Tuesday, December 15, 2020

Munich appeals court overrules lower court's shameless approach to security amounts: Conversant v. Daimler

As I already noted earlier this month, the Oberlandesgericht München (Munich Higher Regional Court) fundamentally disagrees with the Munich I Regional Court's approach to setting the amounts of collateral to be posted in the form of a bond or a security deposit when patent injunctions are enforced while an appeal is pending.

Meanwhile I've obtained a copy of an order by the appeals court in Conversant v. Daimler, raising the security amount from 5.5 million euros to 146 million euros. That's an increase by more than a factor of 26--and a complete (with respect to this part of the dispute) victory for Daimler at this stage. It also means that Nokia-fed Conversant won't ever enforce a German injunction against Daimler over the patent-in-suit, as the troll probably can't afford this amount anytime soon and the patent is going to expire in about a month's time.

What the lower court had done in that case--and not only that one, as the appeals court will make a similar decision in a Nokia v. Daimler case on Thursday--was not just an error. It was an utter disgrace. It was what happens when judges prioritize "forum-selling" over their own professional honor. And the way in which they explained the "reasons" for their approach was so bad that even the term "nonsensical" would represent a euphemism.

Here's the fundamental problem, in a nutshell:

  • A plaintiff who prevailed in trial court often seeks to enforce an injunction even during the appellate proceedings.

  • But if the defendant prevailed on appeal, wrongful-enforcement damages would be owed.

  • Some kind of security (a bond or a deposit) is to be provided by a plaintiff for enforcement at this stage is to make sure that the defendant can be made whole in case it is later entitled to wrongful-enforcement damages, but the plaintiff can't pay at that point. The actual damages can only be determined later, but the security amount is set based on a reasonable estimate.

  • The purpose of such collateral is to enable a defendant to pursue an appeal--as opposed to being coerced into a settlement by the risk of early enforcement damages exceeding what the plaintiff would later be able to pay.

The lower Munich court hit a new low--which says something--when its "logic" simply defeated the purpose of such collateral:

  • They said that a defendant had an obligation to mitigate damages by taking a license, but

  • in that case it's over and there won't be an appellate decision.

It's not that the lower court wasn't aware of this contradiction. They even suggested that a defendant could make a licensing offer that would be tied to the outcome of the appellate proceedings (by which they probably meant a condition subsequent or similar structure). But as the appeals court noted in its December 3, 2020 partial final ruling (partial because it only corrected the security-related part of the decision, without looking at the underlying merits yet),

  • a patentee could simply reject a licensing offer on that basis (and insist on a license deal that would not be contingent upon any future decision),

  • Conversant was evasive at best when Daimler suggested such a contractual structure, and

  • making such an offer puts a defendant out of compliance with German SEP case law (this point is the least important aspect in my view, as it merely shows that such a deal structure would be unusual).

Simply put, the lower Munich court wanted to deprive defendants of their right to appeal its (sometimes totally wrong) decisions.

Fortunately, the appeals court restored sanity.

The amount of approximately $175 million for shutting down Daimler's German sales for a month (Conversant even won a recall and could have forced Daimler to destroy any "infringing" products) is actually low, but that's because, as the appellate decision notes, Huawei obtained an exhaustive component-level license from Conversant, which indirectly covers approximately 86% of Daimler's German sales. It's mostly the Mercedes truck business that doesn't benefit from that indirect license.

No similar arrangement exists with respect to Nokia's SEPs--and the patent-in-suit in that case isn't about to expire. In the Nokia case, Daimler cars that come with a telematics control unit (TCU) from Samsung subsidiary Harman Becker are excluded from the scope of the injunction, but the effect of that carve-out doesn't come close to the 86% coverage Daimler enjoys in the Conversant context because of Huawei's license. All things considered, a security amount in the billions of euros will likely be set on Thursday. The lower court had set it at only 18 million euros. The numbers don't tell the whole story, but they'll make it clear that the appeals court doesn't merely reverse the lower court in this context. It effectively rebukes it. And rightly so.

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