Thursday, December 12, 2019

Nokia's winning streak continues: Munich Higher Regional Court surprisingly affirms anti-antisuit injunction

A few hours after Judge Lucy H. Koh of the United States District Court for the Northern District of California granted Avanci, Nokia et al.'s motion to transfer Continental's U.S. FRAND/antitrust lawsuit to the Northern District of Texas, the Oberlandesgericht München (Munich Higher Regional Court) surprisingly affirmed the Munich I Regional Court's Nokia v. Continental anti-antisuit injunction. At the hearing held four weeks ago, the court actually indicated an inclination to reverse.

The reasons for the decision are unknown. Maybe Nokia's modified wording of the injunction played a role.

After the U.S. venue transfer decision, it would have been difficult at any rate to obtain in the very short term a U.S. antisuit injunction against the Nokia v. Daimler (as well as Sharp v. Daimler and Conversant v. Daimler) patent infringement cases pending in Germany. But it might still have happened just in time before Nokia will secure its first German SEP injunction. Now, with the German anti-antisuit injunction in place, a new U.S. antisuit motion would have to have a narrower scope.

All appeals have been exhausted as far as the preliminary injunction is concerned. Conti could insist on clarification of the same matter in a regular proceeding, which would take a while, but then a further appeal would be possible (either if permitted by the court of second instance, or by bringing the equivalent of a U.S. cert petition). The question of whether German courts can order anti-antisuit injunctions--while arguing that antisuit injunctions are unavailable under German law--requires clarification at the highest level.

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Avanci, Nokia win transfer of Continental's FRAND/antitrust case from San Jose to Dallas

The Avanci patent pool firm and its co-defendants--most notably, Nokia--never wanted Judge Lucy H. Koh of the United States District Court for the Northern District of California, famous for (among other high-profile cases) FTC v. Qualcomm, to adjudicate Continental Automotive Systems' FRAND/antitrust complaint. The first challenge they brought related to intra-district assignment. The N.D. of Cal. has multiple divisions, the two most important ones of which are San Jose (Judge Koh's location) and San Francisco. Avanci and Nokia (as well as some other, less significant defendants) asked for the case to be handled in San Francisco rather than San Jose, but that request was declined, and subsequently the case was assigned to Judge Koh.

The difference between San Jose and San Francisco is a one-hour drive under perfect conditions, though it's taken me up to four hours.

The defendants brought a motion to transfer venue in the summer--which has just been granted. They argued that the Northern District of Texas, where some Avanci U.S. entities are based, was the more convenient forum. In late August, Continental filed a very thoroughly-researched opposition brief. I thought it was great, and didn't expect a venue change. My predictions have a very high hit rate, but there were two weaknesses here that Judge Koh identified and one of which I couldn't have seen at the time while the other wasn't easy to spot:

  • After that opposition brief that appeared strong, Continental filed its initial witness disclosures, and various players whose location would have favored the Northern District of California didn't appear on that list. Judge Koh did the only right thing to do, which was to ignore in the convenience context any witnesses Conti didn't even have on its list anymore. For example, Conti had pointed to the location of Apple witnesses, but ultimately named none.

  • What has been a structural problem all along (especially in the antisuit context) is Conti's extremely compex corporate structure. In an amicus curiae brief recently filed with the Ninth Circuit in FTC v. Qualcomm, Conti explained how Michigan-based Continental Automotive Systems relates to the German group parent, and it's like a great-great-grandchild. When arguing its close connection to the Northern District of California, Conti discussed some operations there, but those are different corporate entities. Once again, the question is whether Conti's decision to have only Continental Automotive Systems (and not some other Conti entities as well, starting with the German group parent) sue Avanci and some Avanci members was a good one. It unnecessarily complicates any antisuit motion, and now it has also adversely impacted the opposition to Avanci and Nokia's venue transfer motion.

All things considered, Judge Koh found that the Northern District of Texas was the more convenient forum, especially for non-party witnesses (whose logistics are more relevant in this context than those of party witnesses, and where counsel is based doesn't matter). Also, the interest of a given district in resolving a case is generally highest where the alleged actions occurred, and that's Avanci's location in this case. Conti had pointed to Silicon Valley's stroing interest in SEP licenses for IoT businsses, and named various companies, but that was too thin for Judge Koh's taste. She might have afforded that argument some weight, but it would have had to be underpinned with some hard evidence, given that the issue is a global one as Conti itself had written at some point.

What's more important now than the basis on which Judge Koh exercised her discretion is what this means for the wider dispute:

  • Texas is in the Fifth Circuit, and SEP antitrust law there isn't favorable, but that's irrelevant to the extent that Conti makes arguments under contract law.

  • The Fifth Circuit isn't bad for Conti with respect to a possibly renewed motion for an antisuit injunction. I believe the Munich appeals court will overturn Nokia's German anti-antisuit injunction in a few hours, so Conti will then be free to try again. Generally, the Fifth, Seventh and Ninth Circuits--and some also say the First Circuit--are considered to be the most permissive circuits in the antisuit context. The Ninth would be preferable over the Fifth, but again, the Fifth isn't considered exceedingly restrictive.

  • The bigger problem Conti faces with respect to an antisuit motion is that it will take some time before the new court is up to speed on the case and in a position to adjudge that kind of motion.

  • While the Ninth Circuit's decision in FTC v. Qualcomm (the hearing will be held in February) isn't formally binding on a court in the Fifth Circuit, there will be some persuasive impact.

  • Judge Koh didn't stay anything, so it's possible that even in Dallas a trial could take place in (late) 2021 (Judge Koh had scheduled it for October 2021).

  • Nokia, which is suing Daimler over 10 SEPs in Germany, pretended to be constructive, though the only two outcomes of mediation by the International Chamber of Commerce as Daimler's surrender (which wouldn't help Conti and other suppliers) or simply no deal. But the European Commission won't launch formal investigations into Nokia's refusal to license component makers (though those components come with all the same hardware as phones, which Nokia does license, apart from a screen) in the meantime. And the Mannheim court postponed this week's trial to March, making it a possibility that the Munich I Regional Court will enter an injunction against Daimler before the Mannheim court might have taken a more favorable position on component-level licensing. So there have recently been setbacks for Conti on three fronts where it could have inched closer to an exhaustive component-level license: its EU antitrust complaint; its U.S. contract and antitrust case; and Mannheim (though that case was obviously brought by Nokia, it represented an opportunity for Conti).

  • Here's what I would advise Conti to do in light of the current landscape and recent--not final but nevertheless hurtful--blows: Conti either has to push far harder and smarter (they have great lawyers in Germany, but the problems they face are 100% political, 0% legal) for getting Nokia investigated by the European Commission's Directorate-General for Competition (DG COMP) or if they don't want or don't know how to do that (Nokia certainly does play the game holistically, but Daimler and Conti are employing 19th-century methods against an agile, clever, no-holds-barred rival in the 21st century), they should bring a Dusseldorf lawsuit against Nokia as Huawei did. At this point they might even still get a Dusseldorf case merged for case management purposes (though technically retaining a separate case number) with Huawei's case.

