Monday, May 1, 2023

Antitrust & patent judge Mr. Justice Marcus Smith will hear Microsoft's appeal of UK CMA's irrational decision to block Activision Blizzard purchase: Apple, Optis waiting for his FRAND ruling

Chances are you've heard of Mr. Justice Marcus Smith--at minimum, of some of his decisions--whether you read FOSS Patents primarily for its coverage of patent litigation (the original focus), its commentary on select antitrust matters, or a combination of both. At least two of his cases will be of particular relevance to this blog in the near term:

  • The standard-essential patent (SEP) ecosystem is anxiously awaiting his Optis v. Apple FRAND (fair, reasonable, and non-discriminatory terms) judgment in Optis v. Apple (Claim No. HP-2019-000006). That part is called Trial E. Most of the trials were technical, and Trial E is about license fees. While that case is at the intersection of patent and antitrust law, Justice Smith also hears purely technical patent cases (see this article by law firm Simmons & Simmons).

    In addition to Oxford, he studied at the University of Munich. Munich is now a major patent litigation hotspot.

  • It is a given that Justice Smith will preside over a three-judge panel that will adjudicate the impending Microsoft v. Competition & Markets Authority appeal of what is probably the most illogical decision not only the CMA but any competition authority of a civilized country ever made in a merger case. That ruling came down on Wednesday. Based on what Activision Blizzard CEO Bobby Kotick told CNBC, I wouldn't be surprised to see that appeal lodged even before the end of this week, though Microsoft has time until later this month.

Justice Smith is the President of the Competition Appeal Tribunal ("CATribunal" or "CAT"), which he has been since 2021, as well as one of the judges of the Patents Court, which is part of the Chancery Division of the High Court of Justice (previously known as England & Wales High Court, thus still abbreviated as EWHC).

There is another UK judge with a dual antitrust/patent focus many of my readers know--and some even personally know as a former colleague (patent litigator)--Mr. Justice Richard Meade. He is the judge in charge of intellectual property, but he's also a member of the CAT bench. While it's almost inconceivable that Justice Smith would not be involved with the "ABK" (for "Activision Blizzard King") case, Justice Meade may or may not be on that panel as well.

It bodes well for Microsoft's appeal that at least one judge with patent expertise will be involved. That's because the CMA's decision gets technology and technology markets completely wrong. The CMA's Inquiry Group was biased, incompetent, and did not even get basic math right (which is why they had to amend their provisional findings and drop the primary of theory harm after Microsoft pointed out they had subtracted only one year of costs from five years of foreclosure benefits). The members of that group--mostly with a financial services background--don't understand technology in the slightest. Some of what they've written in their ruling has made the CMA the laughing stock of gamers on social media and discussion boards. Patent-specialized judges are jurists, not engineers, but they develop a good understanding of technology and that's why it would be great if not only Mr. Justice Smith as the President of the Court but also Mr. Justice Meade became involved. I don't think any CAT judge will buy the Inquiry Group's absurd vision of the future of cloud gaming, but judges with a strong grasp of technology will find it even easier to see that the CMA ruling is plain stupid.

In September 2021, I commented on Justice Meade's presentation at a Chinese conference and noted that "Justice Meade stole the other European judges the show in terms of content, structure, and presentation (despite not switching into full-screen mode): low-key but world-class."

Justice Meade is also involved with the remedies part of the Optis v. Apple dispute. Equally in September 2021, he ordered an injunction that will, however, not be enforced if Apple takes a license to the Optis portfolio on the FRAND terms that are being determined as we speak by Justice Smith. I commented on a remark by Justice Meade on Apple's threat to exit the UK market depending on the global terms to be set in the UK (I expressed an understanding for both his and Apple's views).

In the Microsoft-ABK context, no one has threatened to leave the market, but the CMA decision has apparently forced Microsoft to ask the UK government for a ministerial override of the CMA decision. Microsoft's relevance to the UK economy and national security is key in that context because at least one of three statutory criteria for such an override (impact on financial stability, security, or media plurality) must be met. I discussed that in an #UnblockABK blog post, which outlined various possible ways forward for that transaction. For now there is every sign that Microsoft wants--and is highly likely--to get the CMA decision overturned. There can be no reasonable question whether the CMA's blocking decision is wholly unreasonable, just how close it is to an act of malfeasance or whether the CMA merely suffers from institutional schizophrenia (contradicting itself even within a one-page statement) or megalomania.

