Saturday, August 31, 2013

Samsung says Apple's damages claim has increased by 'hundreds of millions of dollars'

Last week Judge Koh (United States District Court for the Northern District of California) denied a couple of Samsung motions that would, if granted, have delayed the limited Apple v. Samsung damages retrial scheduled to start on November 12, 2013 and relating to 13 Samsung devices with respect to which the judge vacated the jury determination (in her March 1 damages order, she originally vacated damages relating to 14 products, but after Apple pointed her to an error, she backtracked on the Galaxy S II AT&T). Late on Friday (August 30, 2013), Apple and Samsung brought their motions to strike certain portions of each other's damages report (Apple is the party claiming damages and needed a new damages expert after the one from the first trial passed away; Samsung presented a rebuttal report by its own expert).

The public redacted version of Samsung's filing doesn't state the most interesting numbers, such as Apple's total damages claim for the limited retrial, but I'm grateful that it gives us at least a better idea of the amount by which Apple appears to have increased its damages claim with respect to the 13 products at issue in the upcoming retrial:

"While the changes [as compared to last year's report] may look small on paper, they result in the addition of hundreds of millions of dollars in additional claimed damages, severely prejudice Samsung, and should be stricken."

(emphasis mine)

This sheds some light on Samsung's recent allegation that Apple is claiming "vastly greater damages".

The first thing to stress here before I even show you the document (which I will) is this:

Samsung is comparing the damages claim Apple wishes to present to the retrial jury in 2013 to the part of the damages claim Apple presented in 2012 that related to the 13 retrial devices. I gave the word "claim" maximum emphasis in the previous sentence because the increase of the total damages award that Apple would obtain if (i) the court denied Samsung's motion to strike and (ii) the retrial jury awarded Apple 100% of what it asked for, while last year's jury (a fact too many people forgot) gave Apple only about 40% of what the court allowed it to demand, could make the new total award substantially greater than what was actually awarded last year, and the difference could even be closer to (if not above) a billion dollars, not just the "hundreds of millions of dollars" from Samsung's comparison of the damages claims.

Some of you won't need this explanation: the damages claim is the demand with which a patentee goes into the trial (the limited damages retrial in November, for example), while the award is what the jury gives him. You walk in with a claim; you walk out with an award. The jury won't award anything if there's no liability (for example, no infringement found, and/or patent found invalid), but that's not going to be an issue in November. If there is a finding of liability (such as here), it's unlikely that the jury awards zero damages. It's also unlikely that it awards more than what the patentee asked for. So most of the time the award will be between a low percentage of the claim and 100% of the claim. The courts play an important gatekeeper role and can prevent a patentee from presenting unreasonable damages claims to the jury in the first place. But a court can't just rule that a number seems unfair -- it has to rule on the methodologies used and calculations performed, and on the way the damages claim is going to be presented. Obviously, if methodologies are stricken or calculations corrected, it affects the numbers that are presented; and if the presentation is modified, it affects the degree to which the jury will likely agree with the right holder.

The vacated amount -- to be replaced by the November verdict -- is approximately $400 million. It was closer to $450 million based on the March order, but after the April correction concerning the S II AT&T we're now talking about $400 million from last year's $1.05 billion award that must be redetermined. Apple will ultimately get (not taking into consideration the potential effect of an appeal from a final district court judgment) the total of the $650 million portion that was not vacated and whatever the new jury will determine in November as a replacement for the vacated $400 million portion. But the vacated portion was only about 40% of what Apple presented to last year's jury as its claim, which amounted to (in a rough estimate) a billion dollars with respect to the retrial products. Now, under Judge Koh's March damages order, the damages periods will be shorter for the retrial products, because damages periods that began too early were (not the only but) the primary reason for which the court vacated certain parts of the damages verdict. That factor adversely affects Apple's ability to claim damages.

From the beginning I said that even if the related adjustments for the damages periods (which would have come down to deleting a few cells from a spreadsheet if the same damages expert were still available) were made, Apple could present a damages claim to the retrial jury that would exceed the portion to be replaced of the original damages award, because the fact that last year's jury gave Apple only about $1 billion of its $2.5+ billion damages claim outweighs the impact of deleting a few months from the damages base. And what Samsung is complaining about now is that Apple on top of this potential upside has come up with allegedly new "damages methodologies and damages periods" -- and that it is "proffering opinions and calculations that the Court previously excluded" as well as "relying on exhibits and testimony that Mr. Musika [last year's expert] did not cite in his report or discuss at trial", and that this makes a difference to the tune of hundreds of millions of dollars.

But it's not perfectly clear, due to far-reaching redactions, whether the difference Samsung complains about gives full consideration to the adjusted damages periods. It's possible that the delta falls within the wide range that is "hundreds of millions of dollars" regardless of which point of comparison one uses. Anyway, "hundreds of millions of dollars" relates only to the claim, not to the much wider discrepancy between what may be the claim presented in November 2013 and the corresponding parts of the actual award from August 2012. For now, I'm operating under the assumption that the damages award could increase by up to roughly a billion dollars in November if (i) one interpreted Samsung's heavily-redacted portrayal of Apple's damages claim in the light most favorable to the theory of a massive increase and (ii) all went very well for Apple with the court and the jury (theoretically, the jury could even award more than Apple demands, but that's unlikely), and while there could also be a net reduction, I'd be surprised if the retrial jury, which is going to be told that Samsung's identified infringements are law of the case and just has to come up with a new number, gave Apple only a very small percentage of whatever demand Judge Koh ultimately (after ruling on Samsung's motion to strike) allows it to present.

From a probabilistic point of view, anyone who still says that the amount has been "reduced", let alone "slashed", misleads people (willingly or not) by implying something that could happen but is not the most likely outcome based on what is known today; a reasonable probabilistic assumption would be that a jury which is told that infringements must be considered to have been established (as opposed to a jury that may find infringements but still have doubts when it rules on damages) will, on average, award a patentee 50%, and likely more, of the damages claim approved by the court.

I would be more sympathetic to the characterization of the March damages ruling as a "reduction" if Judge Koh had modified the framework for the new damages determination in a way that clearly prejudices Apple on the bottom line. For example, if she had ruled that the jury was all wrong by giving Apple (as part of its award) a percentage of the infringer's (i.e., Samsung's) profits, then that would really up the ante for Apple in a retrial and would make a reduction the most likely outcome. But the adjusted damages periods -- just a few months for the most relevant products -- have limited impact compared to the discrepancy between Apple's claim and the jury's award. Judge Koh had to vacate those parts of the damages award because the jury award was an aggregate per-product figure, not granular enough to just subtract the portion of damages relating to the months before Samsung had notice of is alleged infringement. In other words, the decision to vacate had more to do with a formal problem and deference to a jury (whose awards can't easily be second-guessed) than with a fundamental problem with Apple's entitlement to substantial damages. That's what I saw right away on March 1, but I was alone in doing so.

Again, we need to see now how the court rules on the motion to strike, but at least Apple will, realistically speaking, get to present the corresponding portion of last year's claim minus the adjustments of the damages periods. There will be an upside for it, and it won't be easy (though it will be possible) for Samsung to prevent the total award from going up.

After Samsung itself stated for the first time that the total damages award could be greater after the retrial than it was before the March damages order vacating parts of the verdict, contrary to incorrect reporting by the media containing quotes from partly incompetent people (at least one of those who spoke out on this is easily among the top three experts on U.S. patent law, but had unfortunately not followed this case in sufficient detail before commenting on the March ruling), Fortune/'s Apple 2.0 blogger Philip Elmer-Dewitt asked: "How could the press get the effect of a judge's high-profile ruling so wrong?" After almost five months, I've made an attempt to answer that question in a post on this week's New Zealand patent reform bill, which contrary to mischaracterizations does not abolish all software patents. You're going to see that the longer these smartphone patent disputes take, the more frequently the general media and certain experts they quote will miss the point. For example, there are still journalists (including some people I truly like) who believe Google prevailed on its fair use defense at last year's Oracle Android/Java trial, when in reality the jury was just hung and a reversal of the district court's finding of non-copyrightability would put fair use back on the agenda. Retrials and remands create a degree of procedural complexity and a risk of confusion that most people don't have the time to cope with, which doesn't prevent everyone from writing about and speaking out on these cases regardless (and some just have to write about this whether they like it or not). I try my best to help the press get things right, and I'm glad that there are journalists who make use of this assistance for the benefit of their readers.

If you're interested in Samsung's motion to strike, here it is:

13-08-30 Samsung Motion to Strike Portions of Apple Damages Report by Florian Mueller

I've also uploaded Apple's motion to Scribd, but I chose not to publish or discuss it in this post because it doesn't shed much light on the economic dimension of the retrial.

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Friday, August 30, 2013

German court stays Nokia lawsuits against HTC, ViewSonic over two app data-routing patents

Today the Mannheim Regional Court announced its decision to stay four patent infringement actions: two lawsuits brought by Nokia against HTC over two app data-routing patents and two against ViewSonic over the same patents. The patents-in-suit are from the same patent family: EP0882375 and EP1439723 on "a communication network terminal supporting a plurality of applications".

Nokia asserts that the way in which Android routes push messages from third-party application servers over Google's server to applications installed on an end-user device infringes on these patents. Google intervened in all four cases.

