Tuesday, November 29, 2016

Mannheim Regional Court denies injunction in standard-essential patents case for antitrust reasons

There was a time when I spent most Fridays--and occasionally also a Tuesday--in Mannheim (and on trains from Munich to Mannheim and back) to watch numerous smartphone patent trials. After coming to terms with a prohibition on making Internet connections from the courtroom (which prevented me from live-tweeting about the proceedings), I generally enjoyed my visits. I admired the depth of the judges' technical understanding and their effective trial management (authoritative, but not authoritarian; highly facts-focused, but with a great sense of humor that I know other trial watchers also appreciated). There are, however, two notable exceptions from my fond memories: the incredibly dry air in the courtrooms and, more than anything else, the Mannheim judges' take on what the obligation to license standard-essential patents on FRAND terms should mean for patent infringement remedies.

Now there is hope for the FRAND defense (or, to reflect the German legal framework more accurately, the FRAND "objection") in Mannheim. I have just obtained a redacted (anonymized) version of a ruling that came down a few months ago in a case involving two wireless standard-essential patents (SEPs) and denied injunctive relief as well as some forms of specific performance that are simply legal (not equitable) remedies in Germany because the court concluded that the defendant's parent company had been a willing licensee while the plaintiff had not met its obligations to explain, prior to the filing of the complaint and not just in a later pleading, why it believed that the royalty it demanded ($1 per device) was fair, reasonable and non-discriminatory (FRAND).

Here's the German-language decision by the 7th Civil Chamber under Presiding Judge Andreas Voß ("Voss" if transcribed to English), some parts of which I will summarize and one long passage of which I will translate further below:

Mannheim Regional Court Ruling 7 O 209-15 by Florian Mueller on Scribd

The first part of the decision finds the defendant liable for the infringement of two wireless patents granted by the European Patent Office and valid in Germany. The defendant is ordered to provide an accounting that will enable the plaintiff to bring a specific damages claim, and the ruling determines that the defendant will owe damages (with the amount not yet having been determined; that's what the accounting is needed for in the first place).

But the plaintiff's other prayers for relief (injunctive relief, specific performance) were thrown out, and applying the applicable loser-pays rule proportionately, the plaintiff is ordered to pick up two thirds of all litigation costs (court fees and parties' legal fees applying standard fees under applicable law) while the defendant, despite losing on the merits, only has to shoulder one third. That cost quota already indicates that the remedies part is the most interesting one.

Under the court's claim construction of some narrow disputed limitations, the defendant is held to have infringed both patents-in-suit. The infringement findings are based on the specification of the standard and there was some argument about whether a certain feature is a mandatory part of UMTS (3G) but, ultimately, a mere capability of devices can constitute an infringement.

With respect to the damages claim, declaratory judgment (with the exact amount to be determined after an accounting) was entered in favor of the plaintiff, and the decision notes that the related relief is not unavailable for antitrust reasons.

Toward the end of the ruling, a patent exhaustion defense is dismissed and a motion for a stay (pending proceedings in the Netherlands, which wouldn't have a preclusive effect on the German case), is denied.

The part I'm now going to provide an unofficial translation of begins near the top of page 15:


4. However, the complaint must be rejected to the extent that Plaintiff is additionally seeking an injunction, a recall, the removal from distribution channels, and the destruction of patent-infringing products. Access to such remedies is barred by antitrust law in light of the opinion of the Court of Justice of the European Union in Huawei v. ZTE [...].

a) The Chamber [= panel] outlined its interpretation of the CJEU opinion in Huawei v. ZTE in a published ruling dated January 29, 2016 ([Mannheim] case no. 7 O 66/15) and reaffirms, after further consideration, its related reasoning. In the Chamber's opinion, the [CJEU] stressed that the exclusionary right based on a patent is unenforceable in an infringement proceeding only under very special circumstances. As a result, any factual circumstances that allegedly outweigh patent law have to be pled and, if in dispute, proven by the accused infringer.

