European Commission hands down Statement of Objections against Microsoft's purchase of Activision Blizzard King: MLex

MLex reports that the European Commission has sent Microsoft a Statement of Objections (SO) over the acquisition of Activision Blizzard King (NASDAQ:ATVI). The MLex report also contains a quote from Microsoft, which is neither a confirmation nor a denial of the SO. I don't doubt what MLex says, so the SO has come down and the EC will probably confirm it soon.

The week before the SO, the European Commission's Executive Vice President Margrethe Vestager met with Sony's PlayStation chief Jim Ryan. Microsoft subsequently accused Sony of having lied to "people in Brussels" (which may or may not include the EC) about the parity aspect of the ten-year Call of Duty license it is offering.

The global set of Microsoft-ActivisionBlizzard merger review processes may be approaching an inflection point now in the positive sense of going around the final curve and entering into the home stretch. MLex found out earlier that the EC's Directorate General for Competition (DG COMP) and Microsoft are talking about what a clearance decision conditioned upon specific commitments could look like, but that an SO would come prior to a potential agreement that would be the EU equivalent of a U.S. consent decree. Similarly, the UK Competition & Markets Authority (CMA) will publish its provisional findings these days. Those were scheduled for late January or early February, and January is already over in the UK as I write this post. The EU SO and the UK provisional findings may just be necessary milestones.

Not long after MLex reported on the SO, Microsoft said in a U.S. court filing that the deal will not consummate before May 1 at the earliest, but no reference is made to the SO.

As long as the Commission and Microsoft haven't agreed, anything can happen, from unconditional clearance to conditional clearance all the way to a blocking decision that Microsoft would have to appeal to the EU General Court. But the situation in Europe may indeed be different from the state of affairs in the U.S., where at a recent hearing the Federal Trade Commission said there were no substantive settlement talks going on. And Bloomberg quoted a former U.S. antitrust official who claims that the FTC rushed to court in order to discourage the EC from striking an agreement with Microsoft. I can't verify that claim, nor is it wholly implausible. There was a time, though, when it would have been counterintuitive for the U.S. government to torpedo a U.S.-U.S. merger that strengthens the U.S. economy vis-à-vis large Asian rivals. Should that story be true, it would serve to show that the FTC will come under serious settlement pressure once the EU has approved the transaction.

The DG COMP-FTC difference in constructiveness is most likely attributable to different levels of risk aversion:

Some observers believe the FTC may not give a damn about losing in court, and may even consider it a sacrifice they just have to make in order to "reset" merger laws, though I have my doubts that such a strategy of running into surefire defeats will impress Congress all that much.

Not only the FTC but also the current DOJ never appears to get tired of losing. The FTC and DOJ's guiding principle these days--including this month's new United States et al. v. Google antitrust lawsuit, which is to some extent an "undo merger" case--reminds me of two quotes:

"The possible has been tried and failed. Now it's time to try the impossible."

"You have to try the impossible to achieve the possible."

By contrast, Mrs. Vestager, who is in charge of antitrust enforcement as well as digital industry policy, does not appear to have an appetite for losing. The sole exception may be the Apple-Ireland tax case, where she identified a real issue but tried to shoehorn it into state aid law, which the EUGC flatly rejected in a ruling that the European Court of Justice (ECJ) will probably affirm. The Apple tax case raised an issue that must be solved at the political level, and the "state aid" case served to draw attention to a structural problem that hasn't really been solved but at least Mrs. Vestager tried.

When it comes to merger, cartel, and unilateral conduct cases, however, Mrs. Vestager does not run into surefire defeats. For instance, after the EUGC reversed DG COMP's Qualcomm decision last year, the Commission refrained from appealing the case to the ECJ. When I saw the EUGC's Qualcomm decision, I also found it hard to see how the Commission could have raised a material question of law with the top EU court.

The Microsoft-ActivisionBlizzard SO, in and of itself, does not pose any risk to DG COMP's track record. What the Commission achieves this way are two things:

• DG COMP shows that the times of waving Big Tech's acquisitions through are over. This will discourage other such deals. Potential acquirers feel the strong headwinds. The shareholders of potential acquisition targets will prefer strategic alternatives that don't get delayed and potentially derailed by regulators.

• The Commission also demonstrates that it is not "softer" than the FTC and DOJ (and, potentially, the UK Competition & Markets Authority, whose comparable procedural milestone--called provisional findings--is also around the corner). Maybe more solution-oriented, but still pretty tough.

As I said in my post on the New Zealand Commerce Commission's postponement of its decision, a certain group of competition enforcers may now be trying to synchronize their proceedings. That doesn't mean to walk in complete lockstep, but to align schedules to some degree and to take similar procedural steps. Some other antitrust agencies, most recently Chile's FNE, have not had qualms over granting unconditional clearance to this transaction, which is the legally sound thing to do (and at least the Brazilian and Chilean decisions were definitely well-reasoned; in fact, they resembled what U.S. and EU competition authorities would have done five or ten years ago if presented with the same set of facts, and it's not the law that has changed, but politics).

There are no serious issues, so the SO is more of a statement than there can be serious objections:

• There will still be plenty of competition--as opposed to massive concentration--in the highly fragmented games business. And there will always be new major game makers of the kind no one even knows today.

• In the console market, Sony is and will remain the market leader. Merger reviews are not meant to cement someone's market leadership, but even if that were the name of the game, it wouldn't matter:

  • Most Call of Duty gamers would rather switch games than consoles if they had to, but they wouldn't have to because

    • Microsoft has no incentive for such a foreclosure strategy and, at any rate,

    • has offered Sony a ten-year license as everyone knows.

  • Even if--in an alternative universe--foreclosure occurred and everyone who plays CoD on a PlayStation today switched to the Xbox, Sony would still be the market leader (by far).

• The cloud gaming market is new. Some have entered, some are preparing to enter, some (such as Google, a company no third party could trust to really be committed to anything other than its search engine business and maybe its cloud platform) have left. In any event, the ten-year license offer includes subscription services.

• Windows is an open platform where anybody can offer anything. No app review like on the mobile platforms; no app tax.

• In light of the foregoing, no procompetitive justifications are needed, but there really is a procompetitive aspect here that I--as an app developer who formally complained to DG COMP and others over the Apple-Google duopoly's app distribution terms and policies--care about: Microsoft's plans for a universal (cross-platform) app store. In order for the European Union's Digital Markets Act (DMA) to make an actual impact on the market, it takes not only the law but also serious challenges to the Goopple duopoly. That's where apps like Candy Crush come in.

• The sole vocal complainer is Sony, and there are clear signs now of its reluctance to put all the facts (concerning its own content-centric strategy) on the table.

The facts being what they are, the question is not whether regulators can on a legally defensible basis object to the consummation of this transaction. It's only a question of whether or not a given regulator is happy to lose in court.

There was a time when U.S. policy makers, competition enforcers, academics, lawyers, and companies accused the EU of stretching the envelope of competition law. The EU now has the opportunity to become the first major jurisdiction to play hard but fair, to make a strong statement as it has with the SO, but to work it out. (Let me nuance "first major jurisdiction", though: as I made clear before, I have a lot of respect for the work done by Brazil's CADE and Chile's FNE on this matter, and believe they are rising stars in antitrust enforcement, but the U.S. is and historically will remain the cradle of antitrust enforcement, the EU often leads the way in digital market regulation, and the UK CMA has become very important as a result of Brexit.)

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European Games Developer Federation supports Microsoft's purchase of Activision Blizzard: position paper is as authentic as it gets

In these times where self-declared app developer associations are often just astroturfers on the payroll of the likes of Apple, it is reassuring that genuine developer representatives still exist and speak out on the issues.

Yesterday, Jari-Pekka Kaleva, the managing director of the European Games Developer Federation (EGDF), published a summary of his organization's observations on Microsoft's acquisition of Activision Blizzard King (NASDAQ:ATVI). The blog post links to a December 23 three-page PDF document on the same subject.

The EGDF credibly claims to represent, through its 23 member associations that are national trade groups, more than 2,500 of approximatley 5,000 game developer studios in 22 European countries. The EGDF's German member is GAME, which organizes "the world's largest games event": gamescom.