In accordance with the preliminary inclination indicated at the May 7, 2013 trial, the court found HTC and ViewSonic's Android-based devices to infringe these patents, but it also doubts strongly that these patents will come away unscathed from the nullity (invalidation) actions before the Federal Patent Court of Germany. ViewSonic is not pursuing a nullity case against these patents on its own, apparently due to budget constraints, but has benefited from HTC and Google's efforts to take down these patents.

Various other German Nokia lawsuits have been stayed this year over doubts concerning the validity of the patents-in-suit, a couple of them by stipulation (i.e., voluntarily), and in the case of these app data-routing patents the court's assessment of likely invalidity, at least in the form in which it was discussed at the May trial, hinges on a theory that effectively deems the potential novelty of one claim describing a data structure entirely irrelevant to the novelty of another claim referring to that data structure (as if an independent claim could be held against a claim depending from it the way a prior art reference could be). While the result of the nullity proceedings at the Federal Patent Court could be the one the Mannheim court considers highly likely, I wouldn't be surprised to find the Federal Patent Court analyze a dependent claim based on all of its limitations and disclosures, including the ones it incorporates by reference from an independent claim.

Nokia has issued this official statement:

"Nokia is pleased that the Mannheim court has found HTC and Viewsonic to infringe two Nokia patents. These are among more than 50 patents asserted against HTC, which has already been found to infringe other Nokia patents and an injunction is already in effect in Germany as a result of those decisions. HTC needs to end its unauthorized use of Nokia's proprietary innovations."

That statement barely mentions ViewSonic and focuses almost completely on HTC, which is obviously the strategically more important target for Nokia and the larger-scale dispute. I reported on Tuesday that HTC and Nokia have submitted a joint pretrial schedule for the ITC investigation of Nokia's second complaint against HTC, and that they told a U.S. district court that they frequently meet for settlement talks but haven't reached an agreement yet.

HTC, represented by Hogan Lovells in the German Nokia cases, has been defending itself extremely well so far, in some cases with Google's help (represented by Quinn Emanuel), which it may not even need because it's a very experienced, competent and creative litigant in its own right.

Plaintiffs like Nokia typically hope to win some quick, high-leverage injunction(s) in Germany and to settle worldwide disputes on that basis. Nokia has won a German injunction against HTC and is enforcing it, as its statement quoted above mentions, but that one has not made HTC back down. As a result, this dispute, which started in the spring of 2012, may go on for some more time. Next month a couple of rulings on HTC countersuits against Nokia will come down, but I'm not sure that those will lead to a settlement. This means that Nokia's more recently-filed patent assertions (such as the second ITC complaint mentioned before) will be particularly key to the resolution of the dispute. Also, the UK proceedings are behind the Geramn infringement cases and could provide some clarity. And at some point, starting next spring (absent a settlement, of course), the Federal Patent Court of Germany will start to adjudicate numerous nullity (invalidation) complaints targeting Nokia patents-in-suit, including various ones at issue in stayed cases. If HTC has been found to infringe a patent but the case was stayed over doubts concerning the validity of the patent, and the patent actually does survive (contrary to what the infringement court considered the likely outcome), then a tipping point in Nokia's favor could be reached, further down the road.

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Thursday, August 29, 2013

Microsoft taking aim at Motorola's "empty head, pure heart" defense in ongoing Seattle trial

The Microsoft v. Motorola breach-of-FRAND-pledge trial, which started on Monday, is still going on in Seattle, and I'm glad when at least some documents get filed because it makes it easier to follow the trial from a distance of well over 5,000 miles.

GeekWire's Todd Bishop reported on Twitter that Now-Google executive and previously Motorola's vice president of intellectual property licensing, Kirk Dailey, said the following: "At the time, based on what I knew, I thought that what I sent was a [F]RAND offer." In a filing made this morning (the court apparently asked both parties to provide input on the admissibility of evidence relating to antitrust investigations of Motorola's conduct), Microsoft describes this as an "empty head, pure heart" defense. (Microsoft's counsel did not coin this term, which is commonly used in U.S. disputes over what constitutes good-faith or bad-faith conduct; Motorola, in its submission, omits the words "empty head".)

This denial of bad intent is somewhat (but not too closely) related to Motorola's position that its October 2010 royalty demand letters at issue in this case were merely an invitation to sit down and negotiate.

The Google subsidiary faces an uphill battle because the jury will be (or has already been) informed of the FRAND rate determined by the court, which is less than one-twentieth of a percent of Motorola's original demand. Finger-pointing at Microsoft, claiming that it was/is trying to destroy Android when it's actually signed 20 Android patent license deals (19 of them without any litigation), is going to be of limited use. In my opinion, the October 2010 letters contain a rather clear ultimatum. So it's not surprising that Google's Motorola resorts to an "empty head, pure heart" defense.

The parties disagree on (among other things) whether Microsoft may present evidence and elicit testimony regarding antitrust investigations of Motorola's conduct. One of Motorola's arguments is that this case is a contract lawsuit and Microsoft didn't bring antitrust claims in it, but Microsoft says these regulatory investigations are nevertheless relevant to the question of whether Motorola can really claim that it didn't know that it was doing something problematic. And there are other legal theories that I won't elaborate on because the judge will soon rule on the admissibility of such evidence and argument (or may already have done so -- no live-tweets under the #motosoft hashtag this morning), except that I do want to mention that Google says the FTC consent order enjoys protection under rules meant to protect settlement offers.

Microsoft's submission also mentions the European Commission's antitrust investigation of Motorola Mobility's enforcement of standard-essential patents against Apple and Microsoft. That investigation, unlike the one by the FTC, is still ongoing. While the European Commission made clear that the launch of formal investigations does not mean that a company will ultimately be found to have breached EU competition rules, it's still reasonably meaningful.

There's a third governmental investigation that would be very relevant here, but it wasn't discussed by the parties' submissions this morning: the ITC investigation of Motorola's complaint against Microsoft. There wasn't a final ruling on Motorola's SEP claims because the Google subsidiary withdrew them (not least because of pressure by the FTC) between the preliminary and final rulings. So I'm not sure this is going to come up this week at all, but to all those following the trial fom afar like I do and trying to form an opinion on whether Motorola acted in good faith, I strongly recommend taking a look at ITC Administrative Law Judge David Shaw's findings. After a protracted investigation and a full evidentiary hearing (the ITC equivalent of a trial in district court), Judge Shaw found that "Motorola was not interested in good faith negotiations and in extending a [F]RAND license" to Microsoft. So much for good faith and the allegedly pure heart...

Here are some of the key findings in Judge Shaw's preliminary ruling regarding Motorola's behavior:

  • "The offers made to Microsoft show that although Motorola assured the [standard-setting organizations] and the public that it would provide reasonable and non-discriminatory licenses for the patents essential to certain standards, those communications were misleading."

  • "[...] Motorola's statements and conduct toward Microsoft, and also toward [REDACTED/presumably including Apple], show that Motorola's statements to the SSOs were misleading."

  • "The evidence shows that the royalty rate offered by Motorola of 2.25%, both as to its amount and the products covered, could not possibly have been accepted by Microsoft."

  • "Indeed, there is no evidence that any company would agree to the offer that Motorola sent to Microsoft."

  • "[...] the evidence supports Microsoft's conclusion that Motorola was not interested in good faith negotiations and in extending a [F]RAND license to it."

Kirk Dailey is an intellectual property professional. It stretches credulity that he had no idea of the unacceptability of his demand letters when an ITC judge found that no reasonable company in Microsoft's shoes could have acceded to them. After acquiring Motorola, Google (the parent company) hired him. Google is very smart and sophisticated. It wouldn't hire someone with an empty head.

It's also important to consider here that Judge Shaw is not at all biased against patent holders like Motorola. His findings were based on the specific outrageousness of Motorola's demands, based on which he couldn't help but conclude that Motorola didn't mean to invite Microsoft to negotiate but was just looking for an excuse to seek product bans. In another case involving standard-essential patents (the investigation of InterDigital's mid-2011 complaint against Nokia, Huawei and ZTE), Judge Shaw sided with the patent holder. In other words, a so-called "patent troll" seemed more reasonable to him than Motorola.

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Follow-up on New Zealand: patent offices and judges don't interpret patent law like geeks do

My tale-of-caution post on yesterday's adoption of a patent reform bill in New Zealand has been one of my most popular writings this month -- popular in terms of the interest it has drawn, not in terms of the message that certain Internet crowds would have preferred. The stated goal of that post was not to curry favor with any audience, but to discuss the matter responsibly.

This follow-up post has two distinct parts. In the first part I'll explain the discrepancy between mainstream media reports that New Zealand has banned/outlawed/whatever software patents and the more nuanced and cautious opinions expressed by IP-focused writers, including a couple with whom I don't always agree. In the second part I'll try to explain with what kind of mindset one has to approach a piece of substantive patent law when trying to assess the effect it will have further down the road. What may appear crystal clear to a geek usually doesn't have its broadest meaning when patent offices and courts of law have to make sense of it. I think there are some easy ways to show why that New Zealand law isn't tantamount to the abolition of software patents.

