Tuesday, August 30, 2022

Whether Amazon instigates or draws antitrust scrutiny, it's always about avoiding price competition: abstract parallel between cloud software licensing and most-favored nation clauses

This is the promised follow-up to yesterday's post, New Microsoft software licensing terms to take effect on October 1: revisions designed to strengthen smaller cloud solution providers--and to address Amazon-orchestrated EU antitrust complaint.

There has been a steady trend in recent years for this blog to look at more and more tech industry antitrust issues. In the end, they always involve intellectual property in one form or another. At some point I stumbled upon Professor Frédéric Jenny's "analysis of potentially anti-competitive practices" with respect to cloud infrastructure services, a study commissioned by CISPE. In the previous post I commented on CISPE: it's striking that an organization seeking to promote European cloud sovereignty is primarily backed by Amazon.

Without a doubt, Professor Jenny--an economist--is a prominent figure in the French antitrust community. However, that report he authored for CISPE last year is just a piece of rather unscientific advocacy. What one would normally expect from a competition economist is a clear causal chain and, especially, numbers. Instead, the "evidence" adduced in that paper is just anecdotal. It's like "one customer said" and "oh wait, another customer also said."

That reminded me of a passage from Qualcomm's reply brief in support of its Ninth Circuit appeal of the district court's FTC decision:

"See United States v. AT&T Inc., 310 F. Supp. 3d 161, 211 (D.D.C. 2018) (in weighing evidence of competitive harm, 'competition authorities and courts . . . refus[e] to take the views expressed by customers at face value and insist[] that customer testimony be combined with economic evidence providing objective support for those views'), aff’d, 916 F.3d 1029 (D.C. Cir. 2019)."

In other words, it's old news that customers prefer to get more and pay less. For the avoidance of doubt, the relevant passage is found in a court ruling, but is a quote from a treatise: Ken Heyer, Predicting the Competitive Effects of Mergers by Listening to Customers.

Professor Jenny did the very opposite of what that passage proposes: he took--presumably selective--customer quotes at face value and did not provide any objective support.

The objective of that study isn't totally clear. In no small part it's actually legislative advocacy, suggesting that the EU's Digital Markets Act should also treat software companies like Microsoft, Oracle, and SAP as "gatekeepers." The DMA is huge, but it can't be all things to all people. The reason why some companies must be subjected to special gatekeper rules is their control over platforms, not their ownership of software copyrights. An open letter that CISPE--together with other organizations--addressed to EU competition chief Magrethe Vestager in February urged at a late stage of the legislative process (as the letter even concedes) a "clarification" that would result in the designation of Microsoft, Oracle, and SAP as "monopoly software gatekeepers":

"We cannot wait for a revision of the DMA in five years, nor for a pyrrhic victory in antitrust litigations in 10 years or more when the competitiveness of the market will not be recoverable.

That's what they wrote in February, but by now what they want is a formal antitrust investigation of those companies, initially Microsoft. After yesterday's announcement of new licensing terms that pay heed to the valid ones of the concerns raised by European cloud service providers, regulatory intervention doesn't appear necessary, much less does it seem urgent.

There are major issues to be addressed with respect to mobile app ecosystems: the app tax; the app review tyranny; App Tracking Transparency; access to NFC functionality (for payment systems and other important applications). There's Google's search monopoly and (apart from iOS) superdominant market position in browsers. And Amazon's own conduct.

Amazon would benefit in two ways if CISPE's antitrust initiative resulted in full-blown investigations: by harming a competitor and by defocusing the Commission from other issues that include what Amazon itself has been doing.

The most well-known issue surrounding Amazon's business is a most-favored nation clause: third-party sellers using Amazon's platform are prohibited from "[s]etting a price on a product or service that is significantly higher than recent prices offered on or off Amazon." This is called a "most-favored nation" (MFN) clause and means that vendors cannot offer lower prices elsewhere, be it through direct distribution or on other platforms. The District of Columbia filed an antitrust lawsuit (PDF) over this in May 2021. In 2017, the European Commission accepted commmitments from Amazon on e-books that also involved the MFN topic. As the Commission noted, "[t]he clauses may have led to less choice, less innovation and higher prices for consumers due to less overall competition [...] in e-book distribution" (emphasis added).

Interestingly, Professor Jenny's study discusses the potential competitive effect of cloud service providers who also make software, such as Microsoft, offering customers particularly attractive terms if they buy cloud services as well as software licenses. As I wrote further above, there aren't really hard facts and numbers in that study. But let's assume--just for the sake of the argument--that this is right. It means a company like Amazon with its AWS cloud service could compete, but it would have to charge less for its own services so the total cost of ownership (TCO) for the customer won't be too high.

If a competition authority actually barred Microsoft and others from offering attractive prices for the combination of cloud services and software licenses, the net effect would be that AWS gets to charge customers more than otherwise.

With Microsoft having fleshed out the implementation of its European cloud principles, all of CISPE's members but one--Amazon--have nothing left to complain about that could reasonably give rise to antitrust investigations. The customers of small European cloud service providers will be just fine with the licenses they already have secured from Microsoft (or with new ones that they can optionally obtain through those CSPs). Amazon is obviously free to file an EU antitrust complaint of its own. But to do that, Amazon would have to argue that it can't compete, which is simply not credible based on market share.

As things stand, regulatory intervention doesn't appear imminent. But presumably Amazon won't give up anytime soon. It has the resources to keep on trying.

Monday, August 29, 2022

New Microsoft software licensing terms to take effect on October 1: revisions designed to strengthen smaller cloud solution providers--and to address Amazon-orchestrated EU antitrust complaint

This is only the second time in more than ten years for this blog to comment on enterprise software licensing. The first instance was about two years ago when I expressed skepticism regarding EU antitrust complaints by certain SAP customers. Now I have seen an announcement by Microsoft that deserves a closer look. Microsoft's policy team (Microsoft On the Issues, @MSFTIssues, a Twitter account that I follow and vice versa) retweeted the following:

Today's announcement by Microsoft's Chief Partner Officer Nicole Dezen is a follow-up to a May 18, 2022 blog post by Microsoft President Brad Smith, Microsoft responds to European Cloud Provider feedback with new programs and principles. I will look at the specific licensing changes in more detail and comment on them tomorrow. For now, I'd just like share a few thoughts and observations:

  • The backdrop is that a group named Cloud Infrastructure Services Providers in Europe (CISPE) has been alleging for a while that Microsoft engages in an "anti-competitive tying of productivity suites with cloud infrastructure services." What they essentially claim is that smaller European cloud service providers can't compete on a level playing field with Microsoft's Azure cloud because many enterprise customers rely on Microsoft software (such as Windows, Office, and SQL Server) and can't bring their existing Microsoft licenses to third-party cloud services as easily as CISPE believes should be the case.

  • CISPE is largely funded by Amazon, whose AWS is the world's largest cloud service (I used it for the backend of two mobile games). The other members are smaller European cloud hosters. It is undoubtedly a challenge for anyone to compete with the behemoths in a business characterized by major economies of scale, but some of CISPE's members--and various significant European cloud service providers who are not CISPE members--prove that there are opportunities for innovative, creative, and flexible players. The part that I struggle to understand is that those smaller European companies view Amazon--the biggest bully on the block--as a political ally. Let's face it: if you're in the cloud business, particularly in the Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) segments, your top three competitive challenges are

    1. AWS,

    2. AWS, and don't forget:

    3. AWS.

  • CISPE is complaining not only about Microsoft, but also about Oracle and SAP. And in at least one of the papers they also voice concerns over Google. In other words, they're against everyone except themselves and... AWS.

