Thursday, April 30, 2020

Nokia's patent assertion tactics conflict with von der Leyen's environmental and Vestager's industrial policy goals

Daimler brought its EU antitrust complaint against Nokia in 2018, and the Euporean Commission is still dragging its feet while another court decision (Nokia v. Daimler, scheduled for May 20) is around the corner. Just for a few seconds, let's imagine an alternative universe in which the target of the complaints would have been a cellular SEP holder like Qualcomm, InterDigital, Huawei, or LG--as opposed to Nokia. Those organizations, especially the American ones, might already have been fined by now, or at a minimum they'd have received a strong Statement of Objections (SO). But Nokia and, by extension, Ericsson benefit from such an obvious and indefensible kind of protectionism that this situation threatens to wreak havoc to the EU Commission's credibility as a competition watchdog on the global stage.

So Daimler's and its suppliers' tough luck here is that shrinking Nordic companies are above EU law in the eyes of some people in Brussels--according to what I've heard from a variety of sources, Nokia can also count on French commissioner Thierry Breton, who has a telecoms background that appears to be infinitely more important to him and his cabinet than the importance of the automotive industry to Europe as a whole and his native France. As an EU commissioner, he's supposed to focus on the European interest, which he is apparently not doing; and as a French appointee, there is a natural expectation in his country that he would keep French industrial interests in mind as opposed to personal preferences or loyalty conflicts.

But instead of regretting Daimler's and its suppliers' (politically, not legally) wrong choice by complaining about Nokia first, the Commission should also look at it from another angle: Nokia self-servingly seeks to leverage its increasingly-devalued patent portfolio without giving a damn about the EU's economic interests and the Commission's overarching policy goals.

  1. There's a simple reason for which Nokia decided to sue Daimler prior to any other automaker on this planet and previously bullied Volkswagen and BMW--two rather cowardly organizations--into Avanci license agreements of limited scope. That reason is Germany's unbalanced patent litigation system. While it's obvious that a patent holder like Nokia would firstly go after premium car makers in order to establish high royalty amounts, those three German corporations aren't the only ones operating in that segment. Nokia could have sued some non-European brands first, but preferred to go to Germany because an injunction in that country would give them maximum leverage over a company with major manufacturing operations and logistics centers in that country.

    As I mentioned in previous posts, Germany won't make more than a negligible modification to its patent injunction regime. Nokia is lobbying very actively for the status quo. In fact, I personally participated in a WebEx conference in which Nokia's chief in-house litigator, Dr. Clemens Heusch, lobbied the German parliament to ensure patents would remain superstrong in Germany.

    By milking and suing European companies that are falling behind in terms of digital technologies and need resources to confront some fundamental challenges, Nokia makes it harder for EU Commission EVP Magrethe Vestager to achieve her vision of "A Europe Fit for the Digital Age."

  2. As automotive supplier Continental publicly stated in March, Nokia's refusal to provide the prereqisite degree of legal and financial certainty to everyone in the supply chain has already prevented innovation from happening--digital innovation that in some cases has direct environmental impact.

    By impeding digital and environmentally-friendly innovation on the part of automotive suppliers like Continental, Nokia's patent licensing tactics run counter to both Commission President Ursula von der Leyen's "EU Green Deal" and Commission EVP Magrethe Vestager's "A Europe Fit for the Digital Age" policies.

  3. As I reported yesterday, the Avanci patent pool/platform, whose primary purpose it is to advance Nokia's (and Ericsson's, Qualcomm's etc.) agenda of refusing to license component makers, has singled out Tesla as its next target for its patent attacks. It doesn't even matter whether those parties explicitly coordinated their lawsuits or simply act uniformly because of a shared strategic interest. Either way, they've decided to gang up on Tesla like a clan of hyenas.

    While Nokia itself isn't suing Tesla yet, Nokia patents are being asserted against Tesla by Sisvel as well as Conversant, with the latter being a Nokia front no matter how much Nokia disowns its privateer. And even Nokia itself apears to have bullied Tesla before based on what I hear (and what I conclude from what was discussed in the closed-door part of a Nokia v. Daimler trial in Munich).

    Many patent holders (this also applies to owners of non-standard-essential patents) consider Tesla a perfect target: they believe it may be somewhat soft because it's a small organization regardless of its market capitalization being about as high as the aggregate of the caps of VW, BMW, and Daimler; and they know that Tesla is a company everyone's watching closely in the industry.

    By choosing Tesla its next strategic target after those German car makers, Nokia--directly and indirectly--attacks the most innovative company in the automotive sector (which even invests big-time in Europe) instead of letting Tesla focus on what it's best at: eliminating automotive emissions and keeping up the pressure on the car industry at large to abandon combustion engines.

    Targeting Tesla after Daimler creates another conflict between Nokia's opportunistic patent monetization tactics and Commission President von der Leyen's EU Green Deal policy agenda.

Nokia is being very inconsiderate, so the Commission should take off its velvet gloves, focus on the actual issues, and just disregard the countries in which the different parties are based. Europe doesn't even own 15% of all 5G patents, so from a strategic point of view, patent abuse by non-EU companies poses a several times greater threat than whatever Nokia and Ericsson are doing.

That said, it would of course be desirable for Europe to slow down Nokia's and Ericsson's demise, or to enable them to grow again. But there's a right way and a wrong way to do it. Condoning SEP abuse is a bad deal for Europe on the bottom line.

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Wednesday, April 29, 2020

Avanci conflict with Tesla escalates as Nokia-fed patent troll Conversant sues Tesla in Texas and Germany

Avanci, which usually refers to itself as a licensing "platform" though its lawyers also described it as a "pool" in at least one U.S. court filing, offers a license to cellular SEPs held by a group whose key members are notorious standard-essential patent (SEP) abusers such as Nokia and Ericsson as well as some trolls they fed with patents. Various additional patents have been contributed by numerous organizations, such as Deutsche Telekom, that elected to come in for convenience and lack the strategic sophistication and foresight to realize the Avanci approach (of refusing to extend licenses to component makers) runs counter to their interests.

One Avanci member, Foxconn-owned Sharp, sued Tesla in Japan last month, requesting the Tokyo District Court to impose an import ban. Sisvel, a patent troll and Avanci member, sued Tesla in the District of Delaware in December over former Nokia patents. Yet another Avanci member, Nokia, may have an interim agreement with Tesla in place as an unnamed American car maker "X" was referenced in the public part of a Nokia v. Daimler trial in Munich in February; should Tesla have been that mysterious U.S. company, then they actually provided a fair amount of information that Daimler presented to the Munich court while the courtroom was sealed. And now we're witnessing an all-out Avanci v. Tesla patent litigation campaign as Conversant Wireless Licensing is asserting various Nokia patents against Tesla in two complaints filed in the Western District of Texas last week (this post continues below the two documents):

20-04-24 TXWD20cv323 Conver... by Florian Mueller on Scribd

20-04-24 TXWD20cv324 Conver... by Florian Mueller on Scribd

Conversant previously filed some German SEP lawsuits against Tesla as well:

"After no further communication from Tesla, on or about February 26, 2020, Conversant filed patent infringement complaints against Tesla, Inc. and its German subsidiary Tesla Germany GmbH before the Manheim [sic] Regional Court in Germany."

The correct spelling of the German city name is, of course, Mannheim. There are a few towns named "Manheim" in the U.S., but anyone who's ever driven from O'Hare Airport to downtown Chicago has seen "Mannheim Road".

I'm trying to find out how many cases Conversant brought in Mannheim, and what the patents-in-suit are. I just emailed the Mannheim Regional Court's spokesman before writing this post. At this stage the Mannheim court can't provide case and patent numbers, but I hope this will change in the months ahead.