My first observation on the EGDF's observations is that they're perfectly independent from Microsoft. One cannot conclude otherwise: the statement, while ultimately supportive of the transaction in question, says things that Microsoft undoubtedly disagrees with. The EGDF "acknowledges that Microsoft has the ability for anti-competitive market behaviour and has not in the past consistently respected assurances it has given to continue making games published by companies that it has acquired available on rival platforms." The second part must relate to the ZeniMax (Bethesda) acquisition, and to the best of my knowledge, no promises were broken there. Also, the EGDF calls on Microsoft to "compete on content by lowering its 30% platform fee on [its] Xbox."

Furthermore, the EGDF's position paper "calls upon the European Commission" to closely monitor Microsoft's implementation of the EU Digital Markets Act on its Windows operating system and cross-platform Microsoft Store, and to back up the continued availability of Activision Blizzard games on rival consoles and subscriptions "with rigorous compliance and enforcement mechanisms." The EGDF supports the EU Commission's in-depth investigation, but on the bottom line believes the upside outweighs the potential downside:

• The EGDF says something I've also been saying for a while, which is that this deal is key to Microsoft's ability to challenge Apple's and Google's mobile app stores. I agree with the EGDF that "Microsoft is paving the way also for European game industry SMEs [small and medium-sized enterprises] that do not have sufficient financial resources for the upcoming legal fight to defend their new rights against Apple and Google." In October, I was first to highlight a passage from a Microsoft filing with the UK Competition & Markets Authority (CMA) that revealed plans to "shift consumers away from the Google Play Store and [Apple] App Store."

• The EGDF also considers it necessary to have a strong competitor to Apple's "emerging cloud gaming / game subscription service" offerings.

• The EGDF would also like to see Microsoft challenge Tencent as the world's leading game developer and publisher.

It may not be a coincidence that the EGDF drew attention to its December 2022 position paper on the day the European Commission's intent to hand down a Statement of Objections (SO) became known. My interpretation of the Reuters artice is that there still is hope for a constructive solution in the EU. The SO is an important procedural step and a show of force. If it comes down, it will serve as a stern warning to Big Tech companies that their major acquisitions may face stiff resistance. But an SO is not the end of the world either when there are clear procompetitive benefits (such as the ones highlighted by the EGDF) and a will to offer meaningful and justiciable remedies.

I consider the EGDF statement rather significant, but let's not forget about the outcome of a survey of Call of Duty gamers by Chile's competition authority: 61% of CoD players would rather switch games than consoles.

It's more instructive to listen to gamers and small and medium-sized game developers than to Sony.

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European Commission authoring Statement of Objections (antitrust charges) against Google's ad business while DOJ is rumored to be preparing its second antitrust lawsuit and Google announces summary judgment against the pending one

This is a transatlantic story. Let's start in the European Union and then cross the Pond.

Brussels-based Reuters antitrust expert Foo Yun Chee reported yesterday that the European Commission's Directorate-General for Competition (DG COMP) appears to be readying a Statement of Objections (SO) against Google's $100B+ ad business. The preliminary antitrust ruling, against Google can then defend itself through further written argument and at a hearing (and a final decision could still be appealed), may be handed down in early 2023, though there appears to be considerably greater uncertainty about when than if it will happen.

Foo Yun Chee always has great sources in the EU antitrust community, one of whom told her that "the Commission has asked third parties to delete confidential details in their submissions, usually a precursor to allowing Google to access documents following the receipt of a statement of objections." Indeed, in Brussels antitrust circles this is commonly considered a harbinger of an SO.

The European Commission has already ruled against Google three times, and has defended two of those decisions (one in full and other for the very largest part) in the EU General Court, from which Google can appeal on to the European Court of Justice, but all factual findings are final after the EUGC has spoken.

Exactly one month ago--on September 14--the EU General Court (which used to be called the Court of First Instance) affirmed almost the entire Google Android ruling. The aspect that matters most to me--because app developers like me are now totally dependent on competition enforcement against both Apple and Google (in that order--is that the EUGC also agreed with the Commission's finding that competition at the device level doesn't discipline the platform duopolists' treatment of developers.

Google's ad tech business is also facing a $25 billion class action brought by Geradin Partners (here's the antitrust boutique's press release, which points to a decision by the French competition authority concerning Google's ad tech business) on behalf of publishers. Technically, those are two parallel cases: one in the UK and one in the Netherlands, with the latter covering the entire European Economic Area (EEA), which consists of the EU's Single Market plus a few smaller countries.

Europe may not be the only continent on which Google will have to defend its ad tech terms and practices: In August it was reported by Bloomberg--and picked up by other media, such as TechCrunch--that the United States Department of Justice is preparing a second antitrust lawsuit against Google, which it may bring on behalf of the United States in the District of Columbia or the Southern District of New York. The focus of that second case will be Google's digital ads business.

There are structural differences between the two jurisdictions, but definitely some parallels between an SO in the EU and a governmental complaint in the United States.

That second complaint hasn't been filed yet, though at the time it looked it was potentially even going to happen in September. This is obviously just a subjective feeling, but I believe it would look better if the DOJ first--or at least shortly after a second Google lawsuit--brought a case against Apple that it's reportedly working on. Suing Google twice but not doing anything about Apple's conduct wouldn't strike the right balance in my humble opinion. To be fair, it is very meaningful that the DOJ will support Epic Games against Apple in a week from today. Here's my preview of the Ninth Circuit appellate hearing: I'm optimistic.

Meanwhile Google will try to defeat the first United States v. Google lawsuit in the months ahead. A joint status report filed by the DOJ, 36 states, and Google mentions that Google is going to seek an extension of the page limit for summary judgment motions from 45 to 50 pages, and intends to bring such motions against the federal government's lawsuit as well as against that of the 36 states. I doubt that those motions will put an end to the proceedings in district court, but it will, at minimum, be interesting to read the parties' legal argument at the summary judgment stage, and a streamlining of the case is less unrealistic than a complete rejection of the complaints.

Here's the filing the parties made with the United States District Court for the District of Columbia yesterday:

United States and 36 States v. Google: Joint Status Report

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Lawyers tried to avoid Epic v. Apple judge for banks' class action against Apple over Apple Pay monopoly abuse--but jury is out on ultimate assignment

The class action-specialized law firm of Hagens Berman yesterday announced an antitrust class action on behalf of payment card issuers against Apple. The complaint (PDF) alleges monopoly abuse in the form of the "manifestly supracompetitive" fees Apple charges payment card issuers for transactions made on Apple Pay. Apple has very high shares in the smartphone, tablet, or smart watch markets in the United States, the geography the lawsuit focuses on, and does not allow other payment apps (particularly "wallet" apps) to use the iPhone's NFC chip. Developers can use NFC for some purposes, but Apple prohibits third-party apps to facilitate payments via NFC. Apple charges transaction fees despite other companies doing almost all of the work--and those amounted to $1 billion last year and are projected to soon reach $4 billion, in the U.S. alone.

I'm going to be following this litigation as it unfolds, so this here is not my "definitive" analysis but merely a few observations to begin with.

Explanatory complaint: One key strength of this complaint is that it does a great job explaining the issues and their effects. It's definitely one of the best U.S. complaints I've ever seen in explanatory terms.

Plaintiffs: The caption is Affinity v. Apple as Affinity Credit Union of Canada (which also does some business in the U.S.) is the initial plaintiff. Hagens Berman now wants payment card issuers to sign up so they will get a share of what could be a multi-billion dollar payout. Depending on who will join the plaintiff class (of the thousands of entities that would meet the eligibility criteria), this case here could get a lot more serious than some consumer or "small developer" class actions that typically end in settlements that benefit the lawyers to a far greater extent than anybody else.

Sherman Act claims: There's a tying claim (Sherman Act Section 1) that is described as a "requirements tie." It's not a general tie that would require anyone purchasing an iPhone, iPad, or Apple Watch to use Appel Pay. But if the users of those devices want to do "tap and pay" transactions, "Apple has made Appe Pay the only option for fulfilling that requirement." In that sense, Apple ties the "tap and pay iOS mobile wallet market" to the "iOS mobile device markets." An additional section 2 claim accuses Apple of monopolization by excluding competition, "including by way of its unlawful practices in restraint of trade." As a fallback, the complaint also alleges "attempted monopolization."

