Sunday, April 30, 2023

CMA issued schizophrenic statement on digital markets shortly after announcing to block Microsoft's purchase of Activision Blizzard: UK regulator contradicts own ruling

Were the CMA a person, one would really have to worry about it. As I'll show in this post, the CMA even contradicted itself on a fundamental question--competition among mobile app stores--on the very same day it tried, by means of a decision that won't stand, to block Microsoft's purchase of Activision Blizzard. Institutional schizophrenia.

I'll explain the reasons for this diagnosis first before talking about what's wrong with the CMA and the irresponsible approach taken by its current leadership, an approach that does damage without achieving anything good for UK consumers or companies in the end. Much to the contrary, the CMA's actions are counterproductive.

To be very clear, I'm not saying that any particular person is schizophrenic: there's no indication for that. It's an institutional problem. The biggest part of it is a lack of understanding of the tech industry, especially on the part of the Inquiry Group, whose members have an impressive background in other areas (mostly financial services) but are incompetent with respect to technology markets. Coupled with Mrs. Cardell's ambitions appearing stronger than her sense of responsibility, the results can be terrible, nonsensical, and in this case even schizophrenic.

In my two previous posts, I discussed why and how Microsoft can/will still close this deal (#UnblockABK) and the fact that Microsoft is not the first company to consider the CMA's actions a liability to the British economy: the CMA even tyrannizes startups and grown-ups, which a few years ago killed 30% of Deliveroo's jobs for no reason. Today's CEO was the agency's General Counsel at the time.

The CMA issued an unbelievably self-contradictory statement on Wednesday, only shortly after the merger-blocking decision:

Ensuring effective competition in digital markets, for people, businesses and the economy

A statement on mergers and digital markets from Marcus Bokkerink, Chair, and Sarah Cardell, CEO, CMA.

The one-pager argues that a legislative initiative that was introduced into the British Parliament the previous day--named Digital Markets, Competition and Consumers (DMCC) Bill--and largely crafted by Mrs. Cardell herself and the Microsoft-ABK decision "are distinct," but "[the CMA's] existing merger control regime and the new digital markets regime can work in complementary ways to maintain effective competition in digital markets."

The opposite is true with respect to ABK:

While the DMCC as the UK's equivalent of the EU's Digital Markets Act is indeed designed to open up mobile ecosystems and free them from the Apple-Google strangehold, the insanity that is the ABK decision would (if surprisingly allowed to stand) prevent the most promising challenger--also in financial analysts' opinion--to Apple's App Store and the Google Play Store from emerging.

That fact alone would make the statement self-contradictory, but the contradiction is far more specific than that and that's why this amounts to institutional schizophrenia:

  1. The DMCC Bill as introduced into Parliament on Tuesday (April 25) will indeed--as the Cardell-Bokkerink statement says--"give the CMA the ability to work in a faster and more targeted way to improve competition and foster opportunities for innovation in digital markets where a firm is found to already have strategic market status." And yes, if the CMA uses its powers wisely (after carefully building the tech industry expertise the ABK Inquiry Group lacks), the DMCC Bill "will allow [the CMA] to set targeted and proportionate conduct requirements to ensure other businesses aren’t at risk of being exploited and excluded, and to safeguard users against unfair terms and constrained choices." (emphases added)

  2. But this means that the CMA will impose conduct requirements on Apple and Google so they cannot exclude (Apple) or hobble (Google) rival app stores. App makers are being exploited; rival app stores are being excluded; and user choices are constrained.

  3. Here's the key passage of the DMCC Bill:

    Chapter 3

    Conduct Requirements

    19 Power to impose conduct requirements


    (7) The open choices objective is that users or potential users of the relevant digital activity are able to choose freely and easily between the services or digital content provided by the undertaking and services or digital content provided by other undertakings.

  4. Apple and Google will undoubtedly be found to have "strategic market status" (SMS). That term is also found in the Cardell-Bokkerink statement. No restriction in digital markets is strategically more important than mobile app stores monopolies: two gatekeepers controlling what apps we get, what the apps can do, and how app makers can promote their products, as well as taxing every purchase we make there (directly through the app tax, and indirectly through self-preferencing of advertising systems etc.)

  5. But here's what the crazy merger ruling says:

    "83. In relation to Microsoft expanding into mobile gaming, the chances of Microsoft succeeding seemed low in circumstances where the two largest mobile OS—Google’s Android and Apple’s iOS—either currently prohibit rival mobile gaming app stores or impose strict limits on their ability to monetise content."

  6. So the CMA's chairman and CEO--in the same April 26 statement--celebrate the DMCC Bill and the benefits it will bring to consumers and companies, but they incredibly say that the Microsoft-ABK decision is part of the same master plan, when that one flatly rejected the Relevant Customer Benefit that a universal app store run by Microsoft would bring.

  7. Here's the second sentence of that paragraph 83:

    "In any event, there seemed to be other, less anti-competitive ways, through which Microsoft could reasonably attempt to enter this market, such as by licensing mobile gaming content from publishers."

    No, there are not.

  8. The problem with the second sentence is that the Inquiry Group is (as I mentioned before) simply incompetent when it comes to technology markets. Financial analysts know that the most serious threat to the Apple-Google app store duopoly is Microsoft. That's because it takes two ingredients for a rival app store to get traction: you need to be able to compete at all (Apple) and on a level playing field (that's the current problem on Android), but also need a very attractive offering that is exclusive to your store and will drive users there. Only then will users not only rely on the default app stores (an incredibly high hurdle to overcome, especially if one understands what the Power of Default means) but also go there to discover third-party apps--from app makers large and small, including app makers from the UK.

    It's simply attributable to the Inquiry Group's incompetence with respect to tech markets that they believes there "seemed" (which should not be the legal standard for rejecting a Relevant Customer Benefit anyway) to be alternatives such as licensing: there is no way that Microsoft could solve the problem through commercial agreements with game makers like ABK, simply because those will always go not only for maximum revenues but also (for strategic reasons) maximum reach. It's not realistic that Microsoft would make those companies a sufficiently attractive offer that they would forgo the maximum reach that the default app stores will offer them. Smaller companies may do that, or even larger companies but only for low-priority titles. That, however, would not overcome the Power of Default.

    But what can you expect from an Inquiry Group that is incompetent enough to count all Game Pass Ultimate users as xCloud users--when xCloud is unavailable in numerous countries and even where it's available, only the fewest people play games via xCloud instead of locally--and that doesn't even get basic math right (comparing five years of profits to one year of costs)? They were obviously way out of their depth, which didn't prevent them from feeling like they collectively had dictatorial powers (like the Central Committee of the Communist Party of the Soviet Union).

  9. It will take time to make mobile app distribution competitive, but the CMA's sole remaining theory of harm is about cloud gaming and alternative app stores can succeed years before cloud gaming would even just hypothetically become as big as the technologically incompetent Inquiry Group asserts.

As I just referenced the Cold War days, let me adapt a famous speech by President Reagan:

Mr. Bokkerink and Mrs. Cardell:

If you want customer choice in mobile ecosystems, open the app stores.

Mr. Bokkerink and Mrs. Cardell:

If you want to create opportunities for UK companies of all sizes by giving them an alternative app store where end users will go to discover apps, allow the most promising challenger to emerge.

It's fairly likely that the CMA's CEO, Sarah Cardell, genuinely believes she's defending consumer interests even though she is not. Despite good intentions, she might be tempted to abuse her powers--powers she wouldn't have if not for Brexit (prior to which the CMA didn't get to decide major cases) and a rule-of-law deficit in the UK: regulators that have to defend their decisions in court on an a reasonably level playing field either have to act more reasonably (which usually happens) or at least they couldn't do much harm in the other event. The rule-of-law deficit could be addressed not only be changing the standard of review but simply by the government using its powers from time to time--as does the German government--to override regulator decisions when it's in the public interest.

If there's nothing that disciplines the CMA's institutionalized excess, a regulator that's out of control will additionally complicate the United Kingdom's efforts to strengthen--or at least maintain the strength of--its economy post-Brexit. Venture capital investment in the UK has recently been hit harder than in any comparable economy, and the CMA complicates investors' exits and in the Deliveroo case even complicated fundraising and killed jobs. Opening up mobile app stores would help many venture-funded startups; blocking Microsoft's purchase of ABK helps no one but Sony, Apple, and Google. More and more companies are considering delisting their stock from the London Stock Exchange (LSE)--which by the way has a partnership with Microsoft that is unrelated to whether publicly-traded companies believe they can get better valuations in New York. The crown jewel of the UK's tech sector, Arm, is going public on the U.S. Stock market. The CMA was not the only regulator to have concerns over the sale of Arm to Nvidia, but its institutional excess and its irrational decisions do nothing to advance the UK's interests.

Should the CMA consider itself--as a person interviewed by the Financial Times suggested--"the world's policeman" for competition in digital markets, then there would be an additional diagnosis of megalomania, and not necessarily just institutional megalomania. Even the European Commission--which has far more power than the CMA and especially a lot more experience with major cases--wouldn't look at itself that way.

In a matter of weeks, the European Commission will show the difference between the Champions League of intelligent, competent, and reasonable antitrust enforcement on the one hand and a second-division team that overestimated itself after it was thrust into a higher league by historical accident. The EC will also show the difference between decades of experience in dealing with high-stakes global-player cases in the technology industry and a regulatory startup. The EC's specialized tech merger review unit is here the CMA's DMU hopes to get--and where it has the potential to get, prudent leadership provided.

