Wednesday, December 2, 2020

Federal Council of Germany has patent reform bill on agenda for December 18 session

Just a quick procedural update on German patent reform: the Bundesrat (Federal Council) has patent reform on the agenda for its December 18 session--item no. 15 for the day. While I was pleased to see some improvement in early September, the legislative proposal that the German government (Chancellor Merkel's cabinet) ultimately decided to put on the table is worded in such a way that the courts would rarely even reach the question of proportionality, much less resolve it in a defendant's favor. I criticized various large companies for shooting themselves in the foot in this context.

So what's the significance of that December 18 decision by the Federal Council going to be?

The Federal Council is the co-legislative body in which the governments of the German federal states cast their votes. Just like in the U.S., patent law is federal law, not state law. Therefore, the Federal Council's influence is limited. Theoretically it could veto even a patent reform bill, but could then be overruled by a supermajority of the Bundestag (Federal Parliament). A veto won't happen here, realistically. Instead, the Federal Council will just express its views, which the Federal Parliament will then take into consideration.

While some members of the Federal Parliament have been informally looking at this dossier for a while, the formal process will only begin after the Federal Council has taken its non-binding position.

Obviously, a camp that believes it can get mileage out of the Federal Council's opinion will try to leverage it. Presumably, the state of Lower Saxony, a major Volkswagen shareholder, will be in favor of serious patent injunction reform. The most populous state, North Rhine-Westphalia, is home to Deutsche Telekom, but also to chemical giant Bayer, which opposes reform, and the Dusseldorf courts, which generate a lot of "business" for the state (which runs those courts) and the local economy. In the second-most populous and economically strongest state, Bavaria, they have BMW and Audi, but I doubt that those organizations know how to prevent their state government from siding with Siemens and the patent law community at large (Bavaria is home to the European Patent Office, the German Patent and Trademark Office, the Federal Patent Court of Germany, and as a result, to numerous patent law firms).

I'd like to be proven to have been wrong on this one, but I really fear that the Federal Council will be just about OK with the current bill (which won't solve the problem, not even in the long run) at best and speak out against even that kind of toothless reform at worst (in which case the Federal Council would likely propose particular wordings that would further dilute the injunction reform statute). When the Federal Council's position has been made public, I'll report and comment on it.

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Thursday, November 26, 2020

Dusseldorf Regional Court refers component-level licensing of standard-essential patents to Court of Justice of the EU

The Landgericht Düsseldorf (Dusseldorf Regional Court) has indeed, as widely anticipated in light of the inclination the court expressed during the early-September trial, referred to the top EU court a set of legal questions regarding the right of component makers to an exhaustive component-level standard-essential patent (SEP) license. This news was first shared on Twitter by Benjamin Raetz ("Rätz" in German), an intellectual propety lawyer with the firm of Kather Augenstein, whose clients include Volkswagen (in favor of component-level licenses) and Ericsson (opposed). Here's the tweet (this post continues below the tweet):

As a result, a Nokia v. Daimler case as well as a Huawei v. Nokia case (in which Huawei is seeking to obligate Nokia to make a FRAND licensing offer at the component level) will be stayed. Formally, the decision in the Huawei case will likely come down next month or in January. But the court made it clear in September that the two cases are interrelated. In fact, Huawei's case used to be a third-party counterclaim that was severed from the Nokia v. Daimler case. Theoretically, the court could also stay Huawei's case pending the resolution of today's referral, but that would not be a good idea given that there is a risk of Nokia getting leverage over Daimler in some case and coercing the Mercedes maker into a settlement, while Huawei would certainly see this matter through. Whether Nokia will get such leverage is hard to tell. For instance, if the Munich appeals court were to (more or less) uphold the lower Munich court's negligible security amount in a different Nokia v. Daimler case, and if Daimler failed to win a stay, then the Nokia-Daimler dispute could be over as early as next month, in theory.

Two other Nokia v. Daimler cases are due to be heard by the Dusseldorf Regional Court next month. If Nokia loses on the merits, there won't be a need for a stay.

Some major SEP holder opposed to component-level licensing, particularly Nokia (which made an unacceptable new licensing offer to makers of telematics control units) and non-party Qualcomm (which counted on EU internal market commissioner Thierry Breton's support and lobbied the German Federal Ministry of Economic Affairs (where some people saw through the smokescreen while some others were pathetically clueless), tried some maneuvering in hopes of dissuading the Dusseldorf court from this referral. But now that the referral has been made, this matter will be resolved in Luxembourg.

EU competition commissioner Magrethe Vestager said at yesterday's announcement of the Commission's Action Plan on Intellectual Property that the EC wanted the parties to talk to each other and was seeking to keep these case out of the courts. That's easier said than done. Judicial clarification is needed, and it will come.

Nokia could appeal this decision to the Oberlandesgericht Düsseldorf (Dusseldorf Higher Regional Court) by means of the German equivalent to a U.S. interlocutory appeal. However, the judge presiding over one of the two patent-specialized divisions of that appeals court, Presiding Judge Dr. Thomas Kuehnen ("Kühnen" in German), took a clear position on this question last year, and he's known to be in favor of this referral.

