

I thought you might like to see the letter [PDF] Barnes and Noble filed with the ITC and the slides [PDF] titled, "Microsoft's Anticompetitive Behavior in the Mobile Operating System Market", that Barnes & Nobles presented to the US Department of Justice's Antitrust Division in July and filed with the ITC as an exhibit, in which it lays out its complaint about Microsoft. It's a compelling read. There are some further exhibits also, including the Barnes & Noble letter to the US DOJ back in April. In effect, Barnes & Noble says Microsoft is doing what's it's done in the past against Netscape and Java, only now the target is Android and the weapon of choice is patents. I also thought you'd probably have questions about how there can be an antitrust complaint over patents, since by their very nature patents are a granted monopoly, so I found some resource material for you. For me too, actually, because I was wondering about it myself. You'll find our old friend SCO Group on page 9 of the slide presentation, by the way, on a list titled "Microsoft Infringement Suits Against Open Source Software", with an annotation: "Microsoft provided financial support to SCO, enabling it to file and litigate several infringement suits targeting open source software." And Barnes and Noble alleges that the Nokia deal included an agreement to pool and then use patents in an aggressive attack against Open Source.



The Barnes & Noble Accusations The overview, in the slides, of Microsoft's anti-competitive behavior is the following: Publicly Claiming Control of Android and Other Open Source Operating Systems

Requiring Potential Licensees to Enter into Overly Restrictive Non-Disclosure Agreements

Demanding Royalties Commensurate with Owning the Entire Android Operating Sysem (and Similar to Royalties for a Windows Phone License) Even Though Microsoft Only Owns Trivial Patents

Imposing Licensing Provisions Unrelated to Microsoft's Patents and Designed to Prevent Competitor Innovation

Filing Frivolous Patent Infringement Actions Against Companies That Refuse to Enter Into Anticompetitive Licensing Agreements

Deal with Nokia Includes an Agreement to Engage in a Coordinated Offense Use of Patents Against Open Source Software