Geographic market: I've already mentioned the geographic focus on the U.S., which in this case doesn't seem arbitrary at all. The complaint contains a chart according to which Apple imposes particularly high transaction fees in the U.S. as compared to the UK and the EU:

Market definition: Given Apple's very high market share in the U.S., the case--unlike cases with a global market definition such as Epic Games v. Apple--doesn't hinge on a single-brand market definition. However, the term "aftermarket" is mentioned once.

Relationship with EU investigations: The complaint makes reference to the European Commission's recent Statement of Objections (a preliminary finding of an antitrust violation) in an Apple Pay case. While there are jurisdictional differences, one can reasonably argue that the Apple Pay situation is worse in the U.S., as evidenced by the fact that fees in the U.S. are several times higher. Besides the investigation in which the EU issued the aforementioned SO, there's a second investigation into Apple Pay (with a slightly different focus) that was announced about two years ago.

Google: This here is not a "Goopple" case where both duopolists--Google and Apple--behave in similar ways. The complaint mentions how much more freedom and, as a result, innovation there is in the market for Android wallets.

Security: The complaint attributes (at least in part) to Apple's exclusionary practices that there have been serious security issues involving Apple Pay. This is going to be a very interesting part of the case to watch, as Apple uses security (alongside privacy) as its favorite pretext for anticompetitive, innovation-stifling terms and policies.

Negative judge-shopping: The Northern District of California, where this complaint was brought, has multiple divisions. Hagens Berman specifically requested "[i]ntra-district assignment to the San Jose division." That's the closest one to Apple's Cupertino HQ, and normally parties prefer not to be in an area where a high percentage of potential jurors may have friends or relatives working for the other party. I'm almost 100% sure that the real reason is not that they want to litigate in the backyard of Apple Park. The presumptive motivation here was to keep the case out of Judge Yvonne Gonzalez Rogers' hands. She's based in Oakland and presiding over the Pepper v. Apple consumer class action (that went all the way up to the Supreme Court) as well as Epic Games v. Apple, which is currently before the Ninth Circuit.

But there is a possibility of her getting the case despite the plaintiff's efforts to sidestep her division. The first thing that happened was that the court assigned the case to Magistrate Judge Thomas Hixson, who has a strong antitrust background but (a) is based in San Francisco and (b) handled discovery-related matters for Judge YGR in Epic Games v. Apple. In this case it's a given that the parties will decline to proceed before a magistrate judge, and then the case might be assigned to that Epic v. Apple judge on the other side of the Bay Bridge...

While she decided Pepper for Apple (only to be overruled by the Ninth Circuit and then the Supreme Court) and then granted Epic only a pointless consolation prize, it would be utterly unfair to suggest that Judge Gonzalez Rogers intends to be protective of Apple. The way she "grilled" Tim Cook at the end of last year's trial was definitely the opposite of what a judge would do if there wasn't a sincere intent to find out the truth even if it might be bad for Apple. She also made a very correct remark during the trial about competition having the potential to leading to security improvements. But there are indeed some issues.

The question of whether consumers had standing in Pepper was tricky, and narrowly decided. If Justice Kavanaugh hadn't joined the liberal minority, Judge YGR's dismissal of the case would probably have been affirmed.

But (at least) the part of the Epic Games v. Apple judgment dealing with Epic's single-brand market definition was a total disaster: wrong on the law, wrong on the economics, wrong on the technology. The sheer absurdity of saying that Epic's foremarket definition of smartphone operating systems was meant to suggest a higher market share for Apple than it actually has in the smartphone market is unbelievable, given that no iPhone gets sold without iOS and vice versa: same market share either way. In January I wrote that "[t]here is a one-to-one relationship (as programmers like me would say) between iPhones and iOS installations." Epic used the same term in its reply brief several months later.

Given that history, I can see why antitrust plaintiffs suing Apple over its death grip on its mobile ecosystem would rather have their case assigned to the San Jose division, which still doesn't mean that anyone accuses an honest judge of being biased. It's just that she has made mistakes that benefit Apple big-time, and no one wants to be on the receiving end of the next such mistake.

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EU Commission market-tests totally insufficient FRAND commitments offered by Samsung

For about two years I was hopeful, and to a reduced extent I still am, that European Commission Vice President Joaquín Almunia was going to curb the increasingly-rampant abuse of FRAND-pledged standard-essential patents (SEPs) and provide a greater degree of clarity especially in connection with injunctions. But a press release issued by the EU's top antitrust regulator today shows that there is considerable risk that the ultimate outcome of the EU investigation of Samsung's SEP assertions against Apple, despite a preliminary ruling against Samsung that came down last year, could be thoroughly disappointing.

Samsung's proposal has now also been published on the Commission's website.

Actually, if the proposed "commitments" the Commission is now submitting to a market test were ultimately considered acceptable, it would have been better for the EU not to take any action in this regard at all. Samsung's proposals would make things worse, not better, and they would increase, not decrease, legal uncertainty. I am absolutely stunned that the Commission, after countless speeches by Mr. Almunia that stressed the importance of preventing FRAND abuse, decided to market-test Samsung's offer instead of rejecting it outright. Samsung's proposal is far weaker than the FTC-Google consent decree, which I don't exactly like either because it doesn't make sense to me to require the target of an abusive SEP assertion to do this or that.

Here's the deal: Samsung would make a commitment for only five years (!) -- which is ridiculously short because there is no reason for which the abusive pursuit of SEP-based injunctions would be any more legal in five years' time than it is today -- not to pursue SEP-based injunctions relating to smartphones and tablet computers, provided that a defendant who doesn't want to be the target of such injunction requests "agrees to a particular licensing framework". The choice between facing an injunction or agreeing to licensing is, on the face of it, similar to the FTC's approach, but Samsung's proposal to the EU is structurally far worse. Here's how the Commission describes it:

"The licensing framework consists of: (i) a negotiation period of up to 12 months and (ii) if no agreement is reached, a third party determination of FRAND terms by either a court or an arbitrator, as agreed by the parties. If the parties cannot agree on either submitting to court or arbitration, the parties will have to submit to arbitration."

As for the first part, it's not a bad idea to let companies negotiate, but this whole antitrust issue is about scenarios in which a patent holder makes out-of-this-world demands and doesn't want negotiations to succeed. This "negotiation period" would provide Samsung and other abusers with the option to claim that an implementer of a standard failed to participate (constructively or at all) in such negotiation, which I'm sure is part of Samsung's plan.

The second part -- third-party determination of FRAND terms -- is the more important one at any rate. And the last sentence of what I quoted would have disastrous consequences and make the European Commission a supporter, not a fighter, of FRAND abuse. I'll repeat it:

"If the parties cannot agree on either submitting to court or arbitration, the parties will have to submit to arbitration."

This is a downright perversion of the concept of arbitration. It's arbitration that must depend on an agreement between parties. But parties must always have access to a court of law, with or without an agreement. Anything other than that would be irreconcilable with the rule of law. Under Samsung's proposal, the result of an arbitration proceeding could only be appealed to a second arbitration panel, but not to a court of law.

If the Commission accepted these terms (for now I still doubt that it will, and I hope I won't be proven wrong), the net effect would be that the pursuit of injunctions would be considered OK if an implementer of a standard does not agree to arbitration on the patent holder's terms.

This wouldn't be the same straightforward extortion as demanding an out-of-this-world royalty rate or a cross-licensing involving non-SEPs, but it would create even greater legal uncertainty than the status quo. The target of abusive SEP assertions will still face a high risk of the outcome being a supra-FRAND royalty rate.

Samsung has a high drop-out rate of SEP assertions, as do other SEP holders, but it seeks royalties based on the assumption that all of its declared-essential patents are actually essential and valid. The way to ensure that SEP holders get paid only for their true SEPs, and not rewarded for violating the standard-setting rules through overdeclaration, is to require them to prove in court that their patents are actually infringed and valid. Samsung's proposal to the Commission would not prevent an implementer from challenging the validity and infringement of Samsung's SEPs, but it would reverse the burden of proof in this regard.

