Friday, March 31, 2023

After major progress toward clearance over the course of the first quarter, Microsoft's acquisition of Activision Blizzard could consummate during the second quarter

On this last day of the first calendar quarter of 2023, it's worth recalling what an eventful quarter it was for the Microsoft-ActivisionBlizzard merger reviews--and time for a preview of the second quarter, which should be the home stretch.

At the end of 2022, the transaction had been cleared--unconditionally--in four jurisdictions: Saudia Arabia, Brazil, Serbia, and--during the last week of the year--Chile. But the U.S. Federal Trade Commission had brought an (in-house) administrative complaint, and the European Commission as well as the UK Competition & Markets Authority (CMA) were investigating multiple potential concerns. Regulators in some others jurisdictions were apparently inclined to await the outcome in some other places before finalizing their own decisions. No agency made that cross-jurisdictional domino effect clearer than the Australian Competition & Consumer Commission (ACCC), which on February 2 announced that it was "engaging with overseas regulators" and that its own timeline would remain suspended for that reason.

As those merger reviews went into 2023, it looked like Sony's claim that Microsoft would remove Call of Duty from the PlayStation to make huge numbers of gamers switch to its Xbox console had quite some traction.

Surveys such as in Chile actually showed that most CoD fans would rather switch games than consoles, and that even among CoD gamers, Grand Theft Auto was potentially more popular--or at least it was clear that CoD wasn't a unique "must have" title as Sony claimed.

What made the traction Sony's theory seemingly had all the more astounding is that more competition among videogame consoles would actually be a good thing. Sony is the undisputed market leader. If one applies its own market definition, it is more than twice as big as the sole competitor (Xbox) on a worldwide basis, and about four times as big in Europe. In Japan, that market definition ("high-performance videogame consoles") would even make Sony a de facto monopolist.

I said "good thing" because consumers were never going to be deprived of choice. Microsoft made it clear all along that they wanted to bring more games to more gamers. While PlayStation gamers were never going to lose access to games as a result of the deal, ownership of Activision Blizzard obviously enables Microsoft to ensure that Sony couldn't strike exclusive deals designed to cement its leadership with Activision Blizzard. What Sony prefers is single-platform (PlayStation-only) titles. Alternatively, Sony will ensure that its users have some goodies such as making progress more rapidly ("double XP", which means "experience points"). It is, in fact, absolutely pro-competitive if more games are certain to be available on the Xbox--the PlayStation's only challenger based on Sony's own portrayal of market dynamics--on a "parity" basis.

It's simple economic logic that the dominant market leader can more easily strike exclusive deals with third parties and more profitably single-platform its first-party titles. The cost of foreclosing a minority platform is far lower than that of withdrawing or withholding a title from the platform on which most console gamers play. Game makers look at this not only from a revenue point of view but also take word-of-mouth and multiplayer dynamics into account: a game that is exclusive to the dominant platform can still be recommended by people to many of their friends, and friends can play together. Not so when a game is exclusive to a minority platform.

Sony's theory should have been rejected all along. But some regulators did not want to take this lightly, given that there is widespread concern over the power of "Big Tech." They wanted to take a closer look, and to set the stage for a potential agreement on remedies. It's also fair to say that competition authorities have so far had relatively little interaction with the games business (as a result--and unintended consequence--of Sony's vocal complaints, that may change going forward).

Sometimes things have to get worse before they get better. After the European Commission's Statement of Objections (SO) in late January and the UK CMA's publication in early February of its provisional findings, many observers were concerned that the transaction could be blocked--especially in the UK, where it is more difficult than in other major Western jurisdictions to have that kind of decision overturned by a court of law.

So, by the middle of this first quarter, one could have been led to think that the deal was at a high risk of being blocked. I was a bit of an outlier when I actually saw a silver lining in the CMA's remedies notice.

The second half of this quarter, however, delivered good news for the deal in multiple ways:

  • Right before the EU merger hearing, Microsoft announced the finalization of an agreement with console maker Nintendo.

  • After the Brussels hearing, a cloud gaming agreement with Nvidia, a company that was not an outright complainant over the deal but which had raised potential concerns, was announced. Once those concerns were addressed through successful negotiations, Nvidia threw its weight behind the transaction. On the basis of those two agreements alone, Microsoft was in a position to say that CoD would be brought to 150 million more devices. Consumer benefit rather than consumer harm. And let's not forget that Valve (known for Steam) said they didn't even need a contract with Microsoft because they could rely on a commitment.

