Tuesday, April 2, 2019

Judicial backlash to privateering: German appeals court holds acquirer of standard-essential patents bound to previous patent holder's FRAND promise

The patent system is prone to abuse because, contrary to widespread misconception, the commercial value of patents lies in legal uncertainty, and patent offices around the globe prioritize quantity over quality (institutionalized excess and race to the bottom, especially with leaders such as USPTO Director Andrew Iancu or the current president of the EPO and his predecessor). Statistics show that most patents are invalid as granted, and even those that are valid rarely involve an inventive step of the impressive kind--and reasonable people can disagree on claim construction, which is why a fairly high percentage of all claim constructions are reversed on appeal.

Patent judges are increasingly aware of the issues, and it depends on each judge's style how they try to address the problem (such as by being ever more inclined to stay cases when the validity of a patent-in-suit is doubtful)--but the root cause (the aforementioned institutionalized excess) can't be addressed by them, so it all comes down to purely symptomatic treatment.

One form of abuse that constitutes a systemic threat is privateering: the practice of transferring patents to patent assertion entities whose business is to bring extortionate litigation. A few years ago I made a public call to "name and shame companies that feed patent trolls," and I'd like to refer you to such previous statements (you can find far better explanations of the privateering problem from others to be honest) rather than elaborate on this again.

The most famous patent-specialized German appellate judge, Dr. Thomas Kuehnen ("Kühnen" in German), Presiding Judge of the primary patent litigation senate (= panel) of the Düsseldorf Higher Regional Court and author of the leading German patent litigation manual (also available in English), is exceedingly patentee-friendly (think of him as the German answer to former Chief Judge Paul Michel), but enough is enough, even for him. While he was angry about the European Commission's pro-FRAND and pro-competitive interventions earlier this decade (he claimed pursuing antitrust claims for the pursuit of injunctions over FRAND-pledged patents was tantamount to "expropriation"), Juve Patent reported in late February that Judge Dr. Kuehnen's wrath was aimed at Unwired Planet, a privateer fed by Ericsson (and others) with patents asserted against, in that particular case, Huawei (and various other device makers in other actions).

I wholeheartedly agree with Judge Dr. Kuehnen that the transfer of SEPs for the purpose of extracting supra-FRAND royalties runs counter to the notion of FRAND licensing. And I don't think his "Wild West" analogy is an overstatement. It's really about the weaponization of patents and at least comes somewhat close to robbery.

On March 22, Judge Dr. Kuehnen's panel handed down the ruling in that Unwired Planet v. Huawei (with Huawei being the appellant). In that case, an expired patent was at issue, so the FRAND questions didn't involve the entitlement to injunctive relief. It was about monetary damages.

The Unwired Planet cases in different courts raise interesting and important issues related to patent damages and judicial determinations of royalties. In the UK, both the England & Wales High Court and the appeals court thought it made sense for a UK court to set a global FRAND royalty even when the defendant generates only a minuscule percentage (if the word "percentage" even makes sense here) of its global revenues in the UK. It obviously does not, and I'm hopeful that the Supreme Court of the UK will grant the petition to appeal in that case and a related Conversant case (over former Nokia patents). The press office of the UK Supreme Court told me that a decision may come down shortly before or after the Easter holiday. To me this looks like the epitome of a legal question that the highest court in a given land would want to take a look at: the extraterritorial reach of jurisprudence.

While I completely agree with Judge Dr. Kuehnen that privateering is unFRANDly and consider it great policy to combat that rampant and problematic practice (which I'd like to see courts around the globe tackle vigorously), I'll put my critique bluntly: I think Judge Dr. Kuehnen approached the issue along the lines of "if all you have is a hammer, everything looks like a nail," and legislated from the bench as if patent law were a parallel universe. He actually appears to be conscious of having taken a position that reasonable people can disagree with, which is why he explicitly authorized an appeal to the Federal Court of Justice. Normally German appeals courts don't do that, requiring an appellant to firstly file an "objection to non-admission [of the appeal]" (the German equivalent of a cert petition).

To be clear, I wouldn't have the slightest policy problem with his decision being upheld later. The outcome makes a lot of sense. But in my opinion, what Judge Dr. Kuehnen wants would require new legislation, plain and simple. The German government is evaluating a potential patent litigation reform measure, and maybe (though competition law per se falls within the European Union's acquis communautaire) the privateering issue could be addressed there as well.

