Thursday, September 21, 2017

Meet the patent trolls of the 2030s: Bosch, Volkswagen, Daimler, BMW

Four days before the 67th International Motor Show (IAA) in Frankfurt will end, I'd like to offer a bold prediction: unless a miracle of the kind I can't imagine happens, Germany's automotive industry (car manufacturers as well as suppliers) will suffer a fate similar to that of the smartphone divisions of the likes of Nokia and Ericsson, ultimately resulting in "trollification" by the 2030s.

As Frankfurter Allgemeine Zeitung noted last month, 52% of all patent filings related to self-driving cars belong to German companies, with Bosch alone (which is number one and followed by Audi and Continental)holding three times as many patents in that field as Google and Apple or Tesla not having any significant patent holdings in that field yet. Besides Bosch, Audi, and Continental, three other German companies are among the top 10 patent holders in this field: BMW, Volkswagen, and Daimler.

Patent filings related to self-driving cars are picking up speed, so the landscape will almost certainly change in some ways in the coming years, but not entirely.

So far, major automotive companies have not used patents aggressively. Much to the contrary, they often find themselves on the receiving end of patent troll lawsuits in the Eastern District of Texas and elsewhere, and they tend to support reasonable royalties (such as through the Fair Standards Alliance) and defensive initiatives (including a fake one--"fake" because it's merely about making a statement and doesn't solve a single patent-related problem ever--called Open Invention Network). I'm not aware of any major dispute between two large car makers. Apparently they work out cross-licensing deals quietly and amicably.

But that's because right now those companies are in the business of selling vehicles (and related services), not in the patent assertion business. While it may seem daring to talk in 2017 about what's going to happen in the 2030s (if not before), I am fairly convinced (not 100%, but way above 50%) that we're less than two decades away from the point at which Germany's automotive industry is going to enforce patents aggressively and try to shake down the future winners in the marketplace.

I believe Germany's leading car makers--and some of their key suppliers--are going to be in only a slightly better position than the smartphone divisions of companies like Nokia and Ericsson were when Apple and the Android ecosystem revolutionized the concept of a mobile communications device. I said "slightly better" because brands like BMW and Mercedes have been very strong for several times longer than Nokia's brand at the time of the iOS/Android revolution. Those brands are associated with certain strengths, some of which will remain important even in the self-driving electric future. But apart from that factor, those companies are practically doomed and will have to resort to patent licensing in less than 20 years' time. They won't disappear into oblivion too quickly, but over time they will, and there will be a long period during which they will still be around and you'll still see Mercedes stars on the roads, but where most of the revenue opportunity will belong to leading U.S. technology companies.

One challenge that those German automotive companies may somehow manage to overcome--though they haven't so far--is the one of creating good user interfaces. I've had an S-Class for a few years and the UI is just simply not well-thought-out. One example is the big button that also serves as a wheel. When using voice control to dial a number from my history of calls, that button means "Yes, this number" in one situation and "No, abort the operation" less than a second later--something that would be completely unthinkable at a company like Apple or Google. Another example is that they waste space on the screen by showing the city of a destination before the street name (which then often doesn't fit on the screen at all, or must be abbreviated beyond recognition). Those are simple things, and while it's astounding that Mercedes would ever have come up with a stupidly-designed user interface in the first place, they--and their competitors--may figure this part out over time.

Maybe someone will explain to their software developers the concept of a race condition because the way the thing intermittently fails to activate functions when starting up--or the way the UI occasionally freezes when dialing--suggests to me they have one or more of those in their code. Maybe they'll even understand that they should keep track of the last cities I navigated to so I don't have to select the same city again and again when entering a destination. And who knows, maybe they'll realize one day that they should provide free firmware updates from time to time to keep customers happy, especially when you have really nasty bugs in your software (as they do). Again, none of that is rocket science.

The bigger issues are of the strategic kind. For decades they have largely relied on a core competence: combustion engines, which involve about 200 times as many parts as electric motors. Daimler once invested in Tesla, then exited. With more foresight, it would have acquired it while it still had the chance. Anyway, those companies will lose their #1 competitive advantage.