Disconnect between mainstream media and IP-focused writers

Most media reports on the decision have been misguided, and have in turn misguided the readers of those articles. Interestingly, even an overtly (and sometimes shrill) anti-IP blog named Techdirt has been far more measured and closer to accuracy this time than all those mainstream IT media, saying that "New Zealand Sort Of Bans Software Patents" (emphasis mine) and that "while the intentions appear to be good, some of the language in the bill may open some loopholes, so we'll be interested to see how the bill is actually interpreted, and what happens within the actual tech sector". This more cautious take by Techdirt should give all those people pause who attributed, in certain discussion forums, my analysis, which was more than anything else an effort to prevent people from making false business decisions in reliance on political spin, to the fact that I have (voluntarily and proactively) disclosed consulting relationships with industry players Microsoft and Oracle, who presently support strong IP protection for software. It should also be food for fought for those who dismiss Intellectual Asset Management magazine's analysis as biased because its readers are mostly patent lawyers.

There's an undeniable discrepancy between the assessments of IP-focused blogs/websites on the one hand and mainstream media on the other hand. Now, whom should you trust if you don't have the time and background to research the whole issue for yourself? That's your choice, but you should at the very least be cautious when you see that IP-focused people throughout the political spectrum -- from radically anti-IP (Techdirt) to moderate (this blog, because I used to campaign against software patents but do understand the industry's perspective as well) to consistently pro-IP (IAM Magazine's Joff Wild and I disagree from time to time, such as on standard-essential patents) -- do not portray the New Zealand decision in the simplistic black-or-white manner in which mainstream IT media do. Even in case you assume that Techdirt's Mike Masnick (who said he was surprised when it turned out he had received funding, indirectly, from Google), IAM's Joff Wild and I are agenda-driven while mainstream media are not (or to a lesser degree), the presumed agendas of the three of us IP bloggers cover the entire spectrum.

Substantive patent law (the rules of patentability, including patent-eligibility) is a highly specialized subject. Patent law is way more specialized and, to the general public, far less accessible than most (if not all) other fields of law, and substantive patent law is a thin vertical slice, and by far the most abstract part, of patent law. In my anti-software-patent lobbying efforts I once met a Member of the European Parliament who's a law professor and he asked me questions about this for almost two hours because he wanted to understand the intricacies of software patentability rules. Keep this in mind when choosing which kind of sources to trust.

The Internet is huge, but you won't find a reporter for a totally independent mainstream publication who really understands this particular field.

Before we get to the question of competence: mainstream journalism isn't always as independent as you might think. Some publishers have stricter disclosure rules than others. Even where the rules are in place, you won't find 100% compliance across an entire industry. IT websites are typically advertising-funded. It's not advisable to assume that editorial decision-makers never care about the interests of the major advertisers who fund them. And journalists always depend on their readers. Populist headlines are quite useful for link-baiting, even if inaccurate. Just to be clear, most of the journalists I know seem perfectly honest, so most of the time the problem is just that they have to do several stories a day on a variety of subjects. They simply can't, even if they give it their best, have the same detailed understanding of a given topic as people who've been focusing on these complex issues and processes for years. Furthermore, they have space constraints and must keep things short and simple for an audience, but even experts frequently can't be accurate and short/simple at the same time.

I often get asked why my blog doesn't allow comments, and why comments are deactivated on almost all of my Google+ posts. (I do, of course, get responses on Twitter, and sometimes I answer there.) That's because there's too much half-knowledge out there that is too time-consuming to address. I'd have to debunk stupidity after stupidity to prevent readers from getting confused by pretenders -- people who use specialized terminology, invoke laws and cite to judicial decisions but actually don't know what they're talking about. I believe my time is better spent on other activities, and this blog is basically a by-product of, and promotional tool for, my work as a consultant.

To be clear, independent journalism is important, and there are literally hundreds of journalists I've been in contact with just over the last few years, most of whom I totally respect and try to help with information when they request it. They do an important job, and their efforts and mine are complementary, except that there can be situations in which I disagree with mainstream media. For one example, let me refer you to Philip Elmer-Dewitt's article on how I was right and mainstream media were wrong on the March 1, 2013 Apple v. Samsung damages ruling. Philip notes that "[a]lmost lost in the flood of 'Apple setback' headlines was the lone voice of FOSS Patent's Florian Mueller, who pointed out that what was being described as a drastic cut in a $1.05 billion award could, in theory, turn out to be an increase". By now, everyone knows that I was right because Samsung acknowledged it. I was even being conservative: Samsung says Apple is claiming "vastly greater damages" in the retrial. If you insisted on the broadest definition of independence, you'd have had to rely on the mainstream press, which told you that Apple was going to get less money out of this case. But, with the greatest respect, independence does not compensate for incompetence. I always say what I believe in, and even if people suspect that I want to do clients a favor, there are examples when I get things right that others get wrong. A more recent example is the scope of a U.S. import ban Apple won against Samsung. Most of the initial media reports said that only certain older devices were banned. But the import ban would also apply to any newer (including future) devices that infringe in the same way. I published the letter the ITC sent to U.S. Customs because it leaves no doubt about the potential scope of the order.

Let me close this first section by conceding that there is a conundrum facing everyone trying to obtain information on these cases. On the one hand, mainstream media get certain things in these highly-specialized contexts completely wrong, and I've talked to various lawyers involved with the smartphone disputes (mostly when I saw them in German courts, where U.S. counsel is frequently also present) who told me they find my blog fundamentally more reliable on their cases than even the most reputable financial papers, which sometimes don't even understand who's actually won a lawsuit (if there's a mixed ruling). On the other hand, the kinds of people who specialize on these issues -- even anti-IP activists like the Techdirt author or a certain European anti-software patent organization -- will sooner or later have some financial relationship of some sort with some industry player, even if indirectly, such as through membership fees paid to industry associations or donations made to non-governmental organizations. These major players are like an elephant in a room: they're everywhere. You'd also be hard-pressed to find a professor in the relevant fields (law, economics, computer science) who's never ever represented or advised a client, never taken money for a study, never appeared in court as an expert witness. The holy grail of someone who's competent enough to have consulting and other opportunities with large organizations but stays totally independent -- and still finds enough time to stay up to date on all the details of an issue -- simply doesn't exist. That's the number one reason why specialized blogs like this one not only exist but thrive.

How patent examiners and judges interpret substantive patent law in practice

When laypeople read in the New Zealand bill that something isn't patentable if the invention lies solely in it being a computer program, they think that this can be interpreted in only one way: no more software patents. But they have to understand that legal professionals and software engineers are divided by a common language, to the extent that even the meaning of words like "invention" and "computer program" differ greatly between everyday use and legal use. If a given company told its software developers that they can no longer obtain patents on inventions matching that criterion, they'd stop filing any patent applications because it would look to them like a waste of time -- but if the same company sent the same instructions to its patent department, the lawyers would simply conclude that they have to draft around the exclusion, and that's what they would do from there on out.

What additionally complicates this is bias. More than 2,000 years ago, Julius Caesar wrote in his Commentary on the Gallic War (parts of which I had to translate from Latin in high school) that "fere libenter homines id quod volunt credunt" -- people believe quite readily that what they want to be the case is the case. Even if it's not. The Romans capitalized on this through certain stratagems, making their enemies believe that they were on a retreat, only to launch a massive assault once their enemies relaxed. It worked again and again.

In theory, patent examiners and judges should read substantive patent law without any bias. And many of them try hard to. And the one thing they certainly won't have is an anti-patent bias. New Zealand's patent office is not going to be interested in interpreting the law in a way that would require it to lay off half or more of its staff. It will have to apply the law, and it may receive instructions from the executive government. But it won't approach this new piece of legislation with a "good riddance" mindset.

The patent prosecution process is inevitably skewed because it's easier for a patent examiner to grant an application than to reject it. If you grant it, anyone against whom it's asserted later has to deal with the problem. As long as you reject it, the patentee's patent attorney will keep trying to persuade you to grant it, and will amend the claims and other parts of the documents until you're satisfied.

The foregoing is not a consideration for the courts who rule on the validity of a patent. Still, you can't expect any judicial activism of the abolitionist kind. Judges look at it from both angles. On the one hand, there must be limits to what is patentable. On the other hand, they know that patent law also means innovators are entitled to protection, provided that their inventions meet certain criteria.

When you have to balance boundaries with entitlement, New Zealand's new law doesn't provide nearly the degree of clarity that mainstream media would have you believe. A phrase like "lies solely in it being a computer program" is very interpretable; the examples of one patent-eligible and one patent-ineligible invention are worlds apart and not clear enough; and when you then see that lawmakers intended to keep "embedded" software within the scope of patent-eligible subject matter, but consider that the question of whether software is "embedded" can in most cases not be answered based on a technical solution for which someone seeks a patent (just like software developers who write "embedded" software may very well use code in it that they previously used in non-embedded software, or the other way round), then you know that all of the line drawing that needs to be done is now your job. This happens all the time, not just in connection with patents: politicians can't reach a consensus on a clear-cut, sharp set of rules, so they produce something vague and leave it to the courts to sort it out. And courts tend to find that an invention is not subject to an exclusion if the exclusion isn't sufficiently clear. That's the way it works, most of the time.

The NZ patent reform bill is not clear. I'll tell you what would be clear, or relatively speaking, clearer:

  • If New Zealand had adopted Richard Stallman's proposal of a broad exclusion from enforcement, then it would simply be impossible to sue software developers and users over patents, regardless of what those patents cover. (This would, of course, depend on whether the exclusion from enforcement is phrased clearly by lawmakers, but I just assumed so for the sake of the argument.)

