Friday, September 17, 2021

OpenRAN is certain to increase standard-essential patent licensing costs: more SEPs, more SEP holders, more implementers, more injunctions

The stated goal of the O-RAN Alliance (O-RAN = OpenRAN = Open Radio Access Network) is to "enable a more competitive and vibrant RAN supplier ecosystem with faster innovation" by virtue of modularizing mobile network infrastructure through standardized interfaces. If OpenRAN (or "O-RAN") is clearly superior over the current architecture, it's striking that even the most optimistic projections come down to approximately 10% of the global RAN market by 2025.

There are hurdles to be taken and concerns to be addressed. In this post I can't talk about them all. To give just one example of a serious technical question, it is debatable whether a mobile network that runs partially on the cloud ("vRAN" or "virtual RAN") could ever match the reliability and performance of traditional equipment, and whether the optimized use of resources that cloud-based solutions potentially offer outweigh security and other risks. I may very well discuss some of those architectual and practical issues on other occasions.

Today I'm going to focus on what is--for this blog--the obvious starting point of the analysis: standard-essential patent (SEP) licensing and litigation. From that angle, O-RAN has zero upside--literally zero--but comes with a significant downside:

1. Not a single cent will be saved in 5G license fees

O-RAN relates to the infrastructure side. Communication between the network infrastructure and end user devices (such as handsets and connected cars) still relies on the same standards--presently, that means 5G first and foremost.

O-RAN doesn't make 5G cheaper. It has no impact on handsets, and the only way that carriers would pay lower 5G royalties would be if O-RAN delayed the rollout of 5G, which no one wants to happen.

2. Additional patents--partly from additional patentees--will have to be licensed, and they will not be free

Not only will there be more patents to be licensed but definitely more patents and--very likely--more holders of relevant patents.

On top of the standards that those mobile networks already have to implement, their infrastructure will have to implement the O-RAN interfaces. While the "Open" part of the standard's name does stand for a connection with open-source software, participants in the standard-setting process (such as ETSI members) will be entitled to FRAND royalties (and not FRAND-0, to be clear). Some relevant patents may end up belonging to companies that are not bound by a FRAND pledge. I don't even want to get into a doomsday scenario of different major markets in the world potentially going in different directions, which may result in a huge number of patents that are essential to a standard in one region but belong to patent holders who did not participate in the relevant standard-development process.

3. More implementers will have to take licenses

At the moment, the number of relevant implementers in the mobile infrastructure market is small: a few base station makers, and their suppliers, such as chipmakers. That number will go up with O-RAN, as the whole idea is to bring in more players (most of them U.S. based, as this is primarily an initiative by the U.S. government and U.S. carriers, with Apple apparently looking at O-RAN as an opportunity for infrastructure-side services that lock customers even more into the iOS ecosystem).

The more licensees there are, the more costly the licensing process becomes, which in the end increases costs.

4. Virtualization and modularization exacerbate the forum-shopping problem

Should parts of the functionality be moved to the cloud, the holders of certain types of patents may be able to choose between enforcing them where the servers are hosted or in the jurisdiction in which those cloud services are used by a carrier.

Even without virtualization, some forum-opportunities will likely result from the fact that different components are made in different jurisdictions, and that some patents may be infringed directly only by the carrier, but particular component makers may be liable for contributory infringement.

5. The availability of drop-in replacements weighs in favor of granting patent injunctions

Just like "plug & play" (relating to personal computer hardware) was derided as "plug & pray," it's doubtful that carriers will be comfortable replacing a patent-infringing O-RAN component with a rival offering. In some cases, carriers will have had reasons for choosing one particular component over the other options.

But patentees who prevail in infringement litigation will be able to leverage the O-RAN marketing promise against defendants. They'll argue that an injunction does not cause irreparable harm (and won't impact third parties) as a component held to infringe the patent(s)-in-suit could be replaced with another.

6. Today's leading infrastructure makers may step up patent monetization

Should O-RAN adversely impact mobile infrastructure sales by today's market leaders, they may further step up their patent enforcement.

I'm not saying that one should oppose O-RAN just over the foreseeable patent licensing and enforcement issues outlined herein. Patent licensing is sometimes just a cost of doing business. But when weighing off the pros and cons, the licensing and litigation aspects are undoubtedly in the "con" column.

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Thursday, September 16, 2021

China extends hand to EU over standard-essential patent enforcement, prefers dialog over escalation: judges from three jurisdictions spoke at today's Renmin University conference

China's response to the EU's request for information via the World Trade Organization (WTO) regarding standard-essential patent (SEP) enforcement was rather succinct. But that is only because China is confident of its compliance with the TRIPS Agreement--and should not be confused for an unwillingness to discuss SEP enforcement policies with a major trading partner.

In 2012, seven judges of the United States Court of Appeals for the Federal Circuit attended what the U.S. appeals court's website still describes as "an historic three-day conference to discuss the adjudication of intellectual property disputes." That event took place at Renmin University of China (RUC), as did the first International Symposium on Judicial Protection of Intellectual Property Rights--Transnational Dialogue and Normative Coordination a few years ago. Today, RUC hosted the "sequel" to that event, and I followed it via Zoom because it represented a splendid opportunity to listen to multiple patent-specialized judges from China, the UK, and Germany.

If the European Commission that if they missed any details in China's official answer, the EU might just ask for a recording of today's conference (approximately five hours).

The presentations by multiple Chinese judges as well as two German (Judge Klaus Bacher of the Federal Court of Justice and Judge Tobias Pichlmaier of the Munich I Regional Court) and two British judges (Justices Richard Meade and James Mellor, both of the England & Wales High Court of Justice) summarized and explained various landmark SEP rulings I've previously looked at, all the way up to the very recent jurisdictional decision in OPPO v. Sharp. No surprises there, obviously. Those presentations were all well-structured and informative. Judge Bacher didn't mention that his court expects implementers to take global portfolio licenses--maybe he omitted it because it was so obvious to him, but in this international context it bears reiterating. I think Justice Meade stole the other European judges the show in terms of content, structure, and presentation (despite not switching into full-screen mode): low-key but world-class.

Several Chinese judges (and academics) were very good. My favorite among them was Judge Zhonglin He, Deputy Chief of the Intellectual Property Court of the Supreme People's Court, who delivered the closing remarks. He made it perfectly clear that they're more than willing to talk to the EU and prefer cooperation over confrontation. In a very credible way, he stressed that the Chinese courts won't issue SEP rulings just for the sake of preserving and exercising jurisdiction. They're not maximalists but look at the specific circumstances of each case.

The differences between Chinese, British and German judicial approaches to SEP cases crystallized today:

  • The German approach is very inflexible. They order anti-antisuit injunctions without ever asking the question of whethera foreign court may actually have good reasons to declare itself the proper forum for the adjudication of a global dispute, while they (the German courts) simply exercise global jurisdiction by forcing defendants into global portfolio licenses under the threat of an injunction. What Judge Bacher said about the Huawei v. ZTE framework

    pronounced by the European Court of Justice in 2015 sounded like a step-by-step, sequential analysis, but has nothing to do with the judicial reality in Germany, which cuts corners by importing virtually everything into the first step (the sincerity of an implementer's willingness to take a license).
  • The British judges were very forthright about how things work in the UK. With respect to the availability of injunctions (not only but also in the SEP context), there is a framework that looks like eBay v. MercExchange, but normally an injunction issues (even in favor of non-practicing entities). Antisuit injunctions are available, but international comity is considered. Where the UK judiciary goes further in a procedural sense than its German counterparts is that British judges set global rates even if only the patentee asks them to do so--but in practice, what German courts do has the same effect, just that implementers will, on average, end up paying more as German courts only throw out facially absurd royalty demands.

  • China's approach is very case-specific, and what positively surprised me is that the Chinese judges who spoke at today's conference sounded as policy-focused as pragmatic. Their policy focus is to provide guidance to the parties to SEP disputes, enabling them to reach an agreement. European companies and officials always take note when a Chinese court determines that it is in the position to set a global rate or to hand down an antisuit injunction--but it's not like anybody with even a tenuous connection with China could just go there and have a global dispute adjudicated in China. The underlying rationale is actually very nuanced. It may seem counterintuitive, but the way those Chinese judges spoke today was actually closer to how U.S. judges discuss patent issues than what I typically hear from British and German judges.