  • Agreements with cloud gaming companies Boosteroid and Ubitus (which powers other companies' services) followed. Also, the CEO of Epic Games welcomed Microsoft's mobile app store plans, which will challenge the smartphone gatekeepers but can only come to fruition with a critical mass of apps, which is where Activision Blizzard King (and by far not only the King part) is indispensable. In light of all of those developments, I wrote that the focus of the merger debate had shifted "from concerns to constructive solutions and procompetitive effects".

    In this regard, one must take into account that Microsoft has not only concluded several agreements with third parties but is prepared to do more of this, even on a basis that regulators could enforce if necessary (but won't have to because those commitments would be "self-executing").

  • The most important development, however, was that both the European Commission (based on what was reported about Microsoft's remedy proposals) and the UK CMA, which amended its provisional findings, abandoned the console market theory of harm. It's now just about cloud gaming, and that's where three players of different sizes have already determined that a contractual access guarantee works for them.

  • With the Japan Fair Trade Commission's announcement earlier this week, a fifth competition authority cleared the transaction:

  • The fact that United States District Judge Jacqueline Scott Corley granted Microsoft's motion to dismiss a so-called gamers' (actually lawyers') lawsuit is also interesting, though the class-action law firms behind that case won't give up until they exhaust all appeals or get paid, so they will refile (which appears to be taking them longer than they thought).

There was no bad news per se for the deal during the second half of the quarter. China's SAMR went into Phase 3, but there is no reason to assume that this is more than a delay. Chinese game makers like Tencent are in favor.

So what's next? The UK CMA expects to keep its schedule, which requires a decision on April 26. The European Commission has submitted Microsoft's proposed remedies to a market test, with MLex reporting that Sony and Google are (unsurprisingly) still unhappy but the European Games Developer Federation is in favor. The EC's deadline is May 22.

If there's clearance from the CMA in April and from the EC in May, the focus in June will shift to the U.S., where the FTC would have to seek a preliminary injunction in order to prevent the deal from closing. Statements keep coming out of the current U.S. administration that they have to take their chances in court to avoid underenforcement, but this merger doesn't have any of the ingredients of a case that would likely move the goal posts in the agencies' favor. It's not a good story to protect a market leader after eight--and by the time of a potential FTC PI motion--10 or more antitrust authorities have rejected that console market theory of harm, or to claim that the deal must be blocked because of the nascent cloud gaming market when the proposed remedy has in fact already been validated (not just tested in the form of questionnaires) by Nvidia, Boosteroid, Ubitus, and possibly others to come. It's just not the vehicle that the FTC needs for its strategic purposes.

UK in April, EU in May, U.S. in late May to early June--that could be the timetable for the second calendar quarter.

Delhi High Court hands Ericsson appellate victory over Indian electronics maker Intex in standard-essential patent case: FRAND is not a one-way street; without injunctions, hold-out will occur

While the European Commission is contemplating measures that would complicate standard-essential patent (SEP) infringement lawsuits (see a first reaction to reports on an upcoming proposal and a table of contents and synopsis), the High Court of Delhi at New Delhi rendered an appellate opinion on Wednesday that reflects a pro-enforcement stance:

Ericsson v. Intex cross-appeal: Delhi High Court ruling

Intex Technologies is an electronics manufacturing services company. On LinkedIn, one of Ericsson's lawyers from the Singh and Singh firm welcomed the "much needed clarity on SEP jurisprudence in India" that the decision brings. The firm itself summarized the 10 key aspects of the decision as follows:

  1. FRAND is not a one-way street and the same casts an obligation on both the SEP owner and implementor to negotiate and act in conformance with the FRAND protocol specified under the CJEU judgment in Huawei v. ZTE;

  2. Parties’ conduct during negotiation of a FRAND license is a relevant factor for determining willingness;

  3. Disclosure of third-party license agreements by an SEP owner during negotiations is not mandatory or a precursor for the implementor to revert with a FRAND counter-offer. The implementor can place reliance on its own licenses executed with third-parties and other SEP proprietors to formulate an appropriate counter-offer or to determine if the SEP proprietor’s offer is FRAND;

  4. There is no embargo on grant of injunctions (both at the interim and final adjudication stage) against an implementor who is unwilling;

  5. If the negotiations between parties fail, that does not mean that an implementor can continue to use the technology of the SEP proprietor for free, without making any payment for such use;

  6. Implementors are mandated to make certain deposits/furnish security in favour of the SEP proprietor in case negotiations fail, in order to balance the right of the SEP owner;

  7. Infringement is SEP cases can be established by using claim charts;

  8. Portfolio licensing on a global basis is in conformance with commercial practices in the industry and is FRAND;

  9. The finding of the Ld. Single Judge and four-factor test prescribed in paragraph 77 of the Nokia v. Oppo judgment is contrary to law;

  10. Under the Patent Rules, 2022 courts can direct deposits of some kind of security even on the first date of hearing;

  11. The peculiarities of the English system of conducting an SEP trial cannot be applied in the Indian context, as the realities of the Indian legal system should be considered.

