Automakers get final boarding call from Avanci for $15-per-car 4G standard-essential patent license: come September, per-unit fee will go up by one third to $20

Juve Patent's Amy Sandys was first (and IAM's Adam Houldsworth second) to report on today's announcement by the Avanci standard-essential patent (SEP) pool according to which the license fee for Avanci's 4G program (which also includes 2G, 3G, and eCall patents) will--"for new licensees signed after August 31, 2022"--increase from the current rate of $15 to a new per-unit royalty of $20. That is an increase by one third.

This means car makers who'd rather save the extra $5 per car have about seven weeks left to sign up. The press release says "the Avanci agreement is a simple form license." That's why the patent pool is "confident that any auto maker who wishes to take an agreement before the rate increase will be able to do so." Whoever has a license now or at least by the end of August will then have 4G price stability for the remainder of the lifetime of those patents.

At an IP conference that took place in Munich last month (which I didn't personally attend), Dr. Claudia Tapia--Ericsson's Director of IPR Policy and Legal Academic Research--raised the question of whether it was fair that BMW, which became Avanci's first-ever licensee in late 2017, and Ford, which took a license in May 2022 and only after losing out in litigation, were paying the same per-car rate. Indeed, Ford could hardly have claimed to be eligible for an early-bird discount.

There's another fairness issue here: about half of the automotive industry (by volume) is now paying the Avanci license fee, but the other half is not. Alfred Sant MEP (Member of the European Parliament), a former prime minister of Malta, has raised this issue in a follow-up set of questions to the European Commission. In April I commented on the Commission's response to his first set of questions.

The upcoming rate hike should create a strong disincentive for further hold-out. Daimler, Tesla, and Ford took their chances in litigation, and just ended up wasting money on lawyers (like a German tire company that apparently never gets tired of losing).

Currently, the multi-brand Stellantis group (Fiat Chrysler, Opel etc.) and Nissan have to defend themselves against several Munich patent infringement cases brought by Avanci licensors. Their chances of defending themselves against all those Munich cases are slim as some of those patents have previously been deemed valid and standard-essential, and Avanci licensors apparently don't even have to make bilateral licensing offers to car makers: they can just point to the availability of the pool license.

Avanci has a total of 49 licensors--far more than when BMW signed up. In February, one of the largest 4G SEP holders--LG Electronics--joined the pool. Cellular SEP heavyweights like Ericsson, Nokia, and Qualcomm had joined the pool long before. The value proposition should be a non-issue. On LinkedIn, one leading licensing expert, Eric Stasik, has called Avanci's rate a "bargain." What I wouldn't doubt for a second is that 49 bilateral licenses would end up costing more than the pool license, even more so if transaction and potential litigation expenses are factored in.

Car makers typically charge customers hundreds of euros or dollars over the years for mobile data services, which are typically included in the car's purchase price for the first two or three years, after which the subscription must be renewed.

In all those years during which Avanci has slowly but surely convinced ever more licensors and more and more licensees to sign up, no better alternative has been presented. Avanci licensors have prevailed in court, again and again and again.

I would be surprised if we didn't see a number of additional Avanci sign-ups this month and next. There is a closing window of opportunity now for the $15-per-car deal, and every single car maker who opted for litigation has lost after wasting many millions on lawyers (the wisdom of whose advice has since been questioned by some people). And car makers who join now may still have a chance to be involved in Avanci's 5G program when it launches.

There are some unresolved issues in SEP licensing, but for the automotive industryit appears to me that the Avanci model has won. I wasn't initially convinced, but can't argue with success.

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Upcoming conferences (U.S., EU) on chipset-level patent licensing and the royalty base in automotive and other high-tech products in light of FTC v. Qualcomm

While I routinely talk to professional investors about key IP and antitrust developments (such as on a highly successful conference call hosted by Susquehanna International Group last week), I haven't spoken at, much less organized, conferences in a long time. But Judge Lucy H. Koh's FTC v. Qualcomm antitrust ruling in the Northern District of California is--while this kind of clear-cut guidance was overdue in my view--a watershed moment for patent licensing practices and damages theories. By virtue of having followed FRAND licensing issues since 2010 and FTC v. Qualcomm from the get-go (including that I attended the entire January trial) it's fair to say that I'm uniquely positioned to discuss the impact, implications and ramifications of the decision as well as related matters, such as certain antitrust complaints Daimler and its suppliers lodged with the European Commission and a Continental complaint against the Avanci patent pool company in the Northern District of California.

Judge Koh's ruling is now being appealed. The notice of appeal was filed on Friday, and a motion to stay enforcement is pending as well. But even if Qualcomm obtained some kind of enforcement stay, there will be important developments in various jurisdictions, and Judge Koh, arguably the world's leading technology judge by now, has the potential for thought leadership not only in other U.S. federal districts and circuits, but even overseas.

Component-level patent licensing is a hot topic particularly (though not exclusively) for the automotive industry, which sees itself increasingly exposed to demand letters and lawsuits.

At a one-day conference in Northern California (for U.S. and Asian attendees) and another one in the Munich area (for a European audience), I am going to discuss the following aspects and implications of the chipset-level licensing and royalty-base parts of Judge Koh's opus magnum:

1. The FTC v. Qualcomm ruling, the underlying testimony, and the parties' arguments

2. Outlook: next procedural steps; prospects of affirmance, reversal, certiorari, or settlement

3. Comparison to other U.S. case law (Microsoft v. Motorola, GPNE Corp v. Apple, HTC v. Ericsson); Entire Market Value Rule and smallest salable patent-practicing unit (SSPPU); influence of FTC v. Qualcomm on other U.S. decisions

4. Patent exhaustion and its attempted circumvention (covenants not to sue, covenants to exhaust remedies)

5. Chipset licensing and standard-setting organizations' FRAND licensing guidelines

6. Automotive antitrust complaints (Continental v. Avanci, DG COMP complaints by Daimler, Bury et al.)

7. Potential for adoption of Judge Koh's reasoning in Europe under Art. 102 TFEU

8. Is legislative action warranted/desirable or can case law solve the problem?

9. Panel discussion (ideally, a neutral moderator and two speakers from each side of the debate)

It's no secret that I've taken pretty clear positions on the issues. However, that never prevents me from accurately summarizing what the other side claims and argues, as my Wall Street clients and listeners know.

I thought about possibly partnering with law firms on this, but frankly, I can't think of a firm that wouldn't also represent at least some clients seeking to maximize their patent licensing revenues, so I felt it would be better for me to stay independent. However, I would entertain sponsorships, provided they can be properly disclosed and don't constitute a conflict of interests affecting what I will say at the conferences, much less what I write on this blog (not an issue if an organization's views on component-level patent licensing are consistent with mine).

At this point there are no definitive conference dates, but I do plan to turn this around rather quickly. I'll be very receptive to what you have to say, and it would really help to know how many of you are interested in attending at a market-level attendance fee (and in which of the two locations). So please drop me an email at fosspatents@gmail.com if these conferences are potentially relevant to your work. Thanks in advance!

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LG offered Nokia privateer Conversant less than 1% of the standard-essential patent license fees it demands--and even that turns out unwarranted

Privateering--the practice of large patent holders formally transferring patents to non-practicing entities that will assert them on their behalf (practically, those deals amount to agency-like arrangements in many cases)--is an issue that has been facing the mobile device industy for a number of years. Nokia and Ericsson are particularly active in that way.

