Some Observations on the Market Reverberations of the Smart Phone Patent Wars

In my first article, I posed the question whether the “Smart Phone Patent Wars” were giving IP rights – and more specifically, patents – a bad rap?  My conclusion was an unfortunate “yes,” with the villains being a handful of companies that willingly contributed patented technologies to various standard setting organizations (SSOs), encouraged their use in a host of consumer electronics, and years later charge the very producers they encouraged to implement these standards with patent infringement.  In my second article, I examined the so-called “Fair, Reasonable and Non-Discriminatory” (FRAND) licensing terms that SSOs require of their participants and concluded the phrase has no clear, widely-accepted definition or standards for determining compliance.  In my third article, I examined the patent policies of four major SSOs and concluded that none offered any clear guidance on what constitutes a FRAND license leading to unnecessary and counterproductive litigation.  In this article – the fourth in a six-part series – I now make a few observations among the flurry of activity as to the market effects of these patent wars.

First, I recently read a blog entry by Mark Cuban – published on the Web’s currently top-ranked blog, the Huffington Post – where he states:

I hate patent laws. I think 99 percent of the time they are anti-competitive, corruptive, impede creativity and innovation … I think the ratio of patent law doing a good job protecting company IP vs it being used purely to negatively impact competitors or to troll for un-earned revenue is probably 1000 to 1, or worse.

Commenting on the Yahoo! Inc. patent infringement lawsuit filed against Facebook in March of 2012, Mr. Cuban concludes his post by stating: “I hope Yahoo[!] is awarded $50 billion dollars. It is the only way that consumers will realize what is at stake with patent law as is.  Then maybe we can get it right and further innovation and competition in this country.”  These statements are from a very influential technology entrepreneur, investor and generally-recognized American business guru.  Thus, it would seem that the continuous negative headlines from the smart phone patent wars are definitely giving patents a bad rap!

Second, the International Trade Commission (ITC) – a U.S. federal agency which is little known outside Washington, D.C. – has become an increasingly popular battleground for patent infringement litigation (and especially the smart phone patent wars).   In 2011, a record number of patent holders filed infringement claims at the ITC.  The agency saw 70 patent lawsuit filings in 2011, up from just 11 in 2000, causing them to plan the construction of a third courtroom to accommodate their increasing caseload.  The agency, despite not being able to award money damages, is becoming a popular battleground because: (1) they can issue exclusion orders enforced by the U.S. Customs Service at the borders which prohibit a competitor from bringing infringing products into the U.S.; and (2) the average turnaround time for a case in 2011 was approximately 14 months (down from 18 months in 2010), whereas a patent owner can wait as long as three years to obtain a federal court judgment.  How has this affected the patent wars?  Well, for example, in June of 2011, Taiwan-based handset maker HTC announced plans to buy S3 Graphics, Inc., a California–based chipmaker, for $300M.  The announcement was largely seen as an attempt by HTC to bolster its patent arsenal for the smart phone patent wars because S3 owned roughly 265 patents.  (This is about $1.1M per patent versus Google’s roughly $510K per patent in its August 2011 acquisition of Motorola Mobility.)  In November of 2011, however, S3 lost its ITC case against Apple.  S3 had contended that Apple’s iPhone® handset infringed four of its patents.   Shortly after the loss, HTC announced it was considering canceling the acquisition in light of the ruling.  In fact,  HTC has to date not consummated the deal!

Third, as the smart phone patent wars’ headlines have been filled with company names such as Google, Microsoft, Apple, HTC and Samsung, one large company about to undertake an IPO is not about to be left out – Facebook!  That is, last month, it was reported that Facebook is planning to launch its own-branded smart phone.  Much like Google partnered with Samsung to develop its own-branded smart phone, Facebook has reportedly joined forces with HTC to develop its Andriod™ operating system-based smart phone.  Thus, with another corporate giant flush with cash entering the smart phone market, one would reasonably predict an escalation in the smart phone patent wars.  In fact, just last week, it was reported that Microsoft – which, in 2007, purchased a 1.6% stake in Facebook for approximately $240M – was attempting to convince Facebook to use the Windows® Phone mobile operating system (rather than the Andriod™ operating system whose development is led by Google).

Fourth, in an example of how the world’s technology giants are bolstering their patent portfolios for offensive and defensive litigation purposes, Microsoft was reported to have purchased over 925 patents from AOL on April 9, 2012, for over $1B.   Then, just two weeks later, Microsoft sold 650 of the 925 patents (along with a license to the remaining 275) to Facebook for $550M.  Microsoft’s General Counsel characterized the two transactions as allowing the company to “to recoup over half of our costs while achieving our goals from the AOL [purchase].”  Facebook’s general counsel, meanwhile, labeled the transactions as a “significant step in our ongoing process of building an intellectual property portfolio to protect Facebook’s interests over the long term.”  In response to the Microsoft-Facebook deal, Yahoo! – which, as mentioned above, filed a patent infringement suit against Facebook in March of 2012 – not surprisingly stated: “Companies who purchase patents are often working from a position of weakness and take these actions to strengthen their portfolio. We see today’s announcement as a validation of our case against Facebook.”