The combination of Sharp and Conversant suing Tesla in different jurisdictions is the usual bulling with which Avanci is trying to coerce Daimler into a SEP license agreement on supra-FRAND terms while the likes of Nokia and its trolls refuse to license automotive suppliers, an issue that I hope Tesla will raise as well. Tesla is far more of a digital company than Daimler and therefore may be vertically more integrated with respect to cellular data communications, so it wouldn't surprise me should Tesla not buy telematics control units (TCUs) from the likes of Continental, but even Tesla won't make its own baseband chips. In contravention of its FRAND licensing obligations, Nokia licenses only end-product makers.

With respect to component-level licensing, a new academic paper was published yesterday in reply to a write-up by Nokia's outside counsel (which also mentioned this blog because of a recent post).

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Tuesday, April 28, 2020

The most lucrative patent shakedown strategy against German corporations: sue their CEOs

According to conventional wisdom, the way to extract patent royalties from German corporations is the pursuit of injunctive relief. While a reform process is underway, the corridor for any "reform" (a misnomer, thus in quotes) is so very narrow that it won't have any impact on negotiation dynamics. The pro-reform camp missed the opportunity: instead of acting like piranhas that smell blood in the water and then kill their prey, they kept making the kinds of modest political demands (only ultra-rare exceptions for extreme cases of egregiously abusive conduct) with which they got the reform process started, and they continued to limit themselves by operating only within the framework of associations (a recipe for failure). Now it's too late to move into a higher gear, and the German patent injunction regime is here to stay.

But most patent assertion entities have failed to identify and seize what would likely result in even higher royalty payments by German (and to some extent other European) companies, even though proof of concept was delivered more than six years ago. Admittedly, I didn't know either, though I could have found out as early as in the second half of 2013, but (in my defense) that's because I focus primarily on disputes between large operating companies rather than on patent troll cases.

In the summer of 2013, Reuters reported: "IPCom lands cash bonanza from D[eutsche] Telekom settlement." The deal settled all 20 cases between Fortress-funded IPCom (which was asserting former Bosch patents) and Deutsche Telekom. The financial terms weren't disclosed but two sources told Reuters that IPCom was going to receive "a low-to-medium triple-digit million euro" amount. (This blog, too, reported on the settlement.)

I remember overhearing a conversation between lawyers in Mannheim (just before some other trial) who defended other parties, such as HTC, against IPCom. Nokia and HTC defended themselves against IPCom for many years, and numerous parties intervened in various IPCom cases, particularly the cases against carriers. So there were a lot of patent litigators in Germany who had knowledge of where those cases stood, and they weren't impressed with the headway IPCom had made at the given time. Against that backdrop, they were all puzzled as to why Deutsche Telekom would, without an injunction looming large, cough up a rumored amount of hundreds of millions of euros.

The answer: a "CEO suit" strategy played out perfectly for the patent assertion entity. One might also call it the "sleepless nights" strategy.

Deutsche Telekom's 2012 Annual Report (PDF, in German) contained the following passage on patent-related risks (page 163; click on the image to enlarge; this post continues below the image):

The passage I underlined in that screenshot states that IPCom sued not only Deutsche Telekom but also "individual members of its executive board" (in the U.S., one would colloquially call them "C-level execs").

One of those individual defendants was then-CEO René Obermann, who served from late 2006 until the end of 2013. So the settlement fell into place a few months before Mr. Obermann would no longer have been covered by Deutsche Telekom's D&O (directors & officers liability insurance). If IPCom had prevailed after he left Deutsche Telekom, he'd have ended up with a potentially ruinous financial liability. He'd have gone from being a multi-millionaire to personal bankruptcy in an instant.

When the end of his term was approaching, he increasingly got nervous about the fact that the dispute with IPCom hadn't been settled yet. IPCom capitalized on this factor, big-time.

Most likely, this was by far and away the biggest license deal IPCom ever struck, despite the fact that there was no realistic chance that IPCom would have obtained and enforced an injunction anytime soon.

Under German patent law, members of the executive board are personally liable, a fact that patent holders can exploit. However, it works only against executives who live in Germany or at least some other EU member state. Otherwise, cross-border enforcement is unlikely to succeed. Hypothetically speaking, enforcement against a U.S.-based CEO would probably work only if he flew to Germany on a private jet that could be confiscated. The managing directors of local subsidiaries can be sued, but only if their entities actually sell products--not if they are merely marketing agencies within a global group structure.

Germany- and EU-based C-level executives can also be scared into settlements by threatening with criminal action. Willful patent infringements are a punishable crime in Germany (and the pseudo-reform that is in the making won't change a thing about that either), though the hurdle is reasonably high.

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Sunday, April 26, 2020

German patent reform process is already over before it's formally begun: automatic injunctions are here to stay

In the most formalistic sense, the German patent reform process will only begin when the federal government (with the Federal Ministry of Justice having the lead on this subject) officially relays its legislative proposal to the country's two legislative bodies, the Bundesrat (Federal Council), which could theoretically veto it (though its veto would be easily overruled) and the Bundestag (Federal Parliament). Despite the corona crisis, that's still likely to happen before the summer hiatus.

But in political terms, it's game over for the pro-reform camp. (I was going to say "pro-reform forces," but they're far too weak to justify that label.)

Merkel's party, the nominally conservative Christian Democratic Union (CDU), has already decided to support in the parliamentary process what the ministry outlined back in January (led by the junior coalition partner, the center-left Social Democratic Party). The ministry made it clear that it merely sought to clarify the law as it stands, and leading German patent litigators have confirmed this blog's analysis that it won't change anything, or only have minimal impact at best (which took some of the pro-reform people weeks or months to understand, and some are so analytically challenged that they haven't even grasped it by now and probably never will). The CDU definitely wants to preserve Germany's system of (near-)automatic patent injunctions across all industries regardless of complaints by automotive and other companies over a dysbalance. Only extreme cases that legally qualify as abuse should give rise to further analysis; contrary to Article 3 of the EU's Intellectual Property Rights Enforcement Directive, the CDU opposes a mandatory proportionality analysis.

I can't provide verbatim quotes here because of a request to treat certain statements confidential, though a WebEx conference call with two members of parliament, three parliamentary advisers, and about two dozen industry representatives on the line is a semi-public event on the bottom line, as the organizers well recognized. (Their insistence on a somewhat confidential treatment is undemocratic at best, unconstitutional at worst.)

The "debate" is now about minor editorial changes that won't impact the outcome of a significant number of cases and, therefore, won't put defendants in a better position when negotiating settlements.

The formal vote will probably be held in the fourth quarter of this year, or maybe in early 2021. There will be new elections in the fall of 2021, so if the fallout from the corona crisis requires the executive and legislative branches of government's nearly-undivided attention for several more quarters, discontinuity might derail the process, which would be preferable over the kind of decision that would be made during this term without the slightest doubt.

It wouldn't have been impossible to convince the Federal Parliament of Germany of the need for a paradigm shift away from the "Property Rule" (which the CDU still seeks to uphold). I was one of only two activists to achieve a unanimous resolution (against software patents) by the same legislative body in 2005, and in 2013 a similar resolution was adopted thanks to the late Jimmy Schulz. But the people advocating proportionality are, by and large, political novices who lack almost everything it takes to overcome the mendacious but effective resistance by the likes of Siemens, Nokia, and Ericsson. Germany's pharmaceutical and chemical industries also seek to preserve the status quo, but with a more intelligent and differentiated approach it would have been possible to address their (legitimate!) concerns over collateral damage from a statute favoring the interests of makers of highly multifunctional products.

The performance of those pro-reform advocates is more pathetic than anything I've ever seen in a comparable context (apart from the fact that they got the process started at all, which is remarkable but will ultimately be pointless). They have no one to blame but themselves. I know that some of them will try to spin-doctor their defeat into a victory, but you can all rest assured that this blog is going to tell it like it is.