Today's conference wasn't going to solve the problems at hand, which are forum-shopping by parties and forum-selling by some (European) judges. But I believe it made an important contribution. I saw that some of the European judges, above all Judge Pichlmaier, followed large parts of the symposium.

It would be great if someone--ideally a political body or renowned academic institution--could organize such a gathering of judges in Europe and invite Chinese judges and academics to speak. To an EU event I would also recommend to invite U.S. judges, such as Judge James L. Robart of the United States District Court for the Western District of Washington, a thought leader on FRAND since his landmark Microsoft v. Motorola case.

There is, however, only so much that judicial dialog can achieve. Ultimately, when the judges go home from such a conference, they have to apply their national laws, and structural differences are a barrier to harmonization. Policy makers should engage in similar discussion.

At the next event of this kind, the focus should be on potential solutions that would satisfactorily address the problem of extraterritorial overreach in the SEP enforcement context.

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Wednesday, September 15, 2021

Intellectual property rights might not entitle Apple to any 'commission' on app revenues, but in any event nowhere near 30%: court misunderstood Epic's lawyers

For a blog with "patents" in the name it would actually have made a lot of sense to start the discussion of the Epic Games v. Apple ruling with the intellectual property aspects of the case. But I had to combat disinformation of app developers regarding the practical effects of the injunction (should it ever be enforced).

The court ruling is unfair to Epic with respect to what it actually wanted and argued. (Some would argue that it's unfair in other ways, too, but I wish to keep a narrow focus in this post.)

In the decision, Judge Yvonne Gonzalez Rogers accuses Epic of "overreach" and suggests that Epic wanted Apple to receive nothing from app developers, though even her own decision notes that "Epic Games does not venture to argue that Apple is not entitled to be paid for its intellectual property." The passage I just quoted is an understatement. Epic's counsel unequivocally said during closing argument that Apple is entitled to reasonable and non-discriminatory compensation for any intellectual property, but an antitrust case is always about putting an end to illegal practices (without necessarily replacing them with an alternative compensation scheme right away). It was not about a free ride. It was about not letting Apple (ab)use its App Store monopoly, and subsequently one could still talk about IP (but not in that same case).

I have no idea what Epic's appeal will focus on, but I wouldn't be surprised if the appeals court agreed with Epic that a sequential approach is precisely the way antitrust law works: you stop the illegal practice first, and then the defendant can come up with a new practice, which may invite further challenges (but those won't happen, or at least won't have merit, if the new practice is reasonable and non-discriminatory). The appeals court may tell the district judge that the purpose of a unilateral conduct case is not to replace an illegal practice with a legal one.

One question that some people are asking themselves already is whether Apple will seek its App Store commission on payments made outside an iOS app but because of an app linking out to, for example, a website. As I explained in my previous two posts, there's no way that Apple would have to tolerate alternative payment systems. The court made it clear that it's just about generating awareness for offerings on other platforms while Apple remains free to require the exclusive use of its own IAP system, and Apple will benefit from the legal standard, which allows Apple to interpret the injunction (in light of the underlying order) in the way most favorable to its own interests, as long as it's not unreasonable.

In practical terms, it would be possible but a real hassle for Apple to have to collect app commissions from developers that are generated through other payment systems. Apple couldn't possibly audit each and every developer's books. Maybe it could impose some severe penalties for fraud and then just perform audits in suspicious cases plus a few random audits. But we don't really have to think too much about that. Again, the injunction--if and when it actually gets enforced--is not going to be a major problem for Apple. They can reasonably interpret the court ruling as not having to condone any "end run" around its IAP rule, such as a mere web shop where users purchase digital items they consume on iOS.

With some console makers not allowing cross-wallet/cross-purchase (or seeking an additional compensation for cross-play), Apple could take the same position now. That would have political implications, but the Epic v. Apple ruling doesn't prohibit it.

As some people are discussing now, the court says that Apple could collect a commission even on sales through other app stores--though it would then be an IP license fee in the form of a percentage of sales, which is why the term "commission" doesn't fit. I think the court should have defined the term more narrowly. (On a previous occasion I also criticized Apple for broadening its meaning.)

What the court got absolutely right is that the 30% cut is not a market rate for the intellectual property in question. The court even takes note of "Apple’s low apparent investment in App Store-specific intellectual property." The commission is practically imposed and enforced because of Apple's app distribution monopoly. The term "gatekeeper" (which is very popular in EU tech policy and law) doesn't appear in that ruling, but that's what it's all about.

That leads us to an interesting question: what is the commission rate going to be in a future scenario (it's really a question of when--not if--this happens) where new legislation and/or a successful appeal by Epic would do away with the gatekeeper toll and would instead leave Apple with only one tool at its disposal--IP enforcement--to collect money from developers?

What if (actually, when) developers can publish iOS apps without depending on Apple's app review because they can go through alternative app stores (and "sideloading")?

The Epic v. Apple ruling explains the following:

"Apple distributes its basic developer tools for free but charges an annual fee for membership in its developer program to distribute apps and which allows access to, for instance, more advanced APIs (many of which are protected by patents, copyrights, and trademarks) and beta software."

"Apple’s intellectual property as it relates to the iOS ecosystem generally are significant. The record is undisputed that Apple holds approximately 1,237 U.S. patents with 559 patent applications pending. With respect to the App Store itself, Apple holds an additional 165 U.S. patents with 91 more U.S. patent applications pending. Other than these patents, Apple does not identify specifically how the rest of its intellectual property portfolio impacts the technology at issue in this case nor does it specifically justify its 30% commission based on the value of the intellectual property. It only assumes it justifies the rate."

Given this year's Supreme Court decision in Oracle v. Google, I can't see how developers' use of Apple's APIs would not constitute fair use. Google even got away with incorporating APIs into a new product that competed with (and ultimately displaced in the mobile market) the original platform (Java). Developers, however, don't use Apple's APIs to build a new operating system: instead, they build applications, with a strong presumption in each case that it constitutes transformative use.

Patent counts mean little. Epic wasn't going to turn this antitrust dispute over Apple's App Store monopoly into a declaratory judgment case over Apple's iOS and App Store patents.

If Apple had to resort to patent litigation against app developers in order to collect a commission, it would have to overcome developers' non-infringement and invalidity defenses. Developers would likely also raise equitable defenses, but let's not get into that here.

Those patent numbers may seem staggering, but they could melt down very quickly as most of those patents might simply never be infringed by a developer and others might get invalidated once challenged. If any valid patents are actually infringed, the next question is whether developers could work around them. Let's assume, just hypothetically, that there would be one or more valid patents left that are infringed and cannot be worked around. Then we get to the remedies stage.

Seriously, Apple wouldn't get anywhere near 30% (or even 15%) of developers' revenues in the form of damages or ongoing royalties.

The only way Apple could theoretically still get its 30% cut would be if it obtained an injunction. In the U.S., Apple would have to meet the eBay v. MercExchange standard. Developers would argue that Apple actually benefits from the availability of apps and makes money on its devices. That would up the eBay ante for Apple. In some other jurisdictions, particularly Germany, Apple could obtain injunctions more easily, but it probably has fewer patents there.

Even if Apple obtained an injunction, it might then face an antitrust challenge to its rates--with the same arguments Apple makes against standard-essential patent (SEP) holders. Sure, Apple would argue that it never made a FRAND licensing promise with respect to its iOS IP. But in Europe, SEP case law is antitrust-, not contract-based, and Apple made the same arguments there (and it also brought antitrust claims in the U.S. over SEPs, such as against Samsung, though in vain, and against Qualcomm, though the San Diego Apple v. Qualcomm case settled during opening arguments).

To sum it up, Apple needs the gatekeeper's leverage to collect its 30% (or 15% under the Small Business Program) commission from app developers. On an IP basis, at least in the U.S. (where it would likely be denied patent injunctions against developers), Apple would get nothing or a much smaller amount. In light of the risk-opportunity ratio, Apple might not even have an incentive to bring any IP infringement litigation against developers.

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Monday, September 13, 2021

App developers must know that any alleged ambiguity in the Epic Games v. Apple injunction favors Apple, not them: there won't be IAP alternatives, not even in WebView

This is a follow-up to my previous post on this topic: "No, the Epic v. Apple injunction absolutely positively DOESN'T allow developers to incorporate 'buttons' for alternative IN-APP payment mechanisms".

