Wednesday, October 7, 2020

Shortsighted, unfit-for-digital-age Daimler management caves to Sharp, takes car-level standard-essential patent license instead of appealing injunction

Some antitrust cases have the potential to go all the way up to the highest court. Epic Games v. Apple is an example: while the district court in California has already scheduled a bench trial to start on May 3, 2021, the judge already told the parties she knows this would go up to the Ninth Circuit (at least).

But even when the strategic stakes are high, it takes two, and if one of them has incompetent decision-makers, a settlement may fall into place even while it would still have the chance to get a better outcome. Daimler is an example of a company of the past that is going down the tubes. Only a company that is run by third-rate bean counters (though first-rate cowards they may be), as opposed to bold and world-class visionaries, would cut its R&D spending by more than 20% over the next five years instead of doubling down on the triple transition the industry is facing (new propulsion techniques, autonomous driving, and digitization).

For whatever reason (lack of digital industry knowledge, conflict of interests, or desire to differentiate by swimming against the tide), Sanford Bernstein analysts have for a while been painting a rosier picture for Germany's leading car makers (and last year even speculated about Tesla going out of business!) than their colleagues at other firms. One of their analysts just gave an interview (in German) in which he seriously said German car makers would bridge the digital gap between them and Tesla by partnering with U.S. tech giants--as if that didn't mean that the most lucrative parts of the future automotive value chain, and the most important elements for differentiation, would belong to other companies than Daimler, BMW, or Volkswagen.

Now, today's news shows once again that Daimler's leadership is uncapable of figuring out how to succeed in the digital era:

Foxconn-owned Sharp announced a license deal with Daimler to settle the pending litigation campaign in Germany. Last year, Sharp filed five patent infringement cases in two German courts, partly over likely invalid patents, but on September 10, the Munich I Regional Court's Seventh Civil Chamber under Presiding Judge Dr. Matthias Zigann granted Sharp a Germany-wide patent injunction against Daimler, requiring only negligible collateral (a few million bucks). While Daimler said it would appeal--and presumably had meanwhile asked the appeals court to stay the enforcement of the injunction--, the lower court's ruling, which totally vitiated the FRAND defense to SEP cases under the CJEU's Huawei v. ZTE framework and ignored Daimler's suppliers' right to a component-level license under EU antitrust law, is not going to be reviewed anymore.

For 86% of Daimler's German sales, an exhaustive component-level license agreement between Sharp and Daimler's indirect supplier Huawei had actually mooted the whole matter. But the question was what Daimler was going to do in the face of the Munich injunction with respect to the remaining 14%. It's unclear whether they could technically have solved the problem by incorporating components supplied by Huawei into those vehicles--I guess they could have done so if they had really wanted to, but maybe some decision-makers at Daimler who failed to understand the wider strategic implications of this didn't want to make that logistical effort. However, with the Dusseldorf Regional Court being virtually certain to refer, as suggested by the Federal Cartel Office of Germany (Bundeskartellamt), a set of component-level standard-essential patent licensing questions to the Court of Justice of the EU, an enforcement stay would have been extremely helpful. After that referral it's going to be a whole new game, and especially the German appeals courts will have to tread carefully so as not to make a decision that the CJEU may shortly thereafter hold to be inconsistent with EU antitrust law.

Daimler had actually achieved what I call a microstay (a stay not for the duration of the entire appellate proceedings but for the time it takes the appeals court to weigh the motion for a stay) in a Mannheim case against Nokia. There, the appeals court strongly recommended to Nokia to commit to refrain from enforcing the injunction at this procedural juncture.

The price Daimler is paying now is not primarily whatever royalty Sharp may collect on (at the most) 14% of Daimler's cars. The real issue is that Daimler this way departed from its previously principled stance that SEP holders should extend exhaustive component-level licenses to Daimler's suppliers.

In other words, the fact that Daimler folded is going to be viewed by certain players as validating the model of car-level licensing. So what's the fallout then and what does this mean, going forward, with respect to other players and issues? In alphabetical order:

  • Avanci: Sharp, just like Nokia, Ericsson, Qualcomm and many others, is a member of the abusive Avanci gang. While Avanci will probably welcome the aforementioned "validation" of the car-level nature of the license deal, the glass is half-empty because the deal bypasses Avanci--for the time being at least.

  • Bundeskartellamt (Federal Cartel Office of Germany): The FCO had intervened in this dispute, and participated by videoconference in the trial after which the injunction came down. While the FCO may continue to content itself with filing amicus curiae briefs, it might also investigate Sharp's extortionate conduct here as it secured a car-level license at the threat of the enforcement of an ill-gotten SEP injunction. The question here is whether Sharp failed to honor its licensing obligations vis-à-vis other Daimler suppliers (which I guess it did) than Huawei in the build up to the injunction ruling. At any rate, the FCO will have learned the lesson now that some German patent infringement courts are so extremely plaintiff-friendly that amicus briefs may not be sufficient.