From the Chamber's vantage point, the [CJEU] developed in its opinion a concept that is meant to enable courts to assess the behavior of the SEP holder as well as that of the alleged infringer with a view to whether the enforcement of SEP-based injunctive relief and a recall must be deemed unjustified abuse of a market position and a means of exerting pressure on a negotiating party of a kind that cannot be accepted or whether it must be deemed an appropriate response to dilatory tactics employed by the (alleged) infringer. However, the Chamber is convinced that the [CJEU] opinion does not intend to place the burden of a determination of FRAND [licensing] terms on courts hearing infringement cases in which injunctive relief and a recall--but not a collection of FRAND licensing fees as in a subsequent proceeding--are sought.

To achieve this objective, the [CJEU] deems it necessary that the patent holder--as a prerequisite to bringing a complaint containing a prayer for injunctive relief and a recall, which exerts massive pressure on the alleged infringer at the negotiating table--notifies an alleged infringer of the asserted infringement, specifying the relevant SEP and stating in which way it is allegedly infringed. At a minimum, the patent holder will have to specify the declared-essential patent-in-suit based on its patent number and will have to state that this patent was declared essential to a standard in a notice to the relevant standard-setting organization.

To the extent that the patent holder is additionally required to state in which way the patent is allegedly infringed, the infringement notice must clarify the standard to which the patent is essential and the reasons for which the patent holder believes that the alleged infringer is implementing the teachings of the patent. At a minimum, it is required that the patent holder states which technical functionality of the accused devices implements the standard. Normally, the accused infringer will be aware of the fact that the device is designed to comply with the standard. Therefore, a mere reference to the fact that the alleged infringer makes or sells standard-compliant products is an insufficient infringement notice. Much to the contrary, the notice must enable the alleged infringer to perform or outsource an analysis of the legal situation. Due to the great diversity of technical functions that are typically defined in an industry standard and, especially, in light of the [CJEU's] mentioning of the difficulties in assessing the legal situation, it is a requirement that the SEP holder, at a minimum, specify the category of the technical functionality of the standard in such a way that the alleged infringer is reenabled to meet its general obligation of analyzing the legal situation.

The level of detail required for this notice can only be adjudicated on a case-by-case and context-specific basis. In this analysis, it must be taken into consideration what level of technical knowledge the infringer has or inhowfar such knowledge can be obtained by him, in the form of professional advice, on a reasonably acceptable basis. In the Chamber's opinion, the [CJEU's] requirements for a substantiation of the infringement allegation is generally met by presenting claim charts of the kind customarily presented in licensing negotiations, provided that they recite the asserted claim of the patent-in-suit or a related claim that also has the determinative elements, structured on the basis of claim limitations compared to the relevant passages of the specification of the standard. [Such claim charts] do not have to meet the requirements that an infringement complaint has to meet in order to survive a motion to dismiss. Therefore, it is usually sufficient that the alleged infringer can understand the allegation brought by the SEP holder, at a minimum by externally or internally seeking technical expert advice.

The same applies to the SEP holder's further obligation to submit, prior to bringing a complaint against an alleged infringer who has expressed a willingness in principle to take a license, a specific licensing offer on FRAND terms and to particularly specify the license fee and its derivation. In light of the aforementioned interpretation of the [CJEU] opinion by the Chamber, this entails the requirement that the offer be acceptable [to the effect of concluding an agreement by offer and acceptance] and contain the essential terms and conditions. The [CJEU's] statement that the patent holder has to submit a specific written licensing offer on FRAND terms does not mean that the court hearing an infringement case has to make a determination as to whether or (as the (alleged) infringer will typically claim) not the SEP holder's offer is actually fair, reasonable and non-discriminatory. Otherwise the infringement proceedings would, contrary to the Chamber's interpretation of the [CJEU's] intent, face the burden of having to determine which amount of license fees and which other contractual terms precisely meet those criteria. A licensing offer is contrary to antitrust law and evidently not FRAND only if in light of the specific situation in the negotiations between the parties and in light of market conditions it represents exploitative abuse.