Purchasing Patent Portfolios that Threaten Open Source Software We suspected when it was announced that the deal with Nokia was about patent aggression, and now we see it in black and white. Barnes & Noble lists three deals as anti-competitive, the Nokia deal, the CPTN-Novell patent deal, and the Nortel patent deal. You can see the "trivial patents" Microsoft used in discussions with Barnes & Noble and in its later patent infringement complaint -- not an identical list -- on page 5 of the slides. Also, the patent infringement case Microsoft filed against Barnes & Noble is ongoing in parallel with the ITC case. Barnes & Noble's answer to the complaint is smoking hot too, and you can read it here. Barnes & Noble says in the answer that "the license fees demanded by Microsoft are higher than what Microsoft charges for a license to its entire operating system designed for mobile devices, Windows Phone 7." Essentially, they accuse Microsoft of using patents as a weapon to carry out an anti-competitive strategy, a campaign of collecting patents for the specific purpose of attacking Android, "embarking on a campaign of asserting trivial and outmoded patents against manufacturers of Android devices. We get to look behind the curtain of secrecy now, at last. Barnes & Noble reveals another detail about the patents in Exhibit B [PDF], a letter dated April 25, 2011 to James J. Tierney, Chief, Networks and Technology Enforcement Section, Antitrust Division, US DOJ from Barnes & Noble: The patents that Microsoft is asserting against Barnes & Noble do not even purport to cover hardware elements or basic software functions for mobile devices, and Microsoft thus has no right to require designers to adhere to any particular hardware or software specifications in order to obtain a license for those patents. Yet Microsoft is doing just that -- abusing and seeking to expand to scope of its patents to control design elements over which Microsoft has no legitimate claim. This conduct is plainly anticompetitive and threatens Barnes & Noble's ability to modify and offer improved products to consumers.... Microsoft only claims ownership of only trivial and non-essential design elements in Android-based devices, as opposed to an entire operating system. I see articles about which is better, Amazon's Kindle Fire or Barnes & Noble's Nook. Well, reportedly Amazon paid Microsoft off, and Barnes & Noble courageously didn't. So personally, I'm buying a Nook. Cravath, Swaine & Moore the same firm that ably defended IBM from SCO Group, is retained as one of the firms Barnes & Noble has on the team. As Steven J. Vaughan-Nichols points out, Cravath recently hired Christine Varney, formerly the "DOJ's top anti-trust lawyer", meaning head of the US DOJ's antitrust division. "If they cant put together a creditable case that Microsoft is acting in an illegal anti-competitive matter," he writes, "I dont know who can." [ Update: Actually, as the NYTimes pointed out when she was hired, she can't appear before the DOJ on any case for two years after leaving: Under government ethics rules, Ms. Varney is banned for two years from appearing in any matter before the Justice Department. And she cannot work on any case or matter that was initiated by her division during her tenure. That latter is significant too, because the first letter [PDF] to the DOJ from Barnes & Noble was addressed to her, while she was still there, back in March. - end Update.] The company is asking the DOJ to investigate Microsoft's patent activities, saying "Microsoft is attempting to raise its rivals' costs in order to drive out competition and deter innovation in mobile devices." How Do Patent Law and Antitrust Law Mix? But can anyone put together a case? You may be wondering how patents could be involved in an antitrust case. After all, everything about the law in the US shows a deep love affair with patents, which allow the owner to keep others out of the patented activity. The government traditionally viewed it that patents promote innovation and money-making, that they are an incentive to patent owners to share their discoveries in return for exclusive use for a term. So, it's a monopoly, but in their view one in service of the greater good. On the other hand, the Sherman Act says it's a violation of the law to monopolize, or attempt to monopolize, or combine or conspire with any other persons, to monopolize any part of the trade or commerce." So there is a built-in conflict, and as you might expect, since we are talking about the law, it's complicated. To get you started, here's Andy Updegrove's collection of antitrust laws, cases and regulations. Here's the FTC Guide to Antitrust Law and the ABA's Section on Antitrust Law. Dig in. There is a glimmer of understanding currently, thanks to the appalling mobile patent wars recently, that there is a downside to patents, that many patents have wrongly issued because of lax standards at the USPTO and are causing significant harm now, and that the software patents in particular block innovation instead of encouraging it in connection particularly with Free and Open Source software. But overall, this 2008 speech by Deborah A. Garzy, then Deputy Assistant Attorney General, Antitrust Division, US Department of Justice, on the interface of patents and antitrust law, reflects the love affair of government and patents. But even then, there is a line, and she sets forth where it is, or more precisely, where she saw it in 2008: Side 2: Antitrust Principles Now, let me talk about antitrust. Over the past several decades, antitrust law has evolved significantly from viewing patent exclusivity as an inherent competitive problem to recognizing it as an important impetus for innovation as a critical dimension of competition.