Thursday, March 26, 2020

Europe stands several times more to lose than to gain from condoning Nokia's refusal to license automotive suppliers

On both sides of the Atlantic one can watch interesting examples of "reverse protectionism":

Antitrust enforcement should simply be a question of legal merits. But the industrial-policy argument that some forces within the European Commission make in Nokia's (and, by extension, Ericsson's) favor just doesn't withstand even superficial scrutiny.

Three charts that I've quickly produced with OpenOffice Calc, relying on data points published on the Internet, show that the European Union would ultimately help Asian and American patent holders extract license fees from European product makers more so than it would strengthen Nokia and similarly-situated Ericsson:

  1. According to the latest IPlytics figures, Nokia (including Alcatel-Lucent) owns 8.63% of all 5G declared-essential patent families, and Ericsson 5.32%. That's a total of 13.95% for the only two European companies on the list--all others are American and Asian patent holders:

    Therefore, no matter how much (over)compensation those two licensors--Nokia and Ericsson--may be able to obtain, the EU economy will remain a net licensee in the greater scheme of things.

  2. Europe's automotive industry dwarfs Nokia and Ericsson with respect to investment in research and development. According to ACEA (European Automobile Manufacturers Association), "EU automotive investment in R&D has increased by 6.7% to reach €57.4 billion annually." Macrotrends says "Ericsson research and development expenses for the twelve months ending December 31, 2019 were $4.107B, a 8.3% decline year-over-year." Statista shows that Nokia's R&D spend is also in decline, down to €4.41 billion. Here's a column chart (click on the image to enlarge):

  3. Finally, it's also interesting to compare the number of jobs in the EU's automotive industry (ACEA: "13.8 million Europeans work in the auto industry (directly and indirectly), accounting for 6.1% of all EU jobs") to the entire population sizes of the two countries whose "national champions" hold 5G patents (click on the image to enlarge):

The underlying patent licensing issue affects more than the automotive sector. There's an emerging Internet of Things industry, and countless European IoT startups are simply not equipped to deal with end-product-level SEP licensing but could make highly innovative products if the wireless chips they incorporate into their products were exhaustively licensed.

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Saturday, March 21, 2020

YOUR TAX DOLLARS AT WORK: Justice Dept. defends foreign-owned patent trolls against Apple and Intel

Apple and Intel--two American high-tech icons--are suing Softbank-owned Fortress Investment on antitrust grounds in the Northern District of California. Their complaint admittedly raises legal questions of first impression. Fortress brought a motion to dismiss the complaint just on the basis of the legal theories it is based upon. Apple and Intel obviously oppose that motion.

Over the last couple of days, various parties filed amicus curiae briefs with the court. Apple and Intel are notably supported by

But Fortress has an ally that you wouldn't expect to back a foreign-owned patent troll group trying to extract money from some of America's greatest tech companies (having filed dozens of lawsuits against the likes of Apple, Google, and by extension, Intel): the United States Department of Justice, claiming to speak on behalf of the United States (i.e., the federal government).

Makan "Macomm" Delrahim, a former Qualcomm lawyer and now the Assistant Attorney General heading the DOJ's Antitrust Division, stops at nothing in his tireless efforts to help patent holders maximize their returns at the expense of the wider economy and actual innovation (this post continues below the document):

20-03-20 Statement of Inter... by Florian Mueller on Scribd

Mr. Delrahim and his subordinates' submission supports Fortress with respect to the claims brought by Apple and Intel under federal antitrust law. The fact that Fortress is Japanese-owned doesn't mean that the DOJ couldn't have good reasons for supporting them: it's about fundamental legal questions that also affect American patent holders. The real issue here is that even if Fortress were American-owned, it would simply be irreconcilable with the America First philosophy to back hyperagressive patent trolls (who sometimes bring dozens of lawsuits against just one defendant such as Apple or Google).

It's shocking, and I wanted to share the news. In a future post I may go into detail on the motion to dismiss (possibly after Fortress's reply brief). The case is still on my watchlist.

The ongoing coronavirus crisis--in which Fortress was about to prevent essential research, but then backtracked under public pressure, while Apple offered a major contribution--is not going to go away anytime soon. Short of a vaccine or effective and reliable cure, many restrictions will remain in force for some time, and many people's lives won't return to normal. The damage that virus is causing to the global economy is beyond belief. Governments around the world will soon face an ecomomic policy challenge of unprecedented proportions. For a swift recovery, it's advisable to support product-making and service-providing companies (like Apple, Intel, and Google) against patent trolls like Fortress and its numerous shell companies who just siphon off money from those who create many jobs. The real economy needs to highlight that simple fact to President Trump and his closest advisers. Enough is enough.

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Practitioners and companies far from giving up on Unified Patent Court -- intergovernmental renegotiation will open door to improvements

For the time being, the Unified Patent Court (UPC)--a single patent judiciary for the contracting states of the European Patent Organization (which runs the European Patent Office)--is actually the Nullified Patent Court. And doubly so:

  1. Three weeks ago, the European Patent Litigators Association (EPLIT) announced that it had "learned that the UK government intends to stop its cooperation towards the creation of the Unified Patent Court." The UPC Agreement involved ultimate jurisdiction of the Court of Justice of the EU (CJEU) over certain segments of patent law. The UK couldn't have submitted to CJEU without its government exposing itself to allegations of betraying the majority that voted in favor of Brexit four years ago.

  2. What came as more of a surprise than British anti-CJEU consistency, the Federal Constitutional Court of Germany yesterday announced that a majority of its Second Senate had declared (as per an order dated February 13, 2020) the German legislature's Act of Approval to the Agreement on a Unified Patent Court (UPC Agreement) "void" as the Bundestag (Federal Parliament) had passed it with a simple majority as opposed to the two-thirds majority required by the Basic Law (Germany's de facto constitution) for acts that effectively amend the country's constitution. Here, the conferral of ultimate jurisdiction over a certain field of law to a new non-German court was held to be tantamount to an amendment to the Basic Law--and, therefore, a violation of constitutional rights asserted by complainants. A minority of three dissenting judges, however, considered this application of the two-thirds majority rule to be exceedingly strict and a potential impediment to further European integration (a very policy-driven position that is unfaithful to the law).

    Simply put, the majority of judges viewed not the UPC Agreement but its ratification to be unconstitutional.

    Apart from the need to modify the treaty in light of Brexit and the fact that the coronavirus crisis dictates other priorities, the government coalition parties couldn't re-ratify an updated UPC Agreement without support from the opposition as they hold only 398 (56%) of the Bundestag's 709 seats. Theoretically, the libertarian FDP (80 seats = 11%) could provide the missing votes.

The combination of the UK's withdrawal (as the UK was a "must have" contracting state under the original UPC Agreement and supposed to be the seat of one of three sectorial appeals courts) and the higher quorum for re-ratification in Germany suggests significant delays, but doesn't spell definitive doom for the UPC project in the opinion of practitioners:

  • Gerd Zimmermann, founder of patent firm Zimmermann & Partner, says "there still is a strong political will in continental Europe to put the UPC in place, as neither Brexit nor the Constitutional Court's ruling weakened the resolve to put a single European patent judiciary in place."

  • Bardehle Pagenberg, a leading IP prosecution and litigation firm that analyzed the fallout from brexit just one day before the Constitutional Court's ruling, said in a press release that "most of industry is rightly in favor of the system even without the UK."