A couple of particularly aggressive privateers--Unwired Planet (mostly fed by Ericsson) and Conversant (a Nokia patent assertion partner)--are parties to a UK Supreme Court proceeding I blogged about earlier this week. One of them, Conversant, was dealt a real blow last week by the Cour d'Appel de Paris--the appeals court for the Paris region, to which all patent rulings by the Tribunal de Grande Instance (TGI) de Paris are appealed. A panel of three appellate judges under Presiding Judge David Peyron ruled against Conversant's appeal of a TGI ruling on several standard-essential patent (SEP) assertions by Conversant (formerly known as Core Wireless) against LG Electronics (this post continues below the document):

19-04-16 French Appellate R... by on Scribd

Conversant's appeal related to a handful of patents. But for three of them, the appeals court held that Conversant failed to provide the information required to make an essentiality determination. While the appeals court declined to declare the French parts of the remaining three patents invalid, it also determined that EP0978210 on "connecting a multimode terminal to the network in a mobile communication system" nor EP0950330 on a "user terminal for mobile communications" are not standard-essential. With respect to EP'210, the court's claim construction is so narrow that the patent can be worked around by performing a measurement of signals periodically as opposed to only in situations of poor network coverage. In any event, the 3G/4G standard specifications say that such measurement should be performed, but also state that devices may simply not do so. EP'330 was found non-essential on two different grounds, either one of which would be sufficient on its own. There choice of high-level protocols (IPv4 and IPv6) is not explicitly required by the specifications of the telecommunications standard, and it's debatable whether IPv4 and IPv6 constitute alternative protocols as opposed to simply different versions of one protocol (the Internet Protocol = IP).

This French appeals court took the position that FRAND licensing obligations apply only to actually essential patents, not merely declared-essential ones. Courts in some other jurisdictions have taken a similar position, but there's an alternative approach according to which a patent holder's FRAND declaration applies to non-essential patents as well.

As a result of its holdings of non-essentiality, the French court declined to make a FRAND rate determination. What's interesting, however, is the enormous discrepancy between the parties' positions. Conversant was seeking a royalty based on the net sales price of an entire handset (the typical royalty base issue) amounting to 0.149% for 4G devices sold in the "principal markets" and 0.170% for 3G devices sold in such markets, with lower pecentages for China. Conversant claimed that this was consistent with Justice Birss's decision in the UK case Unwired Planet v. Huawei.

By contrast, LG offered (depending on markets and whether only 2G, the combination of 2G and 3G, or the whole package of 2G+3G+4G was implemented in a device) between 1.62 and 5.73 thousandths of a U.S. cent per device and per patent family. In order to make those numbers easier to understand, LG also calculated a dollar amount per one million devices from $16.2 to $57.3. Based on Conversant's own claim of owning 22 SEP families, this would in the most optimistic of all scenarios have amounted to 22 times $57.3 = $1,260.60 per one million devices.

Even if one assumed an average net sales price of only $100 per LG phone (which is a very low number), Conversant's own claim would amount to $0.149 per device, or $149K per one million devices--more than one hundred times the $1,260.60 per one million devices that LG offered.

Such discrepancies are not unheard of in the context of FRAND rate disputes. In April 2013, Judge James L. Robart of the United States District Court for the Western District of Washington awarded Motorola Mobility, in a FRAND case brought by Microsoft, less than one-twentieth of a percent of its original demand. Later that year, in the Northern District of Illinois, Judge James F. Holderman held that 19 WiFi patents belonging to a patent assertion entity named Innovatio IP Ventures were worth less than 10 U.S. cents per unit.

While Innovatio had hoped for a lot more than 10 cents per unit, the question is whether Conversant is ultimately going to get anything from the likes of Huawei and LG. Conversant's pathetic results in France are not going to impress the Supreme Court of the UK.

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Qualcomm fears being required to renegotiate patent license agreements with Samsung, many others

This is the first post, and probably not the last, in which I'll discuss some interesting information I found in the Federal Trade Commission's and Qualcomm's proposed findings of facts and conclusions of law with a view to next month's San Jose trial. Qualcomm's filing is more than twice as long (157 pages) as the FTC's submission (71 pages), but Judge Lucy H. Koh will decide strictly based on the law and the facts, so this antitrust case is not going to turn into a battle of matériel. The litigation departments of government agencies are outnumbered by private-sector litigants' armies of lawyers all the time, but quite often they prevail nevertheless.

Here are the two filings (this post continues below the documents):

18-12-06 FTC's Proposed Findings and Conclusions by Florian Mueller on Scribd

18-12-06 Qualcomm's Pro... by on Scribd

Those proposed findings and conclusions serve as a roadmap for the upcoming trial. There may still be some surprises, but by and large the points the parties seek to drive home are clear now, except for those heavy redactions, which I wish someone could fight the way Reuters, MLex, the First Amend Coalition and others attacked excessive sealings in Apple v. Samsung years ago (and I had to do the same at the Federal Patent Court of Germany; by the way, I'm presently involved in a new access-to-documents dispute there, with a notorious privateer).

Section III.I of Qualcomm's filing is one of the most outrageous examples of overredaction. That section is meant to justify Qualcomm's "no license-no chips" policy, which is central to the case. Under the headline "Qualcomm's Practice of Not Selling Chips to Unlicensed Companies Has Valid Business Justifications," paragraph 245 says:

"Qualcomm's practice of not selling chips to unlicensed OEMs is based on the following considerations:"

And then every single one of those business considerations is blackened out. 100%. It's hard to imagine that those redactions are reasonable, and maybe the court won't approve them. Or we'll find out at trial.

Fortunately, the paragraph that is most interesting in commercial terms is public:

"765. Moreover, the FTC seeks an order requiring Qualcomm to 'renegotiate . . . license terms' with all OEM licensees. (Joint Pretrial Statement at 2; FTC Interrogatory Response at 6.) Not only would such an injunction require renegotiation in markets where Qualcomm is not even alleged to have market power, such as WCDMA or non-'premium' LTE, but it is also overbroad insofar as it requires renegotiation of agreements no matter what the terms and no matter whether any anticompetitive harms caused or resulted from those agreements. Such an injunction would be tailored neither to the markets nor harms at issue, including because it would apply to agreements entered into outside the 2011-2016 timeframe for which the FTC has presented evidence."

The passage on the requested relief that Qualcomm's filing refers to says this:

"Require Qualcomm to negotiate or renegotiate, as applicable, license terms with customers in good faith under conditions free from the threat of lack of access to or discriminatory provision of modem chip supply or associated technical, software, or other support;"

It's obvious why Qualcomm doesn't like this, but it's inevitable: if someone violates antitrust law and as a result of such behavior (including, but not limited to, the "no license-no chips" policy) imposes supra-FRAND royalties on others, renegotiation is the only way to redress the balance and fix the problem.

As the final sentence of paragraph 765 of Qualcomm's proposed findings and conclusions shows, they complain, among other things, about the requested injunction not being limited to the 2011-2016 period. The most significant agreement that is still in force and effect and that Qualcomm concluded outside that timeframe is presumably its early 2018 new deal with Samsung. Even if the FTC didn't present evidence that is specific to that timeframe, there can be no doubt that the 2018 Qualcomm-Samsung agreement came into being under the same problematic circumstances--simply because things will only get better if and when the FTC prevails (or if and when private parties prevail, with the Apple v. Qualcomm trial being scheduled for mid-April).

Qualcomm's proposed findings and conclusions do indicate some changes to their business policies after that timeframe, and they seek to leverage those changes so as to argue that the prospective remedy of injunctive relief wouldn't be warranted only on the basis of past behavior. The risk of recurrence is obviously key. But what Qualcomm changed (such as capping its 5% patent royalty demand at a device price of $400) is either unrelated to, or at least falls far short of, what the FTC is tackling here and seeking to redress and to prevent from happening again.