Also, a fundamental drawback of arbitration is that it's usually private -- under Samsung's proposal, it would be "conducted in strict confidence" --, so it does not result in the creation and refinement of a body of case law that gradually increases clarity. With court opinions on FRAND terms, stakeholders get smarter and smarter. With secret arbitration, there's a maximum degree of uncertainty every time. I repeat myself: if the European Commission accepted these proposals, the result would be less clarity than if the Commission had never investigated Samsung's conduct in the first place.

Even the world's number one SEP holder (at least the number one wireless SEP holder), Qualcomm, is critical of arbitration as a FRAND royalty rate-setting mechanism.

FRAND determinations by courts are working out pretty well so far. There are already two rate-setting opinions by U.S. judges (Judge Robart, Judge Holderman), which are useful to courts not only in the U.S. because their FRAND-specific considerations make sense with respect to reasonable-royalty determinations in all jurisdictions. And I was quite encouraged by a Mannheim trial in June that this can also work out in Europe.

Last December, the European Commission appeared strong and determined. It issued its Statement of Objections despite Samsung's unilateral withdrawal of all of its European SEP-based injunction requests against Apple. The Commission said it still needed to investigate what had happened because the pursuit of injunctions had already caused harm. Less than a year later, the Commission market-tests "commitments" by Samsung that are more like a promise to resume its abusive conduct.

One company that is going to read Samsung's proposal with great interest is Ericsson, which is embroiled in a two-way SEP dispute with Samsung in the United States. Ericsson might actually propose to Samsung an arbitration proceeding of the kind it suggests, and if Samsung refuses, then Ericsson might simply seek injunctions against Samsung in Europe.

I may do some follow-up on this market test soon. This is just my initial reaction.

Finally I'd like to refer the CPI subscribers among my readers to this article by two Orrick lawyers on "The Next Chapter of Disputes Involving Standard-Essential Patents". Among other things, that article shows statistics according to which only about one in eight SEP assertions by companies like Samsung, Motorola and InterDigital succeeds in court.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

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German court unlikely to approve Google's 2.25% SEP royalty demand from Apple as FRAND rate

Last year Google proposed to Apple that the Mannheim Regional Court, instead of a U.S. court or arbitrator, determine a global FRAND royalty rate for Apple's alleged use of Motorola's wireless standard-essential patents. At today's Motorola Mobility v. Apple FRAND rate determination trial in this German court (the number one court in the world for smartphone-related patents), Google may just have realized that German judges, despite having a less robust body of patent royalty case law available than their U.S. counterparts, can easily identify a clearly unreasonable royalty demand and, which is not trivial but possible, set a FRAND rate reflective of the intrinsic value of standard-essential patents as opposed to hold-up value due to inclusion of patented techniques in an industry standard.

In April 2012 Motorola Mobility, about a month before finally obtaining antitrust clearance for its acquisition by Google (which closed in May 2012) finally elected, or more likely felt forced, to accept Apple's offer to take a license to Motorola's wireless SEPs in accordance with the German Orange-Book-Standard procedure for avoiding the grant or enforcement of injunctions over patents subject to compulsory licensing. This fact became known a few months later thanks to a U.S. court filing. Apple offered to take a royalty-bearing wireless SEP license, with respect to the German market, but did not specify a FRAND rate. Instead, the resulting agreement states that Motorola shall determine the rate using its "equitable discretion and according to the FRAND standard in industry". Under German law an equitable-discretion clause in favor of the beneficiary of a payment can be reviewed and adjusted by a court if the parties don't agree. And -- surprise, surprise -- Apple did not agree that Motorola's 2.25% royalty demand was fair, reasonable and non-discriminatory. (The royalty rate was not mentioned by the court today, but it has shown up in multiple publicly-accessible documents.)

Thus Motorola brought this Mannheim action in the summer of 2012, seeking declaratory judgment that its royalty demand was reasonable. Apple counterclaimed. Among other things, Apple has recently moved for declaration of unenforceability of several clauses of the license agreement. The European Commission issued a preliminary antitrust ruling ("Statement of Objections") last month according to which "[t]he Commission's preliminary view is that it is in the public interest that licensees should be able to challenge the validity, essentiality or infringement of SEPs" -- key defensive rights that Apple was forced to waive under the Orange-Book-Standard agreement, which came into being at the threat of sales bans against iPhones and 3G-capable iPads in Germany. Presumably Apple's counterclaim for declaration of unenforceability, which is limited to particular clauses and does not challenge the overall agreement, targets the clauses that contradict the Commission's preliminary position. Should the Mannheim court disagree with the European Commission on any of these issues, it will have to stay this German litigation pending further EU antitrust proceedings. This is required by Article 16 of EU Regulation 1/2003:

Uniform application of Community competition law

1. When national courts rule on agreements, decisions or practices under Article 81 [now Article 101; cartels] or Article 82 [now Article 102; abuse of dominant position] of the Treaty which are already the subject of a Commission decision, they cannot take decisions running counter to the decision adopted by the Commission. They must also avoid giving decisions which would conflict with a decision contemplated by the Commission in proceedings it has initiated. To that effect, the national court may assess whether it is necessary to stay its proceedings. [...]

Judge Voss ("Voß" in German), who presides over the panel hearing this case and many other smartphone patent cases, scheduled a decision for September 27, and when it comes down, Google is very unlikely to achieve its goal of a declaratory judgment blessing its 2.25% royalty demand. The court has some issues with it, and I don't think Google will be able to persuade the court of this rate. Apple insists on a declaratory judgment in its favor so it can, as one member of Apple's legal team told the court, subsequently sue Google for antitrust damages.

The reporting judge in charge of this case, Judge Lembach, outlined the court's inclination at a high level, restricted by a protective order that issued at the start of the trial. I thought Judge Lembach's introduction was perfect -- though not for Google's aspirations to overcharge Apple.

No numbers were discussed in public, and this process is not yet at the stage at which the court would set a particular rate. Before any rate-setting occurs (which would require another trial to hear experts etc.), the case may be stayed to wait for the EU to adjudge some of the antitrust issues involved. What was discussed in open court, however, is the fundamental approach, and it can be described as the German equivalent (taking into account certain differences between the two jurisdictions) of Judge Robart's approach in Microsoft v. Motorola, without the part relating to pool rates (which are more useful indicators in connection with H.264 and IEEE 802.11, the standards at issue in the Microsoft case, than the cellular standards at the center of the Google-Apple dispute in Germany).

As Judge Lembach explained, Google seeks to justify its royalty demand primarily by pointing to other patent license agreements Motorola concluded over the course of the last 20 years. It did not disclose the licensees' names to the court. Google claims that Motorola consistently received a consideration corresponding in value to its cash-only royalty demand from Apple. Judge Lembach noted that these individually-negotiated agreements have rather different terms, and the court declared itself unconvinced of Google having proven the reasonableness of its demand on this basis. Among other things, Judge Lembach said it "appeared rather optimistic [from Google's vantage point] to derive its license fee from those license agreements", considering that these agreements contain various "modifications and limitations". Judge Lembach also said that SEPs inherently come with a restriction of choice and are not subject to typical market dynamics, which I consider to be a valid and very important point. Apple's lead counsel in this action, Freshfields Bruckhaus Deringer's Dr. Frank-Erich Hufnagel, reinforced this later. He stressed his enthusiasm for patent law but said it just can't be denied that SEPs raise unique issues that must be taken into account.

The court advised Google that it's entitled to compensation for what its patents contributed to the state of the art, but not to the value of standard-setting itself.

Google's position has a major inconsistency (at least one). On the one hand, Google argues that Apple's reference to royalty stacking and any proposed calculations relative to the total number of patents declared essential to the standards in question is besides the point because it's all about the value of the patents in question. On the other hand, Google does not want the court to perform any valuation other than a derivation from other license agreements, while Apple advocated a representative-sample approach in order to make the valuation of a portfolio of this size more manageable. When counsel for Google (a Quinn Emanuel attorney) said that SEP licensing negotiations between industry players typically involve the exchange of infringement claim charts and an analysis of the technical value, essentiality and validity of the relevant SEPs (as opposed to arithmetics focusing on the total number of patents declared essential to a given standard), Judge Lembach noted that Google does not want such analysis to be performed in this litigation and that it wants "the court to derive the value of these patents [from other agreements] rather than determine it".

