Thursday, September 10, 2020

Munich court's Mercedes sales ban drives demand for Huawei's chips, underscores need for CJEU decision and German patent injunction reform

Bloomberg reports that the Munich I Regional Court's Seventh Civil Chamber (Presiding Judge: Dr. Matthias Zigann) earlier today granted Japanese electronics maker Sharp a standard-essential patent (SEP) injunction against Daimler.

Sharp will be able to enforce this injunction if it posts a bond or makes a deposit of 5.5 million euros--and if the Munich Higher Regional Court, to which Daimler can and certainly will appeal the decision, doesn't stay the enforcement of the injunction pending the appellate proceedings.

In July, this blog reported on the trial, which was revelatory in one particular respect: Daimler stated that six out of seven cars would not be affected by the then-hypothetical, now-actual injunction as they already come, or can easily be, equipped with baseband chips or connectivity modules provided by Huawei. That's because Sharp and Huawei reached an exhaustive component-level SEP license agreement that indirectly (through patent exhaustion) covers Daimler for the most part.

If one-seventh of Daimler's German sales were affected, that would still be a sizable amount, and the damage caused in that case would exceed the court-ordered security by a factor in the hundreds. However, the court may have based the determination of the security amount on the assumption that Daimler should be able to equip the remaining one-seventh of its cars with Huawei components. Only Daimler knows whether that is the case.

The Munich I Regional Court has, therefore, done more to bolster Huawei's sales than the courts in any other jurisdiction, including China itself. Not only Daimler but also other automotive companies will be led to conclude that Huawei and its customers (such as Samsung subsidiary Harman) put car makers in a better position to weather the SEP enforcement storm than other suppliers. I would prefer automotive suppliers to compete purely on quality and pricing, but SEP enforcement is a fact of life and, ultimately, a cost factor.

The Avanci pool claims--but clearly fails--to address the problem. The Munich Mercedes ban conclusively proves that Avanci is part of the problem, not part of the solution, because it refuses to license component makers. The solution will come from bilateral component-level license agreements such as Sharp's agreement with Huawei--a deal between a Japanese and a Chinese company that ends up protecting a German car maker. Avanci was created by patent abusers, who were in turn joined by other companies, some of whom have the same abusive intentions while some others are just total fools. The Avanci model simply isn't working out: either the Avanci gang changes its licensing terms in order to be appealing to component makers, or the automotive industry will render it irrelevant by near-unanimous rejection.

Regardless of the unique circumstances created by the license agreement between Huawei and Sharp, it's a shame that the Munich court didn't deny the requested injunction on the basis that other suppliers were also willing to license Sharp's cellular SEPs. Exactly one week ago, the Dusseldorf Regional Court indicated that it would refer to the Court of Justice of the EU certain questions related to component makers' entitlement to a license and its preclusive effect on injunction requests against their customers. That referral would have made sense at any rate, but it does even more so in light of today's decision, though there is a possibility of the Munich appeals court disagreeing with the lower court on the question of component-level access to SEP licenses.

Despite the unique circumstances of the Sharp-Huawei agreement, today's SEP injunction won't go unnoticed in the German capital of Berlin, where the executive government is readying a patent reform bill. The standard for patent injunctions--which are presently (near-)automatic in Germany--is the most controversial item in that proposal. Tellingly, the German chemical industry association VCI, which opposes reform, was quoted by financial daily Handelsblatt saying that the proposal "overshoots" and undermines IP protection.

It is anthetical to proportionality when entire cars are enjoined over just one of many thousands of patents that allegedly read on cellular communications standards. Daimler and/or its suppliers shouldn't have to negotiate license deals in the shadow of injunction threats over patents that cover a minuscule part of the functionality of the accused products. However, those pushing for patent reform will have to fight hard to ensure that the new statute will clearly require a proportionality analysis not only in non-SEP but also in SEP cases. At a minimum, the official reasons stated by the legislature should contain such clarification. With two Mercedes sales bans having been ordered within less than four weeks of each other, the pro-reform movement has a strong basis for this demand.

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