Monday, April 16, 2018

Samsung obtains U.S. antisuit injunction barring Huawei from enforcing two Chinese SEP injunctions

Friday the 13th wasn't Huawei's lucky day, but it went well for Samsung: in accordance with an inclination he expressed at a recent motion hearing, Judge William H. Orrick of the United States District Court for the Northern District of California decided to enjoin Huawei from enforcing two Chinese standard-essential patent (SEP) injunctions against Samsung until a breach-of-contract question has been adjudicated in the U.S., where a trial is scheduled for December (this post continues below the document):

18-04-13 Order Granting Samsung Antisuit Injunction Against Huawei by Florian Mueller on Scribd

As I had already predicted on the basis of the motion, Judge Orrick concluded that any differences between the fact pattern of Huawei v. Samsung and that of Microsoft v. Motorola (a previous case in which a district court in the Ninth Circuit barred a litigant from enforcing a foreign SEP injunction) weren't relevant in terms of outcome-determinative in the present context. I called this Samsung-Huawei dispute "Microsoft v. Motorola Reloaded, an assessment that is validateed by the order, which discusses that precedent at great length. However, the order acknowledges that there are "undeniable and important differences," and I guess Huawei will try to capitalize on that when appealing this order to the Ninth Circuit.

One of the potentially "important"--though, as per the order, "irrelevant"--differences relates to the extent to which the Chinese court analyzed FRAND claims in Huawei v. Samsung vs. what the German Microsoft v. Motorola court did. Based on what I've read, I have serious doubts that there is the kind of huge difference in this regard that Huawei claims there is. In any event, I published an unofficial English translation of Presiding Judge Dr. Kircher's 2012 Mannheim Microsoft v. Motorola ruling six years ago.

The following passage will play a role--maybe not on appeal, but with respect to the further proceedings:

"I am at a loss as to how I (or a jury) could decide the breach of contract claims. [...] If I take Samsung’s reasoning to its logical conclusion, I see no end to this case, and certainly no way for this action to dispose of the parties' foreign patent actions."

Different judges have different styles. Many, if not most, other district judges would have made this decision (where an appeal is extremely likely) as appeal-proof as possible. Judge Orrick, however, has a very honest and forthcoming writing style, which is very likable but the next best thing to inviting Huawei to appeal.

This does not mean to say that I believe an appeal is going to succeed. There's a whole lot in the order that will presumably enable Samsung to defend the decision at the next level, such as holding that Samsung's Chinese manufacturing operations would really face a major threat or a quote from a speech by a Huawei vice president explaining that patent injunctions in general, and in the Huawei v. Samsung case in particular, are just meant to be bargaining chips in disputes that are just about money:

"Today, the number of disputes is on the rise, but we see fewer cases of injunction. Perhaps judges are quite reluctant to hear injunction cases because of its staggering impact on the market. Sure enough, the core issue is price; 90% or even 99% of the patent disputes are about price. Even if injunction order were to be enforced, does Huawei really want to kick Samsung out of China? Is it possible? Of course not. And is it possible for Apple to kick Samsung out of the US? No. That being said, when faced with potential licensees who are negotiating in bad faith, unwilling to pay fair royalties, you may want to file an injunction order with the court. At the end of the day, your purpose is to get the royalties in return, while using legal action as a bargaining chip. This is how things have changed over time."

The part I'm personally happiest about is that Judge Orrick attached some importance to the fact that Huawei itslf had chosen to make its U.S. filing the previous calendar day. For an example, the docket text says: "Huawei should not seek to enforce those [Chinese patent injunction] orders until the [U.S.] Court has the ability to determine the breach of contract claim it chose to present in this action prior to filing the Chinese actions."

In my initial analysis, and as I was following the process, I always thought this could play a role. In other cases, including the most similar one (Microsoft v. Motorola) as well as some bearing only a high-level resemblance to this one, the sequence of filings and its legal significance was a bigger issue between the parties than here. In comparable situations, the moving party often repeats the term "earlier-filed case" like a mantra. When it didn't happen here, I was starting to worry whether my recollection of the relevant types of facts had been wrong. But as Judge Orrick's order explains, this is indeed relevant in connection with international comity (i.e., deference to the foreign jurisdiction). Additionally, it's a psychological factor: Huawei made its bed and now has to lie in it.

As you might imagine, I'm proud of having accurately predicted the decision (based on the motion and Ninth Circuit precedent). I'm now predicting affirmance by the Ninth Circuit. For a final "See I Told You So," I'd like to note that last month the Federal Circuit completely vindicated my longstanding "fair use is a fairy tale" position on Oracle v. Google. I'm not going to talk about the merits here anymore. I wrote so much about it from 2010 to 2016 that there's no point in reiterating and rehashing all of that old stuff. All sorts of people who bashed me in earlier years were simply wrong: I didn't take those positions for any other reasons than wholeheartedly believing in them, and those positions can't have been as unreasonable as my detractors alleged. Otherwise, a Federal Circuit panel wouldn't have supported my positions unanimously in two separate decisions. That said, should Google file a petition for writ of certiorari (request for Supreme Court review), which is a given absent a settlement, I'd really like the top U.S. court to provide definitive clarity on some key software copyright issues. I'd hope for affirmance there as well, but I really believe the issues are important enough for the software industry at large that cert would be warranted.

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Thursday, April 12, 2018

One month prior to yet another Apple v. Samsung trial, old and new disagreements on design patents surface

On May 14, Apple and Samsung will square off in court again. It's going to be the third trial in their first California case alone. What makes it interesting is that it will involve a design patent damages determination (damages in this case amounting to a disgorgement of infringer's profits) following a Supreme Court ruling in the same case. The exact amount of money that will change hands between Apple and Samsung won't impact the parties' positions in the smartphone market. However, it will be a signal to other design patent holders, including patent trolls. Should Apple be awarded a huge amount that Samsung could ultimately afford but the equivalent of which would potentially put many other companies out of business, design patents would be used in aggressive, extortionate ways.

Last week, Judge Lucy Koh ruled on the parties' Daubert motions. Daubert motions and rulings are hard to figure out from the outside unless they're just about numbers (such as damages claims that a court does or does not permit) because one would need to know the related expert reports to really understand the context. What became clear to me from Judge Koh's ruling, however, is that she gave Apple various opportunities beyond the test proposed by the United States government in 2016 to argue that the relevant article of manufacture for a disgorgement of design patent infringer's profits in this case is an entire phone, not just a casing. While Judge Koh adopted the broad lines of the DoJ's proposed test, her Daubert order explicitly and intentionally declines to apply parts of what the DoJ had argued in its amicus curiae brief to the Supreme Court.

This week, Apple and Samsung filed their motions in limine. Judge Koh allowed either party to bring three such motions for excluding evidence from the upcoming trial. Motions in limine are more instructive for third-party observers like you and me because one can largely understand their meaning without having access to the parties' expert reports, and because it's often very telling what kinds of evidence a party believes would be particularly prejudicial to its case.

Apple's motions in limine

Apple's first motion in limine appears to be its strongest one. The court previously excluded evidence relating to smartphone designs independently developed by Samsung before the iPhone--which nevertheless looked a lot like the iPhone--except in the context of invalidity and infringement. This slide shows some examples on the left, and the first iPhone on the right (click on the image to enlarge):

Let's see how Samsung will respond to this motion, but it won't be easy to persuade Judge Koh that this kind of evidence should be admitted now in the article-of-manufacture context if it was excluded from the previous damages retrial. It's not that it isn't interesting or powerful. In fact, if the jury saw this, it could have a major impact in Samsung's favor. But Judge Koh's cherished "Groundhog Day" principle is that what wasn't allowed at previous Apple v. Samsung trials won't be allowed next time.

