Saturday, March 25, 2023

UK CMA determines (as did DG COMP) that Microsoft-ActivisionBlizzard presents no risk of vertical foreclosure in videogame console market: where do we go from here?

Yesterday the UK Competition & Markets Authority (CMA) announced an update to its provisional findings relating to Microsoft's acquisition of Activision Blizzard King. Based on new evidence--the most important part of which simply flagged an error in the economic analysis--the CMA has "now provisionally concluded that the Merger may not be expected to result in a substantial lessening of competition in the market for the supply of console gaming services in the UK."

This means that just like in the EU (see my previous post on this merger), the focus is now exclusively on cloud gaming. Sony's claim that Microsoft was buying ABK to pull Call of Duty from the PlayStation is no longer relevant. Theoretically, Sony can try to persuade the CMA to change mind again. There's a deadline for that (next Friday, 5 PM UK time). But that's not realistically going to happen.

It was a major surprise that made the ATVI stock go up by about 6% to reach a new high since the announcement of the merger. I commented quickly in the form of a Twitter thread (condensed thread view). But in some other way, it was not surprising. When the CMA's original provisional findings were released on February 8, I saw "major progress" and also found the agency's remedies notice "constructive." I know from my contacts in the financial services industry that fear of the CMA blocking the deal--and such a decision being difficult to overturn--accounts for the largest part of the spread (the difference between ATVI's stock price and Microsoft's offer). But in public statements as well as in private conversations, I've consistently rejected the notion of the CMA being irrational or ideological, despite having disagreed with them on certain questions at different points.

The CMA deserves great respect for this correction, for which it was not too late. What's next? Let's first focus on the UK process and then about implications for other jurisdictions (EU, U.S.)--and for Sony, the sole vocal deal critic.

What's next in the UK?

The console-related part of Microsoft's remedy offer to the CMA is no longer needed:

It all comes down to cloud gaming, where the fact that Microsoft has already concluded multiple access deals (with Nvidia, Boosteroid, and Ubitus) must be given considerable weight. The cloud gaming theory is about a very dynamic and "nascent" market, thus inherently fraught with uncertainty. That has implications for proportionality: compared to a theory of harm in an established market, any remedies based on a nascent market theory will normally be less aggressive.

At this stage an appeal is really just a theoretical scenario, but it's a fact that the narrowing of the case also makes any decision easier to appeal. The UK Competition Appeal Tribunal (CAT) affords the CMA a lot of deference, but not infinite deference. When there are different theories and the CMA says that in the aggregate of those theories there is an apprehension of a substantial lessening of competition (SLC), then the CAT will affirm unless it identifies procedural errors or anything downright irrational. The narrower the case, the less room there is for an opaque amalgamation of probability assessments. Here, it would come down to just cloud gaming--again, a nascent and dynamic market--and decisions by market participants of different sizes (Nvidia, Boosteroid, Ubitus; and Valve's statement that it doesn't need a deal with Microsoft because it trusts them) would make a blocking decision irrational in my opinion.

The CMA has said that it's on schedule. As the timeline chart toward the end of my previous post on this merger shows, that deadline is April 26. I've seen someone comment that the CMA now has more work to do because there'll be responses to the update to the provisional findings. I don't think so. Those responses are a formality, and the case is now smaller and simpler.

What's next in the EU?

I'm sure the European Commission's Directorate-General for Competition (DG COMP) is pleased to see that after four jurisdictions that cleared the deal on the fast track (Saudi Arabia, Brazil, Serbia, Chile), one of the more hesitant ones has also concluded that there is no PlayStation foreclosure risk. It also means that there is now an increased likelihood of a consistent set of remedies to be agreed upon in the two European jurisdictions.

DG COMP sent out questionnaires to market actors as Politico reported (I retweeted Samuel Stolton's tweet). The Commission still has almost two months left. I guess they'll more or less exhaust this deadline unless Sony saves everyone time, as I'll discuss further below.

What's next in the U.S.?

There are two litigations pending in the U.S.: the FTC's in-house adjudicative proceeding and a class-action-style lawsuit in San Francisco.

Technically, Sony's PlayStation foreclosure theory has been dismissed seven times by now. Besides the clearance decisions in Saudi Arabia, Brazil, Serbia, and Chile, and the EU Commission's and CMA's rejection of that theory, there was also an order on a motion to dismiss in the Northern District of California. United States District Judge Jacqueline Scott Corley didn't deem that theory plausible when she ruled on the so-called "gamers' lawsuit" that is actually a lawyers' lawsuit, or one might even say losers' lawsuit given their track record (click on the image to enlarge):

With the greatest respect, I don't understand why one of the world's best news agencies--Reuters--takes such serial losers seriously and mindlessly describes that lawsuit as a complaint brought by gamers when everyone can figure out that the driving force here are the lawyers. The worst-case scenario that those gamers face based on the complaint would come down to buying an Xbox and spending a little more money on a few games, and no one would profitably bring an antitrust lawsuit over that. I can see that any legal challenge to a merger of this magnitude is potentially newsworthy, but it should be possible to put things into perspective, even more so when lawyers have such a pathetic track record in challenging mergers. Ars Technica also talked to them, but they obviously don't play in the same league as Reuters when it comes to legal reporting (they have other strengths).

The class-action lawyers intend to file an amended complaint soon, but the news from the UK doesn't make things easier for them. Their next complaint is not going to plausibly allege a reasonable probability of foreclosure either.

Now, what about the FTC?

The FTC's Chief (and only) Administrative Law Judge (ALJ) D. Michael Chappell largely granted a motion to compel that the FTC brought against Microsoft and Activision Blizzard. But that's not going to change much because the FTC already received plenty of information before it brought that complaint. Its case is not going to improve now.

The FTC would be in good company if it joined the EC and the CMA in recognizing that there is no console-related theory of harm. It would be the right thing to do. It would be honest and honorable. And it would show that the FTC is not "ideologically blinded" as has been alleged. The FTC would emerge stronger from a partial withdrawal of its complaint. In a subsequent step it could then also accept cloud gaming-related access remedies and everything would be resolved without the FTC suffering another loss.

If the FTC voluntarily dismissed the console market theory, that would leave those losers in California as the "Flat Earth Society" with respect to PlayStation foreclosure...

What should Sony do?

Earlier this week I tweeted that Sony had lost control over the narrative, an observation that was picked up by GameRant, Windows Club (Brazil), and Game Eperience (Italy). With all that has happened since, it has been validated.

Sony's problem is that its own practices are now potentially coming under scrutiny. The question of whether Sony maintains a monopoly in the Japanese market (if one adopts its own preferred market definition of "high-performance videogame consoles") came up in the United States Senate:

Sony imposes very restrictive rules on game makers. Many of those who support Sony in the public debate over the acquisition of Activision Blizzard don't even have an idea and that's because Sony, also through contractual restrictions, prevents people from finding out. I quoted several passages from the Epic Games v. Apple judgment in a Twitter thread. Let me quote them again here:

"[F]or all Fortnite transactions via the PlayStation Store, Epic Games agreed to make additional payments to Sony above this commission rate based on the amount of time that PlayStation users play Fortnite cross-platform."

