Saturday, October 5, 2019

Continental accuses Avanci patent pool of "conspiracy" to "boycott[] suppliers so [patentees] can collect hold-up royalties downstream"

Less than two months ago, I described automotive supplier Continental's FRAND/antitrust case against the Avanci patent pool as a conspiracy theory--in a nonjudgmental sense, notwithstanding the term's most common connotation, which is utterly pejorative.

In its opposition brief to the Avanci-Nokia-Sharp motion to dismiss the complaint, "Conti" (as people in the automotive industry commonly refer to it) uses the term "conspiracy" 20 times (plus three occurrences of "conspirator", singular or plural). At this procedural stage, it would be too much to ask for that they'd have to put forward any evidence--the standard right now is whether their pleadings are sufficient. In that regard, Conti appears to be in pretty good shape, and its opposition brief is thoroughly researched and persuasive (this post continues below the document):

19-10-04 Continental Opposi... by Florian Mueller on Scribd

The most interesting allegation is that of an "overarching conspiracy to boycott upstream suppliers like Continental." Continental describes itself as "a user of the standards impacted by Defendants' illegal boycott." Elsewhere, the alleged boycott is labeled "collusive." According to Continental, "the conspiracy consists of multiple means and agreements, all intended to achieve a single cohesive purpose—boycotting suppliers so Defendants can collect hold-up royalties downstream."

Continental argues that neither Avanci's status as a pool that doesn't hold patents of its own nor the fact that its agreement doesn't explicitly preclude its contributors form direct license agreements with upstream suppliers like Conti provide antitrust immunity. There doesn't appear to be a safe harbor like that for Avanci, but there also isn't a wealth of case law in place for holding pools responsible. Conti cites to a February 2015 pretrial decision in Zenith Electronics, LLC v. Sceptre, Inc. in the Central District of California, to a 1999 decision by the FTC (In Re Summit Technology, Inc.), and a DOJ paper according to which certain pool agreements require antitrust scrutiny. So this case before Judge Koh is almost a seminal case; at a minimum, a pivotal one.

I'm fairly optimistic that Conti's accusations are sufficient to survive a motion to dismiss. But they'll need to find a smoking gun, or multiple ones, in discovery. Otherwise Avanci--though not necesarily the conduct of each of its contributors--will be deemed above-board.

The opposition brief highlights certain conduct that is interesting to read at any rate. For an example, Sharp sued Daimler allegedly without even trying to enter into a direct license agreement, and apparently presented an Avanci pool license as the only way Daimler can settle the dispute.

Non-practicing entity Optis Wireless behaved a bit differently. A sworn declaration by PacTech Law's David Djavaherian (firm website), who represents Conti in licensing negotiations with Avanci members, reveals that Optis was only willing to go to arbitration, provided that Conti would dismiss Optis from the California case--but without even making an offer that would enable Conti at this point to evaluate the situation and the prospects of alternative dispute resolution. Should Optis make exorbitant demands, arbitration would almost certainly (though Optis said the parameters could be discussed) create a situation in which Conti could only end up with a highly unfavorable deal since a licensee can't counterbalance an outrageous demand by a licensor by proposing a negative royalty rate.

Mr. Djavaherian used to be in-house litigation counsel at Broadcom (at a time when Broadcom was firmly in the FRANDly camp). So he does know exactly what implications arbitration has as compared to litigation. He's not involved with this FRAND/antitrust litigation, but trying to work out license agreements, which appears very difficult. Recently, he served as vice chair of a CEN-CENELEC workshop that produced the CWA2 set of SEP policy recommendations.

I recently heard both Mr. Djavherian and Conti's lead counsel in this Northern California litigation, Sheppard Mullin's Stephen Korniczky, speak, but due to the Chatham House Rule I can't be more specific. What I can say is that both really understand SEP licensing issues extremely well--the reason that I have criticized Conti's U.S. litigation strategies is simply that I believe they're too slow and that I've never seen a litigant make multiple totally outrageous demands in just one context (here, with respect to the pursuit of an antisuit injunction that would have been absurdly overbroad for more than one reason). Without litigants trying long shots, the law couldn't evolve, at least not as rapidly as the pace of our industry requires it. But what they asked Judge Koh to do for them totally flew in the face of even the most basic legal principles--as did some crazy arguments such as pointing to an antitrust complaint lodged with the EU Commission in connection with the question of whether Nokia's German patent infringement lawsuits against Daimler were or were not the earlied-filed cases than Continental's U.S. lawsuit against Avanci, Nokia, and other parties.

Furthermore, given that their own representation to the court (in paragraph 145 of their first amended complaint against Avanci et al.) is that their client became aware of Sharp's German litigation campaign on or about June 3 (which is consistent with a mid-August Juve Patent article according to which the German legal community had then already been aware of it for some time), I don't understand why they brought their antisuit motion against Avanci, Nokia and two other defendants the following week instead of first adding Sharp to the case (which they finally did about 50 days after becoming aware of Sharp's first complaint against Daimler). There definitely wasn't a sense of urgency with respect to Nokia. While a first hearing in Munich on June 5 was dreadful for Daimler and, by extension, Continental, the court scheduled the actual trial for February 2020. At the earliest, Nokia will be able to obtain an injunction after a December 10 Mannheim trial. Judge Koh was right to dismiss the antisuit motion without prejudice. Conti does have a timing problem with respect to Nokia, but that's because of the dates of the relevant complaints, not of the antisuit motion.

On Halloween, the Munich Higher Regional Court will hear Conti's appeal of Nokia's anti-antisuit-injunction injunction ("AAII"). If the German appeals court finds that AAIIs are categorically impossible, then Conti will win, but should the appeals court make this subject to a case-by-case determination, then Nokia will probably benefit from Conti's slowness, hesitancy, and the unreasonable scope of the original antisuit motion (which wasn't limited to just preventing Nokia from enforcing injunctive relief against Daimler cars that come with Conti telematics control units, but was meant to bar Nokia from any such assertions against Daimler regardless of supplier and remedies sought).

Going back to the conspiracy theory (nonjudgmentally speaking) in the U.S. case, discovery might get interesting, but it's also possible that Avanci and its members structured their collusion so cleverly that no one can dig up evidence of anticompetitive conduct. At the 2021 trial I would expect Avanci to present a number of witnesses who will seek to exonerate it. Also, even a company that is not at all associated with SEP abuse--Deutsche Telekom--has recently joined the Avanci pool.

I'm against Avanci's strategy of licensing only car makers, not the likes of Conti. I do consider Avanci's royalty demands to be supra-FRAND. Whatever Conti can point to at this procedural stage is probably and hopefully enough to keep the case alive, but it's thin. For the time being, it falls far short of what it will take to prevail on the allegation of a conspiracy in two years' time. Conti needs to find or elicit something totally incriminating, lest Avanci will be acquitted.

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