  • Microsoft hasn't acknowledged an antitrust violation per se. The message in May was that there is enough substance to some of the concerns that Microsoft deems it appropriate to amend its software licensing terms with a view to outsourcing and hosting.

  • The European Commission hasn't launched full-blown investigations of a formal complaint filed by OVHcloud, a French company, in March. And it may never have to if Microsoft's new licensing terms satisfactorily address the issues. The measure of a competition authority's effectiveness is not how many investigations it launches or the fines it levies: it's all about safeguarding the competitive process. In some other antitrust contexts, particularly those involving Apple and Google, voluntary changes fell far short of what was needed, so DG COMP had no choice but to launch formal investigations. But Microsoft has a fundamentally different attitude than the two companies I just mentioned. After the antitrust cases they dealt with 20 years ago, they've been careful to avoid regulatory scrutiny.

  • Here's a quick first look at the "three primary goals" Microsoft (re)stated today:

    1. "Make it easier for customers to bring their software to the partner’s cloud."

      An example of what was criticized is that license fees in a multitenant environment (one server, multiple customers) were based on physical CPU cores, while cloud services are all about virtual machines. Microsoft says "[e]xpanded use rights [now] allow customers to run their software, including Windows 11, on hosters’ multitenant servers and more easily license virtual machines for Windows Server."

    2. "Ensure partners have access to the products necessary to sell cost-effective solutions that customers want"

      The blog post describes this as creating "more opportunities for partners to work with more customers, to sell the solutions they need, and to run them where they prefer."

    3. "Empower partners to build hosted solutions with speed and scale"

      Microsoft's partners will be better enabled to "build hosted desktop and server solutions to help directly fulfill customers’ hosting needs." The new program, is called "Cloud Solution Provider -- Hoster" (CSP-Hoster) and enables both license-included hosting (the CSP sells a service to its customer along with the prerequisite software licenses) and BYOL ("bring your own license") solutions.

  • While it appears that Europe is the only jurisdiction in which a formal complaint had been brought, today's blog post says "[t]hese changes will be applicable worldwide." The timing of the announcement (after European business hours) underscored that this is not just about Europe--and globally consistent terms are another notable difference between Microsoft and the likes of Apple and Google, who favor piecemeal resolution and make commitments only jurisdiction by jurisdiction.

  • The new licensing options are available to all cloud service providers except a set of Listed Providers. That is no surprise as it is consistent with what Microsoft said in May. A footnote again clarifies today that "Listed Providers include Alibaba, Amazon Web Services, Google, and Microsoft, and any outsourcer using a Listed Provider as part of the applicable outsourcing service. Customers that want to use a Listed Provider for outsourcing can acquire licenses directly from the Listed Provider."

    In other words, all of CISPE's members except for the driving force behind those complaints--Amazon--get the benefit of the terms announced today. This ups the ante for CISPE to credibly claim that the organization is all about better enabling small European cloud service providers to compete...

    I also interpret this as a denial of there being any anticompetitive harm when it comes to AWS, Google, and Alibaba: there is no indication that those major players can't compete with Microsoft.

Tomorrow I'll do a follow-up to this post and comment in more detail on the licensing terms Microsoft unveiled today, and on CISPE's grievances, such as a "study" by a French competition law professor.

Saturday, August 27, 2022

United States v. Apple could expand and improve upon Epic Games v. Apple: DOJ preparing potential antitrust lawsuit over Cupertino's strangehold on iOS ecosystem

Based on what Bloomberg reported earlier this month, a second United States v. Google antitrust lawsuit could be filed in the coming weeks and focus on Google's ads business. The first Google case--which was brought by the Trump Administration--is going to get more interesting in the fourth quarter, and I plan to talk about it more. So far I've just commented on a discovery order.

There are serious issues concerning Google, but what Apple is doing is actually a lot worse--both in terms of conduct and impact. The Biden Administration appears to be perfectly aware of the pressing need to take action against the iPhone maker. In a major scoop, Politico's Josh Sisco reports that Apple faces a growing likelihood of a DOJ antitrust lawsuit, possibly before yearend. Apple's App Store terms and practices are part of the consideration, but potentially the DOJ could challenge Apple's control over its devices beyond app distribution, with Tile being a key complainant that makes hardware (tracking devices).

What's not mentioned is App Tracking Transparency (ATT). I very much hope the DOJ will tackle that abusive and pernicious scheme, too. It affects the wider economy to a far greater extent than Tile's plight, though Tile does have valid reasons to complain.

Josh Sisco's article recalls something his colleague Leah Nylen already mentioned in September: the fact that DOJ attorneys attended very single day of last year's Epic Games v. Apple trial. I must admit I wasn't aware of that.

In January, the DOJ filed an amicus curiae brief in Epic Games v. Apple, and as I explained then, it was a pro-Epic brief even though it was formally filed "in support of neither party." Every single point the DOJ made was beneficial to Epic and, therefore, prejudicial to Apple. The DOJ's brief is all about ways in which Epic can satisfy various legal requirements that would, at the end of the day, result in a reversal of the federal antitrust part of the district court's decision.

What will the DOJ on October 21, the day of the Epic Games v. Apple appellate hearing in the United States Court of Appeals for the Ninth Circuit?

The DOJ could still ask to be allowed to deliver oral argument. It's the last hearing of the day, and I believe the Ninth Circuit would accomodate that request. But it may also just listen in order to obtain valuable insights as it prepares its own complaint.

As Josh Sisco notes, Judge Yvonne Gonzalez Rogers didn't rule out that another plaintiff than Epic could achieve more. And indeed, at trial and in her decision she sometimes reminded Epic of the fact that it's not a government plaintiff. Given the unbelievable flaws of that ruling, which I mentioned again in my post on the hearing date, I actually think she should be reversed anyway. But it is true that the federal government would have certain advantages if it sued over the same--and even some additional--issues.

I still keep my fingers crossed that Congress will vote on the Open App Markets Act (OAMA) during this term. Should the American Innovation and Choice Online Act (AICOA) be too controversial, going forward with the OAMA may be a pragmatic decision. It's unfortunate that Majority Leader Schumer seeks to shield Big Tech from reasonably strong antitrust enforcement, but if at least the OAMA could be passed into law, that would have tremendous value in itself and might resolve some of the issues the DOJ would otherwise have to address through litigation.

So there's really an interdependent triangle here between the DOJ's contemplated antitrust lawsuit on behalf of the United States of America, the OAMA, and the Epic Games v. Apple appeal. Josh Sisco notes that the DOJ may want to see the actual Epic Games v. Apple decision. In that case, however, it couldn't keep its timeline and still file in 2022. I believe the appeals court's inclination will be discernible at the October 21 hearing--and the Ninth Circuit most likely won't have the last word as the losing side will be sure to file a petition for writ of certiorari with the Supreme Court, which--unless it grants the petition straight away--would most likely issue a CVSG: a call for the views of the Solicitor General.

That's the fourth-highest-ranking official of the DOJ.

Friday, August 26, 2022

Moderna files patent infringement actions against Pfizer and BioNTech in Massachusetts and Dusseldorf over COVID-19 vaccine, seeking only damages and carefully excluding 92 poorer countries

One month ago, I noted--in my first blog post ever on a life sciences patent case--that "Pfizer-BioNTech is the more sophisticated side [than CureVac], which may be attributable to Pfizer's ample experience more than anything else." And I was wondering "whether other companies holding mRNA-related patents will sue BioNTech and/or Pfizer." That question has just been answered: Moderna just announced that they filed parallel patent infringement complaints against Pfizer and BioNTech "for infringing patents central to Moderna's innovative mRNA technology platform" in the United States and Germany.