Actually, to the extent Qualcomm's refusal to extend SEP licenses on FRAND terms to rival chipset makers like Intel was a breach of contract (as Judge Koh has determined on summary judgment), that fact alone means that the economics of certain deals, such as the one with Samsung, would have been different if Qualcomm had behaved the way the court thinks it should have, and if a licensee like Samsung could also have decided to simply purchase baseband chips from Intel, or to license Qualcomm's SEPs at the chipset level (Samsung's Exynos division) instead of at the device level.

The requirement to renegotiate license terms would affect Qualcomm in two ways. Besides the direct implications of having to modify existing agreements in favor of implementers, a judge or jury tasked with determining whether or not Qualcomm complied with its FRAND licensing obligations will also look at (among other things) Qualcomm's other license agreements. It's a safe assumption that Qualcomm's recent deals, such as the one with Samsung, were optimized for the purposes of the forthcoming Apple trial. However, should those agreements be null and void in the sense that they must be renegotiated as per a court order, then they don't serve as useful points of reference for any FRAND-compliance analysis in any jurisdiction.

Again, there's a lot more in the 220+ pages Qualcomm (two thirds) and the FTC (one third) filed on Thursday, such as an interesting passage that could backfire against Qualcomm in connection with promissory estoppel (and possibly have novel implications for exhaustion), but it's simply too much for a single blog post.

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Irreconcilable discrepancies between Huawei's inbound and outbound patent licensing offers

More than three years after naming and shaming Ericsson's privateering deal with Optis Wireless (among a long list of similar partnerships), I became aware of the recent verdict against Huawei in the Eastern District of Texas, which serves to show how Huawei is torn between its strategic interests as a leading Android device maker on the one hand and an aggressive patent licensor on the other hand.

A corporation of that size is party to many disputes at any given point in time, and obviously the shoe will regularly be on the other foot. Parties don't make or change laws, so litigants can merely try to undermine (to a limited and often negligible extent) their adversaries' credibility by pointing to contradictions. However, in two respects such contradictions can be very significant:

• FRAND licensing negotiations and disputes involve bona fide questions, making inconsistencies more problematic than in such a context as patent infringement.

• We're all among the potentially billions of judges sitting on the court of public opinion, and some companies spend huge amounts of money on PR agencies and departments--or even on advertising campaigns like Qualcomm's big-time self-promotion in San Diego--to make us believe that they're the good guys. In that respect, it's a serious issue if they blatantly and brazenly apply double standards.

For an example, while Apple's positions on standard-essential patent (SEP) licensing have been perfectly consistent over the years, I really took issue and even got emotional when Apple's lawyers in the second California case against Samsung argued that a few narrow software patents entitled the iPhone maker to a "reasonable royalty"-type of damage award of $40 per device. Those weren't standard-essential, and if that claim had simply been based on lost profits, it would have been a different story. But they said "reasonable", and that's the R--the single most important letter--in "FRAND."

Samsung used to seek remedies over SEPs that I consistently disagreed with. I viewed their litigation tactics far more favorably when they dropped the related claims against Apple and even joined pro-FRAND organizations. Same with Google, by the way, but since it divested Motorola Mobility and contributed to an LTE patent pool, it's probably not going to be active again as a SEP enforcer in the foreseeable future.

If Huawei were a person, the diagnosis would be schizophrenia. Sorry to say so about one of my two favorite Android brands. According to Wall Street rumors, Huawei is (thankfully) part of the rebellion against Qualcomm. Just a couple of days ago, the FTC pointed to a 20-year-old Qualcomm filing that took the very opposite position on the FRAND licensing of rival chipset makers as Qualcomm is taking now. In Huawei's case, we're not talking about two decades in between. What we're seeing unfold here are parallel cases (Huawei's litigation with Samsung in the U.S. and China, and in parallel, PanOptis' litigation against Huawei in the U.S. and Germany, which provoked a Huawei countersuit in China for the purpose of a FRAND determination). It's like Huawei has to wear a different hat every 20 days, and at times every 20 hours, than change positions over the course of 20 years.

In the (Pan)Optis v. Huawei case in the Eastern District of Texas, the parties filed their proposed findings of fact and conclusions of law (after the recent jury trial and with a view to an upcoming bench trial) late last month--(Pan)Optis on the left side, Huawei on the right side. And some of what Huawei says is really interesting (this post continues below the document):

18-09-28 PanOptis v. Huawei Proposed Findings of Fact by Florian Mueller on Scribd

(Pan)Optis claims to have "acquired" (though it may actually be more of a service provider to Ericsson in economic terms) 63 SEP families. I haven't seen a comparable public claim by Huawei, but this Chinese study (in English, though) concluded that Huawei had declared slightly more than 600 patent families to be essential to 4G/LTE.

According to Huawei's own proposed finding of fact #58, "Huawei sent a letter to PanOptis indicating that it was willing to enter into a license to PanOptis’ U.S. declared essential patents for a rate of 0.09%, its EU declared essential patents for 0.056%, and its China and Rest of the World declared essential patents for 0.04%."

When I see a Huawei FRAND position that has a zero to the right of the decimal point, it immediately brings back to memory the FRAND rate that a Chinese court set, at Huawei's request, for InterDigital's SEPs: 0.019%.

Samsung claims that Huawei never substantially lowered its 1.5% royalty demand. Huawei denies that allegation, but without specificity (at least in the public redacted version of the relevant filing).

The recent Texas verdict related to five patents, four of which were standard-essential (and the jury awarded a far lower per-patent rate on each of those SEPs than on the non-SEP). While Huawei can--and according to a couple of more recent filings will--seek a judgment as a matter of law on the merits and on the damages award, for the time being (Pan)Optis has established the actual infringement of four presumed-valid SEPs, while Huawei has yet to prove anything in the United States. It has prevailed on a couple of patents in China, though.

The proposed findings of fact and conclusions of law in the Texas case also deviate from Huawei's positions in the Samsung despite with respect to whether one court should set a worldwide royalty rate:

"[DCL24] As discussed above, PanOptis has never given Huawei a U.S.-only offer. But, in view of PanOptis' decision to sue Huawei on its U.S. patents in a U.S. court, and in view of the very minor share of Huawei's sales in the U.S., and that Huawei has clearly stated its willingness to agree to and desire for a FRAND license covering its US sales, FRAND requires that PanOptis offer Huawei a U.S.-only license, rather than requiring that, in order to get a U.S. license to cover its minimal U.S. sales, Huawei also take a license in other countries where its sales are much greater (e.g., more than 60% in China) under foreign patents not at issue in this litigation. Despite Huawei repeatedly seeking a U.S.-only license and offering to settle the U.S. case, PanOptis has refused to discuss such options with Huawei."

"[DCL26] Like Motorola, PanOptis violates its FRAND obligations by suing Huawei on U.S. patents and insisting on a global license, despite Huawei's comparatively low sales in the U.S. and Huawei’s offer to enter into a U.S.-only license. Admittedly, Motorola sought an injunction against Apple in Germany, and PanOptis is seeking only damages against Huawei in U.S."

In the aforementioned bench trial opening brief, Huawei discourages the Texas court from setting a global FRAND rate:

"Further, as the Court recognized in limiting PanOptis' Count IX to U.S. patents [...], the Court should refrain from exercising its discretion to adjudicate FRAND issues as to foreign patents since doing so would necessitate determinations concerning the scope, infringement, and validity of non-U.S. patents governed by non-U.S. laws."

