UK antitrust authority gets basic facts wrong as it declines to approve Microsoft's purchase of Activision Blizzard on fast track: extensive review was expected, but reasoning is nonsensical

Post-Brexit the UK Competition & Markets Authority (CMA) has more responsibility and flexibility than ever. In some contexts, the CMA is a thought leader among antitrust authorities. In particular, its market inquiry into the situation surrounding mobile browsers and cloud gaming is a great initiative. Today, however, the CMA has shocked me. No, it's not surprising in the slightest that a $70 billion acquisition by a Big Tech company--here, Microsoft's purchase of Activision Blizzard--gives rise to an extended (Phase 2) review, as there has been an underenforcement in other contexts (such as Facebook's WhatsApp and Instagram acquisitions). What I find truly regrettable, however, is that the CMA risks its reputation as a competent enforcer of competition law in the technology industry by developing some theories that are partly just wrong on even the most basic facts, and where that is not the case, the theories still don't make sense for other reasons.

The CMA clearly can do better than that. The Microsoft-ActivisionBlizzard merger will (have to) be approved when all is said and done. Microsoft was the first client I ever disclosed on this blog (more than ten years ago); and back in 1995, I was the first person to work (on a freelance basis, but still) with Blizzard Entertainment outside the United States. After all that went wrong at Activision (no need to go into detail here), I do want the Blizzard brand--and especially those game brands to whose success I personally contributed (Warcraft, Starcraft, Diablo)--to find a safe and stable new home. But I'm an independent small app developer now, not a Blizzard sales & marketing consultant, and it is primarily because of the important role that I hope the CMA will play in the mobile ecosystem context that I'm worried about the CMA's credibility in light of today's decision.

In today's announcement, the CMA incredibly says it is "concerned that Microsoft could leverage Activision Blizzard’s games together with Microsoft’s strength across console, cloud, and PC operating systems to damage competition in the nascent market for cloud gaming services"--which I'll comment on further below--and believes an in-depth (Phase 2) investigation is warranted unless Microsoft and Activision Blizzard "submit proposals to address the CMA's concerns" on or before 8 September 2022. Frankly, I can't see why the parties should do that as the CMA has simply failed to state any such thing as a credible theory of harm. This means the process is presumably going to continue, but no one really expected the deal to be closed this year. It may not take until mid-2023 (as some believe), but it's certainly going to take time for political rather than legal reasons.

Let's start with something the CMA does not (as it cannot) claim: that there wouldn't be enough competition in the games market. The first question to ask about a merger is always whether it results in horizontal concentration. Other than Sony--the sole complainant whose opposition to the deal is publicly known at this stage by virtue of a pretty transparent process in Brazil--trying to define Activision's Call of Duty as a single-product market, there's no indication that anyone even tries to make that kind of argument. The Brazilian antitrust agency (Conselho Administrativo de Defesa Econômica, or CADE) received various response according to which there's going to be enough competition in the games market post-merger. Just think of Sony, Tencent, Electronic Arts, Epic Games, and so forth.

By contrast, there hasn't been a huge number of singificant players in the gaming console market for a couple of decades, as the CMA itself states. The CMA then expresses a vertical foreclosure concern "that if Microsoft buys Activision Blizzard it could harm rivals, including recent and future entrants into gaming, by refusing them access to Activision Blizzard games or providing access on much worse terms."

That is a non-issue. Right after the deal was announced in January, Microsoft made it clear that Activision Blizzard would support the PlayStation just like before. In a blog post published today, Microsoft Gaming CEO Phil Spencer reiterates that commitment and, once again, recalls that Minecraft, which Microsoft acquired eight years ago, "continues to be available on multiple platforms and has expanded to even more since [that acquisition]." In other words, Microsoft's words and its past actions prove that this transaction--which Microsoft has explained is very much about strengthening its position in mobile gaming--is not part of a scheme to harm Sony.

So, in order to find another excuse for the politically motivated decision not to grant unconditional fast-track clearance, the CMA decided to come up with a contrived and contorted theory of harm involving divergent markets:

"The CMA has also received evidence about the potential impact of combining Activision Blizzard with Microsoft’s broader ecosystem. Microsoft already has a leading gaming console (Xbox), a leading cloud platform (Azure), and the leading PC operating system (Windows OS), all of which could be important to its success in cloud gaming. The CMA is concerned that Microsoft could leverage Activision Blizzard’s games together with Microsoft’s strength across console, cloud, and PC operating systems to damage competition in the nascent market for cloud gaming services."

If the passage I just quoted doesn't convince you, or maybe doesn't even make sense to you, then that's consistent with my reaction when I read that part. The combination of "a leading [something]" (twice) and "the leading [something]" isn't necessarily a competition issue. The question is whether there's a risk of abusing market power in one field in order to unfairly gain market share in another. I then read the official summary of today's decision, looking for an answer to the question of why Windows and Warcraft--and Azure--belonging to the same company should raise concerns.

Paragraph 32 of that summary is--sorry to say so--completely off-base in the eyes of anyone who knows a thing or two about the technological and commercial realities involved:

"Microsoft already has a combination of assets that is difficult for other cloud gaming service providers to match. By having a large and well-distributed cloud infrastructure, Microsoft will be able to host games on its servers on preferential terms and reach gamers throughout the world without having to pay a fee to third-party cloud platforms. By having Windows, the OS where the vast majority of PC games are played, Microsoft can stream games to Windows PCs without having to pay an expensive Windows licensing fee and may be able to design and test games made for Windows more effectively than rivals. And by having an existing console ecosystem, Microsoft has an existing user base of gamers to which it can promote its cloud gaming services, as well as a range of popular games that it can offer."

That's just so wrong. It's like it comes straight from an alternative universe.

Amazon's AWS is bigger than Microsoft's Azure, and hosts many games. And as an app developer (who made and published two game apps) I'm well ware of how Google has been promoting its Google Cloud Platform to game makers. Also, a Google-Nintendo joint venture known for Pokémon GO uses Google's cloud infrastructure, and no one ever expressed antitrust concerns over that--or will the CMA now investigate Niantic's relationship with Google?

There's plenty of competition for game developers as cloud hosting customers, which means those services are available at competitive rates.

While the cloud part is weak, the worst is yet to come: the part about Windows: "By having Windows, the OS where the vast majority of PC games are played, Microsoft can stream games to Windows PCs without having to pay an expensive Windows licensing fee [...]"

This is simply absurd. How can a competition authority that respect itself say something like that?

Anybody can develop a game service client for Windows and publish it without paying Microsoft a cent. Well, for development and testing you do need Windows, but that's just one license each per developer, but you can then distribute your client to as many users--millions and millions of them--as you like, at no extra cost.

This is not the mobile world, where Apple and Google are gatekeepers and retain 30% of in-app purchasing and subscription revenues. Windows is not a walled garden.

What the CMA may have meant is something different than what it actually said. Maybe the CMA means streaming, and if you stream a Windows game, you need a Windows instance in the cloud--but you can also just write your game for another operating system, such as Linux, and stream it to a Windows PC. What you stream is just video and audio data, so you don't need the same operating system on both sides. You can stream a Windows game to an iPhone, or a Mac game to a Windows PC.

