Netflix is watching the IP equivalent of a hardcore horror movie that would make Stephen King proud, and the scenery is Germany's Draconian patent regime.
When the Consumer Federation of America opposed the Comcast-Time Warner merger, it blamed Comcast for a past "degradation of [Netflix'] service quality." In the present context, where licensing firm DivX, LLC is enforcing a Germany-wide patent injunction, a degradation of service quality could indeed happen and would be bad enough in its own right, but according to what Netflix itself told a German appeals court--which nevertheless allowed enforcement to go forward--there is a clear and present danger of the service going offline in the largest European market. That dramatic event would cost Netflix hundreds of millions of dollars in profits per year and possibly billions in lifetime revenues from customers that might never come back. The streaming company now has to decide whether to settle by way of a patent license agreement with DivX.
Meanwhile, Amazon and Vizio are facing a fresh ITC complaint by DivX that the ITC decided last week to investigate and which could result in a U.S. import ban of certain devices. I'll show that complaint further below, and last week's institution notice is what got me interested in the DivX cases in the first place, but given the immediate threat that the German enforcement proceeding poses, let's focus on that one first.
On April 22, 2022, the Landgericht Mannheim (Mannheim Regional Court) granted DivX a German patent injunction in case no. 7 O 88/21 against Netflix over EP3467666 on a "video distribution system including progressive playback." Since then, Netflix--represented by Quinn Emanuel's Dr. Marcus Grosch--has suffered three more defeats that paved the way for the enforcement that is now tightening the noose around Netflix' neck. The Sixth Civil Senate (Presiding Judge: Andreas Voss ("Voß" in German); side judges: Judges Lehmeyer and Professor Singer) of the Oberlandesgericht Karlsruhe (Karlsruhe Higher Regional Court), which hears all appeals from Mannheim patent judgments, denied
Netflix' emergency motion to stay enforcement of the injunction (on July 5),
Netflix' motion for reconsideration of the denial of an enforcement stay (on August 2), and finally also
Netflix' motion to increase the amount of the collateral (bond or deposit) required for enforcement during the appellate proceedings (on October 26).
The Karlsruhe appeals court published a redacted version of the last one (in German)--which contains a wealth of information about the case--and thankfully responded to my request for information.
In its motion to increase the security amount, Netflix based its calculation of enforcement damages on the assumption of having to switch off its entire service in Germany if the injunction is enforced. It had already made that argument in the court below. Neither court was persuaded, given that Netflix faces competitive constraints in Germany and the patent covers a feature called TrickPlay, which makes it hugely more convenient for users to jump backward or forward when watching a stream. There is always some delay as different data than originally foreseen must be downloaded. But DivX' patented technique makes it a lot more bearable than otherwise.
I don't know whether Netflix can now abide by the injunction by merely disabling the TrickPlay feature (as DivX argued)--thereby inconveniencing its German customers in ways they would notice--or whether the technical and logistical complications would effectively require Netflix to shut down its German service altogether. What I can infer from the appeals court's order, however, is that Netflix itself presented the situation as an all-or-nothing choice. Should Netflix be right about that doomsday "go dark" scenario, then it's playing a dangerous game now by refusing to settle. In the other event, Netflix and Quinn Emanuel would risk a massive loss of credibility with both the Karlsruhe Higher Regional Court and the Mannheim Regional Court by having way overstated the practical effects of enforcement--only for the purpose of making provisional enforcement (i.e., enforcement before the appeals court's final decision) potentially unaffordable to the small patent holder. In some jurisdictions, misrepresentations of that kind can even give rise to sanctions on a party and/or its counsel...
The Mannheim court noted in its ruling that Netflix had not pled any fact that would make the enforcement of the injunction in question a disproportionate hardship. As I discussed on many occasions and most recently last month, last year's German patent "reform" has been of zero help to defendants.
The appeals court refers to Netflix' shareholder information, from which one can deduce that its annual revenues from millions of German customers are in the hundreds of millions of dollars. But the security that DivX must provide appears to be only in the millions or maybe tens of millions (almost certainly not in the hundreds of millions).