Here are a couple of observations based on my reading of the decision:

  • Nothing in the Indian ruling contrasts more nicely with the European Commission's draft SEP regulation than the holding that FRAND "is not a 'one[-]way street' where obligations are cast on the Essential Patent holder alone."

  • The judges considered that India is short on judges (relative to population size) and cases take too long to resolve ("the judge-population ratio is extremely poor in this country and expeditious disposal of patent suits cannot be expected at the cost of other suits"). Therefore, it is key to give leverage reasonably early to SEP holders. This litigation here has apparently been going for many years, and "Ericsson filed the information/complaint before the CCI only after a prolonged negotiation of almost five years during which Ericsson had provided Intex a list of its Standard Essential Patents, Claim Mapping Charts to show essentiality and also a test report to show infringement." For those five years, or even longer, "Intex did not share any of its own claim charts with Ericsson either indicating use of alternate technology or disputing essentiality of Ericsson patents or countering Ericsson’s claim charts and the fact that Ericsson had already issued around One Hundred (100) licenses for its worldwide patents to various third parties"

  • Here's the next--and final for this post--reference to the EU initiative: para. 89 of the decision quotes--and describes as reflective of common sense--"a paper dated 9th May, 2022 filed by legal academics, economists, and former United States governmental officials in response to European Commission call for evidence for an impact assessment." According to how the Indian judges summarize a passage from that document, if SEP owners "are flatly precluded from seeking injunctions, then infringers would have little reason ever to agree to, or negotiate in good faith, a licence with a Standard Essential Patent owner." Instead, "[a] well-resourced infringer would rationally reject any licence offer an compel the Standard Essential Patent owner to enter into litigation that typically requires millions of dollars in legal expenses in multiple venues around the world."

Table of contents and synopsis of European Commission's draft proposal for standard-essential patent regulation

This is a follow-up to the previous post, European Commission departs from best practices in hasty preparation of standard-essential patent policy proposal that is fundamentally flawed and unbalanced.

I've meanwhile obtained a copy of the draft proposal, which I understand has already been widely shared among stakeholders. It's really an unmitigated disaster, even worse than I thought when I first commented on the information I had obtained primarily from MLex. I'll be sure to discuss some of the shortcomings in another post soon. I'm also going to review the 248-page Impact Assessment Report, which has also leaked.

The sole purpose of this post is to share with you a ten-page PDF that I've put together just to make my own analysis of the draft proposal and its implications more efficient. So please note that there will be typos and other shortcomings in it. It's not a polished document. It's nothing but a tool that makes it easier to get an overview of what the proposal envisions and assists everyone navigating that 56-page PDF. Knowing that many of you are now trying to digest that document, I wanted to make this available sooner rather than later.

Proposal for a Regulation of the European Parliament and of the Council on Standard-Essential Patents (leaked March 2023 draft): Unofficial Table of Contents and Synopsis

Wednesday, March 29, 2023

European Commission departs from best practices in hasty preparation of standard-essential patent policy proposal that is fundamentally flawed and unbalanced

Yesterday evening, MLex reported on the "draft of a highly anticipated regulation by the European Commission on the licensing of standard-essential patents." Reuters reported as well, but obviously in much less detail than the specialized subscription service.

IAM has already published two articles (paywalled): European Commission to propose radical new SEP/FRAND regime with major consequences for patent owners and Entrusting SEP/FRAND to EUIPO is fraught with challenges. Furthermore, IAM's former editor-in-chief (and now columnist) Joff Wild has criticized the forthcoming proposal on LinkedIn. In one post, he said "[t]his looks like legislation that has been drafted after listening to one set of interests without giving even the slightest consideration to those of people who actually understand SEP licensing" and expresses fears of "years of paralysis ahead": "Madness." In another post, he ironically notes the contradiction between the EU claiming that the Unified Patent Court will create legal certainty and encourage innovation, while now putting forward a proposal before the UPC has even decided the first SEP case.

