Showing posts with label Patents. Show all posts
Showing posts with label Patents. Show all posts

Thursday, October 19, 2023

My final FOSS Patents post: thanks again for your interest in my views

As I already indicated in the previous post, after all those years I have decided to move on in various ways. It's the year of new horizons for me.

This post is my final one on FOSS Patents. There is a possibility that others than me will maintain and contribute to this blog in the future. It will remain available as an archive for a transitional period.

I never monetized FOSS Patents. Not a single ad was sold. Not a single subscription. It started as a private, personal thing, and that's how my involvement with it is ending now. The content wasn't monetized either. Whenever I received serious requests for reuse, I authorized them, such as by the Library of Congress (LoC). By authorizing the LoC more than a decade ago to archive all FOSS Patents post, I already dedicated the content to the general public. And let's face it: the kind of content that you find here is rather short-lived in practical terms, though an archive may satisfy researchers' curiosity.

With the exception that I can't make decisions for third parties whose material I incorporated (which is easily identifiable as such, given that I properly quoted external sources and made the sources of images clear), you can use my FOSS Patents writings under the Creative Commons BY-ND license. Beyond that, I will consider even derivative works fair use so long as they don't create any misconceptions as to what my views really are--and what they are not.

I don't want to make this a big thing here. I'm neither celebrating nor mourning. This is a rational and well-considered step. Times change (for instance. I'm not available for consulting work anymore). I hope you enjoyed reading my posts as much as I enjoyed writing them, and I apologize for sometimes having gone off-topic.

I'm now, starting in a few days, going to be writing a book on the Microsoft-ActivisionBlizzard merger saga. I will do so in a beautiful place with excellent weather and in a quiet environment. That book project--my first one in decades--is going to essentially require my full attention until it's done. Given that I played Activision games in the 1980s, worked for Blizzard in the 1990s, opposed and thereby delayed a merger in the late 2000s, and played Candy Crush in the 2010s, I just want to write that book. And it's not going to be put under a Creative Commons license, by the way.

While my focus on that project will be next to 100%, I may sometimes voice my views on certain other topics elsewhere. There are many formats out there.

Once again, thanks for everything!

Saturday, September 16, 2023

New FTC initiative and very recent D.C. Circuit dismissal of FTC antitrust case relate to use of patents in connection with Abbreviated New Drug Applications

On Tuesday (September 19), the Munich Local Division of the Unified Patent Court (UPC) intends to adjudge a preliminary injunction request in a life sciences case. I will do my best to share the news quickly. A preliminary injunction looms large according to what various observers (including specialized newsletters) say. We will see, but only one thing would really surprise me: if the antitrust-based affirmative defense in that case succeeded. While the UPC is a European court, defendant NanoString's lawyers argue that their client may prevail on a U.S. antitrust claim against patent holder 10x Genomics. Under U.S. law, those seeking to enforce antitrust law against patent holders exercising their monopoly rights face a very high hurdle to say the least.

From the West Coast (Qualcomm v. FTC, 9th Cir., 2020) to Texas (Continental v. Avanci et al., 5th Cir., 2022) to the East Coast (FTC v. Endo Pharmaceuticals, D.C. Cir., 2023), federal appeals courts have been rather clear in recent years that antitrust law does not trump patent law. Patents are monopolies, but there is a strong presumption that they are lawful monopolies. It is not 100% inconceivable that a patent holder may run afoul of U.S. competition rules. That, however, hasn't been the outcome in any recent case. It wasn't even a close call in any of those recent cases.

In this post I want to be nonjudgmental and simply analyze the state of affairs, which some may consider desirable while others may have different policy views. What some may deem judgmental (but is not intended as such) is my take that on the bottom line U.S. appeals courts effectively put patent law above antitrust law. They say things that suggest both are on equal footing. But in practice, if the monopoly rights conferred by patents on their holders are treated with enormous deference so that traditional anti-monopoly rules hardly ever apply, there isn't much of an opportunity for public or private antitrust enforcement. Whether for better or for worse is in the eye of the beholder.

Let's take a quick look at two very recent developments, both of which happen to involve the concept of Abbreviated New Drug Applications (ANDA), a fast-track approval process for generic drugs.

August 25, 2023 decision by the United States Court of Appeals for the District of Columbia Circuit in FTC v. Endo (appeal no. 22-5137)

The D.C. Circuit affirmed the D.C. District Court's dismissal of an FTC case over an exclusive license agreement between Endo Pharmaceuticals (represented by a Dechert team led by George Gordon) and Impax Laboratories (represented by a Kirkland & Ellis team led by Jay Lefkowitz).

The FTC had brought the case based on the observation that prices for a certain category of drugs (and I'm not going to take a position on opioids here as the focus is on the intersection of patent and antitrust law) increased after a patent holder (Endo) exited the market and granted someone (Impax) an exclusive patent license. Price hikes like that are often indicative of consumer harm. But in this case, both the district court and the appeals courts determined that a single patentee (as opposed to a research consortium) is free to grant an exclusive license to a licensee, even if it means that there will be only one market actor left.

There had been a patent infringement dispute between the two companies, provoked by an ANDA that disputed that the relevant Endo patents were valid and infringed. That one was settled in 2017 in the way that gave rise to the FTC's enforcement action.

The FTC tried to describe the Endo-Impax deal as very similar to an exclusive license agreement that the Supreme Court deemed an illegal noncompete contract in Palmer v. BRG of Georgia (1990). In footnote 1, the D.C. Circuit explains why the two cases are distinguishable:

"[In Palmer] an exclusive licensing agreement was a pretext for a noncompete agreement between two competitors, because the parties in Palmer did not require one another’s intellectual property to participate in the market for bar preparation courses. Here, by contrast, Impax’s ability to compete was completely contingent on the clarity of its license to use Endo’s patents, and the complaint itself alleges that Endo surrendered the right to press its suit against Impax through the 2017 Agreement."

Palmer was not about patents. The material in question was presumably protected by copyright, but copyright law is narrow and the Supreme Court took issue with the fact that the net effect was horizontal geographic market division.

Therefore, Palmer is of limited help if we want to find out where patent license agreements might run afoul of the antitrust laws. There could be a hypothetical case where company A licenses to company B a patent (or patent portfolio) P that it doesn't really need to license to make a certain product or offer a service, but the license agreement contains clauses that amount to geographic market division.

The FTC couldn't make that showing. The closest argument to the license being pretextual was that the settlement precluded the licensee from challenging the patents in question, which is, however, a standard term of patent license agreements as the licensing practitioners among you can confirm. Only because a party is contractually precluded from challenging certain patents doesn't mean such challenges would necessarily have succeeded. Even without such a contractual clause, someone who has taken a license often doesn't even want to challenge the licensed patents as the main (or only) beneficiaries would be unlicensed competitors. And it doesn't prevent any third party from challenging those patent rights in an effort to compete in the relevant market.

The D.C. Circuit provides some high-level guidance:

"In a future case, the Commission is free to plead that a licensing agreement results in unjustifiable competitive harms, so long as it explains how those harms exceed what the Patent Act and settled precedent permit, which it has failed to do here."

