Saturday, August 6, 2022

SHOCKING: Nokia patents, other lawsuits force OPPO, OnePlus out of German market--first smartphone maker in history to exit major market over patent enforcement

The history of phones has been linked to patents ever since Alexander Graham Bell patented the telephone in 1876. One of humanity's dreams materialized. Fast forward 146 years, and nothing short of a nightmare has come true: a very significant phone maker has actually exited--not merely threatened to exit--one of the largest markets in the world--Germany--as a result of patent assertions.

I became aware of this shortly after yesterday's post on two standard-essential patent (SEP) injunctions Nokia had just obtained against OPPO from the Munich I Regional Court. Previously, the Mannheim Regional Court had granted Nokia a non-SEP injunction in June as well as a a SEP injunction (over two patents from the same family) in July.

Nokia may win one or more additional injunctions on Tuesday. OPPO has its own countersuits pending, but those are taking longer.

While U.S. and UK courts would hear extensive testimony from expert witnesses in such cases, and German courts appoint their own experts in cases of far lesser significance (such as construction law disputes over only a few thousand euros), neither the Mannheim court nor the one in Munich appointed an economic expert to analyze whether the parties' positions were fair, reasonable, and non-discriminatory (FRAND). In all three SEP cases, the decisions were based on the judges' own determination that Nokia had discharged its FRAND licensing obligations and OPPO was an unwilling licensee.

I'm now going to report and comment on the situation in multiple parts:

  1. Market shares: OPPO 10%, OnePlus 2-3%, and (soon to follow?) Vivo 8%

  2. Hard evidence of OPPO and OnePlus having left the German market

  3. Other patent assertions against OPPO in Germany

  4. Why OPPO's calculus may simply make economic sense

  5. Implications for Apple, Samsung, and Xiaomi

  6. Comparison to previous market impact of other patent enforcement (particularly--but not only--in Germany) and Apple's about-face in the UK

  7. Tactical implications for Nokia-OPPO licensing negotiations

  8. German patent injunction reform: collective failure by Apple, Google, Nvidia, Deutsche Telekom, SAP, automotive industry

Market shares: OPPO 10%, OnePlus 2-3%, and (soon to follow?) Vivo 8%

According to Canalys, OPPO's worldwide market share was 10% in the first quarter of 2022--slightly down from 11% year-on-year. And there's another 8% for Vivo, which is not an OPPO affiliate, but like OPPO belongs to BBK Electronics Corporation of Guangzhou, China, and is also being sued by Nokia in Germany. Vivo hasn't exited the German market (here's a German Vivo product page) as there is no injunction in place yet, but given that OPPO has made the determination that it was prudent to leave the German market and to reject Nokia's royalty demands, it seems likely that--faced with the enforcement of an injunction--Vivo, too, would independently reach that conclusion when running the numbers.

So, in the short term we're talking about the exit of smartphone brands accounting for more than 10% of the market (OPPO + OnePlus), and in the mid term we may be talking about more than 10% (OPPO + OnePlus + Vivo). Vivo has much less of a market presence in Germany than OPPO.

When phones accounting for 10% or more of unit sales in a large market--and an even higher percentage of the low- and mid-range segments--become unavailable, it cannot be denied that there is an impact on consumer choice and possibly even a very significant output restriction in these times of chipset shortages. That, of course, does not mean to blame patent holders or the patent system. I'm talking about the practical consequences of this. This is plainly massive.

Hard evidence of OPPO and OnePlus having left the German market

I had mentioned in several previous posts the possibility of OPPO determining that it was too costly to stay in the German market, and then I ran a Twitter search to see whether someone else had also reported on yesterday's Nokia v. OPPO injunctions #3 and #4. I found this tweet by OPPOblog's Dominik Lux and another one that pointed me to this article. Yesterday, Caschys Blog also reported on this development.

I've also verified the situation myself. OPPO's German website contains the following note (click on the image to enlarge):

That note translates as follows:

"Currently, no product information is available on our website.

"Q: Can I continue to use OPPO products without limitation, receive support, and receive future updates?

"A: Yes, you continue to be able to use your OPPO products without limitation, receive support, and of course you will receive all future updates."