In this regard, the patent holder has to state the method of calculating the license fee. In the Chamber's opinion, the SEP holder must enable the alleged infringer to appreciate on the basis of objective criteria the reasons for which the SEP holder is convinced of the proposed terms meeting FRAND criteria. It is insufficient that an SEP holder proposing a license agreement involving a per-unit fee merely states that per-unit fee without explaining why that amount is deemed to meet FRAND criteria. Therefore, the SEP holder has to shed light on the amount in communications with the alleged infringer, such as by reference to a standard licensing program that is commonly practiced and accepted by third parties or by pointing to other figures from which the royalty sought is derived, such as a pool license fee, which is actually paid for a license to a patent pool by third parties, provided that the pool also contains patents relevant to the standard in question.

The [alleged] infringer must respond to this offer even if--as usual--he does not deem it to meet FRAND criteria [citations to Mannheim and Düsseldorf rulings]. In the Chamber's opinion, an exception herefrom is warranted exclusively in such cases in which the SEP holder's offer is, based on a summary determination, evidently not FRAND and, therefore, constitutes an abuse of a dominant market position by the SEP holder. The counterproposal must be submitted without undue delay, given that the [CJEU] does not support dilatory tactics by alleged infringers. Therefore, the alleged infringer has to respond to the SEP holder's specific written offer as promptly as it can be reasonably expected of him given the specific circumstances of the case and in light of industry practice and the good-faith principle.

If the SEP holder rejects this [counter]proposal and the alleged infringer was already implementing the SEP prior to concluding a license agreement, the [CJEU] requires a bond or deposit that stands as reasonable surety from the moment the counterproposal is rejected. The calculation of the amount of the surety must, among other things, involve the number of past acts of infringement of the SEP in question, for which the alleged infringer must be able to provide an accounting. The surety furthermore has to meet commonly accepted principles in the relevant field.

b) An application of the test laid out herein precludes Plaintiff, for antitrust reasons, from enforcing the [relevant forms of] relief sought in the present case.

aa) In the present case, it is not necessary to determine whether the Chamber's test complies with the Karlsruhe Higher Regional Court's May 31, 2016 ruling (appeal no. 6 U 55/15), according to which an analysis of the SEP holder's offer is not sufficient while the SEP holder should be granted some wiggle room in his FRAND analysis and according to which only a summary assessment, further to a motion for a stay of a first-instance judgment, is required.

bb) That is because Plaintiff has failed to meet its obligation of providing transparency to Defendant as to why it believes the $1 [per-unit] royalty sought to be FRAND or why, as stated by the Karlsruhe Higher Regional Court, it is within the FRAND-related wiggle room granted to it. Instead, Plaintiff merely quantified the $1 per-unit royalty in its offer. The Chamber holds that a mere statement of factors to a multiplication falls short of the [CJEU's] requirements. The general presentation of a UMTS licensing program [exhibit numbers] also fail to provide further information capable of meeting the related [transparency] obligation.

cc) In a briefing (for which leave had been granted), Plaintiff asserts that the Chamber's ruling would create an inconsistency with a parallel chamber [of the same court; this must be a reference to the Mannheim Regional Court's 2nd Civil Chamber], the Chamber holds that, in light of the aforementioned decision of the Karlsruhe Higher Regional Court, that a mere statement of factors to a multiplication underlying the computation of a license fee is insufficient. Such parameters do not enable the alleged infringer to assess whether the offer--be it on the basis of a plausibility check as deemed sufficient by the Chamber or be it in the the form of an objective determination based on the wiggle room granted [to SEP holders] by our appeals court--is FRAND and, if necessary, to make a counterproposal on FRAND terms, as the alleged infringer (as the [CJEU] explained) usually lacks the requisite information on the licensing market, which is at the SEP holder's disposal.