  • The NZ law would at least be a whole lot clearer if the examples of a patent-eligible and a patent-ineligible kind of invention were closer to each other. The example of an auto-complete application using a database and forms doesn't mean much: based on that description alone, the rather permissive European Patent Office wouldn't grant you a patent, and even the most permissive USPTO most probably wouldn't.

    The auto-complete example misses the point. The tricky area in which to draw the line involves software that makes a technical contribution, such as a file system that stores data more efficiently, a database that runs certain types of searches more quickly, security software that detects attempts to hack a system, video codecs -- and those inventions can be implemented in hardware as well, so an exclusion that merely refers to computer programs (and uses an auto-complete program as an example) doesn't really capture them.

    Video codecs, which I just mentioned, are a particularly good example: the NZ patent reform bill doesn't say that graphics adapters are no longer patentable. Now, if someone patents a technique that can be used in a graphics adapter, but someone else implements it in software, then he may get a software patent in the sense of a patent that software developers and users may be found to infringe. The patent office can't reject the patent application because the law doesn't say that innovations relating to graphics adapters are no longer patent-eligible (this also was never the intention of any UK court, by the way). But at the enforcement stage, there's no exclusion in NZ of the kind that Richard Stallman advocates. So the patent can be granted, and an infringer can ultimately be held liable, with all that it entails.

I'm confident that these explanations have already furthered many people's understanding of the issue. It's a difficult subject, and I encourage everyone with an interest in understanding this in more detail to study the European situation. The U.S. approach (which the Supreme Court described as inclusive in its Bilski opinion) is that the scope of patent-eligible subject matter has boundaries, but no exclusions of the kind that Europe has had for several decades now, and that people overrate in connection with the New Zealand patent reform bill. Of course, most of the people who reported and commented on the New Zealand decision have never even read a single European court decision on patent-eligible subject matter. (By the way, just this month I've requested the Federal Patent Court to let me inspect the record of roughly two dozen pending nullity -- i.e., invalidation -- cases.)

Almost a decade ago, the Council of the European Union adopted a proposal on software patents that I was fighting hard against. If you believe that the New Zealand law abolishes software patents, how would you have liked this article from the European proposal, for example?

"Article 4.A

A computer program as such cannot constitute a patentable invention.

A computer-implemented invention shall not be regarded as making a technical contribution merely because it involves the use of a computer, network or other programmable apparatus. Accordingly, inventions involving computer programs, whether expressed as source code, as object code or in any other form, which implement business, mathematical or other methods and do not produce any technical effects beyond the normal physical interactions between a program and the computer, network or other programmable apparatus in which it is run shall not be patentable."

Doesn't that sound even better than the NZ law? And it gets even better, seemingly, if I show you how the European proposal defined "technical contribution", a term that also comes up in the article I quoted above:

"Article 2b

(b) 'technical contribution' means a contribution to the state of the art in a field of technology which is new and not obvious to a person skilled in the art. The technical contribution shall be assessed by consideration of the difference between the state of the art and the scope of the patent claim considered as a whole, which must comprise technical features, irrespective of whether or not these are accompanied by non-technical features."

Well, even the above language, which appears at first sight to constitute a clearer exclusion of software inventions from patent law, would have allowed for most software patents to be granted. You don't have to take my word for it. I'll just refer you to the analysis published at the time by the Foundation for a Free Information Infrastructure (FFII), the NGO that started the European anti-software-patent movement. Here's how the FFII commented on Article 4.A of the European proposal:

"This article is based on a JURI amendment (= amendment from the people who also run the Council's working party) that made it through the EP Plenary Session only because it is meaningless and therefore harmless. The Council's additions however make this amendment harmful. They use the wording of Art 52 EPC and insinuate that a 'program as such' is only the 'expression' side of this program, i.e. narrow copyright-style claims that nobody would write into a patent anyway. This interpretation does not conform to the usual requirements of interpretation of laws and is not currently in use at the patent courts. It deprives Art 52 EPC of all limiting meaning."

You may now be confused, but hopefully at a higher level. Don't take exclusions from the scope of patent-eligible subject matter at their face value. It's a lot more complex than that.

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Wednesday, August 28, 2013

New Zealand Parliament adopts UK approach to software patents, allows broad swaths of them

I just learned on Twitter, from a patent attorney supporting software patents who is very happy about this outcome, that the New Zealand Parliament has adopted a patent reform bill containing a compromise wording on the patent-eligibility of software inventions. Three years ago I commented on the legislative process in New Zealand and cautioned people that abolition wasn't certain because there were clear signs of political support for software patents. For example, the proposal that was on the table at the time said in a footnote that smartphone inventions, almost all of which are software patents, should remain patentable. Based on today's decision I can say with certainty that abolition absolutely positively did NOT happen. (Formally, a third parliamentary reading occurred after that tweet, but it was merely a formality).

While I can see on Twitter that the movement pushing for abolition declares victory, that's not only inaccurate but also an irresponsible thing to do. From the perspective of abolitionists (and I know a thing or two about this because I founded and used to run the European NoSoftwarePatents campaign), the glass in New Zealand is not even half-full. It's still almost entirely empty. I understand that politicians and political movements like to overstate their achievements only to please their supporters/voters, and in this case the spin-doctoring may be driven by a desire to influence political debates in other jurisdictions and the evolution of case law in New Zealand, where there will obviously be some degree of uncertainty now, in some areas, as the courts have to apply the first patent reform bill in decades.

I advocate realism and rationality here because it's the only responsible thing to do. If people are misled to believe that New Zealand has (largely or entirely) abolished software patents, they will make decisions that they will sorely regret when they find out the truth too late. Some innovators will be discouraged from filing applications for software patents, and later they may be sued by those who know that software is still largely patent-eligible in New Zealand and won't have patents of their own to defend themselves with. And some people will believe they are free to infringe -- until they get sued and a court holds them liable. I can't prevent others from engaging in reality distortion, but my conscience doesn't allow me to tell anything other than the truth on this.

I'm now going to explain why the New Zealand outcome is far from large-scale abolition, and why the "compromise" is mostly a victory for those promoting, not those opposing, software patents.

Three years ago, the bill contained a broad statement that "[a] computer program is not a patentable invention" (§ 15-3A). It turned out to be unworkable, and clarifications like smartphones being patentable showed that the intent never really was to do away with all software patents. But a broad statement it was, and the compromise adopted today contains the European "as such" wording. In Europe, hundreds of thousands of software patents have been granted because an exclusion of computer programs "as such" is not an exclusion of patents on software inventions that make a technical contribution. Simply put, "as such" excludes certain aspects of software from patent-eligibility, but not all of them. It largely excludes parts that are protected by copyright law anyway, as opposed to the technical solutions to technical problems that are the province of patent law. The supplementary order adopted in New Zealand says this:

Subsection (1) [which says, like the 2010 bill, that a computer program is not an invention] prevents anything from being an invention or a manner of manufacture for the purposes of this Act only to the extent that a claim in a patent or an application relates to a computer program as such.

[emphasis mine]

Again, "as such" alone doesn't really mean a huge difference between U.S. and European rules on patent-eligibility. The U.S. approach of "everything under the Sun made by Man" being patent-eligible is obviously the most permissive one, but I follow litigation on a cross-jurisdictional basis and in the smartphone patent disputes I watch the vast majority of software patents asserted in the U.S. also exist, or could have been successfully applied for if the patentee had so elected, in Europe.

The New Zealand compromise doesn't stop there, and it then seeks to clarify "as such":

A claim in a patent or an application relates to a computer program as such if the actual contribution made by the alleged invention lies solely in it being a computer program.

[emphasis mine]

The order then goes on to provide examples of what falls within the scope of patent-eligibility in accordance with this sentence. That sentence on it own would not really mean anything. Most of those hundreds of thousands of European software patents also don't cover inventions that lie solely in being a computer program. There's a clear technicity requirement.

The bill provides two examples, one of an invention meant to be patentable under the compromise bill (a washing machine that does a better job at washing clothes) and one meant to be excluded ("a process for automatically completing the legal documents necessary to register an entity", using standard computer hardware). These examples still don't really provide much clarification because these are two extremes, and for line-drawing you need a narrow corridor, not the broadest one imaginable. If the improved washing machine was excluded from patent-eligible subject matter, the patent system would be confined to little more than molecular pharmaceutics. As for the auto-completion of legal documents, the bill only says that "[t]he hardware used is conventional" and that "[t]he only novel aspect is the computer program", and that "[t]he mere execution of a method within a computer does not allow the method to be patented", but most of the hundreds of thousands of software patents we have in Europe are patented because of a technical contribution that goes beyond what this description says. In fact, the auto-complete example in the New Zealand bill is so vague that, without a greater degree of specificity, it wouldn't even be useful for the purpose of illustrating differences between U.S. and European software patent-eligibility rules.

It would be an understatement to say that there is a broad corridor between the two extreme examples contained in the New Zealand bill. The courts in New Zealand are now left to do all of the line-drawing work because politicians, who ultimately realized that they couldn't deprive domestic inventors of protection and isolate their country on the international scene by violating the TRIPS agreement, didn't really do so. At best, one can read between the lines of that bill that there was some pressure to be restrictive in connection with software patents -- but restriction is a fundamentally different thing than abolition.

The story that is being told by New Zealand politicians and lobbyists/activists is that the New Zealand patent reform bill adopts the UK case law on software patents, which is described as the most restrictive one in Europe. In the smartphone patent cases I watch, challenges to the validity of patents are regularly brought in UK courts, typically in hopes of influencing decisions by German courts, where most European infringement complaints are filed. And the UK is anything but a "no software patents" jurisdiction. Therefore, New Zealand won't be a "no software patents" country either.

