Microsoft-ActivisionBlizzard merger goes into UK regulatory hearing with growing support, dwindling resistance

PaRR (Policy and Regulatory Report) was first to report last week that the UK Competition & Markets Authority (CMA) scheduled the first two of its Microsoft-ActivisionBlizzard response hearings--the ones with the deal parties themselves--for this week. On LinkedIn, Jacob Parry wrote:

The UK Competition and Markets Authority will hold a series of response hearings starting next week into #Microsoft's acquisition of #Activision, according to sources familiar with the deal. Microsoft will defend its deal on Tuesday (28 February) while Activision will be heard on Wednesday (1 March), with third parties expected to be heard on later dates.

I tweeted about that (as I'm in the process of implementing the new editorial policy for FOSS Patents), just like Twitter was also the first platform on which I published Microsoft's reply brief that reinforces their motion to dismiss the so-called gamers' lawsuit in the Northern District of California (filed on Friday by Pacific Time).

I've updated my timeline chart in light of the exact dates of the UK hearings (click on the image to enlarge):

Due to the high density of events this week (two response hearings, FTC discovery milestone, opposition to motion for preliminary injunction), I had to use different colors: orange for the private lawsuit in San Francisco, green for the FTC's adjudicative proceeding, and blue for the CMA's merger review.

It's been almost a week since my previous post on this topic: Nvidia, which was not totally against the deal but formally involved as a third party raising concerns, is now supportive. Its problem has been solved by means of a ten-year license agreement. This means a sophisticated player believes in a licensing-based solution. Sony can't claim to be smarter than Nvidia.

It's a bad sign for a party opposing a deal (Sony is the only vocal complainer) when it appears increasingly isolated. By contrast, no one in favor of the deal has been convinced by anything that Sony or the various preliminary assessments of the deal by regulators have said. Case in point, the European Games Developer Federation reiterated its support of the transaction after the EU hearing.

There's more that has happened or become known since last week's EU hearing.

Equity Report says China's SAMR is likely to approve the deal (the timeline is unclear though):

China’s SAMR is likely to approve Microsoft’s acquisition of video game publisher Activision Blizzard, despite the review process being slowed down by potential complaints, two Chinese antitrust lawyers who have advised competitors of the parties told @equityreportuk

— Equity Report (@equityreportuk) February 23, 2023

According to various reports, gaming giant Tencent and one other Chinese company (NetEase?) are in favor of the transaction.

Now there's a whole new stakeholder category that has spoken out: the 60 Plus Association, a non-profit advocacy group representing the interests of senior citizens, contributed an opinion piece to the Washington Examiner that calls on the FTC to settle the case.

A couple days earlier, a Wall Street Journal article exposed the FTC's efforts to use foreign regulators to prevent U.S.-U.S. mergers. It has previously been said that the FTC accelerated its in-house lawsuit against Microsoft's purchase of Activision Blizzard King just to dissuade the European Commission from working out a remedies-based solution. I can't imagine that Mrs. Vestager would allow the EC's competition enforcement division to be used as a tool by a foreign counterpart. For now I believe DG COMP will make its own decision, independently and strictly merits-based. It doesn't matter whether so-called behavioral remedies are presently en vogue in other places, especially when a long-term license is pretty structural.

Even the FTC may change mind. It has reportedly decided to drop its challenge to Meta's (meanwhile consummated) acquisition of VR fitness software maker Within. Earlier this month I commented on that case, which raised different legal questions from Microsoft-ActivisionBlizzard, but wasn't conducive to the FTC's (and Sony's and its counsel's) credibility.

I shared (on Twitter) the news of the FTC's Within withdrawal, and predicted a similar end of its Activision Blizzard challenge, to which Professor Herbert Hovenkamp replied that he "do[es]n't understand the strategy of bringing these cases, and likely losing, prior to new Merger Guidelines":

I don't understand the strategy of bringing these cases, and likely losing, prior to new Merger Guidelines that clarify its standards (which are currently outdated). The D.C. Circuit warned about this in the AT&T/Time-Warner. The courts usually follow reasonable Guidelines.

— Herbert hovenkamp (@Sherman1890) February 26, 2023

Other academics chimed in as well. It was an interesting discussion. I believe there was a consensus that merger rules should be stricter, but the question is (a) how much stricter they can be made by the executive government without meeting judicial resistance and (b) what the right strategy would be:

yes, there are better vehicles for making policy than through a bunch of losing court opinions, which only increase the size of the wall that they are up against.

— Herbert hovenkamp (@Sherman1890) February 26, 2023

It remains to be seen with what theories of harm the DOJ will challenge Adobe's $20B acquisition of Figma in an upcoming lawsuit. That case may very well have merit, but that's a whole different story.

The FTC, the CMA, and the EC have all sent out a clear message by now that major Big Tech acquisitions won't just be waved through the way it used to be. Selling shareholders will now be increasingly hesitant to enter into protracted merger reviews with uncertain outcomes. But Microsoft-ActivisionBlizzard is a deal that is supported by various large game makers, by small and medium-sized ones, by labor unions, by former deal critic Nvidia, and now even by an association representing senior citizens. There appears to be momentum behind the quest for solutions.

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Nokia asserting patents against high-volume smartphone maker Vivo in five countries (China, India, Indonesia, Malaysia, Germany) but no resolution in sight

In the previous post, I reported on a half-dozen of Datang v. Samsung patent infringement lawsuits that are pending in China. I've also obtained information about some other wireless patent enforcement activity in China. This here is a follow-up on Nokia v. Vivo, which is overdue as it's been almost ten months since I last reported on that dispute:

• May 11, 2022: Nokia suing Vivo in two German courts over standard-essential patents--despite limited market presence--and Vivo countersuing in Dusseldorf

• March 22, 2022: Nokia's Asian patent enforcement campaign against Vivo also extending to Indonesia: CNN

China

Nokia filed a patent infringement lawsuit with the Jinan Intermediate People's Court in April 2022.

Vivo countersued Nokia in March 2022 in the Guangzhou Intellectual Property Court over one of its own patents.

Vivo furthermore (also in March 2022) asked the Chongqing First Intermedia People's Court for a FRAND determination. In Chongqing, a rate-setting case brought by OPPO against Nokia is already at an advanced stage. The findings made in that one could have a bearing on the later-filed Vivo case.

Not only Nokia is suing Vivo in China, but so is a Chinese company: ZTE (in Guangzhou and Xi'an).

According to Chinese reports, various decisions by China's patent office (SIPO) came down last week. Vivo is known to have challenged at least a dozen Nokia patents in China, and the result of the five revocation actions that have been adjudicated so far is that two Nokia patents were invalidated in their entirety, one was invalidated in part, and two were upheld. A ZTE patent challenged by Vivo (ZL201210363485.1) has also been declared partly invalid.

In the Chinese market, Vivo now sells more smartphones per year than any other Chinese company. That makes China a particularly important jurisdiction for any patent dispute with Vivo.

India

Delhi High Court records show that two Nokia v. Vivo patent infringement actions are pending there. I hope to find out the details beyond what I reported last year.

Indonesia

One of two Nokia v. Vivo cases pending before the Central Jakarta District Court was already known last year. There appears to be a second case (case no. 31/Pdt.Sus-HKI/Paten/2022/PN Niaga Jkt.Pst).

Malaysia

Nokia is asserting two standard-essential patents (MY-152424-A and MY-151522-A) in the High Court of Malaysia.