Saturday, April 29, 2023

"Total bullshit" by CMA, says Deliveroo founder after agency killed 30% of jobs for no reason; UK tech scene raises alarm; games-specialized journalists disagree on cloud streaming

The UK Competition & Markets Authority (CMA) gives antitrust enforcement a bad name. Reasonable competition enforcers in other jurisdictions will have to be increasingly skeptical of whatever comes out of that agency, which from time to time does things that no reasonable competition authority would ever do. And why should any other antitrust authority take an agency seriously that has to correct a preliminary ruling because it compared five years of foreclosure benefits to one year of costs?

It's a major coincidence that on Tuesday--April 25, 2023--the day before the CMA irrationally and nonsensically blocked the Microsoft-ActivisionBlizzard merger--the founder of Deliveroo exposed another example of the CMA's occasionally irresponsible actions that harm companies and workers, resulting in job losses over meritless concerns that the CMA ultimately had to drop after 18 long months. In a podcast he was so angry he called the CMA's actions "total bullshit" and even used the F-word.

The CMA's regulatory hubris and institutionalized excess is a serious problem for the UK economy, and due to Brexit, it increasingly affects foreign companies. It wouldn't have to be that way if the CMA had a modicum of regulatory humility. The CMA, which was formed in 2013 through the combination of two other government agencies, was at best a B-movie studio (or a second-division team like Stockport County FC) until Brexit suddenly gave it influence over the world's fifth-largest economy. Prior to Brexit, they only got the scraps: all the global-player cases used to pass them by because they'd be handled in Brussels: by the much larger, much more experienced, and much more measured Directorate-General for Competition (DG COMP) of the European Commission, whose decisions are--if all else fails--fully reviewable by the EU General Court.

Before any Stockport County FC fans feel offended: I'm sure they play the game at a higher level than comparing five years of benefits to one year of costs. Otherwise they'd have been relegated a long time ago.

The CMA would have had to understand that it simply lacked the experience to handle high-stakes cases of global--and major political--ramifications. It needed time. It doesn't even have industry experts, unlike DG COMP (I'll discuss that in more detail some other time). The CMA would have had to tread carefully, avoiding mistakes that may be seen as stupid by some and experienced as harmful by others. But it was apparently too tempting for some people to exercise their increased power in unreasonable and irresponsible ways.

The problem has reached such proportions that politicians are now becoming aware of the need to act.

They do read the Financial Times in London, including the ones who have the power to restructure the CMA or replace its leadership if they want. Presumably also the one who wants the UK to become the next Silicon Valley: His Majesty's prime minister.

Yesterday, the FT wrote: UK tech scene raises alarm over block to Microsoft-Activision deal

The subhead: "Investors and entrepreneurs assess potential damage to British tech industry following blow to $75bn gaming takeover"

The article quotes venture investor Ophelia Brown as saying that this is the opposite of "encouraging innovation" and "more bad PR for UK tech and very disappointing."

Through that article I became aware of the April 25, 2023 episode of the Business Studies podcast: "Will Shu and Deliveroo"

Deliveroo, a food delivery service for the few who don't know it, is listed in London and worth approximately two billion UK pounds. In the last part, starting at minute 27, Mr. Shu gets asked about the minority investment Amazon made into Deliveroo. He tells the story of how they got introduced to Amazon, and then doesn't mince words when talking about the CMA:

  • Amazon was just buying 13% of the company's stock with no special rights. I repeat: with no special rights.

    But the CMA has its own approach to numbers: in its provisional findings in the Microsoft-ABK case, they compared five years of benefits to one year of costs. In the final decision they said Microsoft had a 60-70% share of the cloud gaming market by simply counting every subscriber to Microsoft's multi-game subscription service Game Pass Ultimate as a cloud gamer when in reality most of those users play locally on PCs or consoles (and in many countries, xCloud is not even available as I explained in my previous post).

  • The process lasted 18 months though in the end the CMA had to clear the transaction. 18 months.

  • The problem is that at the time (a few years back), Deliveroo needed cash urgently. They were investing in growth and needed outside funding. Due to the CMA's baseless obstruction, the money couldn't be made available to Deliveroo.

  • They had to lay off 30% of their staff. Only because the CMA held up the investment for 18 months and no reason.

  • In light of that, it's understandable that Mr. Shu minces no words: he calls this "total bullshit" and describes it as "killing companies." He even uses the F-word in the podcast.

  • He also complained that they treated him like a criminal when he had to testify in front of panels, with reminders of his criminal liability and everything. While antitrust authorities do have to ask tough questions and elicit truthful answers as they investigate, the circumstances of this case--a minority investment with no special rights--and the fact that jobs were being killed by the CMA are questionable. Apparently Mr. Shu felt he was being treated like in a medieval inquisition proceeding or by a police state--for simply wanting to sell 13% of the company's shares with no special rights...

The CMA is also getting bad press over its cloud-gaming theory of harm.

I'm very active on Twitter and apart from some Sony fans (who don't understand that what Sony is doing is not even in the interest of PlayStation users), gamers are speechless how insanely wrong the CMA is on cloud gaming.

I've seen numerous tweets and various posts on a couple of gamer discussion boards where people looked at the CMA decision and immediately identified that the CMA got the cloud-gaming market share figure wrong. 60-70% is crazy. In fact, even the Sony-supported class-action lawyers (who filed their opposition (PDF) to Microsoft's motion to dismiss their amended complaint a few hours ago) arrived at 40%. Even that number is too high. The difference may be due to a simple fact: at some point a number is not just wrong by U.S. standards, but gives rise to a Rule 11 violation with potential sanctions on counsel. The CMA's Inquiry Group, however, does not have to respect a similar rule. It can say whatever it wants, though the Competition Appeal Tribunal won't find it hard in this case to identify "irrational" findings (that's officially the standard of review).

A senior reporter for a major games-specialized website, Kotaku's Ethan Gach, published an excellent article yesterday: The Reason Regulators Blocked Microsoft's Activision Deal Makes No Sense

On Twitter, he summed it up:

Yes, it cannot be rationalized what the CMA's Inquiry Group did, just like comparing five years of benefits to one year or profits couldn't be rationalized--but that wasn't a final decision. At least there was an easy fix. But they essentially imported all of their crazy earlier theories--the conglomerate theory about Windows and Azure as well as the PlayStation theory--into the remaining theory, in illogical ways.

It's not just that Kotaku, which is neutral about this case (it's not an Xbox-focused publication), disagrees. There's a website named that has bought some of Sony's talking points that had nothing to do with merger law stnadards and is pretty overtly against the transaction. Hell appears to be freezing over because even a columnist, Mr. Fahey, wrote the following after the CMA ruling:

"To be blunt, I remain a cloud streaming skeptic – at least in the short to medium term – and from that perspective, I think this deal should probably have been approved. Microsoft being more robust competition to Sony's market dominance would be a good thing for consumers, and relatively light-touch remedies would have made the Activision Blizzard perfectly palatable for the console market."

Apart from that passage, his article makes some points that are nonsensical. For instance, he says Microsoft is "offering to pay the GDP of a small European nation" to dominate cloud gaming, when in reality the primary objective is about mobile--a word that does not appear even in once in Mr. Fahey's article. The "sheer financial scale of this deal" has no basis in the law anyway. Like the CMA, he conflates multi-game subscription services and cloud gaming. And he has no evidence that Microsoft really believes cloud gaming is going to displace game downloads: he may never have cared to read Microsoft's own submissions to the CMA.

That said, even someone who agrees with the CMA in some ways does not believe that cloud streaming of games is going to be a big thing anytime soon, and says "this deal should probably have been approved."

Who's siding with the CMA now? Essentially just Sony, (silently) Google, Lina Khan, and a fringe organization she was affiliated with (Open Markets Institute). But UK tech investors are shocked, a successful entrepreneur like Deliveroo founder Will Shu told the story of his problems with the CMA, and games-specialized reporters disagree that the CMA had a credible foreclosure theory here.

I expect May to be a great month for the merger, with additional approvals, another ruling by a U.S. federal judge against a Sony-supported private lawsuit, and the slam-dunk appeal (and possibly more and more criticsm, through public statements and private communications with UK politicians) of the CMA's miscarriage of justice.

Friday, April 28, 2023

#UnblockABK: How Microsoft can/will acquire Activision Blizzard despite the UK Competition & Market Authority's abusive and arbitrary ruling

Sarah Cardell, the recently-appointed CEO and former long-time General Counsel of the UK Competition & Markets Authority (CMA), made the mistake of her (professional) life when ruling against Microsoft's purchase of Activision Blizzard King (ABK) on a nonsensical basis. Whether she trusted the wrong people, overestimated her own understanding of technology markets, or couldn't resist the temptation to use her temporary power over one of the world's largest corporations, her agency's decision--which I diplomatically described as "based on misconceptions and speculative concerns"--cannot be rationalized. A Sky News interview (in which she obviously wasn't going to admit anything) suggests to me that the magnitude of her agency's mistake has dawned on her. I also said so on Twitter.

Contrary to what many analysts say, I still expect the transaction to consummate, albeit with what could (but need not) be a significant delay. In this blog post I'll outline why I think so.

The decision is not merely wrong. It's actually nuts. I'm sure it won't stand.