"Sony, for instance, enacts a cross-play policy that compensates Sony where players spend on other platforms but primarily game on Sony’s PlayStation platform. Meanwhile, Sony and Switch have enacted policies that limit the cross-wallet functionality across platforms."

"Cross-purchases allows Fortnite users to buy V-Bucks, or virtual currency, on one platform and spend them on another platform. Cross-purchases are not available on Sony or Nintendo platforms."

"Epic Games believed so strongly in cross-platform play that it threatened litigation against Sony for using policies and practices to restrict the same ..."

As many of my readers know, I've been following Epic v. Apple very closely and have read the ruling multiple times, word by word.

It is at least debatable whether Sony should ever have lobbied and campaigned against Microsoft's purchase of Activision Blizzard King, given that the positions Sony was forced to take to contrive a console theory of harm that is now dead in the water could be held against Sony--market definition included. But even if one were to conclude that it was worth trying in the beginning, the problem is that the traction it appeared to get made Sony unrealistic:

After the European Commission's Statement of Objections and the UK CMA's provisional findings, Sony should have worked out a deal. Instead, its lawyers probably told Sony to keep spending money--and it's not just that, but also that they'd like to try the long shot and maybe make history by blocking a huge merger.

Sony and its lawyers from Cleary Gottlieb have already lost quite some credibility with competition regulators now. They complained about Meta-Within, and the FTC lost in court. They presented an insane Call of Duty foreclosure theory, and it's been rejected in seven jurisdictions by now. The common pattern: Sony--despite its unique combination of assets and incredible market power--is indiscriminately afraid of Big Tech competitors, be it Microsoft or Meta. On Twitter I commented on Sony's rare combination of an inferiority complex and hubris:

While Sony missed the best opportunity for contributing to an amicable resolution of the issue, it would still make sense to simplify things for the EC, the CMA, and the FTC now by working out a deal and endorsing the acquisition on that basis (just like Nvidia did). Better late than never, and the window of opportunity is potentially closing fast now.

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Friday, March 24, 2023

UK patent office declines to base standard-essential patent policy on 'anecdotal evidence from bodies representing smaller businesses'

The ink is barely dry on Justice Mellor's InterDigital v. Lenovo ruling, and there is more news from the United Kingdom concerning standard-essential patents (SEPs). The UK Intellectual Property Office (IPO) is seriously contemplating some policy-making (potentially legislative) initiative related to SEPs. But it wants to see hard evidence that intervention is needed to protect small and medium-sized enterprises (SMEs). To put it bluntly, the IPO is not going to be fooled by lobbyists claiming to represent SMEs while actually working on behalf of large implementers who want to bring down their patent licensing costs.

A few months ago, I was--frankly--shocked that a senior IPO official had accepted an invitation to speak at an ACT | The App(le) Association event, but also relieved to find out from the Office that they were absolutely aware of the fact that Apple funds ACT. I wish the European Commission could wake up and acknowledge this problem, too. The EC allowed ACT and its Google-controlled equivalent called Developers Alliance to participate in a Digital Markets Act workshop earlier this month, claiming to represent small app developers while actually lobbying for the abusive behemoths, a highly problematic practice called astroturfing.

On Tuesday, the UKIPO started a new consultation--though it had already called for views on SEP policy last year--with a questionnaire that will be available until April 24. The UKIPO's website reflects a profound understanding of the topic. What I particularly like is the following statement by the IPO's Acting Director of Business and International Policy, Sarah Whitehead, in an explanatory video:

"However, although we have some anecdotal evidence from bodies representing smaller businesses, we did not hear sufficient evidence directly from UK SMEs, small-cap and mid-cap businesses, including their experiences of interacting or using technical standards when innovating." (emphasis mine)

That is so spot-on.

The system of industry standards--and the licensing ecosystem built around it--is too important to intervene just on the basis of what lobbyists and (especially) astroturfers say.

Apple has not been an SME for about 45 years, much less a UK SME.

There are two "phenomena" in SEP policy debates in the Western hemisphere. Huawei, despite being a large-scale innovator and very reasonable licensor (that also knows the licensee's perspective), is often used as a bogeyman. And on the other end of the spectrum, there are those claims of SMEs--which policy-makers instinctively seek to shield from abuse--being on the receiving end of SEP abuse. I urge skepticism, and I commend the UKIPO for setting a reasonably high evidentiary standard. There cannot be responsible policy-making without it, but again, as the European Commission's recent DMA workshop showed, deceptive lobbying is rampant and some policy makers just don't have the guts to reject dishonest input.

I trust that the IPO will carefully analyze whatever stories it will be told, and will insist on hard evidence. For instance, the Save Our Standards campaign sponsored an interview by an IoT blogger with a U.S. SME, and for me it was easy to figure out that the SME in question never actually had to license SEPs (and not even the customer for which it developed the app they primarily discussed in that interview).

It's great that the UKIPO finds anecdotal evidence from those representing (or, more accurately, claiming to represent) SMEs unreliable. In the next step it's going to be key to scrutinize whatever input will be given by actual SMEs. If those SMEs are just service providers, their input is meaningless. If they make actual products, what issues are they really facing? And do they really need government intervention or would there be reasonably acceptable solutions under the existing framework?

On LinkedIn I raised the following question:

"If SMEs have such a huge problem with SEPs, where are all the SEP enforcement actions against SMEs? Maybe that's (one of) the first question(s) policy makers should ask when they launch consultations on this topic."

I'm a litigation watcher. If SMEs got sued over SEPs all the time, I'm sure I'd have noticed. The relatively smallest company I've recently seen on the receiving end of SEP enforcement is the German WiFi router market leader (70% share!), and the Munich I Regional Court has identified it as an unwilling licensee.

In 2019 I organized a SEP licensing conference in Brussels. The relatively smallest companies who participated and talked about SEP licensing issues were Nordic Semiconductor, AirTies, and Kamstrup. Now, let's put that into perspective:

I would argue that each of those three companies has the resources and the sophistication to respond to SEP royalty demands. As does AVM, that German WiFi router maker I mentioned.

Why is SEP litigation against SMEs so hard to come by? Because enforcement against them is not profitable. But only widespread litigation would be hard evidence of an issue serious enough to warrant legislative intervention.

I hope the UKIPO will remain skeptical of the input that it's now going to receive, knowing that some of it will be orchestrated by Apple-funded lobbying entities. And I would encourage the European Commission to do the same.

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Tuesday, March 21, 2023

Focus of Activision Blizzard merger debate shifts from concerns to constructive solutions and procompetitive effects: Epic Games welcomes Microsoft's mobile app store plans

If not for my new editorial policy that respects the patent-focused part of my readership, I'd have had a handful of reasons to blog about the Microsoft-ActivisionBlizzard merger review processes since my post on Wednesday, Activision Blizzard acquisition won't close before May 22, Microsoft is prepared to stipulate in San Francisco court. I have, however, commented in real time via Twitter, where many of my recent tweets have received hundreds (often between 500 and 900) likes. This is now a roundup of recent developments.