The U.S. complaint was filed with the United States District Court for the District of Massachusetts, which is precisely the venue Pfizer and BioNTech picked for their declaratory-judgment action against CureVac; the German action was filed with the Dusseldorf Regional Court (CureVac's choice).

The patents-in-suit were filed between 2010 and 2016. In 2010, Moderna began building a "foundational platform"--according to its CEO Stéphane Bancel (a native of France who now lives in the United States)--and in 2015 and 2016, Moderna specifically obtained patents on its "work on coronaviruses." COVID-19 is colloquially referred to as "the coronavirus" but it's called SARS-CoV-2 for a reason: there was an earlier SARS (severe acute respiratory syndrome) coronavirus, and there are also non-SARS coronaviruses (such as one that causes the same symptoms as the common cold).

Moderna's press release reads like a textbook example of corporate social responsibility: not only does it stress that no injunction is being sought (which is also what CureVac was very clear about), but Moderna is not even "pursuing monetary damages on sales to the 92 low- and middle-income countries in the GAVI COVAX Advance Market Commitment (AMC 92)." Such a carve-out is exemplary, if not unprecedented. Also, "[n]one of the patent rights which Moderna is seeking to enforce relate to any intellectual property generated during Moderna's collaboration with the National Institutes of Health to combat COVID-19. That collaboration began only after the patented technologies at issue here were proven successful in clinical trials in 2015 and 2016."

The complaint also doesn't relate to "sales to the U.S. government that are subject to 28 U.S.C. § 1498" or to sales prior to March 8, 2022. Moderna once made a pledge for the duration of the pandemic, but made it clear earlier this year that the time had come to get compensated.

Another interesting aspect of Moderna's press release is the unusually detailed description of the infringement allegations:

"First, Pfizer and BioNTech took four different vaccine candidates into clinical testing, which included options that would have steered clear of Moderna's innovative path. Pfizer and BioNTech, however, ultimately decided to proceed with a vaccine that has the same exact mRNA chemical modification to its vaccine as Spikevax®. Moderna scientists began developing this chemical modification that avoids provoking an undesirable immune response when mRNA is introduced into the body in 2010 and were the first to validate it in human trials in 2015.

"Second, and again despite having many different options, Pfizer and BioNTech copied Moderna's approach to encode for the full-length spike protein in a lipid nanoparticle formulation for a coronavirus. Moderna scientists developed this approach when they created a vaccine for the coronavirus that causes Middle East Respiratory Syndrome (MERS) years before COVID-19 first emerged."

Here's the U.S. complaint (this post continues below the document):


The patents-in-suit in the Massachusetts case are

Interestingly, the law firms and even some of the key attorneys representing Moderna against Pfizer and BioNTech have previously represented Apple against Samsung and other companies (more recently, just in defensive cases, but originally on the enforcing side):

It remains to be seen who will represent Pfizer and BioNTech; most likely, the same attorney as in the CureVac case: Dr. Christine Kanz of Hoyng Rokh Monegier.

Pfizer and BioNTech are now facing infringement actions brought not only by a company whose initial effort to create a COVID-19 vaccine failed (CureVac), but also one by a company that delivered one of the very best COVID vaccines: Moderna. A "sore loser" narrative wouldn't work in this context.

I'm a "mix-and-match" vaccinee: I started with AstraZeneca's vaccine, followed by BioNTech's Comirnaty (which was the plan from the beginning), and in January I got a Moderna booster. I have great respect for all the parties to Moderna v. Pfizer & BioNTech, and will read the answer to the complaint with great interest. At this early stage, Moderna makes a fundamentally stronger first impression than CureVac for various reasons, and they'll definitely have a better story to tell in court. That said, an alleged infringer is innocent until proven liable.

Thursday, August 25, 2022

Korean car makers Hyundai, Kia, Genesis take 4G standard-essential patent license from Avanci pool, which has licensed 45 automotive brands by now

With Volkswagen (which upgraded its license to groupwide 4G earlier this year), General Motors (which signed up without any litigation), and Ford (which settled shortly after a Munich injunction), the Avanci patent pool had already licensed two of the world's largest automotive groups. Today, another major group of automotive brands was announced as new Avanci licensees: Hyundai, KIA, and Genesis. They all form part of Hyundai Motor Group, and collectively sell 6-7 million cars per year.

According to the patent pool firm's press release, this increases "the total number of automotive brands licensed through Avanci to 45"--and I noticed that the number of contributors to the pool (i.e., licensors) has hit 50 with the addition of a small licensing firm named Equo. Recently, the number of licensed brands has grown at a far faster pace than the number of licensors (where the pool is already close to market saturation), so I guess we'll soon see Avanci having even more licensees than licensors.

No patent assertions by Avanci licensors against the Korean companies were pending. What I described as a "final boarding call" last month appears to have served its purpose: at least those three car makers have concluded that there was no point in waiting until the per-unit license fee increases from $15 to $20.

Juve Patent and IAM have previously reported on the announcement and stressed that the license agreement just ahead of a "price hike."

Even those car makers who took their chances in litigation (Tesla, Daimler, Ford, and--to a very limited extent--Volkswagen) ended up taking the pool license anyway. And there is no indication that the sky has fallen on any Avanci licensee, to put it that way. Continental's mileage may vary, but they don't make cars (just tires and some electronic components), they don't decide for their customers, and the courts consistently disagree with them.

Hyundai and KIA are traditional, high-volume car makers, while Genesis is a luxury brand that was founded only about six years ago. From a technical point of view, I really like the Genesis GV60, which was designed as an electric vehicle from the start. It has some interesting (optional) features such as biometric authentication and video side mirrors.

Some enforcement actions against are currently pending in Munich against Nissan and certain Stellantis brands (Fiat Chrysler and Opel). We'll see whether those brands--like the Hyundai group--will elect to take a license at the $15 rate before it goes up to $20.

I don't expect it to take long now before Avanci will have licensed nearly 100% of the world's connected vehicles. A year ago, Daimler had settled with Nokia, but on the basis of a bilateral license, and took its pool license only later that year. Meanwhile, Volkswagen's 4G upgrade and multiple new license agreements have massively increased Avanci's market penetration.

Just like others, I, too, would like to know more about Avanci's upcoming 5G license, particularly the rate as well as the initial licensors and licensees. But 4G is today's bread-and-butter business in automotive wireless SEP licensing.

Wednesday, August 24, 2022

OPPO fights back seeking multiple German 5G patent injunctions against Nokia after withdrawal from German market: what goes around...

Since OPPO's indefinite withdrawal from the German market became known earlier this month, I've been hoping for more information on the state of play between the smartphone maker and Nokia. First I found out from the Karlsruhe Higher Regional Court's press office that the two Mannheim injunctions Nokia obtained in June and July are not presently being enforced: whether or not Presiding Judge Andreas Voss ("Voß" in German) so requested, it's been confirmed that Nokia agreed to refrain from immediate enforcement while the appeals court is weighing OPPO's motions to stay the injunctions. In one of the two cases, Nokia has until the end of this month to respond to the motion.