The original version of that post said Daring Fireball's John Gruber was "right for the wrong reasons." He did state reasons on Twitter that didn't convince me because it sounded like Apple's app review practices were going to inform the interpretation of the Epic v. Apple injunction. But John also referred at some point to Apple telling him that the ruling is unambiguous, such as in this tweet, though I disagree with the pages referenced there as that's the Sherman Act--not California UCL--analysis.

It's regrettable (to put it mildly) that The Verge's Nilay Patel just keeps digging himself an ever bigger hole instead of acting responsibly and admitting his error. The man is actually a lawyer by training (and journalist by vocation), so it shouldn't be hard for him to figure out that his analysis was fundamentally flawed because he focused myopically on the wording of the injunction while ignoring the underlying Rule 52 order. And a few hours ago the intellectual bankruptcy of his argument became even more obvious in the following tweet:

So let me set the record straight on this:

Nilay Patel himself says his "whole argument" is that the wording is allegedly "ambiguous." I don't even agree because the ruling is clear enough if one reads the relevant parts of the 185-page Rule 52 order. But if we assume--only arguendo--that Nilay Patel is right and it is ambiguous, it means he loses the argument anyway.

Under controlling Ninth Circuit law, Apple will only be held in contempt of court if it "(1) [] violate[s] the court order, (2) beyond substantial compliance, (3) not based on a good faith and reasonable interpretation of the order, (4) by clear and convincing evidence." In re Dual-Deck Video Cassette Recorder Antitrust Litig., 10 F.3d 693, 695 (9th Cir. 1993)

By coincidence, that case was also an antitrust case as its caption shows. And the same appeals court--the one with which Epic filed its appeal yesterday--clarified that the standard involves "disobedience to a specific and definite court order." (id.)

The bottom line is that any alleged ambiguity would favor Apple, not developers.

I am a developer, and a complainant against Apple in another App Store context. I wish I had better news for the wider developer community. But someone has to counter all that disinformation out there. It hurts me to see people fantasizing and theorizing about out-of-this-world crap that's simply not going to help anyone.

The question is not whether a developer's interpretation of the injunction is somewhat reasonable. It's whether Apple's interpretation is so unreasonable as to constitute disobedience to a specific and definite court order.

That threshold is very high.

Apple may have political reasons (in light of legislative and regulatory proceedings in various jurisdictions) to make concessions to developers. But in legal terms, Apple is free to interpret the injunction in its favor, provided that its interpretation is reasonable.

For the reasons I explained in my previous post, it's not just one reasonable interpretation, but the only one, to understand that the court explicitly did not enable alternative IAP mechanisms. It's all just about informing users of alternative platforms, such as that the same in-game item or currency might be available at a lower cost on, say, a Samsung phone via the Galaxy Store.

WebView (i.e., opening web pages within an app) is not going to be the answer. Any purchases made in a WebView would reasonably be considered in-app purchases and, therefore, wouldn't have to be condoned by Apple under a reasonable (in my view, even the only reasonable) interpretation of the order.

As I cover competition and IP cases across various jurisdictions, I'd just like to point out in closing that the Ninth Circuit standard for civil contempt is consistent with what I see everywhere else: it's par for the course that an injunction is interpreted in defendant's favor and that the evidentiary standard for a violation is also exacting. It's that ancient concept of "in dubio pro reo."

Apple won't even have to approve linking out to websites that merely sell digital items consumed in an iOS app. The clear purpose of the injunction is to have some competitive constraint on Apple by making customers aware of lower prices on other platforms. That platform may be the World Wide Web, but then whatever you purchase there must also be consumable there. For example, a game must be playable as a browser game. If all you get in the browser is the in-game shop, but not the actual game, it won't qualify under a--in my view, the only or at least the most--reasonable interpretation of the order.

In other contexts than anti-steering, the order mentions Apple's argument that it allows "cross-wallet" and "cross-purchases." Cross-wallet means that Fortnite gamers could buy V-Bucks (the virtual in-game currency) on another platform, such as a Windows PC, and then use those virtual bucks on iOS. Sony and Nintendo don't allow that--they insist that whatever you consume on their platforms has been purchased on their platforms (earning them their commission). Apple does. Cross-purchases are the same for digital items such as a powerful weapon. Here, too, Apple is more flexible than some others.

What if Apple now disallowed cross-wallet and cross-purchases?

It would minimize the practical impact of the injunction because game makers could point users to other platforms on which they may find the same offerings at a lower cost, but those purchases couldn't be consumed on iOS.

It wouldn't be a violation of the order (considering the exacting standard I outlined above).

It would be politically problematic, and Apple couldn't do so with respect to "reader" apps under its recent Japanese settlement that has worldwide effect but doesn't cover games.

In legal terms, any modification of Apple's IAP-related terms that disadvantages developers over the status quo would potentially serve as an indication of Apple's market power and the absence of sufficient competitive constraints, meaning that future antitrust decisions could--but, to be clear, won't necessarily--have different outcomes under the Sherman Act, even in the same district.

Apple will now have to decide whether to appeal an injunction and seek a stay of its enforcement. That would be the most obvious thing to do. What sometimes happens is that parties don't try to get a jury verdict overturned because it largely favors them, and in order to do away with the remainder they'd have to argue that the jury made a decision that no reasonable jury could have made (while defending their victory against the other party's claims that the jury was unreasonable). Here, we're talking about a bench trial, so the standard is different, making it easier to "have your cake and eat it."

The injunction won't take effect for about three months, and I guess Apple will appeal it and seek a stay, which may very well be granted.

Assuming that--sooner or later--the current injunction does become enforceable, this post and the previous one hopefully helped many developers understand that most of them won't really benefit to any non-negligible extent. Should Apple play hardball and disallow cross-wallet/cross-purchase, developers may even be worse off than before.

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Saturday, September 11, 2021

No, the Epic v. Apple injunction absolutely positively DOESN'T allow developers to incorporate 'buttons' for alternative IN-APP payment mechanisms

[Update] I've provided further information (specifically on the standard for contempt of court) in a September 13 post. [/Update]

This here is a follow-up to my commentary on the Epic Games v. Apple ruling that came down yesterday. I just visited my favorite IT news aggregator website and saw an article by The Verge's Nilay Patel with the following conclusion, which is off base:

"That means that a fair reading of the plain text of this injunction suggests that buttons in iOS apps can direct users to purchasing mechanisms in the app — if the button just kicks you out to the web, it would be an external link!"

Sorry, that's utter nonsense. On Twitter, Daring Fireball's John Gruber tried to convince Nilay Patel that he was wrong. In the end, Nilay Patel still stressed that it's up to the court to interpret its injunction. Well, John Gruber was right, and Nilay Patel arrives at the wrong result though he is right that the court--not Apple--will ultimately interpret the wording of the injunction. I've been rooting for Epic, and I wish everyone were as honest as Epic Games CEO Tim Sweeney after losing a court battle. But I'm absolutely committed to telling people the truth.

That article by The Verge (a website that actually did a great job covering the Epic Games v. Apple dispute) is simply what happens when one writes about a single-page document (the injunction per se) as if it existed in a vacuum--though it must actually be read against the background of the underlying 185-page Rule 52 post-trial order, just like patent claims are interpreted in light of the patent specification.

Nilay Patel's theory is absurd. It cannot possibly be reconciled with the part of the court ruling that deals with Apple's anti-steering provision. I'm wondering why no one in that Twitter debate (unless I missed it) brought it up. So I decided to write this post to put an end to that phantom debate.

Let's bear in mind that only Epic's tenth claim succeeded at all. Not only Epic's federal antitrust claims but also various state law claims failed. The failed state law claims include a couple that were very specifically about offering different IAP systems: Count 8 alleged unreasonable restraints of trade in the iOS IAP processing market under the California Cartwright Act, and Count 9 presented a tying claim related to IAP. Epic's tenth and last claim--based on California UCL--broadly raised the issue of Epic being "unreasonably prevented from freely distributing mobile apps or its in-app payment processing tool, and forfeit[ing] a higher commission rate on the in-app purchases than it would pay absent Apple’s conduct." But the court found for Epic under its tenth claim only with respect to the anti-steering provisions.