Patentverein, a group of German medium-sized companies critical of the country's bifurced patent litigation system (which deprives defendants of a full invalidity defense to infringement claims), also issued a press release expressing hope that "a new European effort [would] be made without the UK on board."

So there is widespread consensus that re-ratification (subsequently to renegotiation) is a question of when, not if. interestingly, the two patent firms as well as Patentverein say or at least imply it's also a question of how (i.e., on what terms):

  • Bardehle Pagenberg provides a non-exhaustive laundry list of areas in need of improvement: "Since the UPCA has to be revised anyway, the opportunity could – and should – be seized to make the system more attractive. Issues to be considered are the criticized opt-out / opt-in regulations, sound grounds for the compulsory inclusion of European bundle patents, the good, but improvable rules of procedure, the (high) reimbursable attorney fees (which may be prohibitive for SMEs), the renewal fees for the Unitary Patent, as there is no valid reason for subsidizing national budgets via the renewal fee share in the Unitary Patent, just to name the most important ones."

  • Patentverein more subtly expresses the organization's "hopes that the good parts of the [EU-wide] Unitary Patent will be preserved," which I interpret as diplomatically suggesting that there is room for improvement.

  • Mr. Zimmermann says "it's rather likely that governmental and private-sector stakeholders will make a variety of political demands, though it's hard to imagine that any dealbreaker would surface." He considered it "essential to work toward a new multilateral agreement, but negotiation dynamics should not produce a result that would come at efficiency's expense." For an example, "most European patents are filed in the EPO's three official languages, irrespectively of the UK's participation, so for practical purposes the agreed-upon language regime should be maintained."

In addition to those reactions to yesterday's ruling, let's not forget that the UPC's Rules of Procedure have previously been--and without a doubt will again be--a subject of debate. Six years ago, a broad industry coalition warned against the risks of the UPC turning Europe into a trolls' paradise.

In that context, access to injunctive relief is the most important issue--as it is in the German patent reform debate. Earlier this week, the Federation of German Industries (BDI)--the largest industry association in Europe--was forced to retract a submission (particularly on injunctive relief) that the Federal Ministry of Justice and Consumer Protection had already published on its website, as the statement misleadingly suggested that large parts of the German economy backed a permissive approach to patent injunctions. This setback for patent enforcement extremists proved that the companies advocating--as did the aforementioned UPC Industry Coalition--a more balanced patent system are ever more influential. There's a strong connection between a future "UPC 2.0" effort and the ongoing process for a reform of Germany's Patent Act: whatever comes out of the national legislative process will inform--if not dictate--the position the German government will have to take when the UPC Agreement is renegotiated. The stakes could hardly be higher, and a growing number of stakeholders are perfectly aware of this while some others are still clueless as to what it takes to influence patent legislation.

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Tuesday, March 17, 2020

German patent reform movement strikes back: Federation of German Industries (BDI) withdraws injunction-friendly submission to government

The German patent reform movement has miles to go, but it is far from beaten. Last weekend I commented on the submissions (feedback to a patent reform proposal) Germany's Federal Ministry of Justice and Consumer Protection published last week, and noted that the submission by the BDI (Federation of German Industries, an umbrella association of associations) appeared to isolate the automotive industry by taking an injunction-friendly (though troll-critical) position. I pointed out that in reality there's a strong interest in patent injunction reform across different segments of the economy.

In a development that is as surprising as it is telling, the BDI's paper has been withdrawn from the website of the Federal Ministry of Justice and Consumer Protection. The only plausible explanation is that some of the pro-reform forces succeeded in convincing the BDI that it was not speaking for the entirety of German industry associations minus automotive and information & communications technology, but had merely been hijacked by patent extremists.

The ministry would very much have liked the BDI to reach a consensus. A paper that wasn't supported by two major member associations wasn't exactly a consensus position--but the BDI portrayed it as the position of a vast majority of the German economy, which it simply wasn't (as I already made clear on Sunday).

This withdrawal represents a very significant setback for those seeking to preserve the status quo of (near-)automatic patent injunctions.

On this occasion, I'd like to clarify what I meant on Sunday by calling on all pro-reform forces to throw their weight behind the Max Planck Institute's (MPI) submission:

  • First, I meant the MPI paper as a whole, of which the proposed statute is an extremely important--but not the only--part. The document makes it clear what real-world issues that defendants are facing in German patent litigations are meant to be addressed by the proposed proportionality requirement. A proportionality requirement that the statute itself does not elaborate on will, of course, have to be accompanied by a rationale (a commentary provided by the legislature itself) that courts will rely on as they interpret the new statute. The combination of statute and rationale will determine the actual effect.

  • Second, there's nothing wrong with companies saying that they agree with everything the MPI paper says while some of the may still favor positions that go further and/or statutes of greater specificity. And different organizations will set different priorities. But the MPI paper could serve as a common denominator in an effort to overcome fragmentation.

  • Third, with the ministry having put forward a first draft that narrowingly redefines the word "(dis)proportionate" (vitiating it to the point that it merely applies to a few extreme cases at the outer margin of disproportionality), it is now critical to ensure that the statute will have scope for all (dis)proportionality theories that the law--and particularly EU law--allows. That's the most important breakthrough one can achieve now for the sake of balancing the system.

  • Fourth, while the ministry will obviously read--and most likely has already read--the MPI's paper attentively, it's key to consider that politics is not only about what is said, but also very much about who says it. If the ministry and the actual legislature (the Federal Parliament) see that there are strong signs of an economic majority supporting that position, then there is a potential for momentum of the kind that no academic paper can ever have without being backed by corporations and possibly other types of stakeholders.

  • Fifth, I wish to make clear that my proposal to adopt the MPI's paper as the common denominator of the pro-reform movement was not and is not intended to put it above academic write-ups on the subject of German patent injunction reform. The MPI's submission is simply my recommendation among those documents that were officially provided to the ministry in response to its first draft. I have heard rumors of confidential submissions, but a movement can only be unified behind a published position. Also, other documents commenting on, and suggesting improvements to, the ministry's first draft have been circulated. In fact, I wrote one myself that basically blends Art. 3 IPRED and eBay factor #2. But the pro-reform movement should now, ideally, rally behind a paper that was officially submitted to, and published by, the ministry.

The withdrawal of the BDI's injunction-friendly position may mark a turning point in the debate, and in the legislative process. A strong backing of a consensus position of an economic majority would be the best next step. The fact that the BDI had to retract a paper--not merely after having submitted it, but even after the government had published it!--is very encouraging. It creates a vacuum. The economic majority should fill that vacuum by major companies from different industries lending their collective support to a common-denominator position. The time has come to show the decision-makers at the ministry and in the parliament that only a few entrenched interests oppose meaningful injunction reform. The way to show it is to have an impressive list of supporters of a common position. Beyond the common position, anyone may still have--and communicate--further-reaching ideas. But you have to start someplace.

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Daimler slows down production due to coronavirus, potentially reducing impact of patent injunction Nokia is pursuing

Daimler announced today that most of its production in Europe will be suspended for (initially) two weeks, starting this week. "An extension of this measure will depend on further developments," the announcement notes.

The reasons for this are apparently a mix of protecting Daimler's workforce, containing the spread of the virus, lower demand, and supply-chain issues.