The Bundeskartellamt (Federal Cartel Office of Germany) had filed an amicus brief with multiple German courts requesting the referral of component-level SEP licensing questions to the CJEU. Frankly, I liked the Federal Cartel Office's submission to the courts better than what the Dusseldorf court made of this, but that may be subjective.

Meanwhile, the Dusseldorf Regional Court has published the questions to be referred. They go beyond the subject of component-level licensing and also raise general Huawei v. ZTE-related questions. I will publish the original German-language version of each question and provide my own translation below each paragraph (my translation is not exactly literal but uses shorter constructs where I believe doing so does not result in a loss of accuracy, such as by not providing a definition of a term like SEP):

A. Besteht eine Pflicht zur vorrangigen Lizenzierung von Zulieferern?

UNOFFICIAL TRANSLATION: Is there an obligation to license suppliers first?

1. Kann ein Unternehmen einer nachgelagerten Wirtschaftsstufe der auf Unterlassung gerichteten Patentverletzungsklage des Inhabers eines Patents, das für einen von einer Standardisierungsorganisation normierten Standard essentiell ist (SEP) und der sich gegenüber dieser Organisation unwiderruflich verpflichtet hat, jedem Dritten eine Lizenz zu FRAND-Bedingungen zu erteilen, den Einwand des Missbrauchs einer marktbeherrschenden Stellung i.S.v. Art. 102 AEUV entgegenhalten, wenn der Standard, für den das Klagepatent essentiell ist, bzw. Teile desselben bereits in einem von dem Verletzungsbeklagten bezogenen Vorprodukt implementiert wird, dessen lizenzwilligen Lieferanten der Patentinhaber die Erteilung einer eigenen unbeschränkten Lizenz für alle patentrechtlich relevanten Nutzungsarten zu FRAND-Bedingungen für den Standard implementierende Produkte verweigert?

UNOFFICIAL TRANSLATION: 1. Can a downstream company avert injunctive relief over a FRAND-pledged SEP on the grounds of an abuse of a dominant market position in accordance with Art. 102 TFEU if the relevant standard or parts thereof are implemented by an upstream component purchased by the defendant to the infringement claim and the defendant's suppliers are willing licensees but the patentee denies them an independent and unrestricted license on FRAND terms covering all types of use relevant under patent law?

a) Gilt dies insbesondere dann, wenn es in der betreffenden Branche des Endproduktevertreibers den Gepflogenheiten entspricht, dass die Schutzrechtslage für die von dem Zulieferteil benutzten Patente im Wege der Lizenznahme durch die Zulieferer geklärt wird?

UNOFFICIAL TRANSLATION: a) Is this particularly the case if it is common practice in the end product maker's industry to clear patent rights at the component level?

b) Besteht ein Lizenzierungsvorrang gegenüber den Zulieferern auf jeder Stufe der Lieferkette oder nur gegenüber demjenigen Zulieferer, der dem Vertreiber des Endprodukts am Ende der Verwertungskette unmittelbar vorgelagert ist? Entscheiden auch hier die Gepflogenheiten des Geschäftsverkehrs?

UNOFFICIAL TRANSLATION: Are suppliers at each level of a suply chain entitled to a license, or does this apply only to the defendant's direct supplier? Does this depend on industry practice?

2. Erfordert es das kartellrechtliche Missbrauchsverbot, dass dem Zulieferer eine eigene, unbeschränkte Lizenz für alle patentrechtlich relevanten Nutzungsarten zu FRAND-Bedingungen für den Standard implementierende Produkte in dem Sinne erteilt wird, dass die Endvertreiber (und ggf. die vorgelagerten Abnehmer) ihrerseits keine eigene, separate Lizenz vom SEP-Inhaber mehr benötigen, um im Fall einer bestimmungsgemäßen Verwendung des betreffenden Zulieferteils eine Patentverletzung zu vermeiden?

UNOFFICIAL TRANSLATION: 2. Is it required by antitrust law to grant a supplier its own independent and unrestricted license on FRAND terms, for products implementing the standard, to the effect that end-product makers (and, as applicable, intermediate levels of the supply chain) no longer need to take an own, separate license from the SEP holder, thereby providing end-product makers with a defense against a patent infringement claim if the relevant component was incorporated into the end product on a licensed basis?

3. Sofern die Vorlagefrage zu 1. verneint wird: Stellt Art. 102 AEUV besondere qualitative, quantitative und/oder sonstige Anforderungen an diejenigen Kriterien, nach denen der Inhaber eines standardessentiellen Patents darüber entscheidet, welche potenziellen Patentverletzer unterschiedlicher Ebenen der gleichen Produktions- und Verwertungskette er mit einer auf Unterlassung gerichteten Patentverletzungsklage in Anspruch nimmt?