So the starting point of any U.S. antitrust analysis of an exclusive license agreement will be that "both the Supreme Court and the Patent Act have blessed [such contracts] as lawful," and there must be something more--in fact, something egregious--than exclusivity to establish an antitrust violation. A pretextual license such as in Palmer (where the relevant price, by the way, increased from $150 to $400 as a result of horizontal geographic market division) is presumably not the only such scenario, but for now there's no other example of an exclusive IP license being anticompetitive. It would take "allegations establishing that [an agreement] created anticompetitive effects greater than that authorized by settled law and precedent" that is favorable to exclusive IP licenses.

September 14 policy statement by the FTC on brand pharmaceutical manufacturers' improper listing of patents in the Food and Drug Administration's (FDA) 'Orange Book'

On Thursday, the FTC issued a policy statement (PDF), press release, and an additional statement by Chair Lina Khan (PDF) concerning "improper" patent listings in the FDA's Orange Book.

The idea of the fast-track approval process called ANDA is that generic drugs should be approved quickly, but not so quickly that a patent holder cannot enforce its rights. That's why there is an automatic 30-month stay of approval in the event of patent litigation by the manufacturer of the original product. I find the term "brand drug manufacturer" a bit misleading as there are generics companies with fairly well-known brands, too.

The FTC believes to have identified a rampant form of abuse in the form of drug makers including patents in the FDA's Orange Book that aren't really needed. This is somewhat comparable to an overdeclaration of allegedly essential patents in connection with industry standards, but with the effect that the approval of competing products can be delayed (while standard-essential patent owners can only sue after an implementer has released an unlicensed product).

What lends the FTC initiative significant credence is that the FDA supports the new statement, effectively making it an inter-agency initiative.

Unlike in FTC v. Endo, which involved Sherman Act Section 1 and 2 claims, the FTC intends to tackle such improper listings as unfair methods of competition under Section 5 of the FTC Act. In any event, the D.C. Circuit's FTC v. Endo decision does say that anticompetitive behavior that goes beyond what is lawful under patent law can be an antitrust violation.

Where I see a practical challenge for the FTC is that any overdeclarations would have to be shown to have been made in bad faith. However, patent law is sufficiently subjective (for example, a fairly high percentage of claim constructions are overturned on appeal) that drug makers will often be able to argue that even though their position on the inevitability of an infringement of a certain patent by a type of drug may have been wrong, it wasn't wholly unreasonable in the first place. That is, for example, what defendants sometimes argue in order to escape willfulness enhancements of damages verdicts. The FTC says that patents are sometimes listed in the FDA's Orange Book even though their claims just don't read on the drug in question--but what will the courts of law say in a given case?

The FTC's policy statement may now dissuade drug makers from adding patents to the FDA's Orange Book that they'd have listed before. In that case, the FTC may achieve a positive effect without having to litigate. But if it does have to go to court, those cases threaten to become rather difficult to decide--and possibly even more difficult to win.

Sunday, April 9, 2023

For more than a decade, Sony's patent applications have been disparaging Microsoft and Nintendo as 'inferior manufacturer[s]' of video game consoles: gratuitous, childish, unprofessional

Since last year I've been observing that Sony is an unreasonable--or, to use a word with which Sony was threatening the UK CMA with an appeal and which a journalist thought might describe Sony itself: irrational--complainant over Microsoft's acquisition of Activision Blizzard King. Today I learned that Sony's conduct as a patent applicant also raises serious psychiatric questions.

It was actually not another patent blog but GameRant that drew my attention to it:

Sony Throws Shade at Microsoft and Nintendo in Newly Published Patent

A newly published Sony patent oddly refers to Microsoft and Nintendo home entertainment consoles as 'inferior' to its products.

Hat tip to GameRant, but this is NOT NEW. It's long-standing Sony practice. They've been doing this since at least 2011!

Sony has incorporated that side swipe at Microsoft's Xbox and at Nintendo's consoles like the Switch for a dozen years in dozens of different patent applications.

It's amazing that no one has discovered this "tradition" before, and that no patent office told them a long time ago to stop doing that once and for all. Patent applications are not meant to be propaganda instruments for console warriors.

Here's the relevant language from the patent application GameRant discusses (WO 2023/055447, PCT/US2022(034277)):

"For example, an end user device may be a personal computer, a home entertainment system (e.g., Sony PlayStation2(R) or Sony PlayStation3(R) or Sony PlayStation4(R)), a portable gaming device (e.g., Soy PSP(R) or Sony Vita (R)), or a home entertainment system of a different albeit inferior manufacturer." (emphasis added)

GameRant is correct that "home entertainment system" is clearly defined by Sony's patent applications as video game consoles (or hypothetically multifunctional devices that come with video game console functionality). A patent is always its own dictionary. Therefore, saying that other home entertainment systems come from "different albeit inferior manufacturer[s]" is--as GameRant correctly notes --"obviously targeted at Microsoft and Nintendo."

GameRant is furthermore right that it's "strange for this language to appear in a patent." What is common and legit in patent applications is to explain why the claimed invention is superior over the state of the art (i.e., over technology existing at the time a patent application is filed). In that context, there is nothing wrong with discussing specific technical drawbacks (such as inferior performance, higher power consumption, greater memory footprint) of particular prior art (earlier inventions).

But calling competitors generally "inferior" is gratuitous, stupid, childish, and unprofessional. Even if those manufacturers were inferior, it would not mean that whatever invention a given Sony patent purports to describe--here, a "universal controller"--is by definition innovative and deserving of patent protection.

Sony is obviously the kind of client many patent attorneys want. If a small company went to the same patent attorneys and wanted them to file patent specifications that contain such an outrageous passage, most patent attorneys would decline to attach their names to it.

If Sony wants to engage in comparative advertising, it can do so elsewhere. Gamers are not going to make purchasing decisions based on the language Sony uses in its patent applications.

In November, Video Games Chronicle (VGC) quoted the same language from a different Sony patent application (PlayStation has been working on NFTs and blockchain technology, Sony patent reveals).

I've run some searches of patent databases--after almost 13 years of commenting on high-stakes patent litigation, that's obviously a routine activity for me--and found dozens of Sony patent applications that use the same idiotic language. I believe the oldest one of them--unless I missed an even older one, which can happen--is this one (PDF):

Redeemable Content Specific to Groups

Assignee: Sony Computer Entertainment America LLC

Filed: August 29, 2011

Appl. No.: 13/220,315

Don't get confused by the fact that the publication number is US 2013/0054689: that's the publication date. For the first 18 months, patent applications are in "stealth mode": they're in the database, but not publicly available. Then they get published and are assigned a date. But the filing date was August 29, 2011, and the following image shows the same idiocy as in the much more recent patent application that GameRant discovered (click on the image to enlarge):

Here's just a sample of other Sony patent applications that contain the words "different albeit inferior manufacturer" with (dis)respect to competing video game consoles:

GameRant was wondering whether "the offhanded remark" was related to Microsoft's acquisition of Activision Blizzard King, given that the filing GameRant discusses was made in June 2022, "about six months after Microsoft announced" that deal. The above list shows Sony has been doing this systematically for more than a decade. This is not attributable to pride in inventorship. It's just insane.

