Wednesday, December 22, 2021

Daimler takes Avanci patent license--all major German car makers now Avanci-licensed, but Volkswagen only up to 3G

Germany's leading business weekly, Wirtschaftswoche, has just been first (and I might still be second) to report that Daimler has finally taken a standard-essential patent (SEP) license from the Avanci pool, whose licensors include Qualcomm, Nokia, Ericsson as well as dozens of other companies from around the globe.

If you can't beat'em, join'em.

It was actually Avanci's approach of licensing the end product--the vehicle as opposed to a component thereof--which Daimler had originally rejected. As a result, the Nokia v. Daimler patent infringement dispute lasted more than two years and ended in a bilateral (just Nokia and Daimler) license agreement that was announced on June 1, 2021. Daimler had also brought an EU antitrust complaint (over Nokia's refusal to grant Daimler's suppliers an exhaustive SEP license) that it withdrew after the settlement.

Prior to settling with Nokia, Daimler had already taken bilateral licenses from Japanese electronics giant Sharp and non-practicing entity Conversant Wireless. All those companies--plus Japan's IP Bridge--had sued Daimler in Germany over patent infringements. And all of them are among the Avanci pool's more than three dozen licensors.

Piecemeal resolution--licensing one portfolio at a time--apparently turned out uneconomic, and litigation involves major uncertainty, so Daimler's decision-makers opted for a one-stop solution. In the alternative, I guess one Avanci licensor after the other would have wanted Daimler to take a bilateral license. If you're a Qualcomm or an Ericsson, why would you not want to get paid if Nokia does? If you're an Unwired Planet or Longhorn IP, why wouldn't you want to collect royalties if Daimler took a license from Conversant? Why would anyone condone an ongoing infringement while similarly situated patent holders are raking in license fees? Daimler avoided a lot of issues by signing a deal with Avanci. I've criticized Daimler on various occasions, but this pragmatic choice just makes sense under the current circumstances.

Of the three major German car makers, BMW was first to take a 4G Avanci license (in January 2017). In 2019, Volkswagen subsidiaries Audi and Porsche followed--and the following month, other car makers in the Volkswagen Group took a 3G license, but is now being sued by Acer because its license does not cover the 4G standard Volkswagen actually implements. The fact that the other major German car makers had accepted Avanci's car-level licensing model was held against Daimler in the German Nokia cases. Daimler's license deal will now weigh against other car makers' FRAND arguments. I'm thinking of Volkswagen's defenses against Acer but also about Ford, which is facing an infringement case brought by Sisvel as well as other lawsuits (IP Bridge, Longhorn IP) over its refusal to take an Avanci license.

Continental and Thales remain on the losing track

Some Daimler suppliers are still fighting against end product-level licensing. Continental (which knows a lot more about making tires than about patent licensing, litigation, and policy) continues to be a vocal critic of the Avanci model. These days it's hard to attend a FRAND/SEP webinar without someone from Continental expressing concerns. French industrial conglomerate Thales, whose primary competence it is to make high-speed trains, brought an antitrust case in Munich that is highly unlikely to get traction.

The likes of Conti and Thales can keep trying to tell courts and competition watchdogs that they should be granted an exhaustive component-level SEP license by Avanci's licensors, but judges and antitrust officials will see that their customer--Daimler--has determined that a car-level pool license is the way to go. Neither Thales nor Conti will be able to explain away that market reality.

Also, a Fifth Circuit opinion affirming the dismissal of Continental's U.S. case against Avanci and several Avanci licensors will come down soon. Conti's Delaware case against Nokia has been sent back from the federal court to the state court, which means that the case was basically just going in a circle for about a year--and the state court could still find that the case actually belongs in federal court (which in my opinion it does, as patent exhaustion is a theory under patent law, which is federal law, even if contractual questions are involved). It could also dismiss Conti's case, which is actually a fairly likely outcome.

Tout ça pour ça? Questioning the wisdom of Daimler's dispute with Nokia

This outcome does beg the question of why Daimler picked a fight with Nokia (and other Avanci licensors) in the first place. In the end, Daimler wasted millions and millions of euros on Quinn Emanuel's litigation services, only to be enjoined four times (two injunctions in Nokia's favor, one for Sharp, and one for Conversant) just over the course of a few months in 2020. If the Nokia dispute had continued, there would most likely have been several more injunctions, as some cases had been stayed but the patents-in-suit survived Daimler's validity challenges. Daimler could have had this outcome with pretty much any other German patent litigation firm (and they're all less expensive than QE), and could have taken an Avanci license in the first place without ever having to defend against SEP assertions by an Avanci licensor.

For a company that generally prides itself on cost efficiency, such a waste is unusual, if not unprecedented, and I wouldn't be surprised if some people were now struggling to justify the decisions they made a couple of years ago.

It's not that it's necessarily wrong to fight--because if you win, it's hard for others to argue with your success. Daimler wanted to bring down patent license fees. That's their job, just like it's the job of those people's counterparts at other companies to maximize their revenues. But then you have to play a game that you know how to win, and there was no sign of the people in charge of Daimler's Nokia cases being up to the challenge. They lacked the experience and the broad perspective that you need to win a war like that. I'm quite convinced that a company like Apple would have done a far better job by virtue of the strategic sophistication of its in-house litigators (who play this game more holistically and know how to get a better price-performance ratio from outside counsel). They also never figured out how to successfully influence Germany's patent reform process, despite the automotive industry's privileged access to politicians.