UNOFFICIAL TRANSLATION: 3. In the event the first question were to be answered in the negative: Does Art. 102 TFEU impose particular criteria--qualitative, quantitative, or otherwise--based on which a SEP holder can choose which potential infringers at different levels of the supply and value chain to enjoin?

B. Konkretisierung der Anforderungen aus der Entscheidung des Gerichtshofs in Sachen Huawei ./. ZTE (Urteil vom 16. Juli 2015, C-170/13):

UNOFFICIAL TRANSLATION: B. Clarification of requirements laid out by the CJEU in Huawei v. ZTE (judgment of 16 July 2015, case no. C-170/13):

1. Besteht ungeachtet dessen, dass die vom SEP-Inhaber und vom SEP-Benutzer wechselseitig vorzunehmenden Handlungspflichten (Verletzungsanzeige, Lizenzierungsbitte, FRAND-Lizenzangebot; Lizenzangebot an den vorrangig zu lizenzierenden Zulieferer) orgerichtlich zu erfüllen sind, die Möglichkeit, Verhaltenspflichten, die im vorgerichtlichen Raum versäumt wurden, rechtswahrend im Laufe eines Gerichtsverfahrens nachzuholen?

UNOFFICIAL TRANSLATION: Given that SEP holder and implementer have to meet certain obligations (infringement notice, request for license, FRAND licensing offer; licensing offer to a supplier) prior to litigation, is it still possible to make up, without prejudice, for obligations not previously met while litigation is pending?

2. Kann von einer beachtlichen Lizenzierungsbitte des Patentbenutzers nur dann ausgegangen werden, wenn sich aufgrund einer umfassenden Würdigung aller Begleitumstände klar und eindeutig der Wille und die Bereitschaft des SEP-Benutzers ergibt, mit dem SEP-Inhaber einen Lizenzvertrag zu FRAND-Be-dingungen abzuschließen, wie immer diese (mangels eines zu diesem Zeitpunkt formulierten Lizenzangebotes überhaupt noch nicht absehbaren) FRAND-Bedingungen aussehen mögen?

UNOFFICIAL TRANSLATION: Is a request for a license by an implementer relevant only if, based on an in-depth analysis of all circumstances, the implementer's willingness and readiness to conclude a license agreement on FRAND terms with the patentee is clear and unambiguous, irrespectively of what those terms (which at the time of the offer to take a license were not foreseeable yet) might be?

a) Gibt ein Verletzer, der mehrere Monate auf den Verletzungshinweis schweigt, damit regelmäßig zu erkennen, dass ihm an einer Lizenznahme nicht gelegen ist, so dass es – trotz verbal formulierter Lizenzbitte – an einer solchen fehlt, mit der Folge, dass der Unterlassungsklage des SEP-Inhabers stattzugeben ist?

UNOFFICIAL TRANSLATION: Does an infringer who remains silent over the course of several months upon receipt of an infringement notice give an indication of a nominal request for a license not being made in good faith, which in turn would entitle the SEP holder to injunctive relief?

b) Kann aus Lizenzbedingungen, die der SEP-Benutzer mit einem Gegenangebot eingebracht hat, auf eine mangelnde Lizenzbitte geschlossen werden, mit der Folge, dass der Unterlassungsklage des SEP-Inhabers ohne vorherige Prüfung, ob das eigene Lizenzangebot des SEP-Inhabers (welches dem Gegenangebot des SEP-Benutzers vorausgegangen ist) überhaupt FRAND-Bedingungen entspricht, daraufhin stattgegeben wird?

UNOFFICIAL TRANSLATION: Can the terms of a SEP implementer's counteroffer result in a finding of an unwillingness to take a license and the grant of injunctive relief without prior analysis of whether the SEP holder's licensing offer (which preceded the implementer's counteroffer) was FRAND-compliant in the first place?

c) Verbietet sich ein solcher Schluss jedenfalls dann, wenn diejenigen Lizenzbedingungen des Gegenangebotes, aus denen auf eine mangelnde Lizenzbitte geschlossen werden soll, solche sind, für die weder offensichtlich noch höchstrichterlich geklärt ist, dass sie sich mit FRAND-Bedingungen nicht vereinbaren lassen?

UNOFFICIAL TRANSLATION: c) Is the foregoing conclusion unwarranted at least in a case in which those licensing terms in the implementer's counteroffer that give rise to a finding of an unwillingness to take a license are not clearly out of compliance with FRAND either because it is evident or in accordance with jurisprudence of the highest court? [TRANSLATOR's NOTE: the original text has many shortcomings, one of which is that the term "höchstrichterlich" means a decision by the highest court, without clarifying whether the CJEU or the Federal Court of Justice of Germany is meant; in fact, even the Federal Constitutional Court of Germany could theoretically be the highest court in a given case]

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Wednesday, November 25, 2020

European Commission's Action Plan on Intellectual Property deemphasizes automotive industry concerns, prioritizes upload filters

Today the European Commission formally adopted and announced its Action Plan on Intellectual Property ("IP Action Plan").