At this juncture of the public part of the proceedings the discussion was, relatively speaking, closest to Judge Robart's modified Georgia-Pacific approach. In Germany royalty determinations are not described as simulated negotiations. But Google's emphasis on "Motorola's and the industry's licensing practices" and its specific reference to the information exchanged and considered by negotiating parties moved the debate very close to the Georgia-Pacific factors.

The way I understood the Mannheim judges today, they're not inclined to engage in any simple arithmetic no matter which party proposes it. They're definitely underwhelmed by Google's derivation from disparate license agreements (as was Judge Robart in the Microsoft-Motorola case). And they also reject one of Apple's approaches based on a return-on-investment calculation (which Apple's counsel said was merely meant to be an analogy further confirming the economic soundness of its position). At this stage the Mannheim court has yet to determine the next steps and a complete methodology. It appears to me that the court will look for a pragmatic solution: reasonably focused to be manageable, but still based on an assessment of the subject of the license agreement in question.

The court doubts that Motorola can demand the same percentage of the sale of a modern-day smartphone (or tablet computer) as it may have obtained when phones were merely about placing calls and texting. While Apple's proposed royalty base (the price of a baseband chip) won't necessarily be adopted by the court, Google received the indication that it would probably have to adjust its royalty rate (possibly by means of a cap) to reflect the multifunctionality of today's wireless devices. This is somewhat similar to the position Judge Robart took on the royalty base issue in a Daubert ruling (he allowed Google to present a royalty demand at trial based on a percentage of the total price of the licensed products because theoretically this approach can also result in a correct absolute royalty amount).

Just to be clear: even though Apple cited to Judge Robart's ruling in its pleadings (and did so repeatedly at today's trial, where Motorola only referenced the dictum that its cellular SEP portfolio is stronger than its WiFi and video compression portfolio), the Mannheim court is not using the U.S. rate-setting opinion as a blueprint. The German judges are using common sense and their understanding of the relevant technologies. If Google tried common sense and adjusted its demands accordingly, its royalty demands would also get more traction in the various courts.

Here's another example of common sense running counter to Google's position that 2.25% is the "be all and end all" of SEP royalty negotiations: Judge Lembach said that the court believes the expiration of declared-essential patents suggests a decreasing royalty rate over time. Given that the standards in question are rather old, it's not likely that new SEPs reading on those standards will be granted. Should it happen anyway, Google could request an adjustment of a previously-determined rate. Theoretically Apple could also seek an adjustment under German contract law, but to the extent that expiration is foreseeable, the Mannheim court will probably want it to be reflected from the start in the form of a decreasing royalty rate. He indicated that the absence of such adjustments corresponding to expiration could in and of itself be a reason to find a royalty demand to be inconsistent with FRAND.

Other issues include that Google wants Apple to license all of its wireless SEPs (as opposed to, for example, only its 3G-essential patents), which might constitute tying.

Google now knows that the Mannheim court will proceed deliberately. This panel of judges is very much in favor of intellectual property, but it also hears competition cases all the time. At a different trial Judge Voss mentioned that he spent several years working on antitrust matters as a high-level clerk at the Federal Court of Justice. If and when this case reaches the stage of an actual FRAND determination, these judges will use their technical knowledge and their understanding of competitive dynamics in order to answer, possibly with the help of experts, the questions that must be addressed in order to separate the intrinsic value of the relevant SEPs from hold-up value. The numbers may very well be higher than what Judge Robart awarded Motorola with respect to different products and largely different standards. But FRAND means something. There were other contexts (in infringement proceedings) in which I didn't like the Mannheim stance on FRAND. Today I really liked what I heard.

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Preliminary EU ruling finds Google's Motorola guilty of abuse of standard-essential patents

The European Commission announced today that it sent a Statement of Objections ("SO"), a preliminary antitrust ruling, to Google's Motorola Mobility, following more than a year of formal investigations based on a complaint lodged by Apple in February 2012 over alleged abuse of cellular standard-essential patents (SEPs). Samsung had already received an SO over alleged SEP abuse in December 2012.

The European Commission is also investigating a Microsoft complaint relating to Motorola Mobility's pursuit of injunctive relief over H.264 video codec SEPs. Today's statement on the SO in the Apple-related case does not say anything about the parallel case, but I believe Google is in for an SO in that case as well, given that Motorola's conduct against Microsoft was even more outrageous than Samsung's pursuit of injunctions against Apple. In particular, Microsoft had made a binding offer to take a license to Motorola's H.264 SEPs at ten times the MPEG LA pool rate (see the German injunction ruling) and had offered a $300 million bond (while indicating a willingness to talk about an even greater amount) in order to avert enforcement during the appellate proceedings. At the time, Google's Motorola rejected the licensing offer -- which appears exceedingly generous in retrospect, considering a U.S. court's findings of what those patents are actually worth (on a worldwide basis) -- as well as the bond. Its only objective was enforcement of injunctive relief against the Windows operating system and the Xbox gaming console. If a U.S. district court and, subsequently, an appeals court had not barred it from enforcement, that's what would have happened. (By way of comparison, Samsung didn't receive such a binding offer, and it never won an injunction in Europe.)

The Mannheim Regional Court granted Motorola a cellular SEP injunction against Apple in December 2011 (the patent-in-suit was found essential to GPRS, the data transmission standard built on top of GSM, the 2G cellular standard), which Motorola temporarily (until an appeals court sided with Apple) enforced in late January/early Februar 2012, forcing Apple to remove certain products from its German online store. Several months later, Google's Motorola accepted Apple's offer to take a license on financial terms to be determined by a court if the parties, as they both knew they would, failed to agree.

A couple of months after Motorola's allegedly-abusive enforcement, the European Commission cleared its purchase by Google but clarified that merger clearance merely means that the change of ownership does not raise or add to concerns over abusive conduct by the acquisition target.

In a Q&A document accompanying its announcement today, the European Commission described its legal position on the "willingness" of a licensee in connection with SEP injunctions as follows:

"In the case at hand, the Commission is of the preliminary view that Apple's willingness to enter into a FRAND licence manifested itself in particular by its acceptance to be bound by a German court's determination of a FRAND royalty rate. The Commission's preliminary view is that the acceptance of binding third party determination for the terms of a FRAND licence in the event that bilateral negotiations do not come to a fruitful conclusion is a clear indication that a potential licensee is willing to enter into a FRAND licence. This process allows for adequate remuneration of the SEP-holder so that seeking or enforcing injunctions is no longer justified once a potential licensee has accepted such a process.

By contrast, a potential licensee which remains passive and unresponsive to a request to enter into licensing negotiations or is found to employ clear delaying tactics cannot be generally considered as 'willing'.

In addition, in the Commission's preliminary view, the fact that the potential licensee challenges the validity, essentiality or infringement of the SEP does not make it unwilling where it otherwise agrees to be bound by the determination of FRAND terms by a third party. In the case at hand, Motorola required clauses that prohibited such challenges by Apple, even after Apple had agreed to be bound by a third party determination of the FRAND terms. The Commission's preliminary view is that it is in the public interest that licensees should be able to challenge the validity, essentiality or infringement of SEPs."

While the Commission bases this preliminary decision on the concept of a "willing licensee" (as it apparently did in the Samsung case as well), it does not state that the pursuit of injunctive relief is necessarily above board against a company that is "unwilling". One can speculate whether the Commission hints that injunctions over FRAND-pledged SEPs against unwilling licensees are acceptable, but it does not say so explicitly. It merely outlines what an implementer of a standard should or should not do if it seeks to avoid sales bans under the "willing licensee" doctrine. It should not be "passive and unresponsive to a request to enter into licensing neogitations" and it should not "employ clear delaying tactics". If it formally accepts "binding third party determination for the terms of a FRAND licence in the event that bilateral negotiations do not come to a fruitful conclusion", there's a strong presumption of willingness to take a license. Even if someone is not a "willing licensee", the patentee's unilateral conduct may still be deemed anticompetitive.