I agree--but why did Huawei ask the United States District Court for the Northern District of California to make a global FRAND determination in its dispute with Samsung? And why shouldn't Samsung firstly get the chance that Huawei actually had--even if only with respect to a handful of patents--in the Eastern of District (though it now has to get the verdict overturned, either by the district court or on appeal) to litigate its non-infringement and invalidity defenses?

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Apple: Qualcomm's 13 German patent assertions part of "grand evil scheme" to force Intel out of wireless chip market

This is my second post on the Qualcomm v. Apple patent infringement trial held by the Mannheim Regional Court yesterday. In the previous post I reported on the alleged (non-)infringement and (in)validity of the patent-in-suit, EP2460270 on a "switch with improved biasing". While the case is too close to call, this patent assertion may fail on the merits just like the first one that went to trial in Mannheim. But the court might also, contrary to what the non-asserted independent claim 16 implies for claim construction purposes and despite a finding by the Swedish patent office that the patent lacks a sufficient inventive step over prior art presented by Apple, hold Apple liable for infringement and decline to stay the case pending a parallel nullity action. In that case, Apple's affirmative defenses--antitrust and licensing--will be outcome-determinative at least with respect to the availability of injunctive relief.

For a long time, it was hard to fend off even standard-essential patent injunctions in Germany on antitrust grounds (with or without a FRAND commitment, which German courts wouldn't deem enforceable by third-party beneficiaries anyway). It was arguably hardest in Presiding Judge Dr. Kircher's court. The situation improved after the Court of Justice of the EU ruling in Huawei v. ZTE; in a way, it already got a little bit better after the European Commission took action against Samsung and Motorola. But very regrettably, the thinking of German patent judges is still, by and large, that antitrust defenses are just part of a throw-in-the-kitchen-sink tactic of infringers.

The patents Qualcomm is asserting in Germany--at least the ones that have been discussed in hearings or trials--aren't standard-essential, which ups the ante for Apple's antitrust defense. However, it's a fact that Qualcomm's conduct has been deemed anticompetitive by competition enforcers in multiple jurisdictions ("Antitrust Grand Slam").

Judge Dr. Kircher stressed that yesterday's discussion of the antitrust issues in the case was just meant to be a round of opening statements, far from a final decision. However, the court's preliminary inclination is that

• Qualcomm's conduct does not constitute a violation of Art. 102 of the EU Treaty (the abuse-of-dominant-position paragraph) in its own right,

• nor does the court tend to believe that its German patent assertions against Apple constitute a violation of the conduct the European Commission fined it for (exclusivity arrangements with Apple depriving Intel of a fair chance to compete on wireless baseband chipsets; the court feels this is just a fundamentally different type of behavior).

The judge said Art. 102 TFEU violations are typically identified where a company abuses a dominant market position in order to cement its monopoly, with cases involving "divergent markets" (the one in which the dominant position is held and the one that is affected) representing a less common scenario. Therefore, he feels an antitrust defense of that kind should succeed only under exceptional circumstances. Then he is concerned about the "subjective" nature of Apple's theory that Qualcomm's (non-standard-essential) patent assertions are meant to force Apple to drop Intel as a baseband chipset supplier. He also pointed to the fact that Qualcomm denied any such intention. Also, he noted that Apple couldn't infringe Qualcomm's patents with impunity even if Qualcomm pursued anticompetitive goals. Apple's counsel--the antitrust part was mostly argued by Freshfields Bruckhaus Deringer's Dr. Frank-Erich Hufnagel--was quick to clarify that Apple wasn't seeking a "free ride," but prepared to take a license on reasonable terms. Apple is seeking the dismissal of the complaint, but on other grounds; its antitrust defense is all about injunctive relief.

First, I don't think "divergent markets" are nearly as much of an exception as the court indicated. Even the famous EU Microsoft cases involved the leveraging of Microsoft's desktop operating system monopoly and its effects on the markets for workgroup servers and media player software products. Second, the overarching objective of competition enforcement, be it merger control or antitrust in a narrow sense, is to preserve competitive restraints, meaning that a company can't just command any price it wants (without having to pay much attention to its competitors' price points) or impose all sorts of other terms. Competition is never perfect as evidenced by the prices Apple can command for its new iPhones, but the difference between those products and high-end Android smartphones is only gradual, while Qualcomm can charge, for the combination of SEP royalties and chipsets, a multiple of what its competitors demand. It's obvious that Intel's deal with Apple goes a long way toward some competitive restraints on Qualcomm's business decisions, so it's not far-fetched to see the intention.

In his opening statement on antitrust, Dr. Hufnagel explained to the court that--and why--the analysis should be holistic, taking into consideration the entirety of Qualcomm's conduct, which he described--using this exact English term--as a "grand evil scheme" involving different actions and measures such as exclusivity rebates for customers/licensees, the refusal to license rival chipset makers, and a multiplicity of patent assertions in different jurisdictions, including (but not limited to) its ITC complaints targeting specifically Intel-powered iPhones (earlier this week, the ITC staff raised public-interest concerns over that litigation strategy) and the German cases, which in practical terms target only Intel-powered devices because all of the accused devices are sold with Intel baseband chips in Germany.

Dr. Hufnagel said Qualcomm was, by now, asserting a total of 13 patents against Intel-powered iPhones in Germany. Prior to that statement, I was aware of three patents asserted in Mannheim and seven (four of which are from the same family) in Munich. I'll try to find out about the three remaining assertions--and who knows how many other suits Qualcomm may file in the meantime.

Apple's counsel noted that Qualcomm could have simply sued the maker of the allegedly-infringing chipset (Avago/Broadcom), and said the "subjective"/"objective" distinction wasn't key under antitrust law: the focus should be on anticompetitive effects.

It was a powerful statement, but Judge Dr. Kircher took the (preliminary) position that the court had to focus on the patent-in-suit before it in the particular litigation. Dr. Hufnagel conceded that a single non-standard-essential patent assertion was not going to force Apple into submission and back into the Qualcomm fold all by itself. But the wider "grand evil scheme" would have that potential.

The discussion will continue on October 2 in a trial involving a different Qualcomm patent (EP3036768 on a "layout construction for addressing electromigration"). Without a holistic assessment of Qualcomm's overall conduct, Apple's antitrust defense is likely a lost cause except in a case where a patent couldn't be worked around within a reasonable time frame.

In the present case, it appears that Apple could just solve the problem by having its products for the German market made by Pegatron, one of its contract manufacturers. Pegatron was drawn into the litigation. Apple doesn't usually want to do so, but had to plead it into the case because of a lack of clarity regarding whether the patent-in-suit was covered by Pegatron's license deal with Qualcomm, which is subject to "capture periods" (presumably this means that patents applied for or granted during a certain period fall under a license agreement, a structure I've seen in the public redacted versions of settlement agreements). But Apple's primary contract manufacturer, Foxconn (Hon Hai), may not be licensed. Wistron was als mentioned. I believe Compal, for whatever reason, was not named.

The license-based affirmative defense was apparently raised at a relatively late stage. That discussion, too, may continue when other Qualcomm patents go to trial. But it's not as certain as the continuation of the "grand evil scheme" debate, which is actually raging around the globe.

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Qualcomm reduces quarterly forecast by $500 million as Apple stops license fee payments

Bloomberg reports that Apple confirms having "suspended [license fee] payments [via its contract manufacturers in China to Qualcomm] until the correct [fair, reasonable and non-discriminatory = FRAND] amount can be determined by the court" and that Qualcomm therefore has reduced its revenue forecast for the quarter ending June by $500 million. Given that the spring quarter is not the strongest one for mobile phones (the closer the next iPhone model is, the more customers wait until they buy), this indicates more than a $2 billion impact on Qualcomm's annual revenue and profit.