The influence of patent trolls on both the Federal Ministry of Justice and the Federal Ministry of Econmics is shocking. Sisvel was the only company invited to a roundtable by the former (other companies were only allowed to participate to the extent their employees represented industry bodies), and Fraunhofer advises the latter. If the pro-reform camp wasn't as uncapable as it is, it would have been vocal about this issue, but weaklings don't win ball games. (A number of them are so unbelievably clueless and incompetent that the verb "to orchestrate" isn't even part of their political vocabulary; they play the game at a lower level than high school students campaigning for a local cause.)

So the problem will persist, and many will suffer. A solution is not going to come during this legislative term short of some German courts handing down spectacular patent injunctions this year that would lead to second thoughts among Berlin decision-makers. As I said before, the best scenario of those that aren't entirely unrealistic would be for the process to be derailed by corona like so many other initiatives, but most likely this will just go through as a low-priority item that will be considered uncontroversial because those who disagree don't have what it takes to make their presence felt and their positions clear. In the event of adoption in 2020 or 2021, those who want meaningful reform will have to go back to the executive and legislative branches of government next term and push for an upgrade. Additionally or alternatively, some might opt to challenge Germany's (near-)automatic patent injunctions under EU law. Just like Germany's disastrous Orange-Book-Standard approach to standard-essential patent (SEP) injunctions never got fixed within Germany until the European Commission and, especially, the Court of Justice of the EU set the record straight, the wider problem of automatic patent injunctions might also be solved through litigation--not legislation, and much less through national case law--somewhere further down the road.

Where things stand now, any pro-reform advocacy is futile. No one can help a bunch of misguided companies that obsequiously thank their government for backing mostly foreign patent trolls and failed businesses increasingly reliant upon a troll-like business model. I had actually started to prepare an initative but decided to fold it before it got off the ground because it's pointless under the circumstances, and I have more exciting and promising things to do, part of which you'll read about soon. That said, I will continue to comment on the process, but this blog was never intended to influence German politics--as its language demonstrates.

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Thursday, April 23, 2020

Europe's top three digital industry challenges: automotive; automotive; and don't forget, automotive

European Commission EVP Margrethe Vestager's mission statement is found on her homepage: "A Europe Fit for the Digital Age" That, of course, is easier said than done, given that the digital economies of both the United States and East Asia are far, far ahead of the European Union. There's no European Google, Apple, Facebook, Twitter, Amazon, eBay, Uber, AirBnB, whatever. No European cloud. No European smartphones (practically speaking). And U.S. tech giants employ far more top-notch researchers than all of the world's universities combined, which is just one of various factors contributing to the brain drain affecting Europe (and for which Africa--let alone sub-Saharan Africa--is never going to provide an adequate replacement).

"Incredible Shrinking Europe" (as the WSJ called it) has a rich history and a bleak future. What Mrs. Vestager faces is not merely a Herculean task. Putting Europe on an equal footing with America and East Asia is mission (absolutely) impossible. At the end of her term, Europe will have lost more ground than during the previous decade, no matter how hard she tries. But the EU can at least try to slow down its decline in an increasingly digital economy, and maybe avoid or delay the point at which a future European Commission president--if the EU still exists at that point--will have to fly to Washington DC and Beijing to beg for development aid.

That may sound like an exaggeration, but it's basically where continental Europe is headed in economic terms. In a matter of a few decades, the economic discrepancies between the more advanced parts of the world and Europe will be comparable to today's differences between Europe and, say, Latin America. One of various early indicators is the severe underperformance of continental European students in math (as evidenced by TIMSS), which keeps deteriorating.

The EU is wasting money on such a non-starter as its European Cloud Initiative. I've heard enough about it from industry experts to have no doubt that it's a fool's errand. So let's talk about what the real priority should be.

By far and away the biggest threat Europe faces in connection with an increasingly digital economy is the demise of its automotive industry: a doomsday scenario in which European car makers will suffer the fate of the handset divisions of Siemens, Bosch, Nokia, Ericsson, Philips, and Alcatel--not necessarily in the sense of non-European companies acquiring or licensing their brands, but the likes of Google (as the recent Android Auto deal with BMW already shows) will own the digital services, which is where the high returns, network effects, and most of customers' loyalty (even a lock-in at some point) will be, while some European companies will go out of business and others will just be making the low-margin parts that don't provide much differentiation. There's plenty of portents that this might actually happen. Not during Mrs. Vestager's term, but not to so long thereafter that she might not end up being considered one of the EU leaders who missed the last chance to avert a catastrophe comparable to the dinosaur extinction.

In fields like digital platforms, the EU has no chance to make headway, which is bad enough. But when it comes to automotive, it stands everything--its "automojo" if you will--to lose. Last month I pointed to some numbers that show how incredibly important the automotive sector is to the European economy (and, by extension, society). But that industry is being affected by digitization at a breathtaking pace and, as a result, is basically getting absorbed by the informations and communications technology (ICT) sector.

The European Commission would have to be asleep at the steering wheel not to make the automotive industry its #1 priority with respect to digital-industry policies. Cars are smartphones on wheels, software is increasingly in the driver's seat, and what most politicians probably don't even know is that the whole business model is going to change. By that I don't primarily mean ride-sharing. Whether future cars will be owned by one household or called on demand, the most lucrative revenue streams will be digital. Today, money is made primarily by selling, maintaining, and repairing the thing. Services (such as navigation) play a minor role. It will be just the opposite in about ten years' time.

Automobiles are the most important category of (increasingly-)digital products in which Europe today has significant market share. But those companies are all on the wrong track. Here's one data point that an analyst recently highlighted to me:

Tesla's market capitalization of US$135B (as of closing on Wednesday) is roughly the same as the aggregate of the market caps of Volkswagen (€64 billion), BMW (€32 billion), and Daimler (€30 billion). Tesla will turn 17 this summer while those three large German automakers are, on average, about 100 years old.

The stock market isn't always right, and it often changes mind. One or more of those traditional automotive companies may at some point stage an Apple- or Microsoft-like comeback. But at this point, and based on the profile of the Old Boys' Network people running those organizations now--there's no reason to be confident it will happen.

The market cap comparison I just drew is not merely about propulsion technologies. To just the same extent, it has to do with the fact that Tesla is truly a digital company, and Tesla will know how to derive digital service revenues from its customer base, while those European companies are still struggling to deliver a great digital experience.

As CEO of Daimler, "Dr. Z" tried to modernize the Mercedes company. He should have started with Daimler's user interfaces, but that was probably a world too far from his area of expertise. He aspired to be unconventional, appearing in sneakers at a Green Party convention, but his 19th-century moustache was a visual symbol of him not being a digital leader. The EU can't force those automotive companies to appoint digital industry executives as their CEOs now (or people with a mixed background, though that may be hard to come by). But at least the EU could and should define the automotive industry as part of the digital sector, and ensure that it won't fall too far behind. Mrs. Vestager chairs the working group of EU commissioners on digital industry affairs ("Commissioners' Group on a Europe Fit for the Digital Age").

This here is separate from how the antitrust laws should be enforced. The focus of this post is purely on industrial policy, regardless of poor structural choices made by the EU when the current Commission was put together.

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Tuesday, April 21, 2020

With new restrictions on standard-essential patent (SEP) injunctions against connected cars and other IoT products, Japan may leave Old Europe behind

Through IAM I became aware of a article on a Japanese policy initiative regarding standard-essential patent (SEP) injunctions in the Internet of Things (IoT) space (including, inter alia, connected cars). I've tapped some other sources to find out about the status of Japanese policy-making in this area.

At the meta level, two differences between the situation in Japan and the one in the Western world are striking:

  1. The new initiative to further restrict access to SEP injunctions comes from the Japan Patent Office (JPO). By contrast, the people working on policy matters at the European Patent Office (under whatever president) and the United States Patent & Trademark Office under Director (and long-time patent trolls' lawyer) Andrei Iancu are pro-patent-holder extremists whose only policy idea is to have more patents, stronger patents, and ever more leverage for owners of patents that for the most part shouldn't have been granted in the first place in light of prior art.