That is something I also noted in my initial reaction on LinkedIn:

"It looks like the Commission doesn't trust the new #UnifiedPatentCourt because it wants to make the #EUIPO -- which has zero #patent expertise -- the mandatory #FRAND arbiter. The obvious alternative would be to wait a couple of years and see how the #UPC will adjudicate cases involving standard-essential #patents."

If one thinks it through, the very unbalanced draft (which is all about imposing additional requirements and costs on SEP holders without any element that would discourage hold-out) is not only an expression of no confidence in the UPC but also an attempt to overrule the European Court of Justice. In Huawei v. ZTE, the ECJ sought to strike a balance between licensors' and licensees' interests. It wanted either side to make a constructive contribution. Far be it from me to deny that the SEP licensing process could be improved for both sides. But what the EC has in mind (according to the reports I mentioned) comes down to putting a thumb on the scales only to the detriment of SEP holders.

There are issues that could have been--and still could be--addressed prior to a formal legislative proposal.

But in order to identify and fix those flaws, a proper internal and external consultation process would be needed. The Commission should simply act in accordance with best practices instead of shooting for an arbitrary date (World IP Day--April 26, 2023--is not a date that has any particular meaning for the EU legislative process).

It's not that there hasn't been any consultation. About a year ago I reported on one. And last year's Survey for start-ups and SMEs investing in, relying on or developing communication technologies is still open.

The problem is that so far the Commission has asked stakeholders only for some general input on how the SEP licensing process is working and what issues the respondents encounter. What the Commission has not done--but should do--is to let stakeholders comment on an outline of a potential legislative proposal.

Last time I engaged in patent policy work in Brussels the procedure was different. In early 2006, the European Commission outlined a European Patent Litigation Agreement (EPLA), a predecessor to the UPC Agreement. Stakeholders were able to comment on the specifics of that proposal. The Commission then held a hearing before the summer break. In parallel, the European Parliament was working on a non-legislative patent policy resolution.

If the Commission had done--or still decided to do--the same here, there would definitely be room for improvement. The draft bill that is described in those media reports would make the EUIPO--a trademark office with zero patent expertise--the mandatory arbiter over FRAND rate disputes. The EUIPO would furthermore be tasked with the accreditation of experts in a field (essentiality checks) in which the agency itself has no expertise. And the idea of a SEP register is nonsensical. Standard-setting organizations like ETSI already receive essentiality declarations. But the way DG GROW would like it to work suggests a static perspective on a dynamic environment. Major SEP holders are granted new patents on a daily basis. Patent claims change during the prosecution process (in response to rejection notices). And license agreements come with capture clauses that include patents granted during a future period. Transparency is important, but so are licensing realities.

DG GROW did not even involve other Commission DGs the way it should. That's what I learned from a reliable source I have to protect.

Normally, legislative proposals are discussed well in advance between the DG in charge of a bill and other DGs whose areas of responsibility are affected. Here, there are various DGs with a potential interest in this. From what I heard, DG COMP would rather not be involved. Should Mrs. Vestager make the announcement of the proposal, it will be in her role as the head of the EU's digital industry policy, not as antitrust chief. But there are DGs who should have been involved earlier: DG CONNECT (digital industry), DG TRADE, DG RTD (Research). Shockingly, DG GROW appears not to be listening to them at all. It appears those other DGs received the draft regulation only a couple of days ago. In other words, they were lucky to see it a day or two before MLex and Reuters.

Even the current presidency of the EU Council--the Swedish government-- was apparently blindsided as far as the specifics of the proposal are concerned.

All of this suggests that there are serious institutional (and also interinstitutional) issues. Why is DG GROW in such a hurry? There is no current crisis concerning SEPs. There's no problem with car makers spending $15 or so per car on cellular SEP license fees. That industry faces some fundamental challenges, but SEP royalties--a minor cost of doing business that affects the competitors of European automakers to the same extent--are not one of them. There isn't even a lot of SEP litigation: in most cases, license agreements are worked out without the need for patent enforcement.

The current proposal--if enacted--would weaken certain European innovators, override the ECJ, display a lack of faith in the UPC, and make other places in the world more attractive for SEP enforcement (for instance, Latin America) and standards development (the U.S.). In some other jurisdictions, the EC's proposal would likely inspire legislation that would further weaken SEP holders. Apparently the EC is also seeking to weaken ETSI, such as by reducing the voting rights of contributors and of non-EU companies. I can't elaborate on all those issues in this post, but the combination of all that's going on poses a serious threat to standards development in Europe.

