Amounts committed, or who wanted it most?

 * reported in Business Insider on 21st July to have been $2.6bn–not totally material in the context of what follows–what’s $500mn between friends?

As a proportion of cash reserves, or who needed it most though, the story is quite different. We accept that this is a highly rudimentary analysis but telling nonetheless:

We can only idly speculate about the others in the auction. Huawei seemingly joined up with RPX (odd combo though RPX’s larger members are listed above). Nothing much known or reported about ZTE, Qualcomm, IV and others. We’ll have to hack a few phones (joke I promise) or keep our noses close to the ground to find out.

In summary, Google, in terms of gross cash, probably wanted it most badly but couldn’t find enough friends to play with. Apple wanted it second most but allied even with old foes to be able to win.

Intel and RIM were prepared to commit the largest proportion of their cash reserves to win it suggesting that both needed it most.

Intel ended up choosing what looked like the wrong partner, but when viewed against the ability to negotiate the IP rights it needed in a consortium of what would have been seven, probably took the right decision to partner with Google.

RIM is a standout for us. With a meagre (relatively) $2.9 bn of cash reserves and a rapidly declining market share and (so they say) future, this is a staggering amount of money to commit. RIM really really needed it, and we wonder whether this would have been authorised but for a rather rapid ROI in the form of relief from license out-payments.

And, equally interestingly, who do we think is most affected by having to renegotiate its cross license agreements? We believe that Nokia and Qualcomm should be expecting knocks on the door in the coming weeks from Apple and RIM seeking to renegotiate their current cross license terms. Nokia is likely the largest loser unless and until it can benefit from a license to the Nortel portfolio from, most likely being acquired by, new best friend Microsoft.

In short, lots and lots of behind the scenes dynamics, both direct and indirect.

Winners

Company  & Executive Summary of Auction Performance	Benefits
A very smart move. Played the auction very cleverly. Was not willing to bid as much as Google on its own but won by finding friends and foes with similar motivations or maybe a common motivation to stop Google winning.Is there any truth in the rumour that Bill Gates personally holds a large share in Apple?	A bigger and more influential seat at the Standards tables.The opportunity to renegotiate its current cross license deals with (probably and immediately) Nokia and others.The opportunity to redefine the way that Standards bodies operate. Less cartel, more collaborative.The opportunity to increase its cash pile, should it desire by seeking out its own license deals for the Nortel portfolio, to the extent that it is currently unlicensed.
Another very smart IP move by MSFT. Knows that product revenues alone will likely not maintain its market position. Has made the shift to high margin IP contribution inside a technology generation by hiring some of the best IP minds.	Its first seat at the Standards tables.The hedge of knowing that whichever way the markets go, it will be a net IP winner. From all product revenues to partly and growing IP revenues, MSFT will be a net winner. It has learned very very fast.The ability, unless constrained by the private agreements, to sub-license to its mates, including new friend and M&A target Nokia.
Under extreme product pressure and risks becoming another Psion, loved by a few but not loved enough by the masses. We believe that its primary motivation was financial and immediate, to relieve some of the out-payments it makes under cross licenses.	An immediate ROI in terms of its ability to renegotiate several of its cross license deals.We also believe an increased seat and influence on the Standards bodies.
Seems to have got what it wanted. We would be surprised if Ericsson didn’t get a defensive license to the Nortel portfolio through its acquisition of the Nortel business units. If so, this was strategic and value-adding	A larger seat at the 3G, 4G and LTE Standards tables. Moving it away from the over-dependence on the now becoming legacy 2G essential patents.
Seems to have been a combination of IP strategic and product strategic. IP strategic like its investment in Intertrust with Philips. Product strategic as known to be due to release a folding tablet device, its first 3 &4G enabled tablet, in Q1 of 2012.	Product defence from being subject to new cross licenses when its folding tablet comes out.IP strategic in giving it a first time seat at the Standards tables.
With EMC, we can only take the reports on faith that EMC has acquired a part of the Nortel portfolio dedicated to data storage. Not a known IP aggressor but has committed a sizeable amount of cash to being part of the victory parade. More to follow.	Really not known.

For intrigue, we also wondered if the consortium has thought about how it will use its new and respective Standards seats collectively? Or indeed if this is allowed?

And the losers?