The sentence continues as follows: ". . . and may be able to design and test games made for Windows more effectively than rivals." Note the "may": they don't know. They just suspect. Yeah, let's just have a Phase 2 investigation, doesn't matter whether there is the slightest factual basis "because $70 billion and Big Tech."

As a software developer, I know this is ridiculous. I'm not aware of any Microsoft game ever having had a feature or other characteristic (such as superior performance) that was attributable to the fact that Microsoft owns Windows. Instead, Microsoft gives game developers access to PC hardware--which, again, is different from what Apple does on iOS. It's a level playing field. About 30 years ago, there were complaints by productivity software makers that Microsoft didn't provide all the documentation to them that they'd have liked to have. Maybe that was the case, or maybe it wasn't--but no one has made a credible claim to that in a couple of decades.

Finally, the CMA says that "by having an existing console ecosystem, Microsoft has an existing user base of gamers to which it can promote its cloud gaming services, as well as a range of popular games that it can offer." Sony also has an existing user base of gamers owing to its console, and keeps buying game studios. Interestingly, just like Microsoft's primary reason to buy Activision Blizzard has to do with mobile gaming, Sony announced a few days ago that it is buying a mobile game maker named Savage Game Studios.

A lot of companies have access to gamers. Console makers are one such category of companies. The CMA apparently can't raise any concerns that are really specific to this particular transaction.

I just checked on the ATVI stock price, and the UK announcement is not having a significant impact pre-market. Phase 2 was investors' operating assumption as I heard from Wall Street friends. My personal opinion here is that the glaring weakness of the CMA's "case" is actually good news for ATVI longs. It remains to be seen what other regulator will say, but so far all that is known is that the FTC's excuse for an extended review is centered around novel and unspecific theories, and the UK CMA's announcement today serves to confirm that there aren't any real issues. The takeover was announced 7.5 months ago, and during all of that time no one has given a valid reason for a blocking decision.

I heard that New Zealand's ComCom will also make its Phase 1 decision tomorrow. [Update] That one has been pushed back by a week. [/Update] I'm going to follow the process with great interest, as an app developer, as someone who has done consulting work for Microsoft as well as Blizzard, and as someone who loved Activision games like River Raid and Keystone Kapers (on an Atari 2600 in my early teens) and played Candy Crush up to level 1431 a few years ago as you can see in the following screenshot I just made:

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Whether Amazon instigates or draws antitrust scrutiny, it's always about avoiding price competition: abstract parallel between cloud software licensing and most-favored nation clauses

This is the promised follow-up to yesterday's post, New Microsoft software licensing terms to take effect on October 1: revisions designed to strengthen smaller cloud solution providers--and to address Amazon-orchestrated EU antitrust complaint.

There has been a steady trend in recent years for this blog to look at more and more tech industry antitrust issues. In the end, they always involve intellectual property in one form or another. At some point I stumbled upon Professor Frédéric Jenny's "analysis of potentially anti-competitive practices" with respect to cloud infrastructure services, a study commissioned by CISPE. In the previous post I commented on CISPE: it's striking that an organization seeking to promote European cloud sovereignty is primarily backed by Amazon.

Without a doubt, Professor Jenny--an economist--is a prominent figure in the French antitrust community. However, that report he authored for CISPE last year is just a piece of rather unscientific advocacy. What one would normally expect from a competition economist is a clear causal chain and, especially, numbers. Instead, the "evidence" adduced in that paper is just anecdotal. It's like "one customer said" and "oh wait, another customer also said."

That reminded me of a passage from Qualcomm's reply brief in support of its Ninth Circuit appeal of the district court's FTC decision:

"See United States v. AT&T Inc., 310 F. Supp. 3d 161, 211 (D.D.C. 2018) (in weighing evidence of competitive harm, 'competition authorities and courts . . . refus[e] to take the views expressed by customers at face value and insist[] that customer testimony be combined with economic evidence providing objective support for those views'), aff’d, 916 F.3d 1029 (D.C. Cir. 2019)."

In other words, it's old news that customers prefer to get more and pay less. For the avoidance of doubt, the relevant passage is found in a court ruling, but is a quote from a treatise: Ken Heyer, Predicting the Competitive Effects of Mergers by Listening to Customers.

Professor Jenny did the very opposite of what that passage proposes: he took--presumably selective--customer quotes at face value and did not provide any objective support.

The objective of that study isn't totally clear. In no small part it's actually legislative advocacy, suggesting that the EU's Digital Markets Act should also treat software companies like Microsoft, Oracle, and SAP as "gatekeepers." The DMA is huge, but it can't be all things to all people. The reason why some companies must be subjected to special gatekeper rules is their control over platforms, not their ownership of software copyrights. An open letter that CISPE--together with other organizations--addressed to EU competition chief Magrethe Vestager in February urged at a late stage of the legislative process (as the letter even concedes) a "clarification" that would result in the designation of Microsoft, Oracle, and SAP as "monopoly software gatekeepers":

"We cannot wait for a revision of the DMA in five years, nor for a pyrrhic victory in antitrust litigations in 10 years or more when the competitiveness of the market will not be recoverable.

That's what they wrote in February, but by now what they want is a formal antitrust investigation of those companies, initially Microsoft. After yesterday's announcement of new licensing terms that pay heed to the valid ones of the concerns raised by European cloud service providers, regulatory intervention doesn't appear necessary, much less does it seem urgent.

There are major issues to be addressed with respect to mobile app ecosystems: the app tax; the app review tyranny; App Tracking Transparency; access to NFC functionality (for payment systems and other important applications). There's Google's search monopoly and (apart from iOS) superdominant market position in browsers. And Amazon's own conduct.

Amazon would benefit in two ways if CISPE's antitrust initiative resulted in full-blown investigations: by harming a competitor and by defocusing the Commission from other issues that include what Amazon itself has been doing.

The most well-known issue surrounding Amazon's business is a most-favored nation clause: third-party sellers using Amazon's platform are prohibited from "[s]etting a price on a product or service that is significantly higher than recent prices offered on or off Amazon." This is called a "most-favored nation" (MFN) clause and means that vendors cannot offer lower prices elsewhere, be it through direct distribution or on other platforms. The District of Columbia filed an antitrust lawsuit (PDF) over this in May 2021. In 2017, the European Commission accepted commmitments from Amazon on e-books that also involved the MFN topic. As the Commission noted, "[t]he clauses may have led to less choice, less innovation and higher prices for consumers due to less overall competition [...] in e-book distribution" (emphasis added).

Interestingly, Professor Jenny's study discusses the potential competitive effect of cloud service providers who also make software, such as Microsoft, offering customers particularly attractive terms if they buy cloud services as well as software licenses. As I wrote further above, there aren't really hard facts and numbers in that study. But let's assume--just for the sake of the argument--that this is right. It means a company like Amazon with its AWS cloud service could compete, but it would have to charge less for its own services so the total cost of ownership (TCO) for the customer won't be too high.

If a competition authority actually barred Microsoft and others from offering attractive prices for the combination of cloud services and software licenses, the net effect would be that AWS gets to charge customers more than otherwise.

With Microsoft having fleshed out the implementation of its European cloud principles, all of CISPE's members but one--Amazon--have nothing left to complain about that could reasonably give rise to antitrust investigations. The customers of small European cloud service providers will be just fine with the licenses they already have secured from Microsoft (or with new ones that they can optionally obtain through those CSPs). Amazon is obviously free to file an EU antitrust complaint of its own. But to do that, Amazon would have to argue that it can't compete, which is simply not credible based on market share.