Wednesday, March 1, 2023

Huawei asks China's patent office to confirm Xiaomi infringes patents, but administrative process is more similar to mediation than to litigation

There are reports from China that the country's State Intellectual Property Office (SIPO) has accepted Huawei's requests to determine that Xiaomi infringes four select patents. Two of them are 4G/LTE standard-essential patents (SEPs) while the other two are non-SEPs on panoramic images (a camera feature) and screen locking.

Apparently those petitions were filed on January 17, 2023.

The same reports quote Xiaomi as saying that the two parties are "actively negotiating" a patent license agreement, and that both Huawei and Xiaomi believe in IP and licensing. Xiaomi describes this proceeding as an alternative dispute resolution mechanism: it's an administrative proceeding that may help the parties reach an agreement.

In other words, they're not embroiled in litigation. This is not a case of Huawei seeking an injunction against Xiaomi. There always is a risk that if negotiations fail, enforcement actions will begin. For now, the most likely outcome is that they will reach an agreement on the terms of a patent license agreement, also considering that another major Chinese smartphone maker--OPPO--worked out a deal with Huawei last year (an agreement that apparently also involved an exclusive license to certain patents, three of which OPPO is now asserting against Nokia in its latest German countersuits).

Huawei's patent licensing program is wildly successful. Without ever having defined IP licensing as a strategic business area, Huawei has become a net licensor. Xiaomi must be the biggest unlicensed user of Huawei's patents at this stage. Several other major smartphone makers are known to have a license.

Monday, February 20, 2023

Gradually refocusing FOSS Patents on patents WHILE exploring alternatives for antitrust analysis and commentary

A flurry of antitrust news during the first third of this month had the effect that temporarily 80% of FOSS Patents' posts had nothing to do with patents. I received some actions that made me realize I had strayed too far from what used to be this blog's focus for the better part of the 12+ years it's been around. As I promised nine days ago, here's my new editorial (and social media) policy:

  • FOSS Patents blog:

    • Back to the roots: for the next next six months (March-August 2023), there will be no more than 10 non-patent posts in any given calendar month.

    • Starting September 2023, that monthly limit goes down to five.

    • This is a one-way street: no exceptions, no ifs, no buts. If anything, there'll be a further reduction.

  • Antitrust commentary:

    • My passion for competition topics, which has recently earned me a prestigious nomination, is undiminished. I just don't want to disregard that a large of the audience of the FOSS Patents blog is patent-focused.

    • I may launch a dedicated antitrust blog, which in a way would be a logical next step, though I can't promise (much less announce) anything yet.

    • I plan to contribute to Concurrences at least twice this year (vs. once in 2022).

    • From time to time I may publish LinkedIn articles on antitrust topics (LinkedIn articles are structurally much like blog posts).

  • Social media:

    • The patent law community has clearly chosen LinkedIn (and is not really active on Twitter anymore).

I wish to thank you all for your interest in my analysis and commentary. It is of the utmost importance to me to cater to the specific needs of two different--though partly overlapping--audiences. Please stay tuned!

Friday, July 9, 2021

Fortress Investment once again urges district court to dismiss Intel's antitrust case over patent aggregation by non-practicing entities

In mid-June, both Apple and Intel opposed Fortress Investment's motion to dismiss their second amended antitrust complaint in the Northern District of California. A week later, Apple withdrew from the case, allowing Apple to take a purely defensive perspective on antitrust law (case in point, Apple just lost an appeal to Epic Games in Australia).

Last night, Fortress filed its reply brief in support of its motion to dismiss (this post continues below the document):

21-07-08 Fortress Reply ISO... by Florian Mueller

My impression was that some of the arguments in favor of dismissal are more like summary judgment than motion-to-dismiss arguments. I will give this more thought, and if there are any other observations worth sharing, I may do a follow-up post. What I found most interesting at first sight is that Fortress argues that, after Apple's withdrawal, "five out of the nine alleged 'markets' now contain no Defendants or patents that have ever been involved in a lawsuit against Intel." According to Fortress, the complaint failed to properly allege antitrust injury even while Apple was a party to the case, but Fortress believes it is now in an even stronger position.

Fortress makes a similar argument in connection with supracompetitive royalties (which are key to the complaint's theory of harm):

"[...] Intel does not dispute there is no allegation that it has ever paid any royalties to any Defendant ('supracompetitive' or otherwise). Intel states that 'Plaintiffs have 'engaged in licensing negotiations' with Defendants,' [...], but the only 'negotiations' alleged in the [Second Amended Complaint] occurred between Inventergy, INVT, and Apple, who is no longer a plaintiff in this case. [...] There are no allegations that Intel has been involved in any licensing negotiations with any Defendant, let alone any that would be likely to result in a deal."

The Fortress-funded companies mentioned in that passage--Inventergy and INVT--also made a separate filing (Scribd, PDF) arguing that there is no patent aggregation issue with respect to the standard-essential patents those entities hold.

Fortress also replied to amicus curiae briefs filed in support of Intel (and, at the time, Apple) by ACT | The App Association and Unified Patents (this post continues below the document):

21-07-08 Fortress Reply to ... by Florian Mueller

Fortress disputes that ACT | The App Association's members have actually experienced any problems with patent assertions by Fortress-funded NPEs:

"Notably, the App Association does not name a single 'small company' out of its 5,000 members that has supposedly been 'abused' by any of the Defendants. Thus, whatever the merits of the App Association's arguments about supposed abusive patent assertions against small companies, they are simply irrelevant here."

The motion-to-dismiss hearing will be held in San Francisco in a couple of months.

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Wednesday, June 23, 2021

German patent judges dispel any doubts that might have existed: injunctive relief continues to be readily available to prevailing patentees

An international IP-specialized publication that I've mentioned on a variety of more positive occasions was totally off-base with the following headline on June 11: "Germany's automatic injunction regime for patent cases looks set to end"

That headline is just as wrong as Dewey Defeats Truman was back in the day. There was a procedural juncture last September when I thought the pendulum had swung against the automatic patent injunction regime, but that impression didn't last long. By the time the German federal parliament held its final vote, we were long past the point at which one could doubt what the impact of the amended injunction statute (§ 139 PatG) would be.

I've never seen a reporter from that publication in or near a German courtroom. That may explain this misconception. To be fair, the second sentence below the headline at least nuanced the fundamental misconception by noting that "[this] does not mean that major changes in practical terms are guaranteed." That portrayal of the situation is not spot-on either, but a lot closer to accuracy than the headline.

I explained the fallout from the legislative decision the morning after the vote; in a podcast I published on Monday, you can hear from two very experienced and knowledgeable German patent litigators and from comparative patent remedies expert Professor Tom Cotter; and yesterday I translated a variety of quotes from the case law and, especially, the parliamentary process to show that the legislative intent is clear: there should be and will be no departure from the (near-)automatic patent injunction regime that made Germany the most popular jurisdiction among patentees seeking to enforce their rights against infringers.

