The Patent Litigation Money Pit

Patent litigation, the Sport of Kings, does not come cheap, especially when the litigation transmogrifies into a multi-jurisdictional slugfest.  When managing a global patent fight, it is important to keep the big picture in mind and understand when continued fighting makes sense and when it does not.  One rough and ready tool is to compare the ratio between the current royalty demands and the anticipated litigation costs in one’s case to other historical litigations.  Comparing such ratios can help one understand whether return on investment in the litigation makes sense in terms of hoped-for royalty savings.  Such information can inform the parties when it makes sense to settle.

 

Sometimes, however, global patent wars are not (just or even primarily) about lowering costs.  Rather, they are a result of fights between contractually intertwined parties (e.g. suppliers and manufacturers) over which one of them will have to pay the royalty cost. These kinds of fights typically occur when established patent rights encounter new industries with overlapping, potential licensees who have not determined amongst themselves which of the potential licensees should be responsible for the royalties.  These disputes are particularly challenging for licensors since resolution is not merely a question of royalty amounts (something under the licensors’ direct control) but also a function of power dynamics between the potential, overlapping licensees (something over which the licensors have no control).  This seems to be what is occurring in Daimler and Continental’s continued fight with Avanci and members of its patent pool.

Despite the US Department of Justice’s positive business review letter of Avanci’s 5G program that talks favorably about Avanci’s general approach to licensing, and Avanci’s simple and straightforward tiered pricing (2G eCall only at $3USD/vehicle; 2G & 3G w/eCall at $9USD/vehicle; 2G, 3G & 4G at $15USD/vehicle) Daimler and Continental seem determined to burn their money in litigation.  This contrasts with the approach of Audi, BMW, Porsche, Volvo, VW and others who have taken an Avanci license.  In light of the high praise given to Avanci’s platform by leading economists it seems clear that the absolute value of the royalty demand is not what is truly driving Daimler and Continental to continue the twenty-something litigations with complex anti-anti-antisuit injunctions with Avanci and its pool members.  The fight continues because neither Daimler nor Continental seems to have reserved or prepared (contractually or otherwise) to pay royalties and both acknowledge that royalties must be paid, yet neither Continental nor Daimler wants to be the party that pays.  How else to explain Continental’s rejection of Nokia’s component level license offer?

A simple way to tell that something other than just money is afoot in the Daimler litigations is by comparing royalty to litigation ratio in that suit to the one in a similar dust-up, like the Nokia/Apple litigations of 2010-11. Using the analysis described in the Annex, we determine that Apple’s litigation costs were approximately €46.75MEUR and the royalties paid (which is, by definition, less than the royalties demanded) were roughly €1.150BEUR, making Apple’s ratio of royalty to litigation risk 24.6 (1150/46.75).

For Daimler and Continental, we estimate that they face a potential of €65MEUR in litigation costs and at least €20MEUR in adverse counsel fee risk and a total license demand of €205MEUR.  However, to properly compare the Daimler to Continental litigation to the Nokia litigations one must account for the fact that Nokia only accounts for one of the forty one licensors in the Avanci platform, who, in turn, account for close to  two thirds  of the declared LTE essential patent landscape.  More importantly, Avanci’s platform includes the three other major net SEP licensors: Qualcomm, Ericsson, and InterDigital.  A license with Avanci, thus, is worth far more in terms of sheer licensed SEPs than a direct license with Nokia would be. Additionally, based on their announced multimode 4G rates, a direct license with Nokia represents only some 22% of the total royalties between these four companies. Thus, even (incorrectly to be clear) assuming the other members SEPs have no value, the Nokia portion of any Daimler/Continent license royalties with Avanci amounts to only some €45MEUR.  We also calculate that the Nokia-related portion of legal costs facing Daimler and Continental to be €43MEUR with €9MEUR in adverse counsel fee risk.