Some other parties in OPPO's place would probably have continued to sell their products until the moment enforcement formally begins, as did Apple ahead of the enforcement of Qualcomm's injunction in early 2019. But doing so entails the risk of having to destroy products returned by resellers.

OPPO is standing its ground and not going to cave. The latest development is that OPPO has amended several--if not most or all--of its pending German patent infringement complaints against Nokia and is now seeking injunctions as opposed to "only" damages.

The first four OPPO v. Nokia countersuits became known in October 2021: two in Mannheim, one in Munich, and also one in Hamburg. In May, the Munich I Regional Court held a first hearing in an additional case, which looks very promising for OPPO and its lead counsel in its cases, Bardehle Pagenberg's Professor Tilman Mueller-Stoy (OPPO's defensive cases are being handled by Hogan Lovells). Now it turns out that there have not only been additional complaints, but that OPPO has also added--by way of amended complaints--prayers for injunctive relief:

  • The Mannheim Regional Court has confirmed the pendency of case no. 2 O 119/21 and that OPPO is now also seeking an injunction. The trial has been scheduled for December 6, 2022. [Update] The patent-in-suit is EP3672346 on an "information transmission method, terminal and network device." [/Update]

  • [Update] The Mannheim court has now also confirmed the filing of an injunction request in case no. 7 O 125/21 over EP3547772 on a "data transmission method and apparatus." The trial date is January 20, 2023. [/Update]

  • The Munich I Regional Court has confirmed two previously unknown OPPO v. Nokia cases in which OPPO is now additionally pursuing injunctive relief:

    • Case no. 7 O 3707/22 over EP3445093 on "dedicated information transmission based on validity of scheduling information" (to be heard on April 20, 2023); and

    • Case no. 7 O 5453/22 over EP3697146 on a "wireless communication method, network device and terminal device" (to be heard on April 27, 2023).

[Update] The Hamburg Regional Court's press office has now also confirmed the filing of an amended complaint for injunctive relief in case no. 315 O 217/21 over EP3557938 on a "method and device for random access" (trial on November 30, 2022). [/Update]

While I have yet to obtain some further information from Munich, it's clear now that OPPO is now seeking injunctions against Nokia's base stations in roughly a handful of German cases. I will update this post if I receive the missing information shortly, and otherwise I'll do an update post with a complete overview of all OPPO v. Nokia cases.

OPPO has become an innovation powerhouse, particularly in connection with 5G.

OPPO's decision to step up its retaliatory actions changes the calculus: previously, OPPO's exposure to patent enforcement was greater in terms of unit volumes; but now, with OPPO having shown that it's prepared to stay out of the German market for as long as necessary to resolve patent licensing issues, and with OPPO seeking injunctions of its own, there is considerable risk to Nokia if this litigation takes longer and OPPO obtains its own injunctions in early to mid 2023.

The parties must still be very far apart in their negotiations, judging from this escalation.

OPPO is presently also defending against some German patent infringement lawsuits that InterDigital brought late last year. InterDigital doesn't make products, so OPPO can't countersue over its own patents. That said, the firmness of OPPO's position on what royalty levels are fair, reasonable, and non-discriminatory (FRAND) is evidenced by how the smartphone maker is responding to Nokia's enforcement campaign.

The two-way Nokia v. OPPO/OPPO v. Nokia dispute underscores the key role that German courts play in patent disputes, especially standard-essential patent (SEP) disputes. Most defendants will neither find it economically viable nor be able to reach an internal consensus on the kind of decision that OPPO made. Most of the time, Germany is a great jurisdiction for gaining leverage over implementers--including Nokia when it is on the receiving end, such as when OPPO is countersuing. By contrast, a couple of USITC judges have recently allowed Apple to present far-fetched FRAND-related defenses at trial that judges have both the duty and the authority to throw out as matter of law.

Tuesday, August 23, 2022

In Ericsson's ITC cases, judges allow Apple to broaden scope of 'patent misuse' defense when standard-essential patents are involved: problematic precedent

The ITC has been grappling for a long time with how to adjudicate FRAND arguments in disputes involving standard-essential patents (SEP). Initially, the U.S. trade agency with quasi-judicial powers was practically unreceptive to FRAND defenses, but then came the Obama Administration's 2013 veto--on public-interest grounds--of an import ban Samsung had won against Apple.

I don't have good news for those who want the ITC to be able to carry out its duties in an efficient and predictable manner. While the Ericsson-Apple dispute is still at an early stage (none of the cases has gone to trial, called "evidentiary hearing" at the ITC), a couple of Administrative Law Judges (ALJs) have handed down decisions that will embolden deep-pocketed, sophisticated defendants like Apple to shoehorn FRAND and other SEP-specific arguments into various affirmative defenses as opposed to limiting those arguments to their public-interest argument.

Fortunately for complainants, it's not as prejudicial in the ITC as in federal court when a motion to dismiss or a motion to strike is denied. There won't be a jury. But allowing defendants to waste trial time--and thereby to force a complainant to do so as well--on defenses that could easily be disposed of at an early stage is undesirable for the agency and for SEP holders dealing with unwilling licensees.

Just a few days ago, IPWatchdog published an interesting article that was inspired by Ericsson's ongoing enforcement of a preliminary 5G SEP injunction against Apple in Latin America: From SEPs to Discovery, Colombia is Getting More Patent Friendly. I'm sure that the vast majority of Washington policy makers don't want the Republic of Colombia to beat the District of Columbia when it comes to SEP enforcement. And, again, it's not like something immensely terrible had already happened at the ITC, but there is reason for concern that affirmative defenses like "patent misuse" and "unclean hands" may be used for exactly the kind of FRAND argument that should be relegated to the public-interest analysis. The Commission, the agency's top-level decision-making body, may have to do something about this worrying trend.

The current situation in the Ericsson v. Apple cases is that

  • Apple will be allowed to argue at the February 2023 trial in the SEP case that Ericsson "has engaged in a continuing anticompetitive scheme" (which is simply an allegation of FRAND abuse styled as an unclean hands defense) and that Ericsson's allegedly non-FRAND royalty demands constitute patent misuse, and

  • in a non-SEP case Apple will be allowed to claim that Ericsson is engaging in patent misuse by seeking a U.S. import ban over non-SEPS in order to extract supra-FRAND royalties from Apple on its SEPs.

The SEP case was recently reassigned to ALJ Bryan F. Moore, who yesterday ruled on Ericsson's motion to strike various affirmative defenses. The Office of Unfair Import Investigations (OUII, or commonly referred to as "the ITC staff") largely supported that Ericsson motion, though even the staff didn't recommend throwing out Apple's unclean hands defense. Here's the order (I'll comment further below):


ALJ Moore concurred with both Ericsson and the ITC staff on Apple's equitable estoppel and waiver defense as well as on a theory according to which Ericsson had failed to obtain the conssent and/or participation of unnamed co-inventors. He disagreed with Ericsson--but not with the staff--on the unclean hands defense. On patent misuse, the ALJ rejected both Ericsson's and the staff's arguments, and kept Apple's defense alive.

Toward the bottom of page 6 of the order (and continuing on the following page), ALJ Moore acknowledges the following:

"I agree that consideration of FRAND-related argument should be limited to the public interest phase of the investigation, and that these arguments are not cognizable equitable defenses to allegations of patent infringement."