As things stand, regulatory intervention doesn't appear imminent. But presumably Amazon won't give up anytime soon. It has the resources to keep on trying.

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New Microsoft software licensing terms to take effect on October 1: revisions designed to strengthen smaller cloud solution providers--and to address Amazon-orchestrated EU antitrust complaint

This is only the second time in more than ten years for this blog to comment on enterprise software licensing. The first instance was about two years ago when I expressed skepticism regarding EU antitrust complaints by certain SAP customers. Now I have seen an announcement by Microsoft that deserves a closer look. Microsoft's policy team (Microsoft On the Issues, @MSFTIssues, a Twitter account that I follow and vice versa) retweeted the following:

Today, we’re sharing changes to our licensing terms that will benefit cloud providers and their customers. To learn more about the changes, why we’re making them, and what hosters and customers can expect, check out our partner blog https://t.co/MCG4Rsv6Y9

— Judson Althoff (@judsonalthoff) August 29, 2022

Today's announcement by Microsoft's Chief Partner Officer Nicole Dezen is a follow-up to a May 18, 2022 blog post by Microsoft President Brad Smith, Microsoft responds to European Cloud Provider feedback with new programs and principles. I will look at the specific licensing changes in more detail and comment on them tomorrow. For now, I'd just like share a few thoughts and observations:

• The backdrop is that a group named Cloud Infrastructure Services Providers in Europe (CISPE) has been alleging for a while that Microsoft engages in an "anti-competitive tying of productivity suites with cloud infrastructure services." What they essentially claim is that smaller European cloud service providers can't compete on a level playing field with Microsoft's Azure cloud because many enterprise customers rely on Microsoft software (such as Windows, Office, and SQL Server) and can't bring their existing Microsoft licenses to third-party cloud services as easily as CISPE believes should be the case.

• CISPE is largely funded by Amazon, whose AWS is the world's largest cloud service (I used it for the backend of two mobile games). The other members are smaller European cloud hosters. It is undoubtedly a challenge for anyone to compete with the behemoths in a business characterized by major economies of scale, but some of CISPE's members--and various significant European cloud service providers who are not CISPE members--prove that there are opportunities for innovative, creative, and flexible players. The part that I struggle to understand is that those smaller European companies view Amazon--the biggest bully on the block--as a political ally. Let's face it: if you're in the cloud business, particularly in the Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) segments, your top three competitive challenges are

  1. AWS,

  2. AWS, and don't forget:

  3. AWS.

• CISPE is complaining not only about Microsoft, but also about Oracle and SAP. And in at least one of the papers they also voice concerns over Google. In other words, they're against everyone except themselves and... AWS.

• Microsoft hasn't acknowledged an antitrust violation per se. The message in May was that there is enough substance to some of the concerns that Microsoft deems it appropriate to amend its software licensing terms with a view to outsourcing and hosting.

• The European Commission hasn't launched full-blown investigations of a formal complaint filed by OVHcloud, a French company, in March. And it may never have to if Microsoft's new licensing terms satisfactorily address the issues. The measure of a competition authority's effectiveness is not how many investigations it launches or the fines it levies: it's all about safeguarding the competitive process. In some other antitrust contexts, particularly those involving Apple and Google, voluntary changes fell far short of what was needed, so DG COMP had no choice but to launch formal investigations. But Microsoft has a fundamentally different attitude than the two companies I just mentioned. After the antitrust cases they dealt with 20 years ago, they've been careful to avoid regulatory scrutiny.

• Here's a quick first look at the "three primary goals" Microsoft (re)stated today:

  1. "Make it easier for customers to bring their software to the partner’s cloud."

     An example of what was criticized is that license fees in a multitenant environment (one server, multiple customers) were based on physical CPU cores, while cloud services are all about virtual machines. Microsoft says "[e]xpanded use rights [now] allow customers to run their software, including Windows 11, on hosters’ multitenant servers and more easily license virtual machines for Windows Server."

  2. "Ensure partners have access to the products necessary to sell cost-effective solutions that customers want"

     The blog post describes this as creating "more opportunities for partners to work with more customers, to sell the solutions they need, and to run them where they prefer."

  3. "Empower partners to build hosted solutions with speed and scale"

     Microsoft's partners will be better enabled to "build hosted desktop and server solutions to help directly fulfill customers’ hosting needs." The new program, is called "Cloud Solution Provider -- Hoster" (CSP-Hoster) and enables both license-included hosting (the CSP sells a service to its customer along with the prerequisite software licenses) and BYOL ("bring your own license") solutions.

• While it appears that Europe is the only jurisdiction in which a formal complaint had been brought, today's blog post says "[t]hese changes will be applicable worldwide." The timing of the announcement (after European business hours) underscored that this is not just about Europe--and globally consistent terms are another notable difference between Microsoft and the likes of Apple and Google, who favor piecemeal resolution and make commitments only jurisdiction by jurisdiction.

• The new licensing options are available to all cloud service providers except a set of Listed Providers. That is no surprise as it is consistent with what Microsoft said in May. A footnote again clarifies today that "Listed Providers include Alibaba, Amazon Web Services, Google, and Microsoft, and any outsourcer using a Listed Provider as part of the applicable outsourcing service. Customers that want to use a Listed Provider for outsourcing can acquire licenses directly from the Listed Provider."

  In other words, all of CISPE's members except for the driving force behind those complaints--Amazon--get the benefit of the terms announced today. This ups the ante for CISPE to credibly claim that the organization is all about better enabling small European cloud service providers to compete...

  I also interpret this as a denial of there being any anticompetitive harm when it comes to AWS, Google, and Alibaba: there is no indication that those major players can't compete with Microsoft.

Tomorrow I'll do a follow-up to this post and comment in more detail on the licensing terms Microsoft unveiled today, and on CISPE's grievances, such as a "study" by a French competition law professor.

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New public statement positions Microsoft as the Gorbachev of app store governance, contrasting starkly with Apple's hermit kingdom and Google's fauxpenness

What no one--or only a few people--may ever have considered in the app store antitrust context is that we've all been taking something for granted: that Microsoft would not wall its Windows garden in an Apple-style way.

Even if Microsoft had not gone to that extreme but had "merely" turned Windows from an open app platform into a pseudo-open ("fauxpen") one like Android, the consequences would have been dramatic. It's not that they couldn't have tried. It wouldn't have been quick or easy, but a gradual transition, closing door after door, Windows update by Windows update, would have been technically and commercially feasible. And legally? Only because Microsoft faced antitrust issues in different contexts two decades ago over laughably negligible issues compared to what Apple and Google are doing now doesn't mean anyone could apply a stricter standard to them in today's environment than to Apple and Google.