I called the Phase 1 findings "nonsensical" and thought the CMA was making progress. I did not expect them to go off the deep end. But instead of recognizing that there was only a highly speculative concern left--a concern over competition in cloud gaming--and deciding accordingly, the CMA claimed it had to "protect competition" in cloud gaming.

First, cloud gaming--games being streamed over an internet connection--is just a niche. I play games locally, everyone I know personally who plays games plays them locally. I know people who gave it a try, only to revert to local gameplay. The idea of running the program code of the game in the cloud and reducing the local device to a "dumb terminal" is intriguing in some ways, but the reality is that even a temporary degradation of an internet connection--or a hiccup somewhere along the way that all the data has to travel--will adversely affect gameplay. In a world where everyone has "fiber to the home" and carriers have virtually unlimited capacity that no one else wants to make use of for other purposes, it would work great. But that's not the world we live in, nor are we going to live in such a world in a few years' or even a decade's time. And even in a best-case scenario, there will always be some latency that locally installed games don't experience (no signal can travel faster than light).

It's a nascent market, meaning companies enter and leave all the time. One recent exit was Google Stadia, but Google has shut down hundreds of services over the years, a fact that (rightly) dissuaded game makers from investing in Stadia. The Inquiry Group's inability to understand the market pervades the entire 418-page final report, and one particularly good example is in paragraph 8.299. A submission by an unnamed competitor gets considerably more space than any other input on the question of how important ABK's content is for cloud gaming, though it's a total lunacy that did not even deserve a footnote:

"Another competitor [REDACTED] submitted that the failure of Google Stadia shows the importance of CoD [= Call of Duty] compared to other gaming franchises, and that CoD’s role in attracting consumers to platforms is not directly proportionate to engagement alone. This competitor submitted that [...] further submitted that, despite having these games, Google Stadia did not have CoD, and that this prevented Google Stadia from reaching a meaningful number of [users]."

It's preposterous to attribute the failure of Google Stadia--which was primarily due to Google's lack of commitment to anything other than search and Android--to the fact Stadia didn't have CoD. There was no Stadia competitor that used CoD to make Stadia fail.

The CMA failed to correctly determine market share. While Microsoft told the CMA that its xCloud had a 2021 market share in the single digits, the CMA apparently assumed that every Game Pass Ultimate subscriber was playing games on xCloud. In reality, the vast majority of them download games to their local devices and play there. Many Game Pass Ultimate customers couldn't do that even if they wanted: as a Twitter follower reminded me, xCloud is unavailable in most South American and Asian countries and in all of Africa. On this web page, one just has to click on "Xbox Cloud Gaming (Beta)" to verify that fact.

The most popular cloud gaming service is Nvidia's GeForce Now, and Microsoft and Nvidia entered into a 10-year agreement to bring Call of Duty to that one. Similar agreements were announced with Boosteroid, Ubitus, and British Telecom subsidiary EE. Just today, Microsoft announced an agreement with European cloud gaming service NWARE:

I could go on and on, but I'll leave that for another day--or for multiple other posts--to show just how bad the CMA decision is. It's an utter absurdity. They conflated stores with streaming as I explained on Twitter (also see this tweet by a gamer with an MBA). They took absurd positions in connection with the Relevant Customer Benefits. But even if one ignored all of that, the remedy--blocking the deal--would be irrationally disproportionate at any rate.

That is the same Inquiry Group that totally embarrassed itself when it compared--in the provisional findings, which had to be revised--the benefits from hypothetical foreclosure over a five-year period to the opportunity cost for only one year. Most eighth-graders would be ashamed of that. One member of that Inquiry Group is actually a professor for financial economics, but I don't want to talk too much about the Inquiry Group now. Suffice it to say for now that they appear clueless with respect to the markets, products, and technologies at issue, which wouldn't have been a problem if they hadn't also decided to buy a number of ridiculous claims made by deal critics while hardly believing anything that Microsoft and ABK told them. Totally biased.

Why is the deal not dead regardless of the UK situation?

Let's talk about the practical and procedural implications.

The merger agreement lists the UK among jurisdictions where approval is required. Therefore, let's first look at how that approval can still be secured, and then talk about a hypothetical scenario in which it could not be, but the deal would be closed anyway.

Competition Appeal Tribunal (CAT)

Microsoft announced its appeal, and ABK said they were already working on it. Parties get about four weeks to do so, and in this case I guess it could be filed even sooner.

While any appeals court in the civilized world can easily see that the CMA's Inquiry Group made an incompetent and irresponsible decision, there are three problems here:

  • The UK is the only major antitrust jurisdiction in the First World where a competition regulator is afforded enormous deference by the appeals court. If the EU Commission makes findings, the EU General Court can overrule them on questions of fact or law, and purely legal questions can be appealed further to the European Court of Justice. In the U.S., a deal like this can close unless a federal district court orders a preliminary injunction, meaning the regulator has to go to court and ask for it, but a court decides. In the UK, they have that "Judicial Review" standard, which means that unless one shows unlawful conduct or procedural mistakes (a basis on which Apple recently defeated the CMA, which thought it was above the law when it disregarded statutory deadlines), a decision must be shown to be "irrational".

  • An outright reversal that simply replaces an irrational CMA decision with a rational court ruling is not always possible. Quite often cases have to be remanded to the CMA for further proceedings.

  • All of this can take a while. Even if the initial appeal is resolved after six or nine months, a remand will take several more months.

While I can understand the UK government's desire not to be restricted in its executive freedoms by courts all the time, the problem in the field of competition enforcement is that when bad things happen, you really need a mechanism to counter regulatory bias and/or excess and/or incompetence. The CMA's CEO and this particular Inquiry Group were likely emboldened by the relatively strong shield that is the Judicial Review standard.

I'm not worried about the standard because the decision is really ridiculous and the mistakes are not going to be hard to show to the judges. I also think that the CMA has produced so much material that the appeals court may even find a way to just resolve the matter directly.

The issue is time. The merger agreement expires on July 18. But there are three possible solutions:

  • Given how obviously crazy the CMA decision is, I'm wondering whether the appeals court could order an interim measure that would allow Microsoft to close the deal while the appeal would be resolved. I haven't been able to find out whether that is possible, but in such an exceptional case I wouldn't be surprised if an emergency motion succeeded.

  • The CMA could look at the appeal, recognize its errors like it did in the console foreclosure context, and settle, possibly based on slightly expanded remedies.

  • Microsoft and ABK could work out an extension of the merger agreement. It looks like both companies are absolutely committed to this deal, and are not going to let a stupid mistake by a small group of people kill a deal that makes so much sense.

ABK's CEO Bobby Kotick said some interesting things in an interview. He noted that the CMA was being constructive and solution-oriented until Sarah Cardell had a meeting with the U.S. FTC's chair Lina Khan, an extremist who would like to be able to prohibit any merger above 5 billion dollars for any reason or no reason. I'm not concerned about that, but about whether the rule of law is sufficiently intact in the UK to correct mistakes or malfeasance. The more interesting part is that there was a case in which a deal that the CMA originally blocked was cleared last year: FNZ / GBST. What I noticed is that three of the four members of the FNZ Inquiry Group were also on the ABK Inquiry Group, among them the chairman as well as the "math whiz" I mentioned before.

In the FNZ case, the CMA opened its investigation in November 2019, and it took more than two years--until January 2022--before the deal finally got cleared. It can't and won't take that long in the ABK case.

Ministerial override

Yesterday I watched a recording of a BBC interview with Microsoft's president, Brad Smith. The two key takeaways were that Microsoft is going to fight--they've been more cooperative with regulators than any Big Tech company in history, but enough is enough in the CMA's case--and that there is a case here for a ministerial override.

That is a possibility I mentioned on Twitter back in February (1, 2). Four years ago, the UK [u]pdated [its] rules to strengthen the government's powers to scrutinise mergers and takeovers that may raise national security concerns." That page also explains the following:

"Ministers can only intervene in mergers and takeovers (foreign or domestic) that give rise to specific public interest concerns of national security, financial stability or media plurality." (emphasis added)

Mr. Smith didn't say "ministerial override", but he did refer to Microsoft's relevance to the UK economy (even including its support of non-profits, which are particularly in the public interest) and its efforts to defend the nation from cybersecurity threats.

The fact that the UK government initially stressed the independence of the CMA means nothing. First, the CMA is not really independent. The government could restructure it or replace people. Second, independence is not the same as immunity from a higher authority overruling an agency that would otherwise be out of control.

In Germany, it's not uncommon at all for the minister of economics to allow a merger that the Bundeskartellamt (Federal Cartel Office) would block.

It would make a lot of sense here, especially in a scenario where the European Commission would have cleared the merger, which would isolate the CMA apart from the ideologically blinded FTC that loses court cases all the time.

British politicians should see that the decision is unbelievably wrong and irresponsible, and that the UK's competition enforcement regime would become much more balanced if the CMA got overruled more often, especially the current CMA that is on the wrong track.

It wouldn't have political implications. We're not talking about compromising the independence of a court. We're just talking about a government agency, and one that is run by someone who has been at the helm for only a short period and already brought about a major crisis. The average British voter would ask: "Sarah Who?"

The question is not one of whether a corporation or a government have more power. It's that a blatant and irrational abuse of governmental power has created a situation that must be addressed.

A ministerial override wouldn't happen overnight, and it could be that the appeal has to be filed first. The CMA would be given a chance to recognize and correct its error. If all else failed, the override could happen, and it would be the right thing to do in that situation. Let's also not forget that someone has political responsibility for certain appointments that have led to this situation.