(9) Professor Herbert Hovenkamp recently described this process as "antitrust period in the wilderness.".(10) Current policy is guided by a number of principles, of which I will call out five. 1. A patent does not necessarily create market power. A patent is merely a property right that enables the patent owner to exclude others from using the patented invention for a limited period of time in exchange for the patent owner's public disclosure of its discovery. A patent confers no right on the owner to preclude others from competing with substitute technologies. For that reason, when analyzing an agreement to license or the acquisition of a patent, the Justice Department and FTC do not presume that the patent owner has market power. This issue was recently addressed in Illinois Tool Works, Inc. v. Independent Ink, Inc., where the Supreme Court unanimously held that "a patent does not necessarily confer market power on the patentee."(11) 2. Even when a patented technology or product does enjoy market power, that fact alone does not give rise to an antitrust violation. The Supreme Court has made clear that "[t]o safeguard the incentive to innovate," the "mere possession of monopoly power and [ ] concomitant charging of monopoly prices" is not unlawful "unless it is accompanied by an element of anticompetitive conduct."(12) It follows that, for antitrust to apply, a patent owner must have engaged in some conduct, other than the creative process of invention or conduct authorized by the Patent Act, to unreasonably restrain trade or create or maintain a monopoly in a relevant market. Attempting to enforce a patent obtained through fraud on the PTO, for example, might constitute a violation of section 2 of the Sherman Act, provided all other elements of a monopolization claim are satisfied, including the existence of monopoly power. Similarly, under certain circumstances, the acquisition of a patent could violate Section 7 of the Clayton Act, or patent licensing terms might constitute illegal tying or price-fixing. 3. Patent licensing agreements should be analyzed applying the same antitrust rules that apply to agreements involving other types of property. That does not mean that specific aspects of intellectual property  such as the ease of misappropriation  are ignored. All factors are considered as appropriate in any antitrust analysis. Rather, it means that a firm's use of its patent rights are subject to the same restrictions as generally apply to its use of other assets. It is neither subject to special suspicion, nor free from scrutiny. 4. Antitrust liability for refusal to assist competitors  whether by licensing patents or otherwise  is a rare exception to the ordinary rules of antitrust. A firm is generally free to exercise its independent judgment as to with whom it will deal and not deal.(13) The Supreme Court recently observed that requiring firms to share the source of a competitive advantage with rivals is "in some tension with the underlying purpose of antitrust law."(14) First, such a general policy could reduce the incentive that all firms have to invest in developing a competitive advantage. On the one hand, a firm forced to license its invention for free or on terms that do not allow it to appropriate the full value of the invention may have less incentive to invest in innovation in the first place; on the other hand, firms that can count on getting access to rivals' inventions on such terms also may have less incentive to invest in innovation. Second, such a general policy could involve enforcers and the courts in a highly regulatory and undesirable process of determining the price and other terms on which the patentee must license its patent. And, third, compelling competitors to negotiate to assist each other could actually facilitate the kind of competitor collusion that we typically regard to be the "supreme evil" of antitrust. For these reasons, as stated in the DOJ-FTC Report on Promoting Competition and Innovation issued in April 2007, "liability for mere unconditional, unilateral refusals to license will not play a meaningful part in the interface between patent rights and antitrust protections."(15) On the flip side, depending on the facts, applying the general rules of antitrust to conduct that goes beyond a mere unilateral, unconditional refusal to license a patent could give rise to antitrust liability. 5. Because patent licensing is generally efficient and pro-competitive, it should be assessed under a flexible rule of reason analysis that condemns only practices that are likely to have a net anticompetitive effect. The way in which the Justice Department and FTC apply rule of reason analysis is set forth in two documents: (1) the agencies' jointly issued Antitrust Guidelines for the Licensing of Intellectual Property (issued in 1995), and (2) their jointly issued Report on Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (issued in April 2007). Both documents are available on the Antitrust Division and FTC websites. Conclusion There is a role for antitrust enforcers to play in regard to the acquisition and exploitation of patent rights. But antitrust is not about picking winners and losers, ensuring that no firm has a competitive advantage over another, or designing optimal business arrangements. It is not about protecting competitors per se, but about protecting the competitive process, so that unfettered market forces drive resources to their most efficient uses for the benefit of consumers. In the area of patents, the proper focus of antitrust law is to ensure that neither private restraints of trade nor government policies unreasonably distort or diminish incentive to innovate. _____________