Once Silicon Valley companies are the technology leaders (which Tesla in some ways already is) in the automotive industry, Germany's automotive companies will also struggle in the "war for talent." Most of the world's best software developers either already are in the United States or are potentially receptive to offers from such world-class employers as Google, where they can make a lot more money than at BMW, like Daimler or Volkswagen, get perks that are heard of in Germany, and often get to work on more interesting stuff. There will always be some talented developers who will choose to come to or stay in Germany, but a majority of the world's best programmers won't even consider Germany, period. Frankly, the cost-benefit ratio of learning German--a hard language to learn and of very limited use--is inferior, and most programmers already speak a least a little bit of English. In all likelihood, the average Google or Apple programmer will simply be better than his counterparts at German automotive companies, and if Apple or Google wanted to hire a very talented person away from a Volkswagen or BMW, they could in most instances.

Even if those German automotive companies figured out the digital user experience (which is doable) and even if they built better electric cars over time, there is, however, one thing that's simply going to marginalize them. It's that self-driving cars will be mobile communications devices on wheels. Speed and similar success factors of the old times aren't going to matter anymore at all. Instead, it's all going to be about what you can do while the car is doing all the driving.

The most lucrative parts of the car value chain are going to relate to productivity, communications, and entertainment applications. Plus all sorts of e-commerce (including "sharing economy"-style) services.

Those parts of the value chain will, without the slightest doubt, belong to such companies as Apple, Google, Amazon, and Microsoft. Of those companies, Apple is believed to be working on a car of its own and even made a joke about it at a corporate event. The others--especially Google--will be open to partnering (as they're already doing in some areas) with such companies as Daimler. But they're going to have all the leverage because of a force that is far more powerful than the leadership of traditional automotive companies presumably knows: network effects.

Short of developing something that would have to be several times more revolutionary than the iPhone was ten years ago, there's absolutely no way that BMW, Daimler and Volkswagen--even if they agreed to a three-way merger and secured regulatory approval for it--could ever get sufficient traction among app developers so they could compete effectively with Apple and Google. Even Microsoft with Windows Phone and with all of its money couldn't.

My app is in the final testing stage. We'll launch in a first market (probably New Zealand, where other games have also been launched early) in a couple of weeks and will quickly expand from there before finally launching in the United States. I know what drives platform choices. A few years ago I thought I would start on Android, then wanted to serve both major platforms at the same time, and ultimately decided to do iOS first, Android later. Before I would consider any other platform, we'd most likely do Mac and Apple TV versions of our game. Thereafter? Maybe, maybe, maybe even a Windows version at some point. But a Mercedes/BMW/Volkswagen version? I just don't see that happen.

Using Android on open-source terms won't be a viable option (at least nowhere outside China). Android is open-source in some ways but proprietary in others. It's no secret that most Android device makers aren't really profitable. Automotive companies can still make low-margin hardware in the future. But the biggest revenue streams are going to pass them by.

Also, a high percentage of the people buying premium cars are Apple customers, and their loyalty to Apple is simply stronger. Just this week I was thinking about this when I saw a German car with an Apple sticker on it. I was thinking to myself: Would anyone do it the other way round and put a Mercedes or BMW logo on an iPhone or a MacBook? Or a Volkswagen logo on an iPad? Obviously not.

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Tuesday, September 12, 2017

Apple v. Samsung design patent damages: September 13 panel discussion in Washington DC

About a month and a half ago, Judge Lucy Koh of the United States District Court for the Northern District of California held that Samsung had not waived its "article of manufacture" argument in the first Apple v. Samsung case. That was another step forward for Samsung in its quest to get the damages award reduced. But prior to ordering a new trial on design patent damages, Judge Koh ordered briefing on various questions to be resolved first.

Last week, the parties filed their answers to the court's questions (Apple, Samsung). Samsung argues that Apple has the burden of proof and that the only way the damages question could be resolved without a new trial would be for the court to find an evidentiary failure on Apple's part. Apple refers the court to the Solicitor General's Supreme Court brief. According to Apple, after a prima facie showing regarding the article of manufacture that infringes a design patent, the burden of proof is on the defendant to show that a component of that product is the appropriate basis for a disgorgement of infringer's profits. While I tend to consider Samsung's proposition better policy, I have no idea to what extent Judge Koh may be influenced by the DoJ's Supreme Court brief.