Closing the deal regardless

The UK-approval requirement in the merger agreement wouldn't even have to be renegotiated; it could simply be waived. It's only there so Microsoft wouldn't have to close the deal against a prohition decision by the CMA if it didn't want to, but if it decided to do that, it would be free to do so.

The consequences of going ahead and closing the deal against the CMA's blocking decision would be massive. It's hard to imagine and there is no indication whatsoever that Microsoft is contemplating that possibility, much less have I asked them whether they would consider it, but in a strictly logical sense it's not 100% inconceivable in a scenario where numerous regulators (seven countries so far, and the EU likely to follow soon) would have cleared the deal.

Let's look at it this way: if the transaction could otherwise go ahead, but the competition authority of a tiny country--say, the Amt für Volkswirtschaft of the Principality of Liechtenstein--suddenly entered a prohibition decision, the deal wouldn't fall through. Even if the government of Liechtenstein--the sixth-smallest nation--banned all of Microsoft's products and services in retaliation, so what?

Now, the UK is the fifth-largest economy, and that's why it's so hard to imagine. The CMA could try to impose fines on Microsoft, but those decisions would be subject to judicial review. And they wouldn't be practically enforceable if Microsoft left the market. Would they do that? Interestingly, Apple's lawyers once told a UK judge they might leave that market. I don't think that Microsoft would do what Apple threatened to do. I'm speaking only in the hypothetical. And I wouldn't even do that if Apple had not contemplated the possibility of simply leaving the UK (in that case the issue was patent royalties).

What would most British companies and citizens prefer? Windows, Office, Teams, Azure, and even the Xbox--or a regulator whose leadership doesn't agree with Spider-Man that great power comes with great responsibility? An Inquiry Group that doesn't even get its basic math right?

Whatever will happen, the transaction is more likely than not to be unblocked. The decision that came down on Wednesday fails consumers and companies alike. Except Sony, Apple, and Google. Sony dominates the worldwide console market, and Apple and Google know that Microsoft is in the best position to challenge their mobile app store monopolies.

European Commission's formal SEP Regulation proposal addressed certain issues and is now criticized by both net licensors and net licensees of standard-essential patents

The European Commission yesterday announced--with only a one-day delay--its formal proposal (PDF) for a regulation on standard-essential patents. It's not a question of whether the glass is half-full or half-empty: while they fixed some of the issues that were highlighted in recent weeks (not only minor but also structural ones), other problems persist.

The most fundamental problem is that what the EC's internal market commissioner Thierry Breton presented yesterday is not really considered useful by anyone anymore:

Regrets, regrets, concerned, troubled. Everyone regrets or expresses concerns. No one is happy. According to commissioner Thierry Breton's logic, that would essentially make both camps "bad-faith actors"...

This reminds me of the doomed Directive on the Patentability of Computer-Implemented Inventions, which was jettisoned by the European Parliament in 2005 in a near-unanimous vote because neither camp wanted it anymore (an important difference being that in that case, the original Commission proposal was viewed very favorably by one camp).

Put another way, the current proposal amounts to a lot of bureaucracy and some uncertainty--but ultimately for nothing, even if one wanted to devalue SEPs and complicate their enforcement. It's useless, and I'm skeptical that the co-legislation process involving the EU Council and the European Parliament has the potential to change that. Whether through hundreds of amendments or a "trilogue" (backroom negotiations between EC, Council and EP), this approach is very likely to produce something unlawful or unworkable (or even both at the same time). They're just structurally on the wrong track, and they obviously weren't able to do a complete overhaul over the past month.

That said, I'm happy to see that some of the criticism has been validated by recent changes. I identified many issues myself and also pointed to other writings. For my previous commentary, see the most recent post, the one before, and the link list at the end of that one.

The way I read the current proposal, the de facto antisuit mechanism has been softened. Previously, a SEP holder starting a parallel proceeding in a non-EU jurisdiction (which they now refer to as a "third country") would have been deprived of the right to enforce in the EU because an implementer could have obtained a notice of termination of the FRAND determination proceeding based on the SEP holder's "failure to engage", but the SEP holder would not have received one. Now, both parties get a notice of termination in that scenario, and the SEP holder can then go ahead and enforce.

What they say now is that the EUIPO-led FRAND determination should set global rates unless the parties agree otherwise. While global portfolio licenses are indeed a commercial reality, DG GROW's insensitivity to the concept of international comity is still evidenced by the failure to consider scenarios in which parties may want to obtain valuations in other jurisdictions for the patents they hold or use there (for instance, China). Commissioner Breton is just doing too many things at the same time, which must be the reason why he gave an answer at yesterday's press conference that makes no sense: responding to the question of whether the EU would like other jurisdictions to create similar SEP licensing regimes, he declared himself in favor of others doing so, but the EU's approach--even without the radical antisuit mechanism they dropped--is simply designed to be incompatible with similar rules in other jurisdictions.

Instead of adopting Qualcomm's proposal of a Reciprocal FRAND Agreement, the proposed regulation does not require the parties to commit to be bound by a FRAND determination. The way it works is this:

  • Whoever triggers the FRAND determination process (SEP holder or implementer) doesn't have to state initially whether the determination shall be binding.

  • When responding, the other party will have to tell whether it wants the determination to be binding.

  • But it won't be binding unless the party that started the process also says it accepts to be bound.

It's not even clear how binding a commitment "to comply with the outcome" is. The proposal doesn't clearly say that the parties have to enter into a license agreement on that basis. It envisions that the courts hearing SEP infringement cases between the parties will be informed of those commitments, but after a license agreement there would be no more basis for infringement action.

The term "enforcement", which I criticized as unclear, no longer appears in all contexts. At least Art. 34(1)(a) now says a SEP holder needs a FRAND determination "prior to any inititation of a SEP infringement claim" (emphasis added). That is clearer, though I'm still wondering whether SEP holders can save time by bringing declaratory judgment actions.

DG GROW tried--but in my view failed--to preserve the right to enforce SEPs during a FRAND determination. What the proposal now allows is to seek a "provisional injunction of a financial nature", which is not a sales ban but would merely require an implementer to make a deposit or post a bond to cover license fees. That's not going to discourage hold-out in the slightest. The way the proposal phrases it is also counterintuitive because they literally say that such an injunction should be sought in the courts of a Member States, but even when I asked around on LinkedIn, I got no indication that there is any jurisdiction in the EU (and possibly not beyond, other than interim payments ordered by Indian courts) that allows this. The way the proposal defines Member States courts, however, includes the Unified Patent Court (UPC). Is that a sufficient solution? No, it falls far short, not only because an obligation to make a deposit won't get any unwilling licensee to the negotiating table but also for the following reasons:

  • Many patents have been, and will be, opted out of the UPC.

  • Not even all EU Member States are UPC Contracting States.

  • The UPC doesn't have jurisdiction over national patents.

In the original draft, the definition of "patent" included utility models. That is no longer the case and represents a loophole for right holders. It's actually pretty cheap, quick, and easy to get utility models in Germany. What limits their usefulness that they don't enjoy a presumption of validity, but if they mirror a patent that has been examined by a patent office, that shouldn't be a problem.

The Commission's edits were obviously done under time constraints. The proposal even has typos. It would have been so much better to engage in consultation, given that the people who drafted it clearly don't understand litigation and commercial realities. For instance, that whole idea of achieving through an awareness-raising effort by the EU's trademark office that car makers will let suppliers pass license fees down in the supply chain is nonsensical. In the end, there are market force in play, and the regulation won't move the needle. I'm not blaming public servants for not understanding how things work in the economy, but then they have to solicit feedback based on specific proposals. They refer to extensive consultations, but those were not about the type of proposal that is now on the table and at risk of going nowhere.

Now it's too late for proper consultation. The thing has been put out and now the legislative process must take place, though it could just result in a rejection of the proposal as I mentioned further above.

The SEP Register part of the proposal is still bad for patent pools and has been rightly criticized by the European Telecommunications Standards Institute (ETSI). I can't see any serious improvement there. The only significant change concerning the register is that SEP holders are now in a better position to get a peer review if they disagree with the initial essentiality check. But appeals to the courts of law are still not even an afterthought.

I'm going to take a closer look at the proposal, the impact assesment, and the studies the Commission is referring to. The proposal notes that "[t]he impact assessment relied primarily ... on two external studies." One of them was produced by Charles River Associates, which engages in SEP policy work for Apple and may additionally hope to be hired by parties (especially implementers) with a view to the FRAND conciliation proceedings. The other is co-authored by the founder of IPlytics, who has a vested interest in certain approaches to SEP licensing and litigation that generate more business for that company than others. I'll be sure to write many more posts throughout the legislative process.

This is going to be waste of time, energy, and resources. The chances of that proposal culminating in a useful piece of legislation are very slim.

Wednesday, April 26, 2023

UK Competition & Markets Authority radicalizes itself by blocking Microsoft's purchase of Activision Blizzard based on misconceptions and speculative concerns: parties will appeal

What is at stake now after the UK Competition & Market Authority's unbelievable decision (summary (PDF)) to block Microsoft's acquisition of Activision Blizzard King (ABK) is not just the credibility of that particular regulatory agency and its leadership. The more fundamental question that will have to be answered now is whether the rule of law is intact. Can a government agency that appears to be out of control post-Brexit, and to make decisions even when it doesn't seem to understand the technologies involved, do whatever it wants?