The rate of success of defendants in infringement proceedings, or plaintiffs in declaratory judgment complaints seeking the invalidation of patents, is indeed very high in the UK, but that's not because of patent-eligibility rules. There are various reasons for this. One thing I noticed in various smartphone cases is that UK judges tend to frequently find patents obvious over "common general knowledge", while German courts (particularly the German courts hearing infringement cases, in which the validity of a patent is looked at cursorily but not actually adjudicated) want to see evidence in the form of prior art references (documents, products etc.).

For a case study that shows what the UK approach really comes down to (and what future New Zealand patent-eligibility case law may very well look like after today's patent reform vote), I recommended an HTC v. Apple case. The England and Wales High Court threw out four Apple patents, but even though HTC claimed that every one of them was a software patent and therefore covered an ineligible invention, it prevailed only once -- and even that finding of patent-ineligibility was reversed on appeal! As a result, one of the two claims of that patent survived, and the other one was still found invalid, but only on obviousness grounds. The lower court had basically found that the patent in question, EP2098948 on a "touch event model", didn't have a technical effect but merely made life easier for programmers by giving better structure to code. This is very similar to the New Zealand concept of an invention lying solely in it being a computer program: there's something about it that is limited to the intangible realm of code, not the real world of programmed devices. And even that reasoning wasn't affirmed on appeal.

I'm in no position to predict what the New Zealand courts are going to make of this bill, but I can tell you based on my intimate knowledge of the European situation (I'm based in Germany and follow patent disputes in many countries, including several European countries, which obviously include the UK) that the courts and the patent office in New Zealand still have massive wiggle room to allow software patents, so if I were a corporate executive who cared about the New Zealand market, I would definitely continue to file software patent applications, and I wouldn't consider it responsible to assume that I can just go ahead and infringe.

When all of this settles out, some of the people who celebrate today will be very disappointed to find that the New Zealand patent reform bill isn't nearly as restrictive, let alone abolitionist, as they used to think. By the time they find out, many of today's politicians may not be in office anymore.

[Update] I did a follow-up post the next day that explains all of this further. I'd like to stress that the NZ patent reform bill doesn't disallow patents on graphics adapters, so, for one example, it's still possible to patent video compression techniques, which can later be asserted against infringing software. That's an example that also came up in the European software patentability debate about a decade ago, in which I participated rather actively. [/Update]

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Patents firm Intellectual Ventures accuses Google's Motorola Mobility of "transparent attempt to stall"

Google's Motorola Mobility has to defend its Android-based devices against two Intellectual Ventures lawsuits, one filed in the District of Delaware in 2011 and one filed in the Southern District of Florida about two months ago. The earlier-filed case is scheduled for a January 2014 trial, and at the end of my post on the second complaint I already said that "I wouldn't be surprised to see Google request a transfer of this new case from Florida to Delaware in order to consolidate it with the case pending there and to potentially delay the trial". That has indeed happened, and this week IV has responded to that motion, as well as to another motion (asking for a stay of the Florida proceedings until the transfer motion is adjudged), and it has amended its complaint in response to a motion to dismiss for failure to state a claim.

Google branded IV as a troll for suing its Motorola Mobility subsidiary, though Google was one of IV's early financial backers (as I mentioned in my report on the 2011 complaint) and has been engaging for quite some time now in the utterly trollish enforcement of a repeatedly-found-invalid patent in Germany against Apple, affecting Apple's users in Germany as opposed to the company's bottom line. Furthermore, what IV's other critics primarily express concern about is transparency in patent ownership, and Google doesn't seem to promote, let alone practice, such transparency. Also, while IV can be described as a patent hoarder, Google has become quite a patent hoarder as well. Most recently it bought some patents from Foxconn, and that's just one of many patent purchase agreements it's entered into. Unlike IV, it makes products and offers services, but a patent hoarder it is.

In the official documents in this case, Google has not made a "troll" kind of argument yet. It just denies everything (as defendants typically do in these cases) and seeks to delay. IV, however, keeps pushing hard for a swift resolution. In order to speed things up, it filed an amended complaint not long after Google brought a motion to dismiss (this post continues below the document):

13-08-26 First Amended IV Complaint (S.D. Fla.) Against Motorola by Florian Mueller

Google's motion to transfer venue is the normal course of business, but it has a huge credibility problem here because Motorola Mobility itself stressed its ties to the Southern District of Florida, where it has hundreds of employees mostly working on R&D, in its disputes with Apple and Microsoft. Apple was denied a transfer to another district, while Microsoft overcame Motorola Mobility's opposition to a transfer two years ago. In its opposition to Google's motion to transfer its case, IV basically has to do two things. On the one hand, and that's the easiest part, it can quote from and point to Motorola Mobility's own arguments in those past cases claiming that the Southern District of Florida is the right place for patent infringement cases to which it's a party. Among other things, it stressed that its Florida operation is just 30 miles from the courthouse. On the other hand, IV addresses Google's claims that certain lawsuits filed in the District of Delaware -- the first IV v. Motorola Mobility case as well as litigation brought by IV against other defendants over partly the same patents -- make that district the most efficient choice. IV argues that none of the patents it asserts in Florida are related to the ones it asserts against Motorola Moblity in Delaware, and it argues that any Delaware rulings on patents asserted in Florida can be notified to the Florida court. I think IV has some strong points here, and Google appears to have overstated the overlaps between the cases, but a transfer might happen, and I don't think IV has been able to show that Google's motion for a transfer is baseless. I've seen stronger reasons for a transfer, but also weaker ones.

But in parallel Google brought a rather unusual motion to stay the proceedings in Florida pending resolution of its motion to transfer the case to Delaware. In IV's words, "Motorola's motion to stay is a transparent attempt to stall", and I agree. Typically discovery and other work related to a litigation continue. Sometimes the venue transfer decisions come down after substantial progress has been made, but then the whole record is simply transferred to the destination district. In cases in which two parties already have litigation pending in another district, or in which even just one of the patents-in-suit has previously been or is simultaneously being litigated in another district, there's always a basis for bringing a motion for a transfer, and the transfer motion is legit, but a stay pending its resolution reminds me of the saying that justice delayed is justice denied. The fact that Google engages in more than the usual degree of stalling could be an indication that it's more concerned about IV's patents-in-suit than it admits in public.

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Tuesday, August 27, 2013

Motorola's initial demand letters to Microsoft -- ultimatum or "let’s get things started"?

The Microsoft v. Motorola FRAND breach trial that started yesterday in Seattle gets considerably less media attention than certain California trials (Oracle v. Google and Apple v. Samsung) received, but I'm glad that there's some very informative reporting. On Twitter, Janet Tu (Seattle Times) and Todd Bishop (GeekWire) use the #motosoft hashtag for sharing information on what's happening in the courtroom. They've also written articles on the first day of the trial (Seattle Times, GeekWire).

This second trial is way more exciting from a legal than a commercial point of view. It's definitely interesting to have a debate over what constitutes a breach of a FRAND licensing promise and what the remedies for such a breach should be. But from what I read on Twitter, the damages claims themselves aren't huge if you compare them to the size of the companies involved: $23 million in relocation costs for Microsoft's European logistics center and $6 million in attorney's fees for defending against Motorola's SEP-based injunction requests. Even if Microsoft prevailed 100%, the amount wouldn't be a threat to cash-rich Google. Actually, Google's primary concern would be the embarrassment resulting from this (and which would even result from a $1 nominal damages award). While Google can try to tell the public that this trial was about Motorola's behavior in 2010, Google has had 15 months since taking full control over Motorola and hasn't really honored its FRAND licensing obligations.

Again, from a non-financial legal point of view, the breach question is an interesting one nonetheless, and Google takes this trial very seriously.

I understand from the media reports I linked to further above that counsel for Google's Motorola tries to portray Microsoft's October 1, 2010 Android patent infringement complaint(s) against Motorola as part of an effort to put Motorola out of business, a claim that has a major credibility problem because Microsoft has already announced Android patent license deals with 20 companies, 19 of which accepted Microsoft's terms without any litigation. Someone on a mission to kill the competition wouldn't be willing or able to strike so many deals -- and it's not just the number of those deals but let's not forget that companies who took a license without litigation include patent-savvy powerhouses like Samsung, LG, HTC, Foxconn parent Hon Hai and ZTE. Now, I'm not saying that Android patent deals don't have competitive impact. Of course, if money changes hands between companies, there's always some effect on competitiveness. One company may have to raise its prices (or reduce its margins, or a combination of both), while the other can invest its licensing income into more research and development or other business functions. But if you go for people's throats, they won't just do a deal on your terms because they'd stipulate to their own destruction.

As a matter of fact, Motorola was reasonably optimistic that it could settle with Microsoft if it wanted, but knew that its ability to settle was restricted (actually, eliminated) under the merger agreement it signed with Google in August 2011. Here's a passage I previously quoted from an official Motorola filing meant to inform actual and prospective investors of the potential downside of the Google deal:

"Motorola Mobility has certain potential near-term intellectual property ('IP') licensing opportunities and certain IP litigation risks that without the merger may have been able to be settled on favorable terms to Motorola Mobility and may be more difficult to settle on such terms after entry into the merger agreement. Further, if licenses are not entered into and litigation is not settled, Motorola Mobility's position in these matters may be prejudiced if the proposed merger does not close"

This doesn't support Motorola's allegation that Microsoft was "trying to put Motorola out of business".