By contrast, Apple's second motion in limine appears overreaching at least in key parts (this post continues below the document):

18-04-09 Apple Motion in Limine Against Unasserted Patents by Florian Mueller on Scribd

In that second motion in limine, Apple seeks to preclude Samsung from referring to "unasserted patents." If you scroll through the above PDF document, you'll see that the term "unasserted patents" relates to a wide array of rather disparate references to other patents. The question Judge Koh will ask herself is whether or not the probative value of any evidence is outweighed by prejudicial jury confusion. I'd be surprised if she agreed with Apple on each and every part of that motion. For an example, Apple argues that patents not asserted in this case are irrelevant to the determination of the relevant article of manufacture. However, I can't see how the existence of other smartphone-related patents (utility patents as well as design patents) would not have probative value: the single strongest argument for a narrowly-defined article of manufacture (just the casing) simply is that there is so much more in and on a smartphone than just a very few, narrow designs. Therefore, if the unapportioned profits made by Samsung with entire devices were to be disgorged, everything else would be deemed to have no commercial value at all (which would be a ridiculous proposition, of course).

Just like I would probably grant Apple's first motion in limine at first sight, I'd largely or completely deny the second one because Samsung must have the chance to argue to the jury--not only, but also on the basis of other patents--that other patents cover other elements of smartphones.

There's one thing in that entire PDF that I think shouldn't be shown to the jury. On PDF page 111 there is the following user comment:

"The most idiotic source of much of Apple's patent litigiousness has been the design patents -- almost all of the claims being totally farcical. For example, they claimed 'rounded corners' on rectangular phones. Hope you discuss that."

That would indeed be unfair to Apple. This blog has previously debunked the "rounded corners" myth; but that still doesn't mean that anyone could reasonably support a disgorgement of infringer's profits generated with entire devices.

Apple's third motion in limine is hard to analyze from the outside; let me say that for now I'm unconvinced of it. It's about evidence from after the period relevant to the damages determination the jury will have to make. For an example, Samsung provided some screenshots from Amazon's website that show replacement smartphone casings (with a screen) that are sold separately and at a price much lower than that of an entire phone. If the point Samsung wants to make is that casings are sold separately, I'm not sure the exact date matters. It certainly can't matter if the underlying facts (such as the availability of such replacement parts) was already true during the damages period.

Samsung's motions in limine

Samsung's first motion in limine seeks to "preclud[e] Apple from offering evidence, testimony, or attorney argument that improperly implies that Samsung's increased market share was caused by the introduction of features found to infringe in this lawsuit," such as the claim "that Samsung’s market share increased because of the introduction of features found to infringe."

Samsung says such evidence was previously allowed because it was relevant to an analysis of profits that Apple lost, but it isn't relevant now that it's all about the article of manufacture and Samsung's related profits.

For now it is indeed unclear to me how that kind of evidence would help--and not just confuse--the jury with respect to the article-of-manufacture determination. Let's see how Apple will respond.

Just like Apple's second motion in limine is the broadest one, so (though by far not equally broad, and clerly stronger in my view) is Samsung's second motion "for an order prohibiting Apple from presenting evidence or argument suggesting that this Court, the prior jury, or the U.S. Patent and Trademark Office ('PTO') has already determined the articles of manufacture to which Samsung applied the patented designs."

One of the things Apple would like to do is highlight to the jury how often the words "an electronic device" appear in the design patent documents. I agree with Samsung that the United States Patent & Trademark Office didn't accept or reject certain claim language with a view to an article-of-manufacture determination in a future damages case. No matter how often a patent says "an electronic device," it may nevertheless just relate to a component.

Samsung's third motion in limine relates to the '915 pinch-to-zoom API patent. The asserted claim was rejected by the USPTO on reexamination, and the Federal Circuit (which salvaged other Apple patents in other cases) affirmed the USPTO's decision. The way I understand Samsung's motion is that the disagreement between Apple and Samsung is not about whether the '915 patent is relevant to the damages determination in the upcoming retrial. Instead, the disagreement is whether the related adjustments made by Apple and its experts were sufficient.

There's nothing spectacular about those motions in limine, but they do raise some interesting issues. I'll comment again when Apple and Samsung have responded to each other's motions--particularly to each party's second motion.

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Thursday, April 5, 2018

Microsoft's Shared Innovation Initiative and its evolving approach to intellectual property rights

Microsoft has announced a "new IP strategy for a new era of shared innovation," giving customers ownership of new patents and design rights resulting from their collaboration with Microsoft, with Microsoft merely getting a license to use those technologies for the improvements of certain "platform technologies" such as Azure, Office, and Windows. Microsoft is even willing to support contributions to open source projects at a customer's request.

I haven't done any consulting for Microsoft in more than four years, and even while I was doing some work for them (such as on standard-essential patents), I never received any confidential information about their strategies or the terms of their license agreements. Whatever I know, I know from publicly-accessible court filings, one of which indicated that Samsung at some point paid north of $1 billion in Android patent royalties to Microsoft during a 12-month period.

As an anti-software-patent campaigner (2004/2005), I was profoundly worried about Microsoft using its patents against Linux and other free and open source (FOSS) software. A few years later, I realized three things:

  1. In certain contexts (such as the i4i case), Microsoft actually took pro-defendant positions.

  2. While I understand that many people disliked the idea of Microsoft charging patent license fees to Android device makers, there was no exclusionary use of patents. To the extent Microsoft sought injunctive relief, it merely wanted to bring Android OEMs to the negotiating table in order to reach a license agreement. Depending on the specific terms, licensing can also be anticompetitive, but by now we all know that none of this prevented Android from succeeding, and dozens of companies (many of which would have the resources and sophistication to defend themselves in court) chose licensing over litigation.

  3. I considered many free and open source software activists hypocritical because they criticized Microsoft over almost anything it did in connection with open source while giving the rest of the industry a free pass and intentionally turning a blind eye to some other players' clearly abusive conduct. Just like other companies orchestrated antitrust complaints against Microsoft, Microsoft was in some cases proven and in other cases merely suspected to be behind initiatives targeting other large players. But if there were things that deserved to be criticized, who cares? In the information and communications technology sector, lobbying entities and NGOs that raise issues serve an important hygienic function, provided there really is fire and not just smoke.

During the "Smartphone Patent Wars" it happened for the first time that Microsoft faced the threat of injunctive relief as a result of litigation brought by another large corporation: Motorola Mobility. That kind of adversary, which at some point belonged to Google, wasn't just the kind of troll that you can pay to go away (and that usually won't satisfy the eBay standard for patent injunctions). "Googlorola" wanted to gain so much leverage over Microsoft that it would have been forced to cease and desist from all litigation against Android device makers. Even during the early stages of its dispute with Motorola, Microsoft still made an often-cited filing with the Federal Trade Commission in which it advocated, or at an absolute minimum appeared to advocate, injunctions over standard-essential patents (SEPs). But that changed not much later, and by now most major players, except for mostly failed businesses that increasingly rely on patent monetization, agree that SEP injunctions shouldn't be granted. Two years ago, Google joined the Fair Standards Alliance, which promotes SEP licensing on FRAND terms.

I had already done some work for Microsoft when I first took a clear "no SEP injunctions" position on this blog. I knew that Microsoft's standards group wasn't taking the same position at the time, but no one even tried to discourage me from voicing my position on this.

In recent years, Microsoft's IP-related positions and priorities have apparently evolved further.

The emphasis in announcements of patent license agreements between Microsoft and Android device makers appeared to shift to bundling deals: Microsoft was apparently very interested in getting companies to preinstall certain Microsoft Android apps, such as Skype. The derogatory term for this is "bloatware," and no one knows by how much Microsoft lowered those license fees, but analysts speculated that Android device makers saved a ton of money by bundling Microsoft's apps.

