The Google that has joined Via Licensing's LTE pool is the real Google--not the FRAND abuser

Yesterday's announcement that Google has agreed to make its LTE (4G) standard-essential patents, all or most of which previously belonged to Motorola, available through Via Licensing's LTE patent pool, is for all intents and purposes more meaningful than most settlements of patent disputes between industry players are. It means that Google is being Google again, and has distanced itself from the abusive conduct that gave rise to antitrust investigations in the U.S. (consent order) and Europe (decision, but no fine, which also looks like a compromise).

By "Google being Google again" I mean that the search giant and Android maker has given up on the notion that two wrongs (overwhelmingly meritless, at least impactless, patent assertions against Android on the one hand, and retaliatory abuse of FRAND-pledged standard-essential patents on the other hand) could make a right. Google temporarily used its SEPs in ways that ran counter to positions it was simultaneously taking on non-SEPs, even to the extent that Google, the parent company, submitted a public interest statement in an ITC proceeding that was amazingly inconsistent with what Motorola, the subsidiary, was saying in its own submission in connection with a parallel case. Also, Google's (ab)use of SEPs didn't really lend credibility to its positions on patent reform.

Now the "Don't Be Evil" company has apparently decided to become consistent again. In the LTE context Google is now aligned with companies that have never abused FRAND-pledged SEPs, some of which have even made significant efforts to advocate reasonable interpretations of FRAND. These are the other contributors to the Via Licensing LTE pool: AT&T, China Mobile, Clear Wireless, Deutsche Telekom, DTVG Licensing, Hewlett-Packard, KDDI, NTT DOCOMO, SK Telecom, Telecom Italia, Telefonica, and ZTE. Temporarily, Google's (Motorola's) FRAND positions were actually the same that some infamous SEP trolls and some failed businesses with an increasing or near-exclusive focus on patent licensing (and the privateers they feed with patents) tend to take.

This is the very Google that more than any other (IT) industry giant wants to make the world a better place through investments that the stock market doesn't reward in the short term but Google can afford, such as self-driving cars and "interventions that enable people to lead longer and healthier lives." More than any other large company I know, Google is truly about much more than just making money for its shareholders and other stakeholders. (Of course, this still doesn't give Google the right to violate antitrust rules in its core business, or to leverage excessive control over Android in anticompetitive ways.)

I find it hard to believe that the timing of the announcement--one day after an appellate hearing at which Google saw that it can't win the FRAND part of its Microsoft dispute, though it is winning the real war over Android royalties--is a coincidence. In that Microsoft v. Motorola case, Google's lawyers consistently argued that patent pool rates should not be used as an indicator of FRAND rates. Different standards (H.264 and WiFi) are at issue in that case, but still: Google wouldn't have wanted to undermine its anti-pool-rate argument. It certainly didn't want to give Microsoft's counsel the chance to mention its new position at the hearing, and if it had seen any realistic chance of Judge Robart's FRAND rate-setting opinion being overturned, it might have waited (possibly forever) with this move. Yes, this is speculative, but the connection is close and strong enough to support such a theory.

It's not clear whether Apple and Microsoft (which builds LTE devices as a result of the Nokia acquisition) will be able to benefit directly from Google's contribution to the Via Licensing LTE pool. With Apple, Google has a ceasefire in place, but no license deal (at least none that would have been announced). With Microsoft, it is still embroiled in litigation, though Microsoft hasn't brought any new offensive cases against Motorola in a while (at least none that would be discoverable).

Maybe Google's agreement with Via Licensing precludes Apple and Microsoft from licensing Motorola's LTE patents through that pool until comprehensive license agreements between those companies and Google are in place. In that case, Apple and Microsoft could still use the Via Licensing pool rates as pretty powerful evidence in any FRAND rate-setting dispute with Google.

Maybe Google doesn't even care if Apple and Microsoft license its LTE patents through that pool. Google could still assert older (3G) patents if necessary, as long as those haven't expired. And with the lack of success of Apple and Microsoft's patent assertions against Android devices so far, Google may not even be afraid and, therefore, may not feel it needs any leverage from LTE patents to counterbalance Apple and Microsoft's non-SEP enforcement. Apple started its enforcement against Android more than five years ago; Microsoft, more than four-and-a-half. After all this time, Google may be convinced that it doesn't need a good offense as its best defense because a defense-defense will always do the job to protect Android.

The main reason I used to criticize Google's position on patents so much was its inconsistency. It wanted to devalue non-SEPs while trying to gain undue leverage from SEPs. At first sight, one could also say that Apple and Microsoft are inconsistent because they want to bring SEP license fees down while exaggerating the value of non-SEPs. But FRAND-pledged SEPs are encumbered, and encumbrance is not a value enhancer. Consistency obviously depends on the particular arguments that are used and on whether any differences in value have a logical basis. For example, Apple is in my opinion being inconsistent by stressing its royalty base and "smallest saleable unit" point in connection with SEPs but arguing that even minor aspects of minor features (where the price of the smallest saleable unit, Android, is technically zero) make a substantial percentage of the entire value of a smartphone.

Overnight, Google has gone from "most inconsistent" to "most consistent" when it comes to patent licensing. This overnight change took years of litigation and a couple of antitrust investigations. Still it's great news, and I hope that some others, such as Apple, will soon match Google's level of consistency in this regard.

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Analysis of 222 smartphone patent assertions: more than 90% go nowhere, rest lacks impact

Four years ago to the day, Microsoft sued Motorola over Android. A few days later, Motorola sued Apple. Disputes between Oracle and Google, Apple and HTC, as well as Nokia and Apple were already ongoing. In early October 2010 I decided to focus on smartphone patent disputes (as a blogger and as a consultant). I saw some key IP issues that had to be resolved, and I thought it would take about a year and a half for most of these to be sorted out. A year and a half is roughly the time an ITC investigation used to take.

48 months later, Motorola still hasn't taken an Android patent license from Microsoft, though more than two dozen other companies have. After more than 40 months of litigation, Samsung still hasn't paid Apple a cent. Nor has Motorola, which agreed on a ceasefire with Apple, but not on a license deal. And Oracle v. Google ceased to be a patent dispute about two years ago when Oracle decided to rely exclusively on copyright, which worked out so well that Google is now on the losing track and will presumably file a last-resort petition with the Supreme Court next week.

The fact that things are taking so long is, all by itself, a clear indication of the very limited leverage that major litigants have so far been able to get from their patent assertions. These are not the longest-running patent disputes in history. Not even in the smartphone space, where German patent licensing firm IPCom has been suing Nokia and HTC, to no avail so far, since 2007. But "big player v. big player" disputes in this industry are clearly taking longer now than they used to. There was a time when settlements occurred either before trial or at least before a decision. Now there is a trend toward exhausting all appeals. The following chart shows the duration (number of months on the X axis) of eight disputes (with separate bars for the U.S. and ex-U.S. parts of Apple v. Samsung); the two at the bottom are still ongoing with no end in sight (click on the image to enlarge):

When some of these patent infringement assertions were brought, most of which targeted Android, I expected some serious impact. But Android's market share continued to rise and is, according to the very latest data, now at about 85% (click on the image to enlarge):

"World Wide Smartphone Sales Share" by Smartmo - Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons.

The number of patent assertions against Android was awe-inspiring. I visualized some of them with my signature battlemaps. While everyone gets sued by the trolls, Android was a unique lawsuit magnet with respect to assertions by very large players. And for the first couple of years, Android's rivals, despite a number of failed assertions, achieved some good results in court. But most of those temporary wins didn't last, and the ones that lasted didn't prove strategically impactful.

Of course, just like there has been some fundamental change since certain interim decisions came down in 2012, there can again be key developments in disputes that haven't been settled. Still, the time has come to take stock based on what the final or most recent decisions in those cases have been and on what the state of affairs was when various disputes were settled.

Based on where things stand now, more than 90% of 222 smartphone patent infringement assertions by major players against other large organizations have gone nowhere, with 109 assertions (49%) having failed (so far) and 93 assertions (42%) having been dropped outside the context of a comprehensive settlement or having suffered a comparably negative fate:

Out of the 9% of cases (20 of the 222 assertions) in which liability was established (and not reversed so far, or not before a settlement), only 10 -- 4.5% -- resulted in lasting injunctive relief. And that number would most likely be closer to 3% if, for example, the patents underlying Nokia's German injunctions against HTC had come to judgment in the Federal Patent Court. What's more important than alternative scenarios is that none of the injunctions against the Android operating system itself (including its key apps) had enough impact to force someone into a settlement.