Germany

Last year I listed six German Nokia v. Vivo cases: three in Mannheim, two in Munich, and one in Dusseldorf. There was a hearing or trial of the two Munich cases on February 8. The Mannheim court held a Nokia v. Vivo trial on February 7 (case no. 2 O 36/22 over the SEP that won Nokia a Mannheim injunction against OPPO last year and case no. 2 O 65/22 over a patent from the same family). On March 14, a Mannheim trial in case no. 2 O 37/22 will be held.

While Vivo has also made some inroads into markets like Germany, there already is a precedent of a company leaving the German market after some patent injunctions: OPPO. For Vivo it would presumably make even less sense to remain on the German market.

I'll try to find out more about the next steps in Germany, particularly ruling dates.

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Chinese network infrastructure maker Datang sues Samsung over six 4G standard-essential patents in Fuzhou Intermediate People's Court

Today a reader made me aware of new standard-essential patent (SEP) litigation activity in China: Datang Mobile is suing Samsung in the Fuzhou Intermediate People's Court over six 4G/LTE SEPs, seeking a total of approximately 120 million RMB (US$17 million) in damages. I did a short LinkedIn post to ask around whether other readers could contribute additional information.

In a November 2022 post on Sisvel's narrowband-IoT pool, Datang was mentioned as a licensor that builds mobile networks. Datang's DTmobile unit is also an Avanci 4G licensor.

I've been provided with a shareholder report that has the following headline:

中信科移动通信技术股份有限公司

关于子公司提起诉讼的公告

Here's a Google translation of the headline:

CITIC Mobile Communication Technology Co., Ltd.

Announcement of Subsidiary's Litigation

That document is dated February 6, 2023. The patent numbers are redacted (2009XX.1, 2012XX.1, 2011XX.3, 2011XX.X, 2010XX.0, and 2009XX.3). The defendants are described as "Samsung (China) Investment Co., Ltd. and other companies".

While Datang's cellular SEPs are not often mentioned in the Western world (basically just in connection with pools), it is a significant 4G and 5G SEP holder. As a network infrastructure maker, Datang understands the implementer's perspective.

About a month ago, Samsung renewed a patent cross-license agreement with Nokia. Two years ago, Samsung had a short-lived dispute with Ericsson. Samsung's licensing team often manages to avoid litigation.

The damages amount Datang is seeking in the aggregate of those six Chinese cases is almost certainly not what the dispute is really about. Datang holds many more patents, and particularly also plenty of patents outside of China. Furthermore, it has apparently requested an injunction.

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Sony asks top EU court to enforce copyright law against cheat software that changes variables in PlayStation memory, not program code

The last time this blog talked about an IP enforcement case to which Sony was a party was 12 years ago when hundreds of thousands of PlayStations were seized in the Netherlands over a patent infringement allegation by LG Electronics. More recently, Sony has been mentioned as the only vocal complainer over Microsoft's acquisition of Activision Blizzard King (most recent blog post, tweet about latest court filing by Microsoft, Twitter thread flagging errors in GamesIndustry.biz article previously identified by two of my followers, tweet about likely Chinese approval, tweet about European game developers' support, Microsoft's president's latest tweet about Nintendo deal).

Now Sony is the plaintiff in the most interesting software copyright case that has been referred to the European Court of Justice since SAS (decided in 2012). On Thursday, the Bundesgerichtshof (Federal Court of Justice of Germany) announced (in German) its decision to make a request for preliminary ruling--briefly called preliminary reference--to the European Court of Justice (ECJ). Yesterday, Graf von Westphalen--the law firm that represents the defendant, Datel Group--issued a press release as well (in German, too), from which I learned the names of the parties, which the court itself was not allowed to reveal.

In the IP law community, this case will, however, be widely referred to as Sony v. Datel. And the question is whether cheat software--that allows video gamers to make faster progress or unlock features in games through technical manipulation--infringes copyright law.

These are the questions referred to the top EU court (in German, plus my unofficial translation):

1. Wird in den Schutzbereich eines Computerprogramms nach Art. 1 Abs. 1 bis 3 der Richtlinie 2009/24/EG eingegriffen, wenn nicht der Objekt- oder Quellcode eines Computerprogramms oder dessen Vervielfältigung verändert wird, sondern ein gleichzeitig mit dem geschützten Computerprogramm ablaufendes anderes Programm den Inhalt von Variablen verändert, die das geschützte Computerprogramm im Arbeitsspeicher angelegt hat und im Ablauf des Programms verwendet?

2. Liegt eine Umarbeitung im Sinne von Art. 4 Abs. 1 Buchst. b der Richtlinie 2009/24/EG vor, wenn nicht der Objekt- oder Quellcode eines Computerprogramms oder dessen Vervielfältigung verändert wird, sondern ein gleichzeitig mit dem geschützten Computerprogramm ablaufendes anderes Programm den Inhalt von Variablen verändert, die das geschützte Computerprogramm im Arbeitsspeicher angelegt hat und im Ablauf des Programms verwendet?

Unofficial translation by FOSS Patents:

1. Is the object of [copyright] protection of a computer program under Art. 1 (1) to (3) of EU directive 2009/24/EC ["the Software Directive"] encroached if neither the object code nor the source code of a computer program or a copy thereof is altered, but a different computer program running separately with the protected computer program modifies the values of variables stored in memory by the protected computer program and used by it in the execution of the program?

2. Is it an alteration within the meaning of Art. 4 (1) (b) of the Software Directive if [what follows now is the same conditional subclause as in question 1] neither the object code nor the source code of a computer program or a copy thereof is altered, but a different computer program running separately with the protected computer program modifies the values of variables stored in memory by the protected computer program and used by it in the execution of the program?

To understand the technical background of the dispute, it's helpful to look at how long this litigation has been pending: well over a decade. In January 2012, the Hamburg Regional Court sided with Sony, but was overruled in October 2021 by the Hamburg Higher Regional Court. This is an unusually long time almost ten years between the two decisions, and from the publicly available information I cannot deduce the reason for the delay. Anyway, the case was then appealed further (by Sony) to the Federal Court of Justice (case no. I ZR 157/21, caption: Action Replay).

The Wikipedia page about Datel indicates that the company has a long history of making cheat devices and was sued by Sony as early as in the 1990s. I suspect that the case that has now been put before the ECJ involves a product called Lite Blue Tool, which according to Wikipedia "caused a Sony PlayStation Portable (PSP) to enter into Jigkick or Factory programming mode, allowing the execution of the boot code from a removable storage."

It is extremely difficult to execute unauthorized code on today's PlayStations. It's like with the iPhone: one has to "jailbreak" (or "mod") the device.

Those practical hurdles don't render the legal question here irrelevant. Cheat programs that manipulate games are hated by the industry and by honest players.

I don't want to be a hypocrite: I did something similar in the 1980s on Commodore home computers. There was a BASIC command named POKE that made it possible to modify the value stored in memory (POKE address, value). Plenty of cheat codes were known at the time, and for a couple of games I looked into the program code (using what was called a monitor--a program that displays machine language code in a more legible form) to find out where, for instance, the number of lives was stored so I could just increase it from, say, 3 to 255 (maximum value of a byte). And back then it was even done prior to execution (those were single-tasking devices), meaning that what we altered was the copyrighted work that we had downloaded.

