Hold-up or hold-out? Philips, Thales accuse each other of abusive tactics in standard-essential patent dispute before Federal Circuit, ITC, courts in Delaware and Paris

It almost appears to be a ritual in standard-essential patent (SEP) disputes that the patent holder faults the implementer for hold-out while the accusation flying in the other direction is hold-up. They can't both be right at the same time. On a case-by-case basis, I try to deduce from publicly available information which of the two is more likely in its right to blame the other side, also factoring in what I've previously learned about certain parties' behavior.

When Thales and Philips are the parties, I frankly have reservations concerning either one. Thales is pursuing an ill-conceived antitrust case in Munich over automotive SEP licensing. You can't blame a patent pool for offering a certain license but not another as long as it doesn't contractually prevent its licensors from entering into whatever bilateral license they wish to grant. As for Philips, I've clearly seen a pattern of hold-up from that organization in more than one context, and its positions on patent enforcement always seem oblivious to the fact that even Philips is still making products (though it's lost market share in some product categories and exited other segments, such as mobile phones).

The two companies are now entangled in an interesting cross-jurisdictional web of partly interdependent SEP cases:

• Philips is seeking an exclusion order (import ban) from the ITC, with ALJ David Shaw's final initial determination due tomorrow, April 1. "Final" isn't "final-final": the truly final ITC determination is made by the Commission, the trade agency's top decision-making body, and even that one is appealable to the Federal Circuit.

  Thales--along with its Gemalto and Cinterion subsidiaries--is not the only respondent to that ITC complaint, which also targeted (back in December 2020) Thales's competitors Telit, Quectel, CalAmp, Xirgo, and Laird.

  The accused Thales products appear to be identity/security components used in various products, even including airplanes, and implement cellular standards, especially 3G and 4G.

• There's a case in the United States District Court of Delaware where apparently both Thales and Philips agreed that the court should set a global FRAND rate for a license agreement between them. Thales says Philips should just let the Delaware court do its job instead of seeking leverage from the ITC in orer to unilaterally impose its preferred terms on Thales.

• The Delaware court denied a Thales motion for a U.S.-internal antisuit injunction (an instrument of which some United States Senators are, or pretend to be, blissfully ignorant) that would bar Philips from enforcing a U.S. import ban. But Thales appealed that decision. The preliminary-injunction appeal has been fully briefed and will be heard in the coming months.

  It's just laughable that ACT | The App(le) Association filed an amicus curiae brief in support of the appeal--as if small app developers cared about a U.S. import ban on telecommunications modules incorporated into airplanes and similar products. And three other Thales amici--Honda, Continental, and u-blox--first failed to file mandatory paper copies of their brief and then even their paper vesion was out of compliance with the appeals court's rules. But those stories don't mean that the appeal itself doesn't raise interesting questions. I haven't formed an opinion on the merits yet as I just downloaded the documents from the Federal Circuit docket this morning.

• Either party would be interested in arbitration, but they disagree on the parameters, with Thales insisting on its rights under the ECJ's Huawei v. ZTE case law to challenge the essentiality and validity of Philips's declared-essential patents.

• Meanwhile, Thales has become the third party--following in the footsteps of TCL and Xiaomi--to name the European Telecommunications Standards Institute (ETSI) as a co-defendant in a FRAND antitrust case primarily targeting Philips. Philips filed the original complaint with the Tribunal juidiciare de Paris and an ex parte motion for the seizure of documents from a French Philips patent licensing executive (Sophie Pasquier), along with (obviously unofficial) English translations, with the ITC in late December, arguing that this was an attack on the U.S. case (as the seized documents also include communication between Philips and its U.S. outside counsel in the Thales dispute) with the help of a foreign court--and which Philip characterizes as typical of a party engaging in hold-out.

  For now, Thales is seeking €13.5 million from Philips--an antitrust damages claim based on U.S. litigation expenses. But the amount will go up should Philips actually obtain and enforce an ITC import ban. Thales criticizes ETSI for not having sanctioned Philips for its alleged FRAND breaches, and is seeking nominal damages (€1) from the standard-setting organization.

  I haven't formed an opinion on the merits of the French case either, for the same reason that I have yet to fully understand the parties' arguments in the Federal Circuit.

For now, let me just show you Philips's 272-page filing with the ITC that includes documents from the French case and English translations thereof:

21-12-23 Philips Motion to ... by Florian Mueller

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Commissioner Vestager makes competition-chilling remarks on automotive complaints against Nokia at Chillin'Competition conference

"Chillin'Competition" is a nice wordplay for a conference title. To my dismay, that event provided the setting for competition-chilling utterances by EU competition commissioner Margrethe Vestager. "Competition-chilling" in the sense of doing nothing to promote fair and vibrant competition--and free movement of goods, one of the bloc's key objectives--with respect to automotive components that come with cellular connectivity. The best way to promote competition in that field is to ensure the makers of those components receive exhaustive component-level licenses on FRAND terms. Commissioner Vestager made herself a name as being supposedly tougher than even the legendary "Steely Neelie," but with respect to standard-essential patents (SEPs), her predecessor Joaquín Almunia used to take swifter and more decisive action.

Daimler's antitrust complaint was filed more than a year ago. Then, a few months later, four suppliers (Continental, Valeo, Gemalto, and BURY Technologies) lodged their complaints. There's no justification whatsoever for not bringing the antitrust hammer down now.

