Access Advance's duplicitous royalty policy pretends to be FRAND but fails to withstand scrutiny: patent pools must not borrow from Ponzi schemes

There's been some talk this week about Access Advance's March 8 announcement of an update to its duplicate royalty policy. And once more, it's a non-solution. It would be a running gag if there weren't actually companies suffering due to pending and threatened infringement actions.

For a recap, the Landgericht Düsseldorf (Dusseldorf Regional Court) entered a landmark set of rulings that resulted in the first finding of un-FRAND-liness of a patent pool's terms. The issue was not the rate (which the Dusseldorf court had blessed before) but double-dipping: defendants like Vestel previously took an MPEG LA license and are therefore already licensed to many patents in the Advance pool (potentially also Samsung's HEVC (H.265) patents), but are now being pressured to take an HEVC Advance license without a reasonable credit or refund mechanism to avoid double-dipping. There have been various cases in which courts relied on pool licenses as comparable agreements, but there had not been a previous case in which a pool's terms raised issues. To add insult to injury, the normally rather patentee-friendly court not only found Vestel's FRAND defense meritorious but also declared that the defendant and counterclaimant was entitled to antitrust damages (of an amount to be determined subsequently). Access Advance now claims to have gone beyond the Dusseldorf court's requirements, but as I'll show further below, they still refuse to do what really needs to be done.

Earlier this year Access Advance, the GE-Philips-Dolby-Mitsubishi entity that is all about generating supra-FRAND income (in the combination of patent royalties and pool management fees) for its four owners, already claimed to have learned its lesson. However, a first attempt to address the Dusseldorf court's concerns had some glaring deficiencies. In February, the Dusseldorf appeals court overturned an anti-antisuit injunction against Xiaomi and mentioned the patentee's FRAND defeat in the lower court. Meanwhile I've found out about a number of Access Advance v. TCL cases pending in Munich.

There we are, and now Access Advance is giving it a third try. While there is a web form to request a copy of the new terms ("Duplicate Royalty Adjustment Amendment"), the policy statement summarizing the terms of that amendment is publicly accessible (though it's not straightforward to navigate there). So let's talk about that one, but first I'm going to edit the headline (click on the image to enlarge):

What makes that policy duplicitous is that unsophisticated observers, or sophisticated ones with a two-second attention span, may look at it and actually be led to believe that Access Advance is heeding the Dusseldorf court's criticsm. In reality, it looks like the economics of the HEVC Advance patent pool simply don't make it a profitable option to treat implementers fairly if they are already licensed to some of the patents in question. That shouldn't be an issue: patent pools have to avoid double-dipping all the time, and if, say, 30% of the patents in a pool (assuming for the sake of the argument that they're all equally valuable) have already been licensed, it's common sense that someone taking a license from that pool shouldn't pay a lot more than 70% of the standard pool rate. But Access Advance apparently can't do that without losing money, in which case the approach in question is broken beyond repair.

Were this a motion-to-dismiss process in the U.S., and had the latest policy been presented as a Second Amended Complaint, a renewed motion to dismiss would tell the court that almost all of the issues previously raised still exist. Blog posts aren't formal proceedings, so I can show you very quickly and easily why they haven't really addressed all of the issues.

Only refers to other pools, not bilateral licenses or exhaustion

This link (a so-called anchor link) takes you directly to the part of my January post on the previous version of that policy. In that one, I wrote:

"The first glaring deficiency is that it talks only about patents that are "also included in the patent list of another patent licensing pool, or joint licensing program," without addressing the scenario in which someone took a direct (bilateral) license, which is not at all uncommon in this industry. Bilateral licenses can result from license agreements or even from patent exhaustion. The Access Advance folks know that, and it must be attributed to bad faith that their Duplicate Royalty Policy fails to address that problem."

Nothing changed in that regard: in order to be eligible for the (questionable) benefits of that policy, a company must be "a licensee of another HEVC patent pool or joint licensing program (e.g., the HEVC patent pool administered by MPEG LA)."

As far as I know, Vestel's FRAND defense and counterclaim were based entirely on a prior MPEG LA license, not on a bilateral license or patent exhaustion. But that doesn't make that the other scenarios wouldn't apply to other companies. In January I wrote "the root cause of the Dusseldorf disaster is deep and structural." If Access Advance was sincere about becoming FRAND-compliant, they wouldn't wait until some future defendant raises a related issue: they'd simply recognize that double-dipping, for whatever reason it would occur, isn't FRAND, period.

On a related note, it's debatable whether it's reasonable for Access Advance to limit the applicability of its policy to scenarios in which an implementer took the other pool license first. This is, again, a non-issue in the Vestel and Xiaomi cases: they signed with MPEG LA first. MPEG LA's HEVC pool is the older one, which means a company can have signed up to MPEG LA before the HEVC Advance pool even existed, but not the other way round. But let's look at it this way: Access Advance has told implementers to go seek a refund from MPEG LA, but that wouldn't even be an option if MPEG LA, too, had formulated a duplicate-royalty policy according to which no adjustments will be made if someone subsequently licenses some of those patents elsewhere. So even if one agreed that it's fair to say that the older pool license takes priority, just like an older patent application beats a younger one in an interference proceeding, Access Advance is now taking a position that is self-serving and self-contradictory at the same time.