Finally, here's Judge Koh's order, which is the end of the California road for this case:

19-12-11 Order Granting Ava... by Florian Mueller on Scribd

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Wednesday, December 11, 2019

Commissioner Vestager makes competition-chilling remarks on automotive complaints against Nokia at Chillin'Competition conference

"Chillin'Competition" is a nice wordplay for a conference title. To my dismay, that event provided the setting for competition-chilling utterances by EU competition commissioner Margrethe Vestager. "Competition-chilling" in the sense of doing nothing to promote fair and vibrant competition--and free movement of goods, one of the bloc's key objectives--with respect to automotive components that come with cellular connectivity. The best way to promote competition in that field is to ensure the makers of those components receive exhaustive component-level licenses on FRAND terms. Commissioner Vestager made herself a name as being supposedly tougher than even the legendary "Steely Neelie," but with respect to standard-essential patents (SEPs), her predecessor Joaquín Almunia used to take swifter and more decisive action.

Daimler's antitrust complaint was filed more than a year ago. Then, a few months later, four suppliers (Continental, Valeo, Gemalto, and BURY Technologies) lodged their complaints. There's no justification whatsoever for not bringing the antitrust hammer down now.

Khushita Vasant, a Brussels-based reporter for the Policy & Regulatory Report (PaRR), was first to break the news on Nokia's mediation offer to Daimler and its Tier 1 (= direct) suppliers, and also first to report on Monday that Mrs. Vestager told reporters after the aforementioned conference that "it would be a good thing if there was mutual understanding [between Nokia and the automotive complainants]." The Commission expects an update "by mid-February," writes PaRR.

This means another two months will be wasted. With the greatest respect for the Internaational Chamber of Commerce, this matter here doesn't lend itself to mediation, and there are only two possible outcomes:

  • Daimler surrenders. Or:

  • No deal.

The binary question is: do the component makers get an exhaustive license on FRAND terms? If so, they'd also be free, for an example, to sell excess quantities openly on the market to anybody. That's what is called a free market. The EC knows that.

The monetary terms are, of course, non-binary. If Nokia sought a license fee that wouldn't enable those component makers to stay in this business, it wouldn't help. But the very first step must be for Nokia to stop disputing the component makers' entitlement to a license.

Huawei is suing Nokia in a German court with only the objective of finally getting a component-level licensing offer. No one should ever have had to bring such a complaint, or to ask the European Commission to investigate. Nokia's refusal is downright irrational as it never disputed a phone maker's entitlement to a SEP license, and Huawei's connectivity modules come with all the same types of hardware components as a phone, apart from the screen. The telematics control units (TCUs) made by the likes of Continental incorporate such network access devices (NADs) and come with even more hardware. There's nothing in the claims of those standard-essential patents that a mobile phone has and a NAD or TCU doesn't. I've seen many SEPs, possibly more than anyone involved with the EU investigation, and I have yet to see a cellular SEP that claims a screen.

Daimler and its suppliers should have made Nokia's commitment to an exhaustive component-level license on FRAND terms a precondition for even sitting down and talking. Then, once Nokia has made that commitment, one can talk about FRAND royalty amounts. Those amounts are amenable to negotiation, mediation (where no one is forced to agree), determination by a court of law, or arbitration--the latter, however, provided that the parameters are properly defined, including the right to dispute essentiality and validity, and if there are safeguards against the SEP holder going into arbitration (the results of which tend to gravitate toward the middle) making out-of-this-world demands.

This maneuver helped Nokia in two ways:

There is no indication of Huawei being a party to the mediation talks (at least I couldn't find any in the media), so at least that Dusseldorf antitrust lawsuit against Nokia is going forward.

A leading German patent litigator, who is mostly on the enforcing (not defending) side and is not involved with the Nokia cases in any way, told me he's convinced Nokia can't win. He said this was going to be their "Vietnam." While I'm glad to see Daimler taking a stand against Nokia's conduct, and also hope that all that Nokia is going to get out of this is some hefty legal bills, Daimler and its suppliers must not let their guard down.

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Monday, December 9, 2019

Nokia v. Daimler Mannheim trial postponed from tomorrow to March 2020: rare case in which postponement is bad for defendant

Tomorrow's Mannheim patent trial between Nokia and Daimler, with many suppliers intervening, has been postponed to March 17, 2020, as Judge Dr. Joachim Bock, the court's spokesman, confirmed to me today.

In most cases, pushing back a trial date is in the defendant's interest. What's obviously a different situation is when the "defendant" is actually a declaratory-judgment plaintiff and seeks to get a ruling in one jurisdiction in time to influence a decision in another (such as UK complaints designed to get German cases stayed). But this is the very first time in my observation for a postponement of a German patent infringement case to benefit the plaintiff, not the defendant.

[Update] Here's a statement from Nokia: "We continue to believe that constructive negotiation is the best way to resolve licensing disputes, and have offered independent mediation to Daimler and its tier 1 suppliers to that end. To ensure there is time for this mediation to be successful, we have unilaterally chosen to postpone the pending hearing on 10 December in Germany. We trust that Daimler and its tier 1 suppliers will now engage in these meaningful efforts to reach settlement. There is more to gain for all if we work together." [/Update]

As I'll explain further below, and in fact already explained last week, the question of whether or not Daimler's suppliers are entitled to an exhaustive component-level license on FRAND terms is not amenable to mediation.

I've seen a number of situations in which one party wanted the Mannheim court to stay a case--or postpone a ruling after a trial--but the court kept its schedule unless both parties stipulated to it. One case I remember particularly well involved Nokia and ViewSonic, with the latter saying that settlement talks were at an advanced stage (which is more than Nokia can say), so a ruling wasn't urgent. But Nokia disagreed, and the court handed down a decision.

Should anyone have recommended to Daimler to consent to a postponement of the Mannheim case in exchange for Nokia's zero-credibility settlement efforts, that firm would have given the German automotive company disastrously bad advice.

As I explained in the post I just linked to (on Nokia pretending to be prepared to settle), the Mannheim cases are actually an opportunity for Daimler and its suppliers to obtain positive clarification on the obligation to license component makers. It's a given that Dusseldorf will do so, but things take very long up there. It's also well-known by now that the Munich court, which incessantly cranks out injunctions (most recently against Facebook and its WhatsApp and Instagram subsidiaries), is so far not really interested in Daimler's suppliers' complaint that Nokia owes them a license. But Mannheim could send out a clear signal by siding with the Dusseldorf stance on upstream licenses, and that would make Munich an outlier (and possibly leads Munich to reconsider, or at least would bear weight with the Munich appeals court).

There was no good reason not to hold tomorrow's trial from the defendants and, especially, the intervenors' perspective. The parties could still have negotiated, which isn't going to lead anywhere unless Daimler surrenders. Nokia is not going to offer an exhaustive component-level license. If they wanted, they could do so anytime. You don't need to talk to the press (Reuters, for instance). You can just make a commitment. Any day of the week.

There is no news of Nokia having met Huawei's demand in an antitrust case pending in the Dusseldorf court: Huawei wants to enforce Nokia's obligation to make a licensing offer on FRAND terms.

Daimler's EU antitrust complaint against Nokia is more than one year old. The EU's automotive industry employs roughly 14 million people. Nokia's (and Ericsson's) refusal to license component makers is in clear violation of CJEU case law (Huawei v. ZTE, where the EU's top court stated clearly that everyone is entitled to a SEP license). It's a mystery why the European Commission still isn't formally investigating. Granted, they had some delays with the appointment of the new Commission, but even in a state of interregnum, the Commission's competition enforcement made progress in other areas.

According to Reuters's Foo Yun Chee, quoting an unnamed source, the Commission "indicated in October it could launch a probe." In order to avoid this, Nokia apparently decided to wave a fake white flag. They want to lay the foundation for finger-pointing at Daimler, claiming that Nokia wanted to settle but Daimler and its suppliers weren't constructive.