Meanwhile, Windows Phone has been discontinued, so Microsoft has surrendered to Apple and Google with respect to mobile operating systems. It still has the Windows desktop and server business, but its growth strategy is centered around apps and services. So far, Wall Street loves that new focus, but it remains to be seen over the years whether Microsoft can fend off competition in markets in which it won't have the benefit of making the underlying operating system. I don't mean to be negative, but the jury is still out on this.

The most surprising and--to me--most disappointing indication of Microsoft now being more interested in apps and services than in its own operating system platforms was when it filed an amicus curiae brief last year with Red Hat and HP, supporting Google against Oracle with respect to "fair use." Parasitic Red Hat and Oracle-obsessed HP had previously sided with Google on copyrightability; Microsoft hadn't. But with respect to "fair use" (which Android's use ofthe Java APIs isn't according to the United States Court of Appeals for the Federal Circuit), Microsoft actually sided with the weak-IP camp.

I don't understand why. Maybe Microsoft would like some more freedom with respect to its own use of the Java APIs (in some enterprise applications and on the Azure cloud); maybe Microsoft is more interested in a constructive relationship with Google (unlike Oracle, Microsoft stopped funding various industry groups accusing Google of abusing its search engine monopoly); maybe Microsoft wanted to curry favor with the open source community this way; or maybe Microsoft is interested in "balance of power" (the historic British take on continental European politics) and is afraid of Apple being or becoming too powerful, so it may not want Android's success to be compromised by the Java copyright situation.

Whatever the reason or combination of reasons may have been, I'd never have expected Microsoft to support Google against Oracle on "fair use." By way of contrast, the Federal Circuit concluded: "There is nothing fair about taking a copyrighted work verbatim and using it for the same purpose and function as the original in a competing platform." The "old" Microsoft--the Windows-centric one--would have been interested in reasonably strong protection of its intellectual property in APIs. The new Microsoft is apparently more interested in access to other companies' APIs.

I interpret yesterday's announcement of the Shared Innovation Innovative as an indication of Microsoft continuing to modify its approach to intellectual property. It's still far from advocating the abolition of software patents, but it appears to be trying hard to be part of the sharing economy in some other ways.

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Sunday, April 1, 2018

Radicalization of European politics: growing chorus of calls for Facebook breakup

I wish this were just an April Fool's Day post, but sadly it's true that politicians in the EU are making ever more radical proposals concerning U.S. Internet giants. While I don't expect anything extreme to actually happen in the near term, calls for or speculation about breakups of large corporations contribute to a climate in which it becomes increasingly hard to find reasonable solutions, and to focus on actual wrongdoing by abusers of dominant market positions. It's a climate of thoughtlessness.

About a week ago, EU competition commissioner Margrethe Vestager, more descriptively named Activistager, told the Telegraph that a breakup of Google into multiple smaller entities would have to remain on the table as an option for competition enforcement. No one seriously believes this would be the outcome, but just mentioning the possibility is a kind of saber-rattling that appears totally disproportionate. One may or-as the U.S. Federal Trade Commission concluded in 2013--may not consider any of Google's business practices anticompetitive. But even if one agreed with the EU Commission's charges, one can't seriously think about a breakup. Maybe some minor remedies and limited fines, but that's the maximum extent of it.

Unfortunately, socialist anti-business radicalism is on the rise in Europe. The European political coordinate system has always been clearly to the left of American politics. By way of comparison, even someone like Hillary Clinton would be clearly to the right of the center of European politics--and on some issues even closer to parties considered "far-right" by European standards than to Merkel's Christian Democratic Union, which is conservative in name only, or Macron's En Marche, a movement in the tradition of French statism. But in the past there still was a huge difference between the more egalitarian, statist European approach and what would sooner or later result in five-year plans.

The European debate over Internet giants and the power they accumulate--and the way they leverage their reach and their network effects--needs more reasonableness. The current trend is worrying. Mrs. Activistager should be isolated. But the "nuclear option" of breaking up companies comes up way too often in the European debate.

Just this weekend, two senior German politicians said in interviews that a Facebook breakup may be necessary as a last resort. Robert Habeck, the co-chair of the German Green Party, told a newspaper that governmental intervention is warranted where there isn't enough competition. Mr. Habeck described Facebook as a "data superpower" that owns too many services, including WhatsApp, and aggregates all of their data. Therefore, he believes competition law needs to evolve in order to be able to break up such giants.

In Europe, the Greens are more influential than anywhere else in the world. They regularly join government coalitions in different European countries, and in the European Parliament they sometimes have the power to tip the scales in narrow votes. Most of the time they side with center-left parties, but sometimes also with European conservative-in-name-only parties. Merkel and her closest circle of allies and advisers tried to form a government with the Greens last year, but failed because the somewhat libertarian Free Democratic Party didn't just want to provide the missing votes to Merkel's strategic alliance with the Greens.

The reason I described the Free Democratic Party as "somewhat libertarian" is that it, too, increasingly adopts left-wing populist positions. For instance, the FDP supports Activistager's "state aid" case against Apple and the EU Commission's "digital tax" plans. And the vice chair of the FDP group in the German parliament, Michael Theurer, told Germany's leading financial daily, Handelsblatt, that a corporate breakup would be a "massive governmental intervention and, besides governmental regulation, a last resort"--but even he, while preferring to explore ways to build competitive pressure through innovation, didn't want to rule out a breakup of Facebook.

Mr. Theurer says that the "platform economy" has a tendency to result in monopolies and "a high concentration of power." Therefore, the libertarian-in-name-only politician, like the Green leader I mentioned before, believes competition law as it exists is insufficient to address the digital economy and urges its "further evolution."

While former Pirate Party leader and social democrat Christopher Lauer is far less influential, the leading Berlin newspaper, Der Tagesspiegel, published an op-ed of his last week in which he demanded the "nationalization" of Facebook.

Whatever conclusions Facebook may have to draw from the Cambridge Analytica affair, politicians in Europe, and especially in the largest EU member state, should be more careful about the measures they propose. Radical ideas, even if described as a last resort by some (not all) of their proponents, distract from real issues (such as Europe's abysmal failure in the digital platform economy) and from the quest for real solutions, and are particularly unhelpful on the brink of a trade war.

Europe should try to stay in the global competition enforcement mainstream. But in the Age of Activistager, that may be too much to ask for.

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Monday, March 26, 2018

EU competition commissioner Activistager going off the deep end with Google break-up talk

In Europe, there's already an abundance of signs of a continent in decline, with no realistic hope for a turnaround. Yet the EU--especially its executive government, the European Commission--keeps the bad signs coming. Here's the latest, courtesy of The Telegraph:

Give me a break. While Google's market share in the EU search market is a fact, it's not a result of any wrongdoing. There simply isn't enough innovation in Europe. Otherwise some European company could have built a great search engine with a focus on European languages and websites. Last year, the EU's "digital" commissioner (from Bulgaria, the least advanced but highest-crime country in the 28-member bloc) said in an interview that Europe didn't need its own Google. But apparently some people in Brussels believe they cannot leave Google alone either.

Breakups are the most extreme antitrust remedy. They're talked about far more often than actually ordered. But below a certain threshold it's simply inappropriate to mention the possibility of a breakup. Whatever charges the EU has brought against Google to date fall far short--"far" in terms of lightyears--of where a breakup could even be contemplated.

Apart from the Qualcomm case, where the EU Commission--for a change--joined the global competition enforcement mainstream, it's really hard to make sense of that multi-level crusade against American tech companies. Some alibi action taken against European companies such as IKEA aside, the EU is clearly applying double standards. In connection with state aid, that's particularly extreme:

  • When the Italian government bails out banks, it's not "state aid." Obviously, the eurozone's largest debtor country must be allowed to do this, though it won't help that uncompetitive country in any sustainable way.