Company  & Executive Summary of Auction Performance	Benefits lost
Could not find enough friends. Wanted it badly, probably the most, but its terms of joining together were either unattractive or it is not trusted enough.	Once in a business cycle lifetime opportunity to join the IP grown ups by acquiring a portfolio. We do wonder though whether, doing the maths, Google simply maxed out the benefits it could see from the portfolio and carried out a simple cost-benefit analysis to calculate that it simply wasn’t worth it. Does anyone know by the way if Google indemnifies Android adopters against IP risk in using the platform as part of the license terms? We doubt it but it is fascinating to know.
Not enough of a cash heavyweight to win solo despite really wanting it, and probably really needing it as the world migrates from Intel chip-enabled devices such as PCs. Not able to negotiate what it really needed with the Rockstar consortium so took its chances with Google. A credible effort and well played.	Taking Eduardo Sanchez on faith, really wanted it and probably really needed it. But not weighty enough to get it.
The Chinese didn’t appear to take this opportunity seriously enough. Huawei and RPX appear to have combined but Huawei should have combined with ZTE and the Chinese government to bid.	An opportunity lost. Will now find RIM, Ericsson and even Apple knocking on their doors to negotiate old or new licenses. Should have bid seriously. Maybe did but the truth is yet to come out.
A loser despite not even being a player in the auction. Does this add even greater motivation to find itself a new home within MSFT?	Either immediately or over time will be the recipient of calls and approaches to renegotiate license deals.

Of the patent aggregation funds, we don’t see RPX as either a winner or loser. It played and played seriously enough but its members had larger strategic interests than in backing a co-bid via RPX.

And, finally, what of IV? Strangely mute throughout. Is this heavyweight losing its sparkle?  A rare opportunity to bid for Standards essential patents seems to have gone begging without a thought or even a bid. Very odd.

To reiterate a question, one I’ll post on Twitter too:

Does anyone know by the way if Google indemnifies Android adopters against IP risk in using the platform as part of the license terms? We doubt it but it is fascinating to know.

The Dutch Court in the Hague explicitly rejected this defence and noted that its decision was different to that drawn by the German Federal High Court. The Dutch Court noted that there was no concept of “compulsory licence under cartel law”. Dutch law (like German law) has a specific provision in its patent code for the granting of compulsory licences. Such licences only come into effect when they have been granted by a court. The Dutch Court states that this is reasonable as nobody would otherwise understand the conditions under which the licence had not been granted.

There’s an implicit criticism of the defendant in the case that it had apparently never attempted earlier to take a licence to the technology from Philips. The Court clearly stated the defendant should have attempted earlier (on starting sale of the goods or becoming aware of the need) to obtain a licence under FRAND conditions and, if this attempt had not been successfuly, the defendant could have asked for a compulsory licence to be granted. The Court points out that at least a preliminary licence could have been granted in summary proceedings.

The decision highlights two issues of European Patent Law.

Firstly the need for a uniform patent litigation system to harmonise the decisions of the different national courts. The different decisions in the German and Dutch courts are based on different legal traditions and codes of civil procedure (and contractual law). The Dutch have traditionally granted complusory licences more readily than the German courts and so it’s not surprising that the Court in the Hague suggested this route, whereas the German Federal High Court suggested an alternative option.

Secondly the need for clarity under which licenses to patents required to implement standards can be granted. Most Standards Setting Orgnisations have a clear policy on intellectual property – licences will be granted on Fair Reasonable and Non-Discriminatory (FRAND) conditions. There are, however, difference on how to interpret these conditions – there’s little or no case law to enable a market entrant to assess its risks and It’s clearly impractical in a single European market to have to go to multiple courts to obtain compulsory licences (as the Dutch want) or post multiple bonds (as suggested in Germany).

The case has also been discussed on the EPLawblog here

Technorati Tags:
CD-R, Patent licence, Standards, Orange Book, Philips

Web standards are set up by the World Wide Web Consortium. Their website states that Apple have apparently noted that this patent applies to the Widets 1.0 specification and have exluded all claims from the royalty-free license commitment of the W3C Patent Policy. The W3C is now asking for prior art to be submitted for review by the patent advisory group for the Widgets
specification.

Clearly the W3C group is taking this issue very seriously and its call for prior art to be submitted in an effort to at least potentially invalidate the patent is the first time known to this author that such a procedure has been valid. The patent policy of W3C is, however, different than that of many other standard-making organisations. The patent policy states clearly that any licence may not be conditionable on payment of royalties, fees or other consideration (see section 5 No 3 of the patent policy). Most standard-making bodies seem to state that it is adequate to be prepared to grant licences on FRAND (fair, reasonable and non-discriminatory) terms.

So what will be the outcome? At least a highly interesting discussion – and wouldn’t we all like to be a fly on the proverbial wall during those discussions. Potentially the patent could be declared invalid – if somebody files a request for re-examination at the US Patent Office. It is also possible that companies may choose to license the patent from Apple directly (if Apple is willing to license). In the extreme, the attempts to standardise the widget updating process may fail – since W3C may chose not to adopt any standard at all, rather than a standard which requires a license.

Potentially, of course, the Europeans (or Japanese or Chinese) don’t need to worry – Apple do not seem to have filed the patent outside of the US. However, the moment those updating bytes fly into US territory they could be served with an injunction by nasty Apple bug.