Khushita Vasant, a Brussels-based reporter for the Policy & Regulatory Report (PaRR), was first to break the news on Nokia's mediation offer to Daimler and its Tier 1 (= direct) suppliers, and also first to report on Monday that Mrs. Vestager told reporters after the aforementioned conference that "it would be a good thing if there was mutual understanding [between Nokia and the automotive complainants]." The Commission expects an update "by mid-February," writes PaRR.

This means another two months will be wasted. With the greatest respect for the Internaational Chamber of Commerce, this matter here doesn't lend itself to mediation, and there are only two possible outcomes:

• Daimler surrenders. Or:

• No deal.

The binary question is: do the component makers get an exhaustive license on FRAND terms? If so, they'd also be free, for an example, to sell excess quantities openly on the market to anybody. That's what is called a free market. The EC knows that.

The monetary terms are, of course, non-binary. If Nokia sought a license fee that wouldn't enable those component makers to stay in this business, it wouldn't help. But the very first step must be for Nokia to stop disputing the component makers' entitlement to a license.

Huawei is suing Nokia in a German court with only the objective of finally getting a component-level licensing offer. No one should ever have had to bring such a complaint, or to ask the European Commission to investigate. Nokia's refusal is downright irrational as it never disputed a phone maker's entitlement to a SEP license, and Huawei's connectivity modules come with all the same types of hardware components as a phone, apart from the screen. The telematics control units (TCUs) made by the likes of Continental incorporate such network access devices (NADs) and come with even more hardware. There's nothing in the claims of those standard-essential patents that a mobile phone has and a NAD or TCU doesn't. I've seen many SEPs, possibly more than anyone involved with the EU investigation, and I have yet to see a cellular SEP that claims a screen.

Daimler and its suppliers should have made Nokia's commitment to an exhaustive component-level license on FRAND terms a precondition for even sitting down and talking. Then, once Nokia has made that commitment, one can talk about FRAND royalty amounts. Those amounts are amenable to negotiation, mediation (where no one is forced to agree), determination by a court of law, or arbitration--the latter, however, provided that the parameters are properly defined, including the right to dispute essentiality and validity, and if there are safeguards against the SEP holder going into arbitration (the results of which tend to gravitate toward the middle) making out-of-this-world demands.

This maneuver helped Nokia in two ways:

• As expected, the Commission is just going to wait, as if they hadn't been waiting more than long enough already.

• Nokia now has the chance to obtain a provisionally-enforceable injunction from the Munich court prior to Daimler and its suppliers getting a potentially more favorable decision on the licensing question from the Mannheim court.

There is no indication of Huawei being a party to the mediation talks (at least I couldn't find any in the media), so at least that Dusseldorf antitrust lawsuit against Nokia is going forward.

A leading German patent litigator, who is mostly on the enforcing (not defending) side and is not involved with the Nokia cases in any way, told me he's convinced Nokia can't win. He said this was going to be their "Vietnam." While I'm glad to see Daimler taking a stand against Nokia's conduct, and also hope that all that Nokia is going to get out of this is some hefty legal bills, Daimler and its suppliers must not let their guard down.

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Nokia outmaneuvering Daimler with settlement effort that has zero credibility--but Mannheim court confirms hearing date

One week ago, Reuters' Foo Yun Chee (who's been covering EU competition matters for more than a decade and whom I regard very highly) reported on a statement by Nokia according to which "the Finnish telecoms equipment maker had submitted a proposal for resolving the patent licensing fee row." This relates to the situation between Nokia and Daimler as well as Daimler's suppliers. Nokia brought ten German standard-essential patent (SEP) infringement actions against Daimler earlier this year--several months after Daimler had lodged an antitrust complaint with the European Commission's Directorate-General for Competition (DG COMP) over Nokia's refusal to extend exhaustive SEP licenses on FRAND terms to Daimler's suppliers. At around the same time, four suppliers (Continental, Valeo, Gemalto, and BURY Technologies) also filed complaints against Nokia with DG COMP.

I've always been outspoken about stalling. HTC's mastery of that skill in its dispute with Apple was first-rate. I could write a book or hold a full-day seminar on stalling tactics especially in U.S. and cross-jurisdictional disputes. So when I see the parties' divergent comments in that Reuters piece, I know Nokia is stalling:

"'Nokia continues to work toward constructive ways to resolve commercial disputes related to licensing of our standardized cellular technologies,' Nokia said in a statement, without mentioning any specific proposal to end the row."

"Daimler declined to comment specifically on Nokia's proposal but a spokeswoman said: 'We want clarification on how essential patents for telecommunications standards are to be licensed in the automotive industry. Nokia so far refused to comprehensively and directly license our suppliers.'"

This juxtaposition tells it all. Nokia is pretending to make a bona fide effort to address the issue. But that's just not credible for a simple reason: we're not talking about adjustable fishing quotas. This here is a binary question. Either the component makers get an exhaustive license on FRAND terms (which terms would later have to be negotiated or, if necssary, determined by a court of law or, if the parties agree on the parameters, an arbitration tribunal) that allows them to go about their business--or they don't. Huawei raised that binary question in its Dusseldorf antitrust lawsuit against Nokia.

It's an illusion that there could be anything in between. You can't be just a little bit pregnant.

So what's needed is not lip service, such as hollow-ringing words like "constructive." What's imperative is a sharp decision that puts the disputed matter to rest for good. And that's what Daimler's statement suggests between the lines. They want "clarification" on component-level licensing. Apparently they just haven't figured out yet how to get there, given that they filed their EU complaint more than a year ago and the Commission still isn't investigating.