  • Today a Dutch guarantee scheme named "Extended Growth Facility", under which the government of the Netherlands takes 50% of the risk of new loans to certain types of companies, was cleared by Brussels. It's no "state aid" to those bEUrocrats because the Commission argues the Dutch government would receive "an appropriate remuneration level" and the system would (which can obviously be based only on projections) be "self-financing." I know exactly how those schemes work because Germany had something similar in place in the 1990s--the tbg (Technologie-Beteiligungsgesellschaft der Deutschen Ausgleichsbank). A startup I had co-founded in 1996 received investments, and tbg made a promise of 50% risk coverage to our investors, and it gave us a loan (without any surety provided) of the same amount. We repaid tbg with a 30% premium (on top of ongoing interest payments) after we sold out to Telef√≥nica, and they never had to cover our investors, so I'm not saying it never happens that this kind of thing can be self-financing. But venture capitalists told me about the huge number of bankruptcies that occurred because investors made high-risk "other people's money" types of bets. Let's be realistic: no government would provide guarantees, even if in the Dutch case limited to "medium and large companies" (not startups), if those companies could receive money on the same terms from private-sector lenders, as the Commission incorrectly claims. There's no shortage of money, especially in the eurozone with the European Criminal Bank being just out of control and continuing to flood the markets with euros. Also, there's no shortage of insurance policies for credits in the private sector. The only reason a government would do this is because it wants to provide state aid.

  • The Madeira tax avoidance scheme is accepted by Brussels, too. Portugal is not as big a problem for the eurozone as Italy, just by virtue of being far smaller, but it's one of those strategically-lost Mediterranean countries, so obviously the Commission doesn't cry "state aid."

  • But when Apple simply follows international tax rules, including longstanding structural differences in global corporate taxation between the U.S. and Europe, the Commission feels that "state aid" comes in handy as a competition tool that can be misused to advance a political agenda, as the new "digital tax" proposal shows.

I'm way past the point at which I could understand the EU's absurd actions and inconsistent decisions. What I am concerned about is that the EU is continuing, and apparently even accelerating, its descent into madness.

Just like my favorite political commentator, Rush Limbaugh, who refers to Sen. Schumer as "Chuck-U Schumer" and to Sen. Graham as "Grahamnesty," I'm now going to give certain EU politicians new names.

I'll just call that left-wing political activist (disguising as a competition enforcer) "Activistager." There's the term "judicial activism," and it's what the EU court in Luxembourg is known for. Unfortunately, there is now some regulatory activism, too. It's like Attac designing the competition agenda for Europe...

The commissioner who presented the digital tax plans last week was a member of a Trotskyist group, and Trotskyism is the most radical, most oppressive and most violent form of communism. He may have distanced himself from such extremism, but he's so far left of the center that he's a "communissioner" rather than just a commissioner.

At the top of the organization there's a man whom another senior EU politician described as a "heavy smoker and drinker" in a TV talk show. A Polish politician described the problem in more drastic terms. YouTube videos like this one have raised questions. 12 years ago I was in Luxembourg for some meetings and a journalist told me about what kinds of beverages were spotted at press conferences even in the morning. Another Luxembourgian said that no one in that tiny country wanted to take the risk of libel lawsuits, but they do exercise their freedom of political speech by calling him "Jean-Claude Bokassa" and everyone understands what is meant. With the greatest respect, I'll just refer to him as "Dr. Uncker"--a rather subtle message.

There was a time when the EU's competition enforcement activity was constantly enhancing its reputation. America, not Europe, is the cradle of antitrust, but Europe appeared to take some actions, such as in the Microsoft cases (though I disagreed with the specific charges there), that other jurisdictions took note of. With respect to technology policy, Europe was seen as more open-source-friendly than other developed economies. But now that it is talking of a Google breakup without any such thing as a reasonable basis, that it is reducing the term "state aid" to absurdity by rubberstamping traditional state aid while manufacturing "state aid" cases out of thin air, and that it is at its wit's end with respect to innovation policy and focusing just on new tax schemes, the EU can't be a thought leader or a beacon for the rest of the world. Except in cases in which its decisions are consistent with other jurisdictions, the EU Commission can, at best, be considered backwards-oriented, and I increasingly doubt that the label "oriented" can be applied to it in any combination.

It's a different field of policy, but the EU is also arbitrary and capricious with respect to certain "autonomy" questions. Apart from Spain, the bloc wants to recognize and incorporate Kosovo; while Bulgaria is the most corrupt and highest-crime EU member state at the moment, it's not even playing in the same criminality league as Kosovo... Then the EU is the number one funder of the Palestinian Authority, thus also the largest contributor, through the "Martyrs Fund" (misnomer!), to the families of suicide terrorists. But when a Russian-speaking majority of autochthonous Crimeans unsurprisingly preferred to join the Russian Federation, the EU opposes this because it wants all of Ukraine, including Crimea (though this isn't going to happen), to join the bloc one day. And just yesterday, exiled Catalan ex-president Carles Puigdemont, who never advocated violence, was arrested in Germany. The EU consistently sides with the Spanish government, which is responsible for nearly 100% of the violence committed in connection with the Catalan conflict, and I'm convinced it's largely because even senior EU politicians such as Manfred Weber (leader of the "conservative"--in name only--group in the European Parliament) warned that the Catalan conflict could precipitate the next euro sovereign debt crisis (Spain could get into serious financial trouble, more serious than the one it already is in, without Catalan taxes; this could set off a chain reaction, especially with hedge funds placing bets against other countries, and could make the inherently unstable eurozone collapse).

In elections held earlier this month, roughly 50% of Italian voters supported strongly EU-skeptical parties, and another 20% supported parties that are somewhat EU-critical. It's not that hard to understand.

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Thursday, March 22, 2018

The EU's digital tax bill would burden COUNTLESS tiny app developers around the globe

I couldn't google a single article or statement higlighting the two ways in which even small mobile app developers will be affected by the digital tax the European Commission proposed on Wednesday (see yesterday's post and an October 2017 piece), so I'll just explain the problem here.

Most of the reporting and commentary on yesterday's Commission initiative is limited to one of the two proposals that were made simultaneously: the interim bill. On the EU Commission's website you can see that the March 21 announcement involved TWO DIFFERENT "Proposal[s] for a COUNCIL DIRECTIVE." The first one is a bill "on the common system of a digital services tax on revenues resulting from the provision of certain digital services" (PDF), and I'll refer to this as the "interim bill" so as to distinguish that short-term transitional set of rules from the actual mid-term plan, which is a bill "laying down rules relating to the corporate taxation of a significant digital presence" (PDF). The interim bill is intended to be replaced by the actual bill whenever the latter takes effect--and the EU wants its member states to begin working on both immediately.

At yesterday's Commission press conference, and in most of the media coverage, the focus was just on the interim bill. The interim bill is narrower than the actual bill in the following two ways:

  1. The interim bill has very high revenue thresholds, which all by themselves limit the number of companies potentially affected. We're talking about (as a power of ten) a hundred companies.

  2. The interim bill also defines the types of taxable revenues far more narrowly. That's why its title refers to "certain digital services" (emphasis added). Basically, the interim bill requires companies to sell user data or provide an advertising interface. It doesn't mention subscription revenues, for instance.

There's an "impact assessment" in either proposal, but I couldn't find any reference to mobile app developers. However, either bill specifically lists apps among the types of "digital interface" the tax proposal relates to. Article 2(3) of the interim bill and Article 3(2) of the actual bill are identical:

"'digital interface' means any software, including a website or a part thereof and applications, including mobile applications, accessible by users" (emphasis added)

Also, either bill defines user as "any individual or business."

Contrary to just targeting the likes of Google and Facebook, a huge number of app developers around the world will be affected by what the EU is trying to do. (Whether the EU will ultimately get anything done remains to be seen and is doubted by some.)

There are two ways in which even countless small app developers would be affected if the EU got its way. The first way requires you to have a significant (but not huge) number of users, and then the money you will have to spend on accounting and tax advice services will hurt most of you even more than the actual tax. The second way will affect many of you regardless of the exact number of users you have in the EU because Apple and Google would most likely pass certain costs on to you. The second way doesn't place an administrative burden on you, but it, too, costs you money.