The German Federal Court faced the issue recently in a case (KZR 39/06 of 6 May 2009) concerning CD-Rs. CD technology was developed many years ago jointly by the Dutch company Philips and Sony. The technical parameters were laid out in several different documents with various colours on the cover, including for CD-Rs in the so-called Orange Book. Philips and Sony agreed to license the IP (patents) on which their technology was based. Neither Sony nor Philips were interested in exclusive exploitation; their aim was to have CDs adopted widely. In this they clearly succeeded.

Image credit: CC-BY-SA Bobbiemac on Flickr

There are, however, a number of producers or blank CD-Rs who have made no effort to obtain a licence and Philips, at least, has regularly pursued such manufacturers in the courts and through the customs authorities. One company defended itself to the hilt and maintained that its products did not infringe the claim and, if they did, then it was entitled to a compulsory licence since Philips’ behaviour amounted to an abuse of its dominant position (in the CD-R market). This defence – sometimes called the Euro-Defence – is founded in Art 82 of the European Treaty that prohibits anti-competitive practices.

The German Federal Court in the end decided that the patent was indeed infringed and also that the defence of anti-competitive behaviour did not apply. In doing so they made a number of interesting observations, which will be relevant in future, cases.

Firstly the Court clearly accepted that there was a potential defence and therefore supported the arguments of some lower courts in Germany. The Court rejected an argument that the provisions of the Agreement on Trade Related Aspects of Intellectual Property (TRIPS) on compulsory licences prohibited the raising of the defence. The Court clearly noted that the safeguards foreseen by TRIPS to prevent the arbitrary grant of compulsory license were clearly upheld here – the Court was not making an administrative decision but a judicial ruling that could be challenged in an appeal.

The Court emphasised, however, that for the defence to apply two conditions had to be fulfilled. The first condition was that the potential licensee had to approach the licensor for a licence and make an unconditional offer. Secondly the potential licensee had to behave as if it were paying the licence fee. This would mean, for example, that the potential licence would have to pay a reasonable fee into a trustee account and renounce its right for return of the funds. Interesting the Court did not seem to think that merely making provision for possible payment of the licence fees in the company accounts was sufficient – it was necessary to actually deposit the money in an account.

The Court emphasised that the offer had to be unconditional and reasonable. It had to be an offer that the patent holder could not otherwise refuse without discriminating against the potential licensee. In the case in hand the manufacturer of CD-Rs had indeed made an offer, but it was conditional on a Court holding that the products did in fact infringe the patent. This was not sufficient to be able to assert the defence.

Interestingly the Court made little comment about whether the patent in question was an essential part of the standard or not. The decision of the lower court was accepted that the patent in question would need to be worked by anybody producing CD-Rs in accordance with the Orange-Book standard. Nor did the Court go into any detail about the submissions concerning the alleged lack of enforcement by the patent holder. The Court noted that these allegations were not relevant to the case in question, since the defendant could not assert the defence for other reasons. It remains to be seen whether these facts could be used against the patent holder in future.

So what does this mean in practice? The decision is, of course, a decision by a German court based in part on German law and is therefore only directly relevant to Germany. However, the discussion of the effects of Art 82 of the EU Treaty will be at least of interest to other courts in the European Union. Clearly the Court is saying to users of standards that if you want to use intellectual property associated with a standard, you must make an attempt to obtain a license. Only if you are offered unreasonable terms can you assert the defence. It is probably also advisable to pay the money into an escrow account, rather than merely building accruals in the company’s books.

Case Reference: KZR 39/06 of 6 May 2009; Appeal on a point of law from a decision of the Upper District Court of Karlsruhe.

Image credit with links: CC-BY-SA bobbigmac and available on Flickr.

One of the issues that we deal with on a regular basis is the interrelationship between technical standards and Intellectual Property.

The degree of misconception is immense. Some companies (erroneously) think that by contributing to the standard developments activities they cannot file patents. Other companies file numerous patents (or at least provisional patents) on ideas before they contribute to the standards development – and hope that these ideas are incorporated into the standards. Whilst most standards development bodies require disclosure about relevant (or essential) patents, there seem to be few sanctions available against companies that do not provide full disclosure. Other companies go too far – and declare far too many patents or applications to be essential to the implementation of the standard. And patents can still be held by companies which have played no part in the development process.

The European Commission has been studying the problem and the European Competitiveness Council discussed the matter on 25 September 2008 and issued a number of conclusions (PDF).

Conclusion 17 reads that the Council…

recognises that both standards and patents are innovation dissemination tools and supports the carrying out of a study by the European Commission to analyse the interplay between the two.

The European Commission then organised a conference on 19 November in Brussels on the matter: IPR in ICT standardisation workshop 2008. This website is an absolute mine of information on the latest thinking from a number of players in the standardisation field.

It is difficult to see where this will lead: Clearly standardisation is important to improve competitiveness. However, different standards are applied to different markets. Is it possible to develop a single “overall” policy – or would it be better to discuss best practices?