The removal of product information is key because German patent injunctions typically enjoin a defendant not only from making and selling the products that have been held to infringe, but also from advertising them.

As for the availability of future over-the-air (OTA) software updates, Nokia can't do anything about that unless and until it enforces a patent on a technique that is essential to Android. Cellular standards are implemented at the hardware level, not in Android itself. The WiFi non-SEP over which Nokia won its first German injunction against OPPO can be worked around, but even that one may be implemented at the chipset level.

The German OnePlus store delivers the following when one clicks on the "Phone" category (click on the image to enlarge or read the text below the image):

"Uh-oh! Nothing is found.

"Try searching with different filters."

Some OnePlus accessories are still available. They are not among the accused products (for now).

German injunctions are binding only on the defendants, not on third parties. Therefore, resellers still have OPPO and OnePlus products in stock--though it's unclear for how much longer that will be the case. The largest one of those resellers is Deutsche Telekom (T-Mobile), which carries five OPPO and six OnePlus products as you can see in the following screenshot (click on the image to enlarge):

In the part on tactical implications for the Nokia-OPPO licensing negotiations I'll discuss what the parties' options with a view to OPPO's resellers are.

Other patent assertions against OPPO in Germany

While Nokia is the only patent holder with a German injunction in force against OPPO and OnePlus at this stage, there are other patent cases pending against OPPO and OnePlus in German courts:

Why OPPO's calculus may simply make economic sense

The totality of the injunctions that have come down, as well as other pending and threatened cases, faces OPPO with the choice of

  • taking global portfolio licenses on the patent holders' offered terms, thereby reducing margins and/or (as a result of price increases) the company's competitiveness in the rest of the world, or

  • forgoing potential profits in Germany, possibly even in the long run, in favor of maintaining the company's margins and competitiveness in the markets where it generates the bulk of its sales.

It's what chess players call a gambit. Economically, it's an "op cost" (opportunity cost) analysis of two alternative scenarios.

According to the BITKOM industry association (of which Nokia is a member, too), the annual sales volume of smartphones in Germany is approximately 20 million devices with an average price of approximately 550 euros (US$560). The median would be more interesting to know, as Apple with its sky-high prices is not representative of the rest of the market. It is a safe assumption that OPPO's average price--even with OnePlus included--is significantly lower. That would mean a quantity of roughly 2 million units, at an average price of maybe 400 euros (US$407). If we assume a margin of maybe 10%, that would mean annual profits of approximately 80 million (euros or U.S. dollars).

On Thursday, InterDigital discussed OPPO's global sales volume in a conference call with investors, and an estimate of 200 million units was mentioned (I knew that the number was well over 100 million units per year). That means OPPO generates maybe about 1% of its global sales in the German market.

If we now compare those 80 million euros/dollars in annual profits from Germany to the impact of paying elevated patent royalties on the other 200 million units, the simplest way to look at it is that even if OPPO expected to save only about 40 cents in patent royalties on a per-unit basis, it would make sense to just leave--and even in the long run, stay out of--the German market. The difference between Nokia's and OPPO's positions may be a lot greater than that--and then there are various other patent holders, including the ones already suing OPPO in Germany. In the total of all the patent holders seeking leverage in Germany now or later, the per-unit cost increase could amount to several euros/dollars.

If OPPO assumed that it can get a substantially better deal in a matter of weeks or months, then it would pay off big-time to forgo some German sales, especially during the slow summer season.

OPPO may never really lose 100% of its German sales. Resellers and even consumers may buy products in other European countries, such as Austria or Poland.

Obviously, the question is then whether Nokia will get leverage over OPPO--or OPPO over Nokia, as it's a two-way dispute--in other jurisdictions, as cases are pending in many countries. I'll talk more about the tactical options both parties have from here on out further below.

Implications for Apple, Samsung, and Xiaomi

For Apple and Samsung, and probably even for Xiaomi, the calculus would be rather different if faced with a similar situation.

Apple--which has yet to renew its Ericsson, Nokia, and InterDigital license agreements, two of which have expired and the last one of which is about to expire--has far higher profit margins than OPPO, and doesn't target similarly price-sensitive customer groups as OPPO does especially (but not only) in Asia.