We're not at the point where an Illumina-Grail approach--closing the deal without regulatory approval--would merely be contemplated. That scenario is not on the agenda here, but Illumina did it, and Apple, in a SEP context, said that at some point it would be unprofitable to operate in the UK. Only if Microsoft decided to disregard the CMA's unlawful decision, they would face sanctions that based on my research could theoretically reach about $20B, though that would clearly be disproportionate when Microsoft's entire UK sales are just a fraction of that number and the theory of "harm" is about roughly 1% of the total gaming market. While the CMA's bizarre approach to enforcement has not yet forced a company to leave the UK, the agency is increasingly a liability comparable to a Disinvest in Britain campaign:

  • Microsoft's president told the BBC that the English Channel never seemed wider as there is greater legal certainty and a better climate to do business in the EU. As a result of the CMA's blatant abuse of power, he found it increasingly difficult to grow a technology business in the UK.

  • Activision Blizzard's CEO also indicated that the CMA's outrageous behavior would impact his company's job creation in the UK.

  • Not only the parties (Microsoft and ABK) but also some of their "coopetitors" (rivals, but also partners) find the CMA decision nonsensical and counterproductive in terms of having anticompetitive effects as opposed to defending competition. While I'm sure British Telecom subsidiary EE is also angry, it's a bit more difficult for them to call out the CMA. But other cloud-gaming providers who entered into agreements with Microsoft (subject to the condition precedent that the acquisition is closed) are at liberty to speak out. The most important one of them is Nvidia, the world's leading Artifical Intelligence chipset maker and also the market leader in cloud gaming. Clearly, Nvidia is hoping the CAT will swiftly reverse the CMA:

    Nvidia had to cancel its own acquisition of UK-based semiconductor design company Arm, but in that context the CMA had a UK-specific reason to be particularly concerned (unlike in the ABK case) and, more importantly, it was simply in the global antitrust mainstream. But Nvidia--I repeat, the world's leading AI chipset maker--can now see that the CMA will also make crazy decisions when other jurisdictions simply clear the deal (apart from the U.S., but the FTC doesn't matter because they can't block without a court ruling).

  • Arm is now going public in the U.S., not on the London Stock Exchange. A dual listing would have been difficult due to special circumstances, but the signal that this sends out is terrible for "the City": London's financial district. It's not just that Arm, a logical candidate for the LSE, is not going public in London. There are companies that are delisting from the LSE in favor of the U.S. stock market. Just on Friday, Reuters reported that "Kingspan plans to quit London listing in latest blow for LSE." The post-Brexit situation for the UK's financial services industry is difficult enough, and the CMA's anti-business stance and its current legal philosophy, characterized by contempt for logic if not even for the law, further complicates the situation.

  • A British games journalist told GBNews (videos embedded in tweet below) that the UK is now officially closed for business and this is terrible for its games industry:

  • By coincidence, just one day prior to the CMA's ABK insanity, the founder of Deliveroo told the Business Studies podcast that his company had to lay off 30% of its staff a few years ago because the CMA (whose current and irresponsible CEO was the agency's General Counsel) delayed a foreign minority investment (13% with no special rights) for 18 months. He is still so angry he called "total bullshit" on the CMA and used the F-word.

  • In a decision in which Mr. Justice Smith participated, he saw that the CMA broke the law in a case against Apple. While I actually agreed with the CMA's objective in that case, I also saw the problem with clear statutory deadlines. The CAT was able to quickly overrule the CMA.

  • One of the oldest technology companies--the one that created the world's first mobile phone--is Motorola. A few weeks ago, Motorola Solutions announced the intent to appeal an "unprecedented final decision" by the CMA. Right below the headline, Motorola says that "the CMA’s egregious overreach cannot be justified on competitive, economic or legal grounds." I don't know the details of that case (Mobile Radio Network Services market investigation). But I read announcements of antitrust appeals all the time, and a mature company like Motorola wouldn't use language like "egregious overreach" in an average case.