The 222 smartphone patent infringement assertions I've analyzed were brought by (in alphabetical order) Apple (against HTC, Motorola, Nokia, and Samsung), Microsoft (against Barnes & Noble and Motorola), Motorola (proactively against Apple and reactively against Microsoft), Nokia (against Apple, HTC, and ViewSonic), and Samsung (reactively against Apple). I focused only on three key jurisdictions: U.S., Germany, UK. Those are large markets in which I was able to research the cases, and in which substantial numbers of assertions had been brought. Otherwise the numbers of assertions would have been too low in certain jurisdictions to form even a remotely representative sample. This, by the way, "sandbagged" Samsung's results in my analysis because it prevailed on two SEPs in South Korea and on one in the Netherlands. However, Samsung had the best validity results of all the major litigants whose smartphone patents got challenged: it salvaged (albeit in a narrowed form) two patents in the Federal Patent Court of Germany -- i.e., as many as Apple, Microsoft and Motorola combined, though only three of its patents were adjudged there. Just wanted to mention this for the sake of accuracy.

I could have included patent assertions by HTC (which countersued Apple in the U.S. and Germany, and Nokia in Germany) and Oracle (which, as I explained further above, is now relying exclusively on copyright in its dispute with Google). None of them went anywhere. But I wanted to focus on companies that brought large numbers of smartphone patent infringement assertions.

Here's a complete list of all 222 assertions I have analyzed (this post continues below the document):

Outcomes of U.S. German UK Infringement Assertions by Florian Mueller

If you scroll down there, just focus on the color-coded columns. The first one is liability (a valid patent was infringed), the second one is injunctive relief. The green (successful assertion) cells are few and far between, on the right side even more so than on the left side.

I wanted to use only three colors for the different outcomes, so I had to assign one color or another to certain "gray area" outcomes. For example, if a German court stayed a case based on the assumption that the asserted patent was highly likely to be invalid (the usual hurdle in that jurisdiction), I treated it as a loss even if the Federal Patent Court ruling had not come down yet, but if the hurdle was lower (in some exceptional cases and with respect to utility models), I treated it as a "dropped" case, just to keep things simple. The following document lays out the rationale behind the colors and provides detailed commentary on each of the disputes (this post continues below the document):

Further Remarks Re. Outcomes of Infringement Assertions by Florian Mueller

Of course, one could have made a different selection and/or applied different criteria, and would then have arrived at slightly different results. And the timing of settlements made some plaintiffs look better (for example, Nokia did benefit from this factor because of the relatively early stage of its German HTC cases) than others (for example, Apple likely would have "won something" on remand against Motorola at the ITC). In Apple's case, the analysis could be even more negative. For example, while it settled with HTC before any infringement ruling came down in its Munich cases, the patents were subsequently invalidated, but I decided to omit those cases from my list.

I will reference this post in various posts over the coming months in which I'll discuss some potential conclusions -- political and commercial ones -- in detail. For now I'll just touch on a few of these and indicate roughly how I view all of this.

• This here is an industry-wide and not a company-specific issue. However, the major litigants had different objectives, and that's why these results have different effects on them. Samsung and (at least after being acquired by Google) Motorola just wanted patent peace, so they are fine. Nokia is now mostly a licensing firm and has proven again and again that it can force others into license deals, but its demands will have to be reasonable or others will take their chances in court. Apple and Microsoft have diametrically opposed approaches. 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):

  

• Poor enforcement results suggest that zero-zero cross-license agreements between large players make more sense than huge balancing payments.

• These results support the argument for meaningful patent litigation reform in the U.S. (fee shifting and better defenses against weak patents, for example).

• The fact that too many patents that get asserted don't withstand a validity challenge is by far the biggest issue. An early draft of a study by two Munich-based academics, Professor Joachim Henkel and Ph.D. candidate Hans Zischka, says it all in its headline: "Why most patents are invalid -- Extent, reasons, and potential remedies of patent validity" Highly recommended reading. One of the key findings is this: "For Germany, thus, more than 75% of all active patents are latently invalid, either fully or partially."

  In the smartphone patent space that number is actually much closer to 100% than to 75%. I created the following two charts based on an analysis (uploaded to Scribd) of decisions reached in fora in which there is a preponderance-of-the-evidence standard as opposed to a strong presumption of validity (click on an image to enlarge; this post continues below the charts):

  
  

• My biggest concern in Europe is that, unless its rules of procedure are improved over previous drafts, there will be too many cases in which the Unified Patent Court will allow the Europe-wide enforcement of injunctions over patents that should never have been granted at all or never with a very broad scope. The smartphone patent disputes show that the bifurcation gap -- the problem of an injunction being enforceable before a patent is invalidated by another court -- is an extremely serious issue. I have uploaded to Scribd a list of six smartphone patent cases in which there were extended periods (between 13 and 23 months) between an injunction and a Federal Patent Court ruling that invalidated or narrowed the patent-in-suit. By contrast, there was not even one case in the ones I analyzed in which a German regional court stayed an infringement case and the patent was affirmed in its granted form or in a reasonably broad form.

• Finally, I want to clarify that this analysis is not meant to reflect negatively in any way on the judges or lawyers involved. Of course, some of the defensive victories are very meaningful, and in other blog posts I have mentioned who represented the different parties. For example, the attorneys at law and patent attorneys who enabled Samsung to fend off of all of Apple's German patent assertions and vice versa, or those who represented Motorola against Microsoft, or ViewSonic (under visible budget constraints, but with focus and dedication) and HTC against Nokia, undoubtedly did great work. But counsel for plaintiff were absolutely brilliant in many of these cases, regardless of results. For my own app development company's three PCT patent filings (all of them made in recent months) I've worked with a firm that was mostly active on the offensive side because I don't attribute their results in the Federal Patent Court to the quality of their work.

So much for now. I'll talk about the issues outlined above, and others, in the months and years to come. There are some important issues to deal with. I hope this analysis contributes useful data points and observations to the debate.

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Google should further appeal the 'Posner' Apple-Motorola case: Federal Circuit panel was divided

When the Federal Circuit finally (7.5 months after the appellate hearing) handed down its opinion in the "Posner case" (Apple v. Motorola), I initially focused on only two things: injunctive relief over FRAND-pledged standard-essential patents (SEPs) and the claim construction of the '647 patent, which is at issue in the ongoing Apple v. Samsung II trial in the Northern District of California. I had seen a couple of filings in which Samsung pointed to Judge Posner's claim construction. It asked the court to tell the jury about that interpretation of the patent (which will now finally happen, tomorrow, as a result of the Federal Circuit decision), and it wanted to point to Apple's own 60-cent-per-device damages claim over this patent in the Motorola case. Judge Koh had actually not miscontrued the patent (as I erroneously wrote when reacting in a hurry to the Federal Circuit ruling and pointing out the bearing it has on the Samsung case ahead of everyone else). But she had denied those Samsung requests relating to relevant information available in the Motorola case and apparently disagreed with Samsung that Apple was bound to Judge Posner's claim construction by collateral estoppel.

The Federal Circuit's affirmance of Judge Posner's claim construction has defanged and devalued the '647 patent. Now there isn't even one patent claim in the California case that Samsung can't simply work around. Apple can't really win over Samsung in a strategic sense. It can just hope for a symbolic victory that it can try to use for PR purposes.

I have meanwhile read the entire Federal Circuit opinion, which does contain more good stuff for Apple than for Google's Motorola (except for the '647 claim construction). While Apple will ultimately get its Chicago trial, the patents at issue in that case don't appear strong enough to have serious impact on Motorola's business.

Besides the '647 "quick links" patent that can be worked around by compiling certain code into applications as opposed to providing a certain operating system function, Apple is asserting in that Chicago case the '263 "real-time API" patent (related to streaming) and the '949 "touchscreen heuristics" patent often referred to as the "Steve Jobs patent". The '263 patent was one of the first patents Apple asserted against Android back in March 2010. I would be surprised if Google and its device makers did not have a workaround in place by now, more than four years later.

The "Steve Jobs patent" is theoretically being enforced against Samsung through an ITC import ban that entered into force in October 2013, but simultaneously with an infringement finding relating to older products, the ITC cleared Samsung's designaround products for this patent, including among various others the Galaxy Note, because the ITC concluded that they don't practice at least one limitation of the asserted claims of the '949 patent. On that basis, Samsung is doing just fine in the U.S. market: consumers don't notice the internal change that was necessary to avoid further infringement. Judge Posner had ruled large parts of the '949 patent invalid for indefiniteness. The Federal Circuit has reversed that finding, but I have not found anything in the Federal Circuit opinion that suggests the workaround that Samsung is shipping in the U.S. would not be an option for Motorola as well.