While I understand Sony's desire to combat cheating with copyright law, it may not be the best vehicle. It would take DMCA-style legislation (even going beyond the DMCA in my opinion), but the ECJ may just decide to legislate from the bench as it did when it held website operators liable for copyright infringements on third-party websites they link to (good for right holders) or when it declared a programming language unprotectable regardless of the level of creativity (SAS Institute v. World Programming) (bad for right holders).

Copyright has always been a suboptimal--but still pretty useful--means of protecting computer programs. In practice, it's really a mix now of various intellectual property rights that software makers rely on: copyright, patents, trade secrets (particularly in the age of cloud computing), and trademarks.

Copyright is meant to protect creative expression, such as art and literature. The fact that it extends not only to source code (which comes with legible variable and function names) but also to object code (which is derived from source code, but typically stripped of such clearly expressive elements) is a bit of a stretch, but justifiable because it's still the same structure, sequence, and organization as the source code. However, technical functionality--whatever happens at runtime--is the prerogative of patent law. Art. 1 of the EU Software Directive says that it "shall protect computer programs, by copyright, as literary works within the meaning of the Berne Convention for the Protection of Literary and Artistic Works" and "[p]rotection ... shall apply to the expression in any form of a computer program." The directive clearly says:

"Ideas and principles which underlie any element of a computer program, including those which underlie its interfaces, are not protected by copyright under this Directive."

Art. 4 of the EU Software Directive relates to restricted acts, meaning acts for which one has to be the creator or needs a license from the creator. Of the three types of restricted acts, the first (reproduction) and third (distribution) are not at issue. It's the one in the middle that matters:

"(b) the translation, adaptation, arrangement and any other alteration of a computer program and the reproduction of the results thereof, without prejudice to the rights of the person who alters the program;"

The passage that could help Sony here is "any other alteration of a computer program"--though we are talking about an alteration of an in-memory value as opposed to the protected program code, and the final part protects "the rights of the person who alters the program" (which could include the right to just change values stored in memory after you've paid for the device and the software).

If the ECJ focuses on the effect, Sony has a strong case: if, for example, a runner game puts obstacles in the way of a gamer and a cheat program just writes zeroes into the memory section where the data points for those obstacles (type of obstacle and location) are placed, you get the same effect as if you removed the obstacles by altering the program code that displays them, checks for collisions, or penalizes players for hitting them: the obstacles don't appear or at least don't affect the player. But we're talking about runtime technical effects while copyright is about design time and more static than patent law. I believe the appeals court in Hamburg was right when it held that it would have to take something more than just modifying variables in memory to perform a copyright infringement in the sense of an alteration of a copyrighted work itself. But there is no court above the ECJ, and like in the link liability case I mentioned further above, it may again take an expansive view on the scope of copyright protection.

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DOJ seeks sanctions over Google's systematic deletion of chats: more cross-pollination between United States et al. v. Google (D.C.) and In Re Google Play Antitrust Litigation (N.D. Cal.)

In the first of its two (possibly soon to be three) Google antitrust lawsuits, the Department of Justice filed a motion yesterday with the United States District Court for the District of Columbia, requesting that Judge Amit P. Mehta impose spoliation-of-evidence sanctions on Google over its systematic deletion of "history off" Google Chats after 24 hours. The motion proposes an evidentiary hearing over this issue.

This is only the latest example of United States et al. v. Google (in the District of Columbia) and In Re Google Play Antitrust Litigation (Northern District of California) being two highly interdependent cases--with some of the interdependencies being more than just procedural in nature. This blog has talked more about the Google chat preservation issue than any other (at least any other non-paywalled) website because the issue first arose in San Francisco (where the plaintiffs are three dozen state AGs, Epic Games (Fortnite), Match Group (Tinder), and some class-action lawyers). The DOJ motion explicitly refers in its D.C. motion to the California case, where an evidentiary hearing over this same issue was already held last month. The DOJ makes it clear that the developments in California inspired the motion in Washington. For example, two of the headlines speak for themselves:

"After The Epic Sanctions Motion, The United States Raised Concerns Regarding Spoliation In This Case"

"The Subsequent Epic Evidentiary Hearing Reveals Document Destruction"

Here are some previous FOSS Patents post on the Google Chats sanctions process in California (in reversely chronological order):

• 01/28/23: States, Epic Games, Match Group show smoking guns for Google's spoliation of evidence by moving sensitive talks to 'history off' chats: sanctions loom large

• 01/25/23: 36 states, Epic Games, Match Group allege Google had 'culpable state of mind' when auto-deleting relevant Google-internal chat messages: Google obviously denies

• 11/17/22: U.S. states, Epic Games, Match Group, consumers get evidentiary hearing over Google's systematic deletion of company-internal chats: Northern District of California, mid January

• 11/11/22: U.S. states, Epic Games, other plaintiffs reinforce motion for discovery sanctions against Google over systematic deletion of chats

• 10/14/22: 36 U.S. states, Epic Games, and consumer plaintiffs seek sanctions against Google for not preserving any relevant Google Chats: by default, all Google Chats are permanently deleted every 24 hours

There have previously been at least two other overlaps, connections, and interdependencies between those two Google antitrust cases:

• The scheduling of the San Francisco trial over Android app distribution was affected by the Washington D.C. trial, which will start on September 12. The witness lists overlap. In order to avoid scheduling conflicts, Judge James Donato scheduled his Google Play Store trial for November. The plaintiffs in that case remain concerned about the potential impact of the Thanksgiving holiday.

• The D.C. case is about Google's monopoly maintenance in the search engine market, and one aspect of it is that Google is the default search engine on Android devices. When state AGs involved with both of those Google antitrust litigations became aware of Google's dealings with other game makers by virtue of the D.C. case, that information was used in their 2021 California complaint, which then got consolidated with the Epic Games and class-action lawsuits that were already pending for about a year. That was the time when Google's "Project Hug" initiative to dissuade game makers from distributing their games outside the Google Play Store became an issue in the California litigation. By now that story has even given rise to a per se claim by Epic and Match, and we've learned that Google paid $360M to Activision Blizzard King alone (and other significant amounts to approximately 20 other publishers).

Back to the Google Chats discovery dispute: Let me first show you the DOJ's motion and then also the most recent minute order by Judge Donato in San Francisco, which shows that the noose may be tightening quickly around Google's neck now.

United States of America et al. v. Google (case no. 1:20-cv-3010-APM, D.D.C.): Memorandum in Support of the United States' Motion for Sanctions Against Google, LLC And an Evidentiary Hearing to Determine the Appropriate Relief

In my interpretation, the motion suggests that the DOJ has drawn a similar conclusion from watching the sanctions process in California as I did when I said (in one of the posts I linked to further above) that Epic and its co-plaintiffs had presented smoking guns. But the DOJ also had to act now with a view to the September trial date. The motion assures the court that the sanctions process does not require postponing the actual trial, and that makes sense--but they couldn't wait forever.

Last spring, Google came away unscathed in D.C. over another discovery issue: its "Communicate with Care" policy, which in the DOJ's opinion abused the attorney-client privilege. Some reference to "Communicate with Care" is also made in the latest motion, but the case for sanctions is now a lot stronger, and the key difference actually relates to what the consequences should be: if evidence has been destroyed, for which there is an extremely strong case here, the solution can't just be to go over a bunch of emails again and revisit privilege assertions like in the "Communicate with Care" context. There has to be an inference.

The DOJ says "Google’s daily destruction of written records prejudiced the United States by depriving it of a rich source of candid discussions between Google’s executives, including likely trial witnesses." Also: "Google destroyed written records covering nearly four years of employee communications, and those records likely would have been especially probative."