That game gets played all the time. But there's a right way and a wrong way to play it. The right way in a situation like this is to fully expose the other party's disingenuity as opposed to readily falling--even jumping--in a trap.

If Nokia indicated even over the media that they wanted to talk, Daimler could have said: "Let's talk." But Daimler should have insisted that the sequence of decisions in Germany would remain intact: Mannheim first, Munich second. (There's nothing anybody can do about Dusseldorf being much slower.)

I've seen a number of exchanges between parties' counsel in such situations. Such letters and emails often get attached to U.S. court filings. Microsoft played it very smart against Motorola. They responded in a way that ultimately forced Motorola to drop its mask. Microsoft never made a concession unless it was a great deal. Here, I can't see the great deal. It's a mistake to make it more likely, or even near-certain, that Munich will rule ahead of Mannheim.

The parties could have let the trial go forward, but could have asked the court not to rule unusually quickly. Judge Dr. Holger Kircher, the presiding judge of the Second Civil Chamber of the Mannheim Regional Court, is always in charge and doesn't allow his court to be used as a tool. But the parties could have asked him not to rule before, say, late January. That would have been the realistic time frame anyway (in light of the Holiday Season hiatus).

It's not in Daimler's interest to give the European Commission an excuse for not taking action for yet another month or more.

For an example, Daimler could have told Nokia that they're happy to talk, but there's a precondition: Nokia must recognize in writing the suppliers' entitlement to an exhaustive SEP license on FRAND terms. There's nothing to negotiate, arbitrate, or mediate about that one: it's a binary question.

Again, for an industry that employs almost three times as many people in Europe as Nokia's home country has inhabitants, or about as many as Finland (Nokia) and Sweden (Ericsson) combined, it shouldn't be hard to get such a set of legally and economically strong complaints investigated. They just relied on the wrong people, and maybe they hoped that some would be more helpful than they ultimately were, but in that case one has to keep searching for allies until there is momentum. By the way, I believe I haven't even read a single article on Daimler's EU complaint apart from this one on IT-specialized news website heise.de. If they don't even know how to draw attention to this in Germany, how can they expect swift and decisive action in Brussels?

The fact that the European Commission is dragging its feet isn't a reason to delay resolution of some important FRAND questions (especially access to licenses) in court. Much to the contrary, if the regulators don't help you, the courts are your only chance to solve the problem. Right now the only company that is pursuing a promising and convincing strategy against Nokia is Huawei with its Dusseldorf FRAND lawsuit.

If the automotive industry can't bring its economic weight to bear, it has no one to blame but itself.

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Saturday, December 7, 2019

Korea Fair Trade Commission defeats Qualcomm's antitrust appeal in court, but Qualcomm will appeal--and violate--further

As Reuters and other media outlets reported, the Seoul High Court upheld the record $873 million fine the Korea Fair Trade Commission (KFTC) had imposed on Qualcomm. The issues in the South Korean antitrust case are very similar to the ones in the U.S. FTC v. Qualcomm case, and the most important overlap concerns the obligation to extend exhaustive SEP licenses, on FRAND terms, to rival chipset makers.

For the South Korean competition authority, this is a major legal victory. Qualcomm has announced its intent to appeal this matter further to the Supreme Court of South Korea. But that appeal will take roughly half a decade to be resolved.

Qualcomm's problem is not to cough up the (almost) billion-dollar fine. Korea--with Samsung and LG being based there--is a strategically important market. What hurts Qualcomm much more in the short term is that this Korean decision may also serve to demonstrate to the Ninth Circuit that the U.S. FTC and Judge Lucy H. Koh reached decisions that are simply in the global antitrust mainstream. I guess the U.S. FTC will file a request for judicial notice soon--and, by the way, I believe the companies who lodged EU antitrust complaints against Nokia (Daimler, Continental, Valeo, Gemalto, BURY Technologies) should also try to leverage the Korean decision in Brussels.

The United States Court of Appeals for the Ninth Circuit will hear FTC v. Qualcomm on February 13, 2020. In the post I just linked to, I listed my posts on most of the amicus curiae briefs filed in support of the FTC, and subsequently I also blogged about an automotive-industry brief.

Competition enforcement is not meant to serve a revenue-generation purpose. Fines are meant to deter anticompetitive behavior. So the real measure here is what the KFTC is going to do now. If they continue to refrain from actually enforcing the corrective order requiring Qualcomm to license rival chipset makers, with pressure from the U.S. government being considered the primary reason for this failure to enforce, then they're not going to restore fair competition. Qualcomm will then just continue to refuse to license its rivals, and nothing will change in the marketplace.

A Korean source tells me that the Korean public may be too focused on the fine as a major victory for the government while failing to see the importance of actually enforcing the corrective order. And the large companies who originally complained to the KFTC have settled with Qualcomm in the meantime (or, as in Intel's case, have exited the market). Huawei and MediaTek could have complained, but Korean observers believe they aren't interested in that particular jurisdiction to the extent they'd take action there. So, all in all, the KFTC may be reluctant to allocate the resources to an enforcement effort that would be required.

Realistically, I wouldn't expect a Korean enforcement action to begin in the months ahead. However, I'm a bit more optimistic that something might happen in case the Ninth Circuit affirms Judge Koh's decision on chipset-level licensing (even if on the right-for-the-wrong-reasons basis espoused by the FTC and various amici). In that case, the U.S. government would be in a fundamentally weaker position to tell Korea not to enforce a decision upheld not only by a Korean court but also ordered by one U.S. court and affirmed by one of the most important courts of appeal.

Theoretically, Korean antitrust enforcement should be independent--and effective. But in practical terms, it appears that U.S. influence over this is strong, unless some modem chip makers complain actively and vocally in Korea over Qualcomm's continued non-compliance with the KFTC's corrective order.

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Super Mario company paved the way for BMW and Daimler's invalidity defense against a Broadcom patent

There was a time when a video game console manufacturer like Nintendo and car makers like BMW and Daimler were technologically so far apart that one could hardly have imagined the same patent would get asserted against those three organizations. But times have changed, and a patent on programmable texture processing (a computer graphics patent) can now be alleged--whether with or without merit--to read on game consoles as well as car navigation systems (or other computing technology incorporated into a modern automobile).

There also was a time when Broadcom was more interested in making products than asserting patents, and often filed pretty good amicus curiae briefs advocating reasonableness in patent enforcement (particularly, but not only, with respect to standard-essential patents). That, too, has changed.

Time is ticking away for some very old Broadcom patents on the verge of expiry. Last year, however, Broadcom forced the Volkswagen group into a billion-dollar settlement, exploiting the sad state of affairs of German patent law, where injunctions are granted--mnst of the time over patents that would later be held invalid--without an eBay v. MercExchange-like proportionality analysis. One of Europe's best patent judges believes Germany is in breach of EU law for that reason, and at a conference I recently organized in Brussels, a lawyer said the European Commission could, if it wanted, fine Germany for infringement of an EU directive.

The latest insanity--Germany-wide patent injunctions obtained by BlackBerry against Facebook and its WhatsApp and Instagram subsidiaries over four different (most likely invalid) software patents--shows that this situation is unsustainable, and I'm confident that change will come. Germany's patent infringement judges unanimously oppose reform, but they're not going to be the ones to decide. At the most, they can influence the unelected officials at the ministry of justice, but the German legislature will make the actual decision and is going to be a million times more interested in strengthening the German economy and protecting German jobs and consumers than in attracting lots of patent troll litigation to the country. There won't be a single party in the German parliament that would support the status quo. The judges are going to lose this battle.