Commitment, not merely referral

The previous version of the policy had one weakness that has meanwhile been addressed, but on the bottom line licensees still won't really get a FRAND deal. In January I wrote:

"In a duplicate-license sceario, Access Advance does nothing for licensees other than to 'refer the request to the applicable Licensor(s)' (footnote 3), which falls far short of what the Dusseldorf court wanted, which was legal certainty for licensees."

And I noted that no one needs a policy for a scenario in which a licensor and a licensee agree. If they're on the same page, there is no problem left to be addressed by the pool. All that Access Advance has done is to eliminate that "referral" part. Instead, "Advance commits to deduct the amount of duplicate royalties," but as you'll see, the way they calculate "the amount of duplicate royalties" raises the very same issues as before.

In a nutshell, they do commit to a deduction right away, which would be an improvement over the previous state of affairs if the deduction was FRAND, which it is not.

A commitment to unfairness is the same from the point of view of an implementer seeking a credit or refund as a non-commitment to fairness.

In the next two sections I'll raise the two reasons for which the deduction they commit to falls far short of meeting FRAND criteria.

Access Advance acknowledges that some licensors--presumably including Samsung--receive no royalty payments

In January I already wrote that "Samsung may contribute lots of patents but not actually get much (if any) money out of the pool." That wasn't only about Samsung: there may be others. But Samsung is by far the largest HEVC Advance licensor, and previously was an MPEG LA licensor. It makes sense to focus on that example for practical reasons.

More than one industry source has told me on background that Samsung may not get much--if any--money out of the pool because it may have contributed its patents just to get a cheap license (or the next best thing to a zero-zero cross-license) for its own mobile devices and TV sets. One my intuitively feel that it's simply Samsung's choice to use its patents as a bargaining chip. If they're interested only in their margins as a device maker, that's a legitimate parameter--but companies like Vestel are still entitled to a license to Samsung's patents on FRAND terms.

Samsung has an interesting history with respect to FRAND. The European Commission deemed it a FRAND abuser in its dispute with Apple, though there were extenuating circumstances as it was just retaliation for non-SEP assertions and Apple's royalty demands, whether over rounded-corner design patents or software patents covering only particular implementations of minor features, weren't perfectly reasonable either. In 2014, Samsung withdrew its SEP assertions against Apple, and since then has consistently been advocating the devaluation of SEPs, just like Apple. However, the net effect of Samsung's sweetheart deal with Access Advance raises FRAND question. Even if one gives Samsung the benefit of the doubt (it might not have anticipated what would happen in the Vestel cases), it needs to be concerned in its patent dealings with preserving its consistency because there's a lot more money at stake for Samsung with respect to cellular SEPs than video codec patents.

Why are Samsung's competitors--and even companies that may implement HEVC in market segments in which Samsung has no presence, though Samsung is that big elephant in the room that it's almost impossible not to compete with--potentially harmed?

Assuming that my industry sources are right, Access Advance's new policy still wouldn't entitle those who took an MPEG LA license early on to a deduction with respect to Samsung's patents. There's a conspicuous conditional clause there:

"If a Licensor of Advance's HEVC patent pool would receive a share of royalties from Company under the HEVC Advance Patent Portfolio License Agreement (the 'HEVC Advance PPL') on account of products of Company licensed under such Licensor's patents that are included in both Advance's HEVC Patent Portfolio and the HEVC patent portfolio of another HEVC patent pool or joint licensing program (a 'Dual-Pool Licensor'), Advance commits to deduct [...]" (emphases added)

As Yogi Berra famously said, when you come to a fork in the road, take it. Here, there is a fork in the road because an IF is a condition that can be met, but need not be met. So we have to ask ourselves the question of what scenarios exist in which the IF condition isn't fulfilled. The fact that Access Advance made the actual receipt of royalty payments a condition can only be interpreted as an admission that one or more licensors don't receive a share of the pool's royalty income. Otherwise the wording would have been much simpler and shorter.

Normally it's a given that someone who contributes patents to a pool receives a share of the royalties. Seriously, I've never heard anyone doubt whether, for instance, a company like LG or OPPO gets money from Avanci. The general public doesn't know exactly how much (though the DOJ's Business Review Letter discussed the Avanci model with a view to 5G), but no one would assume that it's zero.

If Samsung got value out of its participation in the pool other than royalty payments, that doesn't mean implementers who previously licensed its patents aren't entitled to a FRAND deduction. Samsung can't just say "sorry, we get no money out of the HEVC pool" (unlike from MPEG LA, a pretty transparent pool). The problem is that GE-Dolby-Philips-Mitsubishi use Samsung's patents to justify the pool rate. They still point everyone to the fact that the Dusseldorf court didn't take issue with the rate--but a rate that appears reasonable for the entire pool may be clearly supra-FRAND when you take out a huge chunk of patents (because of a prior license).