In 2020, Microsoft declared itself in agreement with app store principles laid out by the Coalition for App Fairness (without joining the organization), yet left open the question of whether and when those principles should apply not only to mobile devices and Windows, but also to gaming consoles like the Xbox. Apple pointed, and will keep pointing, to gaming consoles in its defense against Epic Games. On the one hand, it's understandable that Judge Yvonne Gonzalez Rogers was wondering--especially in light of some Epic-internal emails along the lines of "why go after Apple, not Sony?"--why Epic was suing Apple rather than the makers of platforms on which it makes a lot more money and, therefore, pays far greater commissions to platform owners. And she worried about spill-over effects of whatever she would decide (though a case like that doesn't really matter much until the appeals court has spoken). On the other hand, smartphones and consoles are not even an apples-to-oranges comparison: even the minority of consumers who own a gaming console at all have a smartphone in reach 24 hours a day, and access to a console for only a fraction of that time. Therefore, during large parts of the day, and in countless everyday situations, a smartphone is our only computing device at hand, while we always have alternatives to a gaming console (I only ever owned one: the Atari 2600, and my famous game maker at the time was Activision).

On Wednesday, Microsoft made it publicly known that opening up is the way to go, and that the Xbox is slowly but surely transitioning to an open app platform as well. With the industry standing at a crossroads, Microsoft has decided to forgo short-term monopoly rents in favor of betting on a future in which all app developers compete on the merits. No walled gardens, no self-preferencing, no private taxation.

When I saw the headline (Adapting ahead of regulation: a principled approach to app stores), what came to my mind immediately was the ongoing debate over Apple's and Google's bad-faith compliance or possibly even non-compliance with the Dutch dating app ruling and the South Korean in-app payment law. But after reading the long statement in its entirety, it was clear that this was about Activision Blizzard more so than about Apple and Google.

There's no disclaimer of the kind we've often seen at the end of movies: "Any similarity to actual persons, living or dead, or actual events, is purely coincidental." Of course, one just cannot talk about app stores without also addressing, even if only indirectly, mobile app stores. And Microsoft itself is a victim of the App Store Tyranny, not only because its mobile revenues are taxed to the tune of 30% but also because it can't offer products it would like to make available to consumers, such as streaming games on iOS (xCloud). But the overall message and tone of Microsoft's statement is like they're already looking past the dark era of app story tyranny. They're making it sound like Apple's total app store control is already a strategically lost position in the face of litigation, regulation, and legislation all over the world. Apple is still fighting a war it has already lost. The greatest injustice and most massive abuse in the history of the information technology industry is simply not sustainable.

Apple has made itself "the Enemy of the States" (1, 2). The only ally it has left is Google, and even Google is urging Apple to support an open messaging standard rather than cash in on classism and bullying.

In the late 1980s, another walled garden was about to collapse: the East Bloc behind its Iron Curtain. Though counterintuitive it may seem, a market failure in capitalism actually creates a situation that has a lot in common with a communist dictatorship. That's why late-19th-century Republicans realized that antitrust laws had to be created in order to cure market failures and restore competition. So, in the late 1980s, Gorbachev told the leaders of other Eastern European communist tyrannies: "Life punishes those who come too late." He urged the likes of Erich Honecker (then the leader of the German "Democratic" Republic) to embrace--not resist--change. In Honecker's case, those calls fell on deaf ears, which is why Comrade Erich had to flee to Moscow before being jailed in Berlin and dying in his Chilean exile.

Microsoft aims to be the Gorbachev of app store governance. It considers the opening up of these platforms as inevitable--a question of when, not if.

There won't be a third-party app store (of which there are various on Windows, and they can even be found in the official Windows Store) on the Xbox tomorrow. They're going to get there one step at a time. And some of Microsoft's principles are so general that Apple--albeit untruthfully--would claim to adhere to them as well, such as #1 ("We will enable all developers to access our app store as long as they meet reasonable and transparent standards for quality and safety") and #4 ("We will hold our own apps to the same standards we hold competing apps"). But there is enough in that statement--such as the right to use alternative payment systems--to give developers comfort that there is a true commitment to open access.

Finally, the Activision Blizzard connection. Microsoft acknowledges in its statement that regulators will ask questions about that $70B deal. In the mid-1990s, I was the first person outside the U.S. to work for Blizzard as a consultant and representative. Warcraft II was Blizzard's first #1 hit, and it became #1 in German sell-through rankings in early 1996 a few months before it did in the United States. I still have one of about 50 T-shirts that were made for the Warcraft II development team, an honor I will never forget.

Interestingly, Microsoft's proposed acquisition of Activision Blizzard now represents an opportunity to accelerate the opening up of mobile app stores. Legislation, regulation, and court rulings can open the doors, but in order to really bring down the walls around those walled gardens, there must be viable alternatives. In order to be commercially successful, they must appeal to consumers. Some reasonable degree of consolidation on the content side, with Microsoft uniting some terrific game franchises under its umbrella, will enable certain players to really break the app store monopolies of our times. It's one thing to force Apple to allow sideloading or alternative app stores; it's another to actually make it work against "the Power of Default."

Apart from the fact that Microsoft has committed to the continued availability of its key game titles on other platforms, it would be as myopic as it would be misguided to focus on the games and console markets when there's a massive market failure to correct in connection with mobile app stores. I'm all for Microsoft's acquisition of Activision Blizzard, and that's not because I was a consultant to Blizzard in the mid to late 1990s and announced a consulting project for Microsoft in 2011. It's because I've seen and experienced the unsustainability of the mobile app store tyranny, of the Apple-Google duopoly. Small app developers like my company can't change this. Even Epic has so far made more noise than impact, though its appeal is getting interesting.

We need a Balance of Power. We need the Microsofts, Facebooks (sorry, I mean Metas), and Amazons (and possibly even Teslas, given Elon Musk's clear pro-Epic anti-Apple stance) of the world to create a level playing field for us. I'm not saying Microsoft should buy up all games companies, but enabling them to break Apple and Google's mobile app distribution duopoly would make the world a better place. Yesterday's statement makes me optimistic about the net effects of that deal, and I'm saying so even though I have actively opposed other acquisitions (like Oracle-Sun, because of MySQL, and Google-Motorola, because of standard-essential patent abuse).

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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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Microsoft wants Google to pay for relocation of European logistics center due to FRAND breach

The dust has barely settled after Judge James L. Robart's landmark FRAND rate-setting determination in the Microsoft v. Motorola contract case (initial reaction, follow-up including media round-up, closer look), and the next significant disagreement between the parties has already come to light. On Wednesday (May 1, 2013) counsel for Google's Motorola filed a letter asking the court to preclude Microsoft from relying on certain damages theories at the upcoming breach-of-contract trial (scheduled to commence on August 26, 2013) or to extend certain deadlines, which Google recognizes "may require moving the August 26, 2013 trial date".

Given the discrepancy between the court's FRAND determination and Motorola's royalty demands as well as Motorola's concession, made at a hearing last year, that a "blatantly unreasonble" initial royalty demand does constitute a breach of a FRAND contract, I can't imagine any other finding than a breach. Frankly, I don't think it even makes sense to ask a jury whether an initial demand amounting to billions of dollars can be reconciled with a royalty determination that even at the upper end amounts only to a few million dollars per year. Of course it can't. But there's going to be a fight over the damages Google owes. While it's unlikely that such damages could have material direct impact on Google's bottom line, Google is presumably going to fight hard to limit the amount because damages awards for breach of contract are bad for a company's reputation, especially in a context that has also triggered antitrust investigations. Also, Google will look particularly bad if the damages it owes Microsoft end up matching or even exceeding the standard-essential patent (SEP) royalties it will get to collect until expiration of the patents in question.