  1. The actual bill would (if passed) affect you if your app has more than 100,000 users during a fiscal year in a particular EU member state. There are many apps out there that have more than 100,000 users in a country like Germany (more than 80 million inhabitants), France, or Italy (the latter two each have more than 60 million people).

    If you have more than 100K people using your app in a given year (as the sum of first-time users who just downloaded and recurring users from previous years), the bill would (if passed) apply to you even if your revenues were minimal! Article 4(3) of the actual bill defines a "significant digital presence" (the basis for falling under the new EU digital tax) as existing if "one or more of [three] conditions is met," so it's sufficient if (regardless of the other two thresholds, which relate to revenue levels and the number of formal business contracts) "the number of users of one or more of those digital services who are located in that Member State in that tax period exceeds 100 000."

    You know what this means in practice? You would have to file a tax declaration with the tax authorities of one or more EU countries such as Germany, France, Italy, whatever. For small app developers, the administrative effort of having to do this, in a foreign jurisdiction and language, and the potential cost of requiring expert advice (from accountants, tax advisers, or tax lawyers) would be a very significant burden.

    This fact alone shows that the EU's proposal is half-baked at best, insane at worst, and displays gross incompetence and an anti-business ideology. That's why I found it so telling that the EU commissioner who appeared at yesterday's press conference used to be a member of a radical communist group. His Trotskyist (that's the most radical denomination of communism) friends must be proud of Mr. Moscovici.

  2. Even if you don't have 100,000 users in a given EU member state during a fiscal year, and even under the interim bill, the EU's proposal(s) would (if passed) cost you money!

    That's because of how Apple and Google will be affected directly, with us app developers being affected indirectly. What's explained in the remainder of this post is unrelated to your number of users or your own revenues.

    • Under the actual bill, Apple's App Store and Google's Play Store revenues (whatever users pay for paid apps or in-app purchases) would be subjected to the EU tax.

      Just like we are paid our 70% (or 85% for qualifying subscriptions) of ex-sales-tax/ex-VAT revenues, the EU tax will then further reduce the revenues of which we receive 70% or 85%.

    • Under both the actual bill and even the interim bill, those of us generating in-app advertising revenues through Google AdMob would be affected, whether we're Android or iOS developers.

      I love Google's mobile advertising services, both as a great vehicle for acquiring users (I have an amazingly attractive cost per acquisition through Google AdWords because of a very effective HTML5-based playable ad, which Google uniquely empowers me to run) and as an app monetization vehicle (all ads shown in my app--banners, interstitials, videos, playable ads--are served by Google). I'm so grateful for the great support I've received from Google that I won't comment publicly on Oracle v. Google anymore (my positions on API copyright are still the same but I won't reiterate them).

      Google is the number one target of the EU's digital tax plans, so if the EU got its way, my own ads in the EU and my revenues generated through showing ads in my app to EU users would be affected.

      My ads in the EU would become more expensive, and my ad income in the EU would be reduced. Again, even under the interim bill, not just the actual bill.

    • What I just explained would affect not only Android, but also iOS, app developers relying (like I do) on Google's advertising services. In addition, iOS app developers would be affected with respect to their placement of Apple Search Ads. I don't know whether Apple's Search Ads business alone meets the revenue thresholds in the interim bill (50 million euros a year in the relevant market), but it undoubtedly would fall under the actual bill (the number of App Store users alone would take care of that, and the related revenue threshold would only be 7 million euros). So Apple would have to pay the EU digital tax on its European Search Ads revenue. It appears (based on comments on discussion boards) that Apple Search Ads are already a key part of the advertising mix of many app developers. I tried them for a short while and for my app they worked out a lot better than non-interactive Facebook ads and AdWords text ads, but I'm not using them anymore since Google AdWords delivers several times better results thanks to the playable ad format, which Apple doesn't support. But my situation is almost unique. For most app developers it's actually a heaven-sent opportunity to advertise their apps directly on the App Store, and that advertising vehicle would become 3% more expensive as a result of the EU's plans.

What the EU has in mind is bad for app developers everywhere in the world, whether they're based in the EU or outside. At the end of the day, this will affect EU consumers. But I can't think of a single pro-consumer initiative the EU has ever taken apart from the laudable exception of abolishing mobile phone roaming charges...

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Wednesday, March 21, 2018

Transatlantic trade war must be blamed on dysfunctional, self-serving, protectionist EU -- not on President Trump

[Update] You can't make this up: the EU's digital tax plans are just being presented and explained at the EU Commission's daily press briefing by commissioner Pierre Moscovici, "[p]reviously a member of the Trotskyist group the Revolutionary Communist League" according to Wikipedia... [/Update]

This is a broader follow-up to an October 2017 post, "The EU's definitive defeat: digital tax plans and a declaration of surrender to Silicon Valley."

Today the European Commission will propose, or by the time you read this, has proposed, a new digital tax of 3% on large digital companies' revenues in the Single Market. Google and Facebook are going to be affected, but they have higher margins than companies like Amazon, which could be hit really hard depending on what exactly the EU will decide in the end, if and when its member states reach a unanimous agreement. Some smaller countries such as Ireland and Luxembourg have a strong interest in the status quo. Theoretically, they could veto any decision. However, they would not be able to prevent larger countries from imposing a digital tax on their own, which is why some horse-trading might ultimately happen.

In order to understand transatlantic dynamics, it's key not to define the term "trade war" too narrowly. The narrowest meaning of the word would relate to import duties. A slightly less narrow term furthermore includes regulations, of which the EU notoriously has many, and many of which were created by the EU at the behest of European industry bodies seeking to erect practical barriers to entry for foreign--in many cases American--businesses. Typically, intellectual property rules are considered important regulatory tools with trade implications: weak protection can favor local pirates, strong protection can shield local patentees from competing on the merits of their products, or at least give them unfair leverage. And there's the intentional devaluation of a currency. Subsidies, too (thinking of Airbus, for instance). But even all of that is still not the whole picture. Let's not forget about antitrust enforcement and--not only today--taxes.

We're not merely on the verge of a transatlantic trade war. It's already in full swing, and the EU is pushing the escalation button. The Trump Administration has concluded that enough is enough, but it didn't fire the first shot. Before any new U.S. import tariffs may take effect, the EU has drawn first blood, and today's digital tax plans are part of that.

Most EU citizens, to the extent they're even interested in trade policy, are completely misguided, which is mostly the fault of a mendacious EU, dishonest politicians in EU member states, and largely incompetent and unbalanced reporting by mainstream media in the largest EU member states on the continent (to exclude the UK for sure).

Tariffs

As a result of fake news, the average European, even the average European with an interest in these issues, simply doesn't know some simple facts, and even some reporting in the U.S. appears unbalanced because it's driven by a desire for bashing President Trump. Just three eye-opening facts that Germany's most renowned economist, Professor Hans-Werner Sinn, mentioned in a TV talk show this week, where he also criticized German media for not mentioning such key facts:

  • Tariffs are the EU's primary revenue source. Even the European Commission's website lists "mainly customs duties on imports from outside the EU" as its "traditional own resources" before anything else. That's why the Brussels bEUrocracy stands to gain from a trade war.

  • While U.S. customs duties on foreign cars (except for some niche categories) amount to only 2.5%, the EU charges 10% on any vehicle imported from outside the bloc.

  • EU import duties on meat are so high that European consumers have to pay prices that are roughly 20% higher than, for an example, in the United States.

