation invoke the "defensive use" provision of the FTC agreement (it's not a party to the agreement, but a consent decree is going to bear significant weight with the courts) and seek injunctions against Nokia over true SEPs.

To the extent that HTC would do this in the United States, there would be much more uncertainty about the outcome than in Germany. No court in the world has adjudged as many wireless patents and especially standard-essential wireless patents as the Mannheim Regional Court. The Mannheim judges have ruled on the alleged essentiality or non-essentiality of countless patents. If they had to do the same in the Nokia-HTC context, they could do it easily, but they can save time and resolve this part of the dispute as a matter of law by using Nokia's assertions in its complaint as the basis for their analysis of HTC's claim that this dispute falls under an existing license agreement with an arbitration clause. In the United States, however, this kind of question might be put before a jury, and most likely none of the jurors would have previously analyzed the question of whether a given patent is standard-essential or not. That makes it even more important to put the issue to rest as a matter of law. The FTC has explained the fact that the mere threat of injunctive relief has chilling effects on competition. The consent decree must remove the threat, and it must do so reliably, to achieve its stated goal.

In case you wonder why I take such a dismissive position on HTC's allegation that Nokia's relevant patent is standard-essential, let me show you. The title of EP0673175 and its equivalent, U.S. Patent No. 5,570,369, is "reduction of power consumption in a mobile station". The idea of the patent is, as I explained in my trial report, to provide power to the receiver unit of a mobile device only when the incoming signals are really needed, but to save power when the incoming signals are unnecessary because the signal is very strong. Wireless transmissions contain redundancies allowing for correction of data lost due to insufficient signal strength. The objective of reducing power consumption is not just what the title and the abstract say but also confirmed by the most important part of the patent: its claims. Its main independent claim, claim 1, covers "[a] method for controlling the power consumption of a mobile station in a cellular radio system, the method comprising the steps of: (a) providing power for receiving [...], (b) determining whether [the signal is so strong that redundant data can be ignored]; and (c) [only] if [the signal is not that great], providing power for receiving a next predetermined portion of the encoded message, and [doing this again and again until the message has been received]". This concept may be widely used because it's efficient. But standard-essential it's not: it has nothing to do with interoperability between devices. Whether you use more or less power to do the job, you're still sending or receiving the same data. Think of wireless standards as a (far) more advanced version of Morse code: if you send Morse code to me using nuclear power, I can still receive it with solar power. So it's not essential that we both use the same type or amount of power. All that matters is that we use the same code.

To someone who knows at least a little bit about wireless standards and technology it's blindingly obvious that this Nokia patent is not standard-essential -- in fact, about as obvious as if the same claim related to a beeswax melting machine patent. But HTC is claiming that it is standard-essential. It can try to stall, though it won't succeed. But it could also try to use this as a pretext for suing Nokia over undoubtedly standard-essential patents. And that would be much worse than the Ericsson-Samsung dispute because there wouldn't even be two wrongs (that don't make a right anyway) but there would be only one wrong, and only one party that is unfairly harmed on the basis of SEPs. Actually, there could be even a second wrong: if Google also claimed that Nokia's power-saving patent is standard-essential and somehow targets Android, then under the proposed agreement Google would also be free to seek injunctions against Nokia over Motorola's SEPs. The agreement does not require Nokia to sue Google itself, just its software and services even if distributed by others, such as HTC in this case. Then, Nokia -- and its suppliers -- could countersue Google over SEPs. And so it goes.

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