Just like the analyst quoted by Bloomberg, I've previously described patent disputes as an "all-out war," but I try to use the term sparingly. I'm not saying that's not what it is. I just want to wait and see how the dispute unfolds. There can be no doubt, however, that the stakes are high.

The $500 million figure for a quarter that is not the strongest one of the year is not really inconsistent with what I recently estimated to be Qualcomm's royalty demands.

It's worth noting that it was Qualcomm, not Apple, who withheld payments first. There is some kind of "rebate" (as Apple calls it) agreement in place between the two, under which Qualcomm pays back to Apple some of the royalties it collects from its contract manufacturers, and Qualcomm stopped its payments to Apple under that contract, alleging (most recently in its answer to Apple's complaint) that Apple breached that agreement by, for example, talking to regulatory agencies. A recent filing by Qualcomm in a procedural context shows that Qualcomm is none too pleased with what's going on antitrustwise in Korea, the European Union and elsewhere.

Apple's position, according to the Bloomberg report, is that Qualcomm will get paid again once a FRAND rate has been determined by the courts. This reminds me of an issue that a lot of industry players (including, but by far not limited to, Apple) were profoundly concerned about years ago when standard-essential patent (SEP) holders sued them in Germany and the courts here applied the Orange Book ruling by the Federal Court of Justice in such a way that defendants had to make totally outsized deposits in order to avoid injunctive relief. I remember Claudia Tapia, then a BlackBerry IP policy executive (now at Ericsson), saying at a 2012 FRAND conference in Amsterdam that a company could be driven out of business by having to make X number of deposits of 2% to 5%, if not more, of its sales receipts during the course of a multi-year litigation. And if my memory doesn't fail me, I think she said that Apple might be able to afford it but others might not.

Since my campaign against software patents in 2004-2005, I've consistently opposed anything that comes down to "might makes right." My favorite ancient quote (after nine years of Latin and three years of Ancient Greek in school) is from line 880 of Sophocles' Oedipus at Colonus: "In a just cause, the weak will overcome the strong [alternative translations of "mégas": the mighty/great/large]." ("Τοῖς τοι δικαίοις χὠ βραχὺς νικᾷ μέγαν.")

Against that background, I want the dispute between Apple and Qualcomm to be decided by the merits, not by leverage or by who's the bigger bully. I want an outcome that will improve the situation for the industry at large, including the little guys who couldn't afford or take the risk of picking this kind of fight with Qualcomm. While I can easily understand that Apple, after Qualcomm was first to withhold payments, doesn't want to meet royalty demands it considers completely unreasonable, there could be different circumstances under which I would consider it unfair. Also, I still haven't forgotten that Apple once collected roughly half a billion dollars from Samsung on procedurally proper but, in my personal view, unfair grounds in 2015 (I was the lone voice criticizing Apple for it). Here, Qualcomm's strangehold on the entire industry (as it leverages its two mutually-reinforcing monopolies) probably necessitates that someone says "enough is enough" and puts pressure on Qualcomm to change its ways. But again, the outcome should be positive for everyone in the industry, not just one company, and, by extension, it should bring prices down for consumers.

What just makes no sense to me is Qualcomm's claim that "the same terms [that Apple is contesting now in court] have applied to iPhones and cellular-enabled iPads for a decade." This, again, is a might-makes-right kind of approach. If Qualcomm was able to command certain terms because of its leverage, that doesn't make the amount a FRAND rate. That's just circular logic. It's symptomatic of Qualcomm's might-makes-right vicious circle.

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As I suspected, the 2013 Nokia-Samsung patent deal is far from comprehensive: litigation still a possibility

In November 2013, Nokia and Samsung announced a five-year extension of an existing patent license agreement, with the financial terms left to determination by an arbitration panel. The scope was not announced, but back then, I expressed my belief that it was a license covering only (wireless) standard-essential patents (SEPs):

"I continue to believe it's a SEP-only license, including the 'additional' compensation."

Today, Nokia has announced that the arbitration result has a "positive financial impact" for its patent licensing division. Today's announcement explicitly states that this agreement has only a limited scope:

"This award covers part of the Nokia Technologies patent portfolio until the end of 2018. Nokia will continue to discuss with Samsung its other relevant intellectual property portfolios. Nokia has strong intellectual property assets consisting of intellectual property rights in the separate Nokia Technologies, Nokia Networks and Alcatel-Lucent portfolios, which include patents essential for a variety of standardized technologies as well as relevant implementation patents and proprietary technologies." (emphasis added)

See, I told you so. I remember a call I had with professional investors in late 2013 who told me they had spoken with Nokia's investor relations department and had concluded from their conversation that the deal was comprehensive. I told them I didn't believe so. I told everyone via this blog I didn't believe so. Now it's a fact.

While these two parties have so far been able to avoid going to court against each other, the above passage does mean that litigation (in the event they fail to reach an agreement) is still a possibility.

Nokia is the worst patent holder in this industry with respect to privateering. I've raised that issue in a couple of posts (see 1, 2). The fact that having a license from Nokia itself doesn't mean you couldn't still be approached by dozens of other entities monetizing Nokia patents probably makes negotiations between Nokia and potential licensees a lot harder than those talks used to be years ago.

The fact that most of Nokia's patent assertions against HTC failed (though HTC ultimately felt forced to take a license on whatever terms) may also make prospective licensees feel they should take their chances in court.

The next Nokia-Samsung announcement, whenever that one may issue, will most likely be a "fish or cut bait" statement. They won't be talking forever. At some point they will agree or Nokia will sue. I, for my part, would recommend to Samsung (if they asked me, which they obviously don't) not to overpay.

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Indian court reduces provisional royalty rates Micromax has to pay Ericsson in pre-trial phase

In March 2013 the Delhi High Court ordered India's leading Android device maker, Micromax, to make a deposit of FRAND royalties in order to avoid the injunctive relief Ericsson originally sought. For the royalties to be deposited, the court set provisional rates ranging from 1.25% to 2% of the price of a device, the percentage depending on which standards (ranging from "GSM only" to "EDGE + GPRS + GSM" and "WCDMA/HSPA") a device actually implemented.

The court has now published an order that came down last week and determined the provisional rates of royalties that Micromax shall pay directly to Ericsson (as opposed to a mere deposit) for the period between the filing of Ericsson's suit and the trial, which is scheduled for late 2015. Those rates are now significantly lower, which means Micromax's lawyers have managed to increase their client's short-term liquidity. The applicable provisional rates are now 0.8% (GSM only, or GPRS + GSM) and 1% (EDGE + GPRS + GSM, or WCDMA/HSPA), for the period until November 13, 2015. Thereafter, the 1% rate goes up to 1.1% for the following 12 months, and a further increase has been determined for the period after November 13, 2016, but it's rather doubtful that those rates will ever play a role since the parties will have more clarity after the trial and will then (if they don't settle anyway) likely seek an adjustment.

While this is a substantial reduction and useful to Micromax, these provisional rates are still far greater than royalty rates awarded by U.S. courts in a couple of key FRAND determination cases to other SEP holders (Motorola and Innovatio).

The court stressed that this set of royalty rates is "purely an interim arrangement and is not a determination of the FRAND rates for the Ericsson portfolio."

Since this is not a FRAND determination, the order does not address in any way the argument that Ericsson's royalty demands should be related to the price of a chipset implementing a given standard as opposed to the price of a complete, multifunctional device. About a year ago, the Competition Commission of India had expressed concern over Ericsson's royalty base.

In March it turned out that Ericsson had asked Micromax for substantially higher royalty rates than another local company, Saral.