If you still needed to see something more that would eliminate any residual doubt, let me point you to today's Juve Patent article entitled German patent judges predict few changes to automatic injunction.

Juve Patent anonymously quotes judges from the divisions hearing patent infringement cases in Munich, Mannheim, and Dusseldorf. They all basically tell the same story: in order for proportionality arguments to matter, you have to make a showing that your case is a very rare exception.

The Juve Patent article is recommended reading. Rather than quote excessively from it, I'd just like to highlight it because it's the final nail in the coffin of the spin doctoring some have engaged in, and the misconceptions a few have had, since the final parliamentary vote. But I do wish to add something to the quote of an unnamed Munich judge who said that a grace period prior to the actual enforcement of an injunction "should only be granted in extreme situations" such as "when banknotes can no longer be printed or no one can make phone calls." First, even in such cases they're not really thinking of the denial of an injunction, but mostly just a workaround period. Second, like in the Heat Exchanger opinion by the Federal Court of Justice, the availability of a license will be held against the infringer (unlike in the U.S., where it would weigh against inadequacy of monetary relief). And third, the scenario of no more phone calls normally means that it's a SEP. In a SEP case, however, implementers are entitled to a license under the antitrust laws anyway, and there won't be a proportionality defense on top of FRAND. So even delayed enforcement is going to be a very rare exception--and the wholesale denial of an injunction is probably not going to happen even once unless and until the law is amended again.

Don't believe the wrong sources. Some are clueless, and some just try to portray something as a political success within their organizations that's actually a complete lobbying failure. I've been telling it like it is, in a relentless pursuit of the truth, and I'm happy to have been vindicated by multiple judges who spoke to Juve Patent about this matter.

Come September, the new FOSS Patents Premium service will provide complete coverage of how the case law in Munich and Mannheim evolves. Plaintiffs and defendants alike will have to be prepared. Some things will change, but prevailing patentees are going to get their injunctions as long as they make a licensing offer that isn't facially absurd.

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Tuesday, April 27, 2021

Fortress Investment and subsidiaries seek dismissal of Apple and Intel's second amended antitrust complaint over patent aggregation

Not every long story is neverending: this summer we're finally going to know whether Apple and Intel's antitrust complaint against Fortress Investment in the Norther District of California over abusive patent aggregation will be taken to trial--or whether the plaintiffs have to appeal a dismissal with prejudice. Last night, Fortress and various non-practicing entities (NPEs) it funded brought their motion to dismiss and strike the Second Amended Complaint (a 161-page "book" that is technically already the fourth complaint, as Intel originally brought one, which it withdrew in order to refile with Apple).

Just last week, Intel defended itself against Fortress-funded VLSI Technology's second patent infringement complaint in the Western District of Texas, as a jury held neither of the patents-in-suit to be infringed. VLSI had won a $2.175 billion verdict in the first case in early March. More recently, I found out about a bunch of VoiceAge v. Apple cases pending in Munich, though the trial dates in those have been vacated due to the pandemic. VoiceAge EVS is another Fortress-funded NPE.

At this stage, the case is about patent aggregation: Apple and Intel allege Fortress made targeted purchases for the purpose of amassing a portfolio outside of which one can't find alternative technologies. The complaint has come a long way from a diversity of partly very broad and general assertions to its current degree of specificity. But, guess what, Fortress is basically telling Apple and Intel that their best isn't good enough. Allegedly the Second Amended Complaint "repeats the same errors" as the two prior vesions.

This is the motion to dismiss and strike (this post continues below the document):

21-04-26 Fortress VLSI Moti... by Florian Mueller

INVT and Inventergy filed a supplemental memorandum (this post continues below the document):

21-04-26 INVT Supplemental ... by Florian Mueller

As always in antitrust litigation, market definition is key. Fortress says Apple and Intel's new definitions aren't better: the patents are the same, and it's still about "technical fields" (not "specific functions"). Fortress furthermore argues some of the patents "do not fit [Apple and Intel's] new market definitions."

The next step is to establish market power in a given market. Here, Fortress criticizes that the complaint "does not identify a single price—much less a 'supracompetitive' one—that anyone has ever paid to license any of Defendants’ patents" (just damages demands). Fortress furthermore says the complaint doesn't plead aggregation in the sense of having acquired "all or even most of the 'substitutes' in the alleged markets, or that Defendants have aggregated the most important substitutes—i.e., the 'crown jewels'—in any of the markets." And Fortress argues that makret power alone wouldn't suffice: reduced output is allegedly an indispensable additional requirement in the Ninth Circuit.

With respect to antitrust injury, Fortress notes that Apple and Intel "still do not allege that they ever paid for a single license" to the patents at issue.

A conspiracy across those entities (Sherman Act Section 1) is denied because "every allegedly improper transaction is only between Fortress or Fortress Credit and a single other Defendant" but not among the group of companies as a whole.

In the headline of my report on the Second Amended Complaint, I mentioned the alleged Generating Alerts Based on Blood Oxygen Level Market. The motion to dismiss argues that some of the patents Apple and Intel listed in that context "have nothing to do with measuring blood oxygen." At first sight, a couple of examples Fortress provides may indeed be unrelated, such as U.S. Patent No. 7,690,556 on a "step counter accounting for incline": in the patent document, I couldn't find the word "oxygen" once, and the sole occurrence of "blood" relates to other eHealth functionality than the one covered by the patent. While I did get the impression that the Second Amended Complaint defined reasonably narrow markets, it may very well be that a few patents have been miscategorized.

Fortress's arguments get more technical with respect whether certain patents are in the same market. If they were, Fortress argues, a pice change for one would have to cause a change in demand for another. I guess Apple and Intel will argue that the aggregation of a set of patents may simply mean there are no substitutes left, which Fortress obviously denies.

Maybe you wondered why it's a "motion to dismiss and strike": Fortress asks the court to strike an Unfair Competition Law claim under California's anti-SLAPP statute, as this would entitled Fortress to a fee award.

Some of the points Fortress makes in its motion may not serve as a basis for dismissal, but go to the merits. I guess that's what Apple and Intel are going to argue in their opposition brief on June 14.

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Wednesday, February 17, 2021

Nokia withdraws interlocutory appeal of ECJ referral of component-level patent licensing question: dilatory tactics, disrespectful style

We're witnessing the third stage of Nokia's decline. First it failed to stay competitive in the handset business. Then its business model turned ever more trollish and its patent litigation strategies ever more abusive. The third and latest downturn is that Nokia is now abusing not only its patents, but also its procedural options in litigation.