A near-final draft of the document already leaked last week and generated some media attention. I elected to wait for the final document (also because I'm very busy with the impending launch of my iOS and Android game). Given that some significant changes have been made, I'm glad I did hold off.

So here's my rapid response, and I may go into more detail on some of these issues later or in a follow-up post:

  • While a draft version of the document placed a great deal of emphasis on the need to engage with the automotive sector (given the particular issues it is facing with a view to the licensing of standard-essential patents (SEPs)), the final plan downgrades that industry's problems or at least seeks to defocus from them:

    "Although currently the biggest disputes seem to occur in the automotive sector, they may extend further as SEPs licensing is relevant also in the health, energy, smart manufacturing, digital and electronics ecosystems." (emphasis added)

    "With a view to clarifying these issues and identify [sic] best practices, the Commission has launched a study, with a specific focus on strategic sectors including the healthcare and automotive sectors." (emphasis added)

    The fact that the Commission deemphasizes the automotive industry's SEP issues may be attributable to the immense lobbying firepower and persistent, highly professional efforts by major SEP holders such as Nokia and Ericsson, which is not a conspiracy theory but based in fact (and would serve to explain the repeated postponement of the publication of this document). The automotive industry's lobbying departments are basically one-trick ponies that only know about emissions standards and similar topics. Those organizations may need another decade or two before they figure out IP policy.

    I actually doubt that the automotive industry would have had to expect anything positive to come out from the Commission's DG GROW (formerly called DG MARKT) "brokering" an agreement between the automotive sector and major SEP holders. That's because the commissioner in charge of DG GROW, Thierry Breton, is totally in the tank for Nokia and Ericsson, even up to the point where he describes fake news as "a fact! A fact! It is a fact!".

  • The paper recognizes that small and medium-sized enterprises (SMEs) don't account for lots of patent filings. But basically the answer this plan attempts to give is just a combination of ever more internationalization and subsidies. Nowhere does the plan recognize that many SMEs would rather be protected from patents than by patents.

  • One of the top two or three fallacies in the patent policy context is reiterated by the IP Action Plan:

    "Between 2010 and 2019, the number of European patents granted rose from 58 000 to 137 000, approximately - although the rise is less marked than in other parts of the world, notably Asia, where economies are quickly catching up on IP generation."

    A European patent is a patent that can be asserted in Europe--not a patent granted to a European company. None of the top four filers with the European Patent Office (EPO) is European.

  • Artificial Intelligence (AI) patents are software patents, which actually shouldn't be granted in Europe in the first place. Here's what the paper says about Europe's low share of AI patent applications:

    "[A]lthough 26% of high-value research publications on AI comes from Europe, only 4 out of the top 30 applicants (13%) and 7% of businesses, engaged in AI patenting worldwide, are European."

    The reason for that is mostly that major platform companies (in the digital platform economy, Europe is at a level with Africa and irrelevant compared to the U.S. and Asia) generate a lot of income from their core businessees and invest some of that money into AI, enabling them to offer the most attractive working conditions to researchers--and to file for many patents in that field. I can't see how the IP Action Plan would change a thing about that.

  • The Commission loves its upload filters:

    "A crucial part of this work concerns the implementation of Article 17 of the Copyright Directive, which sets out a specific legal regime for the use of copyright-protected content by user-uploaded content sharing platforms. The Commission has carried out an extensive stakeholder dialogue to gather the views of relevant stakeholders on the main topics related to this article's application. Taking into account the results of the dialogue, the Commission will soon issue guidance to support Member States in implementing this provision."

    Just last week, a senior Commission official actually acknowledged that Article 17 may not survive a pending court challenge. I opposed it (even spoke at a couple of demonstrations against it).

  • While this is outside the industry focus of this blog, I believe it would make a whole lot of sense for the Commission to "to introduce a unified [Supplementary Protection Certificate] grant mechanism and/or create a unitary SPC title," which the IP Action Plan mentions as possibilities.

The IP Action Plan is per se underwhelming and unspecific, but that doesn't mean that the initiatives it outlines as potential measures couldn't be impactful in the end--possibly even with respect to SEPs. We'll have to stay tuned.

[Update] The Fair Standards Alliance (FSA) just issued a statement, saying the organization "welcomes the European Commission’s goal to bring more transparency to standard essential patent (SEP) licensing." [/Update]

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Saturday, November 14, 2020

Google brings motion to dispose of Epic Games' antitrust complaint over Android app distribution terms at earliest procedural stage

On Friday evening (Pacific Time), Google brought a motion it had already announced more than two months ago: a motion to dismiss Epic Games' antitrust complaint in the Northern District of California over Google's Android app distribution terms. At the same time, Google seeks to shot down a consolidated class action complaint brought on behalf of some smaller app developers.

Google also faces class actions by consumers. In fact, the latest one of them, Gamble v. Google, was filed on Thursday. But yesterday's motion relates only to claims brought by Epic and other developers.