Even though Apple's patents-in-suit are anything but thermonuclear, I believe there are three key issues -- on every one of which the Federal Circuit panel was divided -- that Google should appeal further by firstly requesting a rehearing en banc (if granted, the full court would likely be divided over those issues as well) and later, if necessary, appealing one or more of these key issues to the Supreme Court. These are the issues of transcendental importance that require further clarification:

1. Injunctions over FRAND-pledged SEPs

   On this highly important matter, the Federal Circuit ruling contains as many opinions as there were judges on the panel: three. There is a majority opinion that says Judge Posner had erred to the extent that he applied a per se rule that injunctions are unavailable for SEPs, yet affirms his decision to deny SEP-based injunctive relief in this case because, among other things, "Motorola's FRAND commitments, which have yielded many license agreements encompassing the '898 patent, strongly suggest that money damages are adequate to fully compensate Motorola for any infringement".

   From that majority opinion, Chief Judge Rader dissents because he saw evidence in the record that Apple was an unwilling licensee, and he thinks SEP holders just be able to obtain injunctions in response to a "hold out" (refusal to pay), which he considers just as likely and disruptive as a "hold up" (excessive demands). In order to make this determination, Chief Judge Rader believes a FRAND royalty rate would have had to be identified first. Circuit Judge Prost also dissents, but from the opposite angle: while the ruling went too far for Chief Judge Rader, it did not go far enough for Circuit Judge Prost. She supports affirmance of Judge Posner's denial of injunctive relief but disagrees with parts of the reasoning. Judge Prost notes that Judge Posner hadn't really applied a bright-line rule (since his opinion mentioned that an injunction might have been warranted if Apple had refused to take a license on FRAND terms) but simply decided the question under the eBay framework. And she "disagree[s] as to the circumstances under which an injunction might be appropriate". She supports the idea that implementers of standards, like Apple in this case, should have the right to defend themselves against infringement allegations before agreeing to pay up for a license, and sees no reason "why a party's pre-litigation conduct in license negotiations should affect the availability of injunctive relief". Then she says:

   "Instead, an injunction might be appropriate where, although monetary damages could compensate for the patentee's injuries, the patentee is unable to collect the damages to which it is entitled. For example, if an alleged infringer were judgment-proof, a damages award would likely be an inadequate remedy. Or, if a defendant refused to pay a court-ordered damages award after being found to infringe a valid FRAND patent, a court might be justified in including an injunction as part of an award of sanctions."

   On this question, I'm absolutely on Judge Prost's side, and on Apple's side. Google is on the opposite side, but I'd still like it to further appeal the FRAND part of the ruling because the current state of affairs -- three judges with essentially three different opinions -- is not a good outcome with a view to other cases. It would work fine for Apple here, and I'm happy about that, but there would still be too much uncertainty in other SEP cases. SEP holders would point to Chief Judge Rader's dissent all the time. Defendants would point to the majority opinion and Judge Prost's dissent on parts of the reasoning. This is a mess of CLS Bank v. Alice (a software patent-eligibility case) proportions. Please, Google, do appeal. And then, please, lose out to Apple on this one.

2. Injunctions over non-SEPs

   In this context, things are even messier (imagine that) than in the CLS Bank case. On the one hand, there are the earlier Apple v. Samsung injunction-related decisions by the Federal Circuit that established a fairly strict "causal nexus" (tying infringements to alleged irreparable harm) standard. On the other hand, as Judge Prost highlights in her extremely well-reasoned dissent (if you don't have the time to read the whole 95-page opinion, I still encourage you to read her dissent, even if you read none of the other parts of the document), Apple did not really satisfy the "causal nexus" requirement in the "Posner case", yet a majority reversed Judge Posner's grant of summary judgment against Apple's pursuit of injunctive relief. That majority consists of Chief Judge Rader, who is notoriously patentee-friendly and even labeled as "death squads" patent judges at the USPTO who invalidate patents that shouldn't have been granted in the first place, and Circuit Judge Reyna, who is an ardent admirer -- if he weren't a judge, I'd say "fanboi" -- of Apple's contributions to innovation, which have however not impressed any judge outside the United States).

   While I'm 100% on Judge Prost's side in the FRAND context, I agree with "only" about 75% of her stance on non-SEP injunctions. But she's absolutely right that the Friday opinion in the "Posner case" is inconsistent with the Apple v. Samsung rulings. There is a need for clarification here. There are two conflicting panel positions on non-SEP injunctions relating to smartphones. This, too, results in a lack of clarity to put it mildly. That lack of clarity is not even in Apple's interest, but in this "Posner case", it's all up to Google to appeal, which I very much hope it will.

3. Functional claiming

   This third part is harder to understand than injunctive relief but no less important. Judge Prost warns in connection with the "Steve Jobs patent" that "under the majority's view, this case provides a stark example of how patent applicants are able to claim broad functionality without being subject to the restraints imposed by § 112 [para.] 6", i.e., the rules governing means-plus-function claims, which are particularly susceptible to invalidation challenges. Judge Prost refers to a paper by Stanford Professor Mark Lemley, Software Patents and the Return of Functional Claiming. This issue of overbroad software patent claims is also on a list of patent policy priorites that the White House published in June 2013.

   I have over the last couple of years repeatedly (here's one example) stated that I don't like the "Steve Jobs patent" because it seems too broad to me. Now that Samsung has worked around it successfully (which has rendered Apple's ITC import ban ineffectual), I recognize that it's not too broad to be worked around, but it still covers too much in my view. I absolutely agree with Judge Prost's related concerns. If Google further appealed this matter, it might provide an opportunity for the Supreme Court to restore sanity.

A fourth issue of transcendental importance is that of permissible damages theories, but the Federal Circuit panel was unanimous (with a very limited exception) and found that Judge Posner had been too strict by excluding the entirety of both parties' damages testimony:

"A judge must be cautious not to overstep its gatekeeping role and weigh facts, evaluate the correctness of conclusions, impose its own preferred methodology, or judge credibility, including the credibility of one expert over another. These tasks are solely reserved for the fact finder."

There are probably better opportunities for getting further clarification on damages, such as an appeal of the ongoing Apple v. Samsung II case. But on any of the three strategic issues I outlined further above, the "Posner case" appears to be a first-rate opportunity to get high-level clarification, ideally from the Supreme Court, which has recently granted certiorari to several patent cases. Chief Judge Rader doesn't seem to always like the Supreme Court's patent-related decisions, but that philosophical disagreement may be part of the reason why the Supreme Court has to review Federal Circuit decisions so frequently.

Even if this didn't go all the way up to the Supreme Court, there should at least be an en banc hearing at the Federal Circuit. Chief Judge Rader and Circuit Judge Prost have practically invited the parties, with their dissenting opinions, to ask for a full-court review.

There will ultimately (absent a settlement) be the Chicago Apple v. Motorola trial that Judge Posner canceled in 2012, but it may still take some time before a mandate to the district court can issue. I see a reasonably high likelihood of an en banc rehearing and a significant likelihood of a further appeal to the Supreme Court.

See, I told you so

While this process is far from over, at least we now have a (divided) panel opinion in the "Posner case", and on this occasion I'd like to compare the (present) outcome with what I had said about that case before. The day after Judge Posner's ruling came down, I published a detailed analysis of its key aspects. The public debate at the time was more focused on whether this meant that judges in general are tired of smartphone patent suits, and there was a fundamental misunderstanding on the part of all those who thought the cancelation of the Chicago trial was a loss only for Apple, when in reality the FRAND-related part of Judge Posner's ruling -- which I called "absolutely fantastic" in the analysis I just linked to -- was a major victory for Apple (more important than the negative part for Apple in my view).

Almost two years after that ruling, and two days after the (first) appellate opinion in that case, there can be no doubt that the FRAND part of the ruling did indeed (as I had accurately predicted) become the most influential part. But I also noted at the time that Judge Posner's decision had to be seen in the light of his publicly-stated skepticism of the state of the patent system, and I thought that he had been too strict in dismissing the case without at least giving the parties the chance to present new damages claims based on his guidance. The day after the 2012 ruling I wrote this:

"In particular, Chief Judge Rader of the CAFC (whose court is going to be next to look at this case) has repeatedly made statements that are markedly more favorable to the interests of patent holders than the positions Judge Posner takes. Again, I'm personally more on Posner's than Rader's side, but with a view to what will happen next, it's a safe assumption that the CAFC will be concerned about the patent-skeptical stance embodied in this ruling and will probably be hesitant to affirm this in its entirety."