Throughout almost 11 years of blogging about patent litigation, I have acknowledged on numerous occasions when parties played the litigation game smart. Very recently, I even gave automotive supplier Continental credit for an interesting strategy in a Delaware state court, even though I bashed them in 2019 for their U.S. antisuit motion (which indeed went nowhere). Up to a certain point, litigants--whether plaintiffs or defendants--are simply in their right to exercise their procedural rights for tactical purposes. But beyond that point, such behavior is no longer legitimate, even if it is still technically legal. For example, trolls that file dozens of cases against a single defendant over the course of a few months--or simultaneously sue hundreds of defendants--give patent assertion a bad name. I still have the greatest respect for the skills of Nokia's in-house litigators and outside counsel, but in recent months it has gone a bit too far with its withdrawals of cases just on the eve of trials or decisions.

In December, Nokia dropped two patent infringement cases against Daimler in Dusseldorf just before trial (at a point where the court presumably had already spent a lot of time studying the pleadings and preparing the trial), only to refile in Munich. And now, just before Presiding Judge Dr. Thomas Kuehnen ("Kühnen" in German) of one of the patent-specialized divisions of the Dusseldorf Higher Regional Court was going to rule on Nokia's interlocutory appeal of the lower Dusseldorf court's preliminary reference to the European Court of Justice, Nokia has withdrawn its appeal. Today a spokesman for the Dusseldorf appeals court informed me by email (appellate case no. 2 W 21/21).

From the beginning, Nokia knew that this interlocutory appeal was a bit of a long shot. Its appeal talked in more detail about whether it was admissible at all than about the question at issue. After the lower court didn't reconsider, this went up to the regional appeals court, and was assigned to the Second Civil Senate, whose aforementioned presiding judge took a very clear position on component-level SEP licensing in an article he published in GRUR, the leading German IP law journal, in 2019. For Judge Dr. Kuehnen, the order on Nokia's interlocutory appeal, which he had presumably been working on for some time, would have been an opportunity to provide his input to the top EU court. Not so anymore. Nokia abused the appellate process to engage in stalling, and apparently never really wanted a decision by the regional appeals court.

When pursuing its infringement cases, Nokia can't wait to get rulings (with the exception of those infringement cases it dropped in Dusseldorf because it probably expected them to be stayed, if not rejected). It's typically the defendants to those infringement complaints who seek to extend filng deadlines, move to file post-trial briefs, and so forth. It would have been better for Nokia's credibility to act consistently, as opposed to stalling in Dusseldorf while insisting on speedy dispute resolution in other venues.

The question of component-level licensing is the key issue in Nokia's--and various other parties'--automotive patent cases. Whether one prefers one outcome of that ECJ referral or another, clarification will help, and if the ECJ ruling provides clarification (there is always a risk of a decision raising new questions), licensing negotiations will benefit from such guidance. Why does Nokia prefer to delay such resolution? Are they so worried they're going to lose? Is Nokia's plan to gain leverage over Daimler in some infringement case in the meantime? In light of a key appellate decision Nokia lost in Karlsruhe (where all appeals from Mannheim go) on Friday (which I'll discuss in the next post), it's just become even harder for Nokia to enforce any SEP injunction against Daimler in the near term.

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Wednesday, February 3, 2021

Conservative politicians shouldn't join Greens and communists in calls for compulsory licensing of COVID/mRNA vaccine patents

This post is a departure from my blog's industry focus that I wouldn't have contemplated if not for the highly unusual circumstances we're facing in the COVID-19 pandemic. The scientific aspects of pharmaceutical patents are above my head, but that also applies to the heads of those politicians proposing compulsory licensing of such patents in the current situation.

I just became aware of a disconcerting statement by the chairman of the center-right European People's Party (EPP) group in the European Parliament, Manfred Weber MEP (Christian Social Union, CSU), quoted in a German newspaper article (my translation):

"If need be, admitted vaccines must also be made by others on the basis of compulsory licensing."

This is the same Manfred Weber who lent unconditional support to the EPP's Axel Voss MEP with respect to upload filters (EU Copyright Reform). In other words, he wants IP overenforcement against kids who upload videos from a private party to YouTube, with some commercial music playing in the background, but he wants to deprive the companies who made a miracle happen--the availability of multiple COVID-19 vaccines after such a short time--of their rights.

His party, the CSU, is the regional sister party (comparable to the Minnesota Democratic-Farmer-Labor Party vs. the Democratic Party) of Chancellor Angela Merkel and European Commission President Ursula von der Leyen's party, the Christian Democratic Union (CDU). It's unlikely that he would toss out such an idea if it hadn't at least been floating around in those circles.

The EU is obviously in deep-shit trouble. In yesterday's New York Times there was an article entitled Slow Pace of Vaccinations Pushes Europe Toward Second Economic Slump. The numbers speak a clear language: as of the start of February, Israel had administered at least one dose of a COVID-19 vaccine to almost 60% of its population, the United Arab Emirates to approximately 35%, the UK to approximately 15%, the U.S. to approximately 10%, and the EU only to about 2%-3%. As I explained early last month, the EU's purchasing decisions were wrong at any given point in time just based on then-available information (New York Times Coronavirus Vaccine Tracker)--and liability issues do not serve as an excuse, as it's simply a reality in a seller's market that not only prices but also other terms are impacted by the demand-supply discrepancy. And money could have solved the problem at the right time by enabling certain companies to invest in European manufacturing capacities early on--just what ex-president Trump achieved with his Operation Warp Speed program.

German and other EU politicians shouldn't make themselves ridiculous by sometimes arguing in the same interview that the U.S. can outvaccinate the EU because it's such a large country, and Israel does so because it's a small country. Some politicians sound like those communist leaders did in the late 1980s before the fall of the Iron Curtain.

The problem is not going to get solved anytime soon, though I was surprised by the good news regarding the Russian Sputnik V vaccine, which appears to beat all other adenovirus vector-based COVID vaccines by a wide margin by using a different vector for the second (booster) jab (and both vectors appear to be unharmful human adenovirus strains)--the EU may end up importing that one. Meanwhile, the virus keeps mutating at a pace that makes it hard to follow. Yesterday, for instance, the BBC reported that the UK just found "more coronavirus cases with 'concerning' mutations."

A crisis is a terrible thing to waste. The EU should learn its lesson and reform itself. Brexit has its first success story (outvaccinating the EU by a factor of 5), and the EU will make things only worse if it doesn't think things through. The Daily Mail was never the EU's best friend, but in this article the British newspaper quotes media from all over Europe, including some very EU-friendly ones, who concluded they can't defend the indefensible anymore with respect to the EU's temporary intentions to put border controls in place between the Republic of Ireland and Northern Ireland in order to enforce vaccine export restrictions (which are, by the way, the epitome of "vaccine nationalism" as opposed to people being all for a coordinated EU effort, but criticizing what went wrong).

Even to only toss out the idea of compulsory licensing in this particular context is an insanity.

In the tech sector, I'm against injunctive relief except maybe under the most egregious of circumstances. Just yesterday I stressed again that patent remedies must be proportionate. And I'm not ruling out at all that maybe, further down the road, some general mRNA-related patents might prove overbroad--and compulsory licensing might be needed on antitrust grounds, should there be a clear and present danger of only one or two companies ultimately being able to make that new generation of vaccines (and potentially other types of mRNA-based medications).