Patent pools must not become Ponzi schemes in the sense that the benefits promised to the first ones to join depend on revenue generated through subsequent transactions with others who will lose money. Here, Access Advance--which, again, is just about maximizing revenues from IPR for GE-Dolby-Philips-Mitsubishi, all of which but Dolby are a shadow of their former selves with respect to video codec innovation--attracted Samsung to the pool with what may be the closest thing to a zero-zero cross-license. But the deal only benefits Access Advance and Samsung if subsequently some other licensees have to pay the very high Advance rate, which they seek to justify, to a large degree, with the strength of Samsung's portfolio. Subsequent licensees must get a FRAND deduction if they've already licensed Samsung's patents through MPEG LA (or a bilateral deal).

A FRAND deduction must be reflective of the overall value derived by a licensor. With a conventional pool, that value is simply a royalty check. But value creation doesn't depend on money changing hands. If a patent pool gave Samsung raw materials in exchange for its contribution, it would still be good and valuable consideration, and a deduction to combat double-dipping would have to be reflective of that type of benefit or it would not be FRAND. Here, the value is that Samsung's own devices got licensed.

Access Advance should tell the world who the licensors that get no money out of the pool are, and what that is so.

Exorbitant pool fees are not reduced

With respect to pool management fees I wrote in January that "[i]n the aggregate of multiple types of fees and charges, Access Advance keeps roughly 40% of the royalty income, which is several times more than MPEG LA's cut according to what people in the industry say about it." Access Advance still declines to reduce those fees in a duplicative-license scenario. Let's resume where we left off further above. After the IF clause I discussed in the previous paragraph, this is what the policy says:

"Advance commits to deduct the amount of duplicate royalties for such Dual-Pool Licensor's patents under the HEVC Advance PPL from invoices sent to Company (i.e., pre-net),(3) thus preventing the Dual-Pool Licensor from receiving duplicate royalties for the Dual-Pool Licensor's patents."

The term "pre-net" is defined in footnote 3:

"Duplicate royalties are that portion of actual net royalty collections apportioned and distributed to Dual-Pool Licensors under Advance’s HEVC patent pool based on products of Company covered by one or more of the Dual-Pool Licensor patents licensed through both Advance’s HEVC patent pool and another HEVC patent pool or joint licensing program, and expressly exclude all fees and other allocations or deductions made by Advance prior to apportionment and distribution of net royalty collections to all Dual-Pool Licensors based on their respective licensed patents." (emphasis added)

So even in scenarios in which implementers already have a license to a substantial part of the portfolio, implementers would still have to pay the same sky-high pool management fees as if they hadn't previously obtained a license to many of the patents in question.

Courts should not be fooled. Competition enforcers might want to take a look should the problem persist, which it probably will because neither Samsung nor GE-Philips-Dolby-Mitsubishi appear prepared to ensure that all implementers are treated fairly.

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TCL facing onslaught from HEVC Advance licensors in Munich: video codec patent enforcement

When it comes to video codecs, Dusseldorf has been the world's leading patent enforcement forum for about a decade. However, Access Advance has lately suffered a major setback there, and it appears that the HEVC Advance pool's answer to the duplicate-royalty problem is still lacking and wanting.

Meanwhile I've done some research on patent infringement actions brought by HEVC Advance licensors against Chinese electronics maker TCL, a frequent defendant to standard-essential patent (SEP) assertions. Those cases were filed with the Munich I Regional Court, where TCL has also been sued by LG Elecronics over a couple of wireless patents, but those cases are stayed until at least the end of next month. The patents-in-suit in those wireless cases (case nos. 7 O 12979/20 and 7 O 12656/20) EP2239905 and EP2086155, both on an "apparatus for transmitting and receiving a signal and method of transmitting and receiving a signal."

A spokeswoman for the Munich court has confirmed the pendency of the following HEVC Advance v. TCL cases:

• 21st Civil Chamber (Presiding Judge: Dr. Georg Werner); hearing dates in September and November

  • Dolby v. TCL, case no. 21 O 4139/21, EP2777270 on a "procedure for coding and decoding of images, apparatus for coding and decoding and corresponding computer programs"

  • Mitsubishi v. TCL, case no. 21 O 4136/21, EP2720468 on a "moving image decoding method"

  • GE v. TCL, case no. 21 O 4140/21, EP2559245 on "video coding using multi-tree sub-divisions of images"

  • ETRI v. TCL, case no. 21 O 4141/21, EP2723078 on an "image decoding apparatus"

  • IP Bridge v. TCL, case no. 21 O 8819/21, EP3288261 on a "moving picture decoding method"

• 44th Civil Chamber (Presiding Judge: Dr. Anne-Kristin Fricke)

  • Philips v. TCL, case no. 44 O 6966/21, EP2950544 on "adaptive coding of the prediction error in hybrid video coding" (hearing date TBD)

In a somewhat related context, Juve Patent reported last year that TCL is typically represented in German patent infringement cases by Dr. Andreas Kramer of Vossius & Partner.