  • Daimler's other suppliers: Some of them, such as Germany's Continental and Samsung subsidiary Harman, are Huawei customers. That shields them against all or large parts of the potential indemnification claims Daimler might have (or might have had--it depends on whether those agreements hold suppliers liable for Daimler's settlements). Others, however, are in trouble, and may lose Daimler's business. See the bullet point on Huawei further below. Also, they may have to fear that Daimler will also settle with Nokia, at which point the suppliers will lose a co-complainant in the antitrust arena.

  • European Commission / DG COMP: The increasingly-protectionist executive branch of the EU has been sitting on Daimler's antitrust complaint against Nokia for two years, seeking to protect Nokia and, by extension, Ericsson rather than Europe's automotive industry. That's just politics and has nothing to do with principled competition enforcement. Daimler's management, which is failing all the way as I explained above, made a major mistake by either being too incompetent to understand from the beginning that an EU antitrust matter of this kind is more political than legal or by being stuck in the past. Whatever the reason may be, while Nokia and Ericsson (and their various allies) played the political game very aggressively, Daimler did nothing--and, as a result, achieved nothing in Brussels.

    One member of the EU Commission wil be overjoyous today: French commissioner Thierry Breton, who spreads Nokia-funded propaganda of the most postfactual kind, has been Nokia and Ericsson's best friend all along. He'll leverage Daimler's deal with Sharp in the Nokia context for sure in order to prevent EU competition chief Margrethe Vestager from launching formal investigations.

    What the Commission's Directorate-General for Competition (DG COMP) could at least do would be to encourage the German Federal Cartel Office to do what the Commission is for purely political reasons unwilling to do.

  • Huawei: They may do even more business with Daimler now, and they become more important with a view to the CJEU referral by the Dusseldorf Regional Court as they're far less likely to settle with Nokia than Daimler is. The terms of all those deals aren't known, but I would assume that Huawei (listed further below) has a better deal with Sharp than Daimler, given that Huawei knows this business a lot better and is deemed by many experts to be the leading cellular SEP holder in the world. In that case, the most cost-efficient way for Daimler to resolve its problem with Sharp's patents is to incorporate cellular components from Huawei into its cars, assuming that the Sharp-Daimler deal doesn't allow double-dipping (if it did contrary to what I assume, then that in and of itself might warrant an antitrust investigation).

  • Munich I Regional Court: The fact that a Munich injunction made Daimler cave, after several years of declining to take car-level cellular SEP licenses, is going to be another boost for this venue's popularity among plaintiffs. Just last week, the same court granted Nokia a video codec SEP injunction against computer maker Lenovo, involving some of the very same legal issues. We'll see whether Lenovo, which just like Daimler at the time announced an appeal, will keep on fighting so that the Munich appeals court will review the lower court's application of Huawei v. ZTE and address the question of component-level licensing obligations.

  • Nokia: For Nokia it's certainly better that Daimler caved than if the Munich appeals court had possibly expressed doubts about the lower court's application of Huawei v. ZTE and positions on component-level licensing. Later this month, on the day before Halloween, Nokia may win a Munich injunction against Daimler as well. Then, Daimler has put a lot more effort into its fight with Nokia than into the dispute with Sharp, so it's unclear what Daimler's management will do. They might make their next mistake then, though they'll then be much closer to the Dusseldorf referral. And as long as Huawei keeps fighting Nokia, the question of component-level SEP licensing will have to be resolved by the top EU court.

  • Patent reform: Even Judge Kuehnen ("Kühnen" in German) wouldn't interpret the current proposal by the Federal Ministry of Justice and Consumer Protection of Germany as changing anything about access to injunctive relief over SEPs. But the legislative process isn't over, and changes could still be made so as to ensure that a proportionality-based defense will be available in SEP cases as well, in addition to the antitrust-based FRAND defense. I'm not actively involved with that process, and time is not on the side of those advocating reform, so I can't offer a prediction. I'm worried that the final outcome will be even less helpful than the current draft, which is very suboptional but still a huge improvement over an earlier proposal.

  • Tesla: The most innnovative one of all large automotive companies is also in the cross-hairs of various SEP holders, all of whom are Avanci members. Most recently, the PanOptis/Unwired Planet patent troll group sued Tesla in Texas. Sharp is seeking an import ban against Tesla in Japan. Whether Sharp has meanwhile also brought German patent infringement cases against Tesla isn't known, but if not, then I guess it's just a matter of time. And most likely the venue of choice will be... Munich.

    Tesla has the potential to become the #1 patent defendant in Germany as it's building a car factory near Berlin. I guess they'll be sued in Germany left and right, over SEPs and non-SEPs, by operating companies and trolls.

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