As I predicted then, the Federal Circuit has indeed determined that Apple and Google/Motorola should get their Chicago trial.

I told you so. I also told you that Oracle's declaring Java API code would be found copyrightable, and that will be the next major Federal Circuit ruling for me to blog about. I guess that one will come down in the coming weeks. A number of people who dismissed my commentary on the "Posner case" and on Oracle v. Google only because of district court decisions in 2012 will have to concede now in 2014 that I was right and they were not.

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Guilty verdict in Microsoft v. Motorola FRAND breach case published

I've already commented twice on Wednesday's Microsoft v. Motorola jury verdict (initial reaction, further analysis of economic and reputational implications). Meanwhile the verdict form has entered the public record (this post continues below the document):

13-09-04 Microsoft v. Motorola FRAND Breach Jury Verdict by Florian Mueller

The jury had to reach unanimity, and it was able to do so in less than four hours, which I attribute to the overwhelming weight of the evidence.

While Google's Motorola is now (as I wrote yesterday) a convicted patent troll (see also AllThingsD and Computerworld), its lawyers succeeded in part because the jury awarded Microsoft only about half of the claimed damages. The damages award has two parts, $11,492,686 for distribution center relocation costs and $3,031,720 for attorneys' fees and litigation costs. For the strategic situation between these two companies, the difference between $14.5 million and $29 million doesn't really matter, and it's not clear why the jury granted Google a 50% deduction. It could be that Google convinced the jury that Microsoft could have mitigated these damages and/or had other benefits from relocating its European logistics center. There could also be any number of other reasons.

Janet Tu (Seattle Times) has written an interesting story on the jury forewoman, Mary-Claire King, "a University of Washington professor and a renowned geneticist who played a leading role in the identification of breast cancer genes". Mrs. King, who declined to talk to the press about the jury deliberations (a smart move in light of what happened after the Apple v. Samsung trial last year), is "also the subject of an upcoming movie called 'Decoding Annie Parker,' in which she is portrayed by actress Helen Hunt".

This is an impressive person who I'm sure was easily able to see through all the smokescreens such as the less than credible "empty head, pure heart" defense. But a smart jury foreperson alone isn't enough: in last year's Oracle v. Google trial, the jury foreman accurately concluded that this was not a case of "fair use", but he was almost alone among jurors in doing so (and he didn't change mind, which is why the jury was ultimately hung). I don't want to blame those other jurors because the court's instructions were misleading in my opinion, especially with respect to what constitutes "transformative" use, and fair use could have been thrown out on summary judgment, which the judge declined but which would have been appropriate and would have simplified things for the jury. I wanted to mention this because "fair use" raises similar psychological issues as the "duty of good faith and fair dealing" issue in the Microsoft-Motorola case.

Both parties had moved, even before the jury verdict, for judgment as a matter of law (JMOL). I guess those JMOL motions will be denied. Motorola will try to get the jury overruled -- if not by Judge Robart, then by an appeals court. But it should actually be grateful for the fact that the court instructed the jury on "good faith and fair dealing" in a way that gave Google a wide variety of opportunities to defend its behavior. The problem is not that the jury was misinstructed or erred -- it's that Motorola's conduct, which continued after its acquisition by Google, is simply indefensible in this context. $54 million for a standard Ford Taurus -- how many judges would even consider it necessary to ask a jury whether this could have been a good-faith demand? This judge did defer to the jury, and the answer was the one to be expected: the guilty verdict I published further above.

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Motorola wanted a free license -- now Microsoft basically gets one and Google will have to pay

A federal jury yesterday rendered a verdict that makes Google (Motorola) a convicted patent troll. It has been found to have breached the duty of good faith and fair dealing flowing from Motorola's FRAND licensing pledges to standard-setting organizations. None of the companies typically described as trolls have actually been convicted of similarly unlawful conduct.

The reputational cost of this finding far exceeds the $14.5 million damages verdict. And it's also a clear signal to other standard-essential patent (SEP) holders: there's a potential liability if you renege on your promises, and damages could be much greater in cases in which someone actually does obtain and enforce injunctive relief, or in which an implementer, at point blank, bows to threats. Before the Seattle trial, AllThingsD's John Paczkowski raised the good question of whether other victims of Motorola's conduct, such as BlackBerry, might now also seek damages and adjustments of extortionate royalties. And let's not forget that Apple has also brought breach-of-FRAND-pledge claims against Google's Motorola, a matter that is currently on appeal.

There's another front on which Google has to be worried about yesterday's verdict: antitrust. The FTC let Google off the hook without major consequences other than imposing restrictions with potential loopholes, dropping from its final consent order its holding that Google's Motorola breached antitrust rules. Now there's a jury verdict that serves as more than a replacement for the related sentence in the FTC's draft order. And Google is not off the hook in Brussels: the European Commission is investigating both Apple and Microsoft's complaints over Motorola's SEP abuse. In May it issued a Statement of Objections (SO), a preliminary antitrust ruling with respect to Motorola's behavior vis-à-vis Apple, with a hearing to be held in a matter of weeks based on what I hear, and yesterday's verdict does nothing to dissuade the Commission from also handing down an SO with respect to Motorola's SEP abuse against Microsoft. This could get more costly than yesterday's verdict: the EU can impose fines of up to 10% of annual revenues.

I'll talk about one of my antitrust concerns -- tying -- now. I had been saying for some time that the plan that Motorola and Samsung pursue in their disputes with Apple and (only Motorola) with Microsoft is to create a situation in which they will get away with infringement of non-SEPs without paying an appropriate royalty and accepting the usual restrictions, such as the anti-cloning provision HTC acceded to in its settlement with Apple. Their cash-only offers were totally prohibitive. As an ITC judge found last year in a preliminary ruling on Motorola's complaint against Microsoft, "Motorola was not interested in good faith negotiations and in extending a [F]RAND license" to Microsoft. The real objective was a royalty-free and restriction-free license to Microsoft's non-SEPs. Motorola admitted this much in yesterday's closing argument, as GeekWire's Todd Bishop, who did some excellent coverage (as did a couple of other reporters) of the FRAND breach trial, reported on Twitter:

Motorola wanted "zero-zero" agreement with Microsoft where both companies could freely use each other's patented technologies. #motosoft

Now, I wouldn't have a problem with someone merely proposing a "zero-zero" agreement involving SEPs and non-SEPs. If two companies negotiate and, without undue pressure, both arrive at the conclusion that the IP they bring to the table is equally valuable, and if they find it more efficient (which it undoubtedly is) to have a comprehensive license agreement involving SEPs and non-SEPs alike, that's fine. But just like in the Samsung-Apple dispute (especially, but not only, the part of it that was put before the ITC), there's one thing that a SEP holder absolutely must do if the other party is not interested in a comprehensive deal involving both categories of patents or doesn't accept a related proposal: it must make a SEP-specific cash-only offer on FRAND terms.

The correct approach to the analysis of someone's compliance with a FRAND pledge and the SEP-related obligations under competition law is to determine whether a SEP holder has made at least one offer that, all by itself, is FRAND. If someone offers a reasonable royalty only if that one is tied to non-SEPs, which are FRAND-unencumbered, and makes an out-of-this-world cash-only "offer" that is the equivalent of demanding $54 million for a standard Ford Taurus, then neither offer is FRAND-compliant, and consequently, either one is part of a behavior that comes down to a breach.

If Motorola had offered Microsoft a cash-only deal on terms within the FRAND range established by Judge Robart, it could have made any number of other proposals without a problem. For example, an alternative proposal involving Microsoft's non-SEPs would have been fine and would not have constituted tying, since there was a tying-free FRAND offer on the table. Even if Motorola had proposed in the alternative that the parties sign a license agreement for a fee that would be determined by rolling the dice (which is what baseball arbitration of the kind Google proposes is basically about, unlike actual baseball arbitration, which prevents unreasonable outcomes beforehand), it wouldn't matter.

I recently explained the concept of tying (a topic on which I also did some work outside of the IT industry, consistently fighting against abuse) in a post on the Samsung-Apple situation, using the example of a water monopoly that would force everyone to buy smartphones from it.