Unlike Google, Apple decided not seek the outright dismissal of Epic's claims. Part of the reason might have been that a motion to dismiss causes considerable delay, but Judge Yvonne Gonzalez Rogers (who is presiding over all those Apple App Store antitrust cases, while Judge James Donato is in charge of the Google Play cases) wanted to put Epic's August 2020 case on a schedule that was basically dictated by the decade-old Pepper v. Apple class action, which had meanwhile already reached the Supreme Court. The Pepper opinion is at the heart of one part of Google's attack on the developer class actions it's facing, as I'll discuss further below.

So here's Google's motion to dismiss Epic's complaint as well as the consolidated developer class action complaint (this post continues below the document):

20-11-13 Google Motion to D... by Florian Mueller

With respect to Epic's claims, and the corresponding claims brought by the developer class actions, Google's strategy basically stands on two pillars:

  • In an effort to make Epic's case fail under the Ninth Circuit's FTC v. Qualcomm opinion (which for the time being, and possibly for a very long time to come, constitutes controlling law in the Ninth Circuit, now that the FTC's petition for an en banc rehearing has been denied), Google argues that Epic actually alleges Google has an antitrust duty to deal, but attempts an end-run around the high hurdle for such a duty by seemingly relying on other theories:

    • Google says Epic has no Sherman Act Section 1 case based on Google's app distribution agreements with developers as Section 1 applies only to concerted action by parties, not to terms unilaterally imposed by one party (here, Google).

    • As for Epic's "tying" claim (of which Judge Gonzalez Rogers has so far been unconvinced in the parallel Epic v. Apple case), Google argues that app distribution and in-app payments are simply part of the same business method, so there isn't a second thing that could be tied to a first. Here, too, Google says Epic actually wants to establish a duty to deal, to the effect that Google would have to allow Epic and others to use alternative payment services for their in-app purchasing products.

  • Google says it's not enough when Epic alleges Google's business model and contract terms merely discourage or make it less likely that, for instance, Android OEMs install third-party app stores on their devices or consumers install Android apps without going through the Google Play store. Instead, Google's lawyers argue, Epic would have to--but cannot--allege that Google actually prohibits or prevents such actions.

I would like to comment on one particular sentence from Google's motion:

"Plaintiffs thus importantly concede that OEMs pre-install Play not because of any obligation under the MADAs but because it is the best app store available."

Sorry, but that sounds too meritocratic. It's not like the Google Play app is such a great store app in technical terms that everyone prefers to use it for convenience or similar reasons. It's pretty good, but the key reason why users go there has a name: network effects.

As expected, Google's motion stresses the various ways in which Android is (without explicitly drawing the comparison, as it wouldn't be relevant to the judicial decision Google is seeking) less restrictive than iOS. On iOS, there's no sideloading, nor are there third-party app stores.

In my own app business I can see the difference between Google's greater openness and Apple's more restrictive terms. We recently uploaded a beta version of our app to both Apple's App Store Connect and Google's Google Developer Console, and requested permission to send it to testers, which we have so far been doing via Microsoft App Center. In Google's case, the app was accepted very quickly (the only problem being a technical one--after more than 24 hours, the related Google Play page still can't be accessed, probably because of a long queue that Google's servers need to process; [Update] I just checked again and finally the Google Play page for our beta test is functional [/Update]). In Apple's case, it was rejected because of a rule for which there is no equivalent with respect to Android apps. But Apple has recently tried to improve its relationship with developers, so we've done something that Apple just enabled in the late summer: we submitted a suggestion to modify the rule--and we're going to submit a slightly modified version of our app that will clearly be outside the scope of that narrowly-worded rule (the game will still be just as much fun on one platform as on the other). We're going to launch the game very soon as it is absolutely feature-complete except for IAP offerings, which are easy to do but we technically can't implement them without distributing test versions through Apple's and Google's platforms.

I'm not saying that Android is totally open. There are rules and restrictions. And frankly, if you're not on the Google Play store, you're at a fundamental disadvantage as an app developer. But there is a gradual difference, and Google's less restrictive approach makes it a possibility that Google might successfully defend itself against Epic's complaint possibly before Epic Games v. Apple even goes to trial.

Should Google's motion succeed, Epic will certainly appeal. But after FTC v. Qualcomm, defendants to antitrust cases are in a more comfortable position in the Ninth Circuit than plaintiffs.

That said, I'm sure Epic's lawyers (some of whom played a key role in Qualcomm's victory over the FTC) totally anticipated the points Google has raised in its motion to dismiss, so we can expect to see a very interesting opposition brief.

In a short separate document (as Epic isn't seeking damages, at least not at this stage), Google addressed the developer class actions' damages claim (this post continues below the document):

20-11-13 Google Memorandum ... by Florian Mueller

Google argues that the Supreme Court's Pepper v. Apple opinion allows only consumers (such as the Pepper class) to "seek recovery in the form of an alleged overcharge on the service fee the app store charge." The tricky part of the Pepper case--to the extent it reached the Supreme Court, where it was just about antitrust standing and not about the merits--was that the Illinois Brick doctrine doesn't let indirect purchasers seek antitrust damages. The Supreme Court could have overruled that doctrine, and maybe it will do so some other time. But in this case, a 5-4 majority of the justices determined that consumers were actually direct purchasers from Apple--as opposed to considering app developers to be the ones who pay Apple's 30% commission.