dd) Plaintiff provided such explanations for the first time in its reply brief and presented an expert report by Professor Kearl [exhibit numbers], which allegedly proves that Plaintiff is not seeking a discriminatory royalty rate from Defendant. Such pleading and production of evidence occurred after bringing the complaint and is, therefore, not capable of complying with the [CJEU's] intent that negotiations take place without the burden of a litigation aimed at injunctive relief, a recall, or removal and destruction [of infringing products]. Therefore, the Chamber interprets the [CJEU's] list of requirements as requiring, prior to bringing a complaint, not only a notice of the accused infringement, but also of the method with which the license fee sought by the SEP holder has been calculated. The alleged infringer cannot make a decision in the course of negotiations as to whether he is willing to accept transparent FRAND terms and to take a license unless the method underlying the royalty computation has been substantiated prior to bringing the complaint. The Chamber upholds its related position despite Plaintiff's reference to a recent decision by the Düsseldorf Higher Regional Court [appeal no. I - 15 U 36/16, Exh. K12], which ponders whether it is necessary in each cas that the [CJEU's] list of requirements be met, particularly in this case the obligation to explain the derivation of the license fee sought, prior to bringing a complaint or whether this would be an overly formalistic interpretation of the [CJEU] opinion. Even if it should be procedurally possible to meet previously-unmet requirements at a later stage, by withdrawing the original complaint and refiling after meeting the obligations, it must be ensured that in this case there will be a sufficient amount of time between the withdrawal of the original complaint and its refiling for negotiating without the immediate pressure resulting from a pending litigation. Even if the SEP holder makes up for previously, in the original proceedings, failing to provide the required explanation, he will have to grant the alleged infringer, prior to refiling the complaint, a certain amount of time during which Defendant can evaluate the arguments presented to buttress the methodology underlying the royalty calculation and relating to the question of whether the royalty sought meets FRAND criteria.

If we did not impose restrictions on how the SEP holder can make up, without sanctions, during the course of litigation for a failure to meet obligations prior to bringing the complaint, this would run counter to the guiding principle of the [CJEU's] opinion, according to which negotiations must take place without the burden of a pending litigation, but on the basis of having all information enabling an assessment of whether or not a proposed license agreement is FRAND-compliant. The Chamber's view is supported by the fact that the [CJEU] issued an order to correct the original opinion, which order clarified that the phrase "prior to bringing a complaint" relates to substantiation of the patent infringement allegation as well as an explanation of the derivation of the royalty sought.

ee) In the present case, Plaintiff was not relieved from this obligation on the basis of Defendant having been an unwilling licensee. Even if, in the course of negotiations, Defendant may have occasionally refused to make a payment of license fees, the Chamber cannot conclude that Defendant had generally presented itself as an unwilling licensee. For example, the November 20, 2015 letter [Exhibit B1] by Defendant's parent company criticizes Plaintiff for explaining, in accordance with the [CJEU] opinion, the reasons for which it believes that the royalty it was seeking was FRAND [reference to exhibit]. Defendant reiterated this request [for an explanation] in its December 4, 2015 letter [Exhibit B2]. Defendant furthermore expressed a willingness to pay royalty of 0.071% of the selling price excluding VAT of each product (January 12, 2016 letter, Exh. B5). Furthermore, Defendant's willingness to take a license manifests itself in an offer, prior to this litigation, to transfer certain patents from its own portfolio, regardless of the circumstance that Plaintiff rejected that proposal for not considering it attractive. Defendant's willingness to discuss with Plaintiff a license is also proven by the fact that Defendant obtained the expert report presented as Exh. B11 in order to buttress the license fee it deemed FRAND. While this occurred only after the complaint was brought, it still reflects in the Chamber's opinion a willingness in principle to negotiate a license agreement, notwithstanding the statements that Plaintiff alleges representatives of [...] to have made in the course of negotiations.

The Chamber furthermore views as an indication of Defendant's willingness in principle to take a license the circumstance that Defendant has meanwhile made a significant deposit with a court, allegedly covering its sales with LTE- and UMTS-compatible products around the globe. Even though this occurred only after the complaint had been brought, this circumstance at least enables us to conclude, on the basis of indicia, that Defendant is a willing licensee, which supports the Chamber's holding that Defendant or, respectively, Defendant's parent company is not a generally unwilling licensee.