More specifically, the DOJ describes the potential impact of Google's systematic-automatic deletion of chats on the D.C. case by pointing to testimony according to which two Google executives chatted--with "history off"--about "Project Banyan, ... a potential collaboration with Samsung on app stores" that according to the DOJ was "worth hundreds of millions of dollars." That Project Banyan is at issue in both the California case over the Google Play Store and the D.C. case. A footnote of the DOJ's motion notes that "[Google executive] Mr. Rosenberg was shown Project Banyan documents during his deposition in [the D.C.] case."

The sanctions process in San Francisco is already at an advanced stage. It seems to me--and I say this with caution because I didn't attend any of the hearings (and the most interesting parts may have happened behind closed doors anyway)--that Judge Donato in California managed the sanctions process very well with his iterative approach. Step by step he obtained clarifications and asked the parties to make their arguments. Last week he entered the following minute order, which suggests that sanctions indeed loom large:

ORDER. For Google's production of additional chats, see MDL Dkt. Nos. 440, 451, Google must at minimum produce all chats that have been preserved for Custodians 1 through 383 (as identified in Dkt. No. 429-2) that are: (1) responsive to any search term the parties have agreed to in this litigation (as proposed by Google in Dkt. No. 451 at 6), OR (2) responsive to these additional terms: "sensitive," "history off," "history is not off," "history on," "history is on," "off the record," or "on the record."

To be clear, for the latter set of terms, Google may not limit its production to only those chats that discussed "turning history 'on' or 'off' in connection with the topics of this case or in connection with [a] legal hold, investigation, regulatory proceeding, or litigation." Dkt. No. 451 at 8. The responsive chats must be turned over without the additional limitation of being responsive to the search terms in this case or being connected to a legal hold, investigation, regulatory proceeding, or litigation.

Google must complete the production of these chats by February 24, 2023, at 5:00 p.m. California time at the latest. This deadline will not be extended. Google may conduct a responsiveness and/or privilege review only to the extent it can do that and still meet this deadline. To the extent Google decides against a privilege review, including for any subsets of custodians, plaintiffs will agree to a "broad non-waiver agreement allowing the clawback of any privileged material," as they have proposed. Dkt. No. 451 at 4.

Signed by Judge James Donato on 2/15/2023.

That's a rather strict tone. Google's lawyers have been trying for a while now to downplay the issue and to put up smokescreens, but Judge Donato wants the truth to come out--and as far as I can see, he's not asking for too much (such as a manual review of millions of documents).

Finally, a quick follow-up to the substantive issues in the D.C. case (United States et al. v. Google I):

Five days ago I wrote about the DOJ's and the state AGs' opposition briefs to Google's motion for summary judgment (U.S. states liken Google's various anticompetitive actions to octopus tentacles; DOJ says 'Google has bought, not earned, at least 33% of all U.S. searches'. Professor Herbert Hovenkamp commented on that, highlighting the key question, which is that defaults are not ties (defaults can be changed by customers, ties cannot):

The U.S. brief relies heavily on defaults, which are not ties. With a market share >90%, are multiple defaults (Android, Apple, several browsers) unlawful? Google notes defaults can be changed. Should their effect be treated as an empirical question? unlawful as a matter of law? https://t.co/FxzMD46mb8

— Herbert hovenkamp (@Sherman1890) February 19, 2023

Google's argument is that this is not really foreclosure, and if it is, then only to a negligible extent because most users would choose Google anyway. But there is evidence that Bing--Google's only competitor (and now even more so than ever)--gets far more usage where Google is not the default search engine. Shortly after the DOJ's and the state AG's opposition briefs, two amicus curiae briefs were filed. The American Antitrust Institute supports the plaintiffs, but what I find more interesting is the following amicus brief by three behaviorial economists (including one from Munich by the way) about the immense Power of Default:

United States of America et al. v. Google (case no. 1:20-cv-3010-APM, D.D.C.): Brief of Behavioral Economists George Loewenstein, Klaus M. Schmidt, and Paul Heidhues as Amici Curiae in Support of Plaintiffs

There'll be more discussion about the Power of Default--in both of the Google antitrust litigations discussed in this post.

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AliveCor's patent litigation against Apple is on wrong track regardless of President Biden's decision not to veto ITC's hypothetical U.S. import ban--Apple Watch not affected, but antitrust case remains interesting

E-health device maker AliveCor yesterday announced that the company has been informed of the White House not having vetoed a hypothetical U.S. import ban on the Apple Watch. Apple sought a presidential override of the U.S. trade agency's patent infringement ruling on public-interest grounds.

AliveCor is rather unlikely to get leverage over Apple from its patents, but its story makes Apple look bad in other ways as I'll explain further below. At this point, the noise that AliveCor is making about the White House decision looks like it's just an attempt to pressure Apple into some kind of settlement based on the hypothetical possibility of an import ban entering into force further down the road.

The United States International Trade Commission (USITC, or just ITC) has quasi-judicial powers. It can impose what is called a limited exclusion order and amounts to a U.S. import ban on "unfair imports", with the (alleged) unfairness most of the time consisting in (alleged) patent infringements. The Apple Watch is not affected for now, and may never be. The ITC's notice of final determination (PDF) (i.e., summary of final--though appealable--ruling) clearly states the following:

"The enforcement of these orders, including the bond provision, is suspended pending final resolution of the U.S. Patent and Trademark Office, Patent Trial and Appeal Board’s (“PTAB”) Final Written Decisions finding the asserted patent claims unpatentable."

An infringement of an invalid patent is an infringement only in an academic sense, but has no practical implications. There's no liability. And for now, the relevant patent claims are deemed invalid, meaning the United States Patent and Trademark Office (USPTO) itself has concluded that those patents should never have been granted in the first place. The two relevant patents on heart-rate measuring techniques are close related, which is why the prior art references cited by Apple's (thus far successful) validity challenges partly overlap: U.S. Patent No, 10,595,731 on "methods and systems for arrhythmia tracking and scoring" and U.S. Patent No. 10,638,941 on "discordance monitoring".

On December 6, 2022, the same panel of Patent Trial and Appeal Board (PTAB) judges declared either patent invalid (case nos. IPR2021-00971 and IPR2021-00972). There are two prior art references that are key to either decision. One of them is a Patent Cooperation Treaty (PCT) patent application from 2012: WO 2012/140559 A1 on "pulse oximetry measurement triggering ecg measurement" by inventors Ram Shmueli and Nimrod Sandlerman. In the PTAB decisions, that one is briefly referred to as Shmueli. The other is U.S. Patent Application No. 2014/0275840 on a "pathological state detection using dynamically determined body data variability range values" by inventor Ivan Osorio. That one is briefly referred to as Osorio. Most of the PTAB's invalidity holdings are based on combinations of Shmueli and Osorio, potentially with some other prior art.

So what is required before AliveCor will actually gain leverage over Apple?

AliveCor appealed the two PTAB rulings to the Federal Circuit, raising a multitude of questions. While it cannot be ruled out that one or more patent claims might ultimately be deemed valid, the much more likely scenario is that the PTAB is affirmed, either 100% or to an extent that the net effect won't be different from the current situation. And at the same time, Apple can try to get the ITC's infringement decisions overturned.

AliveCor, which even used a Wall Street Journal op-ed to urge President Biden not to veto the ITC ruling, looks a little bit desperate. It may also have a resource problem as the small company is trying to assert its rights against the world's richest corporation, but that David-versus-Goliath situation doesn't make those patents any more valid.