Momentum for clearance is growing. There are unmistakable signs for that. The tone of the conversation has changed. This is now the solution-finding stage. It's the time for deal makers rather than detractors and obstructors. It is not a solution to urge competition regulators to try to block a deal when they could never defend such decisions in the courts of law--and when there are relevant customer benefits on the table. One of those "RCBs" is directly related to the primary competition concern that the European Commission and the Competition & Markets Authority are trying to address on the basis of new legislation: opening up mobile app markets.

The Financial Times reported yesterday on Microsoft's plans to create--enabled by the acquisition of Activision Blizzard King as well as legislation that demonopolizes the mobile app ecosystems--a mobile app store. That is not entirely new. Microsoft started talking about it shortly after the merger agreement was announced, and specifically described plans to "shift consumers away from the Google Play Store and [Apple] App Store" in a filing with the CMA. This blog was first to highlight that passage in October (followed by The Verge and others).

In the fall Epic Games' founder and CEO Tim Sweeney said he'd be happy to compete with a Microsoft Store on mobile platforms, and he's spoken out even more clearly now:

He added:

"Microsoft’s core market is way over a billion active users and they want many billions. I love this ambition."

As my readers know, I agree with Epic on a number of app store questions and I'm grateful for their efforts on all developers' behalf. We disagree only rarely, and just at the periphery of those issues.

I believe Epic would speak out even more strongly and clearly in favor of Microsoft's acquisition of ABK if Sony wasn't a shareholder (5% or so) and the PlayStation a key distribution channel. When it comes to opening up mobile app markets, Epic has actually much more in common with Microsoft than with that walled-garden dinosaur.

The FT article confirms what MLex and Reuters have also reported: the commitments (potential merger remedies) Microsoft offered to the EU last week are all about cloud gaming and don't mention any foreclosure concerns related to Sony's PlayStation or Google's Chrome OS, which shows that the European Commission has narrowed its case to gaming services. On Twitter I commented as follows:

Last week, Microsoft announced two 10-year agreements with cloud gaming companies. After the deal with Boosteroid, which I blogged about, Microsoft announced another agreement with Ubitus, a cloud gaming provider that powers other services:

Between Nvidia, Boosteroid, and Ubitus, there are now already three such deals in place. Arguably four, given that Valve (Steam) said they could trust Microsoft and saw no need to contractualize anything.

Those positive dynamics have made Sony lose control over the narrative. In the beginning, the name of the game for them was negativity. It was all about fear, uncertainty, and doubt. That's what got in-depth investigations started in some jurisdictions, though I still believe that the ones who cleared the deal on the fast track (especially Brazil and Chile) got things right by traditional merger review standards. By now, Sony is an entrenched, increasingly isolated, and almost sidelined complainant. It missed more than one opportunity to play a more constructive role. I don't understand that degree of inflexibility.

In order to have enough time for a proper market test of Microsoft's proposed commitments, the European Commission has extended its deadline to May 22--the date that Microsoft previously mentioned as the earliest possible closing date in a filing with the United States District Court for the Northern District of California.

For the class-action lawyers in San Francisco (who've lost a long list of merger cases), it's now back to the drawing board. Judge Jacqueline Scott Corley granted Microsoft's motion to dismiss because "[t]he Complaint does not plausibly allege the merger creates a reasonable probability of anticompetitive effects in any relevant market." Judge Corley rightly asked: "Why would Microsoft make Call of Duty exclusive to its platforms thus resulting in fewer games sold? What is it about the console market or PC games market and Microsoft’s position in those markets that makes it plausible there is a reasonable probability Microsoft would take such steps." Here's the order (my commentary continues below the document, where I'll also provide an updated timeline chart):

DeMartini et al. v. Microsoft Corp. (case no. 22-cv-8991-JSC, N.D. Cal.): Order Granting Motion to Dismiss

The class-action lawyers now have 20 days to file an amended complaint. I guess they'll try, and Judge Corley appears to expect the same, which is why she still has a case management conference on her calendar for April 12. But will their amended complaint fare better? Will they ever meet the "Twiqbal" plausibility requirement? I doubt it.

Given that the private lawsuit in California was largely just copied from the FTC's complaint, what does that decision mean for the FTC? I want to be fair. The FTC obviously knows a lot more about the case than those class-action lawyers do, and chances are that the FTC has better lawyers. While I disagree with the FTC on this merger topic, I know that sooner or later I'll find myself in a U.S. courtroom again watching them defend competition. It's fair to say that the dismissal of the "FTC copycat" lawsuit in San Francisco also indicates that the FTC won't easily persuade a federal judge of its theories, but it's equally correct to say that the FTC would probably have done a better job, so the outcome could have differed gradually.

What should give the FTC pause is the combination of Judge Corley's order and the more solution-oriented position taken by the EU Commission. And there's this backdrop of growing criticism of Lina Khan's leadership of the FTC.

All things considered, now might be a good time for the FTC to look at Microsoft's remedy proposals to the EC and think hard about whether that could be a starting point for discussions. At the first FTC v. Microsoft & Activision Blizzard hearing in early January, Microsoft's counsel said that they hoped to be able to work things out with the FTC after agreeing on solutions in the EU and/or UK. That is now the case, at least with a view to the EU, but arguably also in the UK, where Microsoft submitted a "self-executing" access remedies proposal.

Last week, the UK Competition & Markets Authority (CMA) published Microsoft's response to its provisional findings. Two parts of it were particularly noteworthy. A chart shows the extent to which most console game publishers are dependent on the PlayStation:

But Microsoft also detected a clear error in the CMA's PlayStation-related foreclosure theory:

The numbers presented by the CMA itself show that foreclosure would be vastly unprofitable as soon as an error (comparing a one-year term to a five-year term) is corrected. I wouldn't attribute this to malice, but the CMA can do better than that for sure.

Just like the EC stressed that it might reach different conclusions from regulators in other jurisdictions (probably alluding to the FTC more than to anyone else), the CMA has the same right. But if the numbers aren't there, why should the CMA not find a way to make it work? It would definitely be desirable to have a reasonable degree of consistency between the remedies agreed upon in the UK, U.S., and EU.

Sony is asking for too much if it wants the CMA to swim against the tide and take an unconstructive outlier position that it won't be able to defend in court. The EU won't block the deal. In the U.S., the FTC may or may not become constructive, but sooner or later it will lose in federal court.

Finally, here's my updated timeline chart, which reflects the postponement of the EU decision and the dismissal (without prejudice) of the private lawsuit in California (click on the image to enlarge):

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Sunday, March 19, 2023

OPPO, others stand to benefit from Lenovo's resounding UK FRAND victory over InterDigital: experts' selectivity, excessive discounts, conduct-based arguments fail to persuade judge

This is not a "rapid response" piece by any measure. It's been three days since Justice Edward James Mellor rendered his InterDigital v. Lenovo FRAND judgment. Many others have reported and commented since, and in a first step I pointed--via LinkedIn--to a great summary by Michael Burdon of Simmons & Simmons. Some others had to--or have yet to--correct the conclusions to which they originally jumped.