Getting back to Broadcom's efforts to shake down the German automotive industry, it doesn't look like what worked against Volkswagen is too likely to work out the same way against BMW and Daimler--partly because time is not on Broadcom's side, and partly because Broadcom faces more resistance this time around.

Before Broadcom sued BMW and Daimler over EP1177531 on a "method and system for providing programmable texture processing," they also asserted that patent against Nintendo. The company known for video game consolers and for iconic game franchises like Super Mario and Pokémon was alleged to infringe that patent. But Nvidia then brought a nullity action (a complaint seeking invalidation of the patent by the Federal Patent Court of Germany), and Nintendo's lawyers from the Bardehle Pagenberg firm (which often defends BMW as well) convinced the Mannheim Regional Court that the patent was likely going to be annulled because an Nvidia chip sold before the patent's priority date already came with the technique the patent purports to cover.

Of Germany's leading patent infringement venues, the Mannheim Regional Court is by far and away the most responsible one when it comes to staying infringement actions over likely-invalid patents. Daimler will defend itself against a Nokia SEP case in Mannheim on Tuesday (December 10) as the court just confirmed to me on Friday.

Broadcom filed an interlocutory appeal against the order to stay the Nintendo case, and it remains to be seen what the appeals court--the Karlsruhe Higher Regional Court, where Judge Andreas Voss ("Voß" in German) presides over the patent-specialized division--will decide. The Mannheim court stayed the cases against BMW and Daimler for the same reason as in the Nintendo case, but reminded the parties in its order to stay the case against Nintendo and the pending interlocutory appeal.

A Broadcom subsidiary named Avago has meanwhile lodged some patent infringement complaints against BMW and Daimler. Daimler will have until January 22, 2020 for its answer to the complaint. But the patent is set to expire a few months later. So Broadcom/Avago may never actually get to enforce an injunction. The timeline in the case against BMW remains to be seen. Avago interestingly brought a lawsuit against BMW in Hamburg, a venue in which I have so far not watched a single patent infringement case. While patent infringement suits can be brought in any federal district in the United States, Germany designates specific courts, and almost all patent cases are filed in Dusseldorf, Mannheim, and Munich. It's not unheard of for someone to file in Hamburg (or Frankfurt, Berlin, or Nuremberg), but it's highly unusual.

I asked BMW for further information on those cases, and after telling me they referred my inquiry to the spokesperson in charge of this topic, I never heard back. Daimler declined to provide any information other than expressing the view that the complaint is meritless. So I had to tape some other sources.

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BlackBerry wins German patent injunctions against Facebook, WhatsApp, Instagram over four (most likely invalid!) software patents

Sueddeutsche Zeitung (SZ), a Munich-based newspaper, reported yesterday evening on a set of Germany-wide patent injunctions that BlackBerry--once a smartphone maker, now basically a patent troll--just obtained against Facebook and its WhatsApp and Instagram subsidiaries over a total of four different patents covering chat features.

The injunction is provisionally enforceable. If BlackBerry posts a bond or makes a deposit, it can enforce the injunctions at this stage, though Facebook can appeal to the Munich Higher Regional Court and is, in parallel, challenging the validity of those patents before the Federal Patent Court of Germany. But Facebook has already told the media that the affected services--Facebook Messenger, WhatsApp, Instagram--wouldn't go out of service in Germany: workarounds have been prepared, so the related features would have to be removed.

BlackBerry sued Facebook (with a focus on Facebook Messenger rather than the social media stream) and those two subsidiaries over five different patents, which I listed earlier this year and will list again further below.

The Munich I Regional Court has now handed down injunctions over four of the five patents. These are the five BlackBerry patents-in-suit, some of which they claim to be infringed by only one or two of Facebook, Instagram, and WhatsApp, and some of which they claim are infringed by all three (note that the injunctions BlackBerry just won relate to patents #1, #2, #3, and #5 on the list, but not #4, as explained further below):

  1. EP1734728 on a "method and apparatus for switching between concurrent messaging sessions" (first hearing held on 01/10/2019)

    accused functionality: showing two chat histories in parallel

  2. EP1633114 on a "system and method for maintaining on a handheld electronic device information that is substantially current and is readily available to a user" (first hearing held on 01/17/2019)

    accused functionality: automatically identifying user profiles containing partly identical data

  3. EP1746790 on a "method of sharing an Instant Messaging history" (I attended and reported on the related first hearing)

    accused functionality: sharing messages from the chat history

  4. EP1540495 on a "method and system for displaying group chat sessions on wireless mobile terminals" (first hearing: 02/28/2019)

    accused functionality: displaying chat history while text is being edited

  5. EP2339799 on an "IM contact list entry as a game in progress designate" (first hearing: 02/28/2019)

    accused functionality: chatting during gameplay

BlackBerry has so far prevailed on all of them but the fourth one ("method and system for displaying group chat sessions on wireless mobile terminals"), over which even the Munich court had sufficient validity doubts that BlackBerry felt forced to further narrow the claims during trial. In that case, no immediate decision was possible (for due process reasons), and instead, there will be another trial over that one on March 12, 2020. If BlackBerry persuades the court not to stay, then it may win again.

I am stunned that the court didn't stay all five cases over serious doubts concerning the validity of those patents. When I looked at the claims of the patents-in-suit earlier this year, I quickly concluded that they'd all be highly likely to be annulled by the Federal Patent Court of Germany (which also happens to be based in Munich, which is sort of the Capital of the Patent Movement, at least for Europe). That's partly because software as such isn't patent-eligible in Europe. While the courts rarely ever invalidate a patent as a whole on that basis, they do exclude any non-technical features from their novelty and non-obviousness analysis--and it's hard to see how anything novel or inventive could be found in those patent claims that isn't just software stuff without a technical effect. I already operated a chat service (as part of an online gaming network) in the 1990s and wrote an IRC client in 2000, so I know a lot of the prior art from hands-on experience.

What I have been able to find out is that BlackBerry, represented by Quinn Emanuel (a great firm that has not so great clients at times), had to narrow multiple patent claims-in-suit during the infringement proceedings just to address the court's concerns over non-novelty. There are two problem with German patent infringement courts in the context to grant or deny a stay pending a nullity action. First, they apply an unreasonably high standard (and the "guru" from the Dusseldorf appeals court who has been promoting that high standard for many years more aggressively and fanatically than anyone else recently made dozens of employees of a small company lose their jobs--with Quinn Emanuel again on the enforcing side--over a patent subsequently held invalid). Second--though in many cases that's even more important than the standard--they take only non-novelty (anticipation) arguments seriously and largely refuse to consider obviousness contentions (lack of inventive step) for no good reason (if they can rule on infringement without appointing expert witnesses, they certainly could also assess the existence of absence of an inventive step, but they just don't want to).

The Munich I Regional Court orders stays in only about 10% of all cases, and I have the impression the number is far below 10% for this year. That's a huge problem considering that the vast majority of all patents in this industry turn out invalid once they're challenged before the Federal Patent Court. In fact, not a single one of all the patents asserted in the cases I covered in detail survived a nullity trial (but many never reached that point due to earlier settlements).

I hope Facebook will keep on fighting. They do appear to be determined not to feed the troll. By striking down these patents, even if it takes years, they can teach the German patent judiciary--except for Mannheim, where you find by far the most responsible German patent infringement court--an important lesson. The federal government is drafting a reform bill, and reform is needed so badly that it will likely be enacted even before Facebook's nullity actions against BlackBerry are resolved.