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Federal Circuit unsurprisingly upholds its most surprising decision ever in Apple v. Samsung

On the first day after a long Thanksgiving weekend, the United States Court of Appeals for the Federal Circuit denied, without stating any particular reasons, a petition filed by Samsung earlier this month for a further rehearing en banc in an Apple v. Samsung matter that relates to the second California litigation between these companies. In a way, that "further" rehearing would actually have been the first "genuine" rehearing since the decision by a majority of the circuit judges in early October to overturn a panel decision in Samsung's favor had come down without any opportunity for further briefing, let alone a literal "hearing."

While the sudden reversal of fortunes in October was unbelievably surprising, it would have been a comparable surprise if the circuit judges had now admitted to not having followed proper procedures. There are petitions, ambitious petitions, long-shot petitions, and there are petitions like this one, which one might call "courtesy petitions": they just show to the next higher court that a party really exhausted each and every opportunity to achieve a different result before a (further) appeal. It's like saying "we really didn't mean to bother you and look how hard we tried to avoid it but... what can we do?"

The term "October surprise" is often heard in election years. The FBI's decision to reopen the Clinton email investigation (even if only for a few days) will probably go down in history as this year's October surprise. But that's just because patent law is a complicated, highly specialized field that only a small number of people keep an eye on. Otherwise this year's #1 October surprise would have been that lightning-out-of-the-blue decision by eight circuit judges (with one of them concurring only as far as the result was concerned, not on the reasoning) to overrule a panel decision on all of Apple's three trial-winning patents and to do so without even hinting at the possibility of another decision. The closest thing to a hint was that no decision had come down many months after Apple filed its petition for rehearing. But what can one conclude from silence? From what might be a mere administrative delay? Obviously parties can't submit briefing just because they see something is taking unusually long (without knowing what the key issues are, they wouldn't even know what to address).

Just before Thanksgiving, the Computer & Communications Industry Association (CCIA) filed an amicus brief in support of Samsung's petition. I've uploaded it to Scribd (PDF) and it's a good read. It appears normal to me that there weren't more filings: petitions for rehearing are long shots and a petition for a rehearing after a "rehearing" (even if not a hearing in a literal sense) is more than that. CCIA's brief discusses the confusion and concern caused by the Federal Circuit's handling of this matter. It talks about how commentators have reacted:

  • Donald Chisum (yes, Mr. "Chisum on Patents") and his Chisum Patent Academy co-founder Janice Mueller wrote in a Patents4Life guest post that the October surprise "may turn out to be the court's most controversial decision ever."

    Imagine that: the author of the leading reference on U.S. patent law writes this may be the most controversial decision in Federal Circuit history. But it gets even better (or worse, depending on one's perspective): after disagreeing with the majority of the circuit judges that there was nothing precedential in the October decision, the authors conclude that the Federal Circuit's "highly unusual posture [in this case] may even cause some to question whether the decision smacks of pro-patentee bias."

    Samsung now faces the hard decision of a second cert petition in the same dispute (though this here is a separate case and a totally different issue from design patent damages). Should Samsung decide to fight the good fight here, Mr. Chisum's Patents4Life guest post will be a silver bullet (actually, "silver" may be an understatement).

  • The 717 Madison Place blog focuses on oral arguments and the Federal Circuit. Its author, Denver-based patent attorney Bill Vobach, also found it "odd that the Federal Circuit didn’t conduct oral argument or further briefing." One possible reason in Mr. Vobach's view--and there's nothing implausible about that theory, though there isn't any hard evidence either--is that multiple circuit judges might have had to recuse themselves in the event of further briefings, in which case an 8-3 decision (or 7-1-3 to be precise, but the "1" concurred with the "7" on the outcome, so I view it as 8-3) would have been impossible and the vote might have been as narrow as 4-3. Mr. Vobach interestingly observes that Circuit Judge Newman would have been the senior active member of the majority (as the Chief Judge dissented) but "[s]he must have not wanted to write the majority opinion — as odd as that sounds — and assigned the role to Judge Moore."

    Is there anything in this case that is normal? If there is, I must have missed it...