The overall situation may have an impact on Daimler's antitrust and patent dispute with Nokia (see th previous post on Continental's statement accusing Nokia of impeding innovation in the automotive supply chain). On April 9, Nokia hopes to obtain a patent injunction--over a patent that will most likely turn out invalid in the further process and based on an absurd misreading of the CJEU's Huawei v. ZTE ruling--from the Munich I Regional Court. Even if Nokia succeeded without merit, the question would be what impact the injunction would actually have--not only because it is limited to a list of specified suppliers of telematics control units, but also because reduced production volumes during the coronavirus crisis might make the situation easier to manage.

If Nokia coerced Daimler into a settlement, the problem of SEP holders like Nokia refusing to license component makers still wouldn't have been solved. The suppliers would have no reason to withdraw their EU antitrust complaints. If anything, such a course of events would add another element of abuse.

Time is of the essence for Nokia. A hypothetical win would very likely be reversed. The appeals court won't stay the injunction the next week or so, but it won't need too many months either. Under the overall circumstances mentioned above, there is a possibility that Daimler won't come under pressure until the appeals court has spoken.

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Continental says Nokia impedes innovation and sustainability in automotive industry and IoT by refusing to license component makers

While Nokia has always been outspoken about the automotive industry's antitrust complaints over its refusal to grant exhaustive component-level licenses to suppliers, I gave up at some point on the complainants' willingness to provide any information or share their views. It just didn't seem to be in their DNA. All the more surprising to me was the fact that Continental issued a statement today on the definitive failure of mediation efforts with Nokia.

The Mannheim Regional Court had originally scheduled two Nokia v. Daimler trials today, which were canceled in part because of the coronavirus situation. Continental is an intervenor in all those German SEP infringement actions against one of its largest customers, Daimler. Tires made Continental a household name, but it's a lesser-known fact that they are also a huge supplier of electronics components to car manufacturers. They and their competitors depend on exhaustive SEP licenses in order to be able to invest in further progress in this field. Today's statement refers to "connected, autonomous and sustainable mobility." I interpret "sustainable" in the sense of increasing energy efficiency at the component level as well as technologies that help reduce fuel consumption. In other words, Continental wants Nokia to make its contribution to the fight against climate change--an extremely high priority for the von der Leyen Commission--by enabling innovation a the component level.

Nokia refuses to grant exhaustive licenses to component makers. Instead, it seeks to force end-product makers such as Daimler into licenses, and in discussions involving component makers proposes alternative structures that fail to address the most important competition and innovation concerns.

Here's the full text of Continental's unprecedented statement:

The mediation between Continental and Nokia in the context of Continental's EU complaint against Nokia's licencing practice for Standard Essential Patents (SEPs) has now taken place. Continental still has no direct license for Nokia's SEPs for mobile telecommunications standards such as 3G and 4G. This is unsatisfactory for Continental.

Continental will therefore continue to seek licenses under the commitments from Nokia and other SEP-owners to grant licenses on 'fair, reasonable and non-discriminatory' (FRAND) terms and continue pursuing its complaint with the EU Commission.

Only being granted its own SEP-licenses under FRAND terms will allow Continental to realize its full potential as one of the market leaders and driving forces of innovation in connected, autonomous and sustainable mobility. Without access to the respective licenses Continental and other suppliers are not able to develop, manufacture or sell important technology for future automotive and non-automotive applications.

Nokia's refusal to license its SEPs to Continental and other car parts suppliers, wanting to just license car manufacturers is blocking innovation in the field of connectivity for a more intelligent, safer, and more sustainable mobility. Likewise, this practice is damaging emerging European markets in the automotive industry and the Internet of Things more generally.

Continental will continue to pursue its civil litigation seeking a FRAND patent license from Nokia and others in the U.S. District Court for the Northern District of Texas where Continental has submitted to an independent rate setting by that court. Continental will continue to support its customers against assertions of standard essential patents by SEP-owners applying coercive pressure and injunction claims to obtain supra-FRAND rates.

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Monday, March 16, 2020

Mannheim Regional Court vacates two Nokia v. Daimler patent trials scheduled for tomorrow, one of them due to coronavirus

More than six months ago, the Mannheim Regional Court's press office informed me of four Nokia v. Daimler trial dates, including one that had been scheduled for tomorrow (March 17, 2020). In that one (case no. 2 O 36/19), Nokia is asserting EP2145404 on a "method and apparatus for providing control channels for broadcast and paging services."

About three months ago, it looked like March 17 was going to be really busy, as the court moved another Nokia v. Daimler trial (ase no. 2 O 37/19) from December 10 to that date. The patent-in-suit in that one is EP1273199 on a "method and arrangement for maintaining synchronization in association with resetting a communication connection."

Neither of the two trials is going to take place tomorrow:

  • The trial in case no. 2 O 36/19 over EP'404 was vacated due to the coronavirus situation. The state of Baden-Wurttemberg told its courts to hold hearings and trials only in time-sensitive cases. While Nokia obviously wants leverage over Daimler, the case apparently didn't qualify for a trial under these circumstances.

  • The issue that resulted in the postponement of the trial in case no. 2 O 37/19 over EP'199 was procedural. There's a procedural rule in Germany according to which a party can raise new factual issues only until one week prior to the trial. Otherwise such pleadings can be rejected for being out of time in the court's discretion--or the court might postpone the trial so as to give the other side sufficient time to prepare. Daimler's counsel objected to the untimeliness of a Nokia filing raising new infringement contentions, and the court immediately vacated the trial. A new trial date has not been set yet.

    It strikes me as odd that Nokia would come up with a new infringement theory about three months (!) after the original December 10 trial date. Shifting-sand positions are generally a sign of weakness, though it does occur from time to time that parties turn an otherwise losing case around that way. It is, however, highly unusual that a party would do so now when the case was already about to go to trial on December 10, 2019. That trial was vacated on very short notice (just on the previous day). And the postponement had nothing to do with new theories at the time. Nokia requested it back then on the basis of the parties having agreed to make a mediation effort.

Last month, Nokia lost the first of its Mannheim cases against Daimler. A decision by the Munich I Regional Court in a Nokia v. Daimler case will come down on April 9, with Nokia advocating a gross misreading of the Court of Justice of the EU's Huawei v. ZTE ruling.

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Sunday, March 15, 2020

Distorted picture of stakeholder positions on German patent injunction reform: submissions to Federal Ministry of Justice

Leading litigators agree that the first draft of a German patent reform bill put forward by the Federal Ministry of Justice and Consumer Protection (BMJV) would change either nothing at all or, at best, extremely little about access to patent injunctions. This blog already said within a couple of hours of the dissemination of the document.

Stakeholders had until March 10 (last Tuesday) to provide feedback to the ministry. Throughout the course of the week, the ministry uploaded those documents whose submitters had not requested confidential treatment.

To my dismay, the proponents of meaningful injunction reform have lost the second round in a row. They had originally achieved a breakthrough in the sense that the ministry, which at the outside envisioned a low-key reform package along the lines of a "service update" for computer programs, has dared to touch the holy cow of German patent law--§ 139 PatG (Art. 139 German Patent Act, the injunction paragraph)--at all. But what has otherwise happened is a disaster for the pro-reform movement:

  1. The actual proposal is lopsided in patentees' favor and designed to eliminate or at least minimize any potential impact.