In retrospect, AliveCor should probably have focused on enforcing some European patents in Germany, where obviousness (as opposed to anticipation) arguments often don't dissuade courts from entering an injunction under the country's bifurcation regime (i.e., validity determinations are made in separate proceedings). In the U.S., it is a bit odd that AliveCor first filed lawsuits in the Western District of Texas--a venue that was extremely popular at the time for patent damages claims--in late 2020, and then brought its ITC complaint a few months later. Normally, litigants file ITC complaints and federal companion complaints at the same time.

The history of interactions between AliveCor and Apple is, hoever, interesting. Here are some passages from the ITC complaint:

"35. After AliveCor presented KardiaBand publicly, its founder Dr. Albert was invited to Apple's campus by Dr. Michael O'Reilly, Apple's Vice President of Medical Technology, to present to Apple on KardiaBand. Dr. Albert demonstrated KardiaBand's operation to Apple engineers and Apple's COO, Jeff Williams. Mr. Williams told Dr. Albert that Apple wanted to figure out how to work with AliveCor.

"36. A few months later, Dr. Albert and AliveCor's then-CEO met with Phil Schiller, Apple's SVP of Worldwide Marketing, in order to further demonstrate the KardiaBand product. Unbeknownst to AliveCor, however, Apple was using these meetings to gather information on the operation of KardiaBand. Apple recognized the value in the combination of AliveCor's KardiaBand and SmartRhythm products and wanted to take those ideas as their own and eliminate AliveCor and everyone else as competition.

"37. In fact, after seeing the utility of KardiaBand and SmartRhythm, Apple decided to copy these features and introduce a version of an Apple Watch with its own ECG and AFib analysis and reporting functionality. In late 2018, Apple announced that it was introducing its own ECG app and irregular heart rhythm notification feature as part of an update to the Operating System for the Apple Watch Series 4."

Now, the above sounds like Apple stealing IP--but if AliveCor's patents are invalid, then there was no actual IP, and what Apple did may have been a way of taking advantage of AliveCor's interest in discussing a business relationship, but wasn't illegal.

It's possible that after the initial discussions with AliveCor, Apple performed a check on what IP AliveCor actually owned, and concluded that any issued patents or pending patent applications belonging to AliveCor and relevant to what Apple wanted to do were weak.

But now comes the part that I find more interesting than AliveCor's patent infringement assertions:

"38. After Apple introduced its KardiaBand and SmartRhythm competitor products, it decided to eliminate AliveCor as a competitor. Specifically, with the Apple Watch series 4, Apple updated the watch operating systems from OS4 to OS5. This operating system update included changes to the algorithm the Watch OS used to report heart rates in specific ways that made it impossible for KardiaBand and SmartRhythm (as well as other third party heartrate analysis app providers) [emphasis added] to identify and predict unexpected heartrates and arrhythmias and suggest users record an ECG for confirming potentially [sic] occurrences of AFib.

"39. Ultimately, the changes Apple made to its operating system in OS5 and the introduction of Apple's copycat ECG watches compelled AliveCor to pull the KardiaBand product and SmartRhythm from the market in 2018. [...]"

That, however, is just stated in the complaint to make Apple look bad and not the basis on which AliveCor wanted an ITC exclusion order. AliveCor is, however, pursuing antitrust claims against Apple in the Northern District of California. In an October 2022 post on an antitrust litigation in the same district brought by credit card issuers against Applem I quoted from Judge Jeffrey S. White's March 21, 2022 order that granted in part--but also denied in part--Apple's motion to dismiss AliveCor's original complaint. The most important part was that Judge White held "AliveCor has plausibly alleged an aftermarket for watchOS apps"--i.e., the court may ultimately find that there is a single-brand market under Kodak/Newcal.

Apple filed a motion to dismiss AliveCor's first amended complaint. A hearing that had been postponed to January 27, 2023 was vacated. The court "will issue a written decision on the papers." That case continues to be interesting, but it could be that AliveCor will somehow have to settle because it might otherwise run out of cash. The antitrust case is another potential risk for Apple, but if Epic Games prevails on a single-brand market definition, AliveCor's case is going to be considered a small problem.

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After EU merger hearing, Microsoft announces 10-year deal with Nvidia for GeForce NOW that will also cover Activision's Call of Duty: it's getting lonely around Sony

As expected, Microsoft and Sony met at the European Commission's merger hearing today. Sony even got twice as much time as any other third party to make its case against Microsoft's acquisition of Activision Blizzard King. Shortly before the hearing, I posted a thread of 18 tweets.

The most significant news of the day was neither the hearing (what really matters is what will come out of subsequent remedy discussions) nor Microsoft's announcement (right before the hearing) of the signing of a 10-year Call of Duty license agreement with Nintendo, given that Microsoft and Nintendo had already announced a principal understanding in early December. The most important announcement was made at Microsoft's post-hearing press conference, simultaneously with which Nvidia put out a press release:

Microsoft and NVIDIA Announce Expansive New Gaming Deal

Partnership will bring blockbuster lineup of Xbox games, including 'Minecraft' and Activision titles like 'Call of Duty,' to NVIDIA GeForce NOW cloud gaming service

On Twitter a number of people were wondering how such agreements can be signed before Microsoft formally owns Activision Blizzard. The legally savvy part of this blog's readership obviously knows the answer: condition precedent (a condition that must be met for a contractual commitment to enter into force at all).

This means Sony is left with only one co-complainer: Google. Short of the fruity Evil Empire, that's about the worst ally to have in a context like this--especially in light of Google's $360M "Project Hug" deal with Activision Blizzard King.

Nvidia was not a "complainer-complainer" before: the message was that they were not against the deal per se, but wanted to ensure access to content, which I described as being "opportunistic". That strategy worked out: with the agreement announced today, Nvidia is happy, Microsoft builds momentum for its licensing-based approach, Sony feels lonely, and competition regulators face the choice between

• clearing a transaction that has positive effects for Nintendo's and Nvidia's numerous customers

  and

• trying to block the deal because the undisputed market leader in video game consoles might see its market share "plummet" from, say, 66% to 64%--which is doubtful enough, and at any rate could be avoided by taking a license deal.

What makes the second choice even less appealing is that regulators like the EC and the UK CMA need to turn merger law on its head to write a blocking decision. It's easy to forget this simple fact: if Sony were to lose a little bit of market share, that would--under the law--actually be an argument for, not against the deal.

I understand that unnamed "sources" who may be more or less Sony-aligned tell competition-specialized reporters that licensing wouldn't work reliably. It would be too hard to contractualize the total parity commitment offered by Microsoft and to enforce it later. The problem for Sony and any regulators it seeks to co-opt is this: there would have to be what is called a market test. Market participants would be asked to comment on the effectiveness of a proposed remedy. Sony's answer is predictable. Short of Microsoft offering Sony a majority of the voting rights in Activision Blizzard King, Sony will be against anything. But with respect to Nintendo and Nvidia, there's no more need for a market test: there already is empirical evidence that such sophisticated organizations see their concerns (if they ever had any) satisfactorily addressed by clear-cut, long-term commercial agreements.

Then there's Valve, which publicly stated that Microsoft offered such a deal but they said they didn't take it because they knew they could rely on Microsoft anyway.

Who's more credible? Sony, which simply seeks to exploit its walled garden and to harm a challenger, or the combination of Nintendo, Nvidia, and Valve?