The third and final paragraph of the passage I quoted above shows that the Commission fundamentally disagrees with certain German courts, particularly but not only the Karlsruhe Higher Regional Court and the Mannheim Regional Court, which interpreted the Orange-Book-Standard ruling by Germany's Federal Court of Justice in such a way that companies relying on the antitrust-related Orange Book defense (which related to any situation involving a compulsory license, with SEPs being the primary but not the only example) had to agree to pay royalties -- and had to act immediately after the offer as though the offer had been accepted, though it might never be accepted -- regardless of whether a patent is valid or infringed, and had to drop their invalidity defense (which in Germany consists in a separate nullity action before the Federal Patent Court) the moment the patentee accepted the Orange Book offer (Motorola even forced Microsoft to drop its nullity actions right at a Mannheim trial, before and without accepting the offer). From a policy point of view I totally agree with Brussels on this, despite the greatest respect for the Mannheim Court's very competent and efficient adjudication of the technical aspects of patent infringement cases. Someone who shoots down a patent that should never have been granted in the first place (unfortunately, most patents must at least be narrowed or are entirely invalid once there is a post-grant review by a court of law) does the general public a huge favor.

The way I interpret the Commission's Q&A, it's walking a fine line by disagreeing only with certain lower courts' interpretation of the Orange-Book-Standard ruling by the Federal Court of Justice. The Q&A says the following about Orange Book:

"The 2009 'Orange Book' ruling of the German Supreme Court established that a potential licensee can raise a competition law defence against an application for an injunction by showing that (i) it has made an unconditional offer to license under terms that cannot be rejected by the patent-holder without abusing its dominant position, and (ii) it actually acted as if had entered into a valid patent licence. The Supreme Court's ruling did not specifically relate to SEPs. The Commission's preliminary view is that an interpretation of that ruling whereby a willing licensee is essentially not entitled to challenge the validity and essentiality of the SEPs in question is potentially anti-competitive."

National courts of EU member states such as Germany are required by European law, which trumps national law in antitrust and certain other fields, to avoid rulings that would be inconsistent with the Commission's interpretation of EU law. With the Q&A the Commission published today, it's still not 100% clear (it probably never will be) exactly where the Commission draws the line, but key elements of the Orange Book case law by German regional courts and higher regional courts have now been explicitly labeled as "potentially anti-competitive".

The Düsseldorf Regional Court, which had also issued various rulings conflicting with the position outlined by the Commission today, accurately interpreted the Commission's announcement of the Samsung SO as a clear indication that the Commission considers some of the requirements German courts imposed on defendants in recent years ("imposed" in the sense that failure to meet these requirements would make an Orange Book defense fail) excessive. Rather than granting an injunction to Huawei in a dispute with ZTE over an SEP, the Düsseldorf court referred a handful of questions to the Court of Justice of the European Union (CJEU), to which defendants in antitrust cases can also appeal any Commission decisions. The Commission states in today's Q&A that it "will fully take account of any guidance on questions of law by the European Court of Justice that are of relevance for the Commission's investigation".

The Commission's Q&A also compares the scope of the investigation of Motorola's use of SEPs against Apple with the proposed consent order by the United States Federal Trade Commission in the Google/Motorola case:

"The proposed Consent Order by the FTC only applies to the future seeking and enforcing of injunctions. It does not cover agreements that are the result of behaviour occurring prior to the Consent Order, such as the one that the Commission is examining in this investigation. However, the Commission's concerns about the potential anti-competitive use of SEPs are similar to those that underlie the proposed Consent Order."

By "agreements that are the result of behaviour occurring prior to [an antitrust ruling and/or settlement]", the Commission means the aforementioned acceptance of Apple's Orange Book offer by Google, which at the time was in full control of Motorola Mobility after closing the acquisition. In other words, the Commission is inclined to hold Google liable for seeking to benefit from an unfair agreement resulting from acceptance of an offer Apple had to make under duress, at the threat of injunctive relief due to Motorola Mobility's conduct enabled by certain German courts. There is also a potential issue with such an agreement in the case relating to Motorola's use of SEPs against Microsoft. It turned out in February that Google recently declared an "acceptance" of Microsoft's H.264-related Orange Book offer, which Microsoft disputes because the "acceptance" comes with a condition Microsoft never wanted to accept. At the very least, Google's declaration of (and insistence on) an "acceptance" likewise shows that Google sought to benefit from a deal that came into being under anticompetitive duress. Google's Motorola also benefited from the fact that Microsoft was obligated last year to withdraw its nullity actions against a couple of H.264 SEPs. While the court took that initiative, Motorola's counsel had every opportunity to declare that his client would not insist on such a requirement.

If the final EU-level determination is that the Orange Book contract between Google and Apple came into being under anticompetitive duress, the agreement as a whole may be null and void. At the very least, certain anticompetitive clauses, such as the one barring Apple from challenging the infringement and the validity of the covered SEPs, would be stricken. As far as I know, a FRAND rate-setting case relating to that Apple-Motorola license agreement is pending in Mannheim, with a trial being scheduled for the rather near term. The European Commission's decision creates a situation in which the Mannheim Regional Court may decide to stay the rate-setting case until a final EU antitrust ruling (which could be appealed) issues. That would seem the most logical next step in my view. Apple needs to be given the opportunity to challenge the infringement and the validity of the patents in question, and a rate-setting decision should relate to only those patents that are actually found valid and infringed, which is (if Motorola's transatlantic track record in SEP infringement litigation is any indication) only a small minority of Motorola's cellular SEPs (in a worst-case scenario, which is not the most likely one but not completely unrealistic, it could be that Motorola cannot prove Apple's infringement of a single valid cellular SEP held by Motorola).

The final EU ruling will come down after Google has had the chance to defend itself at a hearing. It may or may not be consistent with the SO.

The acquisition of Motorola Mobility has given Google zero leverage against Microsoft so far, and very limited leverage against Apple. In this recent post I summarized all of Google's patent-related defeats (and its few minor, merely defensive wins) during the last month (April) and also talked about the key decisions made in March. Not only did Google pay a hefty price for patents of rather low strategic value but it also bought some SEP-related antitrust problems.

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Apple filing reveals Samsung recently reduced its 2.4% royalty demand for standard-essential patents

The United States International Trade Commission recently postponed its decision on Samsung's complaint against Apple until May 31, 2013 and raised additional questions relating to FRAND licensing obligations and the impact of an exclusion order. On some questions, only Apple, Samsung and the Office of Unfair Import Investigations ("ITC staff") were asked to comment, while the general public was invited to comment on some others. A number of submissions have now shown up on the ITC's electronic document system and I'll do at least one more blog post on them. Today Apple's submission finally became available in a redacted form and I wanted to immediately share information on an interesting development in the Apple-Samsung dispute: in early December 2012, Samsung abandoned the 2.4% royalty demand for its wireless standard-essential patents (SEPs) it had been adamant about for well over a year.

Samsung's 2.4% demand was mentioned in public for the first time in September 2011 at a preliminary injunction hearing in the Netherlands. A Dutch lawyer representing Apple in a court in The Hague mentioned it in violation of a protective order, and Dutch journalist Andreas Udo de Haes shared the information on Twitter. A few weeks later the Dutch court denied Samsung's injunction request because its royalty demand was considered to be far outside of the FRAND ballpark. The 2.4% figure subsequently came up at other hearings (including a trial held in California last summer, at which a Berkeley professor defended it) and showed up in other documents, such as an Italian decision (another denial of a preliminary injunction).