Google says developers can't seek damages based on an overcharge that, if there was one (which Google obviously disputes) would belong to consumers according to the Supreme Court opinion in Pepper. According to Google's motion, developers might still be entitled to damages based on lost profits, but the developer class actions fail to do so. Therefore, Google asks the court to dismiss those damages claims.

This means the developer class actions could fail not only on the merits (in which case Epic would lose as well) but also because of their damages theory.

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Thursday, November 12, 2020

Two more weeks until the single most important court ruling in the (short) history of the IoT industry: component-level SEP licensing

Originally, the Dusseldorf Regional Court had scheduled its Nokia v. Daimler ruling (with implications for a spin-off from that case, the Huawei v. Nokia case that resulted from the severance of Huawei's third-party counterclaims) for today. But for court-internal reasons, the ruling date has been pushed back by two weeks.

The Internet of Things industry should pay close attention on November 26, 2020. No judicial decision to date has been of comparable importance to the "I" in "IoT."

There's no IoT without an Internet connection. Apart from a small subset of IoT devices that will be just fine with a BlueTooth connection, some kind of WiFi or cellular (such as 4G/LTE) connectivity is a hard requirement. That's where you have to deal with thousands of allegedly standard-essential patents (SEPs)--a challenge even for large and sophisticated organizations, and nothing short of a nightmare for small and medium-sized IoT companies, especially startups.

At a Brussels conference I organized about a year ago, young and innovative IoT companies like AirTies (from Turkey) and Kamstrup (from Denmark) discussed the problem of SEP licensing from their perspective. The problem they face is that SEP holders (particularly trolls, of which are many--and they get fed with patents by the likes of Nokia and Ericsson) are at least as unwilling to extend exhaustive component-level SEP licenses to the IoT industry's suppliers as they are in the automotive context. Their calculus is always that they can maximize their leverage by going after end-product makers, such as companies that produce smart meters (such as Kamstrup). They make outrageous demands, sometimes listing dozens or even hundreds of patents that one can relatively easily identify as being technologically unrelated to the standard they claim they're essential to.

A defendant like Daimler can afford to be defended by a world-class litigation like Quinn Emanuel--and nevertheless got hit by four SEP injunctions just over these past few months. The average IoT company can only dream of hiring QE, and will find it hard to pay even for the initial analysis (not even in-depth!) of claim charts. Actually, they might not even be provided with claim charts as the Federal Court of Justice of Germany abolished that requirement this year in Sisvel v. Haier (contrary to how the Court of Justice of the EU's Huawei v. ZTE guidance should be applied)...

It's simply a fact that IoT startups can't handle SEP licensing themselves, so their suppliers (such as baseband chipset makers) must do the job and then provide a fully-licensed product. That's what patent exhaustion is all about.

The Dusseldorf court's widely expected referral to the CJEU of key legal questions related to component-level SEP licensing can be a game changer to the benefit of the IoT industry. It doesn't matter that Nokia v. Daimler is an automotive case. While it's not incorrect to refer to that kind of dispute as a "connected vehicle case," Nokia's SEPs aren't specific to self-driving cars or collision prevention. It's basic wireless communications technology. The legal questions are the same, but the problem is an even more pressing one for the IoT sector.

I've quickly drawn up a couple of charts to explain how the IoT industry's SEP licensing problems relate to those of the automotive sector. This is particularly important with a view to a Berlin roundtable next week to discuss a Qualcomm proposal that I believe neither the European Commission nor the German government can support without throwing IoT under the bus.

In a nutshell, Qualcomm, Nokia, and other SEP holders pursuing similar licensing tactics would still prefer to license their patents only at the end-product level (i.e., to Daimler, Volkswagen etc.), but not least with a view to the Dusseldorf court's upcoming referral to the CJEU they're now talking about tier 1: the automotive industry's direct suppliers. Telematics control units (TCUs) are tier 1 products from the automotive industry's perspective (the higher the number, the higher up in the supply chain). TCUs contain network access devices (NADs; tier 2), and those rely on a baseband chipset (tier 3). Here's the "nesting" of one product inside another as a simple chart (click on the image to enlarge; thist post continues below the image):

Baseband chipsets are relevant to the automotive industry just like they are to IoT products with cellular connectivity. At the level of the NAD (automotive tier 2), however, there's already some differentiation: NADs designed to be used in cars come with certain automotive-specific functionality that no IoT product needs. And TCUs are definitely just an automotive thing. It wouldn't be an economical choice to incorporate TCUs into non-automotive IoT products, and it would be a waste of space (on top of money).