These calculations make the comparable, Nokia-only ratio of royalty to litigation risk 1.046(45/43), a number 23.5 times less than the ratio in the Apple/Nokia litigations.   As noted in the calculations, the Daimler/Continental ratio is likely much smaller since it only accounts for four (albeit the most prominent four) of Avanci’s members.  Additionally, the Apple numbers should be rightfully much bigger given that in second round, litigation barely lasted half a year and netted much more in royalties. Given the stakes for Apple in its litigations with Nokia, spending the kind of money it must have spent to minimize its royalties makes sense.  This is especially true when one considers that the royalty risk in this ratio is the royalty paid and not the likely royalty requested. Apple most likely faced and even greater ratio at the commencement of the Nokia/Apple litigations. But Daimler and Continental are in a very different situation than Apple was in its litigation with Nokia.   We think it is fair to say that the Daimler and Continental litigation cost risks are roughly equivalent to their royalty risks.  From an objective business perspective this makes no sense.  It creates market friction, distracts from business, wastes the time of courts and regulators, creates perverse incentives for future standardization, and rewards lawyers in lieu of some of Europe’s greatest innovators.

ANNEX

To calculate the costs in the Daimler/Continental litigation we used the following estimate on the cases listed in the table below.  Counsel costs for first instance cases in Germany’s bifurcated system are around €100KEUR for each of the infringement and validity trials in the State and Federal courts respectively (p26).  Additionally, often forgotten is that appeals (of two possible for infringement and one for validity) are functionally de novo  (p211), and thus can cost around the same.  As a result, a patent owner’s counsel fees for a single patent litigation with a vigorous defense by the accused infringer can reach upwards of €500,000KEUR.  This figure does not include court fees or adverse attorney’s fees which are based on the “amount in dispute.”  Additionally, to enforce any injunction that may be granted prior to appeal, the party seeking the injunction must post a bond based on the “amount in dispute.”  The actual amount in dispute is ostensibly the amount of money at stake in the case, but more accurately relates to one of six or seven categories of value.  The greater the value the higher the court fees and the more attorney fees the loser must pay the winner.  Court fees can range from around over €500KEUR and adverse attorneys’ fees can range from around to well over €500KEUR.  While the amount in dispute is typically chosen by the party that files suit, courts are more than willing to adjust the amount upwards (and make the parties top up as required). Given that the courts have been willing to increase the bond amount to 2BEUR in significant cases, it is not unreasonable to expect court fees in contentious cases to be over €500k and adverse costs exposure to be up to €1MEUR per party.  Thus, with Daimler and Continental each party to 20 patent cases, they would be (ignoring potential savings for legal coordination) subject to €40MEUR in counsel costs and €40MEUR in potential adverse fees if they lose.  Only counting the cases where Nokia are involved subject to €18MEUR in counsel costs and €18MEUR in potential adverse fees if they lose.

Trying to tease out the cost of complex FRAND litigation is more challenging.  The specific “FRAND question” will impact the cost.  For example, arguments over jurisdictional priority are likely cheaper than arguments over breach from failure to disclose essentiality.  In my experience the most expensive FRAND cases are those where the issues include the propriety of an entire course of negotiation and a request that the court determine the “correct” royalty rate (and license terms).  The challenge in finding accurate data arises from the fact that most parties to FRAND cases are either private entities with no obligation to disclosure their legal costs or large public companies whose legal fees are dwarfed by other expenses and thus not easy to uncover in public filings.  There are some companies, however, whose public filings allow sophisticated analysts to tease out litigation costs.  Based on a series FRAND litigations (with which we are familiar), we believe that €8.5MEUR would be a reasonable estimate through discovery for a single FRAND case per party.  Based on AIPLA survey data, the costs through discovery account for roughly 2/3 of the cost of an entire high-value patent or anti-trust litigation.  Accordingly, we estimate a complex FRAND litigation such as Continental’s to be approximately €12.75M. (N.B. in our experience FRAND cases have an even greater proclivity that regular contract cases to spiral out of control from a cost perspective, transforming into a €25MEUR++ money pit).  We arrived at €12.75MEUR by teasing out the approximate cost of FRAND litigation involving three jurisdictions (China, USA and UK); seven courts or agencies (the NDRC, DG Comp, Shenzhen, the Chancery Court, the district courts of Delaware, and the Southern District of New York); anti-suit injunction requests; and global FRAND license requests  – at least through discovery  – by examining SEC filings (p27) and subtracting the average costs for the kinds of litigations that were on file at same time but were more typical patent litigations.  Thus, Continental’s two US FRAND litigations (Delaware and Texas) may cost over €25MEUR total.  These estimates do not include any costs associated with the anti-suit injunctions, the referral to the European Court of Justice, or the complaint filed by Continental with the European Commission.