Fifth, as the smart phone patent wars between Microsoft and Motorola/Google related to the ITU H.264 video coding standard rage on (as reported in my previous article), Microsoft shockingly announced on April 2, 2012, that they would move their European distribution center from Germany to the Netherlands.  The move was in anticipation of a German court-ordered distribution ban in a suit brought by Motorola.  Germany, in recent months, has become a major battleground in the global patent wars due to the fact that Germany is Europe’s largest economy, and its courts are seen as patent-holder friendly courts that deal with cases quickly and cheaply.  That is, unlike US, UK and other countries’ courts, German courts readily issue preliminary injunctions without considering patent validity.   As it turns out, Microsoft’s move was justified when, on May 2, 2012, the Mannheim Regional Court issued an injunction against Microsoft banning them from distributing the Windows® 7 operating system, Windows® Media Player software, the Internet Explorer® browser and the Xbox 360® gaming console in Europe’s biggest economy.  As of now, the injunction has not been enforced by Motorola as Microsoft appeals (both in Germany and through the FRAND breach of contract suit in Seattle federal district court).

Sixth, in a sign of new battles to come, and on the same day as the Microsoft injunction issued, Nokia announced that it had filed patent infringement claims against HTC, RIM and Viewsonic in Germany and the U.S., alleging the companies infringed 45 of its patents.  The patents cover smart phone technologies involving power management, multimode radios, application stores, multi-tasking navigation, conversational message display and data encryption.

Seventh, on April 3, 2012, the EU antitrust authority launched two investigations of Motorola Mobility over concerns the company had abused its FRAND commitments made to SSO’s involving the 2G and 3G telecommunications system, H.264 video compression, and wireless local area network (WLAN) standards.  The investigations are a result of a February 22, 2012, Microsoft formal competition law complaint alleging that Motorola “has refused to make its [essential] patents available at anything remotely close to a [FRAND] price” and “attempting to block sales of Windows PCs, our Xbox game console and other products.”  The announcement of the investigations stated:

The European Commission has opened two formal antitrust investigations against Motorola Mobility Inc. The Commission will assess whether Motorola has abusively, and in contravention of commitments it gave to standard setting organisations, used certain of its standard essential patents to distort competition in the Internal Market in breach of EU antitrust rules. …

Following complaints by Apple and Microsoft, the Commission will investigate, in particular, whether by seeking and enforcing injunctions against Apple’s and Microsoft’s flagship products such as iPhone, iPad, Windows and Xbox on the basis of patents it had declared essential to produce standard-compliant products, Motorola has failed to honour its irrevocable commitments made to standard setting organisations. In these commitments, Motorola engaged to license those standard-essential patents on fair, reasonable and non-discriminatory (FRAND) terms.

Put in statutory terms, the EU antitrust authority will examine whether Motorola’s behavior amounts to an abuse of a dominant market position prohibited by Article 102 of the Treaty on the Functioning of the EU (TFEU) which states, in relevant part:

Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.  Such abuse may, in particular, consist in: directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; … [or] applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.

Article 102 of the TFEU is similar to Section 2 of the U.S. Sherman Antitrust Act (“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony”).  It has been recognized that intentional false promises to SSOs to license essential patents under FRAND terms gives rise to actionable claims under Section 2 of the Sherman Act.  Such claims may be made by the federal government (i.e., the DOJ or FTC), private litigants or state attorneys general.

Given these market reverberations, it would seem that FRAND determination clarity is sorely needed – one other than “I know it when I see it.”  Absent such clarity from SSOs, the courts and/or regulators, private lawsuits and after-the-fact federal/state regulatory enforcement actions will continue to be needed to deter anticompetitive essential patent-based market actions.   This is simply a shame.  After all, wouldn’t consumers benefit more if these technology companies actually focused on producing (new) technology?  Without a course correction, many will think like Mr. Cuban who cynically stated:  “This is what patents are for, right?  To protect companies with original IP from smarter, faster, aggressive companies who catch the imagination of consumers and advertisers.  What else could patents be for?”

Future articles (as this is the fourth in a six-part series) will explore other solutions, the status of the global smart phone patent wars, RAND patent licensing schemes, SSOs and their affects on the IP ecosystem.


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2 comments so far.

  • [Avatar for patent litigation]
    patent litigation
    June 8, 2012 02:32 am

    Thank you for this informative article. I had not previously known the details about all of these recent developments in the mobile patent wars.

  • [Avatar for step back]
    step back
    May 31, 2012 05:27 am

    To be fair and consistent ….
    Mr. Cuban should declare: ….

    ‘Not only do I hate the Patent System, I hate ALL Winner-Takes-The-Gold Races’

    Why should the first to cross the completion line get it all?
    Let the second runner up have some too.
    Let the free-riders have some too.
    Property is there to be shared among all comrades, be they fair or foul.

    BTW, Open House at my mansion this weekend. Come and take what you want.’