If your company, too, would like to push for patent injunction reform in Germany, please contact me at fosspatents@gmail.com. I'm already in touch with many companies from a variety of industries--and of all sizes--who have enough of this crap resulting from a broken system, and as a former European Campaigner of the Year (2005; an award I won against Bono and which went to a pope and to Governor Arnold Schwarzenegger in other years) I know a thing or two about patent legislation. I'm convinced a more eBay v. MercExchange-like regime in Germany is achievable, and far more cases than now should get stayed in the future.

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Friday, December 6, 2019

Nokia outmaneuvering Daimler with settlement effort that has zero credibility--but Mannheim court confirms hearing date

One week ago, Reuters' Foo Yun Chee (who's been covering EU competition matters for more than a decade and whom I regard very highly) reported on a statement by Nokia according to which "the Finnish telecoms equipment maker had submitted a proposal for resolving the patent licensing fee row." This relates to the situation between Nokia and Daimler as well as Daimler's suppliers. Nokia brought ten German standard-essential patent (SEP) infringement actions against Daimler earlier this year--several months after Daimler had lodged an antitrust complaint with the European Commission's Directorate-General for Competition (DG COMP) over Nokia's refusal to extend exhaustive SEP licenses on FRAND terms to Daimler's suppliers. At around the same time, four suppliers (Continental, Valeo, Gemalto, and BURY Technologies) also filed complaints against Nokia with DG COMP.

I've always been outspoken about stalling. HTC's mastery of that skill in its dispute with Apple was first-rate. I could write a book or hold a full-day seminar on stalling tactics especially in U.S. and cross-jurisdictional disputes. So when I see the parties' divergent comments in that Reuters piece, I know Nokia is stalling:

"'Nokia continues to work toward constructive ways to resolve commercial disputes related to licensing of our standardized cellular technologies,' Nokia said in a statement, without mentioning any specific proposal to end the row."

"Daimler declined to comment specifically on Nokia's proposal but a spokeswoman said: 'We want clarification on how essential patents for telecommunications standards are to be licensed in the automotive industry. Nokia so far refused to comprehensively and directly license our suppliers.'"

This juxtaposition tells it all. Nokia is pretending to make a bona fide effort to address the issue. But that's just not credible for a simple reason: we're not talking about adjustable fishing quotas. This here is a binary question. Either the component makers get an exhaustive license on FRAND terms (which terms would later have to be negotiated or, if necssary, determined by a court of law or, if the parties agree on the parameters, an arbitration tribunal) that allows them to go about their business--or they don't. Huawei raised that binary question in its Dusseldorf antitrust lawsuit against Nokia.

It's an illusion that there could be anything in between. You can't be just a little bit pregnant.

So what's needed is not lip service, such as hollow-ringing words like "constructive." What's imperative is a sharp decision that puts the disputed matter to rest for good. And that's what Daimler's statement suggests between the lines. They want "clarification" on component-level licensing. Apparently they just haven't figured out yet how to get there, given that they filed their EU complaint more than a year ago and the Commission still isn't investigating.

A Mannheim trial was scheduled for next Tuesday. It would have been the first real trial--as opposed to an early first hearing--and a ruling could have come down anytime thereafter (in January with a likelihood comfortably above 90%, thus ahead of the first Munich trial scheduled for early February).

But out of an abundance of caution, I sent Yun Chee's story to the Mannheim court's press office and requested confirmation that the trial was still going forward. Judge Ruppert, a spokesman for the court, told me that the case would be heard on Tuesday at the scheduled time, but he also highlighted it was only an "early first hearing."

The Mannheim court--which I've described as the most responsible German court when it comes to staying cases involving likely-invalid patents--typically decides these cases after just one trial (which normally lasts only a couple of hours because they are so focused and efficient). However, they call it an "early first hearing" even if they conclude they can hand down a judgment afterwards. So the court's wording doesn't necessarily mean the Tuesday court row has been downgraded from "trial" to "early first hearing."

In Munich they have Patent Local Rules under which an early first hearing is mostly just about claim construction and initial infringement analysis. However, there are exceptions even in Munich. In the first Nokia v. Daimler hearing in June, Presiding Judge Dr. Matthias Zigann also addressed FRAND, even before Nokia's prayer for injunctive relief. But in Munich, when they say "early first hearing," you know for sure that there'll be a second one--the actual trial. In Mannheim, most cases are decided after the "first hearing."

Whatever the scope of the Tuesday hearing will be, the German car maker must be cautious so it won't get outwitted by Nokia. It's absolutely in Daimler's interest to get a Mannheim judgment prior to the first one in Munich, given that the Munich court has so far taken very unFRANDly positions on component-level licensing, while there is at least one Mannheim precedent where Deutsche Telekom benefitted from a supplier's willingness to take a SEP license. A Mannheim decision wouldn't be binding on the Munich court, but could help psychologically since Dusseldorf (unreasonable in other ways, but rather progressive on component-level licensing) will almost certainly decide in Daimler's favor. Munich would then be the outlier, but the appeals court there may very well be more favorable to component-level licensing. In order to get a Nokia injunction stayed quickly, a Mannheim decision upholding FRAND in the component-level licensing context would serve as persuasive authority that could make a decisive difference.

Nokia is playing games, and Daimler must be extra cautious. In the current situation, the European Commission will continue to drag its feet, and won't make a decision on that late-2018 complaint before early 2020 at the earliest. More aggressive parties in Daimler's shoes would already have lost their patience and exerted more pressure; they'd also have considered bringing in, in addition to or as a replacement of current counsel, some other EU antitrust lawyers to make more headway. It should be a simple decision for the Commission to investigate: not only is the CJEU's case law pretty clear that everyone is entitled to a FRAND license but Nokia and Ericsson are basically dying companies compared to the automotive industry and the wider IoT industry (smart meters etc.).

Quinn Emanuel defends Daimler against German patent infringement complaints all the time and is superb at that, but not involved with the EU complaints--unfortunately, QE is largely on the other side of the FRAND debate, which hopefully won't benefit Nokia (a QE client in the United States, by the way) at some point.

Nokia's EU counsel, Thomas Vinje of Clifford Chance, is extremely effective. I was adverse to him ten years ago (Oracle-Sun merger review), and he made a statement to the media about me in 2010 that was just an unsubstantiated rumor, but that's par for the course in Brussels. It's just interesting to see how his positions on standard-essential IP have evolved over the last 15 years, from his fight against Microsoft (where he led the "European Committee for Interoperable Systems") and his zero-royalty advocacy efforts in the EU procurement context over his representation to Samsung and now Nokia. I may talk about that some other time, and that's not why I wouldn't trust Nokia's talk about settlement. The reason for that is the one I gave further above: it's a binary question like being pregnant or not, so there's no middle ground, period.

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Wednesday, December 4, 2019

Injustice is a built-in feature of Germany's bifurcated patent litigation system -- it would be unconstitutional in other countries

I am presently researching the most appalling miscarriage of justice that ever occurred in a German patent case: dozens of people lost their jobs over a patent--held by a publicly-traded U.S. corporation--that later got invalidated by the Federal Patent Court of Germany (a problem commonly referred to as the "injunction gap"). That patent-in-suit is either (if construed broadly) clearly invalid or (if construed narrowly) not infringed by the accused product, but could not reasonably be held valid and infringed at the same time. The case raises questions not only about the outcome but also about the reasoning and the circumstances that led to it. There's even a secondary question that reminds me of why Federal Circuit Chief Judge Rader resigned. But as the issues are so very serious, and the fallout from the facts being published might be massive and lasting, I'm making every humanly possible effort to analyze the matter with utmost diligence. That's why it's too early to provide names, but when the time is right, I will. The case number contains "39."