It's a landmark ruling. Probably the worst that ever happened to InterDigital in any litigation, and arguably one of the most significant setbacks for standard-essential patent (SEP) licensors in general (though nowhere near as bad for them as Microsoft v. Motorola was back in the day). In the short term, a major implementer with a much better licensing track record than Lenovo stands to benefit hugely: OPPO. This may also help Apple against the Optis/Unwired group, where a UK ruling is likely imminent and some of the same players are involved, though the fact patterns may be very different. In the mid term, it very much depends on what the appeals court will decide, but it will be hard for InterDigital to get Justice Mellor's determinations on the credibility of experts--where InterDigital's experts performed poorly--overturned. The UK is now a less attractive venue for SEP enforcement. This InterDigital v. Lenovo decision actually invites a lot more SEP enforcement litigation, but in other jurisdictions, as I'll discuss further below.

It's not all bad for InterDigital, a company that has recently been very good at renewing major agreements (or at least agreeing on a path toward renewal) and has a lot of potential, but the bad far outweighs the good here:

  • The $138.7M lump-sum payment for an absurdly long period (2007-2023) comes down to a per-unit royalty of $0.175, which is only marginally more than Lenovo's best offer of $0.16, and just a little over a third of the $0.498 per-unit royalty InterDigital was seeking.

    Without a doubt, this is the key measure, and there is no explaining away InterDigital's (and its experts') defeat. InterDigital itself conceded defeat by announcing its appeal.

  • The court totally rejected InterDigital's headline rates ("program rates") as comparables because discounts of up to 85% (Samsung) made those numbers pretty meaningless.

  • The court found neither party in compliance with its FRAND licensing obligations: InterDigital was categorized as an unwilling licensor (for consistently making supra-FRAND demands) and Lenovo an unwilling licensee (which is unsurprising). The ruling notes that both parties can be unwilling at the same time. The problem for InterDigital is that this is unprofitable: it can stick that finding of Lenovo's unwillingness to its office walls, but it's not getting any compensation for it. InterDigital had some pretty good conduct-based arguments in this case. But if you have a strong case based on the implementer's behavior, you have to enforce in jurisdictions like Germany (Sisvel v. Haier) where conduct is given a lot of weight. Justice Mellor simply declined to let InterDigital's criticism of Lenovo's behavior result in an increase of what would be seen as the objective market value of the patent license in question.

  • The part that SEP holders will, of course, appreciate is neither new nor spectacular: a willing licensee can't just hide behind statutes of limitation (for the recovery of damages for past infringement) but will make a release payment to fairly compensate for all past use (which in this case may also entail a post-judgment award of interest). I'm not aware of any case law to the contrary in any of the jurisdictions that focus on the willingness of licensees. But it is useful clarification that will be cited elsewhere.

  • Where InterDigital's expert witness on comparables clearly lost all credibility with the court was when he pointed to 20 license agreements outside the top 20 most important ones. The license agreements Lenovo focused on accounted for roughly 98% of all units, and the ones InterDigital's expert focused on amount to roughly 2% of the business. Such selectivity is ridiculous.

    In a jurisdiction where a court mostly delegates these factual findings to an expert witness, the decision might have been different. An economic expert might have independently developed a middle-ground scenario. Justice Mellor notes that InterDigital--which didn't want to undermine the extreme positions its experts were taking--failed to present a more conservative set of numbers. A court-appointed expert might have come up with some new analysis. But when there's a battle between experts and a judge has to make the decision, it's risky to take extreme positions that are easily rejected because they're irrationally selective.

What I consider to be the most important passage is the final sentence of para. 516:

"However, it is important to keep in mind that these volume discounts were ‘applied’ to InterDigital’s ‘program rates’ which were paid only by the smallest and least sophisticated licensees."

Justice Mellor goes on to clarify that he's not faulting InterDigital for being pragmatic and business-oriented in the sense of offering huge incentives to the Samsungs of the world in order to strike deals with them rather than having to engage in protracted multi-jurisdictional litigation, during the course of which InterDigital's cash flow would be adversely impacted and shareholders would get nervous. This is not a moral question. It is, however, relevant to the "ND" part of FRAND.

I would describe Justice Mellor's position as follows:

  • You can't build comparables by squeezing the weak

  • if at the same time you cave to the big hold-outs.

That is not fair, and it ends up distorting competition. It makes the rich richer at the expense of the poor.

InterDigital has only one revenue source: licensing. Apple and Samsung each account for roughly one quarter of InterDigital's income. It's easy to see why InterDigital would rather litigate against someone like Lenovo, and avoid litigation against Apple and Samsung through huge concessions. They're within their rights to make that choice, but is that still going to be the right strategy going forward? If more courts adopt Justice Mellor's position that InterDigital's "program rates" have nothing to do with market realities and fair valuation, then it just won't work as even the little guys will end up paying relatively low per-unit royalties.

Should a long-term hold-out like Lenovo benefit from rates that were agreed upon with willing licensees (companies that renewed their agreements in time, or shortly after expiration of the previous one)? That is a very valid question. But an injunction is a prospective remedy, and that's the context in which those UK FRAND determinations are made, so it becomes just a numbers game. There are no signs of the UK adopting the behavior-centric Sisvel v. Haier approach. If you want that one, you have to go to Germany. The current problem there is that the Federal Patent Court puts out those premature opinions after six months, but the solution is simply to assert enough patents that something will stick.

Courts rarely intend to invite more litigation, and Justice Mellor is no exception. But if one thinks it through, what should a SEP holder like InterDigital do when facing such situations as with Lenovo?

The UK now looks rather unattractive. It took about a year since trial, and now InterDigital needs to appeal, which will take a lot of time and is not too likely to move the dial. I'm not blaming Justice Mellor, who clearly says in his decision that he also had other matters to adjudicate during that period. But is it really a good idea to hold a multi-week trial with expert witnesses and then have a judge write a book (225 pages) about the case? In the meantime, it could have obtained injunctions in such jurisdictions as Germany, Brazil, or Colombia--and pretty soon, the Unified Patent Court, of course. The amount of collateral required to enforce German injunctions can be high, especially against large-scale implementers, but after two rounds of litigation (regional court and higher regional court), that problem goes away.

The idea of a "one-stop shop" solution--a jurisdiction that sets a global FRAND rate and will enjoin the infringer unless that one is accepted--used to be appealing. After InterDigital v. Lenovo, it's clear that this can backfire. The other jurisdiction that sets global FRAND rates even without the consent of both parties is China, and the judges there will definitely take note--as they absolutely should--of the UK findings. Short of a successful appeal, InterDigital can hardly expect to get more than 17 cents per unit from any Chinese device maker seeking a FRAND determination in its jurisdiction.

InterDigital is going to lose against OPPO. It won't get leverage in Germany because OPPO left the market; it is facing an uphill battle in the UK; and in the meantime, the decision may just be made in China.