A Mannheim trial was scheduled for next Tuesday. It would have been the first real trial--as opposed to an early first hearing--and a ruling could have come down anytime thereafter (in January with a likelihood comfortably above 90%, thus ahead of the first Munich trial scheduled for early February).

But out of an abundance of caution, I sent Yun Chee's story to the Mannheim court's press office and requested confirmation that the trial was still going forward. Judge Ruppert, a spokesman for the court, told me that the case would be heard on Tuesday at the scheduled time, but he also highlighted it was only an "early first hearing."

The Mannheim court--which I've described as the most responsible German court when it comes to staying cases involving likely-invalid patents--typically decides these cases after just one trial (which normally lasts only a couple of hours because they are so focused and efficient). However, they call it an "early first hearing" even if they conclude they can hand down a judgment afterwards. So the court's wording doesn't necessarily mean the Tuesday court row has been downgraded from "trial" to "early first hearing."

In Munich they have Patent Local Rules under which an early first hearing is mostly just about claim construction and initial infringement analysis. However, there are exceptions even in Munich. In the first Nokia v. Daimler hearing in June, Presiding Judge Dr. Matthias Zigann also addressed FRAND, even before Nokia's prayer for injunctive relief. But in Munich, when they say "early first hearing," you know for sure that there'll be a second one--the actual trial. In Mannheim, most cases are decided after the "first hearing."

Whatever the scope of the Tuesday hearing will be, the German car maker must be cautious so it won't get outwitted by Nokia. It's absolutely in Daimler's interest to get a Mannheim judgment prior to the first one in Munich, given that the Munich court has so far taken very unFRANDly positions on component-level licensing, while there is at least one Mannheim precedent where Deutsche Telekom benefitted from a supplier's willingness to take a SEP license. A Mannheim decision wouldn't be binding on the Munich court, but could help psychologically since Dusseldorf (unreasonable in other ways, but rather progressive on component-level licensing) will almost certainly decide in Daimler's favor. Munich would then be the outlier, but the appeals court there may very well be more favorable to component-level licensing. In order to get a Nokia injunction stayed quickly, a Mannheim decision upholding FRAND in the component-level licensing context would serve as persuasive authority that could make a decisive difference.

Nokia is playing games, and Daimler must be extra cautious. In the current situation, the European Commission will continue to drag its feet, and won't make a decision on that late-2018 complaint before early 2020 at the earliest. More aggressive parties in Daimler's shoes would already have lost their patience and exerted more pressure; they'd also have considered bringing in, in addition to or as a replacement of current counsel, some other EU antitrust lawyers to make more headway. It should be a simple decision for the Commission to investigate: not only is the CJEU's case law pretty clear that everyone is entitled to a FRAND license but Nokia and Ericsson are basically dying companies compared to the automotive industry and the wider IoT industry (smart meters etc.).

Quinn Emanuel defends Daimler against German patent infringement complaints all the time and is superb at that, but not involved with the EU complaints--unfortunately, QE is largely on the other side of the FRAND debate, which hopefully won't benefit Nokia (a QE client in the United States, by the way) at some point.

Nokia's EU counsel, Thomas Vinje of Clifford Chance, is extremely effective. I was adverse to him ten years ago (Oracle-Sun merger review), and he made a statement to the media about me in 2010 that was just an unsubstantiated rumor, but that's par for the course in Brussels. It's just interesting to see how his positions on standard-essential IP have evolved over the last 15 years, from his fight against Microsoft (where he led the "European Committee for Interoperable Systems") and his zero-royalty advocacy efforts in the EU procurement context over his representation to Samsung and now Nokia. I may talk about that some other time, and that's not why I wouldn't trust Nokia's talk about settlement. The reason for that is the one I gave further above: it's a binary question like being pregnant or not, so there's no middle ground, period.

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Requiring SEP holders like Nokia to license automotive suppliers would spur European IoT innovation on bottom line

While I agree with Politico.eu's question of whether it's a good idea for one EU commissioner to be put in charge of both digital innovation and antitrust enforcement, and have previously criticized the de facto merger of two other directorate-generals of the European Commission, I sharply disagree with the suggestion that a formal antitrust probe of Nokia's refusal to extend exhaustive SEP licenses to component makers on FRAND terms would threaten to weaken Europe's position in the 5G era.

Nice try, Politico and IP Europe (an industry body representing patent monetization-focused companies)--but most likely you're barking up the wrong tree as Margrethe Vestager may simply be immune to anyone's attempt to implant in their head a conflict of interests between two areas of responsibility. [Update] On Twitter, Thibault Larger, the author of the Politico article, has explicitly denied having had the intention to influence the process. He furthermore provided explanations I would summarize as arguing that while he believes there are innovation policy concerns (I view the dynamics differently), his article didn't rule out that Mrs. Vestager might decide in favor of antitrust law enforcement regardless of the industrial-policy concerns Politico believes to have identified. [/Update] Even more so when an article fails to meet journalistic standards: it would have been more honest to let IP Europe author an op-ed. [Update] Also via Twitter, the author noted that "Competitive Edge" is an opinion column. However, I replied that the fact it contains extensive quotes--with an emphasis on and strong endorsement of IP Europe's views (he finds them "very cool" as he said), but also from the Fair Standards Alliance--blurs the distinction between an opinion piece (which normally comes either with no quotes or, if there are any, they are few and far between and only for the purpose of endorsing or criticizing them) and a report. [/Update]

The backdrop is that the Directorate-General for Competition (DG COMP) received antitrust complaints earlier this year from Daimler and four of its suppliers--Continental, Valeo, Gemalto, and BURY--over Nokia's licensing practices. With the Juncker Commission on the way out and the confirmation of the incoming von der Leyen Commission facing delays, the EU's executive body is basically in a state of interregnum. At any rate, Mrs. Vestager will remain in charge of competition enforcement as she sailed through her confirmation hearing. She proved just yesterday that antitrust violators can't hope for a breathing space.