This year the Competition Commission of India launched a second investigation of Ericsson's standard-essential patent licensing practices (in particular, certain conditions it tried to impose on an implementer of a standard).

Here's the court order on provisional royalty rates in Ericsson v. Micromax:

Order - Telefonaktiebolaget vs. Mercury - CS(OS) No. 442 of 2014 by Florian Mueller

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Android partners Google and LG Electronics announce patent cross-license agreement

A press release just appeared on the LG Electronics website to announce a long-term patent cross-licensing agreement between the Korean company, which is one of the more significant Android device makers, and Google.

The announcement doesn't state a specific term. It says "[t]he agreement covers the two companies' existing patents as well as those filed over the next 10 years," which actually suggests that the term is well over 10 years (probably at least 12 years) since any patent filings made 10 years from now would not immediately result in an issued patent at the time.

While the agreement is described as covering "a broad range of products and technologies" and appears to be (without saying so) a zero-zero cross-license for the most part, it's hard to imagine that there would be no exclusions or restrictions. For example, Google won't have allowed LG to build a search engine that makes use of any of Google's related inventions, and LG would probably still want to collect royalties on Blu-ray Disc devices should Google ever build any (Blu-ray is a context in which LG has done some patent enforcement in recent years). But apart from specific areas, this agreement is certainly designed to ensure lasting patent peace between these two Android partners.

Between the lines, both companies' official quotes on the deal criticize those who have a greater focus on patent monetization or even try/tried to use patents for exclusionary purposes. Google and LG stress the focus on products and the related consumer benefits. It's like, "Make stuff, not war."

At the beginning of the year, Google announced similar deals with Samsung and Cisco. Samsung is the world's leading Android device maker. Cisco's interest was presumably more political. All of those four companies -- Google, Samsung, Cisco, LG -- have to defend themselves against patent assertions by the Rockstar consortium. Rockstar's owners include Apple, BlackBerry, Ericsson, Microsoft, and Sony; while Apple contributed most of the money to the 2011 purchase of former Nortel patents, it may not be responsible for Rockstar's lawsuits in any (other) way because of its limited voting rights.

Not only do those companies have a problem with Rockstar but those of them involved with Android (Samsung, LG, and Google, but not Cisco) also had or have issues with some of Rockstar's owners. Samsung and Ericsson settled last year, and Ericsson holds patents in fields relevant to Cisco's business (Ericsson's strategy is to collect royalties from device makers rather than chipset makers). Apple never sued LG and probably never will (at least not over the kinds of patents it unsuccessfully asserted against Samsung, HTC and Motorola in the past), but if it had been more successful against others, it might have done so at some point. Based on reports in the Korean press, LG is similarly unhappy about the Android-related patent license fees it pays to Microsoft as Samsung is. Last week Samsung asked a U.S. court to declare that it may terminate its Android/Chrome patent license agreement with Microsoft.

All of those companies have something to sort out with Nokia as well. Nokia is not a Rockstar shareholder but, with a view to patent assertions, it's clearly in the same camp.

I criticized Google's previous announcements of such long-term, presumably zero-zero (except in presumably some areas) patent cross-license deals as PR stunts. Today's announcement is part of the same campaign, but I have to adjust my position on this type of deal in light of the pathetic results of smartphone patent enforcement efforts by all of the major litigants (only about 9% had merit; only about half of the cases in which liability was established resulted in lasting injunctive relief based on interim results; and even where lasting injunctive relief was obtained, it didn't really matter commercially). Against the background of those results it's very difficult to recommend to any major industry player to accept license deals with massive balancing payments. Everyone should think hard and long before agreeing to make a huge balancing payment to someone who has not yet established in court, or may even have failed miserably to establish in court, their ownership of valid patents that can't be worked around at a rather low cost without serious impact on the market potential of a product line. I'm convinced that many or even most of the smartphone-related patent license deals that are currently in force would never have been made if companies had known a few years ago just how negligible the commercial impact of all those smartphone patent assertions by major players was ultimately going to be (I was very surprised, too).

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Samsung asks court to declare it can terminate its Android patent license agreement with Microsoft

A new filing was made on Thursday in the Southern District of New York in the contract dispute between Microsoft and Samsung over a 2011 Android/Chrome patent license agreement (redacted versions of the two contracts at issue, the patent license agreement on the one hand and a closely-related business collaboration agreement on the other hand, became publicly accessible last week). While seeking a stay pending arbitration, Samsung has (since the motion hasn't been adjudicated yet) timely filed its answer to Microsoft's amended complaint (published earlier this month, it revealed that Samsung paid more than a billion dollars in Android/Chrome patent royalties to Microsoft between mid-2012 and mid-2013) and its counterclaims.

Microsoft wants the court to hold that Microsoft's acquisition of Nokia's mobile devices business does not give Samsung the right to unilaterally terminate the patent license agreement (though the two agreements are undoubtedly interconnected). It also says that the case shouldn't be stayed since any termination, if allowed (which in Microsoft's opinion it's not), would affect only future royalty reports and not the royalties Microsoft says Samsung owes for the period between mid-2013 and mid-2014). Samsung's key counterclaim is now a request for a judicial "declaration that Samsung may terminate the [business collaboration agreement] and [patent license agreement] pursuant to BCA Sections 9.7 and 8.5." (emphasis added)

If Samsung obtained such a declaration (by the court in New York or by an arbitration panel), it would be in a position to renegotiate the terms of the patent license agreement. Since the signing of that contract more than three years ago, smartphone patent assertions by all of the major players have been largely unsuccessful (less than 10% had merit based on final or interim results):

Microsoft has, to put it diplomatically, not outperformed the others so far:

But for now, there is no indication of Samsung actually having provided notice of termination. It appears that Samsung prefers to negotiate with Microsoft from the position of having the option, but not the obligation, to terminate the existing contracts. There could be different reasons for that approach. To me, the most likely reason is that Samsung wants to avoid further escalation of the controversy not for fear of Microsoft's patent assertions (the results in court speak for themselves and some of Microsoft's relevant patents have expired) but because of an interest in continuing to build Windows-based devices.

That interest, however, is not heightened by the fact that Microsoft has become a mobile device maker through the acquisition of Nokia's handset business. For example, Samsung's filing says the following:

"After the Nokia DSB Merger, the agreements, now between competitors, invite charges of collusion. No reasonable business would knowingly undertake the risk of contractually obligating itself to coordinate and collaborate with a competitor—particularly, as here, with respect to setting third-party incentives and controlling the 'out of box' experience of a competitor's products."

Samsung's lawyers even raise antitrust concerns over this kind of horizontal cooperation:

"Additionally, the sharing of product roadmap information, which the BCA contemplates (Sections 2.1 and 2.2 of Exhibit B), now takes on a new and dangerous meaning when viewed through the lens of antitrust law: these provisions could give rise to accusations that two handset competitors, Microsoft and Samsung, are engaged in market allocations in terms of how and when products are developed and distributed to the market. This problem did not exist prior to Microsoft's merger with Nokia['s handset business]."

If you're interested in further detail, here's Samsung's filing:

14-10-30 Samsung Answer to Microsoft Contract Complaint by Florian Mueller

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Here's a redacted version of Microsoft's Android/Chrome patent license agreement with Samsung

The Microsoft-Samsung contract dispute in the Southern District of New York over the implications of Microsoft's acquisition of Nokia's wireless device business for the parties' 2011 Android/Chrome patent license agreement has already exceeded my expectations concerning transparency. Three weeks ago this case brought to light that Samsung forked over more than a billion dollars in patent royalties on its Android/Chrome devices to Microsoft in the 12-month period from July 2012 to June 2013. Last week, a Samsung motion to compel arbitration explained certain interdependencies between the parties' Android/Chrome patent license agreement and a second contract, a Windows- and Windows Phone-related business collaboration agreement.