It's a safe assumption that TCL won't be the last company to be sued by HEVC Advance licensors in Munich...

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TCL takes MPEG LA's AVC/H.264 license just before Dusseldorf trials in patent infringement litigation brought by NEC, Panasonic, IP Bridge

Yesterday Ericsson won a key appellate decision against HTC, and today there is good news for some other standard-essential patent (SEP) holders. Today, patent pool firm MPEG LA announced that "TCL Electronics Holdings Limited ('TCL') has become a Licensee to MPEG LA's AVC Patent Portfolio License" and that "all legal disputes related to patent enforcement actions brought by patent holders in MPEG LA’s AVC License against TCL have been resolved." In complaints filed with the Dusseldorf Regional Court and announced by MPEG LA on July 27, 2020, TCL was accused of infringing patents declared essential to the AVC/H.264 (MPEG-4 Part 10) digital video coding standard used in mobile devices, TVs, and other products.

I've been able to find out that the plaintiffs in those German patent infringement cases were NEC, Panasonic, and IP Bridge. The Dusseldorf court would have held trials pretty soon, but TCL folded.

MPEG LA has a track record of victories in Dusseldorf. MPEG LA itself cannot sue, as it does not own those patents, but its contributors do. Very often, if not always, MPEG LA's contributors are represented in court by Krieger Mes's Axel Verhauwen.

TCL appears to have read the writing on the wall. Just this summer, it suffered two defeats in the Dusseldorf appeals court (Oberlandesgericht Düsseldorf, or Dusseldorf Higher Regional Court) in cases involving a Via Licensing pool: as a result of being deemed an unwilling licensee, TCL was enjoined. Those cases involve a different pool, but chances are that TCL realized it had to start settling at least some of its video codec patent cases.

In July, TCL also settled one of the longest-running cellular SEP disputes by taking a license from Ericsson.

TCL gets sued left, right, and center, which also includes Mannheim, where LG obtained an injunction in March. They have to choose their battles wisely, and it apparently wasn't prudent anymore to decline to take a license from MPEG LA.

Finally, it's worth noting that MPEG LA, in the capacity of an amicus curiae, is supporting the Avanci cellular SEP pool firm against automotive supplier Continental's dubious antitrust claims. The United States Court of Appeals for the Fifth Circuit vacated a hearing scheduled for Monday due to Hurricane Ida. A new hearing date is yet to be determined.

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Dusseldorf appeals court narrowly avoids divergent outcomes in Via v. TCL patent cases concerning Sisvel v. Haier FRAND defense, deems TCL unwilling either way

There are two key reasons for which cases with overlapping issues get consolidated in the U.S. (if necessary, this may even involve a venue transfer). The first one is that divergent decisions are highly undesirable. The second is efficiency (for the court and the parties). Not so in Germany, where each patent is litigated separately unless two or more patents are from the same patent family. Inconsistent rulings by German courts are possible for another reason: judges aren't bound by precedent (no stare decisis etc.).

With respect to standard-essential patents (SEPs), there was a period of a few months during which one patent litigation division of the Mannheim Regional Court--the Second Civil Chamber under Presiding Judge Dr. Holger Kircher--applied EU case law (Huawei v. ZTE) differently from the other--the Seventh Civil Chamber under Presiding Judge Dr. Peter Tochtermann. I declared myself in agreement with the latter, but then came the first of two Sisvel v. Haier decisions by the Federal Court of Justice, and Judge Kircher as well as his colleagues in Munich "won."

There still was--and maybe even is--a pocket of resistance to Sisvel v. Haier in Dusseldorf. Judge Dr. Thomas Kuehnen ("Kühnen" in German), who presides over one of two patent-specialized divisions of the Dusseldorf Higher Regional Court (regional appeals court), made no secret of his disagreement with Sisvel v. Haier, and Judge Sabine Klepsch, who presides over one of three patent-specialized divisions of the lower Dusseldorf court, made a preliminary reference to the European Court of Justice in Nokia v. Daimler one part of which effectively called into question the Sisvel v. Haier approach to the FRAND defense. But Nokia and Daimler settled (by now, another car maker has taken taken a vehicle-level license from Nokia, like Daimler but without litigation). The preliminary reference was inevitably withdrawn. And earlier this month, Judge Dr. Daniel Voss ("Voß" in German), who presides over another patent-specialized division of the lower Dusseldorf court, appeared to be speaking on his entire court's behalf when he said at a top-notch Mannheim conference that they wouldn't seek a review of Sisvel v. Haier by the ECJ anymore.

But is there a possibility of the Dusseldorf appeals court at some point challenging Sisvel v. Haier by way of a request for a preliminary ECJ ruling? I'd be extremely surprised if such a preliimnary reference came from the appellate division under Presiding Judge Ulrike Voß ("Voss" in German, and to my knowledge the various "Vosses" in the German patent judiciary are from different families). About Presiding Judge Dr. Kuehnen I'm not so sure. He's always considered himself smarter and more qualified than the patent-specialized division of the Federal Court of Justice. His book on German patent infringement proceedings is cited over and over--it's almost as influential in German patent law as Areeda/Hovenkamp is in U.S. antitrust law.