On September 1, I saw the CMA on the wrong track (UK antitrust authority gets basic facts wrong as it declines to approve Microsoft's purchase of Activision Blizzard on fast track: extensive review was expected, but reasoning is nonsensical). Almost eight months have passed since then, and what looked just like misconceptions in the beginning now actually appears to indicate a radical agenda as well as a lack of technological competence.

There was hope. Temporarily. The CMA recognized a little over a month ago that there was no vertical foreclosure concern with respect to the console market (as withholding Call of Duty from the PlayStation would be grossly unprofitable for Microsoft even if a few gamers switched consoles). The CMA had made a mistake when calculating the costs and benefits of foreclosure--a mistake that it corrected, which was actually honorable but changes nothing about the fact that the CMA does not appear to do top-notch work as a competition regulator, at least with respect to complex technology industry cases.

To be fair, the CMA didn't even get major cases as long as the UK was an EU Member State. All major tech competition matters were decided in Brussels, where the CMA basically just had an observer status. Post-Brexit it has more power than before, but that power may just be too tempting for some people--a temptation that leads them to make bad decisions at times. The CMA may just have acquired too much additional power overnight, and maybe the politicians who decided on the appointments did not always choose persons who would protect UK consumers but also have a modicum of regulatory humility.

The CMA doesn't understand technology (a cloud service like Azure is a commodity, most major games actually run on the Google Cloud Platform anyway), didn't understand foreclosure economics well enough to avoid the mistake I just mentioned, and there are also signs that the CMA doesn't correctly apply the legal framework. The CMA got overruled by the Competition Appeal Tribunal (CAT) last month for blatantly disregarding certain statutory time limits in a case involving Apple.

The CAT is where Microsoft and Activision Blizzard are headed. Shortly after the CMA published its outrageous decision, Microsoft and Activision Blizzard announced via Twitter that they would appeal:

Microsoft's announcement says "the decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works." I, too, struggle with some of the CMA's arguments. I'll analyze and comment on the CMA's decision in future posts, but for now let me just give one important example that relates to what Microsoft indicates will be a key issue on appeal:

"Microsoft [...] has other important strengths in cloud gaming from owning Xbox, the leading PC operating system (Windows) and a global cloud computing infrastructure (Azure and Xbox Cloud Gaming)"

The Xbox has a small market share compared to Sony, and the CMA is apparently more sympathetic to the dominant market leader, Sony, than to competition and consumer interests. Windows is a totally open system, and in order to offer games over the cloud that run on Windows, one doesn't even need Windows (the server can simply run on Linux as I already stated on September 1, 2022). And Azure is a commodity as I've said before. It's not like cloud operating costs are a huge factor: content is king when it comes to cloud gaming. Cloud services are, from a cloud gaming perspective, just a limited cost of doing business.

The CAT's standard of review is very deferential, but not infinitely deferential. In the Apple case, the CMA made a procedural error that was overruled rather quickly. Microsoft's announcement today mentions nothing procedural, though it's too early to tell whether the appeal will raise procedural issues as well. The CMA's substantive findings are reviewed under the "irrationality" standard. The CMA's position on cloud gaming--and its decision to block a merger over a nascent market (where there are new entrants all the time) after actually recognizing that its key concern (foreclosure in console market) was based on its own mistake--is irrational even in a literal sense. The way the CAT applies the term, the CMA will have a hard time explaining to the CAT that its decision was reasonable.

The CAT will see that the people working for the CMA on this deal weren't even capable of correctly calculating foreclosure costs when they wrote up their provisional findings (a very important document in the CMA process). That's not going to look good, though in a strictly legal sense it's not going to be relevant, just like it shouldn't be relevant (and hopefully wasn't relevant to the CMA) that Sony Interactive Entertainment CEO Jim Ryan is a Brit.

The bigger issue is this: the CAT will easily see that the CMA's reasoning concerning Microsoft's "other important strengths" is nonsensical, and it will particularly see that if a regulator could just block a deal based on totally speculative concerns about a nascent market, many more mergers would have to be blocked.

The CMA decision is so utterly unreasonable that only a successful appeal--or a settlement along the way--has the potential to restore my faith in the UK as an antitrust jurisdiction. It is now about the rule of law. Otherwise the CMA will know that it can get away with whatever arbitrary and capricious decisions it makes. This will also have political implications, and regardless of what happens here, UK politicians should see now that the so-called "judicial review" standard in the UK may lead to institutionalized regulatory excess.

The deal was cleared by other jurisdiction (in chronological order: Saudia Arabia, Brazil, Serbia, Chile, Japan, South Africa). It will be cleared by others in the weeks and months ahead. And I still believe it will ultimately be cleared in the UK. Maybe they'll work out a settlement soon. Otherwise Microsoft and Activision Blizzard will have to agree on an extension of the merger agreement. Some activist shareholders may now push Activision Blizzard to take the $3B breakup fee, but given that the CMA's decision is nonsensical, an extension would be logical.

For roughly a decade, Microsoft had been more cooperative with regulators than any Big Tech company in history. The CMA decided not to reward a cooperative and solution-oriented attitude. Now Microsoft has no other choice but to fight back, and to fight back really hard. In the alternative, it would become the target of regulatory overreach on multiple fronts.

What about other pending reviews and cases?

Let's look at the implications quickly, jurisdiction by jurisdiction:

European Union: The European Commission has a deadline on May 22. EC antitrust chief Margrethe Vestager stated in an interview a few months ago that different outcomes in different jurisdictions are possible. I still believe the EC will clear the deal on one basis or another next month. That will weaken the CMA's position.

United States (FTC): For FTC chair Lina Khan, the CMA's decision isn't really good news. Political pressure will grow because the FTC has done damage to two U.S. companies--to the benefit of Asian rivals--by bringing a frivolous complaint instead of working out a reasonable solution. More and more people will now say that Lina Khan is a liability for the American economy. In purely procedural terms, the probability of the August trial before the FTC's in-house judge is now rather high. If the deal had been cleared by the CMA today, and subsequently by the EU, I believe Microsoft would have consummated the transaction, the FTC would not realistically have obtained a preliminary injunction, and then the FTC would have given up just like in the Meta-Within case.

United States (private lawsuit): At this point, closing is not imminent, so Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California doesn't have to resolve the motion for a preliminary injunction in the near term. The motion was filed on Monday, and Microsoft's opposition brief would normally be due on Friday, May 5, but I guess the briefing process will either be put on hold or at least the briefing schedule will change. I doubt that there will still be a PI hearing on May 12.

Australia and New Zealand: The regulators in those jurisdictions wanted to await the outcome in other jurisdictions. Their historical ties with the UK don't mean that they're necessarily going to agree with the CMA. I believe they'll more likely clear the deal after the EU has done so.

The saga could have been over soon, but instead it looks like it could take longer than expected, if not much longer. That is a shame, but I still hope to see Microsoft's plans for a universal mobile app store materialize. That is one of the important procompetitive benefits of the transaction that the CMA, for whatever reason or no reason, doesn't seem to care about.

I'll be sure to comment on the CMA decision in more detail in the coming days. Please note that I comment more rapidly and frequently via Twitter.

Sunday, April 23, 2023

Next smartphone maker preparing to exit Germany over Nokia patent injunction: China's Vivo makes official announcement while Nokia misses earnings estimates

Nothing is more inconducive to the reputation of the patent system--and here, specifically, Germany's standard-essential patent (SEP) enforcement regime--than a reduction of consumer choice. At a time when the European Commission is finalizing a legislative proposal on SEP/FRAND litigation that raises numerous (and partly structural) issues, I consider it rather unhelpful that another Chinese smartphone maker is preparing its exit from the German market in response to SEP injunctions. But I am committed to keeping you all informed of what's going on regardless of whether one camp or the other may try to gain political mileage out of the facts.

In August 2022, OPPO and its OnePlus affiliate left the German market in response to some German patent injunctions (primarily a Mannheim SEP injunction) that Nokia had obtained. OPPO still hasn't returned, apart from some smaller resellers importing tiny quantities of OPPO devices from neighboring countries. OPPO's exit from Germany drew significant media attention after Wirtschaftswoche ("business week") reported on that development.

History is about to repeat itself. Two weeks ago I reported on a Mannheim injunction that Nokia obtained over two patents from the same family (EP'103 and EP'562) against another high-volume smartphone maker from China, Vivo (which spells its own name in lower case: "vivo"). Juve Patent subsequently reported on that injunction as well as another one over a patent from a different family (EP'626). IAM also reported (paywalled).

When OPPO stopped selling devices in Germany, it had a visible presence in that market, but relative to its sales in other world regions, Europe's share was small. That applies to an even greater extent to Vivo, which is why I was wondering whether the next "DExit" (DE is the top-level domain for Germany) was going to happen. Sadly, the answer appears to be yes.

I've only just now become aware of a German-language statement that Vivo published on its website. Let me provide my own unofficial translation (in which I'll spell "vivo" the official way):

vivo on the ruling by the Mannheim Regional Court

Dusseldorf, April 11, 2023

vivo fully respects intellectual property and is committed to continual innovation through extensive research and development. In the last few years, vivo has entered into cross-licensing agreements with numerous leading companies. We have been negotiating a renewal of our cross-license with Nokia, but have thus far been unable to reach an agreement. We are firmly convinced that Nokia has yet to discharge its obligation to offer a license on "FRAND" (fair, reasonable, and non-discriminatory) terms.