But in the current situation, there simply isn't an economic case for compulsory licensing of COVID-19 vaccine patents. (To be clear, patent remedies are only available after publication of the related applications, and COVID-19 is too new for anything to have been published yet, but there are some general mRNA-related patents and patent applications that BioNTech might be able to enforce already against anyone plagiarizing their COVID-19 vaccines.)

The cost of lockdowns and similar restrictions is so high that there's enough money to be made not only for the companies that invented the vaccines but also by those who merely manufacture them. The recent deal between Pfizer partner BioNTech and Sanofi (which invested in BioNTech two years ago) shows that solutions can be worked out at the negotiating table. It's not just about immediate revenue opportunities: every contribution to what may help to solve the COVID-19 problem generates political goodwill and nice publicity.

What governments should do is incentivize such partnerships by making offers that enable both the inventor and the manufacturer to be generously rewarded. There's this saying that you sometimes achieve more with a gun and a smile than with a smile alone. In this case, however, the solution is money, not governmental heavyhandedness like in a plan-based Soviet-style economy.

I have to stress again that what I just wrote was only about COVID-19 vaccines. I do very much believe in the compulsory licensing of standard-essential patents (SEPs), as most of my readers know. But there's a difference between a couple or a handful of patents reading on a COVID-19 vaccine, with enormous risks taken, and the hundreds of thousands of patents one could theoretically assert against a smartphone maker or automotive company--and no single one of which patents truly protects a major investment in research and development.

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Friday, July 10, 2020

Nokia getting nowhere: two more infringement cases against Daimler stayed as declared-essential patents-in-suit are likely invalid

An earlier version of this post went live on Wednesday and confused EP'505 (asserted in Munich) for EP'199 (asserted in Mannheim). A source of mine had gotten confused, and I should have double-checked, but now it's all 100% correct--and the conclusions are obviously the same, except that the Nokia v. Daimler trial in Munich on the 23rd will go forward and promises to be the most important event to date in the automotive patent wars. I'll try to attend.

Sometimes I wonder whether the S in "SEP" stands for "scam" rather than "standard."

Everyone who deals with patents professionally knows that, at least with respect to information and communications technologies, the system is broken beyond repair. Patent offices issue far too many patents and treat mass filers as "key accounts" whose "demand" for weapons of extortion they seek to satisfy. Unlike its U.S. counterpart, the European Patent Office isn't run by a trolls' lawyer, but it's also part of the problem.

But standard-essential patents take the issues facing the patent system to an even higher level. Companies overdeclare (though some have higher "hit rates" than others). No scrutiny is performed. And besides countless patents that aren't essential from an infringement point of view, the vast majority of those who may claim a standard-essential technique are simply invalid as granted.

Nokia failed to deliver a great smartphone user experience, then increasingly resorted to patent monetization. But it concluded license deals without a lot of patents actually coming to judgment. They monetize a portfolio that contains a huge amount of hot or even not-so-hot air. Where's the substance?

For a while, everything appeared to be working out according to plan for Nokia with respect to the Daimler dispute. They knew they were facing a 19th-century company that they hoped would cave at some point. Daimler certainly failed to put the necessary pressure behind its EU antitrust complaint, while Nokia found political opportunists of the worst kind in Brussels who were--and potentially still are--perfectly prepared to do lasting damage to the European Commission's reputation as a competition watchdog. After so many years of having been accused of protectionism, the Commission couldn't vindicate its critics more effectively and convincingly than by condoning Nokia's conduct.

Meanwhile, Nokia was hoping to get leverage through a barrage consisting of ten German patent infringement actions against Daimler. But the tide has turned, and this appears to be a dreadful season for the failed handset maker. The amicus curiae brief filed by the Federal Cartel Office of Germany with the courts hearing Nokia's cases makes it very hard--if not impossible--to imagine that Nokia would obtain an enforceable injunction against Daimler anytime soon, if ever.

Now I've found out that Nokia also keeps losing on the technical merits. Not only has Nokia been unsuccessful in Mannheim so far, but Nokia felt forced to enter into stipulations to stay two more cases given the high likelihood of invalidation of the relevant patents-in-suit:

  • On October 30, 2019, the Munich I Regional Court's 21st Civil Chamber had held a first hearing in two cases, one of which is about EP2797239 on "a method and a telecommunication device for selecting a number of code channels and an associated spreading factor for a CDMA transmission." The trial was supposed to be held on July 29, but it won't go forward as this patent, too, appeared likely invalid, so much so that Nokia had to consent to a stay (as per a filing on July 7, 2020).

  • In Mannheim, Nokia had already lost one case (patent not essential), and another case had been stayed. On June 15, case no. 2 O 37/19 over EP1273199 on a "method and arrangement for maintaining synchronization in association with resetting a communication connection" was also stayed pending a preliminary opinion of Federal Patent Court on validity. The week before, counsel for Nokia had reiterated that they considered the patent valid, but nevertheless consented to a stay.

There still are some other Nokia v. Daimler cases pending in Germany, with a Munich trial still being slated for later this month, a Mannheim ruling scheduled for early August, and a few Dusseldorf hearings set to take place in August and September. But so far, Nokia simply isn't winning. Much to the contrary, Nokia keeps devaluating its portfolio, and all those handset makers whose licenses are up for renewal in the not too distant future are presumably watching those developments attentively. Nokia's litigators picked the patents they thought were their strongest weapons, and it turns out they're largely non-starters...

What makes me really happy is the fact that the Munich I Regional Court appears increasingly receptive to strong invalidity arguments. That brings at least some balance to an otherwise broken system.

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Friday, April 3, 2020

Today is the 10th anniversary of the launch of FOSS Patents--and here's a Microsoft patent threat from 2004 no one reported before

Ten years ago to the day, the first FOSS Patents blog post went live. (In the table of contents on the right side you can also find an entry for January 2010, but that one was added subsequently--and backdated so the contact form would be listed behind all of the actual content.)

When I talk to readers at courthouses or on other occasions, I realize most people don't even know what the "FOSS" stands for. That means Free and Open Source Software, a "politically and philosophically correct" term that describes both persuasions of the same movement. At the outset, the idea was indeed to focus on patent threats and assertions against open-source programs such as Linux. I always viewed the Open Invention Network (OIN) very skeptically as it appeared to part of the problem to a several times greater extent than it was part of the solution. And I was aware of some threats no one had reported on at the time. In fact, there is one that I hadn't written about in the more than 16 years since it was made, but with so much water under the bridge by now--and with Microsoft being a member in good standing of the open-source community these days--I'm going to reveal it on this occasion:

In early 2004, Microsoft's patent licensing department contacted MySQL AB, the originally Finnish-Swedish and, at that time, heavily Americanized open-sourced database company (whose CEO I was advising at the time). What Linux was in comparison to Windows, MySQL was to Oracle, Microsoft SQL Server, and IBM Db2. The term isn't used much anymore, but back then the "LAMP Stack" meant Linux, the Apache webserver, the MySQL database, and one of the P languages (mostly PHP, with a few people using Perl, or even Python): an open-source technology stack powering more websites than any other comparable configuration. MySQL had risen to popularity alongside Linux. It was a symbiotic relationship. Microsoft, of course, favored Windows + Internet Information Server + SQL Server + Visual Studio (C# or Visual Basic).