Germany needs patent reform badly. The German patent litigation system is not just broken: it was ill-conceived and it's been prone to abuse all along, but abuse has become so rampant that the time is ripe for change. The situation is unsustainable, and the system doesn't really deliver justice.

Right now there's only one leading German patent infringement court of first instance that I believe does a stellar job under the circumstances, and that's the Landgericht Mannheim (Mannheim Regional Court). Many years ago I thought the court was too plaintiff-friendly, but by now it's my favorite one. To a far greater extent than their counterparts in other German venues, the Mannheim judges--whose understanding of technical issue is unsurpassed--have realized just how irresponsible it is to let patent holders enforce invalid patents all the time. In Mannheim, there are judges who deserve an honorary doctorate in (at least) radio frequency electronics and have the expertise to figure out when a patent is likely invalid as granted, coupled with the backbone to stay such cases (while we're on this subject, I found out they recently also stayed one Broadcom lawsuit against BMW and one against Daimler, both over non-standard-essential patents). It will be interesting to see how they address the issue of component-level licensing in Nokia's automotive SEP cases.

The appeals court in Munich also impressed me on a couple of occasions this year, but can't really solve the problem that too few cases (only about 10%, which is an insanity considering that the vast majority of patents are invalid as granted) get stayed by the lower court there pending a validity determination. Dusseldorf--where the aforementioned tragedy occurred--is a near-total disaster at both levels, except on certain FRAND issues, where it's recently been a thought leader and more balanced than ever. Fortunately, Dusseldorf is a slow venue, which is why the kinds of cases I watch hardly ever get filed there.

As part of my research into the (most likely) unprecedented miscarriage of justice mentioned further above, I've come across a symptomatic decision by the Federal Court of Justice, the top German court for patent infringement cases (as only a very few issues, such as due process, go up to the Federal Constitutional Court). The Bundesgerichtshof (Federal Court of Justice) decision in the Kreuzgestänge (cross-linkage) case is nothing short of a declaration of structural and moral bankruptcy of the German patent litigation system. It's a mystery to me how one of the five judges who reached that decision could heap tons of praise on the German patent judiciary with a straight face in a closed-door government meeting in May instead of advocating much-needed reform.

In that case, the Federal Court of Justice pronounced the following doctrine:

"The court adjudicating a patent infringement lawsuit has to independently construe the patent-in-suit and neither legally nor factually bound to this Court's claim construction in a nullity [= invalidation] action relating to the same patent."

Let me provide some context on bifurcation first:

  • Unless a patent is so fresh it can still be challenged at the patent office (a scenario I'll ignore for the remainder of this post), one needs to bring a validity challenge before the Federal Patent Court of Germany. That's the court of first instance for nullity (= invalidation) actions.

  • The Federal Patent Court is typically far slower to resolve a nullity action than the Munich and Mannheim regional courts--and even sluggish Dusseldorf--are to rule on infringement. In the infringement cases, defendants can merely seek a stay pending resolution of (or a key milestone in) the parallel nullity action, but they don't have a full invalidity defense. The decision on a stay is based on some superficial (summary) analysis. The most problematic part is that the courts are largely receptive to non-novelty arguments but not obviousness contentions (and when they do evaluate obviousness, all but Mannheim apply an unreasonably high standard).

  • From a Federal Patent Court decision on a nullity complaint, parties can appeal (of right) to the Federal Court of Justice. However, infringement determinations by a regional court are appealed to a higher regional court (in Munich and Dusseldorf, cases stay in the same city; from Mannheim, they go to Karlsruhe). In most cases, that's the end of the journey for infringement cases, though the higher regional courts sometimes allow a further appeal to the Federal Court of Justice--or, if they don't, one can bring a Nichtzulassungsbeschwerde, which is practically the equivalent of a U.S. cert petition (a request for top-court review) and denied in most cases.

  • If the infringement case is brought in Munich or Mannheim, a nullity action will rarely reach the Federal Court of Justice (second nullity instance) soon enough that the above-cited doctrine would play a role. In Dusseldorf, it's more of a possibility, but even in Munich and Mannheim/Karlsruhe there might be an infringement determination by the appeals court after the Federal Patent Court ruled on validity, however, practically only imaginable if the nullity action was launched as a pre-emptive strike ahead of the infringement complaint or if the patent previously got challenged by another party.

Everywhere else in the world, there's a basic rule: you must apply the very same claim construction to the infringement analysis and the validity determination.

Only one country does it differently, and that's Germany.

The result is that a patent holder may benefit from a broad claim construction in the infringement proceeding and a narrow one with respect to validity. The system is (deliberately) asymmetrical: A defendant would never ever benefit, as the above-cited doctrine relates to a case where the nullity action has been fully resolved (all appeals--just one available anyway--exhausted) and the patent has been upheld (otherwise the infringement case would also be terminated immediately).

The Federal Court of Justice explained that--and this is per se correct--the infringement proceeding, if slower, may actually result in facts entering the record or legal theories being advanced that warrant a deviation from the (earlier) claim construction in the nullity action. That is conceivable, but the problem is that they drew a conclusion that results in the asymmetry I just outlined: if the infringement court finds that the claim construction should be broader than the one used in the (concluded) nullity action, the defendant can't get a new validity determination.

It's a tilted playing field. It's all meant to give leverage to those owning patents that should never have been granted in the first place. It's high time the legislature enacted reform.

If Congress wanted to introduce bifurcation in the U.S. by depriving defendants of a full invalidity defense, and if it then promulgated a rule allowing an inconsistency that can only benefit those enforcing--but never those defending against--patents, I'd predict that the Supreme Court would hold it unconstitutional. The incurable inconsistency of rulings would possibly be sufficient grounds for a holding of unconstitutionality--but, at a minimum, the asymmetry of the inconsistency's impact would be. Even Germany's Federal Constitutional Court might arrive at that conclusion, but it's unlikely that a challenge will be brought anytime soon--and even if it happened, that court is nowhere near as strong and principled as the SCOTUS.

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Tuesday, December 3, 2019

Car makers don't want to pay the likes of Qualcomm wireless patent royalties on leather seats: FTC v. Qualcomm amicus briefs

Earlier this year it became known that Qualcomm used to charge (and maybe still does, depending on the terms of the recent settlement) Apple a 5% wireless patent royalty on iPhone repairs. That's bad enough, but imagine what would happen if all of us had to indirectly pay wireless patent royalties on vehicle repairs? Or on leather seats? The latter is an issue that two automotive industry bodies have raised in a filing with the United States Court of Appeals for the Ninth Circuit.

For a list of previous posts on amicus curiae briefs in FTC v. Qualcomm, and on the order scheduling the oral hearing for February 13, 2020, let me refer you to this post. I will now, finally, comment on the remaining two amicus briefs supporting the FTC.

The Association of Global Automakers (AGA) and the Alliance of Automobile Manufacturers (AAM) made a joint filing (this post continues below the document):

19-11-29 AGA and AAM (Autom... by Florian Mueller on Scribd

What lends their support of the FTC particular significance is that the AMA's members include Ford and Fiat-Chrysler. Ford and Chrysler are American industrial icons.