We are disappointed to take note of the decision by the Mannheim Regional Court and have started preparations to suspend, if need be, the sales and marketing of the accused products through vivo Germany's official channels. We are preparing an appeal of the decision and will evaluate our other options. In the meantime we will continue the negotiations with Nokia in order to conclude the matter on the basis of "FRAND" terms.

Our plans for a long-term commitment to the German market remain unchanged. vivo will remain present in Germany, and our customers can rely on our support. Our business outside of Germany will not be impacted.

Nokia sent a statement to the media:

The Regional Court in Mannheim, Germany has ruled that Vivo is using Nokia’s patented technologies in its smartphones and is selling them illegally without a license. The Court also found that Nokia has acted fairly. We welcome the judgments which confirm, once again, the strength of Nokia’s patent portfolio, and call upon Vivo to accept its obligations and agree a license on fair terms.

So we are witnessing two companies accusing each other of not being willing to sign a license agreement on FRAND terms, which is precisely the situation Nokia is also facing with OPPO. The numbers are not known. Just like OPPO and Vivo typically work out license agreements without a need for litigation, Nokia will claim the same. For instance, earlier this year Nokia renewed a license agreement with Samsung.

However, the plot is thickening that the royalties Nokia is seeking from OPPO and vivo may be at a level with what is acceptable to companies whose devices sell, on average, at significantly higher prices in affluent (therefore, less price-sensitive) markets. For OPPO and vivo, it makes no sense to sacrifice their competitiveness in the lower-end segment and in certain world regions (Asia, Africa, Latin America) only to be "allowed" to develop their German business.

Put differently, I cannot imagine that both OPPO and Vivo would leave the German market just because they're unwilling licensees who don't want to pay reasonable royalties to patent holders. They've worked out deals with licensors who are known to understand the specific needs of such companies who must be cost-sensitive due to the competitive environment and limited disposable income of customers in their largest markets.

No one had done what OPPO was first to do: to exit the German market in response to the enforcement of SEP injunctions. It's been almost 22 months since Nokia's infringement litigation against OPPO started, and Germany is the only market in which Nokia has gained leverage. Now Vivo is leaving Germany as well.

Litigation is neither Nokia's problem nor will it be the solution. Let there be no doubt that Nokia's in-house and outside counsel are second to none. It's also a fact that Nokia has managed to identify some winning patents that it can enforce against multiple defendants in a row. For instance, EP'103 was used against Daimler, OPPO, and Vivo, and the Mannheim court ruled in Nokia's favor in each case.

But what for?

The three most basic questions to ask when a business considers a strategic choice are: "Is it real? Can we win it? Is it worth it?"

OPPO and Vivo are real. Nokia can win, and indeed has repeatedly won, injunctions in Germany. But is this the answer? Or shouldn't Nokia recognize that a company like Samsung is in a position to pay a far higher royalty per device than an OPPO or a Vivo?

On Thursday, CNBC reported that "Nokia shares sank 8% [...] as investors responded to its earnings report." The stock price didn't bounce back on Friday. Analysts had expected a quarterly profit of 523.4 million euros (according to a Refinitiv poll), down from the 583 million euros Nokia reported for the same period last year--but the result of 479 million euros fell short even of the analysts' expectations.

Nokia's net sales had actually grown by 10% to 5.86 billion euros, beating analyst estimates (5.72 billion). But profits took a hit "“due to regional mix and a lower contribution from Nokia Technologies partly related to a license option exercised in Q4 2022." Nokia Technologies' revenue source is licensing. If Nokia had accepted OPPO's and Vivo's counteroffers, it presumably would have beaten--not missed--the earnings estimates. And on top it would have avoided potential bad news that the world's richest smartphone maker, Apple, and its allies and astroturfers will leverage in their EU lobbying activities at this critical juncture.

I understand that Nokia doesn't want to devalue its patents, and far be it from me to suggest that. But the path to license agreements with OPPO and Vivo is not litigation, much less litigation in Germany, a market in which they'd definitely like to operate but can't afford to if it puts them at a disadvantage vis-à-vis low-cost competitors in other world regions.

Nokia's most important license agreement--the one with Apple--was last renewed in 2017 (at a time when Apple preferred to focus on the Qualcomm dispute), and the previous had expired at the end of 2016. If it was a seven-year agreement like Apple's recent license agreements with others, it would be up for renewal by the end of this year. A longer term than seven years would be almost unprecedented in this industry (though Apple once signed a ten-year agreement with HTC, but Apple was the net licensor in that case). Apple is known to argue that it should not a pay a cent more than even the makers of the cheapest phones. It has a "most favored nation" mentality. I understand Nokia's dilemma, but I can't see a winning strategy here against OPPO and Vivo. There is no way that those companies would pay Samsung-like royalties. The solution is to work out a deal with them that reflects those licensees' market realities, and to nevertheless expect someone like Apple to pay a lot more, for good reason.

In the meantime, FRAND determination proceedings brought by OPPO and Vivo are going forward in China, a market that Nokia cannot afford to just leave the way OPPO and Vivo can exit Germany. Also, OPPO and Vivo are countersuing Nokia, particularly in "injunction-happy" Germany. Case in point, the Munich I Regional Court wil hold an OPPO v. Nokia trial on Thursday (April 27) and held one a few days ago (April 20). Nokia may be able to fend off various such countersuits, but once OPPO or Vivo has an injunction and enforces it, the terms of an agreement may be less favorable to Nokia than if they worked out a negotiated solution now.

Just like patent licensing firm IPCom (which had acquired patents from Bosch, a company that used to make mobile devices until about 20 years ago) wasn't able to defeat Nokia despite years and years of litigation, Nokia may never be able to get OPPO and Vivo to accept the terms it has in mind. Some nuts are too tough to crack.

Saturday, April 22, 2023

Essentiality doesn't run in the family: more flaws (and loopholes) detected in draft EU regulation on standard-essential patents

The more experts take a look at the leaked draft of an EU regulation on standard-essential patents (SEPs), the more issues are found. It's remarkable that just when one would think that the list should be complete, even more problems are identified.

In my previous post on this topic I focused on the international dimension (extraterritorial overreach and trade implications). Toward the end of that post, you can find a link list that points you to a dozen other posts.

Just after I published the previous post, I saw this brand new write-up by two partners of leading European IP boutique Bardehle Pagenberg. That article raises issues worth highlighting now.

Before I get to its content, two "meta" aspects:

  • Bardehle Pagenberg is both a patent prosecution and litigation firm. In infringement cases, they represent almost exclusively operating companies (Intellectual Ventures being the only exception I know), including automotive industry players (for instance, they represented two of the Daimler suppliers who intervened in the dispute with Nokia). They defend and they enforce (such as on OPPO's behalf against Nokia, with a Munich trial scheduled for next Thursday). Their perspective is pretty balanced, and over the years I've experienced that firm as being tactically very advanced (whether in an offensive or a defensive role).

  • It's a funny coincidence that's going to confuse a lot of people going forward: the two authors' names are Dr. Tilman Mueller (who just joined Bardehle this spring from Hamburg-based Eisenfuhr Speiser) and Professor Dr. Tilman Mueller-Stoy. That's a nightmare for autocomplete purposes.

I strongly recommend reading the entire write-up if you're interested in that EU SEP regulation, and I'm not going to provide a summary of everything. Here I only wish to highlight three types of shortcomings:

  1. Essentiality cannot be determined based on only one patent per family

  2. Making some SEPs drop out of the register could be strategically advisable

  3. Violations of right to be heard can give rise to constitutional complaints

1. Essentiality cannot be determined based on only one patent per family

Bardehle Pagenberg's non-exhaustive list of practical concerns starts with this item:

If only one patent per family is reviewed for essentiality as planned, the register will not provide any transparency. According to the draft, the evaluation of one patent shall apply for the entire family, but a singular review does not allow any assumption as to whether or not other patents from the same family are standard essential. Similar problems apply with respect to different patent claims in the same patent.

The part about claims vs. entire patents (last sentence of the quoted paragraph) already came up in some of my posts, such as this one on flawed or missing definitions. I agree with the two Bardehle partners that the register will be useless if only a single patent per family undergoes an essentiality checks. Sometimes claims from multiple members of a patent family are standard-essential. For instance, the Mannheim Regional Court deemed Nokia's EP'103 and EP'560 so similar that there wasn't a need to distinguish them at trial. But there could also be a case where only one family member contains essential claims. Now, if one of the family members that has no essential claim gets checked, the family as a whole will be erroneously declared non-essential (a false negative). That takes us to the next item because such findings will sometimes--and I know it's counterintuitive--even be in a patentee's interest.

2. Making some SEPs drop out of the register could be strategically advisable

I've previously mentioned that the EU SEP regulation lacks a mechanism for putting a patent back on the register. It's also not clear what will happen if a patent is deemed essential/valid in one EU Member States and non-essential/invalid in another. Also, even though the draft EU SEP regulation indicates some people's utter contempt for the fundamental principle that appeals must be reasonably available, such decisions by national courts or the UPC will be appealable. And I've also said that SEP holders may benefit from a few strategic underdeclarations so they have patents they can enforce in court that can be enforced without regard to the EU SEP regulation.