See generally Presentation by Thomas O. Barnett, Assistant Attorney General, U.S. Department of Justice Antitrust Division, to the George Mason University School of Law Symposium on Managing Antitrust Issues in a Global Marketplace (Washington, DC, Sept. 13, 2006). Hovenkamp, at 14. 547 U.S. 28, 44 (2006). The AMC also recommended that "[m]arket power should not be presumed from a patent, copyright, or trademark in antitrust tying cases," having decided to study and report on the issue before the Supreme Court ruled. Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) [hereinafter Trinko]. See, e.g., United States v. Colgate & Co., 250 U.S. 300, 307 (1919) (noting that the Sherman Act generally "does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise [its] own independent discretion as to parties with whom [it] will deal"); Trinko, 540 U.S. at 408 (highlighting the "uncertain virtue of forced sharing"). Trinko, 540 U.S. at 407-8. So the view was that patents are a *limited* monopoly, that you can always use other techniques to reach a similar goal, that patents become a problem only in connection with "market power", and even that, along with monopoly prices, is not necessarily a problem, unless there is "anticompetitive conduct". Fraud on the USPTO in getting the patent might count and then enforcing the patent, all other factors being in place, but normally just applying for patents wouldn't trigger antitrust concerns. It's legal to file for patents, after all, and there is no limit on how many you can have. "Competitor collusion" is the "supreme evil" of antitrust law, she said. Is the "net effect" of the conduct anticompetitive? Starting to see what Barnes & Noble is getting at? It is alleging patent misuse . The idea is, as one lawyer put it recently in connection with the uproar over the sale of the Nortel patents, The one thing thats significant here is you have three of the four smartphone platforms ganging up on the fourth, said Kahin. You want patents for an economic benefit, not as a legal instrument. If, as Barnes & Noble claims, Microsoft and its allies are using them primarily as a legal instrument, it can take the matter into the area where patent law and antitrust law meet. Remember that the DOJ wouldn't let Microsoft get the Novell patents as originally set up, stating in a press release you can read on page 13 of the slides, "[T]he deal [as originally proposed] would jeopardize the ability of open source software, such as Linux, to continue to innovate and compete in the development and distribution of server desktop and mobile operating systems, middleware and virtualization products." So the DOJ didn't just fall off a turnip truck. They do see that there is a particular issue in antitrust where Microsoft and FOSS meet. And it's not an even playing field. If a party enforces a patent it knows is invalid, that too can take that party [PDF] into antitrust territory. One of Barnes & Noble's assertions is that the patents are trivial and are being licensed at exorbitant rates, so as to make Android cost more. That was SCO's goal too. But, you say, the law doesn't stand still, and there are shifts over time. What about 2011? Here's a more recent article on the subject, Intellectual Property & Antitrust Issues: Market Power from Patent Baristas in August, explaining the view in 2011 and referencing a recent FTC paper on the subject of patents and antitrust: While antitrust laws prohibit any contract in restraint of trade (See Section 1 of the Sherman Act below), patents on the other hand grant the patent holder unlimited, albeit negative rights of excluding competitors from making, using, selling or otherwise exploiting the invention. The Supreme Court in the Standard Oil Case interpreted Section 1 as prohibiting only restraints of trade that unreasonably restrict competition. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court. 15 U.S.C. § 1 So how does one bridge the gap between antitrust laws and patent laws?...FTCs last report on antitrust and patents addresses a number of issues such as refusals to license patents, collaborative standard setting, patent pooling, intellectual property licensing, the tying and bundling of intellectual property rights, and methods of extending market power conferred by a patent beyond the patents expiration.... The intellectual property laws and antitrust laws share a common goal in that they both promote innovation and consumer welfare by prohibiting actions such as imitation without compensation, monopolistic prices and an oligopoly, which inhibits a fair market. The two are thus wedded to each other. The Antitrust-IP Guidelines have been an indispensable part of the Agencies analysis of intellectual property and antitrust issues. In brief, the guidelines emphasize three general principles: Antitrust rules apply to intellectual property agreements as they would apply to agreements involving any other form of property. Possession of any form of intellectual property does not by itself create a market power. The presence of substitutes for the patented product or process prevents exercise of market power and That intellectual property licensing is not in contravention to competition issues as it allows firms to combine intellectual property rights with other complementary rights of production such as manufacturing and production facilities and workforces. Antitrust-IP Guidelines §2-1 ..... Section 2 of the Sherman Act reads inter alia, Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other persons, to monopolize any part of the trade or commerce [commits a felony]. 15 U.S.C. §2.... A monopolist who acquires a dominant position through obtaining intellectual property rights may violate §2 of Sherman Act if the monopolist exploits the dominant position to enhance monopoly in another market. Thus intellectual property rights do not confer an absolute immunity from antitrust liabilities. Barnes & Noble says, as you can see in multiple slides that Microsoft had nearly 100% of the PC operating system market, it still has nearly 90% share of the desktop, and it's threatened by mobile phones, which increasingly can do everything people used to do on PCs. It shows how Microsoft violated antitrust law earlier, and essentially says the only thing new is who Microsoft is going after this time, and the use of patents as the weapon. It was Netscape and Java before (and Novell would add WordPerfect and DR DOS), and now it's Android. It quotes, on the slide on page 24, from U.S. v. Microsoft, 253 F.3d 34, 63 (D.C. Cir. 2001), showing that it's nothing new for Microsoft to hold "expansive" views of its intellectual property rights: "Microsoft's primary copyright argument borders upon the frivolous. The company claims an absolute and unfettered right to use its intellectual property as it wishes.... That is no more correct than the proposition that use of one's personal property, such as a baseball bat, cannot give rise to tort liability. As the Federal Circuit succinctly stated: 'Intellectual property rights do not confer a privilege to violate the antitrust laws.'" Slide 29 lists what Barnes & Noble views as the results of Microsoft's "anticompetitive behavior": 1. Lessens Competition 2. Raises Barriers to Entry for Small Players 3. Entrenches Dominant Players 4. Microsoft's Licensing Practices Are Aimed At Pushing Manufacturers From Android to Windows Phone 5. Restrictive Licensing Provisions Stifle Innovation 6. Consumers Ultimately Harmed by Microsoft's Anticompetitive Practices I'll put up the other exhibits in the next article, but I think already what we see clarifies what the issues are from a bird's eye view, so you can read Barnes & Noble's assertions with a knowledgeable eye as to how it is trying to construct an antitrust case from recent Microsoft activities. Also, so you know. The ITC makes all filings available for free, and you can register for a free account with their EDIS system to get them. This case is titled: In the Matter of Certain Handheld Electronic Computing Devices, Related Software and Components Thereof Investigation No. 337-TA-769. If you find anything else of interest, let us know. Here's Barnes & Noble's letter to the ITC, as text: *************************** [Kenyon & Kenyon letterhead] October 31, 2011 Via Electronic Filing The Honorable Theodore R. Essex