I may be wrong, but my guess is that Judge Kuehnen will make a preliminary reference if and when the right case along before his retirement in a few years. A set of cases brought by Via Licensing pool contributors against Chinese electronics company TCL (or, more specifically, a TCL subsidiary named TCT), however, would be the wrong vehicle for that purpose because of TCL's dilatory tactics in negotiations with the patent holders.

I already reported on that set of cases two months ago, without knowing the names of the parties. In fact, I had obtained all of my information from a Bardehle Pagenberg article.

Meanwhile, the appeals court has spoken: not in the form an appellate judgment, but TCL's motions to stay the enforcement of Dolby's and Philips's injunctions were denied. That outcome is another victory for Eisenfuhr Speiser's Dr. Tilman Mueller ("Müller" in German), who is an outlier in a purely geographic sense among German patent litigators--he's based in Hamburg--but whose cases sometimes shape the development of German patent case law. The first time I took note of his work was when the Munich I Regional Court referred a question relating to the availability of preliminary injunctions over battle-untested patents to the ECJ.

It's now rather likely that TCL will settle and take a pool license from Via. Therefore, it's doubtful that we'll get to see an appellate opinion in those Via v. TCL cases (just to avoid any misunderstanding, Via Licensing doesn't own those patents, thus can't sue; but Philips and Dolby are Via contributors, so I chose that simplified--albeit slightly imprecise--caption).

That said, the appeals court's decisions denying TCL's motion to stay are interesting, if for no other reason because they show that the Dusseldorf appeals court may be internally divided over Sisvel v. Haier:

• Judge Kuehnen's panel entered its order on July 14, mentioning Sisvel v. Haier (by its official caption, "FRAND-Einwand" ("FRAND affirmative defense")) only once on a total of seven pages (and not in a particularly important context), while Judge Voss's decision, handed down six days later, cites to both Sisvel v. Haier decisions a total of 19 times (spread out over 16 pages).

• Judge Kuehnen chose to duck Sisvel v. Haier: he found TCL to be (not his words, but from what I read between the lines) a typical case of an unwilling licensee even under the pre-Sisvel v. Haier standard, where the hurdle was actually low for a defendant to reach the point where the courts would have analyzed a SEP holder's licensing offer from a FRAND angle. The lower court had made the injunction particularly appeal-proof by determining that TCL was an unwilling licensee under Sisvel v. Haier as well as the standard under the previous application of Huawei v. ZTE by the German courts. For the plaintiffs, that's the strongest basis imaginable: it's like having not only a castle, but also a moat around it.

• Judge Ulrike Voss sort of ducked and embraced Sisvel v. Haier at the same time, which may sound like an impossible combination (like "have your cake and eat it"), but let me tell you how she did it: her panel decided that it cannot possibly have been clearly erroneous for the lower court (Judge Dr. Daniel Voss) to apply Sisvel v. Haier (i.e., Federal Court of Justice case law). In other words, even if one agreed with Judge Kuehnen that Sisvel v. Haier is not a proper application of EU case law, the standard of review for staying an injunction in Germany is that there must be clear reversible error, and following the nation's highest court (with respect to almost every patent case, as it's very rare that any issues reach the Federal Constitutional Court) can't constitute a clear error.

  Without stating on a totally definitive basis that she recognizes Sisvel v. Haier, Judge Voss found that in connection with a motion to stay enforcement, she did not have to reach the question of whether her colleague Judge Kuehnen or the Federal Court of Justice was right. (It would be different situation if TCL kept on holding out and an actual appellate ruling became necessary.)

  On that basis, Judge Voss then rejects a variety of TCL's appellate arguments by citing to the Sisvel v. Haier pair of decisions. One example (of many) is that the Federal Court of Justice had found in Sisvel v. Haier that it's not a get-out-of-jail-free card if a defendant makes a deposit.

The TCL cases didn't force the Dusseldorf appeals court to come clean on Sisvel v. Haier at the motion-to-stay stage, and most likely won't have that effect should there even be full-blown appellate proceedings. But at some point there may be another SEP injunction case that serves as a litmus test: it would have to be a case that clearly has to be decided in defendant's favor under the pre-Sisvel v. Haier standard but similarly clearly must be decided in plaintiff's favor under Sisvel v. Haier I & II. If such a case is assigned to Judge Voss's panel, I guess the decision will be made in accordance with Sisvel v. Haier, though she--while serving on the lower court--made the preliminary reference in Huawei v. ZTE (the only Dusseldorf trial I ever attended). Should a "litmus test" type of case land on Judge Kuehnen's desk, and should he be reasonably confident that the parties won't settle, then a preliminary reference--as maybe his last act of rebellion against the Federal Court of Justice prior to his retirement--is a possibility. How likely it is that such a case is heard by Judge Kuehnen is hard to say. Most SEP holders prefer the Munich and Mannheim courts anyway.