Because of the Western District of Washington litigation (which Motorola can and will take to an appeals court, but I don't expect a fundamentally different result when all is said and done), Motorola's tying strategy against Microsoft has failed. There won't be a "zero-zero" license. Actually, instead of Motorola getting a freebie, yesterday's damages award alone amounts to eight years' worth of court-determined FRAND royalties for Motorola's SEPs. Also, Microsoft will benefit from Nokia's license agreement with Motorola as far as the wireless devices business it is acquiring from Nokia is concerned, a deal that will provide Microsoft with "the most cost-effective patent arrangements for smart devices" of any industry player.

Google's (Motorola's) chutzpah is astonishing. At least 20 Android device makers are known to pay Microsoft royalties; it's actually more than that because the 20 licensees include major Original Device Manufacturers (ODMs) like Foxconn parent Hon Hai, who then pass on their licenses to the companies for which they manufacture phones and tablets. These companies include major patent holders and a number of companies that are known as rather aggressive litigants -- the likes of Samsung, LG and HTC are quite the opposite of low-hanging fruit and soft targets. Even Motorola, before Google took control of it, was basically prepared to pay up. But then Google took charge, and Google is adamant about its claim that Android device makers don't need third-party patent licenses, despite the fact that Microsoft has won (with most of its infringement claims against Motorola not even having been adjudged yet) a U.S. import ban and three German injunctions against Motorola Mobility. Realistically, this dispute can have only one outcome: Google will end up the net payer. The licensing fees from Google/Motorola to Microsoft will be substantial, while the fees for Motorola's SEPs will be modest, and breach damages and antitrust fines may add to Google's overall Motorola acquisition costs.

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Microsoft-Nokia deal results in cost-effective combination of patent cross-license agreements

Here's a follow-up to my first reaction to the announcement of Microsoft's M&A and patent license deal. In that post I published two slides from a "strategic rationale" document provided by Microsoft to the press and thankfully published by AllThingsD's John Paczkowski. That slide is worth a closer look. Let me show it to you again (click on the image to enlarge) before commenting on what it says:

On the slide preceding this one, Microsoft recalls that "[i]ntellectual property is an important element of the smart devices business", stating two reasons:

• Unless managed proactively, patent issues can create uncertainty for smartphone shipments

• Unless managed creatively, patent royalties can add over 10 percent to the costs of a smartphone Bill of Materials

I don't doubt that Microsoft's intellectual property and licensing group is managing these deals proactively and creatively -- we'll get to that in a moment. But it's not just about proactive and creative management. It's also the strength of the IP that a company brings to the table. If you have strong patents and manage them well, you will do well. If you don't have a strong portfolio and then make management mistakes, which Google clearly made in connection with the Motorola deal that was a huge waste of money with respect to the patents involved and only got it into antitrust trouble, then your problem gets worse.

In an interview with National Public Radio's Marketplace Morning Report, I just said that Google owned hardly any patents when it acquired Motorola and had to shore up its portfolio, while Microsoft already has a strong portfolio and is primarily interested in long-term access. (Of course, as I always do, I disclosed proactively to the Marketplace interviewer the fact that Microsoft is one of my clients -- but I'm not involved with this transaction and I speak only for myself, not for any client.)

The philosophies of Microsoft and Google with respect to intellectual property -- and, as part of that, litigation avoidance -- couldn't be further apart. The whole idea of the Google-Motorola deal was to buy patents in order to sue others over them, hoping that this would bring about a stalemate -- a strategy that has been an utter failure. Compare this to Microsoft's focus on licensing patents in order to avoid litigation from being brought in the first place.

It's easy to see that Google's Motorola strategy has failed. There are only two ways in which you can get leverage out of a patent portfolio. The most important one by far and away is to obtain injunctions. Motorola has won zero enforceable injunctions against Microsoft and it just lost the only injunction it has been enforcing recently against Apple, which a German appeals court confirmed to me (will discuss this one in my next post). The alternative approach to get leverage out of patents is to seek monetary compensation, and a U.S. district court awarded Motorola less than one-twentieth of a percent of the royalty rate it initially demanded from Microsoft (a German court has also indicated it won't bless Motorola's royalty demand from Apple).

The slide from Microsoft's rationale document that I published further above gives an example of one of the mistakes that led Google to totally overpay for Motorola's patents: it didn't take into consideration that a broadly-licensed patent portfolio is less valuable than one you can still assert against pretty much everyone in a given industry. Microsoft says that "Nokia is also conveying rights under its agreements with IBM, Motorola Mobility, and Motorola Solutions". This means that a Motorola-Nokia license deal struck a few years ago apparently goes with Nokia's wireless devices business. As a result, Google's Motorola can't sue Microsoft's future smartphone business for the remaining term of that agreement, and Motorola's patent portfolio gets less valuable by the day.

License agreements are typically not published, and litigation is often the only way to find out about any of their terms. I don't know the specific terms that will enable Microsoft to benefit from those Nokia deals with IBM, Motorola Mobility, and Motorola Solutions. But my best guess is that those license agreements were phrased in a way that would make the license travel with the licensed business unit and products. That's not unusual. But there are deals that don't come with the related provisions.

The mentioning of IBM is interesting not because IBM would be likely to sue Microsoft directly (I don't think that would ever happen) but because IBM has repeatedly sold patents to Google.

IBM, Motorola Mobility and Motorola Solutions are only three examples of the "more than 60 patent licenses with third parties", claimed to come with "attractive royalty arrangements", from which Microsoft will benefit. Microsoft will also be assigned Nokia's "existing license with Qualcomm".

Without these additional benefits to Microsoft, it would have had to work out a number of wireless patent license deals as a result of the Nokia deal. Now it appears that the relevant mobile devices will have a comfortable licensing position to start from because Nokia assigns benefits under five dozen deals to Microsoft.

It gets even better. Apparently Microsoft has -- as I infer from the slide published further above -- previously signed patent cross-license agreements with other companies that also apply to new acquisitions by Microsoft. In this regard, Microsoft mentions some very interesting companies including the two global leaders in the smartphone market:

• "Microsoft's agreement with Samsung will provide coverage for these additional devices without added payments"

  In September 2011, Microsoft and Samsung (who already had done another patent license deal before) signed an Android-related patent license deal, under which Samsung has to pay Microsoft. That deal apparently extends to the wireless devices business Microsoft will own after the Nokia deal closes. (But Samsung may still need a license to various Nokia non-standard-essential patents.)

• "Microsoft will also benefit from its prior or continuing agreements with Apple, LG, Nortel, Kodak, and others at no additional cost"

  Little is known about the Microsoft-Apple deal, but it was discussed, privately for the most part,in at least one of Apple's litigations. LG took a royalty-bearing Android patent license from Microsoft in January 2012 (and also had another patent license deal in place before that one). Nortel's patents were acquired by a consortium that inclucded Microsoft, and indirectly Microsoft was also involved with a recent deal relating to Eastman Kodak's digital imaging patents.

Low-cost or (ideally) free-of-charge access to other players' IP is a key success factor. The final bullet point on that slide of Microsoft's strategy presentation says:

"Put all together, Microsoft will have the most cost-effective patent arrangements for smart devices"

This may prove a far more important competitive advantage than many people think today. It will enable Microsoft, after this deal closes, to deliver smartphone functionality at attractive prices while maintaining a reasonable level of profitability. Companies that own weaker portfolios (because they contributed less to innovation and didn't do the smartest acquisitions and license deals) will find themselves at a disadvantage, unless they have something to offer that enough customers are willing to pay a premium for.

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Court-determined FRAND rate for Motorola's standard-essential patents is a blow to Google

The United States District Court for the Western District of Washington has now, after the court and the parties reached an agreement on redactions of confidential business information, published the FRAND rate determination made last Friday, setting the royalties Google's Motorola Mobility can reasonably charge Microsoft for the use of Google's standard-essential patents (SEPs) in Microsoft's implementations of certain standards (the H.264 video codec standard and the IEEE 802.11 WiFi standard). This is a historic decision by Judge James L. Robart, the federal judge presiding over this contract litigation. No U.S. court has previously made a FRAND royalty determination at the request of an implementer of a standard (as opposed to a run-of-the-mill damages award for past infringement). We will now see many more FRAND determinations in the years ahead, also due to the proposed FTC-Google antitrust settlement.