Section VI of the Rule 52 order addresses Epic's Count 10. Section VI.C ("Unfair Practices" is where Epic wins its consolation prize, so that's the part to focus on. The following sentence, found near the bottom of page 162 (PDF page 163), should end the debate:

"On the present record, however, Epic Games' claims based on the app distribution and in-app payment processing restrictions fail for the same reasons as stated for the Sherman Act."

Very clearly, this means that even the sole count on which Epic prevailed (in part) failed to do away with Apple's IAP rule, which is that you must use Apple's IAP system for accepting payments in your iOS native app.

Then, on the next page, the court distinguishes the IAP restrictions--which Nilay Patel erroneusly argued the injunction has annulled--from the anti-steering provisions:

"Epic Games did challenge and litigate the anti-steering provisions albeit the record was less fulsome. While its strategy of seeking broad sweeping relief failed, narrow remedies are not precluded."

The "broad sweeping relief" would have included both alternative methods of distributing apps to iOS users and alternative IAP systems. The "narrow remed[y]" the court gave Epic is just about providing information (including links) on external payment options (websites and apps for other platforms, such as Android, personal computers, or consoles).

The following sentence is the last one to start on that same page, and again clarifies what the court means by "anti-steering":

"Thus, developers cannot communicate lower prices on other platforms either within iOS or to users obtained from the iOS platform." (emphasis added)

Other platforms are key here because Apple does face competition from other device makers and platform operators, but--as Epic argued--not in the aftermarket of iOS app distribution.

The court goes on to explain the importance of "commercial speech, which includes price advertising" and, on page 164 (PDF page 165) says that "the ability of developers to provide cross-platform information is crucial."

Perfectly consistently, the court, when talking about the importance of users being able to make informed choices, recalls that "the Supreme Court has recognized that such information costs may create the potential for anticompetitive exploitation of consumers."

Information about lower prices on other platforms--not alternative IAP systems on iOS itself.

After the Tethering Test, the court performs a Balancing Test. In that one, the injunction ordered against Apple is distinguished from the one denied in the Amex decision by the Supreme Court:

"Here, the information base is distinctly different. In retail brick-and-mortar stores, consumers do not lack knowledge of options. Technology platforms differ. Apple created a new and innovative platform which was also a black box. It enforced silence to control information and actively impede users from obtaining the knowledge to obtain digital goods on other platforms. Thus, the closer analogy is not American Express’ prohibiting steering towards Visa or Mastercard but a prohibition on letting users know that these options exist in the first place." (emphases added)

Section VI.D (Remedies) is equally consistent in stressing that this is about information, not alternative IAP systems:

"Apple contractually enforces silence, in the form of anti-steering provisions, and gains a competitive advantage. Moreover, it hides information for consumer choice which is not easily remedied with money damages."(emphases added)

In summary, what Nilay Patel calls a "close read" and "fair reading" is nonsense because the Rule 52 order couldn't be clearer. In that one, the court made it unmistakably clear that the injunction it ordered is meant to be narrower than the permission of alternative IAP systems that Epic sought, and leaves no doubt that developers shall merely be allowed to provide users with information about prices on other platforms (WWW, Android, PCs, consoles...) to have at least a minimal competitive constraint on Apple. Just transparency. That's it.

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Federal judge awards Epic Games a mere consolation prize against Apple, which regrettably succeeded with its 'web apps are viable' lie

Yesterday's Epic Games v. Apple ruling by Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California (judgment, permanent injunction, and detailed Rule 52 order) amerely defers the resolution of the real competition issues facing iOS app distribution. It's one of those situations in which either side "gets something" and could claim victory, as Apple apparently does though the stock market initially disagreed (I, personally don't think the decision should have moved the stock at all). This makes it all the more remarkable that Epic doesn't engage in spin but concedes defeat. It's not that Epic achieved nothing; but for the time being, all it got is a consolation prize, and that's why Fortnite won't return to iOS at this stage.

Let me just share a few short observations for now as an exhaustive analysis would take a lot more time:

  • Epic are--for the time being--losers, but Apple are liars in the web apps context. They shamelessly took advantage of the fact that courts need to rely on expert testimony--which I almost mispelled as "testimoney" as expert witnesses say a lot of things when the pay is good--as soon as it comes to technical questions, and the biggest and most impactful lie here was that Apple portrayed HTML 5 web apps as a viable alternative to native apps for game distribution. I know exactly how the HTML 5 version of my Viral Days game feels and performs (it's just terrible); and I know how easy it would be for Apple with its death grip on iOS to always ensure that web apps would fail to meet customer expectations. I can't blame the judge for not knowing this. She's a judge, not a programmer. From my vantage point, based mostly on Epic's proposed findings of fact and conclusions of law, Epic had made the case for the insufficiency of web apps pretty well, though I raised three issues (two of them IP-related) shortly before the trial that I thought Epic should have brought up.

  • Epic v. Apple has been a greater success in terms of revelations (such as Tim Cook's admission that he doesn't receive reports on developer satisfaction) than in terms of remedies. An anti-anti-steering order (meaning that Epic got what AmEx was denied) may help Spotify to some degree, but doesn't solve the fundamental problems.

  • Epic could have succeeded--and on appeal still could succeed--even under the market definition adopted by Judge YGR: digital mobile gaming transaction. In my recollection of the late-May closing argument, that's a market definition Epic's counsel could actually live with. Without the word "mobile" in it, the definition would be too broad and Apple would be in the clear. But the aforementioned web apps lie and other smokescreens regarding alternative ways to distribute games to iOS users worked.

  • Originally, Judge YGR didn't want to make the factual findings herself. She'd much have preferred for a jury to decide because appeals courts afford way more deference to jury verdicts than judicial findings of fact. It was already obvious to me last year that she didn't want this case to be the next FTC v. Qualcomm, where one of her colleagues in the same district found in plaintiff's favor and the appeals court threw out the whole thing. So what Judge YGR has rendered here is a decision that gives either party plenty of ammunition at the appellate stage (e.g., "Apple's slow innovation stems in part from its low investment in the App Store"), though the worst part for Epic is clearly that the judge says the Fortnite maker has "failed to prove [its Sherman Act Section 2] claim for myriad reasons." In some contexts, the ruling leaves open the possibility of certain claims being proven with more or better evidence. Some of the rationale could even be described as displaying a great deal of insecurity along the lines of "maybe I should ... but I'm not sure I can." Anything could still happen before the Ninth Circuit. It could nix Epic's consolation prize based on California Unfair Competition Law but could also reverse key conclusions that enabled Apple's acquittal. Should the appeals court find that Apple has actually violated the antitrust laws (and not merely committed an "incipient" antitrust violation as Judge YGR put it), Epic could theoretically still prevail 100%.

  • What's disappointing is that the judge actually saw--as her world-class examination of Apple CEO Tim Cook on the last day of testimony showed--that Apple doesn't face sufficient competitive constraints with respect to developers, and knows that many developers are unhappy, but that this realization didn't dissuade her from a negative finding on Epic's Section 2 claim.

  • Apple's minimalist concessions have worked so far. The remedy imposed here bears a strong resemblance to how Apple resolved its Japanese antitrust issue relating to "reader" apps. But there's so much going on around the globe that Apple is merely delaying the inevitable because dilatory tactics are profitable. United States Senators from both sides of the aisle have responded to the decision by stating their resolve to take action. Before this case has been decided by a final court of appeal, new legislation may already address some of the issues and allow alternative payment options.

  • The ruling says: "Here, Epic Games has provided requests for its remedy which principally appear to eliminate app review." As I am pursuing my own complaints over Apple's app review, yesterday's decision obviously does nothing to address my primary concern. I still believe that alternative app stores are needed, and that anything less won't do.

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Wednesday, September 8, 2021

China to EU: we comply with the TRIPS Agreement and if you have any questions about standard-essential patent enforcement, let's have bilateral talks

On July 6, the European Commission, which represents the EU at the World Trade Organization (WTO) level, filed an elaborate five-page "request for information pursuant to Article 63.3 of the TRIPS Agreement" (TRIPS = Trade-Related Aspects of Intellectual Property Rights) as a formal "communication from the European Union to China." Styled as a request for information for transparency's sake, the EU was expressing concerns over China's standard-essential patent (SEP) case law, particularly global FRAND rate-setting decisions and antisuit injunctions.