Nokia’s 2011 (and 2017) fight with Apple involved 50 patents in total comprising: 3 International Trade Commission cases (ITC), 3 US district court cases, 13 German, 2 Dutch and 4 UK cases.  It also included a FRAND litigation attached to one of the district court cases perspective case. Assuming €5.5MEUR per US patent case; €12.75 for the US FRAND case; €15MEUR for the German and Dutch cases; and €2.5MEUR in the UK, we estimate Apple’s litigation costs at €46.75MEUR.

Turning to royalty risk, based on Daimler’s 2019 sales of some 3.34 million vehicles a conservative estimate of a typical five-year Avanci license comes to €205MEUR. (To reach this number, we conservatively, assume 100% of Daimler’s vehicles are connected, using 4G at a licensing cost of $15/vehicle and flat sales growth).   However, as noted above, this number includes a much larger number of SEP holders than just Nokia.

As for Apple’s royalty risk, we estimate €1.150BEUR. Nokia’s two year litigation with Apple yielded 10 figures (comprising a €500MEUR up-front and payments of €150MEUR a year for five years).  After a quick fight, the Nokia/Apple license was renewed in 2017 for even more with a €1.7BEUR upfront payment and an undisclosed amount of running royalties.

 

Table of Continental / Daimler Litigations

#	Case No.	Venue	Cause of Action	Parties	Disposition or Next Key Event
1	7 O 41/20	Mannheim	EP ‘782 (Infringement)	IP Bridge (patent owner) Daimler (accused infringer Harman Becker Germany, Harman Becker Hungary, TomTom Sales (Intervenors)	2/5/2021 (Infringement and Validity only); FRAND addressed on 4/30/2021
2	7 O 90/20	Mannheim	EP ‘108	IP Bridge (patent owner) Daimler (accused infringer Harman Becker Germany, Harman Becker Hungary, TomTom Sales (Intervenors)	4/30/2021
3	21 O 8609/19	Munich	EP2,854,324	Sharp (patent owner)   Daimler (accused infringer   Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch.  (Intervenors)	Canceled due to settlement
4	21 O 9918/19	Munich	EP2,312,896	Sharp (patent owner)   Daimler (accused infringer   Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch.  (Intervenors)	Canceled due to settlement
5	7 O 8818/19	Munich	EP2,667,676	Sharp (patent owner)   Daimler (accused infringer   Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch.  (Intervenors)	Judgment issued 9/10/2020 in favor of Sharp—moot due to settlement
6	2 O 87/19	Mannheim	EP2,129,181	Sharp (patent owner)   Daimler (accused infringer)   Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch.  (Intervenors)	Stayed pending preliminary opinion of Federal Patent Court in nullity case—moot due to settlement
7	2 O 46/19	Mannheim	EP2,154,903	Sharp (patent owner)   Daimler (accused infringer)   Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch.  (Intervenors)	Stayed until judgment of Federal Patent Court nullity case—moot due to settlement
8	21 O 11384/19	Munich	EP2, 934,050B1 (priority to Nokia)	Conversant (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Intervenors)	Judgment issued 10/23/2020 in favor of Conversant
9	7 O 17751/19	Munich	EP1,797,659B1 (priority to Nokia)	Conversant (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Intervenors)	Postponed due to Covid-19, TBD
10	21 O 17752/19	Munich	EP3,300,421B1 (priority to Nokia)	Conversant (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Intervenors)	Postponed due to Covid-19, TBD
11	21 O 3891/19	Munich	EP1,388,234	Nokia (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Interveners)	Stayed