Here comes the latest and greatest revelation, which in certain respects is of even greater interest than the billion-dollar figure: yesterday, Samsung's counsel in the New York case had to file a public redacted version of the declaration supporting Samsung's motion for referral to arbitration, including the key exhibits--the patent license agreement and the business collaboration agreement.

The following PDF document contains the declaration and the redacted versions of the two contracts (this post continues below the document):

Redacted version of Microsoft's 2011 contracts with Samsung.pdf by Florian Mueller

These contracts are interesting from different angles. One of them is Samsung's motion to compel arbitration. At first sight (and I will have to look at it more closely and think about it some more) it does appear that the two contracts, both of which were concluded within a couple of months of each other, are indeed closely connected. The business collaboration agreement was signed first but already referred to credits (based on Samsung's success with Windows devices) against Android/Chrome-related license fees. Technically they both have the same date: July 1, 2011.

The aspect I found most interesting is all about exclusions. While the license agreement is not limited to a particular list of patents, it's no total-portfolio license either. There are two key limitations: "Excluded Technologies" and "Excluded Software" (any software licensed under an "Excluded License").

As for excluded technologies, Microsoft did not license to Samsung any of its patents relating to

1. Kinect-style gesture-based functionality (this exclusion has nothing to do with touchscreen gesture control, as the contract clarifies),

2. Virtual Reality, and

3. "Information Worker Software": a software or a service "designed or offered as a replacement" of Microsoft's office applications, with OpenOffice and LibreOffice being specifically mentioned as replacements for one or more Office components.

The definition of "Excluded License" includes any version of the GPL, LGPL, Mozilla Public License, and Common Public License, or similar licenses with a copyleft (share-alike) feature. This exclusion, however, relates only to "Other Samsung Products" and not to Samsung's Android and Chrome devices, where the only excluded license is the GPLv3. In other words, the license agreement does cover the GPLv2 parts of Android, such as the GNU operating system and the Linux kernel. This might spark some debate in Free Software circles. It also reminds me of what I said four years ago when there was a debate raging in Europe over "open standards" and the compatibility of free and open source software with FRAND (fair, reasonable and non-discriminatory) licensing terms. I said that patent royalties are paid on free and open source software, including GPLv2 software such as Linux, all the time, also by such companies as Red Hat. The now-public terms of the Microsoft-Samsung patent license agreement are another example.

Besides the actual exclusions I mentioned, there's also a mechanism in the contract that can lead to the exclusion of a category of devices. There are special rules in the contract for a "Deferred Android Device," defined as "an Android/Chrome Device that (a) does not have voice communication as a primary functionality, (b) has web browsing as a primary functionality and (c) has a display screen no larger than 6.25 inches across its diagonal." For such devices, the contract requires the parties to take certain steps for the purpose of agreeing on a license fee on such a device, but if the parties couldn't agree on a fee, then such devices would just not be covered by the license agreement.

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Microsoft's billion-dollar patent royalty stream from Samsung hinges on a second contract

Earlier this month it became known that in fiscal year 2012 (mid-2012 to mid-2013) alone, Samsung paid Microsoft more than $1 billion in Android patent royalties. Samsung is only one, but presumably by far the largest, of Microsoft's 27 Android patent licensees. While Microsoft's patent licensing effort has been tremendously succesful, litigation results (after more than four years of suing Motorola) suggest that Samsung could get a deal on far better terms, or opt to defend itself in court for years (the Motorola way), if the royalty rate had to be negotiated again. A zero-zero cross-license would be a real possibility considering that Microsoft is now a device maker and Samsung holds many patents essential to cellular telecommunications standards.

I've said it before on Twitter: Android isn't free in light of substantial royalties changing hands, but Motorola has so far proven that Android could have been free if every Android device maker had decide to take their chances in court and modify products as needed.

For Microsoft's Android patent licensing business it's now key to hold Samsung for as long as possible (2018) Samsung to the terms of the existing license agreement. Presumably Samsung would be prepared to settle the case if Microsoft substantially lowered the royalty rate. But for now, it's an all-or-nothing proposition: either Samsung still has to comply with the 2011 contract or it doesn't have to.

Samsung has initiated an arbitration proceeding under ICC (International Chamber of Commerce) rules, and a week ago it brought a motion to compel arbitration and to stay the case in the Southern District of New York (this post continues below the document):

14-10-10 MOL Samsung motion to arbitrate Microsoft case.pdf by Florian Mueller

Without access to all the terms of the agreements in question, it's impossible to form an opinion as to which party's contract interpretation is more convincing. The above memorandum of law at least sheds some light on Samsung's argument.

There are two contracts (which was known before, but in less detail): a patent licensing agreement and a business collaboration agreement. The latter related to Samsung's role as a Windows device maker. The patent license agreement requires disputes to be resolved in the Southern District of New York, where Microsoft brought its suit. The business collaboration agreement, however, appears to be even more confidential and, according to Samsung's filing, "specified that [the parties] would arbitrate certain disputes in Japan under the Rules of Arbitration of the International Chamber of Commerce ('ICC Rules')." Under ICC Rules, even the question of arbitrability (i.e., whether a dispute falls under an arbitration clause) must be arbitrated.

Samsung's filing shows that Microsoft's objective was not merely to collect patent royalties on Android devices but also to provide an additional incentive for Samsung by promising Success Credits and Collaboration Credits in connection with Windows phones and tablets as well as Microsoft search services. At the end of the year, Samsung pays the balance between the royalties due under the patent license agreement and the credits under the business collaboration agreement. At least based on Samsung's lawyers' representation of the contractual situation, the business collaboration agreement enjoys priority over the patent license agreement with respect to royalty reports:

"Under the [business collaboration agreement], the 'Royalty and Credit Calculation Report . . . will be deemed to constitute, include, supersede and be in lieu of any 'Royalty Report' otherwise due under Section 4.2.3 of the [patent license agreement].'"

This already lends quite some credibility to Samsung's claim that the two agreements (and a third one, which is just a non-disclosure agremeent) are "interconnected." According to Samsung, the business collaboration agreement allows it to terminate the patent license agreement "in the event that Microsoft breaches Section 9.7 of the BCA." And that section allegedly "prohibits either party from assigning "any rights or obligations hereunder, whether by operation of law, contract or otherwise, including by way of a change of Control." An acquisition wouldn't necessarily be an assignment and Microsoft pointed to a clause in the license agremeent that makes it apply to whatever business may be acquired later. But Samsung now says the following about the business collaboration agreement:

"As relevant here, where the 'assignment is to a competitor of the other party,' the 'assignment' is defined to include any 'merger of a party with a third party.' Part of the parties' dispute about the Annual Invoice concerns whether Microsoft's acquisition of Nokia's Devices and Services business and subsequent integration of that business into its existing operations constitutes a 'merger' with a Samsung competitor within the meaning of Section 9.7."

Nokia's handset division undeniably was and continues (under the Microsoft umbrella) to be a Samsung competitor.

With the greatest caution due to the fact that the agreements themselves are sealed, my impression at this stage is that Microsoft has strong arguments under the patent license agreement per se, but Samsung has a strong point under the business collaboration agreement, and it appears that the business collaboration agreement has more weight in the overall (and rather complex) contractual relationship between these parties. My guess is that the matter will have to be referred to arbitration at least for the purpose of establishing arbitrability. But let's await Microsoft's response to Samsung's motion.