The very recent OPPO v. Sharp decision by the Supreme People's Court (SPC) of the People's Republic of China (PRC) already demonstrated that the Chinese judiciary considers it stance on SEPs to be balanced and perfectly compatible with the concept of international comity (which in this context means that courts in one country respect their counterparts in another).

Even clearer is the message that the Chinese government has for the EU. China does not believe to be under any obligation whatsoever to respond to the EU Commission's request for information. The five-page questionnaire drew a five-paragraph response that fits on a single page. The final paragraph invites the EU to have a direct conversation rather than a further exchange at the WTO level:

"5. China and the European Union have established the China-EU IP Working Group, and China stands ready to have further discussions through such existing bilateral channel."

The first paragraph of China's response is a declaration of its commitment to IPR protection and a reference to the bilateral contacts mentioned in the final paragraph. The second paragraph disputes a formal obligation to respond.

In the remaining two paragraphs, one can find absolutely nothing about SEPs or antisuit injunctions. Zero. Nada. It's just about China's rules for publishing judgments online and a clarification that any guidelines found in cases designated as "typical" or "big" cases still aren't generally applicable. In other words, decisions are still made on a case-by-case basis, even if some judgments have a higher profile than others.

Brevity is the soul of wit. If China had filed 10 or 20 pages defending its case law, that would have been weaker than this terse reply. It would have been defensive.

The EU now has four options:

  1. The Commission's DG TRADE can say "alright, this went nowhere, we barked up the wrong tree." And let it go. Considering the effort that must have gone into the EU's five-page request, there's likely more to come though.

  2. The Commission can accept China's invitation, sit down, and talk. Diplomacy. Bilateralism.

  3. The Commission could bring a more formal complaint to accuse China of non-compliance with TRIPS, triggering a WTO dispute settlement procedure.

  4. Theoretically, the EU could start an all-out trade war (with punitive tariffs etc.). I can't imagine that as the next step, but they might threaten with it at some point.

I'm just a neutral observer who understands the interests of European companies in patent enforcement as well as China's interests in being a key SEP jurisdiction (given that most smartphones are made there, many SEPs belong to Chinese companies, and for a number of device makers China is the largest market). Both sides have legitimate interests, but equally legitimate questions can be asked about the EU's request for information:

  • Why are they concerned only about Chinese FRAND determinations and antisuit injunctions when

    • a U.S. court already entered an antisuit injunction almost ten years ago (Microsoft v. Motorola, a masterpiece of a decision) that prevented the enforcement of European (in that case, German) SEP injunctions, and

    • the UK Supreme Court (shortly before the UK formally left the EU) held in Unwired Planet v. Huawei that British courts can present implementers with the alternatives of accepting a global license agreement "made in Britain" or being forced out of the UK market?

  • Why is it OK for European courts (particularly the ones in Germany) to enjoin Chinese and other companies unless they take a global license? The fact that German courts don't set the rate is secondary. A SEP holder can ask for anything that is not facially absurd, provided that the implementer is deemed an unwilling licensee.

    This also affects U.S. companies such as Apple when they get sued in Germany--and they don't get help from their courts, which decline to make global FRAND determinations unless both parties ask them to.

Given that U.S. courts exercise more restraint than their counterparts in the EU, the UK, and China, I'm not even sure it was a good idea for the EU Commission to make extraterritorial overreach in SEP enforcement a WTO issue--and even less so in light of the Biden Administration's rather implementer-friendly leanings.

Let there be no doubt: there are problems that need to be solved. I would encourage the EU and China to talk to each other, and I would also encourage the U.S. and the UK (which may override its top court's case law by legislative means) to engage in discussions with the EU (and vice versa).

What is not a solution is for the pot to call the kettle black. Given that the EU has some sweeping to do in front of its own door, China rightfully gave short shrift to an insinuation of non-compliance with the TRIPS Agreement. But that doesn't have to prevent the parties from engaging in constructive dialog, or multilateral talks that would also involve the United States and the United Kingdom.

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Monday, September 6, 2021

China's top court affirms jurisdiction over global FRAND rates in OPPO v. Sharp, finding overwhelmingly strong Chinese connection

Last month, the Supreme People's Court (SPC) of the People's Republic of China affirmed on a definitive basis a decision by the Shenzhen Intermediate People's Court that OPPO is in its right to seek a global FRAND determination against Sharp from a Chinese court. Sharp had brought a jurisdictional appeal of the decision below. Last week, Chinese media reported on the ruling.

According to Counterpoint Research, OPPO shipped well 33.6 million smartphones during the last quarter, making it number four in the global market in its own right--though if you throw in the 32.5 million units sold by vivo and the volumes of other subsidiaries of the BBK Electronics group (such as OnePlus), we're actually talking about the world's largest smartphone maker (well ahead of Samsung and Apple). OPPO already has significant traction in various markets outside China, and increasingly has to fend off patent royalty demands and infringement assertions. Landmark rulings are an effective way to earn the respect of actual or potential adversaries.

At a time when the European Commission is challenging the Chinese stance on global standard-essential patent (SEP) dispute resolution by means of a set of questions raised at the WTO level, this ruling by China's top court is particularly important. It took me a few days to obtain an unofficial English translation. While I don't claim to know Chinese law, the ruling is, thankfully, self-explanatory.

The highest Chinese court determined that the lower court had jurisdiction over this case, that it was appropriate for the lower court to exercise such jursidiction and, on that basis, to adjudicate the global licensing terms for the SEPs in question, and also dismissed the argument that a Sharp subsidiary named ScienBizip Japan (which participated in licensing negotiations) was a proper defendant to OPPO's FRAND action.

Neither is the SPC's decision an invitation for all sorts of SEP implementers to flock to China nor is it an outlier. In my interpretation, OPPO made an extremely compelling argument against Sharp's appeal, but even someone whose case is not quite that strong might still prevail. The court considers FRAND disputes to involve questions of contract as well as patent law, and with respect to jurisdiction balances multiple factors such as whether many of the patents at issue are Chinese patents, where the parties negotiated or under which jurisdiction they concluded a license agreement, where the patents are implemented in terms of product development and manufacturing, and where most of the sales are generated. As for the latter criterion, in late 2019 OPPO generated approximately 70% of its global unit sales in China, and developed and manufactured 100% of its products there. Negotiations took place in China, too. And any future enforcement (of contractual obligations to pay royalties) would have a Chinese connection, as most of OPPO's assets are in China.

OPPO argued that the alternative would be for a foreign court to set a global rate, such as a UK Court further to the Unwired Planet judgment by the UK Supreme Court. The Chinese SPC merely took note of that argument without commenting on it, but presumably the global SEP litigation landscape played a key role nonetheless.

There are three schools of thought in the world when it comes to global FRAND rates:

  • U.S. courts are reluctant to set licensing terms for foreign patents. If one party opposes, it's game over (so far). If both parties agree, it's up to the court.

  • European courts (UK & EU) don't want to directly impose license terms on parties, but they practically achieve that effect by allowing injunctions to be enforced unless implementers take licenses on terms that are either set by those courts (UK) or are merely not considered facially absurd (Germany).

  • Chinese courts make FRAND determinations at one party's request, but subject to a multifactorial analysis of the economic parameters (forum conveniens).

This is speculative, but I guess an implementer won't have to prevail on all factors (though OPPO did)--and there's no indication whatsoever that an implementer must generate 70% of its worldwide unit sales in China (as OPPO does). It is likely sufficient to have higher unit sales in China than any other country (simple majority) in order to prevail on that factor. The SPC says that all factors must be "comprehensively" considered.

Sooner or later, we'll see a Chinese court ruling that arrives at a forum non conveniens conclusion. But if OPPO had lost to Sharp, there wouldn't have been a way for anyone to obtain a global FRAND determination from a Chinese court.

From a geopolitical perspective it will be interesting to see the EU and China discuss these jurisdictional questions, but even more interesting is the question of what U.S. courts and the Biden Administration will do. Will they stay on the sidelines?

