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).


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, 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., Inc., Seesmic Inc., Siemens Enterprise Communications Inc., 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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