Nero AG, a company with one of the most fitting names ever (can you imagine a company called Hitler or Stalin 2000 years from now?), has filed an anti-trust lawsuit against the MPEG-LA. The German technology company claims the licensing body has abused its monopoly power, and that is has not honoured agreements made with the US Department of Justice. There’s some juicy stuff in here.

Nero’s antitrust argument

Back in 1997, the MPEG-LA sought a promise from the US Department of Justice that it would not initiate any antitrust investigations against the licensing body. The DOJ expressed then that it currently had no intention of acting upon the MPEG-LA, but this lack of intention was conditioned on a number of things.

First, the MPEG-LA would engage with independent experts to ensure only essential patents would be placed in the MPEG-2 pool. They told the DOJ that the MPEG-2 pool constituted of 53 essential patents. Second, independent experts would “weed out nonessential patents” from the pool. Third, licensing terms would be “fair, reasonable, and nondiscriminatory”.

Nero claims none of these safeguards were honoured, and here’s where it gets juicy; “absolute power has corrupted the MPEG-LA absolutely”, according to Nero. First of all, the so-called independent expert was anything but independent. The expert helped form the MPEG-LA, helped in drafting the first MPEG-LA licensing agreements, answers questions from licensees on behalf of the MPEG-LA, has attended business settlement meetings on behalf of the MPEG-LA, and has testified before US congress on behalf of the MPEG-LA. Heck, he is listed on the MPEG-LA website as “MPEG-LA’s US patent counsel”.

Nero also claims that the MPEG-LA has unlawfully extended its patent pools by adding non-essential patents to the MPEG-2 patent pool. Even though the MPEG-LA told the DOJ there were only 53 essential MPEG-2 patents, the non-independent expert added round and about 800 more patents to the pool, extending the duration of the patent pool, since the old, 53 essential patents expired.

“On information and belief, MPEG LA has similarly extended the duration and scope of its monopoly power in the relevant technology markets for the licensing of patents relating to the MPEG-4 Visual and AVC [H264] standards by adding nonessential patents to its MPEG-4 Visual and AVC pools, which now contain more than 1000 and 1300 patents, respectively,” Nero further claims.

Nero further claims that the MPEG-LA has “formulated and imposed licensing terms that are unfair, unreasonable, and discriminatory”, by charging different royalty rates from licensees for the same MPEG-2 license and by not making any downward adjustment in line with the “rapid and dramatic” decrease in costs of implementing the MPEG-2 standard. In addition, the MPEG-LA collects royalties for the same device multiple times (internal hardware, software, monitor, etc.), and the licensing body has failed to “communicate its policies equally to all licensees”.

Nero argues that these things combined have led to the MPEG-LA having 100% market share, since every device or piece of software even remotely related to video needs a license from the MPEG-LA. The MPEG-LA itself has estimated that in 2006, the value of MPEG-2 products (so just that one license pool) exceeded half a trillion dollars.

Nero also tries to ride the Main Street wave by highlighting the exorbitant bonus culture within the MPEG-LA, which ensures “Enron-esque” salaries to C-level officers, including expensive apartments and sports cars (a Porsche, though? Seriously? So apart from being patent trolls, these guys also lack any form of taste), which Nero claims to reflect a “culture of greed”.

“Such a culture may have driven, and may still continue to drive, MPEG LA’s wilful maintenance or extension – and other abuses – of its monopoly power to maintain cash flows necessary to maintain the lifestyle that has accompanied such culture of greed,” Nero claims. All we need now is Joe the Plumber.

A large part of the suit focuses on the concept of trial software, which, as most of you will know, is an important part of the software industry. Before purchasing a license from the MPEG-LA, Nero asked if trial software would constitute a sale – the licensing body said no. At numerous other occasions, the MPEG-LA confirmed this answer “verbally, in writing, and by conduct”. Then, in February 2008, the MPEG-LA reversed this position abruptly, demanding royalties for trial software, thereby defying the licensing agreements. The MPEG-LA then sought to use the New York Parol Evidence Rule to hide evidence from the court regarding the parties’ agreements on this subject.

“Therefore, MPEG-LA’s unlawful actions have caused, and will continue to cause, Nero irreparable harm for which it has no adequate remedy at law,” Nero concludes, “In sum, MPEG-LA’s predatory and abusive conduct has caused antitrust injury to innovation, competition, and consumers in the relevant technology markets.”

MPEG-LA’s response

According to the MPEG-LA, Nero’s case is nothing special. “I think we’re looking it as a typical response by a company that has not abided by the terms of the license they’ve taken,” said Sullivan & Cromwell’s Garrard Beeney, the lawyer representing the licensing body in this case. He states this is pretty common in license fee disputes.

Conclusion

And this is the organisation the pro-Apple/MPEG-LA/H264 lobby wants to hand over video on the web to. We already established the MPEG-LA is headed by a clear-cut patent troll, and it seems that if any of the stuff in Nero’s complaint is true, we’re dealing with a company much more damaging than a mere patent troll. While I’m not a particular fan of the whole greed culture wave Nero tries to ride, the remainder of the complaint is made up of verifiable information – information that we were actually already aware of.

The MPEG-LA constitutes a major threat to not only video on the web, but also the digital video industry as a whole. The MPEG-LA stifles innovation and places unnecessary costs upon consumers and the industry as a whole. This must end. Just as we don’t want Microsoft to abuse its monopoly position, we shouldn’t want the MPEG-LA to do so either.