The aforementioned Politico article basically argues that Mrs. Vestager would have to leave Nokia and, by extension (as its practices are similar), Ericsson alone at this stage because they posted losses last year and are the only European makers of 5G network infrastructure, but merely launching formal investigations would adversely affect their licensing negotiations.

Either of those two Nordic companies has a market capitalization between 25 and 30 billion euros--and from my many interactions with investment banks and funds as a consultant, I assume the market has already prized in a fairly high likelihood of formal investigations. Those companies used to be much stronger than they are today, so they have become ever more reliant on patent licensing revenues. But they're in the infrastructure business because they believe it's a good one to be in. If they believed otherwise, they'd spin it off and focus on patent licensing, which would be even more profitable after eliminating the need to secure cross-licenses and the risk of infringement countersuits.

Whatever the outcome of formal investigations might be, no one will get a free ride: Nokia, Ericsson, and all other SEP holders will continue to be entitled to FRAND royalties. They believe they can make more money licensing end-product rather than component makers. Ericsson said as much in a presentation, and Qualcomm told the IRS. So for the sake of rational analysis, let's grant Nokia (and, by extension, Ericsson) that their licensing revenues might suffer some reduction as a result of an obligation to license component makers. Would that fact, in and of itself, complicate Mrs. Vestager's task when wearing her other future hat, the one for digital industry policy? Only if one defined the "digital industry" so narrowly that it would basically be limited to two companies.

Component-level SEP licensing doesn't impede innovation. It enables more of it.

Connected cars are a particularly important part of the Internet of Things (IoT). In that industry, which employs roughly 14 million people in Europe (quite a bit more than mobile communications technology companies), supply chains have great depth. Access to SEP licenses at all levels of the supply chain would result in market efficiencies as component makers would have more legal certainty with respect to IP liability--at least they'd control their destiny to a considerably greater extent. So their ability to innovate would be strengthened.

Europe is probably never going to catch up with U.S. digital platform companies like the so-called GAFA group of companies. However, car makers are still Europe's most successful exporters of technology, and plenty of other European companies have already jumped on the IoT bandwagon or will in the coming years. Every single day, some products somewhere are made fit for the digital age by means of mobile connectivity--and new products are created that would be unthinkable without it. It is, therefore, in Europe's best interest to ensure that the desire of a few to maximize their patent licensing income doesn't drive or keep countless others out of the IoT space.

The tiered supply chain has enabled the industry to innovate, bringing safer and more intelligent vehicles to consumers. Over the last five years, the worldwide automotive industry spent approximately 500 billion euros on R&D. In the EU alone, the automotive industry invested more than 170 billion euros in R&D, with stand-alone investments of EU automotive suppliers (i.e., R&D not supported by customers) accounting for more than 41 billion euros according to PwC Most Innovative Companies (2017).

In 2017, Valeo alone--only the third-largest of the five complainants--invested 1.9 billion euros in R&D and filed 2,053 patent applications. Digital innovation comes in many shapes and forms, and Mrs. Vestager will be responsible for optimizing the bottom line of an entire sector, not just that of two companies.

Not only are Nokia and Ericsson just a tiny subset of Europe's digital economy (and IoT potential) but there is also no such thing as "5G infrastructure autonomy." 5G deployment will mostly just involve upgrades to existing base stations, and Huawei already has a fairly high market share in Europe. It's probably hard to find any European carrier who wouldn't be using at least some Huawei base stations anyway.

Europe's share of 5G patents shouldn't be overestimated either. Nokia and Ericsson played a bigger role in connection with earlier cellular standards. In 5G, some Asian companies are stronger, and let's not forget about Qualcomm either. Anyone seeking licenses to 5G patents is going to need licenses to more non-European than European patents.

Most of the work on 5G has been done, so Nokia's and Ericsson's continued ability to invest in research and development won't tip the scales in that regard.

Finally, the Politico story mentioned concerns that licensing negotiations might be adversely affected by an antitrust investigation. I don't even believe that there would be much of an impact on licensing negotiations during the formal investigations. No one would be able to rely on any particular outcome of the EU case. If anyone (at any level of the supply chain) nevertheless delayed the conclusion of license agreements, such as because a car maker might prefer to wait and see whether its suppliers will be entitled to a license, license fees would still be owed on every single unit of a product that is sold. In that hypothetical scenario, a patent holder might sometimes get paid later, but liquidity is a non-issue for companies with market caps in the 25-30 billion euro range.

If launched, formal investigations shouldn't take exceedingly long as this case is important, but not huge. And Nokia itself could always cut everything short by offering commitments that would solve the problem.