Sony has countless license deals with game makers in place, and without knowing their content we can be sure that there are all sorts of complicated provisions in them, compared to which a parity commitment is easily enforceable.

Here's the most important sentence from Nvidia's press release:

"NVIDIA therefore is offering its full support for regulatory approval of the acquisition."

In other Microsoft-ActivisionBlizzard news, someone must have subpoenaed Valve as counsel for that company entered an appearance in the FTC's in-house litigation. Microsoft and Google are negotiating the scope of the former's discovery request and have agreed on another extension of the filing deadline for a potential motion to quash (now Friday, February 24).

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Avanci Aftermarket pool licenses standard-essential patents (up to 4G) to makers of products such as trackers, toll collection, monitoring systems that are not pre-installed in cars

Five months to the day after I said the Avanci patent pool had licensed "virtually [the] entire automotive industry" to the 4G cellular standard-essential patents (SEPs) of more than 50 licensors, Avanci has announced a "dedicated patent licensing program for the vehicle aftermarket" called Avanci Aftermarket.

It may seem counterintuitive, but the number of devices with cellular connectivity that owners install subsequently to the delivery of their vehicle--such as trackers, toll collection devices, and monitoring systems--is comparable to the number of cars that come with built-in cellular connectivity. Avanci's press release refers to Berg Insight's study on the global vehicle telematics hardware market, according to which there is "an annual market [for aftermarket telematics products] of over 45 million units today, with growth forecast to more than 70 million units in 2026."

The initial group of licensors includes more than 40 patent holders, which is obviously a far wider circle than when the Avanci automotive pool started. While a minority of the contributors to the automotive pool are not on board from Day One, some may join later, as Nokia did before (and may do again). The two largest SEP holders I found on the list are Ericsson and Qualcomm.

There are also some initial licensees: "a company collecting road tolls and a leading provider of intelligent transport systems for the public transport sector." It's always a good sign for a new pool when the first licensees have already signed up by launch time.

The new pool makes licenses available for three types of products defined as "monitoring only, infotainment, and other multi-function products." Monitoring (i.e., fleet tracking such as by car rental companies or large corporations that own many cars) is the most limited application. The pool's website defines such devices as being "only capable of monitoring and/or reporting on the performance, activity, location, usage, driving characteristics, or faults of a vehicle or container but without a user interface for receiving or presenting any information to anyone traveling with or inside the vehicle or container, and without the ability to control the operation of the vehicle or container." The license fee for that is only $3 per unit if the latest supported standard is 3G, and $4 if it's 4G.

For infotainment products (such as aftermarket navigation systems), the license fee is $9 per unit up to 3G, and $15 per unit if 4G is included. That number sounds familiar: it was the Avanci automotive patent pool's 4G rate from its creation until last summer (when Avanci issued a final boarding call to automakers prior to an increase to $20). Aftermarket infotainment products make use of cellular standards in a way that is very similar to built-in connectivity, so I wouldn't be surprised if the license fee for those devices was increased to $20 as well, further down the road.

The pool's website defines infotainment products as "connected devices with the capability to download apps, play audio content or other entertainment, access Internet-enabled content such as traffic or weather conditions, and/or provide network connectivity for a wireless local area network such as a Wi-Fi hot spot."

The royalty rate for "other multi-function products" is in between ($6 up to 3G; $7.50 for 4G). The pool's website explains that this is the broadest category and basically covers anything that is not as feature-rich as infotainment products, but capable of more than monitoring:

"On board units and computers that communicate with other vehicles, ticket machines and ticket printers and other fleet management devices such as taxi dispatch systems, dash-cams, and toll collection devices with user interface for presenting information to the driver fall into this category."

Avanci's press release quotes Marianne Frydenlund, whom many in the wireless patent licensing community already knew in her Nordic Semiconductor years:

"With our experience in creating the one-stop licensing marketplace for connected vehicles, the addition of vehicle aftermarket devices is a natural extension that builds on that success. We are committed to providing efficient licensing solutions for new categories of connected products as the Internet of Things expands."

Mrs. Frydenlund is a renowned expert in IoT licensing as Nordic makes chips that power IoT products and entered into interesting agreements with Nokia as well as Huawei. Wireless aftermarket products for cars fall into certain IoT categories (such as asset trackers, which don't have to transmit large amounts of data, but they have to report their GPS coordinates from time to time).

What made Avanci's automotive SEP pool succeed should also work in favor of this new pool for aftermarket products. Device makers need those licenses, and a one-stop shop provides transactional efficiencies for both licensors and licensees. The rates are consistent with the royalties paid by makers of products that provide similar functionality. I would expect rapid adoption of this pool by aftermarket device makers, knowing that car makers, after some initial reticence, signed up in droves, especially last summer ahead of a royalty hike that would otherwise have applied to their licenses.

IAM previously reported on this announcement (paywalled).

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

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

• FOSS Patents blog:

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

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

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

• Antitrust commentary:

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

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

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

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

• Social media:

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

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

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U.S. states liken Google's various anticompetitive actions to octopus tentacles; DOJ says 'Google has bought, not earned, at least 33% of all U.S. searches'

On Tuesday, Google will--according to MLex--participate in the European Commission's Microsoft-ActivisionBlizzard hearing as a complainer. On Twitter you can find my comments on that (1, 2).

Most of the time, Google is a defendant to competition enforcement actions. The United States Department of Justice and various states filed a second antitrust lawsuit against Google. And a couple of days ago, the public redacted versions of the DOJ's and the plaintiff states' responses to Google's summary judgment motions (see my commentary on those Google motions) became available. Technically, those are two cases consolidated into a single one, with substantial overlap.

I'll publish the new filings further below. First, a few observations and "soundbites":

• The most important legal argument raised in both parts of the case is that the plaintiffs urge Judge Amit P. Mehta of the United States District Court for the District of Columbia to focus on the entirety of Google's allegedly anticompetitive actions as opposed to looking at individual agreements with other parties in isolation.

  That argument comes up many times in either opposition brief, and the plaintiffs refer to the 2001 Microsoft decision that is controlling case law in the D.C. Circuit.

  The opposition brief filed by the Colorado Plaintiffs (dozens of states led by Colorado) is generally more colorful than that of the DOJ, but I don't mean that negatively--just two different styles. The Colorado Plaintiffs then liken Google and its different anticompetitive methods to an octopus and its tentacles:

  "More than a century ago, journalistic cartoons depicted monopolies using separate tentacles to harm competition in different ways while controlled by the single mind of a single octopus. In 1911, the Supreme Court recognized combined competitive harm arising from a monopoly’s “resistless methods,” which included multiple products, places, and forms of conduct. [...] Much has changed in the economy in the last hundred years but not this simple precept: a company that has harmed competition in multiple ways must face responsibility for the full and cumulative effects of all of its anticompetitive conduct, without regard to which tentacle it employs."

  The Colorado Plaintiffs even point the court (via a footnote) to a cartoon from 1899.

• A second legal question is particularly key to the DOJ's filing. Google argues that its various agreements (such as the default-search-engine deals with Apple and Mozilla) had only a negligible foreclosure effect because it was all merits-based and customers would predominantly use Google anyway. The plaintiffs, however, point to case law and literature (such as Areeda-Hovenkamp) according to which the foreclosure effect is measured based on the part of the market that becomes practically incontestable, not on what choices end users would have made anyway.