For instance, Apple generates only 0.2% of its worldwide sales in Colombia, but the cost of not being able to sell its 5G iPhones and iPads there is already substantial compared to the license fees Ericsson is seeking. Exiting the German market wouldn't be an option for Apple.

Samsung (which also has to renew the core part of its Nokia license rather soon) and Xiaomi are somewhere between Apple and OPPO in terms of per-unit prices, profitability, and market shares in affluent vs. developing countries.

Comparison to previous market impact of other patent enforcement (particularly--but not only--in Germany) and Apple's about-face in the UK

OPPO's withdrawal from the German market is of an unprecedented scope and scale. So far there had only been

  • sales bans that temporarily affected limited parts of a given smartphone maker's line-up,

  • temporary removals of features, and

  • cases in which companies publicly or privately said they were contemplating exiting a market as an alternative to caving to a patent holder's demands, but in none of those cases did it actually happen when push came to shove.

The most recent case of a temporary exit from the German market concerning some--not all-- of a smartphone maker's products became known six months ago and involved HMD. That was due to the enforcement of patent injunctions by VoiceAge EVS.

The previous incident resulted from Qualcomm's enforcement of a patent injunction against Apple. That one, too, affected only some products: the iPhone 7 and 8, which were already the low-end iPhones at that time. While Apple was temporarily unable to sell them directly in its Apple Stores or online, those devices remained widely available through resellers. The problem was solved by Apple incorporating Qualcomm--not Intel--chips into the iPhone 7 and 8 for the German market. Had Apple and Qualcomm not worked it out, the appeals court would have lifted the injunction anyway: that's precisely what it did at a time when it no longer mattered.

In early 2012, Motorola (while in the process of being acquired by Google) was enforcing a Mannheim SEP injunction against Apple. As a result, Apple was unable to sell the iPhone 3G, the iPhone 3GS, and the iPhone 4 (but not the iPhone 4S), and all 3G/UMTS-capable iPads in Germany. But what was really going on was that Apple iteratively offered Motorola better terms until the appeals court--the Karlsruhe Higher Regional Court--deemed Apple's offer reasonable enough to stay the enforcement of the injunction.

What lasted more than a year was the impact of Motorola's push notification patent injunction. Apple had to disable that feature until the appeals court lifted it in 2013.

IPCom enforced a patent injunction against HTC in Germany before that, and a motion for contempt-of-court sanctions was brought, but there was no market impact.

Last year, Apple's outside counsel told a UK judge that her client might exit the British market if the court set too high a global royalty rate, but ultimately agreed to accept the UK court's determination, and the related trial took place a couple of months ago. (By the way, FOSS Patents was referenced on multiple occasions during that trial.)

Experienced licensing negotiators have witnessed countless situations in which companies said that if they were going to lose a case in a given jurisdiction, they'd rather leave that market than settle on a worldwide basis. Generally, no one ever took such statements too seriously. But with OPPO in Germany it appears that a point has been reached where a significant player has determined that pulling out is preferable over backing down.

Tactical implications for Nokia-OPPO licensing negotiations

Nokia and OPPO can hardly know what the other side's intentions are:

  • Given that the current situation is unprecedented, Nokia may assume that OPPO is bluffing and not going to stay out of the German market for too long after the slow summer is over and OPPO's products that are currently in its resellers' warehouses have been sold.

    But if Nokia miscalculates in this regard, and OPPO actually does pay the price of staying out of the German market (also with a view to other pending patent cases), then the point will come at which Nokia is the more vulnerable side in Germany. OPPO's own enforcement of true 5G patents is likely to lead to injunctions against Nokia's mobile base stations.

  • It would be reasonable for OPPO to assume that Nokia will want to turn the page on that dispute and focus on bigger fish to fry: Apple and Samsung--companies that, unlike OPPO, could not afford to pull out of Germany only to avoid taking a patent license on Nokia's preferred terms.

    But there's another side to this. Nokia knows that whatever deal it reaches with OPPO will be referenced in potential disputes with Apple and Samsung as a comparable license agreement. Nokia can argue that OPPO's average selling price is far lower than Apple's, and significantly lower than Samsung's. But the headline royalty rate is going to be part of the discussion.