OPPO may also benefit from this in its UK litigation with Nokia, but just like in Optis v. Apple, the facts may be very different, so it's too early to tell. I believe Nokia is a more courageous SEP holder than InterDigital, so I doubt that they grant discounts on the order of 85% to licensees like Samsung and Apple. They're probably a lot more consistent. But OPPO is also a much more sophisticated and licensing-oriented adversary than Lenovo.

The UK judiciary was eager to attract SEP injunction cases. Now that they get more of them, they start to realize that those complex cases place an enormous burden on the judges (and, by the way, with very little benefit to UK taxpayers). By taking a long time to decide those cases, and then setting relatively low per-unit royalties, they are now actively discouraging such filings. I'm not saying that it's their strategy, but it's the net effect of what's happening.

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Wednesday, March 15, 2023

U.S. states, Epic Games, others accuse Google CEO Sundar Pichai of 'routinely opt[ing] to move ... to history-off [c]hats to hold sensitive conversations' in violation of retention obligations

Since the "Google Chats" discovery dispute started with a motion by dozens of state AGs, Epic Games, Match Group, and other plaintiffs in October 2022, it has made Google's behavior look worse as more information came to the light of day. The issue has also widened because the DOJ and the same state AGs as in the litigation that was originally started by Epic brought a motion for sanctions in the United States et al. v. Google antitrust litigation in the District of Columbia. Both cases are scheduled to go to trial later this year, and the plaintiffs are seeking trial-related sanctions as opposed to a slap on the wrist.

The latest filing by the plaintiffs in the Northern District of California takes the topic to a new level: Google CEO Sundar Pichai himself is being accused of playing a key role in this. Despite heavy redactions, the following passage is revelatory:

"The newly produced Chats reveal a company-wide culture of concealment coming from the very top, including CEO Sundar Pichai, who is a custodian in this case. In one Chat, Mr. Pichai began discussing a substantive topic, and then immediately wrote: '[REDACTED]' Then, nine seconds later, Mr. Pichai [REDACTED]. [...] When asked under oath [REDACTED]' (Id. Ex. 2, Pichai Dep. Tr. 195:7-12.)

"Like Mr. Pichai, other key Google employees, including those in leadership roles, routinely opted to move from history-on rooms to history-off Chats to hold sensitive conversations, even though they knew they were subject to legal holds. Indeed, they did so even when discussing topics they knew were covered by the litigation holds in order to avoid leaving a record that could be produced in litigation." (emphasis in original)

It's a safe assumption that the above passage tells the story of Mr. Pichai himself having moved a conversation from a history-on to a history-off chat. The first redaction likely means that he realized that the topic should not be discussed with history on, and what he did "nine seconds later" will either have been that he turned history off or that he opened a new chat with history off from the beginning.

This is the filing by Epic and its co-plaintiffs that was made a few hours ago in response to a court order:

In Re Google Play Store Antitrust Litigation (case no. 3:21-md-02981-JD, N.D. Cal.): Plaintiffs' Supplemental Brief on Google's Chat Production

Google was also ordered to make a statement, and unsurprisingly Google continues to deny any wrongdoing or prejudice:

In Re Google Play Store Antitrust Litigation (case no. 3:21-md-02981-JD, N.D. Cal.): Google's Supplemental Breif in Response to the Court's February 27, 2023 Minute Order

From the outside it appears very, very difficult to imagine that Google will get away with what it's done. The courts in California and D.C. will most likely feel forced to impose sanctions. Let us not underestimate how unpleasant this situation is for the two district judges:

  • Google's systematic avoidance of discovery obligations cannot be tolerated, or draw only symbolic sanctions, without calling the whole system of pretrial discovery and retention obligations into question.

  • Both cases--the Android app store antitrust case in San Francisco and the search engine monopoly maintenance case in Washington--are among the most important U.S. antitrust cases in history. Adverse inferences could make a major impact.

    It would obviously have been preferable for Google not to delete those chats, and then the cases could be decided strictly on the actual evidence. Now it's too late.

Nothing has happened yet about the sanctions motion in the District of Columbia. In California, Judge James Donato has gone to extreme lengths to establish the facts. The discovery dispute there is now getting to the point where a decision will come down.

I also have a brief update on a third Google antitrust case: the ad tech case that was filed in the Eastern District of Virginia in January. Google has requested that the case be transferred to the Southern District of New York, where a multidistrict litigation panel decided to consolidate various other ad tech cases (compared to which Google claims the DOJ's case adds nothing new, though it comes years after some others). Google acknowledges, however, that the DOJ's cases are immune to consolidation. It's just that Google sees no particular reason why that case should be litigated in the Eastern District of Virginia, and it argues that the DOJ's convenience (owing to geographic proximity) is not a major factor. Google may indeed win that venue transfer, given that there is a district judge in New York who's already very familiar with the issues.

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Activision Blizzard acquisition won't close before May 22, Microsoft is prepared to stipulate in San Francisco court

Ahead of a motion-to-dimiss hearing and case management conference on Thursday, Microsoft and the lawyers who are the driving force behind the so-called gamers' lawsuit in the Northern District of California have filed a joint case management statement. Those lawyers are, by the way, frequent losers in such merger cases as I'll show further below.

You can find the document at the end of this post. Here are a few tidbits:

  • Microsoft is now prepared to extend an existing stipulation not to close the merger before May 1 (which the court accepted) by three weeks to May 22, 2023.

    Microsoft recalls that "[t]he regulatory review process in the EU, UK, and several other jurisdictions must be cleared (in addition to defeating the FTC’s promised preliminary injunction motion) so that the merger can close before the drop-dead date in the merger agreement of July 18, 2023."

    The lawyers adverse to Microsoft don't want any of that. They obviously wouldn't talk about their real motivation, part of which is that the court won't let them conduct their own discovery until after the preliminary injunction decision (so far, they get documents from the FTC proceeding--already "totaling over 13.3 million pages of documents of 4,285 gigabytes of data").

    If the past is any indication, Judge Jacqueline Scott Corley--whose court is the single most important U.S. federal district court for the technology industry--is going to be receptive to the idea of pushing back the preliminary injunction hearing, which is currently scheduled for April 12. Any postponement entails the possibility of a hearing never having to happen at all; at least it means other--objectively urgent--items get resolved sooner. The strongest argument is that things remain in flux, as evidenced by Microsoft's announcement yesterday of a 10-year deal (involving Call of Duty) with cloud gaming platform Boosteroid--with more such announcements apparently to come in the weeks ahead.

  • Microsoft's summary of the status of the European Commission's merger review states the exact date on which the EC's Statement of Objections was received: January 31.

    I don't want to read too much into the following, but it is worth nothing that Microsoft says "potential remedies [that are being discussed with the EC] "may or may not be necessary." According to media reports, it was already known that no divestiture remedies were going to be required by the EU's antitrust enforcers. But the three words "or may not" indicate that it is not even a given that any formal remedies will be imposed. In that scenario, the EC could--as it has in other cases including one in which I actively participated over a decade ago--grant clearance based on public statements and such facts as the license agreements that have been concluded by the time the decision is made. I said one shouldn't read too much into it because Microsoft's U.S. lawyers may merely have chosen that wording based on the fact that the EC theoretically could clear with or without formal remedies, regardless of whether a formally unconditional (though based on facts that are tantamount to remedies) clearance is likely to happen. It is known that Microsoft is prepared to address any concerns, and the question is then what exactly a regulator requires. There is always the possibility of appeals (as Microsoft's president mentioned in yesterday's Wall Street Journal), and with a view to an appeal a party would want to preserve its argument that it is actually entitled to unconditional clearance.