This second chart shows three scenarios: two types of IoT products (with and without NADs, but again, NADs for IoT are not the same as NADs for cars), and the automotive supply chain (click on the image to enlarge; this post continues below the image):

For the reasons explained further above, end-product licensing is absolutely not a viable option for small and medium-sized IoT companies. And as the above chart shows, TCU-level licensing (tier 1) as proposed by Nokia this fall and, as I mentioned, by Qualcomm wouldn't work either. At a minimum, licenses would have to be available at the NAD level, and then the royalty would have to be commensurate with what a patented invention adds to the commercial value of that component as opposed to that of the end product.

If the top EU court holds that all levels of the supply chain are entitled to an exhaustive component-level license on FRAND terms, the problem will be solved for IoT, at least in the European market with potential repercussions around the globe.

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Wednesday, November 11, 2020

Court throws out tort-based part of Apple's counterclaims against Epic Games

Epic Games just reduced the potential risk it incurs from its antitrust dispute with Apple over its App Store business terms: Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California granted an Epic motion for judgment on the pleadings on some of Apple's counterclaims. As a result, Apple's counterclaims (unless an appeals court revives the ones the judge just threw out) are limited to breach of contract, which Epic already acknowledged in October it would be liable for should it lose its antitrust case against Apple. Punitive damages, which Apple was seeking, are not available on this basis, so they won't have to be discussed at next year's trial.

The court viewed the tort-based ones of Apple's counterclaims skeptically from the beginning. Nevertheless, Apple defended them, presumably in an effort to preserve them for an appeal.

What Judge Gonzalez Rogers told Apple today was that the iPhone maker had not shown any independently wrongful act on Epic's part beyond a breach of contract. Apple had stressed that "independently wrongful" doesn't mean it's an independent act, but that it would be wrongful even if it happened without a contractual framework being present. And in this regard, Apple pointed out that Epic's generation of in-app purchasing revenue on iOS continues even though the related contract was terminated in the summer. But that didn't persuade the judge. At the end of the Zoom hearing (Tuesday afternoon by Pacific Time) she announced her decision to grant the motion.

This decision is unrelated to the heart of the dispute, which is that Epic disputes the legality and enforceability of Apple's App Store terms under the antitrust laws. Judge Gonzalez Rogers said in August that the case could go either way, and the order on Epic's motion for judgment on the pleadings doesn't increase the likelihood of any particular outcome on the core issues in the case.


A couple of hours after the hearing, Apple provided the following public statement:

"We respectfully disagree with the Court’s decision and believe Epic's conduct should be actionable under California tort law. It is clear, however, that Epic breached its contract with Apple. For twelve years, the App Store has helped developers turn their brightest ideas into apps that change the world. Our priorities have always been to provide customers with a safe and trusted place to download software and to apply the rules equally to all developers. In ways the Court described as deceptive and clandestine, Epic enabled a feature in its app which was not reviewed or approved by Apple, and they did so with the express intent of violating the App Store guidelines that apply equally to every developer who sells digital goods and services. Their reckless behavior made pawns of customers, and we look forward to making it right for them in court next May.

"Apple also thanks the Court for providing next generation attorneys the opportunity to argue a motion. We fully support this important policy that gives newer lawyers and those from underrepresented groups meaningful experience in court."

The young attorneys who delivered oral argument were Cravath's John I. Karin and Gibson Dunn's Anna Casey. Given the court's preconceived notion on this subject, I don't think oral argument made a difference. What was very clever on Mr. Karin's part was that at some point he preferred not to add anything to the court's preliminary opinion, which was already favorable to his client's position. So instead of trying to get the most out of this opportunity to practice, he opted for the safest and smartest path.

Apple's statement suggests to me between the lines that they will appeal yesterday's judgment on the pleadings after next year's trial.


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Monday, November 9, 2020

Don't blame EU competition chief Margrethe Vestager if SAP customers' antitrust complaints are fundamentally flawed, get copyright law wrong

You'd be hard-pressed to find anyone less SAP-friendly than me, given that I harshly criticized the German enterprise software maker (just the week before last) for botching--together with Google and Daimler--the German patent injunction reform and even called Microsoft, BMW, and Deutsche Telekom "lemmings" for following SAP's lead. The last occasion on which I collaborated with SAP was over a decade ago when we were co-complainants against Oracle's acquisition of Sun Microsystems--and the individuals I worked with at the time have meanwhile retired. Also, SAP is absolutely irrelevant to my business as a game app maker (I finally submitted a beta version to Apple on Thursday for TestFlight approval, and we'll submit our Android version to Google this week).

But I am interested in reasonable and balanced competition enforcement. While I

  • dislike the notion of EU Commission vice president Margrethe Vestager being in charge of both the EU's antitrust watchdog and digital industry policy (a result of precisely the kind of backroom horse trading the EU is notorious for),

  • believe some recent EU competition decisions against U.S. respondents lack merit (in one of those cases, the EU General Court recently agreed with me), and

  • have been criticizing the Commission's reluctance to take action against Nokia,

it's overly simplistic and sometimes just propagandistic to cry wolf over protectionism each and every time Mrs. Vestager and the Directorate-General for Competition (DG COMP) investigate a U.S. company or fail to take action against a European industry player. It depends. Sometimes it's actually true, such as in the Nokia case, though the politician to blame for inaction in that context is EU fake news commissioner Thierry Breton. But there are cases in which it's not the real issue, and I see some initial indications of a strong case against the case against my non-friends at SAP.