And now that I've talked so much about that claim, I actually wonder whether it was worth it. I mean, it's irrelevant anyway. Microsoft asserted non-SEPs, which are unencumbered intellectual property. It never promised to extend a license to Motorola on FRAND terms for the ways in which it allegedly used and still uses those patents. We're not talking about a two-way lawsuit about allegations of broken promises. We're talking about two distinct categories of patents that come with different sets of rights and obligations, and only Motorola's SEPs-in-suit raise issues due to encumbrances and restrictions.

Unless someone just fell off the turnip truck, no one would seriously believe that in a dispute between two large corporations any one party would act like a charitable organization and never do anything that a creative legal team couldn't somehow find a way to criticize. Microsoft's patent assertion against Motorola was business as usual. Microsoft has always made it clear that it expects intellectual property rights to be respected and to be licensed, and that it's not in the business of allowing free-riding. This is just so different from Motorola's FRAND licensing promise at issue in this trial. Motorola promised to grant FRAND licenses to those SEPs to all comers, and instead sought injunctions (not only against Microsoft but it's still doing so against Apple as well, and it played this game against BlackBerry maker Research In Motion, a company that is notorious for poor judgment with respect to patent litigation tactics, backing down too easily in some cases and overplaying its hand years ago against a troll). By contrast, if Microsoft could be understood to have "promised" anything (and there never was a formal promise of the FRAND pledge kind), it "promised" to protect its IP, and has generally delivered on that one.

Obviously, Google (Motorola) also knows that it can't just turn this into a finger-pointing contest about who threw down which gauntlet or has the right to throw the first stone. Google's Motorola has to defend its own conduct because diversion is not a defense, and what I read in the trial reports mentioned further above indicates that Motorola describes its $54-million-for-a-Ford-Taurus kind of royalty demand as a "'let's get things started' figure" and says "what Motorola expected was the custom and practice in the industry — that you then talk", but Microsoft filed this FRAND contract case in response to Motorola's October 2010 letters.

Microsoft's take in this litigation has been that those demand letters came with a 20-day ultimatum, and that Motorola already breached its FRAND pledge by making a bad-faith demand.

There will be more talk about this in the days ahead. I already commented on the style, content and context of those letters more than a year ago. Rather than repeat what I said then, I'm now just going to (re-)publish both letters for everyone to see and to form an opinion as to how much of an "invitation" to talk -- as opposed to Hobson's Choice ("take it or leave it") -- they constituted, and we can then talk some more about this based on what the lawyers and the witnesses say as the trial unfolds. I think the language of those letters is clear all by itself, and even clearer in light of the context of a FRAND obligation and ongoing litigation. Also, we all know what happened: a day after Microsoft sought to enforce its entitlement to a FRAND license, Motorola started its pursuit of injunctive relief.

There were two letters, one for H.264 (video codec) and one for IEEE 802.11 (WiFi) patents, with the same basic structure. Here they are:

Motorola H.264 SEP Demand Letter to Microsoft by Florian Mueller

Motorola WiFi SEP Demand Letter to Microsoft by Florian Mueller

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Nokia, HTC, Google propose schedule for build-up to May 2014 ITC patent trial over Android devices

While Nokia, HTC and Google are awaiting a preliminary ruling on Nokia's first ITC complaint against HTC, which is scheduled for next month, they are already preparing the ITC trial on Nokia's second complaint over HTC's Android-based devices. The whole dispute started in May 2012, and various rulings have come down in Germany already (I reported on all of them, and will report on the ones scheduled for this coming Friday as well). The second complaint was filed in May 2013. Google is acting as an intervenor with respect to certain patents in both cases.

This month Administrative Law Judge (ALJ) Theodore Essex allowed Nokia to add to the second investigation a patent that was already asserted last year but referred to arbitration at HTC's request. That patent relates to the routing of data to apps on a mobile phone and looks reasonably interesting at first sight. But Judge Essex wanted to "allow the parties sufficient time to conduct discovery relating to the additional" and two weeks ago set a target of approximately 18 months (counting from the institution of the investigation, which occurred about a month after the complaint), i.e., December 26, 2014.

Accordingly, the ALJ's initial determination would have to be filed no later than August 26, 2014. In order to have sufficient time between the evidentiary hearing (trial) and the target date for the preliminary ruling, Judge Pender has scheduled the trial for the period of May 12-16, 2014.

In a joint filing that became publicly available today, Nokia, HTC and Google made a joint proposal for the schedule of the investigation. It's truly a joint proposal: while such submissions by opposing sides often state more disagreements than agreed-upon items, these three companies are 100% in sync on the different milestones leading to the May 2014 trial and, before that, an October 2, 2013 claim construction hearing.

Nokia and HTC also made a joint submission these days in their Southern California dispute over RFID patents. The district court originally wanted to perform an early neutral evaluation (ENE) to give the parties guidance that might facilitate a settlement. But Nokia and HTC file a joint motion, asking the court to vacate the ENE schedule. They told the court that they "are engaged in ongoing negotiations regarding potential settlement of their global dispute relating to claims that each company infringes various of the other company's patents; the dispute involves, besides the San Diego case over RFID, multiple proceedings before the United States International Trade Commission ('ITC'), the United States District Court for the District of Delaware, and foreign jurisdictions, including cases before the High Court of Justice in England and the Regional Courts in Germany". The Delaware-based court and the ITC already require Nokia and HTC to discuss the possibility of a settlement, and "[i]n addition to [court-ordered] conferences, the parties have been meeting independently to discuss terms of a possible settlement". So they'd rather negotiate without the potential benefit of an ENE conference in San Diego.

Without a doubt, certain lines of communication are open between these two companies. They know each other quite well and have been coordinating their defensive efforts against patent monetizer IPCom for several years. The great unknown here is how far apart their positions on the terms are. The mere fact that parties hold frequent meetings doesn't guarantee a swift, amicable resolution of a dispute. For example, Apple and Samsung have also had numerous meetings over the last couple of years to discuss licensing (the ITC summarized these negotiations at a high level in a recent ruling, the related part of which I published), and Samsung continues to be a supplier to Apple, but a deal hasn't happened yet.

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Monday, August 26, 2013

Samsung says Ericsson is "seeking billions more" than under previous patent license agreements

The Microsoft v. Motorola FRAND trial in the Western District of Washington has just started (parties' counsel are questioning potential jurors as I start to write this post), but FRAND disputes are going on in other venues, such as the United States International Trade Commission (USITC, or just ITC), where Ericsson and Samsung are seeking exclusion orders against each other over a mix of standard-essential and non-standard-essential patents. I recently reported and commented on Ericsson's proposal to have the ITC determine a FRAND license fee for its SEPs-in-suit, which is a sign of strength but not a procedural path that I believe in. Today Samsung has filed its response, and I tried to download that document from the ITC server, but the downloaded version could not be opened on my desktop computer or uploaded to Scribd. Since this is an interesting topic, I'll just paste the text further below (I can at least view the document in a browser and copy from it).

I don't want to jump to conclusions, but there are early signs of Samsung, now that its SEP-based strategy against Apple has failed in the U.S. and Europe (and is not too likely to work out in Japan and Australia), becoming a bit more FRAND-friendly and advocating positions that appear to be increasingly inconsistent with Google's (Motorola's) SEP strategy unlike in the past, where both parties, represented by the same firm (Quinn Emanuel) against Apple, were acting like divisions of the same army. Samsung now argues that the proper FRAND value of a SEP is its ex ante value ("As explained by the USTR, an analysis of the value of an SEP requires an analysis of the value of the patent ex ante before the standard was set.") Google is appealing the FRAND part of Judge Posner's ruling in no small part because of this holding (the related Federal Circuit hearing will take place on September 11, 2013). Also, Samsung is now arguing against SEP-based ITC exclusion orders even if a patent holder made an offer on truly FRAND terms and voices a preference for disputes like this one to "be resolved in other available forums", such as arbitration (not my preference) or district court (great idea, and different from Google's Motorola's stance in the Seattle case).

I like the evolution of Samsung's stance, and I think it's smart: Samsung is going to increasingly have to defend itself against SEP assertions and excessive royalty demands. It used to be a hunter, now it's being hunted, a target of hold-up. There's no point in being a captive of one's own former strategies. Samsung may have read the writing on the FRAND wall and drawn some very appropriate conclusions for its general litigation strategy. It may also be looking for an exit strategy from its FRAND antitrust troubles.

Regrettably, Samsung is still advocating the idea of a comprehensive cross-licensing proposal being a FRAND offer, a notion I reject because it constitutes tying.

As expected, Samsung says the ITC should not make FRAND royalty determinations, and I said that I would support Samsung on this one.

One particularly interesting fact this filing reveals provides a clue as to the economic magnitude of this dispute:

"At trial, Samsung is prepared to show Ericsson’s offers to license its SEPs after the expiration of the parties 2007 license agreement are unreasonably high--seeking billions more than the previous license agreements--and that these offers are inconsistent with FRAND."

Obviously, Samsung's mobile phone business has grown a lot in recent years, and that may explain at least part of a higher absolute royalty demand. But the way Samsung complains suggests to me that it also disagrees with Ericsson on a per-unit basis. For example, Samsung represents that its latest offers "reflect a vast and principled increase in licensing revenue from Samsung to Ericsson over the prior two licenses combined".