According to its letter and the accompanying documents, Google is facing damages claims based on the following theories:

• the litigation expenses Microsoft incurred in defending itself against Motorola's conduct in the United States and Germany;

• the costs of relocating Microsoft's EMEA (Europe, Middle East, Africa) logistics center out of Germany in order to mitigate the impact of upcoming H.264-based injunctions (one-time costs of approximately $11.6 million and increased annual operating costs of approximately $5 million);

• Motorola's refusal to grant a license to Marvell covering its IEEE 802.11 (WiFi) SEPs (Marvell, which supplies WiFi chips to Microsoft that are used in the Xbox, requested one in July 2011); and

• Google's refusal to grant Microsoft a license to its H.264 patents under its agreement with patent pool firm MPEG LA after completing the acquisition of Motorola in May 2012.

Google argues that Microsoft has belatedly presented these damages theories. In one of the documents Google attached to its letter to the court, Microsoft's counsel (in a letter dated April&nbp;9, 2013) disagrees particularly with respect to the cost of relocating its European distribution facility out of Germany:

"The relocation of Micosoft's EMEA distribution center from Germany to the Netherlands was completed in June 2012. Motorola was aware of Microsoft's efforts to mitigate the potential harm resulting from the German injunction by relocating its EMEA operations to the Netherlands long before Quinn Emanuel became involved in this litigation. For example, at the summary judgment hearing that took place on May 7, 2012, Art Harrigan [counsel for Microsoft] explained that Microsoft had to move its German distribution center to the Netherlands as a result of the injunctive relief Motorola was seeking, since the relocation would take time to accomplish and could not be achieved effectively after the injunction became effective. Then, during a telephonic status call with the Court on July 9, 2012, Mr. Harrigan stated Microsoft's position that expert damages reports -- which would involve 'figuring out what it costs to dismantle Microsoft facilities in Germany in anticipation of an injunction' -- should be postponed until after the November 2012 [F]RAND [rate-setting] trial."

In another document attached to Google's letter Microsoft explained why it had to relocate its EMEA distribution facility:

"Microsoft's main logistics and products/software distribution center for the European, Middle Eastern and African ('EMEA') market was located in Germany. The injunction Motorola sought through its German actions would have not only removed Microsoft's products [not only the Xbox but also Windows] from Germany, but threatened Microsoft's entire EMEA distribution network for its products."

Google now argues that if Microsoft is allowed to pursue damages on these grounds, Motorola should be allowed to conduct further discovery (beyond Microsoft's ongoing production of documents) with a view to its defenses. This would take more time, and while Google would ideally like Microsoft's theories to be thrown out, it at least wants to achieve some extensions of deadlines, which in turn could require the court to postpone the damages trial.

At this stage it's a discovery dispute with potential scheduling implications. But Google's letter and the attached documents indicate some of Google's defenses. With respect to the relocation of the EMEA logistics center, Google argues that Microsoft should have made an offer under German Orange-Book-Standard rules, an argument that failed to impress the Ninth Circuit last year. It furthermore claims that Microsoft could have avoided some or all of the relocation costs because a temporary restraining order (subsequently converted into a preliminary injunction) by Judge Robart barred Motorola from enforcing its German H.264 injunctions anyway. Based on the sequence of events, it appears that Microsoft had to commit to this relocation before it won the anti-enforcement order. German news agency dpa reported on the relocation on April 2, 2012. The Mannheim Regional Court had originally scheduled its H.264-related Motorola v. Microsoft rulings for April 17, 2012. On April 12, 2012 I found out from a Bloomberg report on the temporary restraining order (and a day later obtained confirmation from the court) that the ruling had been postponed to May 2, 2012. Even if Microsoft had known much sooner that the ruling would come down on May 2 instead of April 17, 2012, it's hard to see how it could have waited until Judge Robart's April 11 decision on its request for an anti-enforcement order before committing to and starting a logistical operation of this scope. (There may also be other issues, such as whether Microsoft was able to rely on a temporary restraining order or preliminary injunction, given that Google appealed it on May 2, 2012, right after the German ruling, and that even by February 2013 Google had still not withdrawn its request for SEP-based injunctive relief in Germany).

This continues to be the most interesting FRAND case ever.

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Surface argument is more of the same from Google's Motorola on patent royalties

Yesterday was the first day of the Microsoft v. Motorola Mobility FRAND rate-setting trial in the Western District of Washington. I did a post on the relevance of the underlying issue to startups.

While I can't attend this one physically, I have been following this case closely ever since it started two years ago and there are great online resources to find out about developments in Seattle. I have set up a public Twitter list named MicrosoftMotoFRANDtrial, replicating the tweets from several reporters who reported from the courtroom. Here are links to several media reports on the first day (in alphabetical order):

• Geekwire (1): Microsoft vs. Motorola patent trial begins, with brief Xbox 'Durango' mention

• Geekwire (2): Motorola wants to collect royalties on Microsoft Surface, too

• Seattle Times: Microsoft, Motorola patent trial starts

• Techflash: Motorola/Google patent trial starts with testimony from Microsoft execs

• Wall Street Journal (subscription may be required): Microsoft, Motorola Face Off Over Standard Essential Patents

The most interesting testimony tidbits that I saw on Twitter relate to Motorola's participation in the negotiations that led to the formation of the MPEG LA AVC/H.264 pool. Motorola didn't ultimately participate in the pool, but according to testimony presented yesterday, it was actually arguing in favor of low per-unit rates and a royalty cap that is even lower than the one MPEG LA ultimately adopted. A witness also said that Motorola didn't argue at that stage that its patents were more valuable, relative to their number, than the average of all other patents contributed to the pool. But at this point, the now wholly-owned Google subsidiary does claim that its patents are more valuable than the patents in the pool. I have seen this argument in court filings and I heard it in open court in Mannheim, Germany, in February.

Unless Motorola's own witnesses can provide some really good reasons for this change of mind, its earlier position on the appropriate H.264 royalty rate will strongly undermine the positions it takes today.

I'm actually not surprised that Motorola took an innovation- and consumer-friendly position years ago. There may be cases in which contributors to standards engage in long-term ambush strategies, starting with violations of their disclosure obligations and other attempts to manipulate the standard-setting process. But it appears that in most cases companies are constructive participants in the process -- not necessarily saints though -- and just change their approach later, either because patent monetization becomes a higher priority to them (typically after their operating business shrinks) or because they have a major infringement problem and hope that standard-essential patents give them leverage for cross-license agreements that allow them to get away with their infringement of non-standard-essential patents. In a recent post I said that "I'm inclined to believe that Samsung used to be a good citizen of the standard-setting universe until it got sued by Apple and decided to cling to its SEPs as a strategic weapon, in an act of desperation because it lacks powerful non-standard-essential patents of the kind that would give it leverage against Apple."

Unlike Samsung, which apparently played a defensive role in connection with SEPs until the dispute with Apple began, Motorola has previously been somewhat aggressive in SEP assertions (such as against Research In Motion). Still, it may have been much more reasonable when the MPEG LA pool was being formed -- or (which I don't know and won't be able to find out) it may have had bad intentions from the beginning, participating in those talks in bad faith in order to bring down prices and ultimately deciding to monetize its H.264 SEPs on its own in a rent-seeking effort. Whatever Motorola's motivation may have been, the discrepancy between the positions it took then and the ones it takes now reflects unfavorably on it in this FRAND contract litigation. It will have some explaining to do.