  • The part about the CMA says nothing new (see my March 8 post on the UK merger review), and doesn't talk about the possibility of unconditional clearance.

  • The plaintiffs' lawyers subpoenaed Sony, and Sony Interactive Entertainment CEO Jim Ryan isn't too interested in talking to them: he could have authorized U.S. lawyers to accept the subpoena on his behalf, but instead he wants to be served in his country of residence, the UK, which would take some time. While I have criticized Sony for not being as cooperative with the FTC as they should be, I don't blame them for not wanting to talk to those class-action lawyers from California.

  • Activision Blizzard has brought a motion to quash their subpoena. In that one, they ridicule the track record of those lawyers ("counsel with a long history of unsuccessful challenges to high-profile mergers just like this one") and provide a long list of failures of those lawyers:

    "In recent and past years, Plaintiffs’ counsel has filed a series of unsuccessful, eleventh-hour challenges to high-profile mergers that either had closed or were about to close. See, e.g., Bradt v. T-Mobile US, Inc., 2020 WL 1233939, at *1 (N.D. Cal. Mar. 13, 2020) (denying motion to enjoin merger pending appeal after plaintiffs lost motion for temporary restraining order); Dehoog v. Inbev, 2016 WL 5858663, at *1 (D. Or. Oct. 3, 2016) (dismissing antitrust challenge to merger of Anheuser-Busch InBev and SAB Miller), aff’d sub nom. DeHoog v. Anheuser-Busch InBev SA/NV, 899 F.3d 758 (9th Cir. 2018); Taleff v. Sw. Airlines Co., 828 F. Supp. 2d 1118, 1125 (N.D. Cal. 2011) (dismissing antitrust challenge to merger of Southwest Airlines and AirTran); Cassan Enters., Inc. v. Avis Budget Grp., Inc., No. C10-1934-JCC, slip. op. at 6 (W.D. Wash. Mar. 11, 2011) (dismissing antitrust challenge to Avis’s proposed acquisition of Dollar Thrifty); Malaney v. UAL Corp., 2010 WL 3790296, at *15 (N.D. Cal. Sept. 27, 2010) (denying motion to enjoin merger of United Air Lines and Continental Airlines), aff’d, 434 F. App’x 620 (9th Cir. 2011), cert. denied, 132 S. Ct. 855 (2011); Golden Gate Pharmacy Servs., Inc. v. Pfizer, Inc., 2009 WL 3320272, at *2 (N.D. Cal. Oct. 14, 2009) (dismissing antitrust challenge to merger of Pfizer and Wyeth); Ginsburg v. InBev NV/SA, 649 F. Supp. 2d 943, 952 (E.D. Mo. 2009) (dismissing antitrust challenge to InBev’s acquisition of Anheuser-Busch), aff’d, 623 F.3d 1229 (8th Cir. 2010); Madani v. Shell Oil Co., 2008 WL 7856015, at *4 (C.D. Cal. July 11, 2008) (dismissing antitrust challenge to joint ventures between Shell and Texaco), aff’d, 357 F. App’x 158 (9th Cir. 2009); Am. Channel, LLC v. Time Warner Cable, Inc., 2007 WL 1892227, at *7 (D. Minn. June 28, 2007) (dismissing antitrust challenge to Time Warner’s acquisition of Adelphia)."

    There are many better class-action law firms in the United States. It is telling that no high-profile firm is challenging the merger. Only some habitual losers are. (I was just talking about class-action firms, not about a government agency that has also been losing a bit too often lately and may or may not bring its own PI motion.)

  • I read between the lines that those class-action lawyers are costing Microsoft's counsel a lot of time, which has cost implications. The class-action lawyers say they don't want to engage in alternative dispute resolution (typically mediation), and that's because it would slow down things. But I'm sure that all they want is a settlement, and increasing the cost of Microsoft's defenses appears to be part of their strategy.

Here's the joint filing:

DeMartini et al. v. Microsoft Corp. (case no. 3:22-cv-8991-JSC, N.D. Cal.): Join Status Conference Statement

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Tuesday, March 14, 2023

Microsoft announces third 10-year Call of Duty distribution deal (with Boosteroid) and says more such agreements will be concluded in coming weeks

The Microsoft-ActivisionBlizzard merger review processes have already created one unprecedented situation: a company (Sony) that is not just the market leader (in videogame consoles) but even holds a dominant market position is being portrayed as a potential victim.

There is another aspect that makes this merger stand out: the vertical foreclosure theory--withholding that "must have" AAA title named Call of Duty from other platforms and services--is being reduced to absurdity by a host of commercial agreements. Microsoft just announced its third 10-year contract in a row. After Nintendo and Nvidia, the latest one was struck with Boosteroid, a cloud gaming platform that is available in the U.S. and various European countries:

The company behind Boosteroid is headquartered in Romania and has its research and development in Ukraine, which is why a high-ranking member of Ukraine's government contributed a quote to the announcement:

"Microsoft partnering with Boosteroid is welcome news and further evidence of the company’s ongoing support for Ukraine," said Mykhailo Fedorov, Ukraine’s Vice Prime Minister and Minister of Digital Transformation. "Boosteroid’s Ukrainian dev team has built a world-class streaming platform under the most challenging circumstances and demonstrates the ingenuity and creativity of our citizens and local game developers."

According to a Wall Street Journal article, "Microsoft expects to reach additional deals in the coming weeks."

It's worth noting that Valve (known for Steam) was offered a deal a while ago and said they knew they could trust Microsoft, thus saw no need to contractualize that commitment.

But the same article also says that Microsoft and the only vocal deal critic, Sony, "aren't currently in discussions." Instead, Sony complained last week that certain passages of documents released by the UK's Competition & Markets Authority (CMA) were redacted, and made the broad and vague claim that the license it has been offered would "irreparably harm" competition. Activision's outspoken CCO Lulu Cheng Meservey exposed Sony's attitude on Twitter:

Jim Ryan (CEO of Sony Interactive Entertainment): "I don’t want a new Call of Duty deal. I just want to block your merger."

Should any of those U.S. lawsuits (the FTC's in-house case and/or the so-called "gamers' lawsuit" in San Francisco) go to trial, we may hear testimony that will confirm that the above is what Mr. Ryan actually said.

With every announcement of another industry player having decided to secure its (and, by extension, its customers') long-term access to Call of Duty, Sony's obstructive attitude becomes clearer. Regardless of where one stands on this particular merger, or even on "big Big Tech deals" in general, the situation raises the fundamental question of when there comes a point at which regulators will feel that a complainant is abusing the process.