That brief stresses the importance of patent exhaustion, which is so key to the automotive industry's longstanding modus operandi. And here's my preferred passage:

"If the Court ratifies Qualcomm's behavior, then Qualcomm and its peers could demand a cut of the profits attributable to even a car's leather seats." (emphasis in original)

That just perfectly illustrates the importance of the royalty base.

What makes the refusal to extend exhaustive FRAND licenses to component makers even harder to justify in the automotive industry is that the telematics control units (TCUs) sold by Tier 1 suppliers (the ones that directly sell to the car makers) come with pretty much the same functionality as a phone, apart from the screen.

Two Tier 1 suppliers--Continental Automotive Systems (whose FRAND/antitrust lawsuit against Nokia this blog has been following for several months) and Japan's DENSO--also filed a joint amicus curiae brief (this post continues below the document):

19-11-29 Continental and De... by Florian Mueller on Scribd

The automotive suppliers' lead counsel in this matter is Orrick, Herrington & Sutcliffe's Jay Jurata, who also spoke at my recent component-level licensing conference in Brussels. At the time--and even until I downloaded the above document--I had no idea he was going to make a filing in FTC v. Qualcomm.

What I finally learned from the brief is how Continental Automotive Systems, the Michigan-based U.S. entity suing Nokia in the Northern District of California, relates to Continental AG, the German group parent:

"Continental Automotive Systems, Inc. is wholly owned by Continental Automotive, Inc. Continental Automotive, Inc. is wholly-owned by Continental Automotive Holding Netherlands B.V., which is wholly-owned by CGH Holding B.V., which is wholly-owned by CAS-One Holdinggesellschaft mbH, which is wholly-owned by Continental Caoutchouc-Export-GmbH, which is owned 51% by Continental Automotive GmbH and 49% by Continental A.G."

Complicated. Possibly even more tiers than an automotive supply chain. They probably need a navigation system to find their way around in that widespread network of subsidiaries.

The most interesting business information that the brief reveals is this:

"[...] Continental has forgone working with both MediaTek and Samsung—upstream manufacturers whose chipsets would allow Continental to upgrade its products to provide consumers with both superior prices and technical capabilities—because their chips come without licenses to SEPs that they practice."

There's already plenty of industry testimony in the evidentiary record of this case that proves this problem. What the Continental-Denso amicus brief adds, however, is an example from the automotive industry. There's also a mentioning of an innovative product Continental would have liked to make, and could make if not for SEP licensing issues ("a single circuit board with cellular communications and high-end infotainment functions").

The European Commission should also take note of those problems, as Continental is one of five EU antitrust complainants over Nokia's Qualcomm-like refusal to license anyone but end-product makers.

I also like this passage:

"Although the cellular connectivity technology at issue in this case is only a small part of connected-vehicle technology, it is a necessary one. And so the inability of Western device companies to access licenses to SEPs on FRAND terms is hamstringing their ability to compete in this critical device-innovation race."

The brief addresses--and practically destroys--Qualcomm's "efficiency" argument for licensing only end-product makers. That part culminates in the following passage:

"And that is, in a nutshell, one of the fundamental problems with the SEP-holders' rule: It takes a decision that should be sorted out naturally through market forces, and places it in solely the hands of the very party that stands to benefit most from inefficiency."

The proposal is to ensure everyone in the supply chain (not just a patent holder's "preferred link in the supply chain," as the brief calls the patentee's sweet spot) has access to an exhaustive license on FRAND terms, and to then let market forces decide what type of patents is best licensed at what level. But in order for market forces to come into play at all, access must be available to everyone. Otherwise it all just depends on a SEP holder's opportunistic choice.

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Procedural implications of Google obtaining certiorari for its appeal of Oracle's Java-Android copyright victory

Last January (2019) I wrote that I wanted Google to be granted certiorari (Supreme Court review) of Oracle's copyright win(s) in the Federal Circuit, but I also made it clear I wnated affirmance (no surprise to anyone who knows what I wrote about the case in previous years). The first wish has come true: on November 15, Google's petition for writ of certiorari was indeed granted.

I'm not going to reiterate positions on the merits that I'm tired of repeating. A while ago I stopped doing that, and instead I just wish to talk about procedures.

Google's cert petition had two parts: copyrightability and "fair use." The Supreme Court sometimes grants petitions with respect to only one question. Copyrightability was already raised years ago (but at an interlocutory stage) and that petition was denied. Now the top U.S. court will look into both questions, which is a good thing given the importance of the issues.

If Google prevails on copyrightability, the case is over. I can't imagine that a conservative Supreme Court majority would disagree with Oracle on the standard for copyright protection, for the reasons I stated on many past occasions. But if it happened, Oracle would have no case.

Assuming that Oracle defends its copyrightability win, the case will then hinge on "fair use." Here, Oracle needs affirmance of a judgment as a matter of law (JMOL) that the Federal Circuit found Judge Alsup in San Francisco should have entered (but didn't, as he did hardly anything throughout the years that didn't disadvantage Oracle).

Google's "fair use" opportunity is that U.S. courts generally afford immense deference to jury verdicts. The standard for JMOL is very high. I still believe, as my longstanding readers know, that JMOL was perfectly warranted here. If the Supreme Court views it the same way, after affirming copyrightability, then the case will go back to the trial court for a determination of remedies. In that context, it may just be about damages. Oracle could seek an injunction, but Google has meanwhile changed its open-source licensing strategy for Android.

There's also a possibility--and it's at least the second-most likely outcome--of the Supreme Court affirming copyrightability but vacating JMOL on "fair use." Theoretically, the court could make it sound like Google, not Oracle, would have been entitled to JMOL on "fair use"--but that's something I absolutely can't imagine. What might happen, however, is that the court finds the jury wasn't entirely unreasonable. In that case, the matter would be remanded to the Federal Circuit first. Based on what the Federal Circuit found, there can be no reasonable doubt that a re-retrial on "fair use" would be ordered. The Federal Circuit would address at least some of the ways (more than Oracle could have raised even in three appeals) in which Judge Alsup's decisions prejudiced Oracle. So the re-retrial would take place on terms more favorable to Oracle than the last two "fair use" trials in this case.

This case has been going on since August 2010. It started when this blog was only a few months old. Next April (2020), this blog will turn 10, and we'll probably just have seen Google's Supreme Court opening brief by then...

Orrick, Herrington & Sutcliffe's Joshua Rosenkranz is still Oracle's appellate counsel. Each time he defeated a Google lawyer on appeal (the first one was Robert van Nest, the trial counsel), Google fielded someone else. My bets are on Mr. Rosenkranz again because he's incredibly effective--and the higher the court, the better for him.

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France seeks to drag rest of Europe into senseless trade war with U.S. over ideologically-motivated digital services tax

Yesterday, the United States Trade Representative (USTR)--which is the title of a presidential appointee at the rank of an ambassador (presently Robert Lighthizer), who has an entire agency, the Office of the USTR, working under him--published the findings (PDF) from the first segment of its Section 301 (Trade Act of 1974) investigation into France's Digital Services Tax. In July I reported and commented on the initiation of the investigation.

The USTR's proposed action "includes additional duties of up to 100 percent on certain French products," such as French wine. The approximate annual trade volume of those goods is $2.4 billion. Today, the French government threatened retaliation, seeking to leverage the collective economic power of the EU (which leverage is the whole reason why French politicians pretend to be pro-European) against the U.S., but President Trump remains optimistic that he'll "be able to work it out."