Reporters noted yesterday that the next-generation Xbox gaming console, codenamed Durango, and the Surface tablet were mentioned. That's mostly because Google (Motorola) tries to argue that new and upcoming devices complicate the FRAND rate-setting process. It suggests that over time it will be entitled to higher royalties because of changes to Microsoft's product offerings. Here's a very telling passage from its trial brief:

"Microsoft's new Surface tablet will use only 802.11, instead of cellular or wired connections, to connect to the internet. [...] Without 802.11 capability, the Surface tablet would be unable to compete in the market, because consumers can readily select tablet devices other than the Surface that have 802.11 capability."

The first sentence states an undeniable truth, though I don't know if cellular versions of the Surface tablet will at some point become available. The second sentence mirrors Motorola's hold-up logic: you need to implement the standard so you must pay a lot for anybody's patents declared essential to the standard. The less of a choice you have, the higher the price will be. But that's not the way to calculate a FRAND royalty. I'll just quote Judge Posner on this:

"There is another decisive objection to Motorola's damages claim. The proper method of computing a FRAND royalty starts with what the cost to the licensee would have been of obtaining, just before the patented invention was declared essential to compliance with the industry standard, a license for the function performed by the patent. That cost would be a measure of the value of the patent qua patent. But once a patent becomes essential to a standard, the patentee's bargaining power surges because a prospective licensee has no alternative to licensing the patent; he is at the patentee's mercy. The purpose of the FRAND requirements, the validity of which Motorola doesn't question, is to confine the patentee's royalty demand to the value conferred by the patent itself as distinct from the additional value--the hold-up value--conferred by the patent's being designated as standard-essential. Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 313–14 (3d Cir. 2007); Daniel G. Swanson & William J. Baumol, 'Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection, and Control of Market Power,' 73 Antitrust L.J. 1, 7–11 (2005). Motorola has provided no evidence for calculating a reasonable royalty that would be consistent with this point."

Motorola didn't create wireless networking as a whole. It would be possible to build fully functional wireless networks without infringing on its IEEE 802.11 declared-essential patents -- there are alternatives to all of the techniques covered by those patents, but after the industry at large agreed to make IEEE 802.11 the WiFi standard, those alternatives, no matter how good they are in a technical sense, wouldn't allow users to connect with existing WiFi infrastructure.

There's another reason for which I doubt that Motorola will get much mileage out of the Surface argument. The other big issue -- besides hold-up value -- is apportionment. It doesn't really matter that Microsoft now sells WiFi-capable tablets. Even if Microsoft surprisingly started to build airplanes or Mars rovers with built-in WiFi capability, this foray into new strategic business areas wouldn't have any bearing on the value of all IEEE 802.11 SEPs it licenses, or on the relative value of Motorola's patents compared to other IEEE 802.11 SEPs. The Surface features a greater diversity of functionality than the Xbox gaming console (which is also a multifunctional home entertainment system but not a multi-purpose computer like the Surface). That's why its price is higher than that of the Xbox. But the price differential is unrelated to the contributions of IEEE 802.11 to the product, and to Motorola's contributions to IEEE 802.11.

Motorola basically argues that without WiFi, the Surface can't connect to the Internet, but that doesn't make Motorola a key enabler of the multiplicity of functionalities the Surface has on board.

It's really difficult to see what Motorola hopes to achieve by repeating, in different ways, shapes and forms, the same hold-up arguments. At least in the United States it doesn't appear to be a winning strategy. Maybe its strategy will become clearer as the trial unfolds.

The trial is scheduled to run until November 21, 2012, the day before the Thanksgiving holiday, and a FRAND rate-setting decision is apparently not expected before late December at the earliest, and more likely, in early 2013. And my guess is that Google (which micromanages Motorola's patent lawsuits) won't like the result, which is unlikely to be anywhere near the 2.25% royalty rate it demands, and will appeal -- unless the parties can reach an agreement in the meantime, which probably depends mostly on Google's willingness to accept that the FRAND value of Motorola's SEPs is entirely detached from the $12.5 billion it paid to acquire the company.

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The German approach to FRAND: let's err on the side of injunctions

German court rulings aren't routinely published on the Internet, and the courts never make complaints and other pleadings available to the public. But U.S. proceedings are more transparent, and German rulings sometimes show up there. Earlier this week, Microsoft and Motorola Mobility, which is now a wholly-owned subsidiary of Google, provided to the United States District Court for the Western District of Washington certified translations of two decisions the Mannheim Regional Court simultaneously announced on May 2, 2012. Those decisions relate to two different patents, both of which were deemed essential to the H.264 video codec standard and infringed by certain Microsoft products, particularly including Windows 7 (along with the Internet Explorer 9 and Windows Media Player) and the Xbox 360. For another six months or so, Motorola cannot enforce those rulings due to a preliminary injunction ordered by the aforementioned U.S. district court.

I have uploaded the two certified translations to Scribd:

• The first document contains both a certified translation and, thereafter, the original German text of one such ruling.

• The second document contains only a translation of a ruling related to another H.264 patent.

The FRAND-related parts of both rulings are consistent. However, the first translation was provided by Motorola, and the second one by Microsoft. That's why the English versions use different terminology.

The Mannheim court's position on the FRAND issues raised by Motorola's enforcement of apparently H.264-essential patents is symptomatic of the patent enforcement extremism that attracts so many litigants, including some flagrant antitrust offenders, to this jurisdiction. I see that attitude all the time, and I've talked about it before. But thanks to the certified English translations of those German rulings, many more people now have an opportunity to experience this FRAND-hostile environment page by page, paragraph by paragraph.

In the following, I'll sum up how Judge Dr. Kircher and his colleagues arrived at the decision to order a Germany-wide injunction against Windows 7, the Internet Explorer 9, the Windows Media Player and the Xbox 360 gaming console (to the extent that those technologies implement the H.264 standard).

After identifying an infringement (Section A of the reasoning), the ruling addresses the question of whether a license agreement, or at least an agreement that precludes Motorola from seeking injunctive relief, exists (Section B), followed by an analysis of antitrust considerations (Section C). The remaining sections then explain some decisions that result from the infringement finding in combination with the dismissal of all defenses.

At that high level, there's nothing special about this structure. FRAND-related defenses are usually a combination of contractual and antitrust claims (for example, this also applies to Apple's FRAND-related defenses and counterclaims against Samsung in the Northern District of California). The only Germany-specific aspect of this structure is that an invalidity argument can only result in a stay of an infringement proceeding but not serve as a defense in its own rights. That's due to bifurcation, a major structural deficiency of German patent litigation that I explained in a recent post.

The section on contract-based defenses is consistent with findings by other jurisdictions to the extent that it doesn't consider a FRAND pledge to constitute a license agreement per se, but it doesn't stop there: the decision furthermore denies that the FRAND pledge Motorola made to the ITU has any contractual significance, and holds that it "cannot be understood as a binding license offer to any number of third parties unknown to the Plaintiff, requiring only acceptance by a third party, but as a request to license seekers to submit their own FRAND offers". The last part of that is, in my view, a highly questionable application of the German Orange-Book-Standard logic to those pledges. It's highly questionable because the Orange-Book-Standard ruling, as this Mannheim decision notes, "referred to a de facto standard" as opposed to a standard set by a consortium that requires participants to make a FRAND promise.