  2. And now, due to utter political incompetence in some places, outdated internal rules in others, and obsolete conventions on the part of key local pro-reform forces, the ministry has received more than enough backing to either turn its first draft into the federal government's formal proposal or make merely cosmetic changes to it.

    There's obviously nothing that pro-reform forces could have done about their rivals' actions. Their failure lies in the fact that they didn't (even though I told many of them a long time ago) restructure and broaden their alliance in an effort to overcome resistance to reform. Those who want a more balanced statutory framework are now on the losing track unless the dynamics of the parliamentary process result in a turnaround. An economic majority actually wants reform, and only a minority opposes it--but the majority doesn't know how to win, or the few individuals who do know just aren't allowed to do what needs to be done, while the patent-extremist minority plays it smart (those organizations have highly experienced, global IP policy teams, unlike the German automotive industry, for instance) and has the relevant ministry officials on its side.

While the actual legislature--the Bundestag (Federal Parliament)--has every right and every opportunity (and would have every reason) to fundamentally improve the bill, parliamentary experts will start their analysis of where the relevant stakeholders stand with the submissions to the ministry. And those submissions present a distorted picture, for the reasons stated above.

In this post I'll focus only on the proportionality of injunctions, not on other aspects of the reform bill that the submissions touch on, except where there is an inevitable overlap.

Submissions in favor of major improvement over the status quo (i.e., fewer injunctions)

Max Planck Institute for Innovation and Competition: That one is fantastic. They explain the issues with the present proposal and propose a straightforward proportionality requirement (which would bring German patent law into compliance with EU law). Among other things, they also argue for taking third-party interests into account, and they explain why proportionality considerations are also critical with respect to standard-essential patents (SEPs). Unfortunately, they don't represent an industry, but I will propose a solution: why don't a number of major companies (either German corporations or international ones with substantial operations in Germany)--regardless of whether they've already supported the submissions of one or more industry associations--throw their full weight behind the Max Planck Institute document and say that they support it 100% even though they might have settled for less before in order to build consensus within industry groups? The Max Planck Institute is a world-class academic institution, not a campaign HQ. They wouldn't seek endorsements, but I am going to contact some key pro-reform players the next few days and urge them to publicly (such as through this blog, where I could publish the names of organizations who confirm their agreement with the Max Planck paper to me just like their PR departments would confirm the existence of a pending litigation) declare themselves 100% (no ifs, no buts, no nothing) in agreement with the Max Planck submission. Let's make the Max Planck Institute's submission the economic majority's lodestar and tell it to the Bundestag.

Germany's leading SME organization (Bundesverband mittelständische Wirtschaft, BVMW): This submission makes strong policy arguments from the perspective of small and medium-sized companies and blend them with reasonably profound legal criticism of the proposal, expressing serious doubts about whether we would see much (if any) improvement. What the BVMW does not provide is a statutory counterproposal, but what the Max Planck Institute suggests would undoubtedly meet the BVMW's criteria.

Patentverein (medium-sized companies advocating balanced patent policy) and BITMi (IT-specialized SME organization): One could interpret these two submissions as an endorsement of the ministry's statutory proposal. However, those are very small organizations and simply don't have the resources to assess the actual legal impact of a statutory proposal. Their papers make it very clear they want proportionality (and above all else, they'd like to close the injunction gap). Both are, however, members of the Mittelstandsallianz (SME Alliance) led by BVMW, and BVMW gets it right that the present proposal falls short of what's needed. For that reason, I count those two organizations, despite the shortcomings of their submissions, in the pro-reform column: their policy positions are clearly pro reform, and if they didn't back the BVMW's criticism, the BVMW surely would have mentioned it, as the BVMW's submission explicitly mentions the Mittelstandsallianz and an aggregate membership of 900,000 organizations.

Verband der Automobilindustrie (VDA, Automotive Industry Association): This submission explains the issues in great detail and proposes various improvements to the statute. It's good--but not very forceful in the end. I therefore call on those automotive industy players who are in favor of meaningful reform (which applies to the vast majority of them) to back the structurally superior Max Planck Institute's submission, especially since there is no philosophical conflict here. The best is the enemy of the good.

ip2innovate: That group has mostly non-German members such as Google, Microsoft, and Intel. Its German members are SAP, Daimler, and Adidas (a company that is also affected by the threat of patent injunctions). Daimler is also a member of the VDA, but it's a reasonable assumption that Daimler actually supports the further-reaching proposal--the ip2innovate submission. ip2innovate's paper is OK for the most part, though there is a huge issue with its statutory proposal: it does spell out some criteria to consider, but in doing so risks discounting the importance of criteria not mentioned, such as the relative importance of a patented invention to an accused product. The Max Planck Institute, with its far greater sophistication, avoided falling into that trap. As for the backing of German companies, Daimler and Adidas are undoubtedly suffering under the current situation. SAP, while it's the most valuable German company, actually never gets sued over patents in Germany. At least one can't find any recent cases on Darts IP. Even if they were enjoined, software patents can usually be worked around very easily and seamlessly. So they're lobbying for reform without actually being affected (so far). That is a limiting factor in the further debate. It doesn't make their position meaningless, but does diminish its weight--though the weight that remains is still significant.

Vodafone: Not a German company, but operator of the second-largest cellular network in the country and a provider of critical infrastructure to many German companies, including many SMEs (as the submission mentions). Their one-pager simply points out that the initial proposal doesn't go far enough. It would have been great if they could have made a joint submission with Deutsche Telekom (and possibly others). But Deutsche Telekom's position was voiced very clearly in 2018 on the corporate website, where they complained about the extent to which Germany's patent law impedes innovation.

ACT | The App Association: A low-quality submission by an organization that claims to represent 5000 SMEs "in Germany, the EU, and worldwide" (my translation), but then mentions only one German member company in its submission. Not worth discussing, and certainly won't impress anyone in German politics.

Nvidia: The strength of this particular submission is its analysis--clearly provided by a law firm--of proportionality as prescribed by the Intellectual Property Rights Enforcement Directive (IPRED) of the European Union. That part of the filing is world-class. When it comes to political clout, however, Nvidia is negligible. It basically just has a small sales operation in Germany. One of its managing directors (apparently the only Germany-based one among the five), Ludwig von Reiche (FWIW, a descendant of a German military family), overrates the significance of that company to German policy-makers by a factor of 10,000, and his understanding of how political decisions are influenced by a factor of at least 5. That said, whatever law firm authored the analysis of EU proportionality law for them did a great job. I'm not aware, though, of Nvidia having ever put its money where its mouth is in this context other than paying for this one document.

Neutral on proportionality

BITKOM (German information and communications technology industry association): Due to dissent within their membership, they couldn't take a position. Most ICT companies clearly want reform, but the likes of Siemens, Nokia and Ericsson also have significant weight within that organization. In connection with the EU software patent directive, BITKOM was one of my numerous opponents and we defeated them (both with respect to a non-legislative resolution by the Bundestag and a legislative decision by the European Parliament). It looks like I may never agree with them on patent policy, but at least they're neutral this time.

progenerika (generic drug industry association): Their submission focused only on the injunction gap. In the field of pharmaceutics, proportionality--provided that a patent is reasonably certain to be valid--is typically a non-issue given that there is almost a 1:1 relationship between a patent and a product, so one can hardly argue that only a minor feature of a complex multifunctional product was affected.