The problem of no clear rules for re-registration of a temporarily-removed patent is serious. Bardehle Pagenberg discusses the potential conseqeuences of a patent having been removed from the EU register, but if the patent (or, more likely, one or more claims) were to be found standard-essential by a national court:

"It would be in conflict with constitutionally protected property rights to further suspend the SEP owner’s access to justice (and to further deprive them of claims for past use) by making them go back to square one and ask for registration and a FRAND determination at the EUIPO again. If, in contrast, the SEP owner was free to continue to litigate without taking that step, there may be an incentive for SEP owners to trigger removals from the register which would contravene the intended transparency."

The first part highlights a rather general problem with those FRAND determinations: the parameters are in flux. Even during a determination, or subsequently to that one, yet prior to a final judgment in an infringement action, all sorts of things may change. What would clearly be unreasonable is to delay the enforcement of a given patent twice only because of its erroneous temporary removal from the register.

The second sentence raises an issue that implementers should be concerned about: SEP owners even benefit from the removal of a SEP from the register as they are then free to enforce it anytime without having to await a FRAND determination.

It obviously wouldn't be in a patent holder's interest to have most of its declared-essential patents removed from the database. But if a few "litigation-grade" patents are available for enforcement outside the purview of the EU SEP regulation, that's a virtue. Bardehle Pagenberg is right that in a worst-case scenario, SEP holders might even "trigger removals." To do so would mean to act in bad faith, but it would be hard to prove.

One doesn't even have to trigger removals if there's a patent family of which only one member's essentiality is checked and results in a false negative...

3. Violations of right to be heard can give rise to constitutional complaints

In one of my recent posts I discussed potential conflicts between the draft EU SEP regulation and the national constitutions of certain EU Member States. Bardehle Pagenberg's article also raises such issues, and let me focus on only one of them:

Although the EUIPO FRAND determination is said to be non-binding, it may well be factually binding and serve as a safe harbor / factual precedent. It is doubtful how that could be compatible with the right to be heard of a third party which was not involved in the initial FRAND rate determination.

Let's face it: if a litigant prevailed on a constitutional complaint, an entire proceeding might have to be repeated after years of costly and time-consuming litigation.

Sadly, there are myriad ways in which the draft SEP regulation would result in violations of the right to be heard. Here are some examples:

  • Third-party intervenors will become involved only at the stage of an enforcement action. Defendants from the automotive and telecommunications industries sometimes have approximately ten suppliers (example: Nokia v. Daimler) behind them. Any one of them could assert its constitutional right to be heard after not having been able to participate in that EUIPO-led FRAND determination.

  • A SEP holder might name defendants to an enforcement action who would (potentially meritoriously) be able to claim they were not heard. If a defendant's parent company is involved in the proceedings, subsidiaries may not be able to claim that their right to be heard was violated--but what if they were acquired at a time when it was too late to participate in the FRAND determination?

  • A company who contributes to a standard after the initial determination of an aggregate royalty determination will typically not have participated in that one. Given the EU's envisioned top-down approach, a party that was not heard when the aggregate royalty rate was determined would still be impacted by it further down the road.

  • Defendants will often claim that they didn't have any basis to participate in the aggregate royalty determination, and may not even have had a product that implements the standard. But at some point they will be affected by that determination.

  • Art. 50(1) could also give rise to such complaints:

    "The FRAND determination panel may hear witnesses and experts requested by either party provided that the evidence is necessary for the FRAND determination and that there is time to consider such evidence." (emphases added)

    That's just not how it works in the civilized world. If the evidence is relevant, the mere fact that the FRAND determination is supposed to be concluded within nine months does not justify violations of the right to be heard. There can be deadlines by which evidence has to be proffered, but if those deadlines are met, all that matters is the relevance of such evidence.

Bardehle Pagenberg's conclusion is this: "Nice try but please try again." The article also suggests that "[t]he Commission should go back to the drawing board to significantly improve the draft or even withdraw it in its entirety. I can't see how cosmetic changes would solve the partly fundamental and even structural problems that have been identified. What DG GROW has in mind is simply not workable. It won't be conducive to the Commission's reputation if the patent law experts in the national ministries in charge of patent policy had to conclude in a Council working group that the draft is fatally deficient (and had to communicate that conclusion to the political decision-makers). The Commission undoubtedly needs help in the form of feedback to specific ideas.

Friday, April 21, 2023

Draft SEP regulation threatens EU Commission's credibility at WTO level, may backfire big-time: issues outlined by former U.S. government officials and senior Qualcomm lawyer

More and more issues are identified concerning the European Commission's draft regulation on standard-essential patents (SEPs) that may or may not be formally put on the table next Wednesday (April 26) by EC Executive Vice President Margrethe Vestager. While the Commission is briefing reporters today (with critics of the proposal apparently planning the same for Monday and Tuesday), Mrs. Vestager told MLex (after speaking at a conference) that the 26th remained the target date, but delays could not be ruled out due to the EC's busy agenda. I first shared the information on LinkedIn (after reaching out to MLex about it).

For my previous reporting and commentary on the subject, see the link list toward the end of this post.

Yesterday (Thursday, April 20), an important letter was sent to key members of the EU Commission and an insightful write-up was published on LinkedIn. I'll discuss both below.

  1. Letter from former senior officials of U.S. government agencies to EC leaders

  2. While attacking Chinese antisuit injunctions at WTO level, the EC intends to create its own antisuit regime to interfere with foreign legal proceedings

Former leaders of U.S. government agencies under POTUS #42-#46 (Clinton, G.W. Bush, Obama, Trump, Biden) sent the following letter yesterday to EC President Ursula von der Leyen, EVPs Margrethe Vestager and Valdas Dombrovskis, and Commissioner Thierry Breton:

1. Letter from former senior officials of U.S. government agencies to EC leaders

Comments on European Commission's Draft "Proposal for Regulation of the European Parliament and of the Council Establishing a Framework for Transparent Licensing of Standard[-]Essential Patents" (April 20, 2023 letter by Christine Varney, David Kappos, Walter Copan, Makan Delrahim, Andrei Iancu, and Noah Phillips)

Most of them work in private practice now. Notably, three of them (former Antitrust AAG Christine Varney, former USPTO Director David Kappos, and former FTC commissioner Noah Phillips) are Cravath partners. Makan Delrahim (Trump's Antitrust AAG) is a Latham & Watkins partner, and Apple (which holds rather different positions) is major Latham client.

The letter expresses "shared concerns regarding an apparent pivot in the European Commission’s longstanding intellectual property (IP) policy that threatens European and American innovation leadership, and by extension, European and American economic success and security." (emphases added)

In diplomatic terms, that is a much stronger statement that it may appear to be at first sight. If we were talking about a statement by the signatories' successors, EU-U.S. relations would almost be on the brink of a trade war. The EC's leaders should ask themselves whether the objective of bringing down patent royalties paid by Apple and some automotive companies is really worth such complications. The answer should be clear, and what's also clear is that some people in the lower echelons of the Commission have acted irresponsibly in drafting a bill that raises such concerns without engaging in proper stakeholder consultation. Asking general questions about SEP-related grievances is not a substitute for discussing the implications of specific ideas.

The signatories of that letter know from their vantage point as former high-ranking government officials about "the critical yet fragile balance that must be struck when regulating [SEP] licensing" and warn that "even seemingly small policy changes can have outsized impacts." So does, by the way, a counterpart of theirs in London, UKIPO CEO Adam Williams, who told IAM in a recent interview (paywalled) that "massive intervention" in that area is rarely the right thing, and one needs to find a middle ground.

That's consistent with what I've observed as a cross-jurisdictional litigation watcher.

Near the top of page 2, the letter says SEP policies "should be data-driven and should consider the practical impact on industry and relevant geopolitical realities" (emphases added). Neither the draft regulation nor the draft impact assessment suggest a data-driven approach. Much to the contrary, I've already identified passages that are shockingly out of touch with reality and based on some people's opinion rather than any evidence, such as in connection with certain patent pools operated by Avanci and Sisvel. I also highlighted "geopolitical" in that quote because the Commission--especially at the most senior level--should be more sensitive to diplomatic and trade considerations.

The former U.S. government officials' letter warns that if the Commission proposed a regulation like the draft they've seen--even if it was not ultimately adopted in a similar way, shape, or form--"would also pave the way for Europe’s implementer-dependent international competitors to set binding aggregate royalty rates that severely devalue European innovation." Elsewhere (Section III), the letter describes those other jurisdictions as "[u]ndemocratic."

The EU would shoot itself in the foot. Given that even just making an ill-conceived proposal (regardless of what will subsequently happen in the legislative process) harms EU interests, the Commission should step back and think it all over again, with help from stakeholders on both sides of the debate.

Section II of the letter points out another credibility issue for the EU. As the letter recalls, it's been less than a year since the executive director of the EUIPO, Christian Archambeau, said “[o]f course, we will never have the competency in patents. But national offices do have competency in patents. So through the network, we can leverage their capabilities for common projects." And now the Commission wants to task the EUIPO with overseeing one of the most complex tasks in patent law (some would even argue it's the single most difficult one): portfolio valuation.

I agree with the overarching concerns raised by that letter and disagree only with the signatories' support of the EU complaint over Chinese antisuit injunctions ("The European Union rightly argued that [...] violated China’s obligations"--in my opinion those Chinese antisuit injunctions are just a defensive response to extraterritorial overreach by foreign courts).