Full text of Samsung's response (public redacted version)


Ericsson’s “Notice of New Authority” misinterprets the USTR’s August 3, 2013 Letter (“USTR Letter”), which disapproved an exclusion order issued in the 794 Investigation on public interest grounds. To be sure, the USTR Letter is important, new authority that affects the 862 Investigation and other current and future investigations in which complainants assert declared essential patents. The USTR Letter does not and could not, however, provide supplemental jurisdiction to the ITC to set unilateral FRAND royalty rates for patent portfolios. Rather, the USTR Letter adopts the view of the Department of Justice and other regulators that ITC exclusion orders are not an appropriate remedy for violations of standard essential patents (SEPs) except under limited circumstances. Where, as here, the parties’ only real dispute is one over how much a licensee should pay as a FRAND royalty—not whether it will pay—and other remedies exist, the USTR Letter recognizes the licensor’s proper recourse is in the courts (or private adjudication, such as arbitration, as Samsung repeatedly has offered to Ericsson). As a result, the impact of the USTR Letter on this Investigation is that Ericsson cannot show Samsung is an unwilling licensee where Samsung has negotiated in good faith, made reasonable FRAND offers, proposed arbitration, and never stayed the co-pending district court case containing the same patents-in-suit as an alternative forum for resolution.

Ericsson’s suggestion that the ITC could and should enter the business of setting unilateral FRAND royalty rates, on a portfolio-wide basis, for patent licensing companies like Ericsson—thus encouraging unwarranted SEP litigation in the ITC—is wrong and inconsistent with the USTR’s letter and purpose. Moreover, even if it were proper, Ericsson’s post-discovery request that the ITC now set a royalty between the private parties as part of the Investigation comes far too late and would requi re significantly different evid ence and trial presentation. Thus, Ericsson’s request should be seen for what it truly is: an attempt to co-opt the ITC into forcing Samsung into paying unreasonable royalties for a license to Ericsson’s SEPs. This is precisely the kind of holdup to which the USTR letter is addressed, and that Samsung, through its expert witness Professor Joseph Farrell, has demonstrated to be harmful to the long-term interest of consumers and innovation in the United States.

I. The USTR Letter Limits Availability of Exclusion Orders for SEPs to Cases Involving Clearly Unwilling Licensees

The USTR Letter disapproved the June 4, 2013 exclusion order issued in the 794 Investigation based on an SEP violation. The USTR’s disapproval was not based on challenging the ITC’s “legal analysis or its findings based on its record.” USTR Letter at 3. Rather, the USTR’s decision was based solely on “policy considerations” as “they relate to the effect on competitive conditions in the U.S. economy and the effect on U.S. consumers.” USTR Letter at 3. In particular, the USTR pointed to the concerns expressed in the joint policy statement issued by the Department of Justice and the United States Patent and Trademark Office titled “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary FRAND Commitments” (the “Policy Statement”). USTR Letter at 1–2. The USTR indicated that it “strongly share[s]” the “substantial concerns” expressed in this Policy Statement “about the potential harms that can result from owners of standards-essential patents (‘SEPs’) who have made a voluntary commitment to offer to license SEPs on terms that are fair, reasonable, and non-discriminatory (‘FRAND’), gaining undue leverage and engaging in ‘patent hold-up’, i.e., asserting the patent to exclude the implementer of the standard from a market to obtain a higher price for use of the patent than would have been possible when the standard was set, when alternative technologies could have been chosen.” USTR Letter at 2.

The USTR did not categorically rule out the availability of exclusion orders for cases involving SEPs, but noted the narrow circumstances where “[a]n exclusion order may still be an appropriate remedy,” explaining that “exclusionary relief from the Commission based on FRAND-encumbered SEPs should be available based only on the relevant factors described in the Policy Statement.” USTR Letter at 2. Such circumstances may exist where, for example, “a putative licensee refuses to pay what has been determined to be a FRAND royalty, or refuses to engage in a negotiation to determine F/RAND terms.” USTR Letter at 2, n.3.

Importantly, the USTR was clear that, notwithstanding the limited availability of exclusion orders for violations based on SEPs, the SEP owner would still have a remedy. USTR Letter at 4 (“My decision to disapprove this determination does not mean that the patent owner in this case is not entitled to a remedy.”). That remedy, however, was not an exclusion order in the ITC but rather that “the patent owner may continue to pursue its rights through the courts.” USTR Letter at 4.

In sum, the USTR Letter advocates the limited availability of exclusion orders for SEP-based violations to only those circumstances involving clearly unwilling potential licensees or where there may be no other remedy, and otherwise recognizes that the proper remedy for FRAND-encumbered SEPs should be decided be in the courts (or private adjudication by a neutral third party).

II. Ericsson’s Arguments Misconstrue the USTR Letter, Are Inconsistent with the Law, and Are Unworkable in Practice

In its Notice of New Authority, Ericsson misconstrues the USTR Letter in multiple ways.

A. Ericsson is Incorrect That The USTR Letter Provides That An Exclusion Order Should Issue If Ericsson Has Made A FRAND Offer

Ericsson first incorrectly argues that the USTR Letter provides that an exclusion order may issue for a violation of SEPs if the ALJ finds that Ericsson’s offer complies with FRAND:

First, whether the licensing offers extended by Ericsson to Samsung during their negotiations comply with FRAND--if so, any exclusion order in this Investigation should be conditioned on Samsung’s refusal to accept the terms that have been adjudicated FRAND.

Ericsson Notice at 4.

Contrary to Ericsson’s argument, the USTR Letter does not provide that an exclusion order may issue if Ericsson made an offer that “complies with FRAND,” but rather the USTR Letter instructs that anexclusion order should not issue on public interest grounds unless it is shown that Samsung was unwilling to negotiate for a FRAND license. USTR Letter at 2, n.3. To be sure, whether Ericsson has made a FRAND offer is before the Commission as part of Samsung’s affirmative defenses. If, however, the Commission finds that Samsung failed to prove Ericsson did not make a FRAND offer, that provides no basis for an exclusion order on SEPs to issue. Rather, the USTR Letter is clear that the public interest focus is on whether the potential licensee, here Samsung, refused to negotiate or refused to pay a neutrally-adjudicated FRAND royalty. See USTR Letter at 2, n.3 (“An exclusion order may still be an appropriate remedy in some circumstance, such as where the putative licensee is unable or refuses to take a FRAND license . . . .”). Significantly, these same circumstances arose in the 794 Investigation where the Commission found the respondent (Apple) failed to prove its affirmative defenses based on a failure to make a FRAND offer but the USTR nonetheless disapproved the exclusion order. Thus, the USTR directly rejects Ericsson’s argument that an exclusion order may issue upon a finding that a FRAND offer was made.

Ericsson’s argument that making a “FRAND offer” is the legal threshold for issuing an exclusion order incorrectly forecloses that both parties can make good faith offers consistent with their FRAND obligations but nonetheless be unable to reach agreement. As explained in the 794 Investigation, a “FRAND license could encompass a range of reasonable terms” and may be in the form of a cross license or involve a balancing payment. 794 Comm’n Op. at 60-61 (July 5, 2013) (public version). There is much room for dispute as to the license terms. Nothing in the USTR Letter suggests or implies that an ex clusion order could issue if both parties are acting in good faith and there is a bona fide dispute about the FRAND royalty. Instead, the USTR Letter provides that no exclusion order should issue in that situation because there is no “unwilling” party to the negotiation. USTR Letter at 2.

B. Ericsson Incorrectly Argues That The USTR Letter Provides That the ITC Should Set Unilateral FRAND Patent Portfolio Royalties

Ericsson’s second proposed reading of the USTR Letter is equally problematic. Ericsson wrongly argues that if the ALJ finds no FRAND offer was made, the ALJ should make his own finding of the proper royalties that Samsung should pay for Ericsson’s four different SEP patent portfolios:

[T]he ALJ should go on to determine what royalty rate (and any other terms) would comply with FRAND—then condition any exclusion order on Ericsson offering those terms to Samsung and Samsung refusing to accept them.

Ericsson Notice at 4.

This proposal is without basis in the law, unworkable, and inconsistent with the USTR Letter.

First, the USTR did not purport to (and could not) confer supplemental jurisdiction on the ITC to determine and set a royalty for SEP portfolios for private parties that cannot agree on terms. The ITC is, of course, “a creature of statute, and must find authority for its actions in its enabling statute.” See Kyocera Wireless Corp. v. Int’l Trade Comm’n, 545 F.3d 1340, 1355 (Fed. Cir. 2008). As relevant here, this Investigation was instituted under the ITC’s Section 337 jurisdiction. To determine a violation of Section 337, the ITC may have to determine whether a licensor violated its FRAND obligations to a standard setting organization as part of the respondent’s affirmative defenses. That inquiry does not, however, require determination of what the proper FRAND royalty would be between two parties, particularly where, as here, the license dispute includes patents not before the Commission including those as part of a cross-license. Similarly, the USTR’s public interest inquiry does not require the ITC to make a finding as to the proper royalty between two parties. Rather, it requires a finding as to whether the potential licensee negotiated in good faith, incl uding whether the SEP holder made offers that were reasonable on their face, or so extreme that no counterparty could accept them, and bad faith cannot be inferred merely from the fact that the parties have failed to reach agreement as Ericsson implies. In sum, no defense and no public policy concerns identified by the USTR require or authorize resolution of the price term in the private cross-licensing dispute between Ericsson and Samsung as part of the Commission’s Section 337 Investigation.