Submissions in favor of the status quo (and the ministry's first draft)

BDI (German industry association): The BDI is an umbrella association of associations. Two of its members, VDA (which wants reform) and BITKOM (which is internally divided), officially distanced themselves from the BDI's submission. The biggest issue with the BDI's submission is that they seek to limit the impact of any statutory change to enforcement stays (as opposed to a denial of injunctive relief in a given case). As for third-party interests, they may see a point with respect to telecommunications networks, but are afraid of further-reaching effects. They do speak out clearly against non-practicing entities (NPEs), and they mention the problem of complex products. So the BDI submission isn't all bad, but on the bottom line it's more of an anti-proportionality than pro-reform position. And the BDI's submission hurts the cause by appearing to isolate the automotive industry, though in reality there's a strong interest in reform in multiple industries (such as telecommunications, semiconductors, and further above I even mentioned Adidas as a member of ip2innovate). [Update on 03/17] The BDI paper had to be withdrawn, validating what I wrote about a strong interest in patent injunction reform across multiple industries. [/Update]

ZVEI (electronics industry association): They make it clear they seek to preserve the status quo and they'd like the ministry to make it even clearer that nothing should change. This one may have been influenced very strongly by Siemens.

Siemens: Whether this submission by Siemens's patent department serves the company's long-term interests is another question. In the IoT era they will increasingly find themselves on the receiving end of patent assertions. But for now, they are radical proponents of strong patent enforcement. While I disagree with them, they did the right thing by making a submission in their own name as opposed to just relying on associations.

vfa (pharmaceutical industry association) and VCI (chemical industry association): Those two organizations' joint submission promotes superstrong patent enforcement. They'd like to further weaken the ministry's first draft.

Ericsson: A foreign company, though still far more relevant to German policy makers than, say, Nvidia's local sales office. Unsurprisingly, they take a radical position in favor of strong patent enforcement. Just like Nokia, Ericsson is a company that failed in the mobile handset business and has fallen behind technologically in the field of network infrastructure, so they're ever more interested in patent monetization.

VPP (organization of 2,500 German IP professionals): This submission, unsurprisingly, favors strong enforcement. VPP's president is simply Siemens's chief patent counsel. So this doesn't really add anything.

German patent attorneys' association: Obviously in favor of the status quo. The more patent litigation in Germany, the merrier--from their vantage point.

German Bar Association: What I just said obviously applies to German attorneys at law involved with patent litigation: they wouldn't want anything to happen that would have more than a non-negligible impact on the attractiveness of their jurisdiction to plaintiffs. Policy makers are well-advised to just ignore that submission.

Berlin-based patent attorney: A patent attorney filed a submission on her own, claiming to mostly represent SMEs, which is ridiculous when you have the country's largest SME organization (BVMW) actually advocating reform. There obviously are SMEs who want strong patent enforcement--some but not all of whom are simply patent trolls. But patent attorneys aren't legitimate SME representatives, simple as that.

German inventors' association: Their membership base is just a few hundred individuals.

DABEI (another inventors' association): This submission is slightly more moderate than the one by the German inventors' association. It proposes an enforcement stay for up to six months in cases of extreme hardships, contingent upon various requirements.

Sanofi-Aventis: They caution against any further-reaching restrictions of access to injunctive relief, but would like the ministry to provide greater clarity. And in case they get sued, they'd like the interests of patients who need access to their medications to be taken into account.

Japan Business Machine and Information Systems Industries Association (JBMIA): They hate patent trolls, but they want their members (such as Sharp, Sony, Panasonic, Fuji, and Toshiba) to have just the same access to injunctive relief as now. They're apprehensive of anything that would look even remotely like eBay v. MercExchange (though the ministry's first draft is lightyears away from it).

Conclusion

One can see that those seeking to preserve the status quo are better-organized and more outspoken, as opposed to just focusing on association-level consensus building.

Some of those advocating reform mean well, but on average aren't as sophisticated as their rivals.

The pro-reform camp needs a much better statute than the one the ministry proposed, but the ministry officials can (legitimately!) portray the balance of the submissions as validating their approach. That is due to a distortion: in reality, the economic majority wants reform, but it failed to make this clear.

It's too late to orchestrate more (and better) pro-reform submissions, but it would make a huge difference now if some major players could officially subscribe to the Max Planck Institute's stellar submission. Rallying behind that paper is the best shot the pro-reform camp has at this stage. But there is a risk of most if not all of the key players being unable to do so just due to internal rules that are unfit for a patent policy debate in the 21st century.

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Monday, March 9, 2020

Academic paper sheds light on severe limitations of Nokia's proposal of granting have-made rights to automakers: impact on vertical supply chain

In recent days, two of my automotive industry contacts have drawn my attention to what one company's chief patent counsel described as a "remarkable" paper on standard-essential patent (SEP) licensing issues: SEP Licensing After two Decades of Legal Wrangling: Some Issues Solved, Many Still to Address by Damien Geradin (Professor of Competition Law & Economics, Tilburg University; Visiting Professor, University College London; Founding Partner, Geradin Partners; and a member of the European Commission's SEP Expert Group).

The 22-page document provides an outline of how European Union case law (with additional references to a few key U.S. decisions) has evolved over the past two decades, going back to the time when Nokia, then far more interested in making products than generating patent licensing revenues, was a complainant against Qualcomm. Times have changed, and Nokia is now an aggressive monetizer of SEPs and the target of antitrust complaints.

The part I found most interesting in Professor Geradin's paper deals with Nokia--or, more specifically, a structure Nokia proposes in lieu of a license to component makers that would protect the downstream by means of patent exhaustion. I'm not aware of a similar analysis of Nokia's proposal of a "have-made right" and the severe limitations inherent to it having been conducted before.

Just like water naturally flows downhill, the natural solution to the patent licensing problem in a multi-tiered vertical supply chain is for each patent to be licensed at the highest level at which it is practiced. An exhaustive license protecting the downstream is precisely what Huawei's German antitrust lawsuit against Nokia is seeking to achieve: an exhaustive license that would, therefore, shield Huawei's customers and all subsequent buyers from infringement claims. In the post I just linked to, you can see charts that show how it would work. A closer look at the ten patents Nokia is asserting against Daimler in its German litigation campaign leads to the conclusion that there is no reason under patent law for which those kinds of patents would have to be licensed only at the bottom of the supply chain (= to Daimler).

Nokia prefers the unnatural--actually, counternatural--way: in defiance of gravity, water should flow uphill. What Nokia proposes is a have-made right: Daimler would be authorized to have third parties, such as Continental, make components to be incorporated into Daimler cars. In Germany, that concept is also labeled an extended workbench.

Nokia argues that this provides sufficient protection and freedom to operate. But does it really? Professor Geradin's analysis identifies a variety of shortcomings and restrictions.

Before I republish here--for your convenience--the relevant passages of that document, let me show you a chart that I quickly drew up to visualize the problem (click on the image to enlarge):

The "SEP Holder" at the bottom of the chart is, in our specific case, Nokia. "Car Maker #1" would be Daimler.

The three red circles with white numbers (1-3) in them show potential or actual disconnects. Each disconnect means that one or more parties aren't protected and/or that some types of transactions cannot happen safely (in a legal sense):

  1. Red circle #1 is a potential disconnect because the tier 1 supplier (the maker of a telematics control unit, which is the component that car makers purchase and incorporate into their products) may lose its protection under the have-made structure if the car maker breached or terminated its agreement with Nokia.