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Flimsy patent exhaustion argument weighs against willingness to take standard-essential patent license, and § 315 still no safe harbor: Mannheim court

German patent prosecution and litigation firm Bardehle Pagenberg published an article last week on a landmark Mannheim FRAND judgment that came down in early March, but the redacted version of which apparently wasn't published until a couple of months later. In that case, LG Electronics won an injunction against TCL over a standard-essential patent (SEP). The redacted judgment doesn't name the parties, but LG issued a press release a week after its first-instance victory.

I strongly recommend the summary and the analysis provided by Bardehle's Professor Tilman Mueller-Stoy and Jan Boesing. After reading the Mannheim ruling, I don't have much to add, but I do wish to address two of the key holdings (one of them is actually just a dictum) because they are so very relevant to aspects of SEP litigation that this blog has addressed and will continue to discuss. Maybe my way of putting it will even encourage some more people to dig deeper by reading the aforementioned article.

Patent exhaustion clause in implementer's counteroffer needs to be timely and stand on solid ground, or will contribute to finding of unwillingness

In some patent--not only but also SEP--cases, patent exhaustion has saved the day for defendants. It's been almost ten years that I attended a French Samsung v. Apple preliminary injunction hearing that resulted in a victory for the iPhone maker because of the exhaustive impact of a license agreement between Qualcomm and Samsung. In that Mannheim case that was decided in March, TCL sought to benefit from a license agreement between LG and the same San Diego chipmaker: Qualcomm. Not all of the accused products in LG v. TCL came with a Qualcomm chip (unlike the particular iPhone model at issue in that French case), but some, and TCL wanted to benefit from patent exhaustion in two ways:

1. TCL's counteroffer excluded Qualcomm-powered devices from the computation of the "release payment" (i.e., back-royalties) that would compensate LG for past infringement.

2. TCL also reserved the right to dispute its obligation to pay license fees on future product sales if and when its SEPs might be exhausted under a Qualcomm-LG agreement.

The way I understand the Mannheim Regional Court's Second Civil Chamber (Presiding Judge: Dr. Holger Kircher), the judges would have considered at least the first part--and possibly even the second part--acceptable if TCL had raised the question of patent exhaustion early in the negotiations and if it had a strong case for exhaustion. However, the court notes that it was a very late stage of the infringement proceedings at which TCL brought this up for the first time, and dilatory tactics are often fatal to a FRAND defense in Germany under the Federal Court of Justice's two Sisvel v. Haier decisions clarifying the application of the European Court of Justice's Huawei v. ZTE guidance. But the court also looked at the clause of the Qualcomm-LG agreement TCL's exhaustion theory was based upon, and found TCL's argument unavailing as a matter of contract law. The ruling also mentions the territorial nature of patent exhaustion.

SEP holders can insist on back-royalties as an indispensable contractual condition. The court was also concerned that TCL might relitigate the exhaustion-related merits in the future by withholding payments.

The ruling doesn't explicitly say that TCL lost the case just because of the shortcomings of the exhaustion-related parts of its counteroffer. It's one of of those multifactorial findings, and TCL did other things that the court deemed to call into question TCL's willingness to take a license on FRAND terms. Also, to be on the safe side, the court also found that LG's offer and negotiating conduct were exemplary (without using that particular term), making TCL look even worse by comparison. Still, my subjective understanding of the decision is that the exhaustion part in and of itself would have been sufficient for TCL to lose the case. Of course, it remains to be seen what the appeals court will say (unless the case gets settled).

Given that the court found TCL's patent exhaustion theory not only belated but also legally deficient, I wouldn't want to jump to conclusions as to what would happen in a case where the patent exhaustion argument is substantially stronger, and made early on, though there still is an argument over whether exhaustion occurred. When products are sold in a different jurisdiction than the one in which they or the relevant components are made, patent exhaustion is rarely a slum dunk for defendants. And a conservative defendant really has to tread carefully in Mannheim now when it comes to exhaustion-related clauses in a proposed license agreement.

§ 315 FRAND licensing offer no safe harbor despite appellate decision

The LG v. TCL decision came down shortly after a ruling by the Karlsruhe Higher Regional Court--to which all Mannheim patent decisions are appealed--that breathed new life into the § 315 safe harbor. § 315 German Civil Code enables contract clauses that leave the determination of an exact amount to a court of law if the parties cannot agree. It's like a placeholer for an actual number, enabling a binding agreement to be concluded even though what is often the single most important question may be left open.

Even the arguably patentee-friendliest judge ever to have served on the Federal Court of Justice of Germany, Professor Peter Meier-Beck, declared himself sympathetic to the § 315 approach to SEP licensing at a Mannheim conference earlier this month.

In LG v. TCL, § 315 came up only in an obiter dictum. That is so because TCL merely brought it up as an analogy when seeking to defend its approach to patent exhaustion against criticism that a licensing offer is unacceptable to the patentee if it leaves open such a fundamental question of exhaustion, which has the potential to give rise to subsequent litigation. TCL apparently told the court that a § 315 offer doesn't totally resolve everything either, but a license agreement comes into being and an injunction may not issue.