The only kind of hard and fast legal significance that the Mannheim ruling attaches to Motorola's FRAND promise is that "due to the voluntary obligations assumed by the declarer to provide a license free of discrimination and abuse, it renders the antitrust review as to the patent owner's market-dominating position obsolete". Frankly, I don't see how that can be correct if everything else the Mannheim court says about FRAND declarations (meaning that they don't grant contractual rights to third parties) is true. It doesn't make sense to me. Those FRAND declarations don't say "I have a dominant position in a relevant market under antitrust law". They just say something like "I am prepared to grant licenses on FRAND terms". A dominant position creates a FRAND obligation without pledge, but one can also make a FRAND promise without having an obligation due to a dominant position. If I made a promise on this blog that I will grant everyone a FRAND license to my posts here, I still wouldn't have a dominant market position -- and I still wouldn't have an obligation under antitrust law as long as I don't have a dominant market position. The bottom line is that certain German judges go out of their way to deny that FRAND promises are binding, and they try to apply Orange-Book-Standard to more than it originally related to.

In the contract-related part, the decision also says it's "implausible" that a FRAND pledge constitutes a "waiver by the patent holder of injunctive relief as a means of enforcing its patent claims against an unknown number of potential patent infringers" because "[a] patent holder who submits a Patent Statement and Licensing Declaration Form merely offers to waive its exclusivity rights under the patent by establishing a license agreement--and not unconditionally". But it isn't really "implausible". If someone promises to grant everyone a license on FRAND terms, he does give up on the notion of exclusivity -- and as a result, there shouldn't be any injunctions since all the parties have to talk about is money. That is fundamentally different from a patent that a patent holder can retain exclusively, or license only to a limited number of parties.

A passage in the section on antitrust-related considerations makes it quite clear why certain German courts don't think outside of the box in connection with industry standards:

"If the seeker of the license were in a position to successfully defend against claims for an injunction by the patent owner by arguing that the latter was obligated to grant a license anyhow, on its own volition, the patent owner would be at the mercy of any dishonest licensee, for whom there would be no more incentive to enter into licensing negotiations [reference to literature]."

This is the problem with certain German courts: they think that licensees can only be kept honest at the threat of an injunction. The claim of "no more incentive" is wrong. Even though German patent law doesn't provide for a tripling of damages for willful infringement, it still wouldn't be advisable for anyone to just keep infringing only because there won't be an injunction. Patent damages in Germany can be based on the equivalent of a license fee, on the lost profits of the right holder, or lead to a disgorgement of infringer's profits. As a result, damages for infringement can far exceed the cost of licensing. Moreover, Germany has a "loser pays" system under which an infringer who loses a lawsuit would end up paying all court fees as well as the other party's attorneys' fees (not actual fees, but an amount that is relative to the amount in dispute, and those costs are also quite significant). Also, patent infringement can be a crime in Germany: not the average inadvertent infringement, but if someone kept infringing after a final non-appealable court ruling, there would be a clear disincentive that is stronger than anything civil law can do.

It's this kind of thinking -- the value of a patent depends on the entitlement to injunctive relief -- that makes certain German judges think that it's better to grant 1,000 unjustified injunctions than to deny injunctive relief in only one case in which it would be warranted. This approach ignores economic realities. It's dogmatic. It's old-fashioned. But until lawmakers take action, it might stay this way.

The attitude I just described is also reflected by the antitrust-related part (Section C of the reasoning) of the decision. The 2.25% royalty demand made by Motorola is just restated. It's neither endorsed nor criticized. The discussion then focuses on whether Microsoft's counterproposal is so good that, under Orange-Book-Standard, Motorola can't refuse it without committing an antitrust violation of the kind that represents an obstacle to an injunction. Motorola's various objections to Microsoft's counterproposal are given significant weight even though Microsoft actually multiplied the base figure, which was directly derived from the terms of the MPEG LA pool, by a factor of 10 -- such a generous multiple that a court could easily, and in my view should, conclude that there's plenty of margin of error to offset any of Motorola's relatively minor objections. For example, if Motorola claims that its patents are more valuable than the ones in the MPEG LA pool, that's one thing -- but ten times more?

The ruling mentions that Microsoft provided an expert report according to which its offer was far more than a FRAND royalty. Instead of appointing a court expert to look into the reasonableness of these terms, the Mannheim court decided to just rush to an injunction:

"In the judicial division's view, this review can be limited to the question of whether the rejection of the offer constituted an obvious violation of antitrust law. As the BGH made clear in its Orange-Book-Standard decision, the infringement proceedings are to be relieved to an avoidable extent of the difficult and time-consuming task of determining the exact amount of a non-obstructive or non-discriminatory licensing fee (BGH, supra, margin no. 39). In the case of a license offer subject to Section 315 BGB, the infringement court should thus be able to limit itself to finding that the patent owner is obligated to accept the offer of a license agreement and to a determination based on discretion if the prospective licensee has deposited an amount that in any event is sufficient and if the other requirements of a 'compulsory license objection' are also present (BGH, supra, margin no. 40). In connection with the question of whether the deposited amount is sufficient for sure (in any event), a summary review by the court is enough (see Kühnen, supra, margin no. 1296)."

In that passage, two things are particularly noteworthy. The first sentence emphasizes that only an "obvious" (in the other certified translation: "blatant") violation of antitrust law is a basis for denying an injunction. This means that German judges have no qualms about giving antitrust violators the immense leverage that an injunction constitutes -- they should just ensure that their violations aren't "obvious", or "blatant". The other word I'd like to draw your attention to its "summary" (before "review"): instead of a diligent analysis of whether a defendant's licensing offer is too good to refuse without violating antitrust law, the defendant has to offer so much more than the actually reasonable rate that it's a no-brainer for the court. But even Microsoft's factor of 10 (as compared to the MPEG LA pool rate) wasn't enough to make this a no-brainer. So what will defendants have to do? Offer 100 times the FRAND rate just so the court doesn't have to think about it? I'm sure there are certain German judges who would grant an injunction even if a factor of 100 was applied.

Further above I said that this ruling reflects patent enforcement extremism. You've now seen that this means it's fine for patent holders to get far higher royalties than the ones they're entitled to (or, if a would-be licensee doesn't specify a counterproposal and agrees on a FRAND rate subject to judicial review, he has to post a bond or make a deposit far in excess of the appropriate amount). And more than anything else, it means that in case of doubt (even if that doubt is hardly reasonable), an injunction over a stanard-essential patent will issue.

It's noteworthy that the Mannheim court granted Motorola this injunction even after the European Commission opened two formal antitrust investigations of Motorola's related conduct.