  2. Even other policy-making institutions, such as the leadership of the IP subcommittees of U.S. Congress, the European Commission, or the German Federal Ministry of Justice have yet to acknowledge for the first time in history that it may be smart innovation policy to weaken patent rights. In Japan, an undoubtedly very innovative country, they're ahead of the pack. Especially in Europe, one-dimensional, backwards-oriented thinking is prevalent.

The Nikki article explains in its first paragraph that the JPO is working on a legislative initiative to deny SEP holders access to injunctive relief in cases in which their patents make only a minor contribution to IoT-related devices, which (as the Nikkei article clarifies) also includes connected cars and medical devices. It's hard to imagine a SEP that would not make only a minor contribution to an IoT product. Most SEPs are extremely underwhelming as they cover simple protocols of the "Hello, how are you? -- Thanks, I'm fine, how about you?" kind as opposed to rocket science. Even the few SEPs that are better than that merely constitute parts of standards with respect to which thousands of patents have been declared essential, and for every SEP there would have been numerous--often virtually infinite--numbers of viable alternatives at the time of standardization.

Japan wants its high-tech sector to be among the world leaders in IoT. You hear the same elsewhere, especially in the European Union, where one generation of politicians after the other states the ambition to make the economy more innovative while that continent is falling behind the U.S. and East Asia at a worrying pace. By contrast, Japanese policy makers appear to be prepared to not only talk the talk, but to walk the walk. According to Nikkei, the JPO's IoT-related proposal is envisioned to pass into law in 2021.

A JPO committee has outlined several cornerstones of a 2021 patent reform bill. Patent injunction reform has been discussed internally many times.

Not only is the JPO working on patent injunction reform but Japan's Ministry of Industry and Economy (METI) is drafting recommendations regarding SEP royalty rates.

I know that several Japanese car makers and automotive suppliers are watching with great interest what will come of Daimler's and four of its European suppliers' complaints against Nokia. At this point I'm not aware of official antitrust complaints lodged by Japan's automotive industry with the Japan Fair Trade Commission (JFTC), but anything's possible.

The draft patent reform bill Germany's Federal Ministry of Justice published earlier this year is fundamentally flawed and would likely have zero impact on SEP injunctions according to some leading litigators. While it's possible that Germany will enact a revised patent law slightly ahead of Japan, what actually matters is the impact any reform will have on litigation and, by extension, on licensing discussions that are informed by what would happen in hypothetical litigation. In that regard, Japan's approach looks more visionary for the time being.

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Friday, April 17, 2020

Rumors of Nokia facing hostile takeover bid: skepticism is warranted and competition enforcement can't wait

Nokia's stock price went up yesterday after a TMT Finance report said the company had hired Citi to fend off a hostile takeover bid from an unnamed U.S. private equity fund. The rumored bid could relate to the company as a whole or to specific assets. Nokia declined to comment.

Let's take a quick look at two questions:

I haven't formed an opinion on the reliability of TMT Finance. That website may indeed have scooped all other media on this one.

Richard Kramer of Arete Research, a 20-year-old and highly specialized, independent analyst firm headquartered in London, wrote in a note to his firm's clients that "Nokia is sure to deflect this unwanted attention on multiple grounds." Mr. Kramer then points to Nokia's ownership structure: "Its largest shareholders are local Finnish pensions funds, who are unlikely to just want to cash in." (That's also my impression as I've had conversations with Nokia shareholders on various occasions, and they were all Finnish pension funds.) Nokia shareholders may not be happy with the fact that the company's shares are "down a third on a [12-month] view," but in Mr. Kramer's opinion "this reflects poor execution that [private equity] is not going to resolve quickly, and a messy, protracted effort to buy out an €18bn market cap company would be highly unwelcome with all the other issues a new CEO faces, so we see this as much more of a negative distraction than a signal of underlying value."

That makes sense to me, and I can only add something when it's clearer what the proposed deal structure would look like.

On the antitrust side, this rumor is no reason to delay anything. Much to the contrary, there is a risk of a buyout like this resulting in even more aggressive enforcement. For an example, Nokia's management might want to coerce a number of companies into license deals just to demonstrate to shareholders that this is a stock worth holding on to. If the deal happened, the new owners might ratchet up patent enforcement, or they might sell some or all of Nokia's patents to trolls (a practice called privateering, which Nokia has already engaged in to a large extent).

Cellular SEP licensing is of great concern not only to smartphone and car makers, but also to the wider Internet of Things (IoT) industry. Many (European) companies might face outsized royalty demands, and with most of them being rather small, they actually depend on their suppliers (such as chipmakers) having secured the relevant licenses.

Honest and consistent competition enforcement is always the best choice. Once an antitrust authority allows itself to be swayed by what's going on in the world of corporate finance, there's an increased risk of making bad decisions. There's always going to be some kind of volatility, and buyout offers are one typical imponderability. But what the EU should focus on is what its highest court decided in Huawei v. ZTE (in terms of everyone's access to a FRAND license), and take a principled stance. Next time, the SEP holder in question may not be European: European companies hold fewer than one in six 5G declared-essential patents.

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Tuesday, April 14, 2020

Make Trolls Great Again: Antitrust Assistant Attorney General Makan Delrahim serves Patent Trolls, not President Trump

As the most vocal Trump supporter among intellectual property bloggers, I want Four More Years for #45, but should "Quid pro quo Joe" win, I would take some comfort in the fact that Antitrust AAG Makan "Macomm" Delrahim would have to return to private practice. His shameless and increasingly distasteful pro-patent-troll lobbying is a disgrace for the entire Donald J. Trump Administration. Instead of supporting America's innovation economy and protecting American consumers (all of which is even more important in the face of the coronavirus crisis), he's advancing an agenda that runs counter to the President's focus on creating jobs. Patent trolls are all about rent-seeking for a few shrewd businessmen--Judge Posner likened them to "highwaymen"--and don't create or sustain jobs; the real economy--with Apple and Intel being two particularly good examples--needs to be protected against patent abuse, but the United States now has an "antitrust chief" who couldn't care less about innovation, competition, jobs, and consumer welfare. He's a lobbyist for patent trolls--not because he's got any connection to trolls, but because his former and presumably future client, Qualcomm, shares many strategic interests with trolls, which is why Qualcomm is a member of pro-troll lobbying groups whose membership consists mostly of trolls.

Last month, probably for the first time in U.S. history, the federal government threw its weight behind a dubious foreign organization against two of America's most innovative companies. The DOJ's antitrust division filed a Statement of Interest (i.e., an amicus curiae brief in the name of "the United States") supporting Fortress and its various patent trolls, such as Uniloc, against Apple and Intel. The Uniloc group (just one part of foreign-owned Fortress's holdings) has brought about 600 (!) lawsuits, and courts have exposed some its lies. Just two examples--the first one is about Uniloc's connection to the Eastern District of Texas, which they made up in part just to keep a lawsuit there:

"Mr. Burdick, Uniloc's only party witness residing within the Eastern District of Texas, does not spend the majority of his time in the Plano office. [...] Mr. Burdick spends equally as much time in Plano, as he does in Boise, Idaho and in southern California. [...] In addition, Mr. Etchegoyen [the CEO of Uniloc Luxembourg] spends about twenty percent of his time in either Newport Beach or Irvine, California and owns a residence in Newport Beach, which he uses when he 'is doing business in Orange County.' [...] Both Mr. Burdick and Mr. Etchegoyen have held around one hundred 'top-level strategy meetings' in southern California, for Uniloc business purposes. [...] Mr. Etchegoyen separately travels to southern California every month to meet with Mr. Turner, Uniloc Luxembourg S.A.'s CFO. [...] All of these facts fly in the face of Uniloc's prior representations: that Uniloc had only one full-time employee, Tanya Kiatkulpiboone, working at its office in Irvine, California as of April 2017 [...]; that Mr. Etchegoyen has lived in Hawaii since well before the filing date of the Complaint and does not maintain a residence in California [...]; and that Mr. Burdick does not work in California [...] ; and that Apple 'attempts to exaggerate Uniloc's ties to California'" (emphasis added)