The Computer & Communications Industry Association (CCIA) will host a panel discussion tomorrow at the National Press Club in Washington, DC from 9 AM to 10:30 AM Eastern: "Next Up In Apple/Samsung Smartphone Wars: Design Patent Remedies Following The SCOTUS Decision"

Speakers include, among others,

  • Carl Cecere, who has filed really good amicus curiae briefs, at different stages of this dispute, on behalf of the Hispanic Leadership Fund and the National Grange,

  • Gibson Dunn's Howard Hogan, whose firm is counsel for Apple in the second Samsung case (not the one involving design patents), and

  • Rebecca Tushnet, First Amendment professor at Harvard Law School.

I will try to obtain a transcript or key quotes from the event and, if interesting things are said (which is very likely given the topic and the panelists), blog about it.

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Friday, September 8, 2017

Judge denies Qualcomm motions for preliminary injunctions against Apple, contract manufacturers

It's not like Qualcomm didn't already have plenty of legal problems. But Judge Gonzalo P. Curiel of the United States District Court for the Southern District of California has just (this morning by Pacific Time) handed down two decisions denying a couple of Qualcomm motions for preliminary injunctions. Qualcomm has failed to obtain a preliminary injunction requiring four Apple contract manufacturers to make royalty payments before the matter is adjudicated. I had predicted that one. What isn't really surprising either, but was much less clear based on how a recent hearing went, is that Judge Curiel also declined to bar Apple from pursuing antitrust cases in other jurisdictions (such as China, Japan, Taiwan, and the United Kingdom).

In order to comment on these latest developments quickly, I focused on the key parts of the rationale underlying the two decisions. First, the expected denial of a preliminary injunction requiring the likes of Foxconn to make immediate royalty payments (this post continues below the document):

17-09-07 Denial of Qualcomm's Requested Preliminary Injunction by Florian Mueller on Scribd

It From the beginning, Qualcomm's motion for a preliminary injunction related to royalty payments was a total long shot, given that the most critical preliminary-injunction factor is irreparable harm as opposed to monetary harm. And indeed, that's why the motion failed. Judge Curiel wrote (among other things):

"The scales of equity, however, do not bend for dollar amounts alone no matter how great."

"This irreparable harm argument, however, is flawed because it is untethered to any discussion of the adequacy of legal remedies."

The second quote above means Qualcomm failed to expain why any problems resulting from the contract manufacturers having discontinued their royalty payments (related to Apple products) couldn't simply be solved, if one assumed purely for the sake of the argument that Qualcomm is entitled to those particular payments, by the court later ordering payments (with interest on top).

Let's turn to the decision denying Qualcomm's motion for an anti-suit injunction against Apple, which would have required Apple to abandon its international antitrust cases against Qualcomm (this post continues below the document):

17-09-07 Denial of Qualcomm's Requested Anti-suit Injunction by Florian Mueller on Scribd

Here, Qualcomm largely relied on a Ninth Circuit decision upholding Judge Robart's 2012 anti-enforcement injunction against then-Google-owned Motorola Mobility. Back then, however, it was the implementer of a standard--Microsoft--seeking an injunction preventing the patent holder--Motorola--from enforcing a couple of German patent injunctions. That is, as Judge Curiel explains in his order denying Qualcomm's motion for an anti-suit injunction against Apple, just the opposite situation. Judge Curiel points out that Motorola had an obligation to extend a FRAND license to Motorola. So does Qualcomm--but Apple doesn't. Even if Qualcomm made a FRAND licensing offer to Apple, Apple could (for whatever reason or no reason) reject it.

Qualcomm wants the San Diego court to determine a worldwide FRAND royalty rate covering Qualcomm's wireless standard-essential patents. But Apple wants a patent-by-patent determination, insisting that Qualcomm firstly prove its entitlement to royalties by establishing infringement and defeating any defenses (such as invalidity). In footnote 5, Judge Curiel explains the difference between the parties' positions and holds that he "need not decide this question [of whether a worldwide FRAND determination should be made in the Southern District of California] to resolve the instant motion [for an anti-suit injunction that would have prevented Apple from proceeding with its overseas antitrust cases against Qualcomm]."