  Applying that standard and referring to an expert report by Professor Michael Whinston, the DOJ says that "50% of all U.S. searches covered by the challenged terms of Google’s contracts are well protected by the power of defaults," but users who are not affected by the defaults "are rare":

  "33% of all U.S. searches are covered by the challenged terms of Google’s contracts and conducted by users who follow the default, whatever it is. [...] Thus, Google has bought, not earned, at least 33% of all U.S. searches"

• A feedback loop further cements Google's market leadership. The DOJ quotes from Google-internal documents to explain how it works:

  "One can regard each [results page] as a massive multiple-choice test. Each day, we get to ask humanity a billion questions of the form, ‘Which of these 10 documents is most relevant to your query?’"

  "With every query, [Google gives] some knowledge, and get[s] a little back. Then we give some more, and get a little more back. These bits add up. After a few hundred billion rounds, [Google] start[s] lookin’ pretty smart! This isn’t the only way [Google] learn[s], but the most effective."

• Concerning the Power of Default, the DOJ's footnote 18 is interesting:

  "For example, on Windows PCs, where Bing is the leading default, Bing’s market share is more than seven times higher than on Mac PCs, where Google is the default."

Now that the integration of ChatGPT makes Bing so much more interesting than it used to be, the question of whether Google's default-search-engine deals are legal is even more relevant. There's more to say about the DOJ's and the plaintiff states' opposition to Google's summary judgment motions, and The Register reported on Friday that the UK Competition & Markets Authority is looking into a revenue share agreement between Apple and Google for the iOS version of Chrome, but I'll leave that for another day. You can find the two court filings below.

United States et al. v. Google (case no. 1:20-cv-3010-APM, D.D.C.): [DOJ] Plaintiffs' Memorandum in Opposition to Defendant Google's Motion for Summary Judgment

United States et al. v. Google (case no. 1:20-cv-3010-APM, D.D.C.): Plaintiff States' [i.e., Colorado Plaintiffs'] Memorandum in Opposition to Defendant Google LLC's Motion for Summary Judgment

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Patent exhaustion can be triggered by covenant to sue last: Germany's Federal Court of Justice creates legal uncertainty for wireless patent holders such as Qualcomm

The global ramifications for the patent licensing industry are huge:

Patent holders who enter(ed) into agreements with chipset makers and other suppliers while hoping to reserve the enforcement of their rights against downstream customers--particularly for the purpose of collecting royalties from end-product makers--can no longer rely on a covenant to sue last (sometimes also called covenant to exhaust remedies) as a means of sidestepping patent exhaustion.

I'm grateful to German IP litigator Oliver Loeffel ("Löffel" in German) for flagging the following decision to me:

The Bundesgerichtshof (Federal Court of Justice of Germany) today published (PDF) a judgment (dated January 24, 2023) according to which

• a covenant not to sue is, as a matter of law, not capable of circumventing patent exhaustion; and

• a covenant to sue last (which the court refers to as a "covenant to be sued last", a term that I can't find elsewhere and which doesn't make sense to me linguistically) is not, as a matter of law, certain to avoid exhaustion. Instead of focusing on what might theoretically happen (i.e., that there are hypothetical scenarios in which the beneficiary of the covenant to sue last might find itself on the receiving end of an infringement action), it depends on the answer to the following question of fact: whether the beneficiary of the covenant must realistically expect--in the ordinary course of events--to be held liable for infringement.

This may also have implications (in the sense of potentially persuasive authority) for other jurisdictions. With a view to the United States, the first part is merely consistent with TransCore, Quanta, and the spirit of Impression Products, but the second part touches on what would raise a question of first impression in the Supreme Court. So far, patent holders such as Qualcomm were pretty confident that a covenant to sue last would not entail patent exhaustion under U.S. patent law. While persuasive authority from a foreign jurisdiction is normally given limited weight, Germany's Federal Court of Justice actually has a reputation for being patentee-friendly, and its patent-specialized judges regularly meet with the judges of the United States Court of Appeals for the Federal Circuit.

The relevant case numbers are X ZR 123 (Federal Court of Justice), 6 U 104/18 (Karlsruhe Higher Regional Court, appellate opinion of November 25, 2020), and 7 O 165/16 (Mannheim Regional Court, judgment of September 28, 2018). The plaintiff (and appellee, at least in the Federal Court of Justice) is Japan's IP Bridge, the defendant is HTC, and the patent-in-suit is EP2294737 on "control channel signalling for triggering the independent transmission of a channel quality indicator", a patent that has been asserted against various defendants and over which IP Bridge won a famous German patent injunction against Ford last year.

The law firm of Kather Augenstein (which by the way represented Ericsson against Apple last year) published an English translastion of key passages of the Mannheim court's decision (PDF). I have not been able to find the appellate decision, though it has been referenced by IAM (as a key post-Sisvel v. Haier FRAND ruling) and even by this blog (because the Munich I Regional Court applied the Karlsruhe Higher Regional Court's claim construction in the Ford case, though it is not even in the Karlsruhe circuit).

Previously, no one paid much attention to the question of patent exhaustion. But the Federal Court of Justice--after siding with IP Bridge on the question of infringement--has now remanded the case to the Karlsruhe court (Presiding Judge: Andreas Voss ("Voß" in German)) because the patent-in-suit may have been exhausted by a covenant to sue last. As a result, it is now known that HTC--on top of technical defenses and a FRAND defense to injunctive relief--argued that the patent had been exhausted (maybe by IP Bridge, or maybe by Panasonic, which originally obtained this patent) through contracts with two chipset makers whose products were incorporated into the accused products (HTC smartphones).

This is a very special subject, so let me start with why such a thing as a covenant to sue last exists in the first place, and then discuss the holdings of the Federal Court of Justice in this case.

The instrument that is called covenant to sue last (or covenant to exhaust remedies) was borne out of necessity: Qualcomm and other patent holders (primarily wireless standard-essential patent (SEP) holders) have always preferred to license their patents to smartphone makers (and, more recently, automakers) over licensing them to upstream suppliers such as baseband chipset makers. But they'd also like to be able to enter into contractual arrangements with chipmakers so long as those dealings don't trigger patent exhaustion, which would make it impossible to enforce patent rights against the downstream, particularly the end-product maker.

They knew early on that a contractual provision would not be capable of preventing exhaustion when a straightforward license is granted. The concept of patent exhaustion is that patent rights are exhausted with the first sale (if the patent holder makes a product) or the first authorized (licensed) sale. The German decision published today also recalls that fact.

So the first "workaround" that lawyers came up with was to enter into a covenant not to sue instead of granting a license. For some time, there was widespread belief that this would do the trick. But over the years, the U.S. Supreme Court's patent exhaustion caselaw became more expansive. The 2008 decision in Quanta Computer v. LG Electronics clarified that patent exhaustion applies to method claims (as opposed to only product claims). In Impression Products v. Lexmark International, the top U.S. court held that post-sale restrictions may be enforceable under contract law but do nothing to avoid patent exhaustion. It also took an expansive view on whether a foreign first authorized sale will exhaust U.S. patent rights.

Between Quanta and Impression, the Federal Circuit equated, in its TransCore decision, a covenant not to sue to a license for exhaustion purposes, The instrument of a covenant to sue last became popular. This is how it works:

• The beneficiary neither gets a license nor a 100% reliable commitment not to be sued.

• But recovery will be sought from the beneficiary only if it cannot be obtained from the downstream.