There are only two ways in which Sarah Cardell's CMA, which is currently out of control, can be reined in. The government could override CMA decisions and replace people. And the CAT can quash CMA decisions or parts thereof. The standard of review is way too high. That was no problem as long as the CMA didn't go off the deep end, but now the CMA behaves as if it's above the law, only because of the legal framework. In the Microsoft-ABK case, however, the CMA decision is simply nuts and that's why the "irrational or unlawful" standard will be easily met by the forthcoming appeal.

The CMA will learn now--or, depending on whether the UK government has made its presence felt, may already have realized--that Microsoft-ABK is not a case like Meta-Giphy, where the CMA made an aggressive decision (though easily distinguishable) that the CAT--again with Justice Smith presiding--quashed and referred back. On remand, the CMA arrived at the same conclusion, and the deal fell through. But in the Microsoft-ABK case, there's just one laughable theory of "harm" left, and if that one is quashed for fundamental reasons, the CAT may be able to resolve the case right away. It's interesting to see that the CMA doesn't really respect the CAT: in its Microsoft-ABK decision, it cites all sorts of input from industry players making predictions for how important cloud gaming will be in "7-10 years" or in "10-15 years" despite the CAT clearly having told the CMA the following in the Meta-Giphy case:

105. Assessment of impairment to dynamic competition will almost always involve consideration of expectations (i.e. an outcome with a more than 50% chance). Clearly, that outcome will involve consideration of multiple factors, but we doubt very much (although of course every case must turn on its facts) if an impairment to dynamic competition that is not thought to manifest itself within five years at the outside can be considered to be an expectation. The world is simply not that predictable.

The CMA just tries to navigate around the Giphy decision without admitting that they don't respect it:

"Based on this evidence, we consider that cloud gaming will continue to grow and is likely to become profitable in the next five years. Although it is difficult to predict exactly how big cloud gaming will eventually become, the evidence supports the conclusion that it is a growing and promising market in which several market participants are investing considerable amounts."

"[...] cloud gaming users and revenue will increase substantially in the next few years."

The mere fact that cloud gaming could become profitable still doesn't mean it's a reasonably large market (it's tiny and it's going to remain small in the years ahead) based on which a UK regulator can reasonably block a global acquisition that is much more about mobile gaming than the cloud. While the CMA claims it has to protect competition in the cloud gaming market, the real players like Nvidia or European startup Boosteroid are for the deal and against the CMA decision.

This case will be the most important one in the CAT's history. It's going to be an easy one to decide, though. By now, gamers discussing the decision and comparing the actual facts to the Inquiry Group's alternative universe have already identified utter absurdities. Let me just show you two more tweets here, both by a Twitter user named PeterOvo, one of which has a tweet of mine attached:

The FRAND rate-setting decision in Optis v. Apple that Justice Smith is working on is much more complicated. It's about what license fees Apple should pay for the use of the former Ericsson patents belonging to Optis, a group of patent licensing firms. In a structurally parallel case, InterDigital v. Lenovo, Mr. Justice James Mellor largely agreed with the defendant. But this is very much a case-by-case thing.

Justice Smith presided over the Optis v. Apple FRAND trial last year. It started in June 2022. I was even considering flying to London to follow it, but ultimately obtained only indirect information. During that trial, I received an email from someone actively involved with the proceedings:

"I have been sitting in on the Optis v. Apple 'Trial E' in London all this week and thought you might like to know your name and your blog has been mentioned repeatedly during the trial."

I understand that both Optis and Apple made references to different FOSS Patents posts. On June 20, 2022, another person directly involved with the case told me that "[my] Foss posts around the time of the Unwired Planet v. Huawei Sup. Ct. opinion [we]re now being discussed in the trial." My reaction was that they should actually have more important issues to sort out than discuss my posts, but pride in authorship is a fact of life and that's why I'm now particularly interested in the forthcoming Optis v. Apple "Trial E" judgment by Justice Smith. Even more so, however, I look forward to the appeal of the CMA's irrational--if not unlawful--merger block.