But in the end he does not limit FRAND-related argument to the public-interest part. Instead, his order opens the floodgates to FRAND arguments under the unclean hands and patent misuse labels. Those affirmative defenses are supposed to apply to egregious types of conduct that patent holders would otherwise get away with. I just find it inconsistent to say that FRAND is for the public-interest phase only and then to allow FRAND arguments under different labels. It effectively means Apple gets multiple bites at the apple, though realistically those equitable defenses won't succeed anyway.

On top of that, ALJ Cameron Elliot allowed in one of the two non-SEP cases that Apple can make a SEP-related argument in a non-SEP case only because Ericsson is simultaneously asserting SEPs and non-SEPs, which is pretty common.

If the ITC continues on that path, one can only encourage SEP holders to primarily bet on foreign venues such as Munich and Mannheim, Barcelona (an up-and-coming patent enforcement forum), or Bogotá.

Thursday, August 18, 2022

Pokémon GO infringes cloud architecture patent: Munich court ruling puts pressure on Niantic (Google/Nintendo) to settle with licensing firm K.Mizra

A few hours ago, the Munich I Regional Court's Seventh Civil Chamber (Presiding Judge: Dr. Matthias Zigann) announced its decision in K.Mizra v. Niantic: the wildly popular Pokémon GO mobile game infringes EP2433414, a patent on "servers for device identification services" that resulted from the research efforts of a reputable and sizeable Dutch organization named TNO (Nederlandse Organisatie voor Toegepast Natuurwetenschappelijk Onderzoe; Netherlands Organisation for Applied Scientific Research). The case numbers are 7 O 13977/21 and 7 O 10368/21. The defendants are Niantic entities in the U.S., UK, and Germany.

Thus far, US-based licensing firm K.Mizra hasn't sought an injunction--only a finding that is entitled to a damages award--but it could do so anytime. For the Pokémon GO community I hope this can be avoided, but as Juve Patent explained yesterday, "nothing has changed" about Germany's automatic injunction rule in patent infringement cases.

The court's press office has thankfully provided me with an anonymized version of the dispositive part of the ruling (the order in a narrow sense). Here's a screenshot of a key passage (click on the image to enlarge):

This comes as no surprise. At the end of the July 14 trial, Judge Dr. Zigann strongly encouraged Niantic--a Google/Nintendo joint venture, with Google's technology being particularly at issue in this case--to negotiate a settlement. Niantic has the right to appeal the decision to the Munich Higher Regional Court, but K.Mizra's infringement argument is rather strong (based on what was discussed at the trial), and the prior art cited by Niantic doesn't really seem to come close to the patented invention.

While it's unclear how protracted this litigation will become or whether it may even extend to other jurisdictions where members of this patent family have been registered (and which would take note of the Munich court's findings), K.Mizra is also asserting a patent against Samsung in Dusseldorf, targeting what is clearly an Android operating system functionality. That patent, too, was originally obtained by TNO. The Samsung case will go to trial in less than a year.

This is another significant win for the Wildanger firm. K.Mizra's winning lead counsel is Dr. Alexander Reetz, who handled matters in a calm but strategic and persuasive way. It was easy to follow his clearly articulated arguments. K.Mizra's lead patent attorney is Dr. Thomas Hell of Bosch Jehle). He and Dr. Reetz played and won as a team. I guess we'll hear about their work more often in the future.

Niantic is being represented by Quinn Emanuel's Dr. Marcus Grosch, who recently got mixed press, one of the reasons for which is that QE is the only patent litigation firm in Germany never to bring patent attorneys along to hearings and trials. That said, I wouldn't attribute QE's defeat in this case to its ironclad rule concerning patent attorneys: K.Mizra seems to have a pretty clear case, and this plaintiff's outside legal team apparently did everything right, so it may just have been impossible to defend Niantic here. But just last month QE also lost an appeal in a Netflix case. And it was two years ago to the day that the first of four German patent injunctions came down on QE client Daimler (the other three followed over the course of only 11 weeks). For a firm that states on its website that it has won 86% of all trials and arbitrations (not long ago they even claimed a 91% rate of success), the German patent litigation track record may very well be substandard. However, Wildanger may really have a hit rate at that level, or at least that's what I've recently seen in the cases I follow (examples: 1, 2).

Ahead of Ninth Circuit hearing in Epic Games v. Apple, Coronavirus Reporter's opening brief in parallel case highlights censorship as another key App Store antitrust issue

As I reported on Tuesday, the United States Court of Appeals for the Ninth Circuit will hear the Epic Games v. Apple cross-appeal on October 21. Epic already received an impressive outpouring of support from amici curiae all the way up to the Biden Administration and 35 U.S. states (even 36 if one counts California's submission, though it addresses only the state Unfair Competition Law part of the case).

On the other end of the broad spectrum of Apple antitrust cases, there is a case that was brought last year by the team that developed a rejected iOS app named Coronavirus Reporter. One of the team members is a former NASA physician (famous astronaut John Glenn’s pre-mission cardiologist), but don't expect to find any major corporation or Big Law firm involved with that case. As I had my own issues with Apple's (and Google's) COVID app guideline, I naturally take an interest in this case regardless of the lack of firepower behind it. I found the original complaint and some of the subsequent pleadings unusually aggressive, to an extent that didn't serve those plaintiffs well. The case was dismissed. However, they have definitely tried hard to make a very factual and reasonable argument in their appellate opening brief:

Coronavirus Reporter v. App... by JeffreyIsaacs

I have not fully analyzed the order dismissing the complaint, and take no position here on the merits of this appeal, other than that this opening brief is a whole lot better than anything I had seen from them before, not only in style but also in substance.

But what I do hope is that the circuit judges who will hear Epic's appeal in a little over two months from today will also take a look at Coronavirus Reporter v. Apple. What that case shows is that Apple's App Store tyranny is not merely a matter of money. The 30% app tax is a serious issue--but if an app cannot be published at all, or not in the form in which it was designed and could have been more appealing to the market, the damages is far greater. It's 100%, not 30%.

Coronavirus Reporter's opening brief focuses on app review issues. That is a nice complement to Epic Games v. Apple, where Judge Yvonne Gonzalez Rogers simply assumed that some manual app review--no matter how imperfect--was better than none at all. There will never be a perfect plaintiff--even Epic isn't, though it undoubtedly has a lot going for it. But the issues surrounding app review are so fundamental that even a small plaintiff like Coronavirus Reporter is now in the position to tell an interesting story to the appeals court.

There's almost no time left to file an amicus brief, but this would be--or would have been--an opportunity for stakeholders to draw the court's attention to some new developments, even including the Wall Street Journal's revelation of revenue-sharing discussions in which Apple was trying to bully Facebook.

Friday, August 12, 2022

Wall Street Journal scoop on pre-ATT Apple-Facebook talks vindicates publishers' class action in Northern California, German antitrust investigation: Facebook comes across as Evil Empire's victim

The Wall Street Journal's Salvador Rodriguez has scored an incredible scoop by reporting on revenue-sharing negotiations between Apple and Facebook of a few years back--before the former decided to introduce "App Tracking Transparency" (ATT)--that make Cupertino look really bad. 9to5Mac has published a short (non-paywalled) summary.

The key thing is that Apple wanted a bigger piece of Facebook's cake. It sought to extend its 30% app tax to Facebook's iOS revenues, such as by having Facebook offer an ad-free subscription service via Apple's In-App Payment (IAP) system, through which even payments for promoted posts (which is just a form of advertising on social media) should be paid. The talks unsurprisingly failed, and meanwhile Apple has not only kneecapped Facebook and numerous other app developers (such as makers of hypercasual mobile games, but also done enormous harm to countless companies depending on cost-effective customer acquisition. A venture investor says this could be a key factor leading to a recession. On Tuesday, the Financial Times' Patrick McGee reported on small businesses now "finding it prohibitely expensive to target likely consumers as they once did," and some small companies are really suffering.