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Samsung paid Microsoft over $1 billion in Android patent royalties in 12-month period: court filing

When Microsoft filed its contract lawsuit against Samsung over Android patent royalties more than two months ago, I predicted that it "[wouldn't] be able to get everything sealed." And yesterday two key pieces of information about the Microsoft-Samsung patent license agreement came to light as Microsoft filed its amended complaint in public (you can find the document at the end of this post):

• The 2011 deal covers seven fiscal years (July 1 - June 30). The last fiscal year it covers will end on June 30, 2018.

• "For Fiscal Year 2 of the License Agreement [July 1, 2012 - June 30, 2013], Samsung reported to Microsoft [...] that Samsung owed over $1 billion in royalties under the Agreement. Microsoft agreed[.]"

  Paragraph 45 of the complaint states the precise number: $1,041,642,161.25 (and interest of $6,991,844.64 that Microsoft claims to be entitled to but Samsung hasn't paid)

So far, Samsung has not yet responded to Microsoft's position on what bearing Microsoft's acquisition of Nokia's mobile devices business has on this contract. Microsoft recalls, as no one would deny, that "[b]oth Microsoft and Samsung, which are highly sophisticated businesses, were represented by skilled counsel throughout the process of negotiating, draft, and executing the License Agreement." And these parties, according to the complaint, agreed to the following clause:

3.2 New Subsidiary License. If a Subsidiary or business unit/division is acquired by a Party after the Effective Date, the Subsidiary or business unit/division shall be deemed a Grantee under Section 3.1 and the License granted under Section 3.1 shall extend to such Subsidiary of business unit/division, but effective only as of the of the acquisition.

Microsoft concedes, however, that "[t]he License Agreement als contains an anti-assignment provision in Section 7.7 [...]," but says "the Nokia Acquisition is precisely the kind of transaction that is explicitly permitted." The dispute also appears to (at least potentially) involve a parallel Collaboration Agreement relating to Samsung's Windows-based devices.

I have a very conservative pacta sunt servanda approach, so I would never downplay the importance of what's at stake in that regard. However, rather than get bogged down in all sorts of contract law details, let's focus on the overarching strategic issues.

There's a non-party to this deal that is still at the center of the dispute: Google. About ten years ago, then-Microsoft CEO Steve Ballmer allegedly (according to a court filing) said this:

"F...ing Eric Schmidt is a f...ing p...y. I'm going to f...ing bury that guy, I have done it before, and I will do it again. I'm going to f...ing kill Google."

As of today, they're both doing well, and if anyone was now going to "bury" the other, Google would be far more likely to do it to Microsoft than the other way round ("far more likely" is an understatement). From a consumer point of view I regret that Google is still superdominant in the search engine business, but I have only myself to blame because every time I install a Windows computer, the first thing I do after the installation process is to set Google as my standard search engine for all browsers, even though I've never been disappointed with the results that Bing delivered on the few occasions on which I used it. (At least I know Google invests more money in very ambitious research projects that can make the world a better place than its rivals, probably more than all of its rivals combined.) Anyway, Google's core business is safe. Meanwhile, Google is actually becoming the new Microsoft in terms of the dominant operating system maker of the future -- just look at this chart:

(You can find more such statistics at Statista)

Google is making fast market share gains at Microsoft's expense, in a field of technology in which Microsoft filed tens of thousands of patents over the last 20 years (becauses it invested tens of billions of dollars in operating system R&D). I would have thought that Microsoft owned a patent thicket that would constitute a lethal entrance barrier even if a new entrant managed to get traction among app developers. I was wrong. I've admitted it before, especially in my October 1 blog post, in which I showed that only about 9% of 222 smartphone patent assertions (by Apple, Microsoft, Motorola, Nokia and Samsung combined, in the U.S., Germany, and the UK) had merit based on final or interim results:

Microsoft has, to put it diplomatically, not outperformed the others so far:

To be fair, Microsoft would also have a 9% "hit rate" in the above chart if a patent with respect to which the Federal Circuit reversed the final ITC ruling had not expired and if, despite some remaining issues on remand, Microsoft had prevailed. But if we look at it in terms of Microsoft patents that are presently (after four years of litigation) enforceable against Android devices, there's only one, and it covers the scheduling of meetings from a mobile device. I always try hard to apply the same standard to all companies (regardless of past or ongoing business relationships), and just like I wrote in the spring that the only feature of which Apple proved ownership in its first 49 months of Android litigation was rubberbanding, it's also a fact that Microsoft's Android patent enforcement is now in its 49th month and the aforementioned scheduling feature is the only one of which Microsoft has proved ownership in court so far. I repeat, so far: it remains to be seen what happens in the years ahead should Microsoft and Motorola not settle before some appeals are resolved and some infringement assertions are finally taken to trial in the Western District of Washington.

The impact of Apple and Microsoft's IP enforcement efforts was and is obviously not limited to the patents they successfully enforce in court. The fact that they do enforce from time to time (though they both haven't filed any new claims against Android devices in years) presumably does have an effect on other companies' decisions. It is very likely that certain features on which Apple and Microsoft hold patents were never incorporated into Android for fear of enforcement. But is Android lacking something today that I as a consumer would miss? No.

In my previous post I also showed the difference between Apple's exclusionary approach on the one hand and Microsoft's licensing focus on the other hand. Microsoft has announced a total of 27 Android/Chrome-related license deals and brought infringement lawsuits against only two device makers, while Apple has started three disputes and extended a license to only one Android device maker (HTC). The following chart shows the difference (click on the image to enlarge):

Unless Microsoft turns its litigation against Motorola around, one can't help but conclude that Microsoft's dealmaking capabilities are stronger than its claims that Android infringes many of its patents. Assuming for the sake of the argument that Microsoft is right and Samsung wants to get out of the existing license agreement, this certainly wouldn't be the case if Microsoft had proven against Motorola (and Barnes & Noble, though not much happened there before a strategic partnership also put the patent dispute to rest) that Android does indeed infringe on valid Microsoft patent claims to a huge extent. (By "huge extent" I obviously mean more than a meeting scheduler feature that I never used, at least not on any mobile device.)

License agreements and FRAND licensing commitments are, besides smart litigation tactics, also the reason for which Motorola hasn't been able to enforce any patent against Microsoft for even one second. It was a contract lawsuit in the Western District of Washington in which a temporary-restraining-order-turned-preliminary-injunction came down and prevented Motorola from enforcing two German H.264 (video codec) injunctions against Microsoft. I guess part of the reason for which Microsoft brought the present contract case against Samsung was so it could seek an "anti-suit injunction" again if Samsung started to enforce any of its patents against the former Nokia devices. Also, it was a contract-based defense (related to ActiveSync) that got Motorola's German synchronization patent case stayed (though Motorola was able to enforce the same patent against the email service of Apple's iCloud for 19 months).

Between Microsoft and Samsung, the amount of money that is at stake (I had no idea before how much it was, though I figured it wasn't chump change) makes a settlement very difficult on the one hand and a very logical outcome on the other hand. If Microsoft prevails on a pacta sunt servanda basis, Samsung will owe it many billions over the years, though this would certainly not contribute to Samsung's enthusiasm as a Windows device maker (think of the operating system market share chart). If, however, the license agreement does not apply anymore, Samsung may decide to simply fend off any Microsoft patent assertions against Android in court and pay Microsoft as much in Android patent royalties going forward as Motorola has paid over the last four years: nothing. (Or it would assert wireless patents against Microsoft's acquired Nokia devices and offset a large part of the royalty revenue stream.) The extreme outcomes are unlikely. A renegotiated license agreement is my best guess.

Finally, here's the amended complaint:

14-10-03 Amended Microsoft v. Samsung complaint.pdf by Florian Mueller

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