Even Apple's outside counsel, Wilmer Hale's legendary Bill Lee, was apparently surprised. The preliminary statement of Samsung's petition referred to Mr. Lee likening the case to a "Disneyland adventure" in an interview, saying it "had more twists and turns than Mr. Toad's Wild Ride" (this post continues below the document):

16-11-07 Samsung Motion for 2nd Hearing by Florian Mueller on Scribd

Samsung's petition raises both substantive and procedural questions. In a footnote, it cites to a National Law Review article (by Lucas I. Silva) that said "the decision to grant en banc review will provide powerful ammunition to parties asking the Court to rehear their cases, and it will no doubt be cited in the many petitions for rehearing that are likely to be filed going forward." That is the kind of impact assessment on the law that might persuade the Supreme Court to take a look at the case.

Another footnote quotes a Law360 article (the one with the "Wild Ride" quote) that quotes Mr. Lee as having told the reporter that "[f]or a time, there was some question as to whether Apple would seek en banc review at all." The rest is history and an unusual story of "who dares wins," but "who dares wins" goes both ways: Samsung may ultimately win by daring to file another petition for writ of certiorari.

According to Samsung's petition, there were three cases in which only limited aspects of a case (not a wholesale reversal like here) were decided by the full Federal Circuit without further briefing and argument, and in one of them there was a dissent that objected to a decision to "bypass[] this court's standard operating procedure", furthermore alleging a violation of the Federal Rules of Appellate Procedure and expressing dismay at having been derprived of input required to make good decisions. That case was Abbott Labs. v. Sandoz, Inc (2009). And the dissent at the time was authored by Circuit Judge Newman. The same Circuit Judge Newman who now, according to fellow blogger Bill Vobach, apparently didn't want to write the majority opinion. That 2009 dissent may be the reason.

Federalcircuitology is the new Kremlinology.

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Thursday, November 24, 2016

Standard-essential patents: more rationality and a shift to China, but where are tech's titans? (guest post)

Preliminary Note

How's that for a holiday special? Right below this introduction you'll find the first guest post ever on the FOSS Patents blog, authored by Richard Kramer, the main founder of Arete Research, and Brett Simpson, one of Arete's co-founders. Founded in early 2000 by experienced research professionals, Arete is the pioneer in independent equity research, and has the largest team of experienced analysts specializing in global technology, telecoms and alternative energy sectors. Arete is the trusted source of equity research to over 100 of the world's most sophisticated tech investors.

The FOSS Patents blog started as a one-man show but it will, over time, become a more inclusive platform. Guest authors' opinions are not necessarily my own. In fact, Richard and I have previously disagreed, which included his 2011 prediction that the "smartphone patent wars" weren't going to have devastating impact, a fact I also recognized about two years ago. Even in areas where we still disagree, I always find his insights interesting, and I hope so do you.

Happy Thanksgiving! And now:

Guest post by Richard Kramer and Brett Simpson, both of Arete Research

Standard-essential patents: more rationality and a shift to China, but where are tech's titans?

Despite a long campaign on the part of the smartphone players from outside of the traditional telecom industry to "de-value" standards-essential patents, a period of irrational inflation of patent assets (Rockstar Nortel patents for $4bn+, anyone?), and the largely Quixotic efforts of a range of patent "re-sellers" (often an indirect negotiating tactic of the large IPR holders), we have gradually seen a more sensible "clearing price" for SEPs get established in the deals of the past few years.

We said in 2011 that "this Cold War around IPR relating to mobile devices is not over, but we think it will reach a phase where settlements will be preferable to all-out warfare." The past few years have seen this view become mainstream. (Perhaps aggressive law firms, like investment bankers, simply are less successful in their business development efforts in egging clients on to undertake massive litigations.)