The U.S. government acted more prudently. The Biden Administration ultimately decided not to adopt a new SEP policy statement, based on input from net licensors as well as net licensees.

Instead of making a hasty and ill-conceived proposal, DG GROW should discuss its ideas (as opposed to the topic of SEP licensing at an abstract level) with internal and external stakeholders, and fundamentally improve its proposal prior to officially putting it on the table. As a SEP litigation watcher I definitely see room for improvement, but no objective sense of urgency here that justifies skipping necessary steps when there is so much at stake.

Epic v. Google judge chides Google for unrepentance and lying about chat deletion, non-monetary sanctions TBD after April 7 discovery cutoff: implications for United States et al. v. Google

Two months after I wrote that "sanctions loom large" over Google's systematic deletion of chats about legally sensitive topics, that prediction and the fact that this blog has written about the topic more often than any other (non-paywalled) website--see the link list in this recent post--have been vindicated. Yesterday, Judge James Donato of the United States District Court for the Northern District of California, who is presiding over multiple consolidated Google Play Store antitrust cases (brought by Epic Games, three dozen state AGs, Match Group, and class-action plaintiffs), entered his findings of fact and conclusions of law, ordering monetary sanctions first (recovery of attorneys' fees) and announcing that non-monetary sanctions will be determined a little later:

In Re Google Play Store Antitrust Litigation (case no. 21-md-2981-JD, N.D. Cal.): Findings of Fact and Conclusions of Law re Chat Preservation

If this was about the actual merits of the case, that order would amount to

  • an entry of liability (Judge Donato finds that Google is guilty of spoliation of evidence),

  • a decision on a first minor remedy (recovery of fees, with the exact amount to be determined now), and

  • a holding that a remedy of a certain category (at an abstract level, comparable to injunctive relief) is warranted, though more information is needed to make that determination.

  • Furthermore, Judge Donato reiterated that a "terminating sanction" won't issue. So what the plaintiffs and Google know now is that there will be a non-monetary sanction that will have an impact on the adjudication of the case (unlike a fee award, which doesn't really matter between those parties), but it won't be fatal to Google's defenses. Comparing this again to a merits decision, it's like a judge saying that an injunction will issue, but it will have to be reasonably narrowly tailored.

Judge Donato notes that "[p]roportionality is the governing concept here." In order to have as solid a factual basis as possible for determining what remedy "fit[s] the wrong," he "would like to see the state of play of the evidence at the end of fact discovery." Fact discovery in this litigation was reopened after Epic and Match were allowed (in mid November 2022) to amend their complaints. As per a stipulation granted by Judge Donato, the cutoff date for that supplemental discovery is April 7 (next week's Friday). Thereafter, "plaintiffs will be better positioned to tell the Court what might have been lost in the Chat communications."

Proportionality must go both ways. Judge Donato "fully appreciates plaintiffs’ dilemma of trying to prove the contents of what Google has deleted." So the really tricky part is still ahead of the court and the parties. The remedy--some jury instruction--must not be disproportionate in terms of penalizing Google to an undeserved extent. At the same time, it would also be unfair if the absence of certain evidence that is totally due to Google's misconduct resulted in inconsequential sanctions.

I believe the minimum hurdle for Epic and its co-plaintiffs will be to show that Google employees likely discussed topics relevant to this particular antitrust litigation--such as "Project Hug" (see the previous link)--by chat. The hurdle for that should not be insurmountable.

The order rebukes the way in which Google has been dealing with this issue:

"Google clearly had different intentions with respect to Chat, but it did not reveal those intentions with candor or directness to the Court or counsel for plaintiffs. Instead, Google falsely assured the Court in a case management statement in October 2020 that it had 'taken appropriate steps to preserve all evidence relevant to the issues reasonably evident in this action,' without saying a word about Chats or its decision not to pause the 24-hour default deletion. [...] The Court has since had to spend a substantial amount of resources to get to the truth of the matter, including several hearings, a two-day evidentiary proceeding, and countless hours reviewing voluminous briefs. All the while, Google has tried to downplay the problem and displayed a dismissive attitude ill tuned to the gravity of its conduct. Its initial defense was that it had no 'ability to change default settings for individual custodians with respect to the chat history setting,' [...] but evidence at the hearing plainly established that this representation was not truthful."