Administrative Law Judge

U.S. International Trade Commission

500 E Street, SW

Washington, DC 20436 Re: In the Matter of Certain Handheld Electronic Computing Devices, Related Software

and Components Thereof Investigation No. 337-TA-769 Dear Judge Essex: This letter is simply to inform Your Honor that the Barnes & Noble Respondents have met and have had correspondence with the United States Department of Justice (DOJ) concerning Microsoft's improper use of the Patents-in-Suit in an effort to dominate the Android open-source operating system employed by Barnes & Noble as well as other companies. The conduct of Microsoft addressed with the DOJ also forms the basis for Barnes & Noble's patent misuse defense raised in this investigation. Since Section 337(b)(2) authorizes the Commission during the course of an investigation and as appropriate to consult with and seek advice and information from the DOJ, Barnes & Noble brings this matter to Your Honors attention. The attached non-confidential documents represent Barnes & Nobles correspondence and submissions to the DOJ and have already been produced to Microsoft. (BN-ITC0358652-BN- ITC0358676; BN-ITC0358677-BN-ITC0358686; BN-ITC0358687-BN-ITC0358690; BN- ITC0358691-BN-ITC0358721; BN-ITC0358730-BN-ITC0358732; BN-ITC0358796-BN- ITC0358824) CONFIDENTIAL INFORMATION REDACTED The Honorable Theodore R. Essex

October 31, 2011

Page 2 Very truly yours, Richard L. DeLucia Enclosures Certain Handheld Electronic Computing Devices,

Related Software and Components Thereof 337-TA-769 CERTIFICATE OF SERVICE I hereby certify that copies of the foregoing LETTER TO JUDGE ESSEX were served upon the following parties as indicated on this 7th day of November, 2011. James R. Holbein, Secretary

U.S. International Trade Commission

500 E Street, S.W., Room 112 Washington, D.C. 20436

Via Electronic Service Honorable Theodore R. Essex

U.S. International Trade Commission

500 E Street, S.W., Room 317

Washington, D.C. 20436

[Email]

Via Hand Delivery and Electronic Mail Jeffrey Hsu

Office of Unfair Import Investigations

U.S. International Trade Commission

500 E Street, S.W.,

Washington, D.C. 20436

[Email]

Via Electronic Mail Counsel for Complainant Microsoft Corporation V. James Adduci

Adduci, Mastriani & Schaumberg LLP

[address, email]

Via Electronic Mail Counsel for Respondent Hon Hai Precision Industry Co., Ltd., Foxconn Electronics, Inc., Foxconn International Holdings Ltd., and Foxconn Precision Component (Shenzhen) Co., Ltd. Edward M. Lebow

Haynes and Boone LLP

[address, email] Via Electronic Mail /s/ Hanna Cha

Hanna Cha

Legal Assistant