But in December 2012 Samsung softened its stance in a couple of ways. The week before Christmas Samsung announced the withdrawal of all of its European SEP-based injunction requests. And Apple's submission in response to the ITC'S latest set of questions reveals that a couple of weeks prior to that withdrawal Samsung had also reduced its royalty demand. The filing does not say what the new demand is other than that is still too high "to come into compliance with FRAND". Here's the relevant passage (click on the image to enlarge or read the text below the image):

"[REDACTED] approximately one week after Ericsson sued Samsung for infringement of Ericsson's declared-essential patents, seeking to enjoin Samsung's use of the UMTS standard. Complaint, Ericsson Inc. v. Samsung Elecs. Co., Case No. 12-cv-00894 (E.D. Tex. Nov. 27, 2012). Samsung's new perspective as the target of another company's use of declared-essential patents to seek exclusion orders may have led Samsung finally to realize the problems with such tactics, and to accordingly reduce its demands to Apple--although not enough to come into compliance with FRAND."

The Ericsson v. Samsung complaint mentioned above was filed on November 27, 2012 (in fact, there were two such complaints, one of which mirrors an ITC complaint brought shortly thereafter). Samsung's reduction of its demands to Apple happened "approximately on week later", i.e., on one of the first days of December 2012.

Samsung is defending itself vigorously against Ericsson's claims (and is, of course, countersuing). This is not the only circumstance to which one may attribute the reduction of Samsung's SEP royalty demands: at the time, Samsung knew it was heading for a Statement of Objections (SO) from the European Commission, a preliminary antitrust ruling, over its alleged abuse of SEPs against Apple. Its withdrawal of its SEP-based injunction requests and the reduction of its royalty demands did not disusade the Commission from issuing the SO as Apple's filing with the ITC mentions in the next paragraph:

"Indeed, Samsung's flurry of December activity was not enough to remove the scrutiny of the European Commission, which on December 21, 2012, issued a preliminary determination that Samsung had violated European antitrust law in its use of declared-essential patents against Apple. The European Commission investigation is ongoing."

Due to redactions it's impossible to know what amount Apple proposes to pay. A footnote indicates that Apple believes FRAND rates should be set in district court. Apple also highlights that Samsung has a track record of overdeclaring patents (saying patents are essential to standards when they actually aren't) at twice the average industry rate. Apple refers to statements by Samsung itself, Nokia and others according to which the total licensing cost of a wireless standard should not exeed 5%-7%, and Samsung would then get a fraction of this. Apple argues that the proper royalty base here is the baseband processor, which sells for about $10. In this ITC investigation only one SEP is still at issue (and was presumably found infringed, as the ITC would otherwise not have had to ask another round of FRAND and public interest questions), and Apple points out that it's a minuscule part of the UMTS (3G) standard:

"Even if it were used, this functionality is trivial and accounts for far less than 0.01% of the code in an accused device and approximately 0.000375% of the UMTS standard."

"Dr. Nils Rydbeck, former Chief Technical Officer at Ericsson--where he spearheaded the development of Ericsson’s original smartphones--explains the relative importance of the constituent elements of a modern mobile device, and concludes that the '348 patent covers (at most) a minute fraction of one category of technology (cellular standardized functionality) within such a device [...] In total, the accused portion of the UMTS standard accounts for about 0.0000375% of that standard. [...] And Samsung only contributed to a portion of that 0.0000375%. [...] That technology is a relatively unimportant portion of the UMTS standard that has not received any significant mention in the press or other publications regarding the UMTS standard. [...] In any ex ante, pre-standardization license negotiation, no reasonable party would pay significant royalties for such a patent."

Samsung is not the only SEP holder to have blinked recently. After demanding for a couple of years an uncapped 2.25% royalty rate for Microsoft's alleged use of Motorola patents in its implementation of the H.264 video codec standard, Google's Motorola Mobility last year surprisingly indicated that it might agree to a $100-125 million annual royalty cap. In a court filing Microsoft reminded Google of the fact that SEP licensing "is not a rug bazaar".

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German court refers Huawei-ZTE standard-essential patent case to Europe's highest court

Today the Düsseldorf Regional Court ("Landgericht Düsseldorf") issued an order in a Huawei v. ZTE case that may, indirectly, have unprecedented impact on all standard-essential patent (SEP) enforcement in the European Union. The court, which hears more patent infringement cases than any other court in Europe (though most of the German patent cases this blog reports on were brought in Mannheim and Munich), decided to refer to the Court of Justice of the European Union (CJEU) five fundamental questions concerning the availability of remedies (primarily but not only injunctive relief) to holders of FRAND-pledged SEPs prevailing in patent infringement actions. An opinion issued by Europe's highest court will be binding on on the European Commission's Directorate-General for Competition as well as the courts and competition authorities of the 27 EU member states. This would affect patent infringement actions as well as SEP-related antitrust cases such as the European Commission's presently-ongoing investigations of Samsung and Google (Motorola Mobility).

This referral would not have been ordered if Huawei v. ZTE -- a dispute between China's two largest telecommunications hardware makers -- had been adjudged a few months earlier. It just happens to be the first SEP case to have gone to trial in Düsseldorf after the European Commission issued a Statement of Objections (SO) to Samsung over its pursuit of SEP-based injunctions against Apple and to have resulted in an infringement finding. In my report on the late-January trial I wrote that the court interpreted the European Commission's public statements on the SO in the Samsung case as an indication that Brussels appears to be more skeptical of SEP-based injunctions than German courts have been in recent years. The Düsseldorf court sees a need for clarification in order to ensure the consistency between its own decisions (under the German Orange-Book-Standard framework) and evolving EU-level case law.

The patent-in-suit in the matter that gave rise to this referral is a EP2090050 on a "method and apparatus of establishing a synchronization signal in a communication system". The court found ZTE to infringe this patent, which Huawei had declared essential to the 4G/LTE cellular telecommunications standard, and was unconvinced that ZTE would achieve its invalidation (ZTE opposed the recent grant of this patent, but in February the European Patent Office rejected ZTE's opposition in a first, appealable, decision). A parallel Huawei v. ZTE case over another 4G/LTE declared-essential patent (EP2033335 on a "method for reducing feedback information overhead in precoded MIMO-OFDM systems") was dismissed because the court did not identify a proven infringement.

If not for the uncertainty surrounding the application of EU competition law to SEP injunction matters, Huawei would have prevailed immediately. ZTE's offer to take a license would have failed under the court's own application of the Orange-Book-Standard criteria for licensing offers a patent holder cannot reject without violating antitrust rules. Under those circumstances, Huawei's lead counsel in this action, Christian Harmsen of Bird & Bird, would have won the third patent injunction in six calendar days after winning an injunction against ZTE over another Huawei (also 4G/LTE declared-essential) patent last Friday and one for Nokia against HTC over a power-saving patent (also in Mannheim, but not standard-essential). Now he's scored a hat-trick with respect to liability, but the question of remedies in the Düsseldorf case can only be adjudged after the CJEU has spoken.

The 4b civil chamber (a panel of three judges), over which Judge Ulrike Voss ("Voß" in German, and not to be confused with the most frequently-mentioned judge on this blog, Judge Andreas Voß of the Mannheim Regional Court) presides, did not have a formal obligation to refer certain aspects of this case to the CJEU but exercised its discretion under Article 267 of the Treaty on the Functioning of the European Union (the EU's de-facto constitution) to do so, and accordingly stayed its proceedings until it receives an answer from Luxembourg. I applaud the court's decision because greater clarity is needed, and while the order generally defends the way in which German courts have applied the Orange-Book-Standard criteria thus far, I actually think that the case law in Germany has recently been drifting in an exceedingly patentee-friendly direction -- not in all cases and respects, but in some important ones. And it was inevitable for some dispute or antitrust case to be referred to the CJEU. For example, if the European Commission fines Samsung over its conduct against Apple (which I think may very well happen in the near term), Samsung would appeal such a decision anyway. Today's Düsseldorf decision was triggered by the Samsung SO, but it may ultimately also affect the Apple-Samsung dispute.

It's possible that Huawei and ZTE settle their dispute before the CJEU issues an opinion. In that case, clarification would merely be delayed. Presumably the Düsseldorf court will also refer other SEP injunction matters to the CJEU (provided that in each case an infringement of a valid SEP is identified and the defendant would normally fail to prevail on an Orange-Book-Standard defense).