Source: Memorandum Order and Opinion at 16-17, Uniloc USA, Inc. v. Apple Inc., No. 2:17-cv-00258 (E.D. Tex. Dec. 22, 2017)

A judge also suspected that Uniloc creates shell entities only for the purpose of letting them go bankrupt in case a prevailing defendant obtains an award of legal fees:

"The Court suspects that Uniloc's manipulations in allocating rights to the patents-in-suit to various Uniloc (possibly) shell entities is perhaps designed to insulate Uniloc Luxembourg from any award of sanctions in the event Uniloc loses this litigation (or some substantial part thereof)." (emphasis added)

Source: Uniloc 2017 LLC v. Google LLC, No. 2:18-cv-00553 (E.D. Tex. Jul. 1, 2019), Dkt. 28 Exhibit V

When a company--particularly a foreign organization--engages in such shady practices, "the United States" (federal government) should not intervene--much less at the district court level--to support that kind of party. But "Macomm" Delrahim is out of control, and Attorney General Barr may not even be aware of what's going on (and, especially, going wrong).

Apple and Intel have replied to the DOJ's brief, but not on the basis of the issues I just raised. The purpose of Apple and Intel's submission is to point out some major inconsistencies

  • between positions taken by the DOJ in the past in similar contexts and the pro-foreign-troll anti-American-innovators brief filed last month;

  • between the DOJ's current merger guidelines and the position taken in the pro-foreign-troll anti-American-innovators statement; and

  • even between two sections of that pro-foreign-troll anti-American-innovators submission (which is just absurd and shows that the DOJ's Antitrust Division is now only seeking to support certain types of parties as opposed to defending overarching principles).

On the first part of Apple and Intel's responsive filing, a footnote provides examples of AAG Delrahim's "expanded amicus program through which the Department increasingly files amicus briefs":

  • Motion for Leave to File Statement of Interest, Continental Automotive Systems, Inc. v. Avanci, LLC, No. 3:19-CV-02933-M (N.D. Tex. Feb. 27, 2020);

  • Statement of Interest of the United States; Lenovo (United States) Inc. v. IPCOM GMBH & CO., KG, No. 5:19-CV-01389-EJD (N.D. Cal. Oct. 25, 2019); and

  • Notice of Intent to File a Statement of Interest of the United States of America, U-Blox AG v. Interdigital, Inc., No. 3:19-CV-0001-CAB (BLM) (S.D. Cal. Jan. 11, 2019.

The Apple-Intel brief doesn't even mention the DOJ's interventions on Qualcomm's behalf, but Qualcomm is not a troll. In the three cases listed above, the DOJ supported trolls (Avanci is a pool/platform company, some of whose members are trolls).

Whatever Judge Edward Chen ultimately decides, Apple and Intel's reply may have helped to mitigate the impact of the DOJ's Statement of Interest. But Mr. Delrahim will likely continue to make such disgraceful and distateful filings with courts all across the United States, unless and until he gets replaced.

Finally, here's the Apple-Intel brief:

20-04-13 Apple Intel Respon... by Florian Mueller on Scribd

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Wednesday, April 8, 2020

Mannheim Regional Court stays Nokia v. Daimler case over likely invalid patent -- and two Munich trials have been vacated due to corona

Most of the time, Nokia signs license agreements without having to sue, and when they sue, they typically manage to settle quickly. That's why the Finnish company's standard-essential patent (SEP) portfolio is largely untested. The former handset maker that still sells cellular network infrastructure (base stations) touts the size of the portfolio, but has yet to prevail on a single SEP in court. Maybe they won a SEP case a long time ago, but I can't remember such an outcome during the ten-year history of this blog.

Three SEP assertions by Nokia have been adjudicated in Germany so far. There's this saying that "two out of three ain't bad," but Nokia's score for the time being is ZERO out of three, and that is arguably not "bad" but more accurately described as a disastrous score.

After losing a case against ViewSonic earlier this decade and its first case against Daimler two months ago, Nokia has just suffered another de facto defeat as it felt forced to stipulate to a stay of case 2 O 36/19 over EP2145404 on a "method and apparatus for providing control channels for broadcast and paging services," which was originally scheduled to go to trial on March 17.

Presiding Judge Dr. Holger Kircher stayed the case--with Nokia's consent--pending the Federal Patent Court's adjudication of nullity actions (complaints seeking the invalidation of the patent) by Daimler and an intervening supplier, TomTom. Those proceedings before the Federal Patent Court typically take years, and the vast majority of patents in this area are either declared invalid in their entirety or they end up being narrowed. A narrowing of the claim scope has the potential to render a declared-essential patent clearly non-essential.

It's constructive of a patentee to stipulate to a stay after the court has indicated a strong inclination to order a forcible stay in the alternative. It simply conserves court resources as a stipulated stay doesn't require a written rationale. Still, it's a concession that a patent was weak in the first place.

Originally, it looked like the period between December 2019 and May 2020 was going to be an extremely busy one for the Nokia v. Daimler patent assertion campaign. But the combination of Daimler defending itself (with help from its intervenors) very well and that force majeure that starts with a "c" has so far prevented Nokia from getting leverage. What's much worse for Nokia is that its dismal track record against Daimler so far will be held against it in future licensing negotiations (with smartphone makers as well as the car industry):

  • Besides the two Mannheim cases of which Nokia lost one and had to stipulate to a stay in the other, a third one was already scheduled to go to trial in December, but then Nokia made a mediation offer and the court pushed the trial date back to March 17. However, shortly before that new trial date, Nokia modified its infringement theory, which is not a sign of strength. That trial got vacated.

  • A Munich ruling was scheduled for tomorrow (April 9), but has been postponed to May 20.

  • Two Munich trials scheduled for April 22 (the related first hearings took place on October 30, 2019) have been vacated due to the coronavirus crisis. New trial dates have yet to be determined.

Theoretically, "it only takes one bullet to kill" as another SEP holder once told a court. However, with every single Nokia case that goes nowhere--and stipulating to a stay is tantamount to throwing the towel--its portfolio-based royalty demands lose credibility. What's happening to Nokia's SEPs here is not much different from what other SEP holders have experienced. The hit rate is very low. The only factor that makes it a little more surprising in Nokia's case is that the patent litigation knowledge they have in-house (including lawyers as well as litigation-savvy engineers) is second to none, and it goes without saying they hire some of the very best firms to represent them. With so much expertise, how come they can't find stronger SEPs? They picked ten patents for the campaign against Daimler, some if not all of which they previously asserted against Apple (though that dispute got settled prior to any trial). They apparently thought those ten were the best they had. And look what's happening...

Policy makers must take the following into account: SEP holders (and Nokia is just one example of many) always want to talk about portfolio royalties rather than about merit, but that is a recipe for overcompensation that results in a misallocation of resources and has quite the opposite effect of incentivizing innovation. When a defendant like Daimler doesn't bow to coercion of whatever kind and lets the judges do their job, it turns out time and again that it's one thing to declare thousands of patents to be essential to cellular standards and another to prove in court that those patents are valid and, actually, essential.

Nokia's greed--they want Daimler and other car makers to pay a multiple of the per-unit royalty they get from smartphone makers--has given rise to this dispute, which now threatens to devalue Nokia's SEP portfolio, with severe implications on Nokia's current and future licensing negotiations.