Interestingly, the Mannheim court once again rejected the suggestion that a § 315 offer was sufficient. It didn't say that no § 315 offer would ever be acceptable from an implementer in a SEP case, but took a rather negative position.

That would have been inconceivable in a comparable U.S. case. If the Federal Circuit had addressed a question like this in another patent case and had said pretty clearly that a particular type of approach to the royalty amount is FRAND, a court below wouldn't dare to deviate from it. But the U.S. is a common law jurisdiction, while Germany is a civil law jurisdiction ("civil law" meaning in this case that it is in the tradition of the sixth-century Corpus Juris Civilis and the Napeolonic Code Civil).

What the Mannheim court does here is intransigent: it acts as if it had not been overruled (in the form of an order to stay the enforcement of an injunction due to the defendant likely prevailing, as opposed to an actual appellate opinion) over a § 315 clause in Nokia v. Daimler. But it's not a miscarriage of justice or whatever. They can do it, though they will likely be overruled again and again. In LG v. TCL it's just a dictum, so there can't be a formal reversal. Maybe the appeals court will assert its authority again and also issue a dictum. It might also just ignore this part as it's not outcome-determinative.

As a SEP holder I'd definitely be encouraged by that Mannheim LG v. TCL ruling. Nokia probably knew about it already when it decided to bring 11 (eleven!) patent cases against OPPO in Mannheim this month. Nokia is also suing OPPO in Munich and Dusseldorf, but Mannheim is the center of gravity of the German part of that dispute. At least initially.

LG will even more aggressively enforce its patents now, so I guess we'll see LG in action in Mannheim again in no time. And TCL is a frequent defendant to patent infringement complaints. What we won't see too soon, however, is an Ericsson v. TCL case: they've settled their long-running dispute according to Reuters.

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French court may hold ETSI FRAND declarations to be binding contracts to the benefit of third parties: cross-jurisdictional ramifications

Two weeks ago, the Tribunal judiciaire de Paris (TJP), which was known as the Tribunal de Grande Instance (TGI) until the turn of the year, handed down an order in TCL v. Philips & ETSI, a case that has the potential to affect cellular standard-essential patent (SEP) jurisprudence throughout and beyond the rest of Europe. That's because the European Telecommunications Standards Institute (ETSI) is based in Sophia Antipolis in the south of France, and the FRAND licensing pledges made by participants in cellular standard-setting to ETSI must be interpreted under French law wherever on this planet a party invokes an ETSI FRAND declaration by a patent holder.

I don't see a potential impact on how U.S. courts adjudicate cellular SEP licensing disputes as they have consistently recognized third-party beneficiary rights in connection with FRAND licensing pledges. However, on the other end of the spectrum there are those extremely biased German courts that have for many years stopped at pretty much nothing in their quest to favor patent holders over implementers, and as part of that have denied third-party beneficiary rights. Continuing to deny the existence of third-party beneficiary rights in connection with ETSI FRAND pledges will be quite problematic (to say the least) if and when the French court to which all French patent disputes are assigned has provided clarification with respect to a FRAND declaration that indisputably must be interpreted under French law. For implementers of standards it would definitely be a positive to be able to rely not only on antitrust law (abuse of dominant market position) but, additionally, on contract law (as defendants to U.S. SEP cases do all the time).

Once again, China's TCL, a company that expanded from TV sets into other segments of the consumer electronics market (though I can't remember ever having seen any of their products in a store, neither in the U.S. nor in Germany), is party to an important SEP case. A couple of months ago, the Federal Circuit vacated in part, reversed in part and remanded TCL v. Ericsson to the Central District of California. What the Federal Circuit took issue with is that Ericsson was denied a jury trial regarding a release payment (past infringement damages by any other name) for past unlicensed sales.

The dispute between Philips--an aggressive SEP enforcer that miserably failed in the mobile handset business just like Ericsson and Nokia--and TCL didn't originally appear to be remarkable in any way. TCL refused to bow to Philips's royalty demands (as had others before TCL), so Philips sued TCL in the UK for infringement of two select SEPs (in 2018). But then came the French connection: almost exactly a year ago, TCL brought a complaint under contract law against Philips and ETSI in France--ETSI's legal domicile.

The objective is to get Philips to make a FRAND licensing offer to TCL, which would be reviewed or, if Philips fails to make an offer, simply be determined by the French judiciary. ETSI itself does not hold patents, but TCL wants ETSI to make a contribution to the process. That sounds vague (as Philips's attorneys accurately note). It's easy to see why ETSI--or any other standard-setting organization--wouldn't want to be drawn into that kind of dispute.

The decision that came down in Paris earlier this month is basically the equivalent of a U.S. court order denying a motion to dismiss (this post continues below the document):

20-02-06 TJP Order in TCL v... by Florian Mueller on Scribd

Philips wanted to get rid of the French case and instead just have any FRAND licensing matters resolved, to the extent this would obviously be necessary before an injunction could come down, by the England & Wales High Court. But pointing to the fact that the UK case is the earlier-filed one wasn't enough.