The euro

The euro currency is simply the biggest financial crime committed in history against the citizens of any territory. Economists had warned early on that it would be completely irresponsible to create a common currency for disparate countries that have different economic and fiscal policies, including among other things widely varying attitudes toward public debt and the extent to which government should run the economy. The European Central Bank, which I usually just call the "European Criminal Bank", is the only lending system in the world where the debtors can set their preferred interest rate and determine the amounts made available to them. That's because each country, regardless of the size of its population or economy or of its contributions to that fundamentally flawed system, has one vote. In my observation, the one-vote-per-member-state system is a typical characteristic of many corrupt organizations, including major international sports bodies or the European Patent Office. It turns majority building into a race for the bottom, with sports bodies and the EPO finding it easier to buy votes from small, poor countries, and in the ECB's case, the problem is that Europe's uncompetitive south (which is not going to become competitive again anytime soon) simply runs the ECB (which wouldn't change even if the ECB had a president from a northern country since the president can't decide anything against the council).

Not only is the euro system unique because no other lending system would turn over all key decisions to debtors but this system has also managed to be bad for the citizens of all of its member states except for a few small "leeches" such as Luxembourg. The ECB is a redistributive system, and normally those systems are zero-sum games: what some give, others take. Not so with the euro: everyone (except for those few small leeches) loses, just in different ways and for different reasons. Germany, a country that is too much focused on the darkest 12 years of its history to defend the interests of its citizens and has less balanced and less competent mainstream media than even some far smaller neighbor countries with the same language, has practically assumed liabilities to the tune of two trillion euros (roughly as much as Germany's entire public debt as it is currently in the books) for those uncompetitive Mediterranean countries. A German citizen who would put 50,000 euros in the bank under today's conditions, with the ECB (because of lenders calling the shots) artifically keeping interest rates down, but inflation being significant (not high, but still), would lose the purchasing-power equivalent of a small Volkswagen car over the course of 20 years. Normally, some other countries' citizens would have to be the beneficiaries. But apart from the "leeches," no one is benefitting. In Italy, that completely overindebted country in which organized crime has greater revenues than any legitimate company, industrial production is still 20% lower than it was 10 years ago. In Greece, wages are about 3 to 4 times as high as in two non-eurozone neighbor countries (Bulgaria, Turkey) that are actually in comparable situations (relating to worker productivity etc.) apart from the euro. As a result, Greece has become a huge importer of olive oil because it has become too expensive to make that product in Greece itself.

The trade war implication of the euro is simply that German exporters don't have to compete fairly: their currency would be far more valuable if Germany didn't have a common currency with some large uncompetitive economies. Currency exchange rates play a role. I remember, from decades ago, that advertisement in the U.S. which said that for the price of one Mercedes you could afford two Cadillacs plus a driver. That was long before the euro. So, simply by being a member of the eurozone, Germany is nowadays engaging in currency devaluation. It still doesn't benefit German citizens since those large corporations don't pay a lot of taxes, their shareholders alerady are or can at any point leave for foreign countries, and their executives can and will leave the country whenever it's beneficial.

President Trump often points to Germany's huge trade surplus as a problem. He does have a point. The way I view it, a significant part of those exports is just due to the euro system: first, the currency devaluation effect I just mentioned, and second (but that's not of concern to the U.S.), Germany inflates its exports by lending money (through the ECB) to countries that couldn't afford that many luxury cars and similar goods if they had to produce the necessary income first or if they at least had to borrow money in an undistorted market.

Intellectual property enforcement

With respect to IP, the U.S. is more concerned about China than the EU. But one should keep an eye on IP in the context of transatlantic trade:

  • The European Commission's guidelines on standard-essential patents (SEPs) are, fundamentally, a good thing. But there was a lot of lobbying pressure from old European companies increasingly reliant on patent license fees.

  • Whenever the Unitary Patent Court (UPC) will be ready, Europe will become a paradise for patent trolls and the likes of Nokia and Ericsson.

  • There are constant attempts to favor open-source software over other licensing models. That can benefit U.S. companies such as Red Hat, but it does have negative effects on European opportunities for such companies as Microsoft.

  • The copyright picture is mixed. In some ways, European copyright enforcement rules overshoot, but the scope of copyrightability appears broader in the U.S. than in Europe.

Competition enforcement

Apart from cases (such as Qualcomm) in which the EU takes positions consistent with those found in other jurisdictions, its competition enforcement activity has increasingly, especially under competition commissioner Margrethe Vestager, become excessive. Mrs. Vestager is basically on a crusade against Silicon Valley. The longer the EU's Google cases take, the less I believe in them, and the tax case (styled as a state aid case) against Apple is an unbelievable absurdity.

Considering the combination of issues the tech industry faces in the EU, it doesn't make sense to me that major Silicon Valley companies engage in Trump-bashing all the time, as I already said in my New Year's post.

Just to avoid any misunderstanding, I do understand and appreciate the benefits of fair trade, such as specialization. So I'm not arguing isolationism. It's just about who's to blame. Consumer benefits are not what the EU has in mind. It never did in any context apart from mobile phone roaming charges.

The EU is an economic failure. There's no way that it's ever going to become a major player in the digital economy. It's simply getting squeezed between the U.S. and East Asia. The real hawks in this trade war are not in Washington, D.C., but in Brussels and in the governments of such countries as France and Germany. The Paris-Berlin axis is a recipe for failure, with Macron simply wanting redistribution and Merkel and her minions being happy to oblige. They'll be the driving forces, along with the EU institutions, behind those terrible "digital tax" plans and the "trade war."

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Saturday, March 17, 2018

Judge Orrick inclined to grant Samsung an antisuit (anti-enforcement) injunction against Huawei

A few days ago, Law360.com reported that United States District Judge William H. Orrick (Northern District of California) expressed an inclination at a Wednesday hearing to grant Samsung's motion seeking to bar Huawei from enforcing a couple of Chinese patent injunctions before the U.S. court has determined whether it is, in light of its FRAND obligations, entitled to injunctive relief.

You won't be surprised if you've been following the case here. Two weeks ago I published a post here with a headline that contained the following prognosis: "antisuit injunction looms large"

Even though I'm just a little blogger, it's a bit daring to offer such a prediction based on the briefing record, especially since antisuit (here, actually just anti-enforcement) injunctions don't come down every day. But for the reasons explained in my previous posts, above all Ninth Circuit case law, Huawei won't be able to complain.

It was hard to find out about what exactly Judge Orrick said, but as far as I'e been able to research, it comes down to the following key points:

  • He appears to apply the Gallo antisuit injunction factors as a substitute for, not (as Huawei argued) a complement to, the general preliminary injunction factors.

  • For one of the Gallo factors, the Unterweser factors are determinative: at least one of the three must be satisfied.

    The key statement by Judge Orrick in this context was that "U.S. courts hold that owners of declared essential patents that have made commitment to SSO's should be precluded from getting injunctive relief." He'll check whether an exception applies, but that will be his task and he probably won't let Huawei do a preemptive end run around a future U.S. court ruling.

    It's correct that SEP injunctions run counter to U.S. (and not just U.S.) policy. The Chinese outlier rulings may very well be overturned at the next higher level. As for the situation in the U.S., I can't think of anything more telling than the fact that Qualcomm, once a big SEP injunction advocate, decided to base all of its injunction requests against Apple (in the U.S. and abroad) on non-SEPs.

  • While the Gallo/Unterweser analysis may very well result in an antisuit injunction, Judge Orrick would like both parties to work out a deal and think again about their litigation strategies. When he said so, Samsung's counsel (Quinn Emanuel's Charles Verhoeven) tried to deflect the part relating to his client, pointing out that Samsung was just defending itself against cases brought by Huawei. But balanced as he appears to be, Judge Orrick noted that a defendant, too, has a strategy.

    So far I can't see anything particularly obstructive in Samsung's defense against Huawei's cases. Other litigants, such as Apple, would take largely the same positions and steps. Whose fault it is that negotiations haven't resulted in a deal (Samsung argues in court that it's because Huawei hasn't moved, and Huawei portrays Samsung as an unrepentant infringer) is impossible to know from the outside. Even the San Francisco judge can't know for sure.