There are some European countries whose existing or envisioned digital tax regimes may come under pressure, so France will have some allies. But there are also many European countries that simply cannot have an interest in an escalating trade war with the U.S. only to defend of one of failing Macron's pet projects.

I've read the USTR's report in detail. The comments submitted by various stakeholder representatives to the USTR during the course of the investigation are also worth reading (you can find them on the public docket).

The U.S. government has reason and logic on its side, as well as longstanding principles of international tax and trade policy. By contrast, France has almost nothing to offer but envy and ideology.

I wrote "almost" because there is a problem that does need to be addressed, and the U.S. doesn't deny it as it's affected by it as well: it's called "base erosion and profit shifting" (BEPS). The OECD is working on that one, and it's a difficult one to tackle. Donald Trump has had some success in that regard: he basically struck a deal with large U.S. corporations under which he gave them a tax rate that made it make business sense for them to repatriate some of the profits they had parked abroad, particularly in Ireland. That kind of deal, however, is only an option if you have a truly strong economy, as the U.S. does and France doesn't to nearly the same extent. It also presupposes a political leader who, like Donald Trump, takes a pragmatic, results-oriented, non-ideological perspective.

President Trump is standing on higher ground here. He's a frequent and sometimes fervent critic of social media giants like Facebook and Twitter, who also in my observation tend to suppress conservative voices by applying dual standards. But as a matter of principle, those compüanies have to be taxed primarily in the U.S., not in France.

The primary obstacle France faces in the BEPS context is simply the European Union. Just like its monetary union is an abysmal failure (as the dysbalance of the European Central Bank's TARGET2 system and ever more negative interest rates and their devastating effects on many low-income earner's retirement savings prove) because it came too early, the "Single Market"--though it does give the EU a lot of political power (500 million reasonably affluent consumers)--is flawed because it has no safeguards in place against abusively low tax rates by small member states: neither can the EU force them to impose higher taxes (though in Ireland's case there would have been a window of opportunity when the country needed a bailout) nor is there even a way of excluding a country from the Single Market if it doesn't meet certain demands (probably the only club in the world that can't get rid of antisocially-behaving members).

There's a parallel between France's Digital Services Tax (DST) and the ill-conceived "state aid" case against Ireland--in reality, against Apple: both measures were taken just because the EU couldn't agree on bloc-wide minimum corporate tax rates. Commissioner Vestager (who's great in many other ways, but misguided in this context) and French president Macron wanted to "do something" at any rate, so the Danish commissioner made up a "state aid" case out of thin air--the Court of Justice of the EU may very well overturn it entirely or for the most part--and the French president had his parliament put that DST in place.

Even that controversial Article 13 (now 17) of this year's EU copyright reform falls in that category. Advocated most aggressively by France, it basically seeks to impose a copyright-based levy on digital content platforms, knowing that Europe's market share in content consumed by European users is greater than its share in platforms. It's a DST by any other name, though not as obviously discriminatory as France's DST.

The biggest mistake those unqualified French politicians made in this context is that they made their intent to discriminate against U.S. companies very clear. The USTR's report refers to ample evidence. At all stages of the political process, and at all levels, French politicians left no doubt that they wanted to target major U.S. digital economy players while defining all thresholds and categories to the effect of not affecting any other companies with very limited exceptions (such as Spotify's advertising-based free music service).

With respect to the discrimination, the following quote from an aide to French finance minister Bruno Le Maire is also telling--it was his response to someone expressing concern over the possibility of Amazon passing on the DST to third parties selling products via its platform:

"“[T]his response makes Amazon less competitive, and so much the better, because its monopoly worries us. [...] This may allow other platforms to recover some of their customers."

It's highly unusual--and equally objectionable--for a government to state publicly that a tax regime is designed to redistribute not only money, but market share.

The French DST is also structurally more discriminatory than the EU's proposed DST (which failed to receive unanimous support) would have been.

The USTR's report makes a very good point: for low-margin businesses, a tax based on revenues (not on sales like a value-added tax, which would affect everyone, and not on profits, which only affects profitable companies) disadvantages low-margin businesses and may even force some of them to exit the French market.

The practical implications of France's DST are also insane. Companies like Amazon or Google would have to put new accounting systems in place so they can track, for the purpose of French DST, whether a transaction came from a user who was on French soil at the given time (even though that may sometimes be the only connection to France--the user may be foreign, and the seller of a good may be foreign). What's worse is that, contrary to longstanding principles of taxation, the French DST is put in place retroactively, and if some companies didn't have the related user-location-based revenue tracking in place before July, then some rough and potentially unfair estimates of the portion of their first-half-of-2019 revenues subject to French DST will have to be performed.

As for who will be affected and how much, the largest volume is presumably digital advertising. Here, the affected players (according to the USTR's report) are Alphabet (Google, YouTube), Amazon, eBay, Facebook (also including Instragram), Microsoft, Snapchat, TWitter, and Verizon (Yahoo)--and only one French company, Criteo.

Where margins are a greater problem, and volumes lower than in digital advertising, is the "marketplace" category. The French law defines marketplace services in such a way that even huge French retailers who sell products directly won't be affected--it's about those who perform eBay-like intermediary services. Here, most are from the U.S., and a few from Japan and other European countries than France. The affected U.S. companies in this context are AirBnB, Google with respect to the Android Play Store (app store), Amazon's retail involving third parties selling via its platform, Apple's App Store, Booking Holdings (booking.com, OpenTable etc.), eBay, Expedia, Groupon, Match Group (Match, Meetic, Tinder), Sabre, Uber, and ContextLogic (Wish). There will be some impact on China's Alibaba, Spain's Amadeus (business-to-business travel services), Germany's Axel Springer media conglomerate (which owns a French real estate site named Seloger) and the Zalando retail site, Japan's Rakuten and Recruit, the Netherlands' Randstad (recruiting), Norway's Schibsted (Leboncoin), and the UK's Travelport.

All in all, 17 of the 27 company groups expected to be covered by the DST will be U.S.-based, and only one French-based.

I wish all of the companies for whose rights President Trump is standing up here were grateful. Some of them are run by ultraliberals who will likely just take this for granted. Some others are more constructive. But should the Democratic Party nominate "Fauxcahontas," one of whose stated goals is to break up various Big Tech players, it will be interesting to see whom Silicon Valley PACs will ultimately donate to...

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Ninth Circuit schedules oral argument in FTC v. Qualcomm for February 13, 2020 (San Francisco)

The United States Court of Appeals for the Ninth Circuit will hear oral argument from appellant Qualcomm and appellee the Federal Trade Commission (FTC) in the antitrust matter originating from the Northern District of California on Thursday, February 13, 2020, at 9:30 AM Pacific Time.

The court's website does not yet list the circuit judges on the panel. In this case, the composition of the panel will play a far greater role than in most antitrust cases as Qualcomm has managed, through lobbying and PR and with help from its former lawyer and forever-loyal supporter Makan "Macomm" Delrahim (Antitrust Assistant Attorney General), to politicize a case that actually raises business issues without any ideological dimension.

The FTC filed its answering brief to Qualcomm's appeal the week before Thanksgiving:

While the FTC's consistent efforts to enforce the antitrust laws have lately been described as a "lonely battle with Qualcomm" in light of Qualcomm's settlement with Apple earlier this year, the FTC received broadbased and sophisticated support last week from a wide range of stakeholders (several of whom are affiliated with the GOP--such as former Reagan and Bush 43 Administration officials--while others are on the liberal side of the political spectrum):

Qualcomm will file its reply brief in a couple of weeks.

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