While the judge didn't have to reach that question immediately, I doubt Qualcomm will get a worldwide FRAND determination in its San Diego backyard. Only one outlier judge in the UK has so far tried to usurp jurisdiction on a global scale (in Unwired Planet v. Huawei), and even that judge realized his decision was going to give rise to disagreement and therefore explicitly authorized an appeal, which will hopefully (and more likely than not) succeed. Three lawyers from the Orrick firm have recently published an article (PDF) on why the Unwired Planet decision is flawed and problematic. Highly recommended reading.

Qualcomm's litigation strategy against Apple and the contract manufacturers Qualcomm decided to draw into the case can be summed up with two expressions: "leave no stone unturned" and "throw in the kitchen sink." That includes long-shot motions of all kinds. So far that strategy isn't working out at all. If Qualcomm hadn't brought various motions, we'd know a lot less at this stage about where Judge Curiel in the Southern District of California and Judge Lucy Koh in the Northern District of California stand on the key legal issues. Now we do know. And what we know doesn't bode well for Qualcomm.

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Thursday, September 7, 2017

Merger review of Qualcomm-NXP: European Commission stops the clock AGAIN

The website of the European Commission's Directorate-General for Competition (DG COMP) indicates that the clock has been stopped for an unusual second time in the regulatory review of Qualcomm's proposed acquisition of NXP, which went into Phase II a few months back as it raises serious concerns. In fact, the previous suspension ended on August 16, 2017 (as I mentioned in a recent post), but just the next day--August 17--the deadline was suspended again.

Whatever the reason may be, it means that the deal still isn't ready to be cleared.

Are Qualcomm and/or NXP unwilling to provide information requested by the Commission? In a unilateral-conduct context, Qualcomm even went to court (and lost) because it didn't want to supply certain information. That could be what's happening in the merger control proceedings as well, but it's also possible that Qualcomm is paying the price for antagonizing DG COMP.

Are negotiations on potential commitments progressing slowly (and if so, is there much hope)? It's a mystery, but again, what's clear is that this deal is ever less likely to get unconditional clearance.

The fact that the EU has stopped the clock again apparently became discoverable only this week--the same week that a legal challenge by Qualcomm to a decision by the Korea Fair Trade Commission (KFTC) went nowhere.

Behind the scenes, the Qualcomm-NXP merger review could be one of the most interesting and significant merger review cases in EU history, but unfortunately those merger control proceedings are very opaque (unless someone leaks documents, which happened in some cases but isn't the norm). I haven't even been able to find out which European companies and organizations are opposing the deal. If you know something about this merger control case that I don't, please tell me via my contact form.

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Monday, September 4, 2017

Korean court denies Qualcomm's motion to stay execution of KFTC antitrust ruling

Last December, the Korea Fair Trade Commission (KFTC) handed down a decision against Qualcomm that U.S. tech companies welcomed. The following month, the FTC and Apple sued Qualcomm on antitrust grounds in California. In March, it became known that Qualcomm's refusal to licenses its standard-essential patents (SEPs) on FRAND terms to other chipset makers is one of the various concerns the Korean competition authority has.

Today, Reuters reports that a Korean court has denied a motion by Qualcomm to stay the execution of the KFTC ruling. That ruling, among other things, requires Qualcomm to negotiate patent licenses with its competitors and to adjust its royalty demands from device makers.

Qualcomm is still trying--and undoubtedly will keep trying--to get the KFTC decision overturned. And it can probably appeal the denial of the motion. But every defeat of this kind makes things harder for Qualcomm in other jurisdictions. So far, antitrust agencies and judges alike reject Qualcomm's legal theories. According to a source cited by Reuters, the court wasn't convinced of Qualcomm suffering irreparable harm from the KFTC ruling. Presumably, the likelihood to prevail on the merits (or, more appropriately in this case, a lack thereof) was also a factor in Korea as it would be in the jurisdictions I know.

No matter how often Qualcomm loses in one venue or another, each of the allegations brought against it must be analyzed independently--by courts and regulators, and also by those of us who express their opinions (as I do all the time). They can be wrong 99 times and right the 100th time. But fancy infographics and other aggressive, well-orchestrated PR efforts are no substitute for credibility. Qualcomm and Acting FTC Chair Maureen Ohlhausen untiringly try to convince us that everyone else is wrong and they are right on these FRAND issues. The "everyone else" who's allegedly wrong includes ever more agencies and courts. That's a growing problem for Qualcomm.

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