  2. Red circle #2 is an actual--not merely potential--limitation: a have-made right fails to cover the entire vertical supply chain. At best, it provides some protection with respect to products made by the tier 1 supplier for the automaker. But it doesn't cover any tiers higher up the value chain (tier 2, tier 3, ...)--and even the tier 1 company is at risk when purchasing (as opposed to actually "making") components from those upstream tiers.

  3. Freedom to operate would normally mean--and on the basis of patent exhaustion would definitely mean--that the tier 1 supplier could sell products (including, but not limited to, excess quantitites) to other customers. Such sales may occur directly (in the chart, that would apply to Car Maker #2) or indirectly through some kind of trading company in between that might buy up excess quantities and sell them later (such as to Car Maker #3 in my chart).

Another structure that is sometimes discussed in this context would involve a patent license by the SEP holder to the tier 1 supplier with respect to only a particular customer (an automaker). That type of arrangement can, at best, avoid the potential disconnect indicated by red circle #1 in my chart. But the tier 1 supplier still wouldn't truly be licensed. The car maker would have the rights a licensee is normally granted, and the tier 1 supplier would basically just perform the royalty payments. Nothing would change for the tier 1 supplier with respect to red circles #2 and #3.

Here are--as promised--the relevant passages from Professor Geradin's paper:

Nokia’s reply to the component suppliers’ problem of having to manufacture and sell their products without a license is that licensed automotive manufacturers, by exercising “have-made rights” that would have been contractually granted by Nokia, could shield from infringement its unlicensed suppliers. Although there is some case-law on have-made rights in the United States, which has been analysed in commentaries, the scope and exercise of such rights are rather unclear in Europe. In the following paragraphs, I analyse the extent to which the granting of have-made rights to automotive OEMs would grant sufficient comfort to unlicensed component suppliers.

A first issue relates to which supplier(s) would be immunized from infringement through the exercise of such have-made rights. In other words, could a licensed automotive manufacturer immunize from infringement its whole vertical supply chain through the exercise of have-made rights? That does not seem to be the case. First, there is no case law in the United States or anywhere supporting that view. In all litigated cases, the courts recognised that licensed OEMs could rely on third parties to manufacture products for their own use. Moreover, in German law, the concept of “have made rights” corresponds to the notion of “extended work bench”, whereby a licensed manufacturer is allowed to have components of the licensed products made by a third-party supplier under its directions/specifications. This third-party supplier would not, however, be allowed to “have made” some of the components it may itself need from manufacturers higher in the supply chain (tier-2 or tier-3) as they would not be part of the extended work bench of the licensed OEM.

A second issue relates to the scope of these have-made rights in terms of what they would allow third parties operating under such an extended work bench model to do. Here again, these have-made rights would be restrictive in that they would only allow the tier-1 supplier to the licensed OEM to produce components for the sole use of that OEM. In other words, the third-party supplier would not be allowed to produce components for other OEMs (unless they are also operating as an extended work bench for this OEM) or to produce components to be sold through traders on the open market.

Thus, with respect to connectivity solutions, it seems that the granting of have-made rights to an automotive OEMs would allow the OEMs to immunize from infringement manufacturers of TCUs for the TCUs specifically produced for the OEM’s vehicles. However, the OEM or its Tier-1 suppliers would not be able to immunize their suppliers higher in the supply chain, such as for instance NADs or modem manufacturers, which would therefore be exposed to a serious risk of infringement proceedings.

The market consequences of tolerating Nokia’s approach would therefore be significant. First, while have made rights could potentially immunise Tier-1 TCU suppliers from infringement proceedings, they would still be unlicensed (as operating under have-made rights is not operating under a license), and their commercial margin of manoeuvre would be narrow. Second, Tier-1 suppliers would be immunized from infringement only as long as the automotive OEM for which they operate as an extended workbench are licensed. If for some reason the OEM was no longer licensed or breached the terms of its license, they would be exposed to infringement proceedings. Third, this approach would rigidify or even make impossible trade in connectivity components as the production and sale of such components would always have to be made in the context of an extended workbench relationship. Fourth, have-made rights would not immunize from infringements manufacturers of components that are higher in the supply chain as their production would not fall under these rights. Thus, it is not clear how a Tier-1 supplier that does not produce NADs or modems could lawfully acquire such components from companies, such as Samsung, Huawei or LG. This would call for vertical integration even when it is inefficient. In other words, have-made rights limit the commercial scope of Tier-1 TCU suppliers and do nothing to allow Tier-2 and Tier-3 suppliers to lawfully manufacture and sell their components down the supply chain.

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Sunday, March 8, 2020

Timing and political affiliations may favor FTC in en banc review of panel decision in Qualcomm case

This is the third post today on FTC v. Qualcomm. I previously discussed the scenario of a remand of the contract law part of the case to the district court (summary judgment on chipset licensing) and the difficulties that judges with a non-expansive approach to antitrust law have with the broad "No License-No Chips" part of the FTC's case.

There are various possibilities and permutations as to what could happen next. But for the reasons outlined in the two previous posts, a remand of the contract law part is somewhat (though not overwhelmingly) probable, and a reversal of the "No License-No Chips" part fairly likely, as far as the panel that heard the case last month is concerned.

The FTC has five commissioners: three Republicans and two Democrats. The Democratic minority supports this case; the Republican majority doesn't, but Chairman Simons recused himself, so the "red" commissioners can't outvote the "blue" ones. There's a stalemate. The Democrats can block a settlement, or a decision to drop the case--but they can just keep defending the pending case.

What I still haven't been able to find out is whether the FTC could even file a petition for writ of certiorari (request for Supreme Court review) without holding another vote. If anyone knows the answer, please let me know (such as via my contact form).

One thing the Democrats at the FTC certainly wouldn't be able to do under the current circumstances is to bring a follow-on case for 5G, should the appeals court determine that the injunction entered by Judge Koh doesn't apply to 5G. While Qualcomm conceded on appeal that it had a monopoly in the two relevant markets defined by the FTC, those were WCDMA and 4G/LTE markets.

Apart from the fact that Qualcomm needs to keep fighting the contract law part of the case (licensing rival chipset makers), a settlement would make a lot of sense for both sides. But the Democratic FTC minority might not want to do that unless President Trump gets reelected, in which case the Democrats at the FTC would be more interested in a face-saving exit.

The panel that heard the case last month will need some time. It's a complex case as the presiding circuit judge, Judge Johnnie Rawlinson, noted at the end of the hearing. I guess we'll see a panel decision in June or July.

Assuming that the FTC loses at least in part (wholesale affirmance really appears extremely unlikely based on how the hearing went), it may very well seek an en banc review--and if it files a petition, I think it's quite likely that many circuit judges will vote in favor. The Ninth Circuit is such a large appeals court that it won't be a full-court review. But with 11 judges picked from a pool in which there are still more Democrats than Republicans, it's unlikely Qualcomm will get lucky again. Qualcomm already benefited from a conservative majority last summer when its motion to stay was granted (any panel might have done so, even one consisting of three Democrats, but the impact of the DOJ's submission was visibly massive). And now the merits panel consists of two Republicans and probably the most conservative Democrat among all federal judges on the West Coast. Statistically, an en banc panel will be virtually certain to have a Democratic majority unless someone manages to game the system.