Hausfeld partner and competition law professor Thomas Hoppner ("Höppner" in German) rightly described ATT as "Privacy by Default, Abuse by Design" in an academic paper he published last year.

M. G. Siegler, a journalist-turned-venture-investor, also sums up nicely how Apple was trying Facebook--based on today's WSJ story--to pressure into a deal that would have given Cupertino a substantial chunk of Facebook's revenues:

Dare Obasanjo, whom I hold in the highest regard as the thought leader on product management and adjacent industry topics, pointed out in light of today's WSJ article that there are very popular advertising-financed apps like TikTok, Google, YouTube (which belongs to Google), and Facebook's Instagram on which Apple makes no money, while Apple can and does tax IAP-centric apps like Tinder, Bumble, Candy Crush, and Roblox.

With the WSJ and the FT, the world's two leading financial papers have shed light on ATT this week--a harsh light for Apple.

In the ATT context, Apple has so far benefited from being viewed by many people as the lesser evil than Facebook, sort of the synonym for surveillance-based advertising and user engagement. Apple claimed to stand on higher ground--think about it, privacy!--and capitalized on Facebook's popularity problems.

Here's my perspective on Meta/Facebook: while I can relate to some of the criticsm leveled at it, and while I never thought it was a good idea that antitrust enforcers allowed them to acquire WhatsApp and Instagram (instead of forcing them to compete with those nascent competitors), I think the public perception is unfairly negative. I actually find many of the positions that Mark Zuckerberg has taken on critical industry issues--such as the need to regulate major platforms, but also on free speech issues--totally reasonable. It also says something that Senator Ted Cruz (R-Tex.) considers Mr. Zuckerberg more receptive to his concerns than some other tech leaders. I hardly use Facebook anymore--somewhere between once a month and once a quarter, but I do use WhatsApp every day (though I slightly prefer Signal). So I'm not a hardcore Facebook fan. But I think that company has been unfairly vilified and demonized.

That made Apple's ATT scheme easier to implement. Now, with what the WSJ's Salvador Rodriguez has just reported, and with the impact on innocent small businesses and the economy and society at large becoming clearer (not only--but also--thanks to the FT's Patrick McGee's article I mentioned), more and more people--especially those who make important decisions, such as at regulatory agencies--will understand the grand evil scheme centered around ATT.

I expect more public enforcement and more private litigation against ATT, and those WSJ and FT articles may serve as Exhibits 1 and 2. Two major enforcement activities are already ongoing:

In the N.D. Cal. litigation, Hagens Berman will appreciate the WSJ article as a treasure trove in terms of starting point for discovery requests, interrogatories, and questions to ask witnesses. The German FCO may also have some questions for both Apple and Meta/Facebook.

No one should make the mistake of cutting off one's nose to spite one's face. If there are respects in which Meta/Facebook can, should, or needs to improve, bring them up. Talk to Meta, as there really are indications (such as what Senator Cruz said) that Mark Zuckerberg is constructive. But don't let Apple get away with a scheme that has a devastating impact on many companies large and (especially) small.

Privacy is largely a pretext. If it was about privacy, Apple wouldn't display a "salesman's" message that strongly encourages authorizing the use of data for advertising purposes when its own interests are at stake while scaring users away from the same kind of authorization when it's requested by third-party apps.

In recent weeks, it became known--based on Apple's job ads--that they're building a demand-side platform (DSP), which means Cupertino wants to scale up its Search Ads business. The DIGIDAY article I just linked to explains DSP as "a core part of an ad tech stack for any company with designs on winning more media dollars" and explains that it "lets a marketer advertise with the help of automation," meaning that "marketers can set up campaigns and manage them with relative ease"--and as a result, advertisers are "likely to spend more."

ATT is a power and money grab. It's not unstoppable. Regulation and litigation--and, if necessary, legislation--can address the problem.

Thursday, August 11, 2022

Sony, apparently the sole complainant about the Microsoft-ActivisionBlizzard deal, has credibility problems due to exclusive deals with game studios and cross-platform taxation

Microsoft and Activision Blizzard announced a merger agreement in January, followed in February by a Microsoft statement on app store principles. The merger is now being reviewed by competition authorities in various jurisdictions. In most places, the record is kept confidential, but

I haven't digested all of the documents. It's a slow process since I'm not fluent in Portuguese; just in Spanish, which is similar enough that one can get the message and just occasionally has to look up a word. It does, however, appear that other industry players, from a local hero like digital games store Nuuvem to the Apples and Googles of the world don't see serious issues that would counsel against clearance--the sole exception being Sony.

While others say there's still going to be enough competition in the games market post-transaction, Sony takes outlier positions such as suggesting that Call of Duty is a single-product market. There can be a single-brand aftermarket, but the notion that any entertainment product with loyal fans constitutes a market of its own obviously cannot be the applicable legal standard.

Sony is trying to make some sort of a foreclosure argument even though Microsoft has made it clear that Call of Duty will remain available across the major platforms. Now, in a filing made on Tuesday (PDF), Microsoft's Brazilian lawyers address, inter alia, Sony's claims--and not without highlighting that Sony is "isolated" among respondents to a CADE questionnaire.

The following passage, which refers to "blocking rights" Sony acquires to preclude game publishers from making their titles available through Microsoft's Game Pass subscription service, has drawn some attention (click on the image to enlarge; the red arrow was obviously added by me):

Some people say the related information about Sony's contracts came to light thanks to last year's Epic Games v. Apple trial (in my previous post I just reported the appellate hearing date). I'm not 100% sure. What definitely was discussed in the Fortnite case is the fact that Sony is even more restrictive than Apple in some ways, such as by taxing cross-platform play. That fact is also inconducive to Sony's credibility as an advocate of cross-platform software publishing. It's furthermore true that an agreement between Sony and Capcom concerning the Resident Evil 8 game was leaked in April 2021, and the Fortnite trial took place the following month, but that may be a coincidence. In any event, here's the relevant passage (click on the image to enlarge):

Subscription services and game stores like the Epic Games Store--Sony is an Epic shareholder by the way--do (often time-limited) exclusive deals all the time; Apple even says in its Brazilian filing that all Apple Arcade games are exclusives, though Apple made none of them itself. The question of whether such a deal is ultimately in the interest of consumers can only be answered on a case-by-case basis. It's just that Sony isn't about promoting competition and consumer choice. Let's put it that way.

Also this week, GameRant published an article according to which Sony's own subscription offering is years behind Game Pass, which according to the game-specialized website "was revolutionary for the gaming industry" when it launched in 2017. Sony should try harder to compete on the merits instead of making filings with regulators just to delay a merger with respect to which no one--neither a competition authority nor a competitor--has presented a credible theory of harm so far.

Ninth Circuit will hear Epic Games v. Apple App Store antitrust appeal on October 21 in San Francisco

The technology industry's most important private antitrust lawsuit in history--Epic Games v. Apple--will be heard by the United States Court of Appeals for the Ninth Circuit on Friday, October 21, 2022. The Ninth Circuit conducts its hearings at different locations on the West Coast; this one will be held in Courtroom 3 of the James R. Browning U.S. Courthouse in San Francisco, just across the Bay Bridge from Oakland, where last year's Epic v. Apple trial took place.