If and when the antisuit injunction comes down, there'll probably a lot more media attention to it. I don't understand anyway why there's so little coverage of a cross-jurisdictional patent spat between the world's two leading Android device makers...

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Monday, March 12, 2018

USPTO taking another look at core Twitter patent: Indian inventor has priority but is facing Alice

It's been almost seven years since I reported on an India-based company putting a long list of companies on notice with respect to a patent application that it credibly alleges relate to Twitter/Facebook-style feeds:

"Microsoft, Yahoo, Google, Apple, Bharti Airtel Ltd., Webaroo Technology (India) Pvt. Ltd., Amazon, AOL, Nokia, Bebo Inc., ExactTarget Inc., Ford Motor, Foursquare Inc., IBM, Linkedin, MySpace, NING Inc., Research In Motion Inc., Quora Inc., Salesforce.com Inc., Seesmic Inc., Siemens Enterprise Communications Inc., Sina.com Technology Co. Ltd., StatusNet Inc., PopBox Inc., Twitpic Inc., Peek Inc., The Iconfactory Inc., Ubermedia Inc., Yammer Inc., Facebook and Twitter."

I haven't seen any infringement litigation since then, but the last company on the list above, Twitter, faces the risk of losing its own core patent family--and, if not saved by Alice, the risk of owing damages/royalties--because of an earlier priority date of Yogesh Rathod's patent application (18 July 2006 - PCT/IN2006/000260) vs. Twitter's "Dorsey et al." patent (23 July 2007):

  1. On March 25, 2013, a submission of prior art under 37 CFR1.501 was made with respect to Twitter's United States Patent No. 8,401,009 on a "device independent message distribution platform." The submission pointed to Yogesh Rathod's patent and was not a reexamination request, but is somewhat close to one.

  2. On February 25, 2016, Mr. Rathod filed a suggestion for an interference with respect to Twitter's broader U.S. Patent No. 9,088,532 (a divisional of the '009 patent). His attorneys explained why their client's patent application has priority over the one underlying that Twitter patent.

  3. The latest and most significant development so far bears today's date: the United States Patent & Trademark Office agreed to reexamine Twitter's (broader) '532 patent based on prior art including, most notably, the Rathod patent application (this post continues below the document):

    18-03-12 Reexam of Twitter Patent Ordered by Florian Mueller on Scribd

A finding that one or more substantial new questions for patentability have been raised is obviously still a far cry from holding Twitter's broader '532 patent invalid, and even if the broader '532 patent died, the narrower '009 patent might survive. But it is significant progress for Yogesh Rathod.

Mr. Rathod is trying to get the very same claims as Twitter's core patent claims granted, but based on what credibly appears to be an earlier priority date.

It could be that an Indian patentee ends up owning what was considered a core Twitter patent. But he's not quite there yet. His U.S. Patent Application No. 15/053,889 is facing an Alice (§101) rejection by the examiner, which he is appealing (the appeal was filed in late November). Most recently, the examiner sought to defend his rejection in his mid-February answer to the appeal brief.

Twitter's older and narrower patent was granted at a pre-Alice time; but the broader one was granted in 2015. The USPTO is clearly applying double standards so far, holding the same claims abstract in one case after not holding them abstract in another. That's not good.

I doubt that Twitter stands much to gain from its own patents. Twitter's business is based on network effects and a strong brand. Twitter's primary challenges relate to growth (both user base and revenues), and patents are not going to be the answer.

So the best that Twitter can hope for is that the patent application with an older priority date than its own will continue to be rejected on Alice grounds. What might otherwise happen is that an Indian inventor would own some key patent claims that Twitter temporarily owned, and sue Twitter (and others) for infringement over that patent.

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Wednesday, March 7, 2018

BlackBerry afraid of transfer of its trollish patent lawsuit against Facebook to Northern California

The company that used to be called Research In Motion is now named BlackBerry. It has always had the wrong kind of name at the given time: Research In Motion would be a typical name for a patent troll (second-best to "Innovations in Motion", more often than not with a demonym such as "American" placed in front) as those organizations try to position themselves as innovative, research-centric businesses with a view to jury trials when in reality they usually aren't. But it had that name when it was making those BlackBerry devices. Now that it has the name of the product, it's no longer making phones and becoming ever more of a patent troll. Admittedly, if I could go back in time, this blog here would have a different name, too: I didn't initially envision it to become so focused on smartphone patent and competition issues, whether or not they involve open-source software ("FOSS" stands for "Free and Open Source Software"). This blog may undergo a name change later this year or next.

BlackBerry has filed a patent infringement complaint against Facebook and its Instagram and WhatsApp subsidiaries (this post continues below the document):

BlackBerry v Facebook by Russell Brandom on Scribd

For the patents-in-suit, let me refer you to Ars Technica's article. I agree with Timothy B. Lee that the patents are extremely broad. In fact, they're so abstract and generic that many or even all of them might die an Alice death before the case even goes to trial.

I have an observation to share that other commentators don't seem to have focused on so far. The "jurisdiction and venue" section (paragraphs 25 to 36) is unusually long. In many other patent complaints it spans only a very few--and especially short--paragraphs. Here, it's almost epic.

Without a scintilla of doubt, the reason for BlackBerry's preemptive defense of its venue choice--the Central District of California (that's Greater L.A.), while Facebook is headquartered in the Northern District--is last year's Supreme Court recent decision in TC Heartland vs. Kraft Foods, which reinstated an earlier ruling (thereby overruling many years of Federal Circuit precedent) according to which "[a]s applied to domestic corporations, 'reside[nce]' in §1400(b) refers only to the State of incorporation" despite potentially broader definitions of "residency" in §1391. TC Heartland was viewed as a blow to the Eastern District of Texas, where patent trolls usually prefer to sue: it's easier now for defendants to get cases transferred out of that district.

BlackBerry's lawyers from Quinn Emanuel--a great firm though it has very much positionied itself as an anti-Apple firm (representing not only legitimate Android device makers but also antitrust violators and trolls against Apple) and apparently now also as an anti-Facebook firm (it already represented Yahoo against Facebook)--go to unusual lengths to justify the venue choice. Paragraph 34 of the complaint points to a 35,000 sq. ft. L.A. office as a "regular and established place of business" (though Facebook's new Northern California headquarters will have 1.75 million sq. ft.), and footnote 4 says there are at least 17 LinkedIn profiles of "people in this District that are dually employed by both Facebook and one of WhatsApp or Instagram." The complaint also points to "network effects" between Facebook's various services in order to establish as close a connection as possible between that L.A. Facebook office and the two Facebook subsidaries accused of infringement alongside their patent company.

BlackBerry also lists an Orange Country address for an in-house counsel, but it's actually a Canadian company and traditionally had most of its U.S. employees in Texas, though this may have changed.

It's all too obvious that BlackBerry doesn't want the case to be transferred to the Northern District of California. It appears to be realistic that it won't be a cakewalk to keep it in Southern California, but at least it wants to try. So it tries to satisfy the second part of §1400b:

"(b) Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business."

It doesn't appear that Facebook filed a declaratory judgment action in the Northern District of California before BlackBerry brought its offensive assertions. But Facebook will still try to get the case transferred to San Jose, and that's where the question of whether Instagram and WhatsApp have a "regular and established place of business" in L.A. or whether it's just Facebook (the parent company)--and whether the parent company's presence is sufficient and whether there are dually-employeed people etc.-- will come up. I'm sure that any relevant witnesses on the Facebook/Instagram/WhatsApp side will be based in Northern California.

Why is BlackBerry afraid of Northern California? Obviously, for the troll that the company increasingly is, the Eastern District of Texas would have been an obvious choice. But presumably BlackBerry didn't want to try such a long shot in light of TC Heartland. I can think of three reasons for which BlackBerry would like to stay out of the Northern District:

  1. Juries in that district tend to be rather tech-savvy. They might be underwhelmed by BlackBerry's abstract patents (unless those are held invalid under Alice as a matter of law) and be more inclined to identify overlaps between those "inventions" and the prior art.