Huawei raised various competition issues with Ericsson's transfer of a portfolio of cellular SEPs to Unwired Planet, and apparently some of them were previously raised by Samsung in parallel litigation.

There are three levels at which a privateering-style transaction can be thwarted by the courts:

  1. standing;

  2. antitrust violation through the transaction considering the specific terms and the overall circumstances and motives; and

  3. imposing restrictions on the acquirer (the privateer) based on the seller's obligations under competition law.

The first one, standing, is more interesting under U.S. law than German law. In Germany, a patent holder simply enjoys standing unless there's a problem with ownership, i.e., the chain of title. That's one of the issues Huawei raised in this case, but to no avail. Maybe there was an intermediary owner--an Ericsson entity--that held those patents for a couple of days before selling them on to Unwired Planet, but it really seems there was nothing serious there that could have decided the case. So far, so good.

Where I do disagree with Judge Dr. Kuehnen--and I dare to do it in such an outspoken way even though I'm aware of his incredible intellect and enormous prestige--is that he doesn't believe the second path (issues involving the transaction) has merit, and instead comes up with a creative but highly questionable construct along the lines of the third path: limiting the acquirer's entitlement to royalties based on a previous patent holder's obligations and licensing practices.

To give you an idea of how novel and unorthodox that approach is, it may help to remind you of the fact that Germany is a jurisdiction that doesn't even enable third-party beneficiaries (such as companies that are entitled to a FRAND license because of a FRAND promise made by a participant in a standard-setting process to a standard-setting organization) to enforce their rights like a direct contract. So even if Ericsson had never sold those patents to anyone, Huawei couldn't simply enforce third-party beneficiary rights to a FRAND license from Ericsson. But Judge Dr. Kuehnen's decision comes down to restricting Unwired Planet's rights vis-à-vis Huawei. So we're not talking about a third-party, but partically fourth-party, beneficiary rights.

It's not just about the FRAND commitment at an abstract level. It's that specific licensing terms could be deemed discriminatory based on what the previous patent holder did. (It would, of course, make sense to consider a previous patent holder's licensing terms in a FRAND analysis, but just an indication of what terms might have been agreed upon by parties.)

I know I'm repeating myself: I'm not against third-party or even fourth-party beneficiary rights in the FRAND context. Not at all. But I struggle with the dogmatic avenue that the Duesseldorf appeals court chose. The ruling seeks to create the notion of, for all practical intents and purposes, "in rem" rights, meaning rights that attach themselves to an asset (here, a patent) and benefit third parties vis-à-vis an acquirer.

German law provides for "in rem" rights in connection with real estate. For instance, a right of way so that neighbors can cross your property or the right to lay telephone lines. Those rights must, however, be notarized and are added to a public land register. If you agree on certain rights and obligations between neighbors by means of a mere inter partes agreement, there's no obligation on, or right benefiting, a future acquirer. What you can do then is add a clause to the agreement that requires a party, in the event of a sale, to ensure that the acquirer will enterinto the same obligations, including the obligation to pass those obligations on to the next acquirer. If this is done properly, you can at least sue someone who failed to pass an obligation on to the next buyer. If you make the slightest mistake there, tough luck...

Given the rigidity of German law in connection with the distinction between what is agreed upon between parties and what attaches itself to an asset, it's hard to see how implementers of standards could have far-reaching "in rem"-like rights when dealing with acquirers of patents.

What Judge Dr. Kuehnen appears to be coming from is this idea that intellectual property should be treated as much like real property as possible. That's a fallacy. In this case, it happens to nevertheless allow a pro-competitive, FRAND-compliant, result. But in most other cases, it leads to bad policy and bad case law.

The focus on the P in the term "IP" is also reflected by Judge Dr. Kuehnen not having any concerns over the terms of the Ericsson-Unwired Planet agreement. The ruling has no problem with Ericsson basically still being in charge and Ericsson having specifically told Unwired Planet to sue certain defendants--things that could even raise standing issues under U.S. law (depending on the facts).

Up to a certain point I think it is indeed important that patent holders are free to sell their assets. I agree, for instance, with the ruling that the defendant didn't show that the incremental litigation cost resulting from the distribution of a patent portfolio to additional entities reached an abusive extent (though the ruling suggests you'd basically have to sell each patent to a different acquirer to meet that standard).

It's just that the whole rationale reflects not only a property-centric perspective on patents (though in reality, patents are just a license to sue) but also the fact that its author has been focusing on patent law for decades and sort of lives in a parallel patent universe. A better mouse trap is needed badly.

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