These are the questions the Düsseldorf Regional Court would like the CJEU to answer (in my own, obviously unofficial, translation):

1. Does an SEP owner who declared himself willing, vis-à-vis a standard-setting organization, to grant a license to all comers on FRAND terms, abuse his dominant market position if he seeks injunctive relief from a court of law against a patent infringer despite the infringer having declared himself willing to negotiate such a license

   or

   is it a requirement for the presumption of abusive conduct that the infringer has made a binding offer to the SEP owner on terms that the SEP owner cannot refuse without treating the infringer unfairly or discriminatorily and [furthermore require that] the infringer, in anticipation of the license he is seeking already complies with his contractual obligations with respect to past acts of infringement?

2. In the event that a presumption of abuse of a dominant market position may already result from the infringer's willingness to negotiate:

   Does Art. 102 TFEU involve specific requirements for said willingness to negotiate in substantive and/or chronological terms? Can such a presumption be based merely on the infringer's (oral) declaration in broad and general terms of his willingness to enter into negotiations or does such a presumption require that the infringer has indeed entered into negotiations, such as by, for example, communicating terms and conditions under which he is prepared to conclude a license agreement?

3. In the event that the [infringer's] submission of a binding offer to conclude a license agreement is a requirement for an abuse of a dominant market position:

   Does Art. 102 TFEU involve specific substantive and/or chronological requirements with respect to such an offer? Does the offer have to set forth all of the commercial terms that in accordance with relevant industry practice are usually set forth in such license agreements? Can the offer be conditioned upon actual use and/or validity of the SEP-in-suit?

4. In the event that the infringer's [precontractual] fulfillment of obligations arising from the requested license is a requirement for an abuse of a dominant market position:

   Does Art. 102 TFEU involve particular requirements with respect to such acts of fulfillment? Is the infringer required, in particular, to make disclosures relating to past acts of infringement and/or to pay [precontractual] royalties? Can an obligation to pay [precontractual] royalties also be fulfilled by giving security?

5. Do the requirements for the presumption of abuse of a dominant market position by an SEP holder also apply to other remedies for patent infringement (disclosures relating to past infringement, recall [of infringing products from distribution channels], damages)?

These are important questions. Interestingly, the Düsseldorf Regional Court makes reference to a previous FRAND pledge. In the German Orange-Book-Standard case there was no promise to license the patent-in-suit on FRAND terms, and it's possible that developments in EU law will ultimately require German courts to distinguish between FRAND standards and other cases in which a patent infringer raises a compulsory-licensing defense. It's also possible that the rules will be the same in all cases involving essential patents (regardless of whether a FRAND promise was made or an entitlement to a compulsory license is enforced), but in any event EU competition rules, which trump national competition rules, may turn out to be significantly more implementer-friendly than the recent application of Orange-Book-Standard by certain German courts. The European Commission issued an SO against Samsung even though Apple did not raise an Orange-Book-Standard defense (i.e., make a binding offer to take a license on particular terms and start to comply with the proposed agreement even before the other party accepts it) at any of the five Apple v. Samsung SEP trials (plus one retrial) I attended in Germany. (Apple did, however, make an Orange-Book-Standard offer to Motorola Mobility, which the latter ultimately, after various amendments, felt forced to accept.)

One important issue that is absolutely key to the Samsung and Google (Motorola) antitrust cases that the Düsseldorf court does not raise in its questions to the CJEU is whether a blatantly unreasonable royalty demand by a patent holder also constitutes abusive conduct and precludes injunctive relief. This one will also have to be clarified at some point, even if it may not be outcome-determinative in Huawei v. ZTE.

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Apple leverages Samsung's EU antitrust problems and recent statement in USITC proceeding

Today a "notice of new facts" that Apple's counsel filed on Friday in connection with the ITC investigation of Samsung's complaint entered the public record. On November 20 I already reported that FRAND issues are key to the ongoing review of an initial determination that didn't hold Apple to infringe any valid Samsung patents, given that Samsung is not completely unlikely to prevail on one of its standard-essential patents (SEPs).

Apple's notice informs the ITC of Samsung's "remarkable about-face [last] week" in the form of "withdrawing its requests for injunctive relief on allegedly standard-essential patents in its pending cases against Apple in courts throughout Europe", and of the issuance of a Statement of Objections (SO), which is a preliminary ruling and bears considerable weight.

Apple presents Samsung's entire statement on the withdrawal to the ITC, based on this report by CNET's Don Reisinger, which serves as Exhibit A to Apple's notice. This is what the corporate statement said:

"Samsung remains committed to licensing our technologies on fair, reasonable and non-discriminatory terms, and we strongly believe it is better when companies compete fairly in the marketplace, rather than in court. In this spirit, Samsung has decided to withdraw our injunction requests against Apple on the basis of our standard essential patents pending in European courts, in the interest of protecting consumer choice."

And this is how Apple highlights the striking contradiction between Samsung's statement on the European withdrawal and the position it takes vis-à-vis the ITC:

"Here, in the [337-TA-]794 [ITC] Investigation, Samsung recently argued that 'U.S. customers will not be harmed if an exclusion order is entered here,' and '[t]o the contrary, the interests of U.S. consumers favor the enforcement of standard-essential patents[.]' (Samsung's Initial Submission, Dec. 3, 2012, Public Version at 19.) Samsung's new admission in Europe that foregoing injunctive relief is 'in the interest of protecting consumer choice' fundamentally contradicts its position here in the ITC, and demonstrates that its pursuit of exclusionary remedies on declared-essential patents is in fact anticompetitive."

This is quite a "gotcha". I also wrote in my commentary on Samsung's withdrawal that "I would encourage Samsung to do so in other jurisdictions as well". Apple is now basically making the same suggestion. Rightly so. What's good for the goose is good for the gander. And what's good for European consumers (on that one I totally agree with Samsung) should not be withheld from consumers in the United States, Asia, Australia, or anywhere else. Are Americans second-class citizens compared to Europeans? I don't think so. And I don't believe Samsung thinks so either. But then its explanation doesn't make sense.

In retrospect it would have been a smarter choice for Samsung, on this global chess board, to provide a rationale for the European withdrawals that does not weaken its case elsewhere, especially at the ITC. For example, Samsung could have made a law-of-the-land argument: this is Europe, it's different from the rest of the world, and we've decided to respect the continent's special rules that have a certain tradition in the overall interoperability context. It could even have said that this was meant to be a conciliatory gesture toward the European Commission. All of this would have been more defensive than the consumer-friendliness claim, but it would not have adversely affected its ITC case, and two days after Samsung's withdrawal everyone could see why it happened: because Samsung had an SO coming from the European Commission.

Through its notice Apple also tries to get mileague out of the fact that an SO was issued. The SO itself is not publicly available (a future ruling by the European Commission would be published in a redacted form, but we're far from that point). But the EU regulator's press release and related Q&A document provide Apple with high-level preliminary findings that definitely have a bearing on some of the public interest issues surrounding the ITC investigation in which Samsung is seeking a U.S. import ban. It is a preliminary finding of anticompetitive behavior, the Commission describes Apple as a "potential licensee [that] has shown itself to be willing to negotiate a FRAND licence for the SEPs", and it furthermore explains that "recourse to injunctions harms competition" in such a case. An ITC import ban is also a form of injunctive relief. It furthermore makes Samsung look bad that its unilateral withdrawal "does not alter the [European] Commission's preliminary conclusions about the anti-competitive nature of Samsung's conduct thus far" (as the European Commission's Q&A states).

The U.S. and the EU are obviously different jurisdictions, and the ITC, a trade agency with IP-related quasi-jurisdictional competencies, is not the counterpart of a competition enforcer (that would be the FTC and the DoJ in the U.S., and the European Commission's Samsung Q&A notes close contact between those agencies). Also, an SO is just a preliminary ruling (though it does mean quite something after almost a year of formal in-depth investigations). That said, the ITC will understand that if it granted Samsung (or any other SEP abuser) a U.S. import ban while other decision-makers in the Western hemisphere -- U.S. federal courts as well as the European Commission and various European courts -- vigorously oppose the pursuit and the enforcement of injunctive relief against willing licensees, it would appear to disregard the interests of consumers and of a functioning standards system. And there are some influential lawmakers on Capitol Hill who would not view this favorably.

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