Second, Ericsson’s proposal that the ITC engage in the business of setting license royalties is unworkable. Ericsson asks the ALJ to decide the license royalty terms for its worldwide SEP portfolios covering four different standards. Ericsson Notice at 7 (The ALJ “should make an in-depth evaluation of whether Ericsson has offered FRAND terms to Samsung and if not, what would constitute FRAND terms for Ericsson’s standard essential patents.”). Most of these patents are not before the ALJ—Ericsson claims to hold hundreds more patents than those at issue in the 862 Investigation. As explained by the USTR, an analysis of the value of an SEP requires an analysis of the value of the patent ex ante before the standard was set. USTR Letter at 2 (patentees improperly seeking “a higher price for use of the patent than would have been possible before the standard was set”). As a result, the majority of the patents for which the ITC will be setting a specific royalty would then be for patents for which it lacks evidence and argument. Thus, Ericsson seeks a binding determination on the value of patents (including foreign patents) not before the Commission.

Moreover, this FRAND licensing dispute involves a cross-license to Samsung’s substantial patent portfolio. In the 794 Investigation, the ITC noted that cross-licenses are “typical in the industry,” may be “consistent with FRAND,” and require balancing payments between the parties. Here, the parties have two prior cross-licenses (covering many of the same patents) as benchmarks and this litigation arises from their unsuccessful attempts to conclude a third cross-license agreement. From Samsung’s perspective, any determination of a FRAND royalty between Samsung and Ericsson must take into account the value of a cross-license to Samsung’s SEPs as well as the parties’ previous agreements. That evidence, in substantial part, is not before the Commission in this Investigation. Simply put, even if determining a specific FRAND royalty on a portfolio basis were an appropriate exercise in a Section 337 Investigation, resolution of these issues would require a substantially different evidentiary and expert record than the one presented in the 862 Investigation.

Third, Ericsson’s proposal is inconsistent with the USTR Letter. The USTR Letter recognizes that injunctive relief, like exclusion orders, on SEPs raise hold-up concerns counter to the public interest and that an SEP holder’s primary remedy lies in the courts, which have a larger range of potential remedies, not in the ITC. These concerns include the undue bargaining leverage a licensor may gain through the threat of an exclusion order. USTR Letter at 2. As explained by Dr. Farrell, Samsung’s expert and former DOJ/FTC chief economist, a primary concern of regulators is the threat of an exclusion order distorting the private bargaining between parties on SEPs in a manner that harms U. S. consumers and long-term competition and innovation. Farrell Witness Statement at 2. Here, Ericsson’s proposal would further encourage, not discourage, SEP enforcement in circumstances where such an enforcement campaign is not warranted. Indeed, licensing companies, typically non-practicing entities that seek ever higher royalties with little or no concern for the valu e of the technology or cross-license (which could only be determined in a separate proceeding) would likely welcome the opportunity to have the ITC determine unilateral license rates under the shadow of a potential exclusion order—raising the identical concerns that the USTR cited in disapproving the exclusion order.

Similarly, deciding a specific rate only for Ericsson’s SEPs without regard to any cross-license is counter to the purpose of the USTR Letter of keeping the threat of exclusion orders from altering SEP license negotiations. If the ITC were to choose to set unilateral portfolio rates as part of its Investigations, it would improperly tilt the scales in SEP negotiations in favor of patent licensing entities (like Ericsson) and, against standards implementers (like Samsung) that follow industry cross-licensing practices. On this point, Ericsson’s motives in seeking to impose its unilateral FRAND rates through the threat of an exclusion order are clear: Ericsson’s primary request is an exclusion order because Samsung will not accept its terms; its request that the Commission set unilateral rates is only if the Commission finds that Ericsson failed to make a FRAND offer in the first place. Ericsson Notice at 4.

III. Ericsson Incorrectly Argues that the Parties Have Prepared Their Cases for the Commission to Decide the License Royalty Terms

Ericsson also incorrectly argues that the parties are prepared to argue the proper royalties for Ericsson’s patents essential to the 2G, 3G, 4G, and 802.11 standards. As explained above, the issue of the proper royalty for a cross-license has been a subject of negotiation, not litigation. At trial, Samsung is prepared to show Ericsson’s offers to license its SEPs after the expiration of the parties 2007 license agreement are unreasonably high--seeking billions more than the previous license agreements--and that these offers are inconsistent with FRAND. At trial, Samsung also is prepared to show that it, unlike Ericsson, has at all times acted in good faith and has been willing to negotiate, to arbitrate, and to litigate in the district courts if agreement cannot be reached. Samsung has not, however, prepared the specific analysis endorsed by the USTR, by industry experts, and by the courts for ascertaining the specific values for an Ericsson SEP-only portfolio license. It has not done so because those price terms are thus far not an issue in this investigation. And it is not otherwise required to do so as part of its FRAND obligations where, as here, Samsung has prepared and justified offers based on cross-licenses; an approach endorsed by the Commission and consistent with industry pr actice and these parties’ prior practices.

To the extent the Commission decides that it is appropriate to decide specific royalties for Ericsson’s SEPs substantially more discovery and time would be necessary, given the issues outlined above. In any case, as only a small subset of Ericsson’s alleged SEPs are before the Commission, even were it to take up the royalty term issue as to the patents in suit, it could not do so as to the entirety of Ericsson’s SEP portfolios.

IV. Under the USTR Letter, Ericsson Cannot Obtain an Exclusion Order

Although Samsung disagrees with Ericsson’s in terpretation of the USTR Letter, Samsung agrees with Ericsson that the USTR Letter is important new authority for the 862 Investigation. It is important because, under the standard USTR applied in disapproving the exclusion order in the 794 Investigation, Ericsson cannot obtain an exclusion order in the 862 Investigation.

Samsung has at all times been a willing licensee in its dispute with Ericsson. The record evidence on this fact is decisive. As Ericsson acknowledges, Samsung and Ericsson have had extensive license negotiations starting months before the 2007 patent license was set to expire. Ericsson Notice at 5. Those negotiations, which have occurred all over the world, are still on-going and reveal a bona fide dispute about the appropriate royalty for the parties’ respective 2G, 3G, 4G and 802.11 standard essential patent portfolios. Id.

In those negotiations, Samsung has made multiple offers to Ericsson. While those offers apparently do not include enough money for Ericsson, they do reflect a vast and principled increase in licensing revenue from Samsung to Ericsson over the prior two licenses combined. Under no objective standard could this substantially more favorable offer to Ericsson, which covers many of the same previously licensed patents, be characterized as a “refusal to negotiate.” Moreover, while Ericsson now prefers to exchange only unilateral, running royalty license offers, Samsung’s license offers have been identical to the types of offers that the parties exchanged in their prior two successful license nego tiations. Samsung has made cross license offers based on lump sum royalties and balancing payments. In fact, Ericsson’s legal officer responsible for this litigation concedes that the prior [REDACTED]

In addition to making reasonable offers to Ericsson, Samsung also has, on numerous occasions, offered to have the parties’ dispute resolved through binding, neutral arbitration. In particular, the parties actively are discussing the possibility of having the FRAND terms and conditions for a cross-license to their respective SEP portfolios set by an arbitration panel.

Ericsson’s request for an exclusion order is inconsistent with the DOJ/PTO Policy Statement approvingly cited in the USTR Letter because there are other available remedies for Samsung’s alleged infringement of Ericsson’s SEPs . Ericsson has admitted [REDACTED]

Samsung, however, has before and after the filing of Ericsson’s complaint been willing to arbitrate the license amounts in dispute. Samsung also did not stay the companion district court case that Ericsson filed, as was Samsung’s right, with the express expectation that if the parties could not reach agreement, they may need to litigate in the district court. Ericsson has raised the same FRAND arguments in the district court that it raises here. Thus, consistent with the USTR’s reasoning and with the public policy considerations set forth in 19 U.S.C. § 1337(d)(1), this dispute can be and should be resolved in other available forums.

It bears emphasis here that Ericsson's improper and untimely request that the ITC blessor otherwise determine its unilateral SEP license rates substantially ignores the USTR guidance on exclusion orders. Samsung is the only party that has addressed the proper public interest arguments that the USTR Letter raises. Samsung presented evidence and argument, including through its expert Dr. Farrell, on why no exclusion order should issue under the Policy Statement. That same Policy Statement was later endorsed by the USTR. By contrast, Ericsson substantially ignored Dr. Farrell’s analysis and dismissed the hold-up concerns reflected in the USTR Letter and Policy Statement as without basis.

* * *

Samsung agrees that the USTR Letter has an important impact on this case but not for the reasons Ericsson argues. Neither the 794 Investigation Commission Opinion nor the USTR letter determined a FRAND royalty between the litigants in the 794 Investigation and there is no reason the Commission should do so here. The USTR did, however, determine that an exclusion order for SEPs was inappropriate in the 794 Investigation as a matter of public policy. For the same reasons set forth in the USTR Letter, no exclusion order is appropriate for public policy reasons in this Investigation. Accordingly, Samsung submits that th e proper course of action for this investigation, following the USTR Letter, is for Ericsson promptly to seek to terminate its SEPs from the investigation.

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