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Monday, April 6, 2020

Munich I Regional Court postpones Nokia v. Daimler patent ruling from April 9 to May 20, 2020


In light of the coronavirus crisis, I double-checked with the Munich I Regional Court's (Landgericht München I) press office and found out that the Nokia v. Daimler standard-essential patent ruling scheduled for this week's Thursday (April 9) has been pushed back to May 20, 2020.

The court did not cite any particular reason for the postponement. A postponement of a ruling date is not unheard of in complex cases, and this is a big one in every respect. It's always better if courts take their time than to rush to judgment.

Without speculating on whether this has anything to do with corona, it's simply a fact that the Free State of Bavaria has not imposed any new restrictions in more than two weeks. The current rules (social distancing, partial lockdown) will be in force until at least April 19, 2020. Presently, courts can hold hearings and trials they deem time-sensitive, and they are free to announce decisions, with the presiding judge of a given panel determining courtroom modalities such as a minimum distance to keep between any two persons.

What's more relevant now than court-internal reasons is the impact on parallel proceedings in other places. This gives the European Commission's Directorate-General for Competition (DG COMP) more time to decide on whether to launch formal investigations into Nokia's refusal to license automotive suppliers. DG COMP resumed its preliminary investigations last month after a couple of rounds of mediation had failed.

DG COMP won't necessarily be the only competition authority in the world to take a closer look at this in the near term.

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How many times can a patent holder violate EU antitrust law in a single litigation? (Nokia v. Daimler)

Last week the Munich I Regional Court's press office confirmed to me that the Nokia v. Daimler ruling scheduled for this week's Thursday (April 9) had not been postponed. The government of the federal state of Bavaria has not imposed any additional corona-based restrictions since. From what I hear, Presiding Judge Dr. Matthias Zigann is the only member of the court's 7th Civil Chamber to go to the courthouse almost every day, while his side judges are working from home. German courts have sometimes postponed patent rulings on very short notice, but for now the operating assumption is that a decision (which may or may not be a final judgment) will come down on Thursday.

With the automotive industry being hit so hard by the coronavirus crisis, Nokia's pursuit of an injunction--while there are plenty of willing licensees (Daimler and a number of suppliers)--is ethically questionable, though there is a possibility of the injunction not having immediate effect in practical terms. So much for corona and ethics; let's also not talk today about the enormous strength of Daimler's invalidity contention, or about proportionality under Art. 3 IPRED and its political ramifications (a Nokia "win" on Thursday--an injunction against entire cars over one of thousands of tiny features of a single cellular standard--would give the whole German patent reform debate new impetus). Now I'll just focus on the antitrust implications of what might happen.

If Nokia obtained and enforced that injunction, it would likely set a new record in the number of EU antitrust violations a patent holder can commit in connection with a single patent infringement case...

The Court of Justice of the EU made it clear in Huawei v. ZTE that a standard-essential patent (SEP) holder violates Art. 102 TFEU (the abuse-of-dominant-position paragraph of EU law) by refusing to grant a FRAND license to an implementer. A license is a license, and not a "have made" right or a contractual arrangement under which a component maker merely becomes a payment processor for the car maker.

There's a number of implementers in that Nokia v. Daimler case whom Nokia has refused to license, yet it seeks to shut down products containing their components. At a minimum:

The six companies I just listed are intervenors in the Munich case. There's even a seventh intervenor: Renault, which makes a car for Daimler. Presumably Nokia is not unwilling to license Renault as it makes entire cars (even when wearing the hat of a Daimler supplier), so in order to know whether Nokia violated the antitrust laws with respect to Renault, one would need to know the status of licensing negotiations between those two organizations. It's hard to imagine that Nokia would want a lower per-unit royalty from Renault than from Daimler, so there likely is another violation, albeit one that requires a quantitative analysis.

So there are six or seven antitrust violations in the vertical supply chain. But Nokia also appears to be violating EU antitrust law with respect to Daimler even if one ignores the suppliers for a moment as the CJEU held in Huawei v. ZTE that the only scenario in which a SEP holder steers clear of an abuse of a dominant position under Art. 102 TFEU involves the combination of two factors, neither of which is present in this case (click on the image to enlarge; this post continues below the image):

Nokia wants the Munich court to interpret the above paragraph in an absurd way. The top EU court said that a SEP injunction is warranted only after a SEP holder made a FRAND offer while the implementer failed to make a good-faith counteroffer. (A blatantly non-FRAND counterproposal would not suffice to avert an injunction.)

The CJEU gave implementers two chances to avoid being enjoined: they can show that the SEP holder's offer was not FRAND, or they can make a diigent good-faith counteroffer without delaying tactics. They can also meet both criteria at the same time, but they don't have to.

Countless articles have been authored on Huawei v. ZTE. I'll just give one example written by a major U.S. law firm (Morrison & Foerster):

"Only if the SEP holder has followed those steps and the alleged infringer continues to use the SEPs in question, and fails to make a FRAND counter-offer and provide security, may the SEP holder seek an injunction. Otherwise, doing so may constitute an abuse of the SEP holder’s dominant position [...]"

In the February trial, the court showed an inclination to agree with Nokia because "the SEP holder hasn't committed any wrongdoing if its own offer is FRAND." That's wrong, however. The CJEU ruling means that the SEP holder commits a wrongdoing either by not making a FRAND offer or by failing to continue to negotiate despite a diligent, good-faith, timely response by the implementer. One could also simplify it like this: if the SEP holder's offer is not FRAND, that's a violation, end of story; but even if it is, the SEP holder can still violate EU antitrust law by rejecting a FRAND counteroffer.

Nokia seeks to convert the two hurdles for SEP holders into two opportunities for them. In order to achieve this, they effectively suggest that Europe's highest court is inarticulate: in the world according to Nokia, "and" doesn't mean "and" when "or" suits Nokia's agenda, as if the judges in Luxembourg didn't know what "and" means.

The "and" in question has a blue background in the screenshot further above. Three L's way against Nokia's attempt to turn the CJEU ruling on its head: language, logic, and layout.

"And" means "both of." So much for the language.

"And" is a logical conjunction.

From a linguistic and logical point of view, it's made even clearer by the fact that the second one of the two parts makes reference to the first by saying "that offer" (I put a green rectangle around the relevant occurrence of "that" in the screenshot). "[T]hat offer" is the SEP holder's initial offer, and interpreting the second part as if it (more precisely, the implementer's failure to fulfill its obligations under it) could independently legalize a SEP injunction simply pulls the rug (the precondition of there already being a FRAND offer on the table) from under its feet.

Finally, the text layout would make the logical conjunction clear in its own right. In the screenshot, I applied an orange background color to the words "as long as," and a blue one to "where" a few lines below. Nokia's suggestion that the SEP holder could meet either the first or the second criterion is also nonsensical because "as long as" is before a colon followed by two bullet points, while "where" comes after the second of the two bullet points. If the two bullet points were alternative requirements for Nokia to satisfy (as they aren't anyway, for the reasons explained before), "as long as" would have to come after the first bullet point (just to the left of "prior to bringing that action"). But in the CJEU's ruling, "as long as" simply ranks higher than "where," so the two just can't be considered interchangeable.

Seeking an injunction against a willing SEP licensee constitutes only one antitrust violation vis-à-vis a given party. But here, Nokia is practically doing so against seven or eight parties. And against one of them--Daimler--Nokia is apparently violating Huawei v. ZTE even twice as it (i) seeks an injunction despite Daimler having given a diligent, good-faith, and timely response, while (ii) Nokia is demanding a fairly high multiple of the per-unit royalty from Daimler that it gets from major smartphone makers. That higher per-unit fee is even more discriminatory when considering that people use smartphone connections for far more hours per day than their cars are online (while one must not actively use a smartphone while driving, virtually no one turns it off either, so the period during which a smartphone has a cellular connection is pretty much a true superset of the hours when the car is connected).