It's a cross-appeal as Epic is appealing the dismissal of its federal antitrust claims under the Sherman Act, while Apple is appealing the consolation prize Judge Yvonne Gonzalez-Rogers handed Epic in the form of an anti-anti-steering injunction under California state law (Unfair Competition Law).

I think the correct outcome would be for Epic to prevail on market definition and some other issues, and the part under state law would then become pretty irrelevant. In any event, the losing party will certainly file a petition for writ of certiorari (request for Supreme Court review).

The district court's judgment is fundamentally flawed. It is symptomatic that there are hundreds (!) of typos in the unusually sloppy Rule 52 Order, which I've documented in a PDF file. With respect to the foremarket part of Epic's single-brand market definition, Judge YGR got everything wrong that she possibly could get wrong: the law, the economics, and the technology. Those misconceptions culminated in a sentence according to which Apple's market share in smartphones is smaller than in smartphone operation systems, though we all know that no iPhone is sold without iOS and iOS is never sold without an iPhone. There's a good chance now that the appeals court will identify some of the glaring defects of that decision, and afford the district court's judgment no more deference than it deserves.

After that erroneous decision, Apple was allowed to--and actually did--terminate all of Epic's developer accounts. A temporary restraining order that was subsequently converted into a preliminary injunction barred Apple from doing so in the summer of 2020, but was lifted as a result of the district court's judgment in September. On Twitter, Epic CEO Tim Sweeney recently mentioned that Epic can't even update Fortnite for the Mac anymore, though Mac app distribution was not an issue in that antitrust case. I'd love to see a massive Epic v. Apple damages lawsuit in a couple of years, but in order for that to happen, Epic firstly needs to convince the judges that Apple has violated the antitrust laws.

Apple will be represented at the hearing by Mark Perry, who already sported a ponytail at some of the Epic v. Apple hearings two years ago. Back then he was with Gibson Dunn; he has recently joined Weil, Gotshal & Manges. While Epic hasn't yet filed a notice of who will be its lead counsel, I presume--based on the appellate briefs--that Thomas C. Goldstein will be the chosen one. He defeated the Federal Trade Commission--before the same appeals court--on Qualcomm's behalf, and successfully defended Google against Oracle before the Supreme Court. He's quick-witted, forceful, and even though I found some of the points he made in Oracle v. Google more than questionable, I'm glad--as an app developer--that Epic has enlisted him.

Either side will get 20 minutes of oral argument time at the appellate hearing. Four other cases (three of them criminal) are presently on the list before the "Fortnite case" for that day, with the first one to be heard at 9&nsp;AM. Should it stay that way, the Epic v. Apple hearing would most likely start between 10:30 AM and 11:30 AM Pacific Time.

We may see requests from the DOJ and from state AGs to participate in oral argument:

On top of raising some very important competition issues concerning Apple's treatment of app developers, Epic's case has brought to light a number of interesting facts relating to Apple's and even some other parties' practices. Take Google's #GetTheMessage campaign, which was just launched this week (and on which I commented yesterday): as a result of discovery in Epic Games v. Apple, Apple-internal communications were made public. Apple executives discussed the pro's and con's of bringing iMessage to Android, and a key reason not to do so was that parents might otherwise be more interested in buying their children less expensive Android phones. The problem is that social pressures (classism) force low-income families to buy their kids iPhones--a U.S.-specific problem due to Apple's market share.

In one of the next posts, I'll also talk about a document from Epic v. Apple that involves Sony and is interesting in the context of Microsoft's proposed acquisition of Activision Blizzard.

There is now another antitrust case against Apple pending in the Northern District of California that has the potential to be the perfect next step after Epic v. Apple: a group of French publishers represented by the Hausfeld firm are challenging not only the app tax and Apple's app review regime, but also the App Tracking Transparency (ATT) scheme. ATT is making a terrible impact on the economy at large. On Tuesday, the Financial Times' Patrick McGee reported on small businesses now "finding it prohibitely expensive to target likely consumers as they once did," and some small companies are really suffering.

Outside the U.S., various consumer class actions are also worth watching and have the potential to bring down Apple's (and Google's) app tax. The latest development in South Korea--a fact-finding inquiry by the Korea Communications Commission--may also yield significant results.

Getting back to the U.S. situation, it's possible that Congress will vote on the Open App Markets Act (OAMA) at around the time of the Epic v. Apple appellate hearing. Last week, CNBC and other media reported on the fact that while Congress passed a bill on chip manufacturing subsidies before its summer recess, "tech industry's critical policy issues" had yet to be addressed, among them the American Innovation and Choice Online Act (AICOA) and the OAMA. Now the end of the Congressional term is approaching fast. One expert--Paul Gallant, the managing director of investment bank Cowen's Washington Research Group--said that Congress might end up voting on the OAMA, which is more focused and "gained broader support in the Senate Judiciary Committee than the American Innovation and Choice Online Act." I consider both bills important, but as an app developer I'm naturally most interested in avoiding any further delay of the OAMA's passage into law.

Wednesday, August 10, 2022

Google's #GetTheMessage campaign about iMessenger compatibility with Android Messenger raises important issue for society, gets Qualcomm's support, but has shortcomings

Google has just ratcheted up its campaign to pressure Apple to support the RCS messaging standard in order to massively improve interoperability between Apple's iMessenger and Google's Android Messenger app. I already commented on the topic in January.

The new #GetTheMessage effort says "[i]t's time for Apple to fix texting." Well, it would also be time for Google to fix a number of things--some of which it has in common with Apple. "Goopple" is the mobile ecosystem duopoly, if not a cartelopoly. Apple is more radical and outspoken about its walled-garden approach, while Google isn't truly open in all respects: sometimes it's fauxpen.

One high-profile supporter whose #GetTheMessage tweet I noticed is Qualcomm CEO Cristiano Amon:

This is just the latest in a series of public statements by Qualcomm executives disagreeing with Apple, which is for now--and possibly for several more years to come if they don't get their own baseband chipset act together--a large Qualcomm customer. Apple and Qualcomm are particularly at loggerheads over standard-essential patent (SEP) royalties. SEP license fees should not be an issue for Apple in the #GetTheMessage context, however: Google proposes using the RCS standard, which is apparently too old to be covered by valid patents.

John Gruber of Daring Fireball, who agrees with Apple most but not 100% of the time, notes that what Google is proposing isn't just the open standard, but also end-to-end encryption, which Google added on top of it. This is an interesting observation, but in the greater scheme of things it's of--at best--tertiary relevance. Google is still right in principle that it's important for society to ensure seamless messaging across major mobile platforms. And I can't believe it's a coincidence that Apple uses an inferior contrast (white on light green vs. white on medium blue) for messages that are not sent by and delivered via iMessage. That is one issue, and there are more important ones.

Should Apple just consider RCS suboptimal (and there may be valid reasons for that), it would obviously be free to propose that Apple and Google form a working group, possibly invite other industry players, and develop a superior alternative. But it's easy to see that RCS would be (a) better than the status quo, which forces low-income family to buy iPhones--instead of cheaper and functionally also very good--Android devices for their kids due to classism, and (b) more than good enough for the start.

It's a U.S.-specific issue because of Apple's market share. The problem may, however, be solved in other jurisdictions (particularly the EU with its Digital Markets Act) before anything happens in the States.