What crystallized at this early stage of proceeding is that TCL and Philips have divergent views on the legal significance of the ETSI FRAND licensing pledge signed by the participants in its standards-development processes. Philips described it as merely a precontractual matter, while TCL insisted that it constitutes what is called a "stipulation pour autrui"--a covenant benefitting a third party, i.e., a contract that can be enforced by anyone implementing a standard such as 3G/UMTS or 4G/LTE (thus also by non-ETSI members).

TCL's related prayer for relief is "juger que les déclarations d’essentialité faites par les sociétés PHILIPS à l’ETSI constituent une promesse de concéder une licence à des conditions FRAND aux sociétés membres du groupe TCL, portant sur l’ensemble des brevets des sociétés PHILIPS déclarés essentiels pour les normes UMTS et LTE." My unofficial translation: "declare that the essentiality declarations made by the Philips entities to ETSI constitute a covenant to grant a license on FRAND terms to TCL entities, covering the entire portfolio of patents declared by the Philips entities to be essential to the UMTS and LTE standards"

At this stage, the court has not entered (declaratory) judgment yet. However, it has denied Philips's request for dismissal in its entirety and allowed the case to go forward (with a caveat I'll explain in a moment). It's slightly--but legitimately--speculative to say that the case would probably have been dismissed if Philips had succeeded in persuading the court that TCL didn't have a hard contract case.

I've seen at least one commentary, by a group of three French lawyers, who interpret the order as "the first time that a French court rules that the promise made by the owner of SEPs as per ETSI's IPR Policy governed by French law constitutes a 'stipulation pour autrui'." But my reading of the decision is more conservative. Outside the sections in which the court summarizes the parties' pleadings without stating its own opinion, it mentions the key term "stipulation por autrui" only once (the bottommost paragraph on page 10):

"Si les fondements juridiques des demandes dirigées contre l'ETSI et les sociétés PHILIPS sont différents (les premières sont fondées sur le contrat d’association qui régit les rapports entre l'ETSI et ses membres et les secondes sur la stipulation pour autrui par laquelle les sociétés PHILIPS se sont engagées à consentir des licences à des conditions FRAND issues des règles de fonctionnement de l'ETSI), il ne s'agit pas d'un obstacle à la reconnaissance d'une identité de situation de droit, ainsi que l'a jugé la Cour, ce d'autant moins qu'en l'occurrence les demandes sont toutes expressément soumises à la loi française ainsi que le prévoient les règles de procédure élaborées par l'ETSI." (emphasis added)

The highlighted part means "the covenant to the benefit of a third party by which the Philips Entities have promised to grant licenses on FRAND terms further to ETSI's by-laws." I can see why some would read this as a holding by the court that the relevant passage of the ETSI FRAND declaration (Article 6.1) indeed constitutes a contract to the benefit of a third party. There would be a grammatical argument here: the court could have used "seraient" instead of "sont" in order to distance itself, by means of indirect speech, from TCL's assertion. Imagine "seraient" as being the same as "sont," but with the equivalent of "allegedly" before it. I am sensitive to that grammatical difference because there was a time when I did a whole lot of work on EU policy matters, and when French, Belgian or Luxembourgian politicians gave speeches, the grammatical form indicated whether they stated a fact or merely restated someone else's account. But in this case I'm still hesitant to view this as a judicial conclusion. The reason for my conservative approach is the context. Not only is the wider context an order on a motion to dismiss, but the highlighted passage merely appears in parentheses in a conditional subclause ("Si" = "If").

The order is not a declaratory judgment, but a denial of a motion to dismiss, so it would be a dictum at best. But for the reasons stated above, I believe the context calls into question that the grammatical form alone indicates a judicial holding regarding third-party beneficiary rights.

While Philips's motion to dismiss has failed for the time being, ETSI's still requires further analysis. The court will hold a hearing in June on the question of whether ETSI is properly named as a defendant. Further briefing will be provided by the parties in the meantime.

Now there's a tricky procedural aspect. In order for the French court to find that the French contract case can go forward despite the UK patent infringement case having been filed earlier, there had to be a close connection between the claims against Philips (which is neither a French nor a UK party) and ETSI (a French organization). The court found that ETSI's role in monitoring the implementation of its licensing rules would be sufficiently closely related to Philips's obligation (at least as alleged by TCL) to extend a FRAND license to TCL. Such a close relationship is sufficient to establish French jurisdiction as ETSI is a French defendant. But what if the further proceedings resulted in a holding that there are no justiciable claims here against ETSI?

I can't predict whether French procedures would result in a dismissal of the case against Philips, too, given that suing ETSI was key to TCL's theory for French jurisdiction. But, at a minimum, such a holding would raise the bar for other parties who may bring French contract cases in the future against holders of patents declared essential to ETSI standards.

At this stage, the court has merely found that ETSI may be properly named as a defendant. But the actual decision on whether ETSI remains in the case will be made later this year. And thereafter we may see a declaratory judgment on the ETSI declaration, a prospect that makes this a case worth watching as it has the potential to provide much-needed clarification (which in some less conservative people's eyes it already has!).

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