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Gemalto files opening brief in Java-related patent appeal against Google, Samsung and HTC

Smart card maker Gemalto, a company with a current market capitalization of EUR 5.9  billion ($ 7.6 billion), brought a patent infringement lawsuit in October 2010 against Google, Motorola, Samsung and HTC, alleging that "Android Applications and the development of such applications using the Android SDK infringe one or more claims of the Patents-in-Suit". Gemalto basically says it made Java work on small devices. I didn't keep a close eye on that litigation in the Eastern District of Texas. The case was dismissed earlier this year on summary judgment. Gemalto appealed, and yesterday Gemalto's opening brief in its appeal of that dismissal to the Federal Circuit became publicly available (this post continues below the document):

13-07-09 Gemalto Appellate Brief Against Google Samsung HTC by Florian_Muelle_439

Gemalto is trying to resuscitate its case against the key players in the Android ecosystem by arguing that the district court based its summary judgment on an erroneous claim construction, but even under the district court's interpretation Gemalto says it has a case for infringement under the Doctrine of Equivalents (DoE).

The primary problem facing Gemalto here is that its patent were filed in connection with Gemalto's development of Java-capable smart cards, where everything is on the same chip, but the smartphones it accused of infringement obviously have more components. The district court read the patent as being pretty smart card-specific and, as a result, imported certain limitations into the claims by means of its claim construction, above all the requirement "all" memory for storing converted applications has to be on-chip (and not separate) memory. Gemalto disagrees that its patents is smart card-specific and points to rather unspecific references to other embodiments in the specification. It also thinks that the claim term "programmable device" should not be interpreted as being coextensive with the term "microcontroller". These are the claim construction arguments based on which it hopes to capture infringements outside the field of smart cards. And if all else fails, it wants to try the DoE, saying that "the accused Android smartphones execute 100% of the program instructions from on-chip cache memory, and 97% of the time the instruction code to be executed for a given application is stored in the on-chip cache memory (either the L1 instruction cache, the L1 data cache, or the L2 data cache) before it is requested or needed by the CPU". In other words, 97% is claimed to be equivalent to 100%.

If Gemalto's appeal succeeded, the final judgments would be vacated and the case would be remanded to the Eastern District of Texas, where it would have to be put before a jury.

The finding of non-infringement, based on the court's claim construction, was originally made by United States Magistrate Judge John D. Love. I've uploaded it to Scribd. Chief Judge Leonard Davis adopted the Magistrate Judge's findings.

Chief Judge Davis does not have a reputation for being exceedingly defendant-friendly, but there was a time when he was more reluctant to dismiss patent infringement claims than as of recent. In March he threw out a claim against Red Hat. And in April he adopted Magistrate Judge Love's recommended finding of non-infringement in the Gemalto case.

Claim constructions by district courts are frequently reversed by the Federal Circuit. I haven't yet formed an opinion on this appeal, to be honest. I've read the brief and the decisions, but don't know if and when I'll find the time to look at this in more detail. Maybe I'll just wait until the Federal Circuit rules on this. Then the case will either be over (it's unlikely that this would go up to the Supreme Court then) or Gemalto will get a second wind, in which case the further proceedings in Texas could get interesting.

[Update] A reader contacted me after this post and drew my attention a UK ruling that came down yesterday and declared two Gemalto patents invalid. HTC anticipated a Mannheim lawsuit (which Gemalto indeed filed, and lost on April 30, 2013, over of a patent from the same family as the ones at issue in Texas) and launched a pre-emptive declaratory judgment action in the UK against multiple Gemalto patents. Gemalto gave up on some of them along the way and decided to defend four of them at a recent trial. Two of the four have been declared invalid, and the other two will come to judgment in the near term. [/Update]

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Companies worth $1 trillion are suing others over Android's alleged patent infringement

On Friday it became discoverable that Fujifilm, a Japanese company, has sued Google subsidiary Motorola Mobility for Android's alleged infringement of four of its patents. So far, Fujifilm has mostly played a defensive role in patent litigation, bringing declaratory judgment actions or countersuits. But after trying unsuccessfully since April 2011 to work out a license deal, it became the eighth company with a multi-billion dollar market capitalization to assert intellectual property rights against Android in court.

I have looked at Fujifilm's complaint, and it describes the scope of its four asserted patents in extremely broad terms. If Fujifilm really believes to have monopolized, for one particularly outrageous example, the idea of "a telephone that can communicate with other devices (e.g., a computer) over a path other than the telephone network", such as over WiFi, then its demands may have been out of line and Motorola Mobility may have been forced to take its chances in litigation. It's very likely that those patents will be narrowed dramatically, if not invalidated in their entirety, during the course of litigation. But it's too early to talk too much about the merits of this lawsuit. Claim construction and summary judgment will provide some more clarity between now and a possible trial.

What I'm more interested in at this stage is a certain phenomenon. Android continues to be an IP infringement lawsuit magnet not just with respect to troll lawsuits (the trolls sue everyone including Apple) but, more importantly, lawsuits from large publicly-traded industry players. Apart from reactive or preemptive lawsuits brought by Android device makers against Apple, the only large companies to have sued Apple in recent years are Eastman Kodak and Nokia. Apple and Nokia settled more than a year ago. That's it. But eight large publicly-traded companies are currently embroiled in litigation with Android companies (be it Google or its device maker partners) over Android's alleged infringement of intellectual property rights. Seven of those companies have brought patent infringement claims; one of them, eBay, has asserted trade secrets, a different kind of intellectual property right.