We seem to be entering a period of more tactical lawsuits, realise that pursuing litigations to the bitter end carries too many business risks to justify the rewards. One can see this with Apple, where for all its initial aggression around design patents, it has more recently adopted a pragmatic approach, coming to agreements with Ericsson (avoiding extensive and messy litigation in West Texas), Huawei, and even Kudelski (over OpenTV patents). Perhaps the business risks of extended litigation are now being weighed in the calculation over "defending" rather nebulous design patents, which often draw attention to, and sympathy for the sued party. Nokia also made it clear that it sees itself in a "new world" given that its prior major licensing deals were struck when it needed cross-licenses for its own smartphone business, with a critical renewal at Apple forthcoming.

Yet the new wrinkle in global SEPs has been the emergence of Huawei as the primus inter pares of the Chinese technology world. If we trace back the origins of the most relevant SEPs in wireless technology, they stem from a combination of infrastructure vendors and chipmakers (Siemens-Infineon; Motorola-Freescale, Ericsson-EMP, etc.), Huawei has not only established itself as top three wireless networks vendor (in a now largely consolidated market), but also continually invested in chip-level technology at the device level with its HiSilicon unit (now gradually seeking merchant silicon sales).

In the past two years Huawei has filed more patent applications than even Qualcomm, a key output of its $8.6bn R&D investment. By securing a licensing deal with Apple, and pursuing ZTE and others in China, Huawei is signalling that it must abide by the same rules in all markets. In Jan. '16, Huawei agreed a broad cross-license deal with Ericsson, in Sept. '16 it settled a long-standing dispute with InterDigital and is current engaged in counter-suits with Samsung. In this context, it will be interesting to watch how it resolves the Samsung situation, and handles cross-licensing with Nokia, as well as resolving a rather salacious lawsuit involving T-Mobile, where Huawei staff were caught breaking into a T-Mobile office, while Huawei responded by taking the unprecedented step of suing T-Mobile, a prominent infrastructure and smartphone customer.

The emergence of Huawei as a leading force in global IPR claims is good news for traditional IPR holders like Qualcomm and Nokia, where the quid pro quo for Huawei collecting royalties outside of China must surely be that leading Chinese smartphone brands must now pay royalties on domestic shipments, something that has been deftly avoided by previous (Xiaomi) and current (Oppo) market share leaders, from a combination of focus on the domestic market and exporting to equally IPR-unfriendly markets through "agents". Qualcomm is suing Meizu in China, Samsung and Huawei are suing each other in China, while Nokia sub-licensees WiLAN, Sisvel and Vringo all brought suits either in China or against Chinese vendors like ZTE, Haier, etc. Not only are the Chinese, most notably Huawei, becoming more assertive, but China is increasingly becoming a critical venue alongside the traditional US, UK, Dutch and German courts. The gravitational forces of IPR have now inexorably begun shifting Eastwards, both as a source and claimant of royalty income; one now has to rank Huawei alongside Qualcomm, Ericsson and Nokia as the stalwarts of an increasingly rational wireless SEP environment.

One of the big surprises to us is the lack of involvement in standards setting (and patent generation) from the most influential companies in global tech: Apple, for its $160bn smartphone business, has exerted zero influence on 5G development. Google, Microsoft, Intel, Amazon, Facebook have collectively doubled R&D in the last two years – reaching $30bn+ excl. stock comp - but choose to focus on emerging technologies such as machine learning, VR, AR, driverless cars, robotics, drones, where there are no standards, but instead a loose commitment to open source technology (often as a fig leaf for proprietary technology). It’s even more surprising when considering how much their businesses have profited the most from 4G, and how much more they stand to gain from 5G. Data is the new gold and 5G will enable data to be used in “near real time” that will be essential for applications like driverless cars, or even assisted driving.

Why sit on the sidelines? Perhaps it is that 5G offers few “insertion points” in this global SEP licensing process, since it largely continues the use of the 4G air interfaces, making renewals more of a pro forma matter. This leaves wireless heavyweights – Qualcomm, Huawei, Ericsson, Nokia, et al – remaining firmly in control of the standards setting process in 5G and thereby controlling one of the most lucrative profit streams in tech, as seen in the $8bn revenue base at Qualcomm’s QTL unit, or the $1bn+ licensing streams of Nokia and Ericsson.