Qualcomm's allies (those writing op-eds, in particular) repeatedly portrayed FTC v. Qualcomm as an "Obama case." That PR strategy could hurt Qualcomm in an en banc scenario. And regardless of whether the judges would view this one as an "Obama case," or see the DOJ's support of Qualcomm as a "Trump campaign," Democrats are always more likely than Republicans to support novel, aggressive, expansive antitrust theories.

Even if the en banc didn't improve the outcome for the FTC, the passage of time would have value in itself for the Democratic FTC minority: in the meantime, the presidential elections would take place. It's no secret that I hope (though for different reasons than this antitrust case) that President Trump will be reelected. Should "Quid pro quo Joe" run against him, many people may realize whose dealings (via his son) with Ukraine raised the far more serious issues. But Democratic voter turnout will probably be very high. And between now and November, anything can happen, even a global economic crisis due to the coronavirus, which in turn could affect the outcome of the presidential election.

I wish to stress that in an ideal world, politics wouldn't affect antitrust enforcement. But in the world in which we live, especially when a case has been politicized like this one (by others than me), political factors can't be ignored. It's just about figuring out what may happen next and why.

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FTC's "No License-No Chips" theory in Qualcomm case may have been too aggressive to be affirmed

For the technology industry, the question of whether rival chipset makers are entitled to a FRAND license to Qualcomm's cellular standard-essential patents (SEPs) is the commercially most relevant part of the case. I just wrote about it in the previous post (the first one of a series of three posts on FTC v. Qualcomm as a follow-up to last month's appellate hearing). But chipset-level licensing has become a question of contract law, with or without a potential antitrust add-on. From a pure antitrust point of view, "No License-No Chips" is the centerpiece of FTC v. Qualcomm. Exclusive dealing, which allegedly delayed Intel's entry into the premium LTE chipset market, is more of a historic thing than something that would make much of a difference for the future (which is why I'm not even going to discuss it here).

"No License-No Chips" is Qualcomm's practice of separately collecting patent royalties on its chip. If Qualcomm just sold its chips without previously signing a patent license agreement, its patent rights would be exhausted. Normally, tech products are sold and the price covers the intellectual property involved. But Qualcomm has always done it differently in the cellular baseband market (though not in other business areas), and very successfully so.

Trial testimony was consistent and clear: many companies bowed to Qualcomm's royalty demands only because they needed Qualcomm's chips. Then they were stuck with license agreements that also applied to any devices they'd ship with baseband chips made by other companies than Qualcomm.

The FTC argued--and Judge Lucy H. Koh agreed--that this resulted in a surcharge: patent royalties were inflated by shifting a part of the monopoly chipset price to Qualcomm's licensing division.

Reasonable people can disagree on whether this practice constitutes an illegal practice of the "raising rivals' costs" (RRC) kind as the FTC alleged and Judge Koh held.

The Ninth Circuit panel that heard the case last month consisted of one judge who views the FTC case as a "house of cards" (Judge Consuelo Callahan), one judge who was unconvinced of the FTC's argument to say the least (Judge Johnnie Rawlinson), and Judge Stephen Murphy III, who is normally a district judge himself (Eastern District of Michigan) and a bit more deferential to Judge Koh's ruling than the two circuit judges. All in all, a reversal of the "No License-No Chips" part is significantly more likely than affirmance.

Other trial reports than mine made it sound like the FTC had already lost. Apart from the fact that the court took no position on chipset-level licensing (see my previous post), I believe the jury--in this case, the panel--is still out. Yes, Judge Callahan may very well get support from Judge Rawlinson, in which case a unanimous decision (with Judge Murphy II likely joining them) is possible. But even when I watched the recording of the hearing again this week, I felt that Judge Rawlinson wasn't near-certain to reverse. The hearing made the FTC's position look weaker than it is. Qualcomm was represented by a world-class lawyer, Thomas Goldstein, who made it extremely easy for the court to agree with him, while an academic representing the FTC, Brian Fletcher, made it unnecessarily hard for the judges to follow. And Judge Callahan was totally in the tank for Qualcomm and hostile to the FTC ("the house of cards starts to fall"), even arguing that Qualcomm dealing with Apple would be like David and Goliath, but there was no one on the bench who would have supported the FTC. Still, it's not a given that Judge Callahan will find another judge to form a majority with her on everything. On some aspects, probably. But not necessarily on all.

Raising rivals' costs (RRC) is a recognized theory in the monopoly-maintenance context. RRC has major advantages for monopolists over predatory pricing--above all, it's profitable in the short term, not only in the long term when others may have exited the market or may have been marginalized. Back in 1983, an FTC working paper already mentioned patentable inventions as a potential vehicle for RRC schemes.

Qualcomm's appellate strategy emphasized that the FTC had allegedly failed to prove a surcharge. But at the hearing, things appeared to go even better for Qualcomm: the judges seemed to doubt that even if there had been supra-FRAND royalties, those would have constituted a tax on rivals as opposed to simply effective patent monetization.

The FTC's "No License-No Chips" theory was optimized for judges who favor a rather expansive view of antitrust law: liberals, typically. But not for conservatives. In my next post I'll get back to the political implications, given that there could be an en banc review by 11 judges (not three), with a Democratic majority being very likely.

When asked for case law above the level of a district court that would support the "No License-No Chips" part of Judge Koh's ruling, the FTC's special counsel, Professor Fletcher, gave the 1922 United Shoe Machinery v. United States decision by the Supreme Court. The fact that it's almost 100 years old (old law can still be good law) is less of a concern than the following aspects:

  1. The patent royalty collected "on shoes operated upon by competing machines" was just part of a set of seven "restrictive [contractual] provisions," which were "tied together."

  2. As Qualcomm noted in its reply brief on appeal, United Shoe just like the Caldera case from the District of Utah regarding Microsoft's per-device operating system license fee are different from Qualcomm's business model because United Shoe and Microsoft were fully paid when competing products were used, while Qualcomm receives only its full patent royalty, but the chipset purchase price goes to a rival.

  3. The district court decision in United Shoe (which the Supreme Court affirmed) explicitly allowed the offender to license its patents on "reasonable nondiscriminatory" (RAND has a long tradition in antitrust law) terms.

The circuit judges didn't seem to be concerned about profit shifting from one Qualcomm division (chipsets) to another (licensing). And their thinking apparently is that any concerns over excessive royalties need to be addressed in patent infringement cases. The FTC's special counsel argued that companies can't challenge Qualcomm's terms because they need uninterrupted chipset supplies. But there was no indication of the court buying that argument to the extent that it would deem antitrust intervention necessary.

Upon further reflection, I have concluded that the FTC probably should have taken a more conservative (in every sense of the word) approach to "No License-No Chips." Qualcomm does have some arguments that aren't easily countered. For instance, Qualcomm has also concluded license agreements on its terms with companies that weren't dependent on their chipsets at the relevant time. Those companies might simply have accepted those terms because any royalty determination by a court would be very much based on an analysis of the terms of comparable agreements. There might have been other reasons. And an excessive royalty isn't less excessive just because some people accept it. But those are circumstances that really make it hard to prove any wrongdoing on Qualcomm's part. Being greedy is what companies are supposed to be.