After the appeals court cleared the way for enforcement, DivX made the deposit and demanded compliance. Netflix is still operating its service in Germany, and DivX has meanwhile filed a motion for contempt-of-court sanctions with the Mannheim court. It seems that Netflix has until after the Holiday Season to file its opposition brief, which is unusually long and hard to reconcile with the policy goal of strong IP enforcement that has been pronounced by the European Union and the German legislature. As a longstanding fan of the Mannheim court (from back when Judge Voss was presiding over its Seventh Civil Chamber), I'm a bit worried that other patent holders may be discouraged from filing their cases with a court that comes across as lenient with deep-pocketed hold-outs. Plaintiffs generally have a lot of confidence in the Munich court, and for certain types of cases Dusseldorf is becoming more popular after it substantially shortened its median time to trial.
The circumstances of the present case warrant swift and decisive action, with the Karlsruhe appeals court having affirmed the Mannheim court all the way and an opposition panel of the European Patent Office having rendered a preliminary assessment according to which the patented invention is not anticipated by the prior art (it appears that the prior art references Netflix primarily relies upon are actually more than one step away from the challenged claim--and out of an abundance of caution DivX has filed various amended claims as potential fallbacks).
At this stage of proceeding, DivX' German lead counsel is Dr. Thomas Gniadek of Simmons & Simmons. He represents plaintiffs as well as defendants (last time I mentioned him was in the spring, when Xiaomi settled with Philips, and he was on a Bardehle Pagenberg team about ten years ago that won some cases against Motorola, represented by Quinn Emanuel). The EPO will hold the opposition hearing in January, where patent attorneys from Eisenfuehr Speiser will represent DivX.
Quinn Emanuel Germany notoriously refuses to bring patent attorneys to infringement and nullity trials and hearings, which also applies to this case. While QE's vigorous litigation style is a good thing per se, it is really up to their clients to decide when the time has come to settle in order to avoid risks that one cannot responsibly take. Let me put it this way: I know patent litigators who are much more inclined to advise clients to err on the side of caution.
There has been one high-profile case in which a client scored a settlement with the help of another firm (Paul, Weiss) after terminating QE's contract: world soccer body FIFA, whose World Cup is taking place as we speak, had spent a fortune on QE's fees (so much that QE even set up a Zurich office just to be closer to that client), but after Gianni Infantino--a lawyer by training--took over, he changed horses in midstream and shortly thereafter even got $200 million back from the United States Department of Justice. In the German Daimler cases, I don't think QE Germany can be blamed because the Mercedes company didn't even take its chances the way Netflix is doing now. It's just that Daimler could have gotten those four patent injunctions in 11 weeks at a much lower cost--or could have taken an Avanci patent pool license (as it ultimately did) in the first place.
Protracted litigation only benefits the lawyers. That's a fact. But for those of us watching the cases, it means more "bring the popcorn" situations.
ITC complaint against Amazon and Vizio
On October 24, DivX--represented by Tensegrity's Matt Powers, whom this blog first mentioned in 2013 when he was also doing some work for Apple--filed a complaint with the United States International Trade Commission (USITC, or just ITC), seeking a U.S. import ban on Amazon and Vizio devices:
On Wednesday (November 23), the ITC instituted an investigation. Unified Patents, which challenges patents in the USPTO's PTAB all the time on behalf of large companies hiding behind it, filed a public interest statement that was obviously not going to dissuade the ITC from instituting the investigation. In fact, the filing itself acknowledged that the ITC routinely investigates complaints by licensing firms and considers patent licensing activities--if certain criteria are met--as capable of satisfying the ITC's domestic industry requirement. And the fact that DivX has previously concluded license agreements actually suggests that even Netflix (under pressure now in Germany as I explained above) and Amazon will ultimately take licenses. The question is just the cost, and if the German Netflix service went offline, the deal terms will hardly be sweet.
These are the five U.S. patents-in-suit against Amazon and Vizio:
U.S. Patent No. 8,832,297 on "systems and methods for performing multiphase adaptive bitrate streaming"
U.S. Patent No. 7,295,673 on a "method and system for securing compressed digital video"
U.S. Patent No, 10,225,588 on "playback devices and methods for playing back alternative streams of content protected using a common set of cryptographic keys"
U.S. Patent No,. 11,102,553 on "systems and methods for secure playback of encrypted elementary bitstreams"
U.S. Patent No. 11,050,808 on "systems and methods for seeking within multimedia content during streaming playback"