If I exclude eBay (which closed on Friday with a market capitalization of $51.58 billion), the other seven large companies (all of whom assert patents, and a couple of them additionally other categories of IP) have a collective market capitalization, based on Friday's closing, of $1.06 trillion. Here's a list of those companies in chronological order of each company's first patent infringement lawsuit targeting Android:

• Apple (AAPL): $565.68 billion

• Oracle (ORCL): $144.42 billion

• Microsoft (MSFT): $246.9 billion

• Gemalto (PINK:GTOMY): $6.52 billion

• British Telecom (BT): $27.02 billion

• Nokia (NOK): $6.89 billion

• Fujifilm (PINK:FUJIY): $8.47 billion

By comparison, Google's market capitalization is $188 billion.

The companies who claim that Google's Android infringes on their intellectual property are too diverse to believe in a conspiracy. And I repeat myself: apart from reactive or proactive countersuits from Android companies, Apple doesn't face much of a problem with big-company lawsuits. Does it do a better job at steering clear of infringement than Google does? Does it do a better job at working out license deals or non-aggression pacts with others in the industry? Honestly, I don't know what Apple does because they obviously don't tell the public what their dealings with other industry players are like. But whatever they do, they show that the commercial success of a platform is only one of the relevant factors. Android's IP issues are not simply a function of its market share. There must be some more fundamental problems.

Google's defensive abilities are admirable, but it can't fend off all of those assertions. I recently published a list of 11 Apple and Microsoft patents that courts in different jurisdictions ruled were both valid and infringed by Android.

As an Android user, I would like to see Google address those problems more effectively. When I look at public statements made by Google officials, it sometimes seems that the company is, at different levels, in a state of denial concerning Android's intellectual property issues. 11 months ago, Google announced its merger agreement with Motorola Mobility. By now, it becomes clearer and clearer that this acquisition is not the answer.

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Top five companies asserting IP against Android have collective market cap of $734 billion

While all of the major mobile platforms have to deal with widespread "trollish" activities, Android's intellectual property problems have a variety of unique characteristics.

There's no doubt that Android's popularity and its potential disruptive effect have contributed to the fact that 44 Android-related intellectual property lawsuits have been filed since March 2010. But it isn't all just attributable to Android's market share. It's only one reason, not the only one. There are also some Android-specific reasons for this mess, some of which have to do with Google's approach to other companies' intellectual property.

Other mobile platforms also face troll problems and, in a few cases, efforts by large players to levy a patent tax. Apple, for example, is embroiled in disputes with Eastman Kodak and Nokia that fall into the latter category. But in Android's case it's noticeable that a handful of sizable, publicly traded IT companies believe Google's software infringes on their intellectual property rights. The latest major player to make such assertions is eBay (including its wholly-owned PayPal subsidiary).

I have produced a chart that shows the market capitalizations (as per the closing of the relevant stock markets on Friday, May 27, 2011) of the top five right holders that have filed lawsuits over Android, and by comparison I also show the market caps of the top five companies they have sued so far:

There's also a PDF version available for download from Scribd. You can also share the graphic conveniently on Twitter via Twitpic.

The aggregate market cap of the top five right holders exceeds $734 billion, while the corresponding amount on the right side of the chart is less than half of that ($343 billion). Roughly half of the latter amount relates to Google itself, and those assertions are about what Google does more so than about what Google's partners do.

Only Oracle and eBay sue Google exclusively, and Gemalto sues Google as well as three Android device makers. But Apple's and Microsoft's assertions are also primarily attributable to Google's alleged infringements. Even in the Samsung case, which is in no small part about infringement of design-related rights, Apple asserts utility patents, all of which but one or two are related to Android in general. In other words, those device makers serve as "proxies."

From a strategic point of view, Google faces a bigger problem than the device makers. Samsung, HTC and LG are not exclusively committed to Android and also build phones running Windows Phone 7 and other platforms. Motorola Mobility has been rumored to be building a team to develop its own mobile operating system. So if Google cannot solve Android's intellectual property issues, its device makers could even abandon the platform at some point.

In the court of law, cases are (and should be) decided on how the judges and juries view their merits. A company with a minuscule market cap has the chance to beat an Apple. However, I thought it was nevertheless interesting to see to what extent Google's approach toward intellectual property rights has brought up major industry players against it. It wouldn't be possible to draw up a comparable chart for Apple's iOS, RIM's BlackBerry or Microsoft's Windows Phone. You can find troll attacks on any of them, but you won't find claims of intellectual property infringement by several players of the nature and stature you see on the left side in the chart shown above.

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Google is patently too weak to protect Android

About a week ago, IFI CLAIMS Patent Services published its new ranking of the 50 companies awarded the most US patents in 2010. Microsoft is still the number three patentee with 3,094 new patents, Apple is a rising star with 563 new patents (+94%, a greater gain over the previous year than anyone else on the list), but Google isn't even on that list.

I ran a couple of queries on the USPTO's patent database. Last year, Google was granted 282 US patents and -- at the time of posting this -- owns 576 in total.

While Google has ramped up its patenting activity in recent years, the gap in portfolio strength between the Android developer and its mobile operating system competitors actually appears to be widening.

Quite often I talk to people who vastly "misoverestimate" :-) the power of Google's portfolio. There's a popular belief that all major high tech companies own tons of patents, and many consider Google fairly innovative. But its patent portfolio is dwarved by those of its competitors. Microsoft's portfolio, for instance, is 25 to 30 times larger (and, as I'll explain further below, much more diversified).