The bottom line is that Motorola will get a few cents per unit of Microsoft products implementing the standards in question, resulting in a total annual amount of maybe a couple million dollars as opposed to the $4 billion annual payment Motorola originally demanded and defended last year as being "in fact reasonable [F]RAND]". The court set a range and a point. The range is needed to determine whether Motorola's initial royalty demand was reasonable and non-discriminatory. The point is what Microsoft will pay under the license Google's Motorola now has to extend. These are the per-unit amounts the court arrived at:

• H.264 patents: The range is 0.555 cents ($.00555) per unit to 16.389 cents ($.16389) per unit. The lower bound (half a cent per unit) is what Microsoft will have to pay, as the court found that "Motorola did not demosntrate that its H.264 SEP portfolio provided significant technological value to Microsoft's products". Dozens of major H.264 patent holders make their patents available through the MPEG LA AVC/H.264 pool at similar rates, which the court considered, besides the fact that Google as an MPEG LA licensee agreed to reciprocity, "an indicator of a [F]RAND royalty rate". The court also found that Microsoft is an intended third-party beneficiary of a grant-back obligation in Google's license agreement with MPEG LA.

• IEEE 802.1 patents: The per-Xbox royalty will be 3.471 cents ($.03471) per unit for the Xbox and 0.8 cents ($.008) per unit for all other Microsoft products using the standard; the range is 0.8 cents ($.008) to 19.5 cents ($.195) per unit. A Via Licensing pool of IEEE 802.11 SEPs was considered less successful than MPEG LA's AVC/H.264 pool but its rates were still found to be reasonably indicative of a FRAND rate for patents reading on this standard.

In terms of what Google can expect to get per year, it appears that these per-unit rates correspond to an annual payment of less than $1.8 million -- again, Motorola originally wanted $4 billion. Microsoft's position at the trial was that Motorola can ask for approximately $1.2 million a year. The court's determination is 50% higher than that one, but less than a 20th of a percent of Motorola's initial demand.

Even if "only" compared to Motorola's reduced demands, which were made at the FRAND rate-setting trial in November 2012 and included the suggestion that royalties relating to the H.264 video codec could be capped at $100 million to $125 million per year (which Motorola didn't say initially) and Xbox-related royalties for IEEE 802.11 would be in the "1.15 percent to 1.73 percent" range, the wholly-owned Google subsidiary will now have to content itself with very, very little.

This FRAND rate determination is a strategic win for Microsoft in its wider patent dispute and a strong indication that Google way overpaid for Motorola. I'll just reiterate what I wrote on Wednesday:

$12,500,000,000 certainly has a lot of zeroes, but $12,500,000,000 is a high price for a lot of zeroes. Zero enforceable injunctions against Microsoft in Germany. Zero enforceable injunctions against Apple in Germany if, as I predict, the push injunction against Apple is now lifted. Zero U.S. import bans (on Monday the ITC just tossed the sole remaining patent-in-suit in Motorola's case against Apple, and Google faces a high hurdle in its attempt to salvage its case against Microsoft after an Administrative Law Judge recommended its dismissal a month ago). Zero offensive wins in U.S. federal court.

The FRAND rate Judge Robart has set is not zero, technically speaking. But it's a whole lot closer to zero than to what Google's Motorola demanded (and to what Google paid for this patent portfolio).

Google may not have thought the deal through because it just wanted patents, desperately, after its losing bid for Nortel's far more valuable portfolio. Google was probably misguided by the number of patents the acquisition target held instead of understanding their very limited value. Last year an ITC judge already found that "Motorola was not interested in good faith negotiations and in extending a [F]RAND license" to Microsoft, but didn't say what Motorola is actually entitled to in light of its FRAND licensing obligation (the ITC doesn't make FRAND determinations and resolve contract disputes). Judge Robart has performed this complicated task. His findings of fact and conclusions of law are 207 pages long and contain some very sophisticated calculations. All the facts were on the table, and the result is that SEPs are not the answer to Android's patent infringement issues. Nor are Motorola's non-SEPs, which haven't given Google any serious leverage either.

The next step in the Seattle FRAND action, which Microsoft brought in November 2010 to enforce Motorola's FRAND licensing commitment, is a decision on Microsoft's claim that Google's Motorola breached its FRAND contract by making a blatantly unreasonable initial royalty demand. The court has already set a schedule for that process, envisioning a trial (which may or may not involve a jury) to begin on August 26, 2013. Motorola's counsel conceded last year that if the court found the initial royalty demand "blatantly unreasonable", this would constitute a breach of contract, entitling Microsoft to even further remedies (though Microsoft has already achieved its most important objective: it has enforced its entitlement to a license on FRAND terms, while Google is not entitled to injunctive relief against Microsoft over these patents). The breach-of-contract decision should be a fairly easy one -- frankly, it's hard to see why there's even a need for a trial to determine that the original $4 billion demand was far, far outside the FRAND range determined by the court, but it's too early to tell how this question may be resolved in the alternative to a trial. The outcome, however, is easy to predict, and will add to Google's SEP-related worries.

Finally, here's the document (there may be one or more follow-up posts on this decision, but for an initial reaction I'll leave it at this):

13-04-25 Microsoft-Motorola FRAND Rate Determination

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German court postpones ruling on Apple-Motorola lawsuit targeting 'core Android operating system'

In early July, the Mannheim Regional Court held two trials on Apple lawsuits against Motorola Mobility and Samsung over EP2098948, a multi-touch event model patent, and scheduled decisions for today in the Motorola case and for September 21 in the Samsung case.

I went to the court, but there has been a rescheduling. The decision concerning Motorola will now come down on the same day as the one on the Samsung case, i.e., in three weeks.

There can be situations in which the same patent targeting the same technology -- in this case, we're talking about the Android operating system itself -- is adjudged differently by the same court in parallel lawsuits involving different defendants. For example, one party may fail to bring certain infringement or invalidity contentions in time. But based on how those two trials went, there is no obvious reason why the two cases might have different outcomes. And the consistent outcome is more likely than not to be a finding of non-infringement.

A three-week delay is no big deal in the greater picture. By comparison, Apple obtained a highly favorable jury verdict against Samsung in California a week ago, but the court is unwilling to consider Apple's request for injunctive relief before December, with a decision possibly not even coming down before the end of the year. I'll talk about that in my next post.

I mentioned the "core Android operating system" -- in quotes -- in the headline because Google used this term in its official reaction to last week's Apple v. Samsung verdict, and I thought this touch event model patent is a good example of what a reasonable decision of the "core Android operating sstem" should include. I think Google's use of that term has confused a lot of people out there, and that confusion was anything but unintended.

Google's statement made one very good point. Several of the patents the jury deemed valid and infringed are undergoing reexamination by the USPTO. I, too, believe that this is likely to change the situation, to some degree, in Samsung's favor further down the road.

Also, Google actually admitted that some of the trial patents do affect the "core Android operating system". Google said this:

"Most of these [patent claims] don't relate to the core Android operating system [...]"

"Most" means "not all, but some". It's not Google's fault that some people later said that none reads on core Android.

Obviously, design patents covering the shape of a tablet or smartphone are not an Android issue. Note that I usually refer to patents that Android-based devices have been found to infringe, which is not the same as saying that Android itself has been found to infringe -- but there are also some people who ignore that distinction.

While Google is not responsible for the shape of Samsung's tablets or smartphones, it is indirectly affected by Samsung's infringement. Apple's coherent story of "copying" ranging from packaging design to operating system functionality was clearly a key factor that helped Apple obtain last week's verdict.

It's unclear what Google considers to be the "core Android operating system". The narrowest definition of the core of Android would be... Linux. Android is a Linux derivative. But none of Apple's trial patents reads on Linux itself, so it's clear that Google defines "core Android operating system" more broadly than that.

The touch event model patent that was scheduled to be adjudged today would undoubtedly have to be considered a patent that reads on the "core Android operating system". It covers the way Android informs applications of touch events. All applications receive touch events. Not all applications rely on the specifics of the patented technique (such as selective sending of events if more than one touch is identified at the same time), but this is an operating system patent, not just an application patent that would be relevant only to a particular app, such as the photo gallery or the YouTube client.

The fact that Google CEO Larry Page is talking to Apple CEO Tim Cook about intellectual property matters including Android-related patent litigation shows that Google has problems in this area. How many of those problems relate to the "core Android operating system" depends on how one defines that term.

Whether or not a particular patent reads on what Google includes in its definition of the "core Android operating system" is not the most important thing. What really matters is what technical changes are necessary in the event of an injunction. Will the workaround result in degradations of the user experience, or a loss of functionality, performance, security, or stability? Google has not commented on this yet, but at some point it will have to. After now-Google-owned Motorola won a German injunction over a push notification patent, Apple was very clear about the implications. It explained on its website how this affected some of its customers accessing the iCloud or MobileMe email service from Germany, and how users were able to mitigate the impact. If Apple wins a post-trial injunction against Samsung, I hope Samsung and Google will also be very specific about their workaround strategy -- and not just refer us to an arbitrary distinction between the "core Android operating system" and Android as a whole.