This is important since the hyper-scale data centre players have squeezed the OEM business model down to ever lower margins; this creates a rising incentive to seek royalties for SEPs, and also extract value from implementation patents which are largely unlicensed today.

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Tuesday, November 15, 2016

Automotive companies fighting for FRAND: Daimler, Hyundai join Fair Standards Alliance

About four to five years ago, there was a time when "FRAND Patents" would have been a more suitable name for this blog than "FOSS Patents": the pursuit of sales and important bans over standard-essential patents (iun violation of pledges to license them to all comers on fair, reasonable and non-discriminatory terms), royalty demands far out of the FRAND ballpark and exorbitant damages claims were the three most important symptoms of a huge underlying problem, and I did what I could to shed some light on what was going on and going wrong.

While I'm glad that some of the worst potential consequences were avoided at the time, I have realized that there is some unfinished business in that area. Antitrust settlements and court decisions were helpful. Some of them, such as Judge Posner's 2012 Apple v. Motorola ruling, were really great. But attempts to abuse FRAND-pledged SEPs are still rampant. Various SEP owners are still seeking injunctions (not in all jurisdictions but definitely in some). Royalty demands and damages claims still appear to be out of line in too many cases.

Why hasn't the problem been solved yet?

  • For the most part, courts solved problems only in narrow contexts. Even Judge Robart's rate-setting decision in Microsoft v. Motorola (2013), which was wonderful in some ways, had a major shortcoming: it didn't require Motorola to base its royalty claims on the smallest saleable unit implementing a given standard, such as a WiFi chip for IEEE 802.11 patents or a baseband chip for patents on cellular network standards.

  • Antitrust authorities stopped short of establishing clear, bright-line rules. Instead, they entered into settlements with major loopholes. I particularly criticized, at the time, the FTC's Google/Motorola consent decree.

That said, I do have hope that significant progress will be made over the next few years:

  • Judges and competition enforcers can easily see that what was done a few years ago was generally good but simply not enough.

  • Android companies (Google and certain device makers) weren't the "perfect" FRAND offenders to crack down on as they weren't repeat offenders or aggressors. What they did was just retaliation for attacks on Google's Android mobile operating system and the related ecosystem. They hadn't done this before (Motorola maybe, but not Google, which owned Motorola at the height of the smartphone patent wars). They haven't done it since. What they wanted then was not to cause damage to the concept of FRAND licensing: at the most they were prepared to accept collateral damage in order to end the smartphone patent wars on the basis of (more or less) zero-zero license deals.

    Google's antitrust lawyers stressed all the time that their client hadn't drawn first blood -- and they pointed to assertions of patents on de facto industry standards and to what they called "commercially essential" patents. Microsoft said something very accurate at the time: two wrongs don't make a right. Unfortunately, however, regulatory agencies are controlled by politicians, and they just didn't want to take sides in the ecosystem wars between Android rivals and the Android ecosystem. As a result, some of the world's worst SEP abusers benefited from what Google/Motorola, Samsung and others were doing (and from those companies' political weight). But times have changed. Earlier this year, Google joined the Fair Standards Alliance. It's now fighting the good fight for FRAND.

  • The pro-FRAND coalition is now more broadbased and more powerful than ever. Case in point, I received a press release today from the Fair Standards Alliance announcing that Daimler and Hyundai have joined the Brussels-based organization, joining major IT companies such as Google, HP, Cisco, Intel, Dell, and Juniper Networks as well as rival car manufacturers Volkswagen, BMW, and Tesla.

    They are profoundly concerned about abusive assertions of patents on wireless and IoT (Internet of things) industry standards. That concern isn't new: automotive companies frequently have to defend themselves against patent assertions (in the Eastern District of Texas and elsewhere). I'm not allowed to disclose the name publicly but I also gave some advice a few years back to a major German automotive company, and I've talked to lawyers defending such companies in court. But if the problem wasn't huge, those organizations wouldn't have joined the Fair Standards Alliance.

Let's give meaning to FRAND. I'll make my little contribution again by blogging about FRAND developments, not only but also in a litigation context.

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