Put differently, the question is whether a given regulator rewards constructive or incentivizes obstructive behavior.

Competition authorities have resource constraints. If everyone behaved like Sony by unnecessarily complicating matters, and if that happened in situations with more than one major transaction under review, regulators' ability to achieve good outcomes would be compromised.

In today's Wall Street Journal article, Microsoft president Brad Smith also says the following:

"If the only argument is that Microsoft is going to withhold ‘Call of Duty’ from other platforms, and we’ve now entered into contracts that are going to bring this to many more devices and many more platforms, that is a pretty hard case to make to a court." [...] He said any decision on the deal would be subject to judicial review.

That is a new kind of statement. It suggests that a blocking decision (such as by the CMA) might be appealed. In that case, Microsoft would have to work out an extension of the merger agreement with Activision Blizzard--a possibility that Microsoft has so far declined to discuss in public. An appeal could obviously not be decided by the current mid-July deadline. Would Activision Blizzard do that? In my observation, they're really very committed to making this deal happen. If they see that all the facts are on the table to prove that a blocking decision is not just wrong but plainly irrational, then they will keep on fighting for it and an extension becomes a "numbers game" (Microsoft would owe ABK $3 billion if the current deadline was missed).

I believe Mr. Smith was talking about a purely hypothetical situation. Nothing has changed about my impression that the CMA is actually being constructive in its own way. I've taken note of the fact that Microsoft recently placed full-page ads advocating clearance of this deal in UK newspapers. It shows an unwavering commitment and that they take nothing for granted. That is the key message from today's announcement, too.

If a company tries hard to cooperate with regulators and goes out of its way to address potential concerns, it's being constructive. But there comes a point where such a company might just have to demonstrate to those agencies that if all else fails, it will stand its ground in the courts of law, as is already the case in the United States. By accepting a negative decision that has no basis in law and fact, a company like that would effectively invite other regulatory action adverse to its interests. It would be a victim again and again, while the likes of Apple and Google exhaust all appeals and risk non-compliance fines just to get the best results possible. Today's Wall Street Journal article suggests Microsoft is not going to accept totally baseless decisions, though it's still going to be far more cooperative than Apple or Google.

The last week of April will be extremely important for this merger as my timeline chart (last updated on March 1) shows:

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Friday, March 10, 2023

WiFi router maker AVM deemed unwilling licensee of standard-essential patents--but more WiFi 6 patent assertions by Huawei may be needed to force settlement

Everyone loves WiFi 6, but not everyone is prepared to pay the creators of that standard fair, reasonable, and non-discriminatory (FRAND) patent royalties. A panel discussion organized by the Licensing Executives Society International (LESI) in January reflected hopes that implementers would seize the opportunity to save license fees by taking a pool license early on, but also the determination to bring enforcement actions if need be.

Prior to joining Sisvel's WiFi 6 pool (which welcomed another licensor last month: Mitsubishi), Huawei already felt forced to conclude that some WiFi 6 device makers are unreceptive to licensing offers unless and until they get sued. That's why Huawei, which created a sizable part of the entire standard, sued, among others, German WiFi router market leader AVM. AVM's FritzBox has a market share of approximately 70% in Germany.

The Munich I Regional Court held a FRAND hearing in mid December. At the time, Presiding Judge Dr. Matthias Zigann had just been promoted to the appeals court (he will, of course, be a key UPC judge as well), and his deputy, Judge Benjamin Kuttenkeuler, presided over the hearing, which largely took place behind closed doors. Meanwhile, Judge Dr. Zigann's permanent replacement has been appointed, and has since the beginning of the year been presiding over the court's legendary (in patent circles) Seventh Civil Chamber: Presiding Judge Dr. Oliver Schoen ("Schön" in German).

Let me first show you the current composition of the panel (click on the image to enlarge):

From left to right: Judge Dr. Hubertus Schacht, Presiding Judge Dr. Oliver Schoen, and his deputy (and the rapporteur on this Huawei v. AVM case), Judge Benjamin Kuttenkeuler. This is quite a triumvirate, considering that all three of them have authored important opinions and presided over patent hearings and trials.

The trial was held in a larger courtroom than usual, and I heard that this was necessitated by the strong interest of many attendees of a Federal Circuit Bar Association event in Munich to see the Seventh Civil Chamber in patent action.

A decision will be announced next week, which strongly suggests that it is not going to be an injunction for the time being, but more likely, a stay. Based on a preliminary opinion rendered by the Federal Patent Court, the Munich I Regional Court expressed the inclination to identify a squeeze: either the patent is interpreted narrowly, in which case it would not be deemed essential to the standard, or broadly, in which case it would be considered likely to be invalidated for lack of novelty. This comes down to an assessment of the probabilities of different outcomes in the Federal Patent Court, whose final decision may take years and, after further written pleadings and oral argument, could deviate from the first impression.

This is a challenge facing other litigants in Germany as well. Nokia, for instance, saw some of its Daimler cases stayed, but various patents fared better in the Federal Patent Court than one would have thought. Those cases would have come back with a vengeance if the parties hadn't settled. Nokia is currently embroiled in litigation with OPPO and Vivo, both of whom are countersuing Nokia in Germany. Many Nokia and OPPO patents have come under invalidation pressure, with OPPO's patents-in-suit being young enough that they can only be challenged in EPO opposition proceedings. The jury is still out on the shape and form in which some of those OPPO and Nokia patents may ultimately survive. But in the short term, preliminary opinions that raise doubts about the validity of the patents-in-suit complicate matters on the enforcement front.

Germany's 2021 patent reform ("PatMoG 2") was a total failure with respect to the standard for injunctive relief: nothing has changed, and some litigators are frustrated that the Dusseldorf Regional Court effectively says that instead of a proportionality defense, defendants should seek a compulsory license (or that this is at least the first thing they must attempt--in a jurisdiction in which only two compulsory licenses have been granted over the past 50 years or so, one of which was reversed on appeal). There still has not been a single case in which the proportionality defense mattered. It's been a total waste of time and money. But the six-month target for preliminary opinions by the Federal Patent Court--which took effect less than a year ago--is making a greater impact than I would have thought.

If I were a Bundespatentgericht (Federal Patent Court) judge, I would issue rather vague and non-committal statements. I would just identify a naturally non-exhaustive list of potentially outcome-determinative questions. That would even make institutional sense because one may wonder now why the Federal Patent Court wasn't able to issue those opinions on a similarly timely basis in the past. Also, the kind of companies who lobbied the German government and German lawmakers for that reform bill are some who are far more frequently on the defending than enforcing side, so why do them a favor after they essentially claimed the Federal Patent Court was lazy? But somehow the judges there seem to take too much pride in their compliance with the new law.

As a result, plaintiffs looking to benefit from Germany's near-automatic patent injunction regime need to bring more parallel patent assertions in order to gain short-term leverage over infringers. Otherwise there is a risk of a first wave of assertions resulting in a mix of non-infringement rulings and stays. As a result of thumb, I would at this stage discourage enforcement campaigns over fewer than a handful of patents.