What Microsoft--and again, the Microsoft of then is not the Microsoft of now when it comes to these types of issues--told MySQL (a company that had received tens of millions of dollars of venture funding while Microsoft already had roughly 10,000 times greater resources) was that they claimed to hold a patent that covered functionality at the very core of the MySQL database engine. From a software development perspective, a database engine is a relatively monolithic (as opposed to modular) thing. If someone asserted a patent against the basic architecture of your engine, it could mean that you have to almost start all over. You'd lose years.

Microsoft was clear about its demand: a 2% royalty on MySQL's (tiny) sales. Two things were not clear, however: whether Microsoft had an agenda to actually start a patent war against open source and, particularly, the LAMP Stack, so that an initial royalty agreement would not have been an amicable resolution of an IP issue but could have been the beginning of the end for MySQL and LAMP; and Microsoft declined to disclose that mysterious killer patent.

The concern I just outlined--that Microsoft would wage an all-out patent war against open source--was not merely paranoia. A Microsoft exec in charge of corporate strategy at the time had told some Silicon Valley venture investors a year or two before that "if it comes to worst with open source, [they'd] just use some of [their] patents." So what was presented as a shakedown might have been a concealed attempt at a shutdown.

Microsoft was the only company at the time to have an issue with Linux; the rest of the industry viewed Linux as a chance of liberation from Microsoft dominance. When it came to MySQL, however, two other major patent holders--IBM and Oracle--potentially had just the same strategic motivation to attack the successful startup, as those companies were pro-Linux, but faced a disruptive-innovation threat from MySQL. While that would have been a gigantic violation of antitrust law, one of MySQL's founders even feared that Microsoft, IBM and Oracle might have agreed to launch near-simultaneous patent attacks on them. And they had only a very few patents (from a smaller startup they had acquired)--likely of zero retaliatory value.

MySQL didn't accede to Microsoft's demand, and Microsoft never stepped up the pressure or sued. Part of the reason may very well have been (and in my view, most likely has been) that there were two things going on in the EU that Microsoft had to be cautious about. The European Commission going after Microsoft for its conduct in some other conduct; and the EU's legislative bodies (Council and Parliament) were working on a Directive for the Patentability of Computer-Implemented Inventions, i.e., software patents directive. Concerns by the open-source community played an important role in the political debate.

At some point MySQL was seriously considering making Microsoft's patent royalty demand public. We had already prepared a press release, and it was going to be centered around an open letter to EU policy-makers urging them to abolish software patents in Europe (though that wouldn't have solved the problem for MySQL anywhere else, and it actually generated most of its revenues in the U.S. anyway). We didn't escalate the conflict, and ultimately that was better for everyone involved.

Oddly, about five years later Microsoft actually tried to defend MySQL's independence. Oracle was in the process of acquiring Sun Microsystems, which had acquired MySQL the previous year for $1 billion. While Sun wanted MySQL's business to grow, there were reasons to assume Oracle simply wanted to control it so as to eliminate a competitive threat. Microsoft and SAP (even though mostly concerned about Java in the beginning) were the two large complainants, and MySQL's founder, Michael "Monty" Widenius, was the third complainant, with help from me. So MySQL's founder and I ended up in an alliance with Redmond about five years after we had thought Microsoft would potentially use patents to destroy it.

If not for that old Microsoft patent threat against MySQL--16 years under wraps--, I might never have gotten involved with patent policy in the first place. And I had it very much in mind when I launched FOSS Patents. At that time, I already knew that Microsoft wasn't necessarily a foe (as the Oracle-Sun merger review showed). In fact, I felt that some FOSS people, maybe because they received funding from the likes of IBM and Oracle, weren't being fair: they turned a blind eye to some other large tech companies' (especially their financial backers') questionable patent dealings and pro-software-patent lobbying, but even when Microsoft had good intentions in specific areas, they looked at whatever Microsoft did or announced like Sherlock Holmes with a magnifier glass and, if all else failed, simply made up concerns that weren't warranted. Part of the FOSS Patents agenda was to focus more on companies whose patent abuse got less attention, but "deserved" more. The first big story here was the second post ever: on an IBM threat against an open-source mainframe emulator.

This blog's focus evolved dynamically. In fact, just about four weeks before I launched FOSS Patents, Apple had filed its first patent infringement complaint against an Android device maker (HTC). Android became the most heavily-attacked piece of open-source software that year as Oracle sued Google (a case that later became only a copyright dispute as Oracle's patents failed in court), Microsoft sued Motorola, Motorola sued Apple (which countersued using largely the same patents as against HTC), and the following year Apple sued Samsung.

Of the roughly 2,300 FOSS Patents posts I've written to date (also, there were a few guests posts), roughly 63% (1,456 posts) went live in the years 2011-2013, the three years in which the "smartphone patent wars" were raging on a very large scale. By 2014 they had already subsided, and in 2014 various disputes came to a partial or complete end.

With those Android companies countersuing, my litigation reporting simply had a mobile focus (and occasionally even gaming consoles). If I had anticipated that, I'd have named the blog "Mobile Patents" or "Phone Patents."

Actually, "FRAND Patents" would have made even more sense. I already took a clear position against injunctions over standard-essential patents in 2010. And a few years later, a Research In Motion/BlackBerry lawyer accused me, after a Mannheim trial, of having "devalued" SEPs and that companies were cutting back on their standardization activities (obviously not true, as we all know now with the benefit of 2020 hindsight).

More recently, this blog has almost been an "automotive" blog, only because car makers are currently the ones that SEP holders like Nokia primarily seek to prey on.

So there's probably no point in ever renaming a blog, much less when it is as well-known as this one. I'm very grateful for having so many loyal readers, and a number of highly important people in the industry as well as in the judiciary, executive and (to a lesser degree) legislative branches of government. I really am.

There's one thing I had envisioned for the 10th anniversary that I haven't found the time for: a redesign. This blog still uses the "Blogspot" platform's original blog layout. Blogspot became Google's "Blogger" service, and undoubtedly supports more fashionable layouts. However, since I have manually entered and edited all the HTML tags here from the outset, it's a bit risky to switch to a newer layout (I ran a test and the result looked awkward)--I or someone I'd pay for it might have to go over 2,000+ posts and make countless manual adjustments. Nevertheless, it may happen later this year--certainly sometime before the potential 20th anniversary :-)

There were times when I was seriously considering discontinuing this blog, or handing it to some other organization, such as an IP-focused publishing company. But in recent years there have been some really exciting developments--and I've found a way to keep blogging while continuing to run an app development company (I'll have a new game to announce this summer).

Some of you encouraged me to keep going--even some who have rather different positions on SEPs or on patent policy in general. Thanks for that, too. I'll keep sharing my honest observations and opinions with all of you for quite some more time!