Anything could happen on Thursday. In some other courts I'd offer a 90% prediction that the case would be stayed over serious doubts concerning the validity of the patent-in-suit. In that regard, Munich is "special" because the court rarely stays cases. But Munich, too, is part of the EU.

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Friday, April 3, 2020

Today is the 10th anniversary of the launch of FOSS Patents--and here's a Microsoft patent threat from 2004 no one reported before

Ten years ago to the day, the first FOSS Patents blog post went live. (In the table of contents on the right side you can also find an entry for January 2010, but that one was added subsequently--and backdated so the contact form would be listed behind all of the actual content.)

When I talk to readers at courthouses or on other occasions, I realize most people don't even know what the "FOSS" stands for. That means Free and Open Source Software, a "politically and philosophically correct" term that describes both persuasions of the same movement. At the outset, the idea was indeed to focus on patent threats and assertions against open-source programs such as Linux. I always viewed the Open Invention Network (OIN) very skeptically as it appeared to part of the problem to a several times greater extent than it was part of the solution. And I was aware of some threats no one had reported on at the time. In fact, there is one that I hadn't written about in the more than 16 years since it was made, but with so much water under the bridge by now--and with Microsoft being a member in good standing of the open-source community these days--I'm going to reveal it on this occasion:

In early 2004, Microsoft's patent licensing department contacted MySQL AB, the originally Finnish-Swedish and, at that time, heavily Americanized open-sourced database company (whose CEO I was advising at the time). What Linux was in comparison to Windows, MySQL was to Oracle, Microsoft SQL Server, and IBM Db2. The term isn't used much anymore, but back then the "LAMP Stack" meant Linux, the Apache webserver, the MySQL database, and one of the P languages (mostly PHP, with a few people using Perl, or even Python): an open-source technology stack powering more websites than any other comparable configuration. MySQL had risen to popularity alongside Linux. It was a symbiotic relationship. Microsoft, of course, favored Windows + Internet Information Server + SQL Server + Visual Studio (C# or Visual Basic).

What Microsoft--and again, the Microsoft of then is not the Microsoft of now when it comes to these types of issues--told MySQL (a company that had received tens of millions of dollars of venture funding while Microsoft already had roughly 10,000 times greater resources) was that they claimed to hold a patent that covered functionality at the very core of the MySQL database engine. From a software development perspective, a database engine is a relatively monolithic (as opposed to modular) thing. If someone asserted a patent against the basic architecture of your engine, it could mean that you have to almost start all over. You'd lose years.

Microsoft was clear about its demand: a 2% royalty on MySQL's (tiny) sales. Two things were not clear, however: whether Microsoft had an agenda to actually start a patent war against open source and, particularly, the LAMP Stack, so that an initial royalty agreement would not have been an amicable resolution of an IP issue but could have been the beginning of the end for MySQL and LAMP; and Microsoft declined to disclose that mysterious killer patent.

The concern I just outlined--that Microsoft would wage an all-out patent war against open source--was not merely paranoia. A Microsoft exec in charge of corporate strategy at the time had told some Silicon Valley venture investors a year or two before that "if it comes to worst with open source, [they'd] just use some of [their] patents." So what was presented as a shakedown might have been a concealed attempt at a shutdown.

Microsoft was the only company at the time to have an issue with Linux; the rest of the industry viewed Linux as a chance of liberation from Microsoft dominance. When it came to MySQL, however, two other major patent holders--IBM and Oracle--potentially had just the same strategic motivation to attack the successful startup, as those companies were pro-Linux, but faced a disruptive-innovation threat from MySQL. While that would have been a gigantic violation of antitrust law, one of MySQL's founders even feared that Microsoft, IBM and Oracle might have agreed to launch near-simultaneous patent attacks on them. And they had only a very few patents (from a smaller startup they had acquired)--likely of zero retaliatory value.

MySQL didn't accede to Microsoft's demand, and Microsoft never stepped up the pressure or sued. Part of the reason may very well have been (and in my view, most likely has been) that there were two things going on in the EU that Microsoft had to be cautious about. The European Commission going after Microsoft for its conduct in some other conduct; and the EU's legislative bodies (Council and Parliament) were working on a Directive for the Patentability of Computer-Implemented Inventions, i.e., software patents directive. Concerns by the open-source community played an important role in the political debate.

At some point MySQL was seriously considering making Microsoft's patent royalty demand public. We had already prepared a press release, and it was going to be centered around an open letter to EU policy-makers urging them to abolish software patents in Europe (though that wouldn't have solved the problem for MySQL anywhere else, and it actually generated most of its revenues in the U.S. anyway). We didn't escalate the conflict, and ultimately that was better for everyone involved.

Oddly, about five years later Microsoft actually tried to defend MySQL's independence. Oracle was in the process of acquiring Sun Microsystems, which had acquired MySQL the previous year for $1 billion. While Sun wanted MySQL's business to grow, there were reasons to assume Oracle simply wanted to control it so as to eliminate a competitive threat. Microsoft and SAP (even though mostly concerned about Java in the beginning) were the two large complainants, and MySQL's founder, Michael "Monty" Widenius, was the third complainant, with help from me. So MySQL's founder and I ended up in an alliance with Redmond about five years after we had thought Microsoft would potentially use patents to destroy it.

If not for that old Microsoft patent threat against MySQL--16 years under wraps--, I might never have gotten involved with patent policy in the first place. And I had it very much in mind when I launched FOSS Patents. At that time, I already knew that Microsoft wasn't necessarily a foe (as the Oracle-Sun merger review showed). In fact, I felt that some FOSS people, maybe because they received funding from the likes of IBM and Oracle, weren't being fair: they turned a blind eye to some other large tech companies' (especially their financial backers') questionable patent dealings and pro-software-patent lobbying, but even when Microsoft had good intentions in specific areas, they looked at whatever Microsoft did or announced like Sherlock Holmes with a magnifier glass and, if all else failed, simply made up concerns that weren't warranted. Part of the FOSS Patents agenda was to focus more on companies whose patent abuse got less attention, but "deserved" more. The first big story here was the second post ever: on an IBM threat against an open-source mainframe emulator.

This blog's focus evolved dynamically. In fact, just about four weeks before I launched FOSS Patents, Apple had filed its first patent infringement complaint against an Android device maker (HTC). Android became the most heavily-attacked piece of open-source software that year as Oracle sued Google (a case that later became only a copyright dispute as Oracle's patents failed in court), Microsoft sued Motorola, Motorola sued Apple (which countersued using largely the same patents as against HTC), and the following year Apple sued Samsung.

Of the roughly 2,300 FOSS Patents posts I've written to date (also, there were a few guests posts), roughly 63% (1,456 posts) went live in the years 2011-2013, the three years in which the "smartphone patent wars" were raging on a very large scale. By 2014 they had already subsided, and in 2014 various disputes came to a partial or complete end.

With those Android companies countersuing, my litigation reporting simply had a mobile focus (and occasionally even gaming consoles). If I had anticipated that, I'd have named the blog "Mobile Patents" or "Phone Patents."

Actually, "FRAND Patents" would have made even more sense. I already took a clear position against injunctions over standard-essential patents in 2010. And a few years later, a Research In Motion/BlackBerry lawyer accused me, after a Mannheim trial, of having "devalued" SEPs and that companies were cutting back on their standardization activities (obviously not true, as we all know now with the benefit of 2020 hindsight).

More recently, this blog has almost been an "automotive" blog, only because car makers are currently the ones that SEP holders like Nokia primarily seek to prey on.

So there's probably no point in ever renaming a blog, much less when it is as well-known as this one. I'm very grateful for having so many loyal readers, and a number of highly important people in the industry as well as in the judiciary, executive and (to a lesser degree) legislative branches of government. I really am.