Politico--to be clear, I'm not attacking that publication--reported on allegations (also found elsewhere) that Mrs. Vestager had a conflict of interest with respect to SAP. This is different from the situation in October 2019, when I actually disagreed with the focus and message of a Politico article on the automotive component-level standard-essential patent (SEP) licensing issues involving Nokia and, by short extension, Ericsson. A few weeks later I met Politico's Thibault Larger in Brussels and we understood each other's positions quite well; I also apologized should my post have appeared to insinuate anything improper or unreasonable on Politico's side.

At the heart of those complaints against SAP--one was lodged with the Bundeskartellamt (Federal Cartel Office) in 2018, and another with DG COMP--is some customers' disagreement with SAP's policy that it charges for how its software is used, which often involves third-party applications. The complainants--a group named VOICE including the likes of Siemens and Volkswagen--argue that the 2009 EU directive on the legal protection of computer programs (summary) protects interoperability to the extent that SAP couldn't do that. With my combined IP and antitrust background, I can't help but find that argument not only spurious but downright nonsensical.

What the directive in question actually refers to is the decompilation (a step that is typically at the beginning of a reverse-engineering effort) of program code. If a certain set of conditions are met, the right holder's ability to enforce copyright may be limited for interoperability's sake.

There's no such theory in Europe as copyright misuse, which is a very American concept. SAP is free to define the terms of its copyright licenses, even if those terms make whatever reference to third-party products--unless there's an antitrust violation, and the aforementioned directive explicitly says that it's not meant to restrict competition enforcement. At the same time, I can't find anything in that directive that would lower the hurdle for establishing an antitrust violation, contrary to what the complainants say.

They acknowledge that there are alternative Enterprise Resource Planning (ERP) offerings by world-class vendors such as Microsoft (way bigger than SAP, not in the ERP market, but genrally speaking) and Oracle (whose relational database management system powers most SAP installations). But they argue there's a lock-in (it's too costly to switch), and that the others are just as bad. So what do they want to make? A collective-dominance case? It's not clear from what they say publicly.

About ten years ago, I raised concerns over many customers' lock-in into IBM's mainframe technology. But here, it does appear that there are successful migration case studies. All that the VOICE group alleges is that switching costs are so high "that no [chief information officer] would survive" such a decision. What's different from the IBM mainframe case (in which the EU, by the way, ultimately did nothing) is that SAP isn't really doing anything that would make it harder for Oracle or Microsoft to compete in the ERP market--at least I can't find any such allegations on VOICE's part.

Pollitico quotes anti-SAP blogger Shaun Snapp as saying that the general counsel of a typical SAP customer has "no clue" about the exact meaning of the terms of a software license agreement. I don't think antitrust law is meant to make up for the shortcomings of in-house legal departments.

Another argument from the same source comes down to making the exploitation of a lack of sophistication a violation of competition law: SAP offers combination discounts, and according to Mr. Snapp, the average SAP customer's "procurement team [which chooses the vendor] only cares about getting the price down."

I'd have to find out more about the complaints to be able to comment on market definition and the allegations of abusive conduct in more detail. But what they've made public so far is pathetic.

I do wish to stress that copyright is far narrower in scope than patents, so it's simply not like the way SAP factors the use of third-party products in when determining a license fee could in any way be compared to, say, SEP abuse by Nokia and its partners in crime. What Nokia does has very negative implications for automotive suppliers and their direct and indirect customers all the way down to consumers--and those who will likely suffer the most, though they're far smaller and therefore in a weaker position, are all those Internet of Things startups that face shakedown after shakedown from SEP holders. But that's because patents are broad, and a SEP doesn't even have to be broad: just by virtue of being essential to a standard, it can keep someone out of a market (if an injunction gets enforced).

I'm not saying that no one could ever violate the antitrust laws through copyright assertions, but it's like 1,000 or 10,000 times harder to do on that basis than with patents, especially with standard-essential patents, and the allegations those SAP customers make in public fall far short of persuading me that SAP needs to be investigated by the European Commission or the Federal Cartel Office of Germany. I may comment on this again on some other occasion.

In the automotive SEP licensing context, Mrs. Vestager need not feel any conflict of interests: on the bottom line, the digitization of Europe's economy would benefit from component-level licensing, not only with a view to the automotive sector but also considering IoT, so even if it had to happen over Mr. Breton's objection, the Commission should take action, which is overdue now that the fourth SEP injunction has come down against Daimler since mid-August. In the SAP (by coincidence, a difference of just one letter vs. "SEP") context, it appears to me that there simply may not be a case to begin with. Rejecting those complaints is probably just a reasonable application of competition law, as opposed to an inhibition to go after a "European champion."

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