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Thursday, October 17, 2019

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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Tuesday, January 15, 2019

Qualcomm and Apple bridged the wide gap between their FRAND perspectives through complicated arrangements

Yesterday (Monday) was Day 5 of the FTC v. Qualcomm antitrust trial in San Jose (Northern District of California). In a first summary shortly after the court session, I provided an overview of how, after most of the day had gone extremely well for the FTC, Qualcomm got what athletes call a "second wind" and made tremendous headway against one of the FTC's three expert witnesses, Michael Lasinski. This is now a follow-up post with a focus on negotiation dynamics and deal structures, which was the #1 topic on Friday.

Apple's Chief Operating Officer Jeff Williams was first to testify on Monday morning. He was a member of the team that created the original iPhone, and has interacted with Qualcomm ever since. What we learned from him contributed to a better understanding of Qualcomm's dealings with other companies.

In an antitrust case pitting the U.S. government against a patent-wielding U.S. chipmaker, Apple obviously plays an important role--but many observers of this proceeding appear to miss the grand picture by focusing too narrowly on that company. Only one of the FTC's four key issues is specifically about Apple: exclusivity arrangements. Even that one is ultimately about a pattern, just that the related agreements between Apple and Qualcomm are the only manifestation of that pattern at issue in this case.

At the moment, Apple appears to be Intel's only customer. Qualcomm elicited testimony from Intel's Aicha Evans confirming that at certain points she wasn't even interested in a couple of potential customers. There may have been any number of reasons for that as Intel needs to ramp up its baseband chip business step by step, but there's no reason to assume that Intel wouldn't be interested in growing its business in this field and in having a broader customer base.

Qualcomm's practices have been a concern for the industry at large. I heard this from companies like BlackBerry and (when it was at its peak as a handset maker) Nokia, and some I can't mention due to NDAs (other than saying they're not Apple), before I first became aware of Apple's positions--which I did only in connection with the KFTC (Korea Fair Trade Commission) antitrust proceeding.

The testimony from industry players--of all sizes and from multiple countries--that the FTC has presented is extremely strong. In fact, it's so strong that the FTC's expert witnesses (we'll hear the only trained economist among them, Professor Carl Shapiro, in a few hours) are going to be much less influential in this case than they would be in others. Those industry witnesses have established so many facts relating to the question of anticompetitive harm that I don't think Qualcomm can this around by winning the "battle of the experts," which it may or may not.

As I've stated before, it's advisable not to overrate the importance of who--Apple or Qualcomm--was first to propose exclusive arrangements. If a company is made an offer that serves its anticompetitive objectives in illegal ways, it still has the obligation under the antitrust laws to refuse it. That said, we're all curious about how that type of deal came into being.

Mr. Williams nuanced Apple's proposal by differentiating beween short-term and long-term exclusivity. At the time the parties were negotiating the original (2011) Transition Agreement (which was about Apple discontinuing its relationship with Infineon and exclusively sourcing baseband chips from Qualcomm), Apple apparently had no problem with short-term exclusivity based on the market landscape. But Apple did not want to enter into an exclusive deal for the long haul, given that things can change in this industry within a relatively short period.

Qualcomm presented evidence (including Apple-internal emails, at least one of which was written by Steve Jobs) that a one-year term was to short for Apple's purposes. So the original Transition Agreement became a two-year deal (2011 and 2012). Obviously, two years still fall far short of what one would consider "long term."

A first amendment to the Transition Agreement was negotiated, and it covered the period until including 2016. Accoring to Mr. Williams, Apple did not take the initiative to propose exclusivity in that situation. And Mr. Williams mentioned a situation in which Apple had made a counterproposal to Qualcomm in which the exclusivity commitment was redlined, triggering a response by Steve Mollenkopf (now Qualcomm's CEO) that those "general design commitments" (a euphemism for exclusivity requirements with a clawback clause) were really important to Qualcomm.

It's key to view the 2011 and 2013 agreements in the wider context of Apple and Qualcomm struggling to work out mutually acceptable deal terms. Apple was by far not the only company to take issue with Qualcomm's requirement that others had to grant back a royalty-free license to all patents of their own. We heard about that from various witnesses, most recently Ericsson.

But after the enormous risks Apple had taken with the original iPhone (trying to enter an industry that was an oligopoly, with BlackBerry having been the only successful new entrant--prior to Apple--in a long time), and knowing Apple's emphasis on differentiation, it does not surprise me that Apple was particularly opposed to Qualcomm's grant-back condition.

The face-saving solution that allowed both companies to remain consistent with their principles was that Apple obtained only an indirect license--through contract manufacturers like Foxconn. The CMs were obviously unable to license Apple's patents to Qualcomm, but they were able to secure a license from Qualcomm covering the devices they manufacture(d) on Apple's behalf.

Fundamental, philosophical disagreements between Apple and Qualcomm related not only to the grant-back requirement but also to the royalty base and, directly related to it, the amount. We learned yesterday that Apple would have accepted Qualcomm's 5% royalty rate if applied to the cost of a baseband chip. Just like with the extortionate grant-back clause, it also makes sense that Apple, from the beginning, took issue with Qualcomm's royalty base (complete devices). Prior to the iPhone there had been some relatively unsuccessful personal digital assistants and early "smartphones" made by various companies such as Nokia. Also, BlackBerry added email to voice and short-message texting. But only the iPhone represented a complete paradigm shift from "mobile phones" that gradually got more and more computing functions to a "mobile computer." That's where Apple as a computer manufacturer and maker of handheld devices (at the time, the iPod was already reasonably popular) brought the two worlds together in a way that established the primacy of computing functionality over telephony. The computer absorbed the phone, not the other way round. So Apple was particularly concerned about Qualcomm seeking to be compensated for functionality its patented inventions weren't related to.

According to Mr. Williams, Apple didn't care about whether Qualcomm formally lowered its royalty or just agreed to incentive payments that had the same bottom-line effect. The royalty Apple could live with at the time (while still believing this number was not FRAND) was $7.50 per device, and that was simply because it was the average of what everyone else was paying Qualcomm. No matter what Qualcomm then claimed to be the royalty base, the net effect from Apple's point of view was that Qualcomm got compensated for the equivalent of a feature phone, not for what Apple's mobile computer offered on top.

But, as we know, Apple had to make concessions to Qualcomm. Exclusivity (under the 2011 Transition Agreement and its 2013-2016 amendment) was known before. Yesterday Mr. Williams said that under the very first agreement between Apple and Qualcomm, Apple was required to publicly renounce the WiMax standard.

The FTC is not going after Qualcomm for deals under which it paid device makers like Apple to say negative things about, and refrain from implementing, standards that might have been alternatives to standards that Qualcomm had greater benefits from (because of greater leverage over those standards, such as particularly CDMA). But I hope that at some point, in whatever jurisdiction but ideally in the United States, a regulator or a court of law or, if all else fails, a legislature will take action against such competition-distorting deals, too.

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