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FRAND abuse: German court hands Motorola an injunction against Windows 7 and Xbox 360

This morning, Judge Dr. Holger Kircher of the Landgericht Mannheim (Mannheim Regional Court) handed down his postponed ruling on a set of four closely-related Motorola lawsuits against Microsoft. Motorola won an injunction (which it won't be allowed to enforce, at least not immediately, for reasons discussed below) against the further distribution of (as well as an order to recall from retail and destroy) Windows 7, the Internet Explorer, the Windows Media Player and the Xbox gaming console in Germany based on the following two patents:

• EP0538667 on an "adaptive motion compensation using a plurality of motion compensators" (filed in 1992)

• EP0615384 on an "adaptive compression of digital video data" (filed in 1994)

These old patents are, at least according to Motorola and its favorite court, essential to the H.264 video codec standard. H.264 is the format in which roughly 80% of all digital videos are recorded. Motorola actually has an obligation to make licenses to those patents available to all implementers on fair, reasonable and non-discriminatory (FRAND) terms, but instead of honoring its promise and complying with applicable antitrust laws, it demanded royalties that would amount, in a conservative estimate, to $4 billion annually. Microsoft obviously didn't accept those terms, and Motorola didn't even genuinely expect it to: from the beginning it just wanted to win injunctions in order to force Microsoft into a broad cross-license agreement.

The European Commission is formally investigating Motorola over suspicions that this conduct violates EU antitrust law. Brussels will certainly take note of today's ruling, and EU antitrust law trumps German law at the end of the day. At any rate, the Mannheim court didn't bless Motorola's royalty demands: only here, the rule is that an injunction will be denied only if a refusal of an offer by someone to take a license on certain terms is deemed an antitrust violation.

Today's decision was the most anticipated German patent ruling ever, especially after Microsoft recently said that it was moving its European distribution center out of Germany (to the Netherlands) in order to avoid disruption of its European logistics chain as a result of the German legal situation, and after a U.S. federal court prophylactically ordered a temporary restraining order against Motorola's near-term enforcement of today's ruling.

Mannheim was easy for Motorola -- now comes the hard part

Back to Mannheim. Based on Judge Dr. Kircher's extremely broad interpretation of Motorola's patents and the problematic tactics with which he obligated Microsoft at the February trial to withdraw its challenge to the validity of the patents-in-suit, it comes as no surprise that Motorola won a permanent (but appealable) injunction from this court.

This was the easy part for Motorola, which submitted an expert report to the court in which it likened standard-essential patents to bullets in a gun ("it only takes one bullet to kill"). The hard part comes now. In order to actually enforce this injunction, Motorola needs to provide security and overcome two more hurdles in other courts:

1. Since the injunction will definitely be appealed by Microsoft right away, it can only be enforced on a preliminary basis, which means Motorola is liable for damages of premature enforcement should the injunction turn out to have been improperly-granted (which I believe it ultimately will be). Therefore, Motorola is required to provide security as a prerequisite to enforcement. The court determined that Motorola would have to post a bond or make a deposit amounting to hundreds of millions of euros. The judge only announced one of the four rulings, and the security required for the injunction of that one ruling amounted to 60 million euros, but he said that the amounts vary and include even greater amounts for the other three rulings. All four cases are closely related: they are about two patents targeting three different Microsoft legal entities (Microsoft Corporation, a subsidiary based in Ireland, and the German subsidiary). Motorola will certainly provide this security. It has already made three or more deposits over 100 million euros each to enforce a couple of rulings against Apple, which will cost German taxpayers millions of euros/dollars.

2. The appeals court, the Oberlandesgericht Karlsruhe (Karlsruhe Higher Regional Court), can suspend the enforcement of this injunction. It will do so if its initial analysis is that Microsoft's appeal is more likely than not to succeed. For example, it may determine that Motorola's FRAND abuse is so egregious that enforcement must be stayed for the duration of the appellate proceedings (which typically take a year and a half, or sometimes more).

3. The third major challenge for Motorola is probably the steepest one: Judge James L. Robart of the United States District Court for the Western District of Washington won't allow an end-run around his FRAND case. In November 2010, eight months before Motorola brought these German lawsuits, Microsoft filed a complaint with the United States District Court for the Western District of Washington in order to enforce Motorola's own FRAND licensing promise on a worldwide basis, and if Microsoft keeps on winning decision after decision in that litigation, Motorola won't get to enforce the German decision. On April 11, Judge Robart odered the aforementioned temporary restraining order. On May 7 (next Monday), there will be a hearing on a Microsoft motion for summary judgment of its breach-of-contract claim. If Motorola's $4 billion demand is considered "blatantly unreasonable", Motorola will be found to have breached its contract. The existing temporary restraining order will be in effect until Judge Robart's decision after that hearing (it could come down later the same day, but it could also take longer). In a recent post I explained the significance of that hearing and the possible next steps, which I believe will include further restraints on Motorola provided that Microsoft's summary judgment succeeds or, should the judge agree with Motorola that a jury needs to be asked, Judge Robart sees that Microsoft is sufficiently likely to succeed on the merits.

   In the build-up to the May 7 hearing, Motorola didn't dispute the $4 billion figure: it merely called it "misleading" without explaining this claim in the publicly-accessible part of the filing. It also told Judge Robart that its demand was "in fact reasonable [F]RAND". Unbelievable.

   Motorola is very well aware of the fact that Seattle is the center of gravity for this FRAND dispute. Last week, an ITC judge sided with Motorola on a non-final basis (over a case targeting the Xbox with three FRAND-pledged patents and one non-standard-essential one), and a few days before that recommendation came down, Motorola basically argued that a U.S. import ban could stil be prevented by the findings of the Seattle-based court.

Microsoft can prevent the enforcement of this Mannheim injunction by convincing the Karlsruhe Higher Regional Court of the merits of its appeal and/or winning further decisions in Seattle. Motorola, however, needs to fend off both challenges, the one in Karlsruhe and the one in Seattle.

Related German litigations

Motorola is also suing Apple over standard-essential patents in Germany. It won a Mannheim injunction based on a patent allegedly essential to a wireless data transmission standard names GPRS. It temporarily forced Apple to remove certain products from its German online store but can't currently enforce that particular injunction following a decision by the Karlsruhe-based appeals court.

I previously mentioned Motorola's enforcement of a push notification patent against Apple. Motorola is also suing Microsoft over that one (also in Mannheim). A decision is scheduled for May 11, 2012 (next week's Friday).

Both Apple and Microsoft countersued Motorola in Germany only after Motorola opted for the geographic escalation of disputes that originated in the United States. Apple has already won two injunctions against Motorola in Munich, and Motorola is under pressure from various Microsoft patents, particularly one on system event management.

Motorola is currently the only Android device maker to be embroiled in litigation with Microsoft

A couple of days ago, Microsoft and Nook maker Barnes & Noble announced the settlement of their Android-related patent dispute. Other major device makers such as Samsung, HTC and LG have taken a license from Microsoft. Licensing is the rule, litigation is an exception. No matter what Motorola tries in Germany or elsewhere, I have no doubt that it's only a question of when, not if, Motorola will also pay royalties to Microsoft in order to address Android's infringement in a constructive and commercially reasonable manner.

Implications for Google's proposed acquisition of Motorola Mobility

Regulators in the U.S. and the EU approved Google's envisioned acquisition of Motorola Mobility only with reservations concerning MMI's use of FRAND-pledged standard-essential patents and Google's endorsement of MMI's litigation tactics. Currently the closing of the deal depends on the Chinese Ministry of Commerce (MOFCOM). I don't have any information (at least no official or otherwise verifiable information) concerning the state of the Chinese merger review. Today's German ruling may have implications for the Chinese proceedings if it's true that FRAND plays a key role there, but again, there's no way of knowing at this stage.

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