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Wednesday, September 1, 2021

TCL takes MPEG LA's AVC/H.264 license just before Dusseldorf trials in patent infringement litigation brought by NEC, Panasonic, IP Bridge

Yesterday Ericsson won a key appellate decision against HTC, and today there is good news for some other standard-essential patent (SEP) holders. Today, patent pool firm MPEG LA announced that "TCL Electronics Holdings Limited ('TCL') has become a Licensee to MPEG LA's AVC Patent Portfolio License" and that "all legal disputes related to patent enforcement actions brought by patent holders in MPEG LA’s AVC License against TCL have been resolved." In complaints filed with the Dusseldorf Regional Court and announced by MPEG LA on July 27, 2020, TCL was accused of infringing patents declared essential to the AVC/H.264 (MPEG-4 Part 10) digital video coding standard used in mobile devices, TVs, and other products.

I've been able to find out that the plaintiffs in those German patent infringement cases were NEC, Panasonic, and IP Bridge. The Dusseldorf court would have held trials pretty soon, but TCL folded.

MPEG LA has a track record of victories in Dusseldorf. MPEG LA itself cannot sue, as it does not own those patents, but its contributors do. Very often, if not always, MPEG LA's contributors are represented in court by Krieger Mes's Axel Verhauwen.

TCL appears to have read the writing on the wall. Just this summer, it suffered two defeats in the Dusseldorf appeals court (Oberlandesgericht Düsseldorf, or Dusseldorf Higher Regional Court) in cases involving a Via Licensing pool: as a result of being deemed an unwilling licensee, TCL was enjoined. Those cases involve a different pool, but chances are that TCL realized it had to start settling at least some of its video codec patent cases.

In July, TCL also settled one of the longest-running cellular SEP disputes by taking a license from Ericsson.

TCL gets sued left, right, and center, which also includes Mannheim, where LG obtained an injunction in March. They have to choose their battles wisely, and it apparently wasn't prudent anymore to decline to take a license from MPEG LA.

Finally, it's worth noting that MPEG LA, in the capacity of an amicus curiae, is supporting the Avanci cellular SEP pool firm against automotive supplier Continental's dubious antitrust claims. The United States Court of Appeals for the Fifth Circuit vacated a hearing scheduled for Monday due to Hurricane Ida. A new hearing date is yet to be determined.

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Tuesday, August 31, 2021

Standard-essential patent royalties set to rise after unanimous Fifth Circuit judgment in Ericsson's favor ($2.50 or 1%/$1-4 per 4G device) against HTC

Hurricane Ida's landfall prevented the Fifth Circuit from holding the Continental v. Avanci et al. appellate hearing scheduled for yesterday (Monday, August 30). But the appeals court is still weathering the storm in other ways, and today put out its HTC v. Ericsson opinion (PDF).

The judgment is unanimous, though Circuit Judge Higginson filed a concurrence to make a point that is, ultimately, not outcome-determinative here.

The case originated from the Eastern District of Texas, where HTC alleged a FRAND breach by Ericsson, lost a jury trial, and the district court additionally entered declaratory judgment holding Ericsson in compliance with its obligations under the ETSI FRAND pledge, which is governed by French law. While the appeals court's affirmance of the district court ruling is based on purely legal questions (partly relating to jury instructions), it's worth noting what royalty demands have been blessed on the bottom line:

  • Ericsson initially (in 2016) wanted $2.50 per 4G device.

  • After HTC brought the complaint in question, "Ericsson proposed a new licensing agreement whereby HTC would pay 1% of each 4G device sold, subject to a $1 floor and a $4 cap."

HTC's response to the original $2.50 rate was a measly $0.10 counterproposal. The reaction to the 1%/$1-4 deal was an amended complaint.

Why such a discrepancy? Primarily it's due to the fact that HTC made a smallest salable patent-practicing unit (SSPPU) argument, claiming that the baseband processor should serve as the royalty base.

Outside of the Northern District of California, SSPPU arguments don't seem to get traction. While I believe no court would ever be inclined to let a WiFi SEP holder collect 1% of the price of an entire airplane with WiFi on board, baseband processors that aren't fully licensed aren't the measure--and if they are fully licensed, than the value of all IP licenses far exceeds that of the raw material.

The district court declined to overinstruct the jury, and its approach has now been affirmed. This is also a post-term achievement for the Antitrust Division of the United States Department of Justice under then-AAG Makan Delrahim. In late 2019, the Trump DOJ had filed an amicus brief formally in support of neither party but practically in Ericsson's favor. Interestingly, Apple's amicus brief in support of automotive supplier Continental's ill-conceived U.S. case against Avanci, Nokia and others--which is pending with the same appeals court--is all about bashing the Trump DOJ.

Let's face it: this victory for Ericsson is of transcendental importance. Whatever HTC will end up paying Ericsson is just a small piece of the puzzle. In the greater scheme of things, this is yet another milestone for cellular SEP holders, some of whom are going to look at Ericsson's win and feel that their rates are too low. And it's going to be harder and harder for car makers to refuse to pay royalties on their products that the U.S. judiciary apparently considers appropriate for phones. Apportionment arguments don't seem to do the trick for implementers--and there are so many license agreements that will have to be renewed in the near future, with SEP holders often demanding substantially higher royalty rates for licenses covering 5G.

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Sunday, August 22, 2021

The Federal Patent Court's six-month target and 33-month reality: flawed patent reform straight from the ivory towers of Berlin

NOTE: The above is a simplified comparison as the six-month target relates to the Bundespatentgericht's (Federal Patent Court) preliminary opinions and the 33-month reality to final judgments, as I'll clarify further below.

Throughout the German patent "reform" process, I focused myopically on access to injunctive relief. A few days ago, on the occasion of the start of operation of the Munich I Regional Court's 44th Civil Chamber, I reiterated my belief that those who hoped to benefit from the new injunction statute (automotive, electronics, and telecommunications companies) are not going to pay less for patent royalties--they're just going to spend more money on litigation. Pharmaceutical companies going after plagiarists will likely be fine, but they do have a risk because of the psychological pressure it may put on a court if an injunction allegedly deprives patients of access to life-saving medications (one could see those dynamics in this year's political debate over access to COVID vaccines).

What I treated with benign neglect was the second-most important part of the "reform" bill: the one that relates to stays of infringement proceedings pending parallel invalidation actions before the Federal Patent Court of Germany, the European Patent Office, or the German Patent & Trademark Office. But now that the measure has formally entered into force, it's overdue to conduct an impact assessment.

I'll be blunt: The text that has been inserted into § 83 of the German Patent Act (the section on nullity proceedings) is just as fundamentally flawed as the modifications they made to § 139 (the section on injunctions). The sum of those two amendments--which are still like 100 times more important than all other modifications combined--is nothing short of a dumpster fire.

In current polls, there's not a single political party in Germany that has the confidence of more than about a quarter of the population in its ability to address the most serious challenges. If more than a small minority of professionals understood that the same government (meaning the executive branch, which drafted the piece of legislation, as well as the government parties' lawmakers in a strict sense) understood what crap they put out in the patent policy context, confidence levels would drop even further.

They even know that they botched the part on stays over validity doubts. Pathetic craftsmanship is to blame, and the incoming government will be told that an amendment (comparable to a bugfix update of a computer program) is needed. Here's why:

  • They call on (but don't--as they can't--obligate) the Federal Patent Court to hand down a preliminary opinion ("qualifizierter Hinweis") within six months of service of the relevant nullity complaint on the patent holder.

  • However, according to § 81(2) of the same law, a nullity action cannot be brought while

    • one has the opportunity to file an opposition with the issuing patent office (EPO or German PTO) or

    • such opposition proceeding is pending.

    Especially in a context like 5G, there'll be many young patents: notice of opposition can be given for nine months after publication of the granted patent.

  • The German government could probably ask the German PTO (DPMA) to hand down preliminary opinions during the same six-month timeframe, which it would do if it had the prerequisite resources. But at least in the cases I'm interested in, DPMA-examined patents-in-suit are few and far between. The EPO, however, is run by the EPOrg, an international organization (Germany is just one member states among several dozen).

  • So there'll be a number of disputes in which the version of § 83 that was promulgated this month is going to be ineffectual due to § 81(2). A serious blunder.

Then there's a sentence in the new version of the statute that isn't wrong, but shows that the whole "reform" has more to do with appeasement and window dressing than with actually making an impact:

"Ist eine Patentstreitsache anhängig, soll der Hinweis auch dem anderen Gericht von Amts wegen übermittelt werden."