  2. Relative to its economic and societal stature, Facebook has relatively few employees, but still enough that Northern California jurors may know Facebook employees.

  3. Paul Grewal. The former U.S. Magistrate Judge from the Northern District of California (whose opinions were always extremely well-written, not just in my opinion but that of other litigation watchers, too) became Facebook's deputy general counsel in charge of litigation. He's also quoted in Facebook's response, according to which the social network company intends to fight back (I very much hope so: please, Facebook, don't feed the troll even if you can cheaply get rid of the case!). BlackBerry may be afraid of Mr. Grewal still having a unique relationship with some of the judges in that district.

Just one other observation. BlackBerry is seeking an injunction. RIM (as it was called at the time) faced the prospect of an injunction in 2005 when it was being sued by a patent troll named NTP, and had to cough up hundreds of millions of dollars. The following year, the Supreme Court's famous eBay v. MercExchange ruling on patent injunctions came down. Under eBay, irreparable harm is key, and whatever little of an operating business (security software) BlackBerry has left is not really in a competitive relationship with Facebook, Instagram, and WhatsApp. Also, remedies will only have to be discussed if and when BlackBerry prevails on the merits, and that's a big "if."

BlackBerry's approach to patent injunctions has changed. I remember a meeting with them between their almost-shutdown and eBay. One of their in-house counsel told me that they would only pursue an injunction in extreme situations such as an employee leaving the company and stealing some of their code. None of that is at issue now. They've simply become more of a troll themselves.

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Saturday, March 3, 2018

Huawei may have overplayed its hand in Samsung patent dispute: antisuit injunction looms large

Procedural sophistication is a virtue, especially in cross-jurisdictional litigation. But in the event Judge William H. Orrick grants Samsung the antisuit (technically, just temporary anti-enforcement) injunction it is seeking against Huawei in the Northern District of California (in order to prevent the enforcement of a couple of Chinese patent injunctions), the world-class Chinese Android device maker and experienced patent litigant has no one to blame but itself--for excessive procedural gamesmanship of the kind that is all too obvious to (federal) judges. Should Judge Orrick find Huawei's attics "vexatious and oppressive," one of the three Unterweser antisuit injunction factors (a set of factors from the Fifth Circuit that the Ninth Circuit also applies) would be met, and someone who brings claims only to seek an immediate stay of some of them does appear to be suing for the sake of suing.

Huawei could have sued Samsung in only one country: China or the United States. It could also have brought perfectly non-overlapping complaints in any number of jurisdictions. Instead, Huawei sued in San Francisco one day (only to immediately seek a stay of some of its claims there), in Shenzhen the next day, and while requesting a global FRAND determination from the U.S. court it was going for the jugular--for injunctions in the country in which Samsung manufactures its smartphones--in China, meanwhile winning injunctions over two standard-essential patents (SEPs).

There are some valid points in Huawei's opposition brief (filed on February 20), but on the most critical questions it has nothing to offer but strawmen (this post continues below the document):

18-02-20 Huawei Opposition Brief by Florian Mueller on Scribd

Where I agree with Huawei is that the positions Samsung took on injunctive relief over SEPs in connection with an ITC import ban it was seeking and nearly (if not for a presidential veto) obtained against Apple were just the opposite of what Samsung has been saying since. However, for almost five years Samsung has been reasonably consistent, even supportive of advocacy groups and industry alliances that promote reasonable restrictions on access to injunctive relief over SEPs. Any inconsistency of the kind Huawei points to is, at best, a psychological issue--not a substantive or procedural one.

Huawei argues that Samsung is contradicting its own positions because it's seeking an antisuit injunction, for which it is required that the U.S. action be dispositive of the relevant issue(s) in the foreign litigation, while not agreeing that the U.S. court could set a global portfolio FRAND rate. At first sight, that may call into question the merits of Samsung's antisuit injunction. But Huawei had to grossly overstate the scope of the relevant issue (that's the most important one of the "strawmen") in order to portray Samsung as inconsistent. It's only a question of breadth. In its reply brief, Samsung stresses that it never argued that the California case would be dispositive of the entire Chinese actions--it's just about FRAND compliance and its implications for the entitlement to injunctive relief, and Samsung isn't against the U.S. court determining access to injunctive relief (this post continues below the document):

18-02-28 Samsung Reply Brief by Florian Mueller on Scribd

With respect to the legal standard, the most fundamental disagreement is whether Samsung must meet the general factors for preliminary injunctions in addition to antisuit-specific factors or whether the standard for antisuit injunctions stands on its own without having to additionally meet the general preliminary injunction factors. Samsung refers to a Ninth Circuit opinion from 2006, Gallo v. Andina, which was also cited in Microsoft v. Motorola, the closest case to Huawei v. Samsung: the propriety of an injunction is, therefore, determined based on the parties and issues being identical, on the first (U.S.) action being dispositive of the other (the foreign one), and whether at least one Unterweser factor applies. Ultimately, the impact on comity must be "tolerable." But that's it according to Microsoft v. Motorola.

Obviously, Samsung argues that if it had to prevail on the general preliminary injunction factors, it would do so handily, but it really looks like that's not even going to be reached.

Samsung's reply brief doesn't go into detail on this, but as probably the only non-party person to have watched the German Motorola v. Microsoft proceedings in person while following the U.S. Microsoft v. Motorola case via PACER, I found an oddity in Huawei's efforts to distinguish the "Robart injunction" from its Samsung case. Huawei claims that "[t]he German [Motorola v. Microsoft] court [i.e., the Mannheim Regional Court] thus issued its injunction without ever evaluating whether Motorola had complied with its FRAND commitment."

  1. When Judge Robart in the Western District of Washington issued the original temporary restraining order (which was converted into a preliminary injunction and upheld by the Ninth Circuit), the German rulings had not even come down yet. So theoretically there could have been anything in them, including an evaluation of Motorola's FRAND compliance.

  2. While it's correct that German contract law doesn't recognize the concept of third-party beneficiaries, the German Orange Book standard (which was relevant at the time, though by now the CJEU ruling in Huawei v. ZTE applies EU-wide), which is based on antitrust law and the Roman concept of "dolo agit qui petit quod statim redditurus est" (translation from Latin: "he who is seeking something he must return immediately is acting in bad faith"), does involve FRAND questions. Huawei is right that under Orange Book the question was not (though now, post-Huawei v. ZTE, it is) whether the patent holder made an offer on FRAND terms--it places the responsibility for making a FRAND offer on the license-seeking implementer of a standard. But the whole "dolo agit" theory I just mentioned requires anticompetitive conduct by the patent holder. The test applied by German courts in the Orange Book context was whether the patent holder could, without violating antitrust rules, refuse a licensing offer from the alleged infringer. That was, contrary to what Huawei claims, an analysis of FRAND compliance. Structurally different from the way U.S. courts look at it (antitrust vs. contract law; failure to accept vs. failure to make an offer) and from the way EU courts look at the issue now, but nevertheless a FRAND compliance determination.

While Samsung used to take different positions five years ago (an eternity in this industry) and is doing what any other defendant would do in its situation (seeking to put obstacles in Huawei's way, such as by firstly requiring an actual liability finding prior to a rate-setting decision, and by requiring country-by-country resolution of liability), Huawei's opposition appears fundamentally weaker to me than Samsung's motion. It wouldn't have been hard for Huawei to avoid a situation in which one can reasonably find its procedural tactics "vexatious and oppressive," and Huawei could have chosen to keep certain issues out of the U.S. case or at least to file the U.S. case after the Chinese ones. It has made its bed and must now lie in it. I believe Samsung's motion will succeed--if not in district court, than in the Ninth Circuit.

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