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FTC urges ITC not to ban iPhone, iPad and Xbox over Google's standard-essential patents

Last week, Jon Leibowitz, the Chairman of the Federal Trade Commission (FTC), the U.S. antitrust authority that takes pride in "protecting America's consumers since 1914", said at AllThingsD's D10 conference that his institution might file its concerns over the pursuit of injunctive relief over standard-essential patents (SEPs) with the United States International Trade Commission (ITC), a U.S. trade agency with quasi-judicial powers that can order import bans on infringing products.

On Wednesday, Bloomberg and CNET were first to report that the FTC indeed filed a statement on the public interest with the ITC, urging the latter to "consider the impact of [SEP] hold-up on competitive conditions and United States consumers" in connection with its upcoming decisions on Google's (Motorola's) complaints against Apple and Microsoft. In both investigations (Apple, Microsoft), there have been preliminary findings of violations, but the final decision, especially on remedies, will be made by the Commission, the six-member decision-making body at the top of the ITC.

The five-page interinstitutional letter, the full text of which I provide further below, suggests that the ITC "refrain from imposing [] remedies in conflict with the public interest", arguing that "patent hold-up" over SEPs "could raise prices to consumers while undermining the standard setting process" and proposing that the ITC consider such alternatives as

• denying the entry of an exclusion order unless the holder of a FRAND-pledged SEP has "made a reasonable royalty offer" (which, as the letter recalls, an ITC judge did not consider to be the case in Motorola's dealings with Microsoft and, by extension, with Apple) or

• delaying the effective date on which an import ban enters into force "until the parties mediate in good faith for damages for past infringement and/or an ongoing royalty for future licensed use", putting pressure on both parties because the implementer may face an import ban if he "refuses as reasonable offer" while the patent holder may see the exclusion order "vacated if the ITC finds that the patentee has refused to accept a reasonable offer".

In connection with the mediation-based approach, the FTC notes that the ITC delayed the effective date of an exclusion order against HTC for four months despite an infringement finding, "[b]ased on consideration of competitive conditions in the United States economy" (just this week, Apple filed a follow-up complaint because HTC allegedly continues to infringe). What the FTC's letter doesn't mention is that the ITC wouldn't even have to use its own resources to facilitate FRAND licensing negotiations between Google and the implementers it's suing: a federal lawsuit will go to trial in Seattle in November and result in a license agreement, on terms set by a district court, between Google (Motorola) and Microsoft, and Apple filed a similar action in the Western District of Wisconsin in 2011.

Like Apple CEO Tim Cook, the FTC makes a clear-cut distinction between the pursuit of injunctions over SEPs and other (non-standard essential) patents:

"The FTC recognizes that 'the [ITC] has consistently held that the benefit of lower prices to consumers does not outweigh the benefit of providing complainants with an effective remedy for an intellectual property-based Section 337 violation.' We agree that an appropriately granted exclusion order preserves the exclusivity that forms the foundation of the patent system's incentives to innovate, and the threat of an exclusion order can provide a significant deterrent to infringement. In such a case, the short run price increases may benefit consumers in the long run by providing incentives for innovation, consistent with the proper role of the patent system.

[F]RAND-encumbered SEPs present considerably different issues. A [F]RAND commitment provides evidence that the SEP owner planned to monetize its IP through broad licensing on reasonable terms rather than through exclusive use. [...]"

The FTC's statement will bear considerable weight with the ITC. The law governing the ITC, Section 337 of the Tariff Act (19 U.S.C. § 1337), states that the ITC shall consult with the FTC on such decisions:

"During the course of each investigation under this section, the Commission shall consult with, and seek advice and information from, the Department of Health and Human Services, the Department of Justice, the Federal Trade Commission, and such other departments and agencies as it considers appropriate." (emphasis added)

The FTC just wants to ensure that SEP holders get compensated based on the value of their actual innovation, as opposed to exploiting a gatekeeper role through hold-up.

The implications of this statement go far beyond the two investigations in which it was filed. In a few months, the ITC may face a similar situation if Apple is found to infringe any of the SEPs Samsung is asserting at a trial that started on Monday. Samsung is being represented by the same law firm that spearheads Google's (Motorola's) abusive assertions of SEPs, an ill-conceived strategy that appears ever more likely to fail.

By acquiring Motorola Mobility, Google bought itself into dozens of pending litigations with Apple and Microsoft, including four that have already resulted in injunctions against Motorola (in chronological order: 1, 2, 3, 4), as well as two formal antitrust investigations by the European Commission.

I agree with the Wall Street Journal's Rolfe Winkler that "Google is playing with fire on patents" by continuing Motorola's pursuit of import bans despite regulatory concern on different continents. In a corporate blog post, Microsoft notes that "[f]rom China's Ministry of Commerce, to the EU's Directorate-General for Competition, to the U.S. Department of Justice, and now the FTC, the world’s regulators are speaking clearly and consistently: companies should not misuse standard essential patents."

Google already has enough antitrust problems in its core business, search. The FTC intends to concludes its investigation of Google's related practices later this year. European Commission Vice President Joaquín Almunia just gave Google an ultimatum to come up with proposals relating to several claims of abuse of its dominant market position in search (article, statement as Word document). Now the Federal Trade Commission and the European Commission have a similar stance on SEPs. It's time for Google to be realistic and reasonable. It can't fight the whole world over this issue. Google's management just tries to cover up the $12.5 billion mistake it made by acquiring Motorola Mobility in a desperate impulse buy because Android faces serious IP infringement issues. The sooner Google recognizes its error and makes truly FRAND licensing offers to Apple and Microsoft, the better for Android, and, above all, for consumers.

Google would like the world to think that all patents are the same. But they clearly aren't. It was a crazy idea in the first place to look at SEPs as strategic nuclear weapons.

The FTC's letter clarifies that it's not a statement on "whether seeking an injunction or exclusion order for [F]RAND-encumbered SEPs would violate [applicable U.S. antitrust laws]". But Google and its lawyers should read the writing on the wall.

Full text of FTC statement

[Back in February I published the full text of a statement by European Commission Vice President Joaquín Almunia on Google's acquisition of Motorola, and in the remainder of this post I now publish the latest FTC statement. The FTC submitted almost identical statements (the difference only being the investigation numbers) in the Motorola v. Apple and Motorola v. Microsoft cases. Below please find the version filed in the Apple case As footnote 2 clarifies, the statement refers to "RAND" but also means its synonym "FRAND".]

UNITED STATES
INTERNATIONAL TRADE COMMISSION
Washington, D.C.

In the Matter of

CERTAIN WIRELESS COMMUNICATION DEVICES, PORTABLE MUSIC AND DATA PROCESSING DEVICES, COMPUTERS AND COMPONENTS THEREOF

Inv. No. 337-TA-745

THIRD PARTY
UNITED STATES FEDERAL TRADE COMMISSION'S
STATEMENT ON THE PUBLIC INTEREST

The United States Federal Trade Commission submits this Statement in response to the United States International Trade Commission's Notices of Request for Statements on the Public Interest in Investigation Nos. 337-TA-745 and 337-TA-752.[1] The investigations appear to present an issue of first impression for the ITC that has significant implications for the public interest: the propriety of granting an exclusion order in favor of a standard essential patent (SEP) holder that has committed to license on reasonable and non-discriminatory (RAND) terms.[2] ITC issuance of an exclusion or cease and desist order in matters involving RAND-encumbered SEPs, where infringement is based on implementation of standardized technology, has the potential to cause substantial harm to U.S. competition, consumers and innovation.[3] Simply put, we are concerned that a patentee can make a RAND commitment as part of the standard setting process, and then seek an exclusion order for infringement of the RAND-encumbered SEP as a way of securing royalties that may be inconsistent with that RAND commitment. Consistent with the requirement of Congress that the ITC "shall consult with, and seek advice and information from ... the Federal Trade Commission ... as it considers appropriate" on matters affecting the public interest in ITC investigations, we submit this statement explaining the potential economic and competitive impact of injunctive relief on disputes involving SEPs.[4]

Firms in the information technology and telecommunications industries frequently resolve interoperability problems through voluntary consensus standard setting conducted by standard setting organizations ("SSOs"). Interoperability standards can create enormous value for consumers by increasing competition, innovation, product quality and choice. However, incorporating patented technologies into standards also has the potential to distort competition by enabling SEP owners to negotiate high royalty rates and other favorable terms, after a standard is adopted, that they could not credibly demand beforehand, conduct known as "patent hold-up."