My translation:

"Is an infringement action [i.e., one in which the challenged patent is asserted] pending, the preliminary opinion should also be transmitted ex officio to the infringement court."

Just like the new injunction paragraph that contains useless passages such as a reference to the principle of good faith, the above sentence is a waste. Lawmakers should keep statutes focused on what really makes a difference. Let's face it: if a defendant wants to get a mileage in the infringement proceeding (i.e., increase the likelihood of a stay) out of a preliminary opinion by the Federal Patent Court that casts serious doubt on the validity of the patent-in-suit, that defendant's counsel will be sure to file the German equivalent of a U.S. request for judicial notice anyway. Conversely, if the preliminary opinion is favorable to the patent holder, the plaintiff in the infringement case will request judicial notice. There's no reason whatsoever to believe that an infringement court ever ignored a preliminary opinion by the Federal Patent Court on the (in)validity of a patent-in-suit.

I decided not to translate the German word "soll" with "shall" because that literal translation would be too close to a hard and fast obligation. Some translate "soll" in a legal context with "should" in order to make it clear that it's merely a target, not a limit. And that leads us, finally, to the most fundamental deficiency of that botched statute:

"Dieser Hinweis soll innerhalb von sechs Monaten nach Zustellung der Klage erfolgen."

My translation:

"The preliminary opinion should be rendered within six months of service of the nullity complaint."

Does that one really close the so-called injunction gap? The injunction gap is the window for the enforcement of an injunction that results from the fact that the infringement rulings typically come down well ahead of the nullity decisions, meaning that actually-invalid patents are often enforced, which often gives the patentee so much leverage that the defendant will be forced to settle and, under the standard terms of a settlement agreement, drop the nullity action.

A lower standard for stays would have moved the goalposts in defendants' favor. Whether or not one believes that the standard is too exacting right now, there is no question that if you lower the standard for stays, you get more stays. The same is not necessarily true of a six-month target for preliminary opinions.

Here's an "all other things being equal" perspective:

In order for more infringement proceedings to be stayed under the new statute, and with the standard for stays remaining unchanged,

  1. the quality of the nullity complaints must not be lower;

  2. the quality of the reasons provided by the Federal Patent Court must not be lower (lest the preliminary opinions bear less weight with the infringement courts);

  3. there must not be a reason for which the Federal Patent Court would be less inclined to cast doubt, in a preliminary opinion, on the validity of a challenged patent; and

  4. the Federal Patent Court would actually have to meet the six-month-target or at least not miss it by so much that an injunction would be entered and enforced before the infringement proceedings get impacted by the preliminary opinion.

Most German patent litigators aren't concerned about the first one of those four items if viewed in isolation: the infringement courts expect defendants to make their nullity case when they file the answer to the complaint, and if the Federal Patent Court actually hands down a preliminary opinion about six months later, that's normally timely.

Let's now skip straight to the end of the list: is the six-month target realistic?

On page 135 of the Federal Patent Court's 2020 Annual Report (page 69 of the PDF), one can read that the average number of months from docketing to resolution of nullity complaints was 24.6 in 2016 and has steadily increased to 32.8 (which I rounded up to 33 in the headline) by 2020.

The previous page indicates that there were 380 nullity cases pending on January 1, 2020. During that calendar year, 230 new nullity cases were filed, out of which 200 were adjudicated or withdrawn. The net gain of 30 increased the docket size to 410 pending nullity cases by yearend 2020.

In November 2019, I contacted the Federal Patent Court's press office with the question of how many nullity actions really get decided as opposed to dismissed by parties (which typically happens further to settlements, or because a nullity complainant is on the losing track). I was pointed to other statistics, according to which about 50-60% of all nullity cases were withdrawn, and 60-80% of those withdrawals occurred before the Federal Patent Court held its internal vote (the remaining withdrawals must have happened while the Federal Patent Court's decision was being appealed to the Federal Court of Justice).

For a simple breakdown, let's multiply 60% (number of withdrawals) by 80% (for the number of withdrawals prior to the court-internal vote), and we can see that roughly half of all nullity cases go away before they actually come to judgment. In the types of disputes I watch (which are typically settled relatively quickly), it's actually rare for the Federal Patent Court to decide. That's why I haven't even attended a Federal Patent Court hearing in more than seven years.

Now we can see why the backlog grew by "only" 8% (from 380 to 410 cases) during 2020: the current time to resolution is already so long that many cases never have to be adjudicated. The longer the nullity cases take, the more likely it is that a dispute is settled because of developments in the infringement cases (also including cases in other jurisdictions).

That fact complicates any effort to accelerate the Federal Patent Court's handling of nullity complaints:

The sooner the Federal Patent Court decides, the less likely it is that the case has been withdrawn (because of a settlement or for whatever other reason).

Most of the Federal Patent Court's work used to be done late in the process. In the past, the preliminary opinions typically came down when the nullity hearing was already in sight. From a case management perspective, the early stages of those cases used to be largely administrative: early on, it's largely just about the briefing schedule. Then, if a given nullity action was still alive after a while, came the point when the court had to address substantive questions and write its preliminary opinion.

Whoever in Berlin may have suggested that the Federal Patent Court could simply move up the issuance of a preliminary opinion like you reschedule a car tire change is either a fool or just wanted to fool others.

In many cases, the court never had to write a preliminary opinion because of earlier withdrawals. With the same resources that are required to hand down a preliminary opinion in just one nullity case, the court could probably handle dozens of nullity cases at the pre-opinion stage where its responsibilities are largely just administrative.

From the outside it's hard to tell what percentage of the actual work performed by the Federal Patent Court in a nullity case relates to the initial assessment of the merits and the authoring of a preliminary opinion. I've inspected a number of Federal Patent Court case files over the years. My guess is that it's at least 30% of the effort. The parties may make further filings after the preliminary opinion; a hearing typically takes a full day; and the actual decision must be written carefully. But after the preliminary opinion, the five-judge panel is already well aware of the challenged patent, knows the prior art references, and has identified the issues on which the case hinges. This may even be well over 50% of the overall effort, but I wanted to offer a conservative estimate, to err on the side of auction.

If the Federal Patent Court actually wanted to change its modus operandi now, it would have to basically devote all of its available resources to the production of preliminary opinions, and even then it might not be able to make the six-month target in many cases under "all other things being eqal" conditions. And this reallocation of resources would further slow down the actual resolution of cases, as the total workload would increase substantially considering that many cases are dropped before a preliminary opinion used to be formed and rendered.

It's highly unlikely that the Federal Patent Court will overnight get the incremental resources that the ill-conceived (and in my view, simply idiotic) patent reform bill would require.

The Federal Patent Court is already the second-largest court in Germany. Only the Federal Court of Justice employs more judges, and that court has jurisdiction over all civil (including, but not limited to, patent) and criminal law. Any appeal of a Federal Patent court nullity decision can be appealed to the Federal Court of Justice, and those are appeals of right, while appeals of infringement decisions are discretionary (comparable to the U.S. certiorari process).

The preface of the Federal Patent Court's 2020 report was written by now-retired President (i.e., Chief Judge) Beate Schmidt. She wishes her successor, Dr. Regina Hock, all the best--and notes that the Federal Patent Court "is facing new challenges" related to the Unified Patent Court (UPC) and the patent reform bill. Between the lines she requests additional resources: "With the unique composition of its bench, some of whose members have a technical background while others have legal training, the Court is well-equipped for the correct adjudication of increasingly complex cases, provided that it can count on support from politics, industry, and stakeholders." (my translation; emphases added)

Realistically, additional funding is not going to be available to an extent that would truly address the problem and enable the Federal Patent Court to deal with this new challenge.

So there won't be preliminary opinions under "all other things being equal" circumstances. No way.

Instead, the Federal Patent Court will quite often need more time.

But it will strive to meet the six-month target as often as possible, or to at least not exceed it by too much. There'll be a price to pay for that shortcut to a preliminary opinion. The court will hardly be able to maintain the same level of quality. And the judges will have a strong incentive to make their preliminary opinions, which in the past were very often consistent with the final judgments, more of an "agenda-setting" procedural step: instead of taking a position on whether the patent is valid or not, those opinions may become more like a list of items that counsel should address.

That, in turn, will not help the infringement courts with their summary determination as to whether or not a case should be stayed.