There's one thing I had envisioned for the 10th anniversary that I haven't found the time for: a redesign. This blog still uses the "Blogspot" platform's original blog layout. Blogspot became Google's "Blogger" service, and undoubtedly supports more fashionable layouts. However, since I have manually entered and edited all the HTML tags here from the outset, it's a bit risky to switch to a newer layout (I ran a test and the result looked awkward)--I or someone I'd pay for it might have to go over 2,000+ posts and make countless manual adjustments. Nevertheless, it may happen later this year--certainly sometime before the potential 20th anniversary :-)

There were times when I was seriously considering discontinuing this blog, or handing it to some other organization, such as an IP-focused publishing company. But in recent years there have been some really exciting developments--and I've found a way to keep blogging while continuing to run an app development company (I'll have a new game to announce this summer).

Some of you encouraged me to keep going--even some who have rather different positions on SEPs or on patent policy in general. Thanks for that, too. I'll keep sharing my honest observations and opinions with all of you for quite some more time!

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Thursday, April 2, 2020

Component-level patent licensing and pricing has always served the PC industry well--only trolls and other SEP abusers deviate from the norm

Back in November I made a call for input regarding cases in which standard-essential patent (SEP) holders displayed the kind of behavior vis-à-vis the PC industry that we see from certain wireless patent holders with respect to smartphones and cars.

I mentioned one such example: Motorola Mobility's demand that Microsoft pay a 2.25% royalty on the end product, explicitly defined as a computer (not the Windows operating system), for implementing a video codec standard in Windows. Motorola abandoned that position in the course of litigation, but a demand letter taking that insane position had entered the public record before.

In response to my call for input, only a few other examples have been reported to me, and they confirm that it's basically just patent trolls and companies who for whatever reason behave like trolls:

  • The other such case I previously reported on is In re Innovatio: Innovatio "sued numerous coffee shops, hotels, restaurants, supermarkets, large retailers, transportation companies, and other commercial users of wireless internet technology located throughout the United States." So it was a case of a patent troll going against commercial end users, though the patents in question were implemented in a WiFi chip. While Innovatio wanted an average royalty of $3.39 per access point, the district court awarded less than ten cents per WiFi chip.

  • Alcatel-Lucent, which was later acquired by Nokia, sued PC makers Dell and Gateway, though the component at issue was Microsoft Windows: the MP3 standard was implemented in Windows. Microsoft intervened and ultimately resolved the issue.

  • Finally, Ericsson v. D-Link. Ericsson took the position that it was not required to offer a FRAND license to 802.11 chip makers (e.g., Intel, Broadcom, Qualcomm Atheros) because their products did not "fully" comply with 802.11n (only an end product could fully comply according to Ericsson's position, which is what we nowadays hear from Nokia in connection with cars). According to Ericsson, the 802.11n chips alone were not "fully compliant" with the 802.11n standard and therefore not entitled to a FRAND offer.

    Furthermore, there was testimony that in 1997-99, Lucent proposed their technology to the IEEE and suggested that their royalty should be 5% of the entire end product (not of the 802.11 component).

Those cases aside, it has always been the norm in the PC industry that patents are licensed at the ocmponent level, and that component makers are free to sell to any PC maker, any hardware distributor, any retailer, or any end user. There aren't just wireless standards. Codec standards were already mentioned above. But there's a variety of other standards such as graphics adapter standards (VGA etc.), PC bus standards, local area network standards, and random access memory standards.

No one in the PC industry--apart from rare exceptions such as the ones stated further above--ever argued that their patents on memory chips or on display standards all of a sudden became more valuable because of some added value or technological progress in other areas. No one said memory chip patents were worth more only because of a faster CPU--or a larger monitor.

The primary reason for this is simply that most PC components have been and continue to be sold not only to PC makers like Dell but also as separate parts through retailers. You can buy all PC parts separately and assemble your own PC at home; you can also add memory chips or replace a graphics adapter with a better one. That applies to desktop PCs. With portable computers it doesn't work like that. But the PC industry started with desktops, and any differences in how/where/by whom the pieces are put together never had an impact on licensing.

There are some striking parallels between cars and PCs: highly modular products. Nokia argues that it should get a per-unit SEP royalty from Daimler that is several times higher than what it gets from smartphone makers (even though end users typically use their smartphone for many more hours per day than the cellular communications functionality of their cars)--and its arguments comes down to saying that SEPs have always (which is not even true, as there are notable exceptions) been licensed at the end-product level in the smartphone industry. But that doesn't mean it makes sense for smartphones. It's circular logic to claim that a demand is resaonable because some people have been making it for some time.

A smartphone--or the comparable functionality of a car--is internally just as modular as a PC. It's just not possible to go and buy a case from this vendor, a graphics chip from another, and memory from yet another. All of that has practical reasons that are unrelated to the way standards are implemented, and the way SEPs should be licensed.

Making patents in one field of technology more expensive based on the value of everything else that's in the device (even if one can't practically "plug and play" or self-assemble like in the PC segment) is economically unsustainable. And it's easy to explain why: let's focus on only five of the many components of a smartphone:

  • W for "wireless connectivity" (which in reality is more diverse: cellular, WiFi, Bluetooth, NFC...)

  • P for "processor (CPU)"

  • M for "memory"

  • O for "operating system" (though there's also a multitude of apps)

  • D for "display"

So cellular SEPs are part of W. That W component can be found in a cheap phone ("dumbphone"), in a high-end smartphone, or in a car. A car is not even the limit: it could be an airplane or it could be installed in a building. W always does the same; should there be a difference in terms of what features of a standard are actually used, then there might be price differentiation, but no one has provided a real-world example and cars certainly don't use any features of those standards that a smartphone wouldn't use as well.

Now let's assume we have the SEP holders in the W area demand an extra $20 not because of an increase in the value of the W part in its own right, but because of everything else around it.

On that same basis, anyone holding SEPs on memory standards, display standards, the standards implemented by an operating system (such as video codecs), or standards closely related to the CPU (such as data bus standards) could also demand more money just based on all the other components, including but not limited to the wireless part.

SEP holders of the W kind would want 10% of W+P+M+O+D. If the OEM acceded to those demands instead of insisting on a reasonable royalty based on the value of the relevant component, the price would have to be raised to maintain the same level of profitability (or any profitability at all). SEP holders of the P, M, O, and D kinds would then also want higher royalties. Each and every time the OEM accepts this, and increases the price of the end product accordingly, you get another round of successive rate increases. That's economic mayhem with prices spiraling to the sky.

If each of the five categories of SEP holders wanted 5% of the end-product price, it would mean 25% in total. So at some point--sustainable or not--the spiral would stop. But it would never stop if everyone argued "use-based pricing" as long as technology improves here, there, and everywhere, or gets incorporated into a bigger end product. Theoretically, the fact that a single (unless totally negligible) app becomes available on an app store could trigger a round of "use-based" price increases across all fields of technology.

In this simplified hypothetical example, we're talking about only a smartphone. But a car is way more multifunctional than a smartphone, which further exacerbates the problem I just described.

The only solution is to license patents in the supply chain, and to use the smallest salable patent-practicing unit (SSPPU) for the royalty base. That doesn't mean that the ways in which a given technology--such as wireless connectivity--actually gets used don't matter. But in the market for PC components, graphics cards didn't become more expensive only because a software company released a new word processor that offered some exciting functionality. A word processor without a screen won't work; but the screen is still just a screen, regardless of the incremental functionality of a word processor. Those who make the screens (or hold patents essential to screen-related standards such as video cable standards) must content themselves with the fact that the incremental functionality achieved by others generates additional sales. Incremental volume is a benefit. That sounds simple, and it actually is--because otherwise, with "use-based pricing," you get the spiral I described further above unless technological development grinds to a halt, which might just happen in that case.

In the PC space, modularity wasn't merely an architectural, technological reality. The way those components were sold and optionally assembled by anybody made it easy to see. But that doesn't mean that other technology stacks aren't modular, too. The modular commercial model of the PC industry is the (only) appropriate one for smartphones and connected cars.

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