When I point out those facts, many people are just as surprised as I was when I learned a long time ago that Australia has almost the size of the "lower 48" states of the United States but only about 5% the number of inhabitants. Counterintuitive facts are nevertheless facts.

Android is a "suit magnet"

The number one patent-related trend in 2010 was, beyond all doubt, the flood of infringement suits that swept over the smartphone industry and that I expect to further intensify this year. Prior to 2010, there were a few cases, most notably NTP vs. RIM, which had the US BlackBerry service on the verge of a shutdown and resulted in a $612.5 million settlement, and Qualcomm's fights with Nokia and Broadcom, which also raised antitrust questions. But what's going on now is far bigger, and potentially far more devastating.

The operating system that is the target of more infringement action than any other is Google's Android. When one of those many suits was filed, I already quoted Maureen O'Gara, who noted that "[t]he freebie operating system is proving to be quite a little suit magnet." That's a funny metaphor, and by now it would be an understatement.

Here's a list of Android-related disputes that started in 2010 (in chronological order):

1. Apple vs. HTC (see this overview of "Apple vs. Android")

2. Oracle vs. Google (five months later, Google still hasn't been able to countersue Oracle)

3. Interval Licensing vs. Google and others (analysis of amended complaint)

4. Microsoft vs. Motorola (overview of state of affairs at end of 2010)

5. Apple vs. Motorola (see this overview of "Apple vs. Android")

6. Gemalto vs. Google, Samsung, Motorola and HTC (analysis)

7. Vertical Computer Systems vs. Samsung and LG (analysis)

8. Helferich Patent Licensing vs. Huawei (the mid-November complaint listed 24 licensees including Apple, Microsoft and HTC, but Chinese device maker Huawei apparently refused to pay)

9. Multimedia Patent Trust (Alcatel-Lucent) vs. LG and others (analysis)

10. Hybrid Audio vs. HTC, Dell and others (analysis)

11. Hopewell Culture & Design vs. Motorola, Samsung, HTC, LG and others (analysis)

12. Sony vs. LG (complaint; this is the first such suit of one Android adopter against another)

That's a dozen already, and I have no doubt there will be more. Ten of the disputes listed above started just last quarter. Some of those suits also target Apple (which has a clash of titans going on with Nokia), but fewer than Android although it would be economically more attractive; a small number of cases involve BlackBerry or other platforms. I'm not aware of any suit accusing a Windows Phone 7 device at this stage, although Microsoft is frequently sought out by patent holders.

Google can't solve Android's problems through cross-licensing

There is indeed a connection between the rampant enforcement of patents against Android and Google's weak patent portfolio. Only a few of the litigants are non-practicing entities while most of the plaintiffs, especially the ones asserting large numbers of relatively strong patents, sell products of their own. Those who actually have products on the market would have to think (at least) twice before attacking Android if they might need access to some of Google's patents.

Cross-licenses are the way most patent disputes between large companies are resolved. If there is parity in terms of how much each party needs the other company's patents, the deal may be done without money changing hands. In most cases, however, one company will have the upper hand and make a payment to compensate for the difference in portfolio value. Still, such payments tend to be much lower than the cost incurred by a "have-not" who needs a license from a powerhouse. In a price-sensitive, highly competitive market such as smartphones, the cost of patent licensing is eminently important.

No matter how influential Google may be on the World Wide Web, its patents apparently didn't deter Oracle from suing. I'm sure Oracle took a close look at Google's portfolio and determined that there was no risk of a serious counterstrike, or of any at all. If you look at my visualizations of other smartphone patent disputes involving major players on both sides (Apple vs. Nokia, Apple vs. Android, Microsoft vs. Motorola), you can see how they escalate and involve ever larger numbers of patents. By contrast, Oracle still doesn't face any infringement allegations.

If Google could countersue, it might already have a favorable settlement with Oracle in its hands. Since it can't, it will either have to fend off all seven patents asserted by Oracle (plus any others that Oracle could assert in a second suit), in each case by taking the patent down or proving that there's no infringement, or it will have to come up with some theory that it was entitled to a license of some sort. Otherwise, Oracle will prevail and the vast majority of Android applications would presumably have to be rewritten. So chances are this will cost Google (and possibly the Android ecosystem at large) dearly.

Even the 576 patents Google owns are a significant number and set it apart from many others who have even less. But when you're competing in a highly litigious environment in which a diversity of patents is required to build a solid product, that's too little. In Google's case, it's not just weakness in numbers. There's also a lack of diversification. I've looked at a random sample of Google patents, and most of them relate either directly to search or to closely related technologies such as location-based services.

Such a narrowly focused portfolio just can't frighten players like Apple, Microsoft or Oracle, all of whom innovate in a variety of fields of technology. I'm not saying that Google isn't innovative. It's just not innovative in the way that gets rewarded by the patent system with a sizable and diversified portfolio.

Google leaves its partners in the lurch

It's quite possible that even some device makers who adopted Android overrated Google's ability to defend Android against patent threats. Now they see that many patent holders seek royalty payments from makers of Android-based devices, and roughly a dozen have already gone to court with infringement allegations directed at Android.

Google probably doesn't have any contractual obligations. It puts out Android on open source terms. If things work out well, Google reaps most of the rewards. If things go wrong, others bear the brunt of the patent litigation (only three of the twelve suits I listed name Google among the defendants).