By comparison, major U.S. corporations value their in-house counsel a lot more. As a result, they bring in people who could easily be partners at some of the world's leading law firms. By contrast, the general perception in Germany is that if someone becomes in-house counsel, it's because they're not up to the way more lucrative challenge in Big Law. Going in-house is pretty much a point of no return in Germany, not a revolving door like in America. This doesn't mean that there aren't some very capable people in the legal departments of German corporations, but on average they're clearly nowhere near as sophisticated as their U.S. counterparts. That's also what I hear from patent holders of different sizes trying to work out deals.

For German legal departments, it's less about achieving results than justifying their decisions internally, such as by fooling their superiors into believing that something (such as German patent "reform") is a success story when it actually isn't. But at this stage Daimler's lawyers can hardly justify their waste of money on those Nokia, Sharp, Conversant, and IP Bridge cases. The negative ROI is all too clear.

German corporations treat legal departments are mere service providers. In major U.S. corporations, they have a strategic role and are a sparring partner for management in certain contexts. A great example is Brad Smith, who joined Microsoft as in-house counsel, ran its legal department for many years, and was then promoted to President (beyond still being the company's top lawyer).

Possibly the most important breakthrough for Avanci to date

For Avanci, Daimler's decision to take the pool license is a breakthrough. Its importance can hardly be overstated as other car makers are now going to be increasingly inclined to do the same, as opposed to betting on that non-starter called Licensing Negotiation Groups. Early last month, an Avanci executive mentioned new license agreements with Jaguar, Land Rover, and Aston Martin. And while neither Avanci nor Tesla ever confirmed it, there's a strong assumption of Tesla having taken an Avanci license, as multiple infringement actions brought by Avanci licensors against Tesla were withdrawn near-simultaneously.

Shortly after Nokia's settlement with Daimler, another--unnamed, but possibly Ford--car maker took a bilateral license. We may see similar effects now, but with respect to Avanci.

Meanwhile, the automotive industry is awaiting with interest the (delayed) announcement of Avanci's 5G pool rate.

Ramifications for Ericsson v. Apple

As I touched in a previous section on how Apple would have performed in Daimler's place, the iPhone maker is now going to be indirectly impacted by this in case it fails to renew its license agreement with Ericsson. Should we see another round of Ericsson v. Apple infringement cases in 10 days' time, Ericsson will benefit from Daimler's Avanci license in two ways. Apple famously makes a smallest salable patent-practicing unit (SSPPU) argument, and the momentum behind the Avanci pool--even though in a different industry--ups the ante for anyone arguing that SEPs should be licensed at the chipset level. And even though there are differences between these industries, the more traction Avanci has, the harder it will be for Apple with its huge margins to argue that it can't just pay Ericsson $5 per iPhone for its entire patent portfolio all the way up to 5G (for a reminder, Avanci has yet to announce its 5G rate, but the rate is expected to be substantially higher--for good reason--than the 4G fee).

Wirtschaftswoche's recent patent coverage

Today's Daimler-Avanci breaking news is actually the third patent-related Wirtschaftswoche story on patents within less than a week that is recommended reading for those who understand German and are interested in patent licensing and litigation. "WiWo" also researched the creepy story of dozens of jobs lost at a small family-owned company due to Germany's bifurcation regime (which allows injunctions to be enforced prior to a ruling on the (in)validity of a patent-in-suit). That article appeared in Friday's print edition, and was additionally uploaded to yesterday.

Also yesterday, Wirtschaftswoche reported on the Acer v. Volkswagen patent lawsuit. In that article, I am quoted as saying that Volkswagen should long have acquired a SEP portfolio (given that such patents are for sale from time to time) and needs to approach IP more strategically at the top level. To be clear, VW has a fully functional patent department, and they're ahead of others in their industry, but without C-level executives taking a stronger interest in IP and deciding not to make themselves dependent on other companies (such as Daimler) through slavish adherence to industry associations, they're not going to be match for wireless patent licensors. Volkswagen told the VDA (Germany's automotive industry association) point blank that they'd leave the organization unless it fully commits to electric mobility.

C-level interest in IP differs greatly between the automotive industry and Big Tech. Big Tech CEOs have subscribed to this blog and the related Twitter account, but I'm not aware of the top brass of automotive companies ever having subscribed to FOSS Patents.

As Daimler's Avanci license shows, the automotive industry has to come to terms with the fact that major wireless companies are now in the position to impose their preferred business models on car makers, no matter how much the auto industry may point to century-old traditions regarding their supply chains and what have you.

The battle over the business model is practically over. Daimler's legal fees are a sunk cost, and its financial controllers will be crying tears. What all car makers--above all, Volkswagen--need to reflect on now is how to achieve the best results possible under a framework that wasn't their first choice, but which has simply prevailed. They've all learned a few lessons in recent years--and they've paid their tuition fees. The problem they face is that the world around them is changing faster than their organizations can adjust. Increasingly they're going to face competition from companies that hold SEPs, such as Apple, Google, or Xiaomi. In times of transformation, leadership from the very top of those organizations is needed. Otherwise the only beneficiaries will continue to be patent litigation firms.

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