Instead of arguing that Qualcomm's practice of charging patent royalties separately from, and as a precondition to, chipset sales is generally illegal, the FTC could--and with a view to conservative judges should--have focused on only the combination of that practice with rebates. Those rebates were granted in exchange for exclusivity and/or co-marketing commitments. With rebates involved, there is a case that competitors couldn't sell their products on a commercially viable basis. The FTC's case does raise the issue of those rebates (incentive payments), but just as a factor that exacerbates the situation. What I feel is that the FTC's basic "No License-No Chips" scenario should have included rebates.

Last fall, the American Antitrust Institute (AAI) and Public Knowledge (PK) submitted an amicus curiae brief in support of the FTC that illustrated the impact of "No License-No Chips" in conjunction with rebates (this post continues below the document):

The AAI/PK brief explained the numbers as follows:

"The illustration shows that if Qualcomm had charged a monopoly chipset price and a FRAND royalty, as were its right and voluntary contractual commitment, respectively, then Qualcomm would have faced pressure to drop its $30 all-in price to match its competitors’ $21 all-in price. However, because Qualcomm imposed a surcharge on its SEP royalty along with an exclusivity rebate, Qualcomm was able to maintain its all-in monopoly price of $30 while forcing up the all-in costs of its rivals' products to the higher level of $31, at which they would not be viable. As a result, entry is deterred."

Professor Fletcher also mentioned those rebates, but almost as an afterthought, or an add-on. The case (going back to the original complaint, long before Professor Fletcher represented the FTC) would have been narrower--but more solid--if the FTC had focused on the scenario the AAI/PK amicus brief outlined so well.

Otherwise, the FTC needs a court that is prepared to adopt novel theories that are somewhat aggressive and ambitious.

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The FTC's most (and potentially only) important achievement in its Qualcomm litigation may be a contract interpretation, not an antitrust ruling

This is the first of three posts today on FTC v. Qualcomm, which the United States Court of Appeals for the Ninth Circuit heard last month. The second post will discuss the "No License-No Chips" part of the case, and the third one will have a proedural and political focus.

Since it was founded almost 106 years ago, the Federal Trade Commission's task has been a mix of antitrust enforcement and consumer protection. It would be an oddity--but not an improbable outcome as things stand now--if FTC v. Qualcomm ended up making an impact only by means of providing clarification of a matter of contract law.

I'd actually have liked a compulsory-licensing type of ruling to come out of this case. I do see the point in enforcing FRAND licensing commitments under contract law, but an additional avenue would have been desirable--and in cases where a patent is standard-essential but no FRAND plecge was made, there must be a way to compell a patentee to grant licenses on FRAND terms. It turned out, however, that I'd have to keep waiting for some other case to have that effect:

  • Judge Lucy H. Koh of the United States District Court for the Northern District of California held Qualcomm in violation of antitrust law for refusing to license rival chipset makers, but did so under Aspen Skiing, which requires a party, among other things, to abandon a prior profitable course of dealing in hopes of making more money further down the road after having eliminated or fundamentally weakened a rival. That's a very fact-specific, historic, behavioral inquiry and could never be the U.S. equivalent of the Court of Justice of the EU's Huawei v. ZTE ruling, which clarified that SEP holders, under EU competition law, must grant licenses on FRAND terms to all comers.

  • The Federal Trade Commission didn't even want to make an attempt to defend Judge Koh's Aspen-based holding. Instead, the FTC presented to the Ninth Circuit an alternative theory with an allegedly lower standard to meet: by not honoring contractual commitments to grant licenses, Qualcomm allegedly committed an antitrust violation (in addition to a breach of contract). While antitrust liability could serve as an additional deterrent against a refusal to grant licenses, this theory--even if it succeeded--wouldn't entitle anyone to a license who isn't already entitled under contract law anyway.

At last month's hearing, the Ninth Circuit didn't discuss the merits of the first question it has to decide in this context: whether or not to vacate the 2018 summary judgment according to which Qualcomm had an obligation under its FRAND licensing pledges to two U.S. standard development organizations (ATIS and TIA) to license rival chipset makers. The judges were merely interested in the procedural aspects, and didn't even spend much time on that one as they focused on "No License-No Chips" (the topic of my next post).

The court's procedural focus may--but need not--mean that the panel believes there were triable issues (especially the technical question of whether the cellular SEPs at issue are actually practiced by a baseband chip). If a trial is deemed necessary to discuss technical and potentially other facts (such as industry practice), that part of the case goes back to the district court. There was no summary judgment motion by Qualcomm asking the district court to hold that Qualcomm did not have such an obligation. So the appeals court couldn't resolve this question of contract law in Qualcomm's favor. It could resolve it in the FTC's favor by affirming the summary judgment, but the only alternative is a remand.

The FTC's right-for-the-wrong-reasons theory falls if a retrial--actually, the first trial on contract interpretation in this case--results in a finding (supposing it isn't overturned on appeal) that Qualcomm had no such obligation. Then Qualcomm's refusal to grant licenses wouldn't constitute an antitrust violation under the FTC's theory.

Assuming the Ninth Circuit decides to remand the contract interpretation question, it can just wait whether that part of the case ever comes back, and determine the derivative matter of an antitrust violation (based on a breach of contract) later. But the appeals court could also make it clear at the time of a remand that the contract interpretation question won't result in a holding of an antitrust violation in any event.

Given that this is a huge case, I guess the appeals court won't resolve more than is necessary at a particular stage of proceeding. That's just a guess, though.

If the appeals court sent the contract interpretation back to the district court but already made it clear that there won't be an antitrust violation in the chipset-licensing context no matter what, the FTC would have to spend tax dollars litigating a question that would be outside the scope of its mission. However, the FTC could theoretically appeal such a Ninth Circuit ruling to the Supreme Court, and on that basis could justify the further pursuit of this contract law issue.

For Qualcomm it's extremely important to get that summary judgment overturned. While it's a contract-specific holding, it would sooner or later result in some other chipset maker suing Qualcomm in California for a license (just like automotive supplier Continental is suing Nokia and other Avanci patent pool members--initially they brought the complaint in California, but it got transferred to Texas--on that basis).

This part of the case can't be settled in a way that solves the problem for Qualcomm. Even if the FTC dropped its case, other parties would still point to that summary judgment. Qualcomm could argue that it never took effect as a result of a settlement, but that would be a formalistic perspective. So Qualcomm needs to get--and to win--a trial on this issue.

In 2018, the FTC and Qualcomm asked Judge Koh to stay the case with respect to the then-pending summary judgment motion. Judge Koh declined what I called "litigation à la carte." At the time, the parties knew that if summary judgment would (as it then did) be entered, it would complicate any settlement efforts because Qualcomm would have no choice but to fight that particular decision.

As Qualcomm once told the IRS, it's "humongously more lucrative" to license only end-product makers, not chipset suppliers. At a minimum, Qualcomm would want to reach the point at which any chipset maker contemplating a contract lawsuit to get a license would face the uncertainty of a trial. If the Ninth Circuit vacated that summary judgment, Qualcomm might already be interested in settling this part of the case as well.

A trial always comes with considerable uncertainty, but Qualcomm would face major hurdles. Its own practice of obtaining exhaustive chipset-level licenses ("more equal than others") is at least a psychological problem. On the technical side, Qualcomm would have to present some cellular SEPs that are not implemented by a baseband chip but require additional hardware. The cellular SEPs-in-suit I've seen so far, including Nokia's ten patents-in-suit against Daimler, are baseband chip patents, as Qualcomm's German counsel--in that case, representing Daimler--noted last year.

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