In some communication between the two parts of the Goopple duopoly, someone even suggested that Apple and Google should operate as if they were one company. In some respects they come close to that, but not in all. It's not like Apple's heavy-handedness is great for Google; it's just that Google is trying to mitigate the damage, such as by paying Apple something like $15 billion a year to be the default search engine on iOS. I consider it a positive by-product of Google's #GetTheMessage campaign that their disagreement over messenger interoperability may also lead to greater divergence on app store governance and related topics. That's not because I mean to promote conflict, but because nobody can seriously want an Apple-Google cartel. In these special circumstances, division is a good thing (up to a certain point, and not at the expense of interoperability).

The first question is whether this is going to make a difference. John Gruber says Google is beating the RCS dead horse. Granted, Google's campaign appears desperate. In the end it's about selling Android phones in the U.S. market. Google knows that Android as an operating system, and Android-based devices (such as foldables), often introduce innovative features a while before Apple does, yet Apple keeps growing its U.S. market share. That is a legitimate concern. It indicates a market failure that should be remedied.

But will Apple care about whether the #GetTheMessage hash tag is trending somewhere? The problem is that it will be hard for Google to draw attention to the issue after this news cycle is over. The only thing that would help here is regulatory scrutiny and/or private antitrust litigation (which might have to raise an essential facility question, which would not only be hard to prevail on as the concept hasn't been recognized by the Supreme Court but would also be against Google's own interests in other tech law contexts). While not likely to happen, that course of action would generate news at various procedural junctures and culminate in a trial where the plaintiffs' (whoever they might be) lawyers could grill Apple executives and confront them with issues such as classism.

Apple is already facing a publicity campaign by Meta (Facebook) in the U.S. over app tracking:

It's interesting to see the #1 search engine company and the #1 social network company spending money on such campaigns that deal with some of Apple's practices. But so far there hasn't been enough pressure to force Apple to open up.

Will Apple's shareholders care? It's hard to imagine that the board of directors would order the company's executives to do something about messenger interoperability. If Google's campaign makes an impact, it may, however, make it easier for Tim Cook to get his board to support a decision in favor of enhanced interoperability--but there's no reason to assume right now that he even wants to propose such a move.

One thing that Apple may have to consider with a view to the long haul is that it's becoming more and more controversial--not yet to the extent that it influences purchasing decisions, but at some point that may happen. In a recent post on app store class actions in various jurisdictions I mentioned that it would be like a modern-day pillory for Apple if they had to pay out money to iPhone users as a result of a court of law finding that they illegally overcharged their customers. The combination of losing one or more consumer class action lawsuits, Google's #GetTheMessage campaign, and further (ideally even more aggressive) resistance by Meta and others to Apple's ATT program (see this recent post on macroeconomic effects)--and maybe if Epic Games ultimately turned things around and won its case--could materially affect Apple's reputation even in the eyes of end users.

So, while I'm not fully convinced, I support #GetTheMessage because it's a good thing in principle. Please do so as well.

Tuesday, August 9, 2022

Korea Communications Commission launches 'fact-finding investigation' into Google Play, Apple's App Store, and (local player) ONE store: Google's rejection of KaTalk updates apparently triggered this

It took only one month and two days for my headline according to which Google was on a collision course with the Korean government to be vindicated. I predicted this after Google rejected updates to KakaoTalk (commonly referred to as KaTalk), a messenger app used by about 93% of Korean smartphone users, the reason for those rejections being KaTalk's use of external payment methods (via its website).

The Korea Communications Commission (KCC) teed up today's announcement of a "fact-finding investigation" into three mobile app stores quite nicely, and I'll say further below why I think they're playing it smart. First, here's a report by the Yonhap news agency, according to which the KCC will start a probe in a week from today to look into potential violations of the in-app payment rules the country's legislature adopted last year.

The idea of that legislative amendment was and remains that app developers should be able to bypass Apple's, Google's, and other app store operators' taxes on in-app payments. Korea is not the only jurisdiction in which Apple and Google have made announcements of what constitutes bad-faith pseudo-compliance with rules or regulatory decisions. It has also happened in the Netherlands, where an antitrust decision is being appealed, and Google recently announced such plans with a view to the EU's Digital Markets Act, though it turned out only a few weeks later that the real reason for doing it at this particular time was, presumably, a preliminary investigation by the European Commission's Directorate-General for Competition (DG COMP).

In South Korea, Apple and Google impose a 26% commission on in-app payments processed by third-party payment services, which effectively means that the total cost to a developer of (a) the platform operator's tax and (b) the fees charged by third-party payment processors (which are apparently a bit higher in Korea than in some Western countries, where Apple and Google impose a 27% tax on third-party transactions) is not--or at least no more than negligibly--lower than simply using Google Play Billing for Android or Apple's IAP for iOS apps. As a result, developers have nothing to gain, as they'd need to be able to offer users substantially lower prices in order to convince them to use alternative payment systems--and without the developer losing money on those cheaper transactions, of course.

The Korean law doesn't state specifically that mobile platform operators are not allowed to charge commissions; and it probably couldn't say so, as companies may own valid and enforceable intellectual property rights that entitle them to royalty payments.

There can be no doubt about the spirit of the law: it's about giving app developers choice. Consumers already had the choice of making payments using different credit cards or other payment methods.

Instead of just talking price regulation at an abstract level, the KCC is now going to analyze whether the targets of the investigation are "enforcing certain in-app payment methods and refusing developers who use external payment methods to register and renew their apps on their markets." (quoting Yonhap)

The second part--"refusing developers who use external payment methods to register and renew their apps on their markets"--is precisely what the KaTalk situation was all about. TechCrunch reported in mid-July that Kakao, the company that makes KaTalk, removed its external payment options. Kakao seemingly caved after some short-lived resistance (by contrast, Epic Games' Fortnite was kicked out of Google's and Apple's stores two years ago--almost to the day--and still hasn't returned), but it may now have the last laugh.

I don't mean to suggest that Kakao coordinated this with the KCC. I would, however, assume that Kakao at some point complained to the KCC, and that the KCC appreciates the fact that Google's repeated rejection of updated KaTalk versions gives the regulatory agency some ammunition: there was some actual harm to the developer as well as to consumers, even if only during a short window.

That is just the first of two reasons why I think the KCC teed this up nicely. The other is that it's politically clever to investigate not only Apple (over the App Store) and Google (over the Google Play Store), but also South Korea's large telecommunications carrier, SK Telecom, over its ONE store (yes, the official capitalization is "ONE store"). On the web, ONE store describes itself as "Korea's leading app store."

Going after a local hero in addition to two American behemoths makes it all look a lot more principled than otherwise. No doubt that ONE store would also like to squeeze developers. But ultimately the South Korean economy stands a lot more to gain from opening up mobile payment systems.

Samsung's Galaxy Store is also very significant, but apparently compliant with the new IAP statute. It's also telling that the Galaxy Store became the #1 Fortnite Mobile distribution channel after Google and Apple ejected that game: it means Samsung allows developers some things that Apple and Google don't.

It's not 100% certain at this stage the investigation will lead to further action, but I'd be surprised if the KCC ended up concluding that Apple's and Google's terms and policies--and the implementation of those terms and policies--are compliant. The Telecommunications Business Act would enable the KCC to fine Apple and/or Google to the tune of 2% of their Korean revenues.

The Yonhap report doesn't specifically indicate that the KCC may consider the 26% app tax rate a violation of the country's IAP rules. Maybe the KCC is going to focus on behavioral rather than numerical issues, at least for now--they've got to start someplace. We'll certainly hear from that Korean enforcement action again in the not too distant future. I think there's potential there.