In other words, Google's lawyers are liars according to the order. That's harsh, but it doesn't look like this is formally going to have an impact on the severity of the non-monetary sanctions to be ordered in the coming months. It is, however, the kind of stuff that will hurt Google when it appeals the decision, which I'm sure it will. Google even likes to appeal decisions prior to final judgment, and in another context but related to this litigation it succeeded to the extent that the United States Court of Appeals for the Ninth Circuit accepted to review a consumer class certification now. On that basis, Google has asked the court to postpone the trial in this litigation (PDF), and in a Twitter thread I agreed that Google had a point:

I want Epic and the other plaintiffs to prevail, and Google is not really concerned about litigation economics, but the fact that the Ninth Circuit is reviewing the class certification decision at this stage does warrant a postponement of the trial in my opinion.

Let's briefly also talk about what this means for the other Google antitrust litigation in which the same spoliation-of-evidence issue is now on the agenda: the first United States et al. v. Google case (in the District of Columbia). A little over a month ago, I commented on the DOJ's motion for sanctions. Meanwhile, Google has filed its opposition brief, which just like in the Northern District of California is the epitome of denial:

United States of America, et al., v. Google (case no. 1:20-cv-3010-APM, D.D.C.): Memorandum in Opposition to Plaintiffs' Motions for Sanctions

Meanwhile the DOJ and the plaintiff states have replied in support of their motion, but those documents are sealed for the time being. Anyway, I doubt that Google will be able to persuade Judge Amit P. Mehta to deny that motion in D.C. without an evidentiary hearing. The San Francisco decision isn't binding on him, but strongly suggests that there is an issue to be addressed.

Interestingly, some of the evidence of Google's systematic deletion of chats that the plaintiffs in the Northern District of California present is actually related to topics at issue in the D.C. litigation over Google's search engine monopoly, such as its revenue sharing agreements (RSAs). The last document I'll show you here was just filed a couple of days ago, and it's an unredacted version of a brief by Epic and its co-plaintiffs. I already published the redacted version in my most recent post on that California litigation, 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. The unredacted document makes it a little clearer what happened there, and the fact that Google's CEO himself sought to delete a message is quite interesting. Also, the unredacted material shows that Google employees were quite aware of what they were doing and why, and in at least one case someone even used a smiley, which is totally inappropriate when enaging in spoliation of evidence. Judge Donato apparently wanted that material to be made public first before issuing his order, given that his order makes even more sense against that backdrop. Here's the unredacted document with lots of exhibits:

In Re Google Play Store Antitrust Litigation (case no. 3:21-md-2981-JD): Unredacted Version of PLaintiffs' Supplemental Brief on Google's Chat Production

Tuesday, March 28, 2023

Patent licensing firm IPCom announces settlement with LG while litigation against Samsung apparently continues

IPCom, a well-known patent licensing firm based in the Munich area, today announced on its website a settlement agreement with South Korea's LG Electronics. All infringement cases and validity challenges pending between the two have been withdrawn. IPCom's managing director Pio Suh is quoted in the press release as "confirm[ing] that LG and IPCom have finally reached a resolution that also includes all of IPCom's assets."

Several years ago it became known that an IPCom affiliate named FIPA was suing both Samsung and LG over patents formerly owned by Hitachi. Samsung was known to have licensed IPCom's former Bosch patents a long time ago, and the same may apply to LG. There is no indication at this stage of a settlement with Samsung.

In recent years, IPCom has achieved various settlements such as with HTC (after more than 12 years of litigation) and various telecommunications carriers. Its cases against Apple were also withdrawn. IPCom's current management has been consistently positioning the firm as a constructive and cooperative patent holder.

The reference in today's announcement to "all of IPCom's assets" suggests that LG is licensed not only to those IPCom patents that formerly belonged to Bosch and Hitachi but also to IPCom's "homegrown" patents. Starting in the middle of the last decade, IPCom started filing patent applications on its employees' inventions. The timing and the fields of technology make it a possibility that at least some of those patents are 5G-related. Should that be the case, some of the companies who took licenses from IPCom a long time ago may not be licensed to those younger patents, subject to what exactly the capture clauses of those license agreements say. So we may hear more from IPCom in the years ahead.

LG exited the smartphone market two years ago, but the settlement was likely about back royalties for the most part anyway. A license agreement between LG and InterDigital served as the primary point of reference when Justice Mellor made his recent InterDigital v. Lenovo FRAND determination.

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.

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.

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):

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.

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.