2. While attacking Chinese antisuit injunctions at WTO level, the EC intends to create its own antisuit regime to interfere with foreign legal proceedings

The letter shown and discussed above discusses geopolitical and international trade issues that would arise even from just putting a fundamentally flawed proposal on the table next week. In that regard, let's now look at the attempt to create de facto antisuit injunctions at the EU level that would interfere with the sovereignty of foreign jurisdictions and go against the concept of international comity.

In a LinkedIn article published yesterday, Qualcomm's chief licensing lawyer, Fabian Gonell, explains why the draft SEP regulation would do "exactly what [antisuit injunctions] do in China: penalize patent holders that bring an action in foreign courts." And Mr. Gonell is rightly wondering how the Commission, which will soon have to file its substantive brief in support of its WTO complaint over China's antisuit injunctions, will seek to distinguish the antisuit element of its proposed SEP regulation "from the [Chinese] conduct of which [the EC] is complaining."

That LinkedIn article makes all the right points, and actually discusses only one of the two antisuit mechanisms envisioned by the EU contrary to its position in the WTO proceedings that no instrument of that kind should restrict patent rights in the first place. So let me explain it here in my way--in even more basic terms with a view to those who may be less familiar with the topic--and discuss both antisuit elements of the draft SEP regulation in parallel.

First, let's clarify what amounts to an antisuit mechanism. Two years ago I participated as a speaker in an EC webinar (the blog post also shows my slide deck)--a webinar that has now been declared part of the consultation process for the draft regulation, which I deem a mischaracterization. I'm now going to take a position totally consistent with the effects-based approach of my May 2021 presentation:

An antisuit mechanism

  • effectively precludes a party from enforcing its rights in another (almost always a foreign) jurisdiction (the enjoined jurisdiction)

  • by means of (typically drastic) sanctions in the enjoining jurisdiction.

The EU complains that China (in that context, the enjoining jurisdiction) imposes antisuit injunctions on patent holders, effectively precluding them from enforcing their patent rights in the EU (through the enforcement of SEP injunctions) by imposing per diem contempt fines.

Back then I said that requiring defendants to EU SEP cases to take a global portfolio license to avoid the enforcement of an injunction ultimately also means that they can't seek a rate-setting decision in other jurisdictions (with respect to the patents valid in those countries) because they will either lose sales or be sanctioned for contempt of court (by disobeying the injunction). In yesterday's article, with a focus on the draft SEP regulation, Mr. Gonell now argues--and I agree--that one must just focused on whether a party is "penalize[d]" for "bring[ing] an action in foreign courts." That is the nature of the antisuit beast, and Mr. Gonell rightly calls it "a distinction without a difference" that Chinese antisuit injunctions result in fines on SEP holders while the EU's envisaged antisuit mechanism penalizes them with a "loss of rights to enforce EU patents."

The EC's draft SEP regulation would penalize SEP holders in one context and implementers in another. Oddly, the antisuit context is the only one in which the draft regulation is at least somewhat symmetrical, while in all other regards it just seeks to impose costs on SEP holders, and to delay and complicate enforcement, while doing nothing to combat hold-out by unwilling licensees.

How can parties set off the draft regulation's antisuit mechanism?

Art. 48 of the draft regulation defines the term "parallel proceeding" as


civil court proceeding, any other court procedure or procedure before a tribunal or administrative or state authority of a jurisdiction outside of the Union called upon by law to make legally binding and enforceable decisions;


concerning a licensing dispute concerning the same standard and its implementation, or including SEPs from the same patent family involving one or more of the parties to the FRAND determination as a party, and


[a duplicative "and"] concerns the same matter which serve as a basis for the FRAND determination.

This is extraterritorial overreach, plain and simple. It's about non-EU jurisdictions like the UK, U.S., China, India, or Brazil, to name but a few examples of jurisdictions in which SEP holders often enforce their rights. And it covers "licensing dispute[s]" as well as patent infringement actions that may result in injunctions putting an end to violations.

Whoever came up with that essentially wants the EU to take the position that all other jurisdictions in the world have to wait until the EU has made a FRAND determination--or if one doesn't wait, one will get penalized in the EU. It's a "my way or the highway" attitude. It has nothing to do with international comity. It's more like what one would expect from so-called "rogue states"...

Let's look at the two sides of the licensing negotiations:

  • If SEP holders started "parallel proceedings", they'd seek a FRAND determinations and/or enforce their rights in foreign jurisdictions.

  • If implementers started a "parallel proceeding", it would be a FRAND determination that would result in an obligation to enter into a license (the statute is limited to proceedings that result in "legally binding and enforceable decisions" as opposed to mere declarations).

The draft regulation doesn't even distinguish between foreign FRAND determinations that would cover patents valid in the EU or not. So, for instance, if an implementer asked a Chinese court to order the SEP holder to grant a license to only its Chinese SEPs on court-determined terms, it would run afoul of the EU's rules! That's insane.

The penalty is defined by paragraph 2 of that article in conjunction with two paragraphs of another article:

[Art. 48(2)]

In case of a parallel proceeding [as defined in para. 1] filed prior or during the FRAND determination by a party, the FRAND determination panel, or in case it has not been established, the competence centre, shall terminate the procedure upon the request of the other party. Article 47(3) and Article 47(4) shall apply.

We have to turn to Art. 47(3) and (4) to find out more specifically what is meant by "terminat[ing] the procedure upon the request of the other party." Art. 47 is the statute that defines what constitutes a "[f]ailure of a party to engage" in the EU's FRAND determination proceedings. So, even if a party that is enforcing its rights elsewhere contributed constructively to an EUIPO-led FRAND determination, the mere fact that it's also asserting non-EU patent rights in foreign jurisdictions would be penalized like a failure to engage.

Art. 47(3) addresses the scenario in which the implementer fails to engage (which as per Art. 48(2) includes a scenario in which a party avails itself of a foreign court for certain purposes, even if no EU patents are concerned):


The competence centre shall issue a notice of termination of FRAND determination to the SEP owner, including for the use before the customs authorities of a Member State, if the FRAND determination was terminated under [t]his article, and the party referred to in paragraph (1) is the prospective implementer.


The competence centre shall issue a notice of termination of FRAND determination to the implementer, if the FRAND determination was terminated under [t]his article, and the party referred to in[ ]paragraph (1) is the SEP owner.

So, if a party--licensor or licensee--avails itself of a foreign court, the other party will get a notice of termination--but the party that exercised its rights outside the EU will not get one. What does that mean in practice? It means that only one party--the one that didn't run to a foreign court--is free to do in the EU what it wants.

If the party that doesn't get such notice of termination is the patent holder, Art. 58(4) precludes it forever from enforcing its rights in the EU:

A court of a Member State or the Unified Patent Court, requested to decide on any issue related to a SEP in force in a Member State, shall not proceed with the examination of the admissibility of the request, unless it has been furnished with a notice of termination of the FRAND determination.

It's a total enforcement deadlock, a sanction that can--and in many cases will--be more drastic than a contempt fine.

For implementers, the penalty is that they lose the protection the draft regulation would afford them with a view to enforcement in national courts as well as USITC-style customs seizures. Implementers--unlike SEP holders--wouldn't be worse off than today if they asked a foreign court to enforce their rights under a foreign country's laws. But if that draft regulation had entered into force, availing themselves of foreign courts (even in my example of someone just seeking a Chinese FRAND ruling with respect to Chinese patents) would deprive them of a shield they'd otherwise have in the EU.

This is judicial imperialism. Should the EC actually put that kind of proposal on the table, I'd be left to wonder why the EU Commission doesn't have the checks and balances in place to prevent such a terrible mistake. It shouldn't be hard for the ultimate decision makers to figure out, with help from their advisers, that the draft regulation is a dumpster fire.

Links to prior FOSS Patents posts on the envisaged EU SEP regulation

In chronological order:

  1. March 29: European Commission departs from best practices in hasty preparation of standard-essential patent policy proposal that is fundamentally flawed and unbalanced

  2. March 31: Table of contents and synopsis of European Commission's draft proposal for standard-essential patent regulation

  3. April 2: Proposed EU SEP regulation will also harm net licensees: implementers of standard-essential patents must be careful what they wish for

  4. April 3: In draft EU SEP regulation, appeals are not even an afterthought: what if owners or implementers of standard-essential patents disagree with decisions?

  5. April 5: EU Commission contradicts itself in attempted justification of SEP regulation in light of EU Charter of Fundamental Rights: 'uniform and predictable outcome' but 'not ultimately binding'?

  6. April 11: Is the EU becoming hostile to standards-related innovation, standards development, and the enforcement of standard-essential patents?

  7. April 12: Definitive issues: draft EU regulation on standard-essential patents fails to properly define 'SEP' and 'enforcement', and encourages antitrust violations

  8. April 14: Stakeholder reactions to draft EU SEP regulation: both licensors and licensees identify issues that counsel against premature proposal

  9. April 16: European Commission's take on patent pools has turned negative: draft impact assessment makes up and distorts facts, relies on conflicted "researcher"

  10. April 17: ETSI asks European Commission to reconsider SEP regulation -- Apple protests as it stands to benefit from SEP enforcement complications more than any European company

  11. April 19: Qualcomm outlines Reciprocal FRAND Agreement as superior alternative to European Commission's "fatally-flawed proposal" of non-binding standard-essential patent valuations

Only indirectly related, yet pretty relevant: