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.