The possibility of patent hold-up derives from changes in the relative costs of once competing technologies as a result of the standard setting process.[5] Prior to adoption of a standard, alternative technologies compete to be included in the standard. SSO members often agree to license SEPs on RAND terms as a quid pro quo for the inclusion of their patents in a standard. Once a standard is adopted, implementers begin to make investments tied to the implementation of the standard. Because it may not be feasible to deviate from the standard unless all or most other participants in the industry agree to do so in compatible ways, and because all of these participants may face substantial switching costs in abandoning initial designs and substituting a different technology, an entire industry may become locked in to a standard, giving a SEP owner the ability to demand and obtain royalty payments based not on the true market value of its patents, but on the costs and delays of switching away from the standardized technology.

Hold-up and the threat of hold-up can deter innovation by increasing costs and uncertainty for other industry participants, including those engaged in inventive activity. It can also distort investment and harm consumers by breaking the connection between the value of an invention and its reward -- a connection that is the cornerstone of the patent system.[6] The threat of hold-up may reduce the value of standard-setting, leading firms to rely less on the standard setting process and depriving consumers of the substantial procompetitive benefits of standard setting.

RAND commitments mitigate the risk of patent hold-up, and encourage investment in the standard.[7] After a RAND commitment is made, the patentee and the implementer will typically negotiate a royalty or, in the event they are unable to agree, may seek a judicial determination of a reasonable rate. However, a royalty negotiation that occurs under threat of an exclusion order may be weighted heavily in favor of the patentee in a way that is in tension with the RAND commitment. High switching costs combined with the threat of an exclusion order could allow a patentee to obtain unreasonable licensing terms despite its RAND commitment, not because its invention is valuable, but because implementers are locked in to practicing the standard. The resulting imbalance between the value of patented technology and the rewards for innovation may be especially acute where the exclusion order is based on a patent covering a small component of a complex multicomponent product. In these ways, the threat of an exclusion order may allow the holder of a RAND-encumbered SEP to realize royalty rates that reflect patent hold-up, rather than the value of the patent relative to alternatives, which could raise prices to consumers while undermining the standard setting process.

The ITC has a range of remedies available to it here to give effect to its statutory obligation to consider "competitive conditions in the United States economy ... and United States consumers[,]"[8] and to refrain from imposing Section 337 remedies in conflict with the public interest. For example, the ITC could find that Section 337's public interest factors support denial of an exclusion order unless the holder of the RAND-encumbered SEP has made a reasonable royalty offer.[9] For example, in the Initial Determination of Investigation No. 337-TA-752, the ITC ALJ found that, "the royalty rate of Motorola of 2.25%, both as to its amount and the products covered, could not possibly have been accepted by Microsoft."[10] While this approach may leave the patentee without a remedy in the ITC, a remedy in district court would remain available. Alternatively, the ITC could delay the effective date of its Section 337 remedies until the parties mediate in good faith for damages for past infringement and/or an ongoing royalty for future licensed use, with the parties facing the respective risks that the exclusion order will (i) eventually go into effect if the implementer refuses a reasonable offer or (ii) be vacated if the ITC finds that the patentee has refused to accept a reasonable offer.[11]

The FTC recognizes that "the [ITC] has consistently held that the benefit of lower prices to consumers does not outweigh the benefit of providing complainants with an effective remedy for an intellectual property-based Section 337 violation."[12] We agree that an appropriately granted exclusion order preserves the exclusivity that forms the foundation of the patent system's incentives to innovate, and the threat of an exclusion order can provide a significant deterrent to infringement.[13] In such a case, short run price increases may benefit consumers in the long run by providing incentives for innovation, consistent with the proper role of the patent system.

RAND-encumbered SEPs present considerably different issues. A RAND commitment provides evidence that the SEP owner planned to monetize its IP through broad licensing on reasonable terms rather than through exclusive use.[14] Consistent with the proper role of the patent system, remedies that reduce the chance of patent hold-up associated with RAND-encumbered SEPs can encourage innovation by increasing certainty for firms investing in standards-compliant products and complementary technologies. Such remedies may also prevent the price increases associated with patent hold-up without necessarily reducing incentives to innovate.

In cases that address RAND-encumbered SEPs, the FTC urges the ITC to follow the requirement of Sections 337(d)(1) and (f)(1) and consider the impact of patent hold-up on competitive conditions and United States consumers.

By direction of the Commission.

Donald S. Clark
Secretary

Isued: June 6, 2012

[-------  footnotes:  -------]

[1] The FTC takes no position on the facts of Investigation Nos. 337-TA-745 and 337-TA-752, or whether Section 337 remedies should issue here. This Statement also does not address whether seeking an injunction or exclusion order for RAND-encumbered SEPs would violate Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, or Sections 1 or 2 of the Sherman Act. 15 U.S.C. §§ 1-2.

[2] This Statement uses the term RAND, but the analysis applies equally to FRAND-encumbered intellectual property. This Statement assumes, for the sake of discussion and without deciding, that a RAND commitment was made.

[3] Commissioner Rosch concurs in the filing of this public interest statement but is of the view that the issuance of an exclusion order (or other forms of injunctive relief) is inappropriate where the patent has made a RAND commitment for a standard essential patent, even if a reasonable licensing offer is made. In his view, a RAND pledge appears to be, by its very nature, a commitment to license; if so, seeking injunctive relief would be inconsistent with a commitment to license. Commissioner Rosch thus submits that if the ITC concludes that Respondent (or its predecessor in interest) made a RAND commitment with respect to a standard essential patent, an exclusion order should be denied for that patent as inconsistent with the public interest, see 19 U.S.C. § 1337(d)(1), or as a matter of equity, see Certain Amorphous Metals & Amorphous Metal Articles, Inv. No. 337-TA-143, U.S.I.T.C. Pub. 1664, at 89-90 (Oct. 15, 1984) (conduct by a patentee that falls within the unclean hands doctrine "will bar the enforcement of all patents that are sufficiently related to that conduct.").

[4] See 19 U.S.C. §1337(b)(2) ("During the course of each investigation under this section, the Commission shall consult with, and seek advice and information from, the Department of Health and Human Services, the Department of Justice, the Federal Trade Commission, and such other departments and agencies as it considers appropriate.").

[5] Joseph Farrell et al. Standard Setting, Patents and Hold-Up, 74 Antitrust L.J. 603, 607-08 (2007).

[6] See generally Fed. Trade Comm'n, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition (2011) ("2011 Report"), available at http://www.ftc.gov/os/2011/03/110307patentreport.pdf; Fed. Trade Comm'n, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy (2003) ("2003 Report"), available at http://www.ftc.gov/os/2003/10/innovationrpt.pdf.

[7] U.S. Dep't of Justice & Fed. Trade Comm'n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition 46-47 (2007) ("2007 Report"), available at http://www.ftc.gov/reports/innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf.

[8] 19 U.S.C. §§ 1337(d)(1), (f)(1).

[9] See 2011 Report at 243 ("Assertion of a patent against a standard, especially a patent subject to a RAND commitment, creates a particularly important scenario for considering the public interest in deciding whether to grant an exclusion order" before the ITC).

[10] Certain Gaming and Entertainment Consoles, Related Software, and Components Thereof, Initial Determination at 300 (May 2012), see also id. at 303 ("[T]he evidence supports Microsoft's conclusion that Motorola was not interested in good faith negotiations and in extending a RAND license to it.").

[11] There is precedent for such an approach at the ITC. In December 2011, the ITC found that HTC infringed valid Apple patents. "Based on consideration of competitive conditions in the United States economy," the ITC delayed the effective date of the exclusion order for four months "to provide a transition period for U.S. carriers." Certain Personal Data and Mobile Communications Devices and Related Software, Notice of the Comm'n's Final Determination finding a Violation of Section 337; etc. at 3 (Dec. 2011).

[12] Certain Digital Television Products and Certain Products Containing Same and Methods of Using Same, Inv. No. 337-TA-617, Comm'n Op. at 16 (Apr. 2009).

[13] 2003 Report at 223-28.

[14] Cf. 2001 Report at 234-35 ("A prior RAND commitment can provide strong evidence that denial of the injunction and ongoing royalties will not irreparably harm the patentee.").

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