    And this works both ways: OPPO won't be interested in weakning its position vis-à-vis other SEP holders (such as InterDigital).

With a view to Nokia's potential future disputes (Apple, Samsung etc.), there's also an upside and a downside from continued litigation with OPPO:

What's unclear is how big a part of OPPO's problem some other German lawsuits (InterDigital, VoiceAge EVS, and any potentially unknown or yet-to-be-filed ones) are. The aggregate of the bid-ask differences between OPPO and those other patent holders could be comparable to, or greater than, the one in the Nokia case. In that case, settling with Nokia would at best solve half the problem fro OPPO. However, against InterDigital and VoiceAge EVS, OPPO can't countersue as those companies aren't selling products in Germany: their revenue model is patent licensing.

Then there are all those other jurisdictions in which Nokia and OPPO are currently embroiled in litigation. Simultaneously with the German cases, Nokia brought complaints in London, Paris, and Barcelona. OPPO sought a declaratory judgment in the Netherlands, where Nokia responded with non-compulsory counterclaims. In China, OPPO is seeking a FRAND determination, and Nokia brought infringement claims. Nokia is suing in India and Indonesia. In the latter jurisdiction, OPPO has so far defended itself, though Nokia could refile. Nokia also sued in Russia, but withdrew there over the Ukrainian situation--but then brought cases in Sweden and Finland.

Nokia may be able to obtain injunctions in some other jurisdictions, but it remains to be seen what the courts in those countries will say about Nokia's and OPPO's FRAND compliance. Divergent decisions are possible.

There are also tactical decisions to be made by Nokia in Germany. It's possible that resellers like Deutsche Telekom and MediaMarkt will just buy OPPO products in other countries within the EU's single market, such as Austria or Poland. Nokia wouldn't want to sue the carriers as they are its network infrastructure customers. What Nokia could consider is a petition for border seizures by customs authorities (here's a German-language article (PDF) by the Bardehle Pagenberg firm on that topic).

We may not see an immediate settlement during the summer, but the closer we get to the Christmas Selling Season, the more likely it is that a deal will happen. Otherwise, OPPO would have nothing left to lose in Germany, but could at some point enforce injunctions against Nokia in Germany.

Should there be no settlement in the near term, we'd likely also see the parties file cases with the Unified Patent Court (UPC) in order to obtain EU-wide injunctions.

German patent injunction reform: collective failure by Apple, Google, Nvidia, Deutsche Telekom, SAP, automotive industry

It's been almost exactly a year since a German patent "reform" bill entered into force. While OPPO wasn't visible in the lobbying efforts related to that piece of legislation, companies like Apple, Google, Nvidia, Deutsche Telekom, SAP, and the German automotive industry had completely false hopes that a modified injunction statute (§ 139 of the German Patent Act) would lead to a departure from Germany's near-automatic injunction regime.

I've commented on that monumental lobbying failure on various occasions, such as earlier this year when two Dusseldorf judges made it clear that patent holders would continue to obtain injunctions in virtually every case where they prevail on the technical merits. More recently, there have been court rulings--also from Dusseldorf--that clarified that the situation was still the same as before. German judges have pointed out in their decisions as well as in public speeches that the language that got inserted into § 139 last year merely codifies the prior case law, under which a plaintiff either has to make stupid mistakes or seek a sales ban on, say, the printing of bank notes or a COVID vaccine in order to be denied an injunction. It's not even clear whether a proportionality defense could succeed in a single case in which a defendant wouldn't be entitled to a compulsory license anyway.

A few months ago, even ip2innovate, a lobbying front for the likes of Google, Nvidia, Daimler, and SAP--conceded in light of an injunction against car maker Ford that the legislative amendment hasn't really lived up to those companies' expectations. Well, I already predicted it in early 2000 right here on this blog. They just wouldn't believe me then. They now know that I was right with my predictions, and they were strategically on the wrong track.

OPPO's exit from the German market illustrates it again. Being exposed to German patent litigation is a vulnerability that some may prefer to avoid regardless of the opportunity costs from not serving such a large and otherwise lucrative market.