Take automotive patent licensing, for example. If Nokia had (which I believe is not and was not the case) entered into a covenant to sue last vis-à-vis the chipmaker, it would only have been able to sue that company after seeking and failing to obtain recovery from Daimler (end-product maker), Continental (tier 1 supplier that makes telematics control units), and whatever tier 2 supplier supplied the Network Access Device (NAD) to Conti.

In the dispute between IP Bridge and HTC, the former succeeded in persuading the appeals court (Karlsruhe Higher Regional Court) that a covenant not to sue would already be sufficient to avoid patent exhaustion and, therefore, a covenant to sue last was even more certain to do the job.

HTC appealed, and the Federal Court of Justice (which is based in Karlsruhe like the court below) reversed and remanded with the following holdings and instructions:

• The Federal Court of Justice said it was not merely an obiter dictum that the Karlsruhe Higher Regional Court said a covenant not to sue would not trigger exhaustion. Instead, it was the bedrock of the lower court's conclusion that a covenant to sue last could not result in patent exhaustion either.

• The Federal Court of Justice says the focus must be on whether the patent holder has authorized the "release into commerce" ("Inverkehrbringen") of products that implement the patented invention. Typically, that will be the case if the patent holder entered into a covenant not to sue, and contractual provisions according to which the patentee reserves its rights against third parties are invalid.

• As a result, the Karlsruhe Higher Regional Court's conclusion that a covenant to sue last does not exhaust patent rights because even a covenant not to sue would not trigger exhaustion has been reversed.

• The Federal Court of Justice then turns to questions that the court below didn't have to reach:

• On remand, the Karlsruhe Higher Regional Court will have to determine whether the patent-in-suit falls under the capture clause of the patentee's relevant contracts with the two chipmakers.

• Patent exhaustion is not ruled out only because the chipmakers don't make phones and the patent claims-in-suit involve technical components that are not found in chips, but only in phones. The Federal Court of Justice acknowledges that patent exhaustion generally applies only to the particular product that was sold on an authorized basis. Exhaustion does not necessarily apply to downstream products that contain that product as one of multiple components. But that may be the net effect if the only meaningful way in which the chipsets in question can be used is to incorporate them into mobile end-user devices. In that case, the patentee's authorization of the sale of such chipsets may amount to tacit consent to the distribution of mobile devices that incorporate those chipsets. What could weigh against that conclusion, however, would be a disclaimer of liability in the agreements between the chipmakers and HTC.

• Even if the relevant agreements were to be interpreted to the effect that the patentee did not consent to the incorporation of those chipsets into mobile phones, the patent could still be exhausted if the technical effects of the patent-in-suit are materially achieved by those chipsets, with all other components of those mobile phones not playing a determinative role.

• Now comes the most important part:

  The Karlsruhe Higher Regional Court will have to determine whether the patentee gave its contractual partners (the chipmakers) an assurance that it would not assert the patent-in-suit against them--and such determination will have to focus on practical as opposed to exclusively theoretical considerations. The first and foremost question will be whether in the ordinarily expected course of events the chipmakers must fear to be sued over an infringement of the patent-in-suit.

In other words, the merely hypothetical possibility of the immediate beneficiary of the covenant to sue last being sued is not enough to avoid exhaustion. If it's rather unlikely that the immediate beneficiary of the covenant ever gets sued, then the covenant to sue last will be treated like a covenant not to sue, which in turn is treated like a license.

How can the chipmaker have a reasonable apprehension of being sued in the ordinary course of events? The normal course of events is that if you hold a patent and sue a device maker (and your infringement allegations have merit), you get paid--unless that device maker goes bankrupt along the way.

The short version is: the Federal Court of Justice does not want to let patent holders circumvent exhaustion through a covenant to sue last, but unless there are special circumstances that suggest otherwise, will treat it like a covenant not to sue, which is treated like a license.

Is this a desirable outcome? This post is already long enough without discussing the policy implications, but I do want to mention one: there may be cases in which chipmakers want peace of mind and where it would be in the public interest to allow patentees to give it to them, but in which patent holders may now tell them that after IP Bridge v. HTC it's too risky for them to enter into a covenant to sue last because they may exhaust their patent rights.

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HARD EVIDENCE: Sony executives flew from London to Seattle in a Falcon 8X on February 6, presumably to negotiate Call of Duty license with Microsoft

[Update]

There has been a lot of discussion on Twitter. I was not first to write about it; I just saw this article by a New York-based academic and entrepreneur.

It's important to distinguish two aspects of this:

1. Did some Sony executives fly from London to Seattle on February 6?

   There can be no reasonable doubt about that part. Some are unconvinced that the airplane in question still belongs to Sony, but no one can point to a different operator.

2. Was the purpose of the trip to negotiate a Call of Duty license with Microsoft?

   That question cannot be answered with certainty until there is either a definitive confirmation or denial. Some have said on Twitter that Sony may have had other reasons than a meeting with Microsoft to fly to Seattle and point to the game development studios Sony owns in that area (Bungie, Valkyrie, Sucker Punch, possibly others). So there is more than one plausible explanation.

[/Update]

This is a follow-up to my previous post on Microsoft-ActivisionBlizzard, Rumor of Sony having visited Microsoft to negotiate Call of Duty license, potentially paving way for clearance of Activision Blizzard purchase.

It is now an established fact that Sony executives flew from London to Seattle on February 6. The most likely explanation for that trip is that after a meeting with the UK Competition & Markets Authority they went to visit Microsoft to discuss the terms of a long-term Call of Duty license.

In that previous post, I originally made a request (which I've meanwhile deleted):

It would be great if someone with experience in tracking private planes--such flight information is publicly accessible--could verify the claim of a Sony corporate jet having visited Seattle last week. If you can confirm based on public information that Sony's visit to Seattle took place last week, please email me [...].

In response to that request, a Twitter user named kjgvad (@g_3_r__) provided me with a couple of hints:

https://t.co/36bIKAtXQf

check Feb 6(London->Seattle->) and Feb 17th(LA->Seattle)? Could this be it? N57SN and N60SN look the two most likely to be ones belonging to Sony.

I [m]ight be wrong however.

I clicked on the link and found out that the airplane with the registration number N57SN indeed flew from London to Seattle on February 6:

So the remaining question was: does that one belong to Sony? The answer is yes:

Flickr user James Ronayne published the above photo, which shows the Dassault Falcon 8X arriving into Luton airport in September 2020--and the Flickr page states that this plane belongs to Sony Corporation (click on the image to enlarge):

Thank you @g_3_r__! This is huge.

As @g_3_r__ also noted on Twitter, it's pretty common for such a plane to be (re-)register under an ownership trust's name. But it was registered under Sony's name, and Sony is the actual operator:

https://t.co/8xMmT8Tkrt pic.twitter.com/ae1KpLAfo6

— kjgvad (@g_3_r__) February 17, 2023

The screenshot says: "Owner / Operator: Sony Aviation"

As Twitter user @bluspacecow pointed out, this is an aircraft trust managed by the Bank of Utah. Also, @bluspacecow said this:

Be sure to explain what an Aircraft Trust is and why millionaires use them. If you google "Bank of Utah Trustee" you come across articles talking about "the Bank of Utah has managed trusts that allow the wealthy to fly the world on private jets"

— Bluspacecow (@bluspacecow) February 17, 2023

Furthermore, @g_3_rr stated a couple of reasons for which this is done:

Usually done for aircraft valuation and license reasons among others

— kjgvad (@g_3_r__) February 17, 2023

Again, here's a link to the previous post on this subject.

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