The part that strengthens Huawei in any licensing negotiations with AVM is FRAND. While the courtroom was sealed for that one, Judge Dr. Schoen made reference to the FRAND defense in his initial outline of the state of play. Judge Dr. Schoen carefully phrased its preliminary assessment of AVM's FRAND defense in high-level terms so as not to reveal any confidential business information in open court. What he did say was that AVM has two options of taking a license to the patent(s) in question, and can't refer to potential progress in one of those conversations in order to refuse to discuss the other option at all.

A patent can only be held by a single entity at any given time, so the only explanation for the two alternative ways to license Huawei's WiFi 6 patents is the Sisvel pool I mentioned further above. What I was unable to deduce from Judge Dr. Schoen's remarks is whether AVM is claiming that an agreement with Sisvel is near and, therefore, not meeting (in the court's preliminary assessment) its FRAND obligations vis-à-vis Huawei, or the other way round. Again, this litigation started before Sisvel's WiFi 6 patent pool was formed. This means AVM certainly hasn't acted like an unwilling licensee in its dealings with Huawei. As far as Sisvel is concerned, the question is why they don't just take the pool license, especially in light of the Licensing Incentive Framework for Technologies (LIFT). Pool licenses are typically form agreements that a willing licensee can execute in a matter of hours.

I don't know whether the court's assessment of AVM's willingness to take a license changed during the non-public part of the trial, but I doubt it: the facts concerning the "FRAND dance" (back-and-forth) are established well ahead of a trial, and the arguments are raised in the written pleadings.

This means that the question is not whether Huawei will prevail, but when. AVM can run, but it can't hide forever.

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Wednesday, March 8, 2023

UK Competition & Markets Authority publishes Microsoft filing that makes case for 'self-executing' access remedies to preserve relevant customer benefits while Sony's naysaying borders on libel

This is my rapid response to two documents published today by the Competition & Markets Authority (CMA) of the United Kingdom: Microsoft's and Sony's responses to the notice of possible remedies relating to Microsoft's acquisition of Activision Blizzard King (ABK).

Those documents were originally submitted on February 22. Today the CMA released the public redacted versions.

When I commented on the CMA's remedies notice, I viewed it as more open-minded than many other commentators did. Since then, the CMA's CEO, Sarah Cardell, has given speeches that I interpreted as the CMA being principled and pragmatic at the same time. Mrs. Cardell clarified that the CMA "is not anti-mergers" (last week's Keystone conference in Brussels) and that behavioral remedies are considered, provided that any concerns are properly addressed.

Meanwhile it has also become known that the European Commission (EC) is apparently inclined to clear the transaction on the basis of access remedies, and won't insist on any divestiture.

I'll start with a couple of quotes from Sony's submission to the CMA (which I instantly shared on Twitter):

  • In para. 28, Sony acknowledges that "Microsoft’s conduct in relation to the ZeniMax acquisition" was "not a violation of a behavioural commitment." The only alleged violations of such commitments that Sony alleges in its filing are not merger-related, and go back a long time when Microsoft was like a different company.

  • Sony goes off the deep end where it outlines a scenario in which Microsoft would intentionally produce "bugs and errors":

    "For example, Microsoft might release a PlayStation version of Call of Duty where bugs and errors emerge only on the game’s final level or after later updates."

    Let that sink in. It's a theory according to which some decision makers at Microsoft, all the way down some command chain, would have to instruct programmers to purposely create (or at least not to fix) bugs and errors. Activision's testers would obviously detect and report those errors, but people would be ordered not to do anything about them because of an anticompetitive agenda. The notion that the world's largest software maker would do this, regardless of the impact on its credibility across all business segments should someone blow the whistle or find out through U.S. pretrial discovery, is an insult not only to Microsoft--as it borders on libel--but also to human intelligence.

So, what does Microsoft propose and what are its arguments?

To some extent, Microsoft's submission on remedies pokes holes into the CMA's theories of harm. That is not the focus of the submission, but it does matter in the remedies context whether a theory of harm is rock-solid or highly debatable. In this context, it's worth taking note of what Axios reported this week: "A YouGov survey commissioned by Microsoft in January found that just 3% of all PlayStation users would switch to buying an Xbox if Microsoft pulled Call of Duty from PlayStation."

The question of whether access or divestiture remedies are warranted in this specific case has three key determinants:

  • the loss of relevant customer benefits (RCBs) that would result from a divestiture (or prohibition),

  • the efficacy of the proposed access remedies (and the extent to which any of the typical concerns over that type of remedy are eliminated in the current context), and

  • the disproportionality of any of the potential divestiture remedies outlined by the CMA.

Other factors that inform the proportionality analysis here are international comity (meaning respect for foreign jurisdictions) as the merging parties are based outside the UK and generate the vast majority of their revenues elsewhere, and the fact that Sony is the market leader. But for the most part it's about finding the sweet spot in light of the three key determinants I mentioned:

Relevant customer benefits: As an app developer who has filed formal complaints over Apple's and Google's mobile app distribution terms, I've been very much interested for more than a year in Microsoft's cross-platform mobile app store plans. The UK is contemplating new legislation that would empower the CMA's Digital Markets Unit (DMU) to tackle the mobile duopoly problem. I'm happy to see that Microsoft's submission discusses plans for an Xbox Mobile Platform. The document explains that Microsoft needs not only King's games (like Candy Crush) but also very much Activision Blizzard's mobile games (CoD: Mobile, Warzone Mobile, Diablo Immortal, Hearthstone, and Warcraft Arclight Rumble) to make it happen.

Microsoft's filing discusses not only those mobile plans but also the fact that the deal has the potential to bring Call of Duty to 150 million more gamers. The submission explains why CoD will benefit Nintendo and its customers, and that currently CoD is not available on any cloud gaming service, but even without the access remedy Microsoft proposes (and Sony rejects because it just doesn't want to be constructive as long as it believes it can delay and potentially derail the deal), it would already be ensured to become available on two such services (Microsoft's own service and Nvidia's GeForce Now as a result of a recently signed agreement).

Efficacy of access remedies: Microsoft notes that parity commitments (regardless of Sony's naysaying) are common contractual provisions in the console industry. What is particularly key here from a practical (enforcement) point of view is that Microsoft's proposal is designed to be "self-executing" by virtue of Microsoft paying for a monitoring trustee, an objective third party assessor, and a fast-track dispute resolution mechanism (arbitration that will lead to swift results).

Disproportionality of divestiture (or prohibition): Microsoft says that even if the deal as a whole was not prohibited, but a divestment of Call of Duty or Activision was required, it would "still effectively involve the largest divestment ever required by the CMA." And it would, which takes us full circle back to the relevant benefits, "have severe adverse effects on the development of competition because it would prevent Microsoft from achieving its key strategic objective, namely building a mobile gaming business with sufficient scale in order to challenge Google and Apple."

There's a lot more to say about the filings that became available today. For now I just wanted to provide a high-level overview. It appears that the CMA's criteria for access remedies can be met, and there isn't a case for prohibition or divestiture, which would be preferred by Sony but not benefit consumers.

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