Defendants will benefit if patents are clearly anticipated by the prior art. Some patents are really ridiculous. However, if there are novelty issues, then the infringement courts are reasonably willing to stay a case, with or without a preliminary opinion by the Federal Patent Court.

Whenever a patent has a certain degree of complexity, and one has to combine prior art references in order to disprove the presence of a sufficient inventive step, there is now even a risk of the Federal Patent Court's preliminary opinions being more skeptical of the prospects of a nullity action.

Under severe time constraints, the Federal Patent Court may often be reluctant to indicate, even on a preliminary basis, a "thumbs down" on a patent that a patent office granted after examination. In case of doubt, it might just indicate in a preliminary opinion that certain questions need to be addressed in the further process--it is legitimate to want to err on the side of caution.

So are we going to see more stays on the bottom line?

Most of the people I talk to believe that there will be more. I'm not sure. My range of expectations goes from "no significant change" to "a slightly higher likelihood of stays." And while it's the least likely outcome, I seriously wouldn't rule out that this statutory change could even hurt defendants on the bottom line, with preliminary opinions that help defendants coming down on a timely basis mostly in cases in which the infringement courts would likely have stayed the proceedings anyway, and with a significant number of complex cases now leading to preliminary opinions that favor patentees just because the court will want to err on the side of caution and would need a lot more time (and further briefing) before it would really have the confidence to express the opinion that a patent is likely invalid. Those "agenda-setting" preliminary opinions may very well dissuade the infringement courts from stays they'd have granted if there simply had been no preliminary opinion available at decision time.

The one who will not be to blame are the judges serving on the Federal Patent Court's nullity panels. Those judges know what kinds of companies lobbied for this bill. Their professional ethics will not allow them to intentionally disadvantage the automotive sector or Deutsche Telekom, nor do they have any reason to devalue any patents asserted against such companies by prematurely declaring them to be likely invalid. The six-month target is an utter stupidity.

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Thursday, August 19, 2021

Munich I Regional Court's third patent litigation division commenced its operation on Monday, first administrative decisions are already known

As the Landgericht München I (Munich I Regional Court) announced in late June, its new patent litigation division started its work on Monday (August 16, 2021). It's the court's 44. Zivilkammer (44th Civil Chamber).

The new civil chamber's Presiding Judge--Judge Dr. Georg Werner--was already known at the time. Today I learned that his deputy will be Judge Dr. Anne-Kristin Fricke, who joined the 21st Civil Chamber (Presiding Judge: Judge Tobias Pichlmaier) a couple of years ago and was available to help out the 7th Civil Chamber (Presiding Judge: Judge Dr. Matthias Zigann) as well with her background in antitrust law. Presiding Judge Dr. Werner's second side judge will be Judge Dr. Franziska Greiner-Wittner. According to the web page of a book she wrote, she studied in Munich and clerkships also took her to Hamburg and Jakarta. In 2015, Judge Dr. Greiner-Wittner was a visiting researcher at George Washington University.

With a view to intradistrict assignment, one needs to consider that the new division is initially operating at 50% of the regular capacity. From this one can infer that the 44th Civil Chamber will get approximately 20% of the total patent caseload in Munich, while either of the other two divisions will handle 40% of cases.

What wasn't clear before--but has been decided by now--is that the new division will not only be assigned cases filed from here on out but some cases already pending with other divisions will be reassigned to the 44th Civil Chamber.

At this stage, no hearings or trials before the new division have been scheduled yet. The current operating assumption is that the new division will be in session on Wednesdays (like the 21st Civil Chamber).

I'm coming from the assumption that Presiding Judge Dr. Zigann will soon be promoted to the Munich Higher Regional Court. In that case, one of the lower court's current deputy presiding judges will be promoted as well. The Munich court has several patent-specialized judges who could be promoted, or maybe a side judge from the appeals court will become a presiding judge on the lower court.

According to an announcement made by the Preparatory Committee of the Unified Patent Court (UPC), the new court with the authority to enter judgments with effect in a multiplicity of European countries, "will start operations around mid-2022." Munich is going to be a key UPC venue, and we're going to see some of the well-known Munich patent judges dividing their time between the courts run by the Free State of Bavaria and the UPC. The percentage of their time that they spend on UPC cases will increase as more and more patentees decide to avail themselves of UPC jurisdiction. Initially, many cases will still be filed with national courts where the case law is pretty settled and plaintiffs know what to expect. During a long transitional period, plaintiffs can choose where to bring their complaints.

Meanwhile, Germany's patent injunction "reform" has entered into force. It was signed into law by the Federal President and published in the Bundesgesetzblatt (Federal Law Gazette) last week. The following day, renowned patent litigation and prosecution firm Bardehle Pagenberg published a YouTube video discussing the potential ramifications for the pursuit of injunctive relief:

As Professor Dr. Tilman Mueller-Stoy ("Müller-Stoy" in German) explains, there may be some new types of discussion in connection with third-party interests affected by the enforcement of patent injunctions. Professor Mueller-Stoy gives two examples: "vital drugs when patients' lives are at risk" and critical infrastructure such as public telecommunications networks. As for the latter, I still don't expect any injunction against a network operator actually to be denied in a case in which the patent holder makes a licensing offer that is not facially absurd. The same Bardehle lawyers published an analysis of the reform bill in late June in which they noted the following, with which I concur:

"It may be advisable, as the case may be, to make a reasonable license offer to the infringer that has carefully been thought out before or when filing the complaint. If the infringer has the possibility of averting a claim for injunctive relief by accepting such a license offer, hardly any German court will limit the claim for injunctive relief based on disproportionality."

As for essential medications, just before the reform bill formally took effect the Munich I Regional Court's 21st Civil Chamber granted Bayer multiple preliminary injunctions over a cancer drug patent, as Juve Patent reported this week. Those PIs are more like temporary restraining orders as they'll only be in effect until a Federal Patent Court ruling next month. The availability of PIs over patents of doubtful validity is a tricky subject that gave rise earlier this year to a preliminary reference by the Munich court to the European Court of Justice. There has also been some back-and-forth lately between the lower and higher Munich courts in some other PI case.

While the new German patent bill with its explicit reference to third-party interests wasn't in effect when those PIs came down, the official position of the government and the parliamentary majority was that it was merely meant to draw the lower courts' attention to the possibility of denying injunctions on (dis)proportionality grounds. Passing a bill into law, even if it hasn't been formally signed or published, would be a sufficient means to the end of creating awareness, and at least the companies sued by Bayer apparently didn't get any benefit from third-party interests.

I'm pretty sure that automotive companies, smartphone makers, and telecommunications carriers will be enjoined just like it was 2020. Of course, this presupposes that counsel for plaintiffs won't blunder. In those kinds of cases, it's extremely rare that someone truly wants to force another company out of the market. It's virtually always about money, and with the availability of a license working just the opposite way in Germany from the United States (under eBay, a willingness to grant a license strongly weighs against injunctive relief as it's antithetical to the notion of "inadequacy of monetary relief"), patentees will normally make an offer. That offer doesn't have to be "cheap." It just has to be close enough to reasonable that the courts will, in case of doubt, order an injunction.

In the pharmaceutical context, licensing offers are far less common. It's typically about market share, not royalties. I believe the courts will ultimately also enjoin pharma infringers like before, but there's a bit of a risk. Should a pharmaceutical innovator like Bayer at some point be denied an injunction due to this year's reform bill, it would be a total disaster for the Federal Ministry of Justice and the Federal Parliament, as no one intended any collateral damage to the research-intensive pharma sector. It was all about automotive and telecommunications companies complaining about extortionate patent enforcement. But the process simply went in the wrong direction because neither the statutory language drafted by the Federal Ministry of Justice nor any of the proposals put forward by trade associations (like the VDA, which is Germany's automotive industry association, or ip2innovate) were any good. As a result, those who started it will have no tangible benefits (unless plaintiffs make mistakes), but others may (or may not) be adversely affected. That would be like a COVID vaccine that provides next to zero immunity while coming with severe, at times fatal, side effects. And everyone, regardless of industry sector, will waste money on expert reports and legal argument related to proportionality. Those costs will mostly hit defendants, though. They're going to have to give it a shot, but it won't save them license fees on the bottom line. So stupid.

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