Obviously, those device makers knew all along that Google could benefit from Android, but they felt they could still benefit from selling the hardware. Patent issues may turn Android-based devices into an unprofitable business at some point, regardless of consumer demand, and at that point it will be hard for anyone other than Google to make any money with Android.

I also think that Sony vs. LG may only be the first of a number of suits in which one maker of an Android-based device tries to get rid of a competitor. I don't want to name names but I could see some Android device makers trying the same kind of cannibalization.

The Android patent situation would definitely be different -- fundamentally different -- if Google had a stronger portfolio and could show some authority. At a rate of a couple hundred new patents per year, and without much diversification, Google won't become a major force in this game anytime soon.

The patent weakness I described is also going to be a serious problem for Google's WebM codec. That's a slightly different but related subject that I've covered separately and plan to address again.

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Digital security company Gemalto sues Google, Samsung, Motorola and HTC over Android's application platform and development tools

Just three weeks after Microsoft announced its patent infringement action against Motorola, a leading maker of smartcard and other digital security technologies named Gemalto contributed another lawsuit to the crossfire of patents in which Android is caught.

With Apple's suit against HTC (started in March), Oracle's suit against Google (August) and this month's two suits, Android is now already facing four major patent infringement suits (not even counting cases that target multiple platforms, such as NTP's patent suit over wireless email). I assumed three weeks ago that "some further escalation is more likely than not to occur unless Google alters course."

While that prediction has already panned out pretty quickly, I think there's still more to come. The intervals between those Android suits have become shorter and shorter: five months, six weeks, three weeks. Since we're talking about a small sample from a statistical point of view, I wouldn't necessarily extrapolate that curve. But it sure looks like asserting patents against Android is now quite en vogue.

Gemalto sues upstream and downstream

While Apple and Microsoft filed suits against manufacturers of Android-based products, Oracle went after Google directly but has (not yet) sued any device makers. Gemalto goes after all of them at the same time by suing Google as well as the three leading manufacturers of Android phones: HTC, Samsung and Motorola (in order of second-quarter market share).

Multi-defendant patent suits happen all the time. The aforementioned NTP suit over wireless email also targets Google as well as some smartphone manufacturers, plus other companies (half a dozen in total). Paul Allen's Interval Licensing is simultaneously suing 11 major players.

If you hold a patent that reads on Android, you can sue at multiple levels. Google is the source of it all. You can also go after Google's downstream, where you find the manufacturers of Android-based devices. Theoretically, you could go even further downstream and sue importers, distributors, retailers, or users. Patent law gives you all of those choices.

Of course, you will ultimately determine what's the most efficient way, and you'll take existing or potential business relationships into account. For an example, most major smartphone vendors are probably Oracle database customers, and Microsoft's preferred way to do business with hardware companies is to sell them Windows OEM licenses as opposed to suing them over patents.

Gemalto is a reasonably sizable player with annual revenues of approximately $2 billion and 10,000 employees in 40 countries. No one will doubt that it can afford this fight. But it's obviously not an Apple, Microsoft or Oracle. Such powerful organizations can send out a warning to an entire market if they sue even one infringer. Suing four behemoths at once may be a strategy for Gemalto to demonstrate confidence in its case and to be taken seriously by everyone in the market.

Gemalto claims all Android application developers are infringers, all Android apps are infringing material

There's one item in Gemalto's complaint that struck me as very important:

25. Android Applications and the development of such applications using the Android SDK infringe one or more claims of the Patents-in-Suit.

Let's assume for the sake of the argument that Gemalto is right about this. This would mean that all Android application developers are infringers and that all Android apps are infringing (therefore, illegal) material.

Still assuming that Gemalto is right, they could theoretically sue any app developers they choose to go after. They could shut down any or all apps. They could put a big "closed due to patent infringement" sign in front of the Android Market app store.

The same would probably also be true should Dalvik infringe Oracle's Java patents. However, Oracle's complaint didn't make such an explicit claim against the entire Android app developer community. Oracle instead focused on Google's alleged wrongdoing.

I don't think it's likely that Gemalto will actually sue Android app developers, and if it did so, it would likely go after large players (where there's money to be made) rather than little guys. Gemalto has apparently chosen its four initial targets and will try to work out a license deal with Google and the manufacturers of Android-based devices. But just the notion that you have a holder of three Java-related patents who tells a court what I just quoted and analyzed is frightening.

Even though they probably won't be sued, Android application developers may find themselves severely affected by Gemalto's infringement action. Gemalto's complaints talks about the Android Market (Google's app store). Assuming that Gemalto wants a percentage of all revenues generated with Android apps, that would ultimately cost app developers money. Google might reduce the percentage it pays to developers. This could also result in higher app prices, which would reduce volume. Or we could see a combination of those effects.

It's not just Gemalto who might want a cut of the app business. There's also Oracle, whose intentions are unclear so far. And who knows how many other patent holders might come out of the woodwork later.

One might argue that this could happen to app developers on other platforms. However, it's pretty clear now that Android is under attack to a far greater extent than any other system. If someone wanted to cash in on an app market, Apple's App Store would be an even more obvious target than the Android Market. But for a variety of reasons that I'll analyze in more detail on another occasion, Google doesn't have the Android patent situation under control in any way. Apple and Microsoft generally appear to resolve such issues through license deals.

Google exposes an entire ecosystem -- including app developers -- to enormous risk. That's irresponsible.

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