Monday, October 26, 2020

Huawei and patent troll Conversant settle patent dispute, automotive downstream stands to benefit from component-level agreement

On Friday, the Landgericht München I (Munich I Regional Court) entered a final (though appealable) judgment in a Conversant v. Daimler standard-essential patent (SEP) infringement case in which Conversant was asserting a former Nokia patent (or, to be precise, a derivative of a former Nokia patent). I've meanwhile obtained a copy of the ruling, and its final part (Section H) reveals that a settlement between Huawei--an indirect Daimler supplier--and the Nokia-fed patent troll has been reached.

The written decision says that on October 21, 2020 (just two days prior to the ruling date), defendant Daimler and intervenor Huawei (referred to as "intervenor no. 8") brought parallel motions asking the court to postpone the decision by two weeks in light of an agreement between Huawei and Conversant. The court denied these motions because Daimler's and Huawei's representations didn't go into sufficient legal detail, and because the settlement agreement comes with conditions precedent that weren't specified (Daimler, in fact, requested the court to ensure that the agreement would enter the record). Furthermore, the court notes that just one day prior to that motion, Huawei had filed a pleading according to which it denied having received a licensing offer from Conversant.

In most if not all German SEP cases against Daimler, Huawei intervened in its capacity as a tier 2 (indirect) supplier. Huawei makes network access devices (NADs), or connectivity modules, which some of Daimler's tier 1 (= direct) suppliers such as Continental and Samsung subsidiary Harman incorporate into the telematics control units (TCUs) they sell to the Mercedes maker. Effectively, cellular SEPs are implemented by the baseband chip (tier 3), so if a tier 3 or tier 2 supplier is licensed, so are the tier 1 supplier (TCU maker) and, by ultimate extension, Daimler.

In July, court filings in several Sharp v. Daimler cases pending before the Mannheim and Munich courts revealed a component-level SEP license deal between Huawei and Sharp. At a trial later that month it turned out that this agreement, through patent exhaustion, resolved approximatly 86% of what was at stake between Sharp and Daimler, thereby greatly reducing the impact of the injunction the Munich court handed down last month. To my dismay, Daimler didn't pursue its appeal, a decision that will cost far more in the long run than it would have cost to at least let the appeals court adjudicate Daimler's motion for an enforcement stay. We'll see in the weeks ahead whether Daimler will settle with Conversant as well--or do the right thing and fight on.

It appears that Huawei's deal with Conversant is structurally similar to the agreement with Sharp. Otherwise there wouldn't have been any basis for requesting a postponement of the decision. Therefore, this agreement is further validation of the concept of exhaustive component-level SEP licensing, and undermines the Avanci pool's end-product-only licensing policy. Conversant is another Avanci member that has now entered into a direct SEP license agreement, bypassing the pool.

Qualcomm is lobbying the European Commission--the #1 enemy of Europe's automotive industry in the SEP licensing context--and the German federal government (which could accidentally become an enemy of its automotive industry in this context as a result of some decision makers' cluelessness) with a proposal to grant licenses, on terms that would not allow those suppliers to be economically viable anyway, at the TCU (tier 1) level. But with every deal like Sharp-Huawei and Conversant-Huawei, it becomes clearer that higher levels of the supply chain must be considered as well, and may even represent the point of maximum licensing efficiency.

I'd like to share more information from the Conversant v. Daimler judgment. For only a relatively small and old portfolio, Conversant wanted 75 cents (US) per car. In my trial report I had written €0.75, but the ruling says US$0.75. Daimler's counteroffer amounted to $0.01 per connected vehicle implementing 4G/LTE, and fractions therefore for vehicles implementing only 3G, only 2G, or only emergency calls.

In Section G (right before the part that addresses the requests to postpone the ruling date), the court discusses how it arrived at the insanely low security amount of 5 million euros. Conversant can enforce the injunction during the appellate proceedings by making a deposit or posting a bond. The amount is meant to guarantee that Daimler can be made whole should Conversant ultimately lose the case, in which event Daimler would be entitled to recovery of wrongful-enforcement damages. One doesn't have to be an automotive industry expert to see that the damage of blocking Daimler's German sales (which could even impact many exports from Germany to other countries) would exceed that amount by a factor of not 10 or 100, but roughly 1,000. The ruling notes that Daimler built well over a million cars in Germany in 2018, and a similar volume would be impacted now. That's why the Mannheim court required collateral to the tune of €7 billion in a Nokia v. Daimler case.

The Munich court bases its collateral determination--as it has recently done on various occasions, apparently also including a Nokia v. Lenovo case--on Daimler's duty to mitigate damages. In a nutshell, the court's "theory" (in quotes because it makes mockery of the word) is that Daimler doesn't have to halt production and sales--it could take a license. That, however, would moot the case, thereby depriving Daimler of its right to appeal and defeating the very purpose of collateral for enforcement during an appeal. It's utterly nonsensical.

That approach to security amounts should be reviewed by the appeals court as soon as possible. It already might have been corrected if Daimler hadn't settled with Sharp.

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