12	21 O 3889/19	Munich	EP2,797,239	Nokia (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Interveners)	Judgment issued 10/30/2020 in favor of Nokia
13	7 O 3890/19	Munich	EP1,671,505	Nokia (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Interveners)	Stayed
14	4a O 26/19	Dusseldorf	EP2,087,626	Nokia (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Interveners)	12/8/2020
15	4a O 27/19	Dusseldorf	EP1,929,826	Nokia (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Interveners)	12/8/2020
16	4a O 17/19	Dusseldorf	EP2,087,629	Nokia (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Interveners)	9/3/2020 hearing; judgment expected stayed and referred to ECJ on 11/26/2020
17	2 O 34/19	Mannheim	EP2,981,103	Nokia (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Interveners)	8/18/2020 judgment in favor of Nokia; declined to refer to CJEU per request of FCO; Daimler indicates intent to appeal
18	2 O 35/19, 6 U 58/20	Mannheim, Karlsruhe Appeals Court	EP2,286,629	Nokia (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Interveners)	Second instance hearing TBD
19	2 O 36/19	Mannheim	EP2,145,404	Nokia (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Interveners)	Stayed until judgment of Federal Patent Court nullity case
20	2 O 37/19	Mannheim	EP1,273,199	Nokia (patent owner) Daimler (accused infringer) Valeo/Peiker, Continental (German and Hungarian subsidiaries), Harman Becker (German and Hungarian subsidiaries), TomTom Sales, TomTom International, Huawei Technology Investment, Bury, Robert Bosch (Interveners)	Stayed pending preliminary opinion of Federal Patent Court
21	19-cv-2520	ND California	Breach of Contract; Promissory Estoppel; Antitrust; California Competition law	Continental Automotive Systems, Inc. (Plaintiff) Avanci LLC, Avanci Platform Intl. Ltd.; Nokia Corp.; Nokia Corp. of Am.; Nokia Solutions and Networks Oy; Nokia Tech. Oy; Conversant Wireless Licensing SARL; Optis UP Holdings LLC; and Optis Wireless Tech., LLC (Defendants	Case transferred to Northern District of Texas 12/11/2019
22	19-cv-2933	ND Texas	Breach of Contract; Promissory Estoppel; Antitrust; California Competition law	Continental Automotive Systems, Inc. (Plaintiff) Avanci LLC, Avanci Platform Intl. Ltd.; Nokia Corp.; Nokia Corp. of Am.; Nokia Solutions and Networks Oy; Nokia Tech. Oy; Conversant Wireless Licensing SARL; Optis UP Holdings LLC; and Optis Wireless Tech., LLC (Defendants	Dismissed with prejudice 9/10/2020
23	USCA5 20-11032	5th Circuit Court of Appeals	Breach of Contract; Promissory Estoppel; Antitrust; California Competition law	Continental Automotive Systems, Inc. (Plaintiff) Avanci LLC, Avanci Platform Intl. Ltd.; Nokia Corp.; Nokia Corp. of Am.; Nokia Solutions and Networks Oy; Nokia Tech. Oy; Conversant Wireless Licensing SARL; Optis UP Holdings LLC; and Optis Wireless Tech., LLC (Defendants	Notice of appeal filed 10/12/2020
24	21 O 9512/19	Munich	Anti-suit Injunction	Nokia (plaintiff) Continental AG (defendant)	Granted 30 August 2019
25	21 O 9333/19	Munich	Anti-suit injunction	Nokia (plaintiff) Continental Inc. (defendant)	Granted August 2019
26	6 U 5042/19	Munich Higher Regional Court	Anti-anti-suit Injunction	Nokia (plaintiff) Continental (defendant)
27	21-cv66	District of Delaware	Breach of Contract (FRAND) Breach of Contract (Exhaustion)	Continental (plaintiff) Nokia (defendant)	Complaint filed January 2021