The big news in the console world last week was LG obtaining a temporary ban on the importation of PlayStation 3s into Europe. I spoke with BBC Radio 4 about this issue (you can listen here at 42 mins if you’re keen!) and wrote a feature on Gamesindustry.biz, now reproduced below:
This case is a ‘first’ for the games industry in several respects: the first time a patent has been used to obtain a console importation ban; the first time a console has been blocked from entering Europe; and the first time a (modern) outside electronics manufacturer has sued over a console. I’m going to discuss why this lawsuit came about, what practical consequences this might have for Sony (though talk of a ‘loophole’ is misguided – more on that later) and what might happen next. Lastly, at the end I set out some key points from this case for all businesses in the games industry.
THE STORY SO FAR
The rivalry between Sony and LG – both of whom are of course Asian giants in electronic consumer products – has been going on for some time. But it really came to the fore when, in December 2010, Sony took legal action to block the importation of LG mobile phones in the US. LG has since responded with legal action in both the US and Europe, alleging that Sony has infringed a number of LG patents over Blu-ray DVD technology, including the Blu-ray tech in the PS3 – which is what has led directly to this battle.
WHAT’S A PATENT?
A patent is a form of intellectual property right – it is essentially a temporary monopoly over the exploitation of a new invention. The legal rationale is that if you have created something useful for society, you are rewarded by the exclusive right to profit from that invention for a limited period of time – provided that afterwards anyone can use that invention freely.
Broadly speaking, in Europe patents are awarded over hardware/physical inventions, not over software. They are therefore mainly of interest to hardware manufacturers, such as console or peripherals manufacturers in the games industry.
Technology companies like Sony and LG tend to amass large portfolios of patents for two key reasons: (1) patents are valuable in their own right; and (2) they can be a useful shield in any patent case brought against you.
That last point needs a little explanation. Let’s say Company A and Company B are both in the electronics industry and both own several patents. Company A sues Company B for patent infringement. Because Company B also owns a patent portfolio, it may be able to use that portfolio to bring its own patent infringement claim against Company A. Hence why owning a patent portfolio can be a shield in patent cases – in fact, having your own portfolio might even stop your rival from suing you in the first place, for fear of an immediate counterclaim.
However, this logic doesn’t work all the time – clearly in this case there has been enough at stake for Sony and LG to go to litigation despite the inevitable counterclaims on either side.
THE PLAYSTATION 3 BAN
As I said, once Sony had started the ball rolling, LG commenced legal action in the US and Europe over Blu-ray tech in Sony products – in particular the PS3. So far, we haven’t seen any substantial reported action on the US front.
However, LG was able to score a big win in Europe by going to the Dutch legal authorities and obtaining this temporary ban (for those who are interested, LG used an EU law on customs action against goods suspected of infringing intellectual property rights).
Why Holland? Reports indicate that PS3s are brought over in container ships from the manufacturing base in Asia to the European distribution base in Holland, from which onwards distribution to the different European national markets is organised. So, by obtaining the temporary ban in Holland, LG has disrupted Sony’s European distribution network.
As to the practical impact of the ban on Sony, opinions on this differ. Some reports suggest that, since most retailers have 2-3 weeks supply of PS3s already, the impact would be muted. On the other hand, the longer this drags on, the greater the potential for it to become a real problem.
In the meantime, it’s not completely plain-sailing for LG for two reasons:
(1) The ban is only temporary – typically ‘up to ten days’ under the normal rules in these cases. LG will need to go back to the Dutch legal authorities if it wants to extend the ban, while Sony will of course be seeking to end the ban.
(2) If a judge later finds that LG was wrong to seek the ban in the first place (ie its patent infringement claim is wrong), then it will in principle be liable to Sony for financial damages to compensate Sony for the harm caused by the ban – quite apart from the PR blow that LG would suffer.
On the other hand, if a judge ultimately rules in LG’s favour, then in principle Sony would be liable to pay LG effectively to compensate it for Sony’s patent infringement.
IS THERE A LOOPHOLE FOR SONY?
Some press reports suggested that there is a loophole for Sony, ie the temporary ban applies only to Holland and therefore Sony could simply get the PS3s into Europe through other ports. This is technically correct legally because the current ban only applies to Holland, but I suspect a ‘loophole’ is unlikely in reality:
(1) It is much easier said than done for Sony to change its entire European distribution network. It takes weeks for container ships to reach Europe, then they have to be sent to the right kind of port, which also has to have on-shore distribution facilities. All of that is currently set up in Holland and it can’t be easily replicated elsewhere. I suspect it would be difficult to fly substantial amounts of PS3s into Europe on any economic scale.
(2) In any event, even if Sony was able to make alternative temporary distribution arrangements, that would be treating the symptom (the Dutch ban) not the cause (the dispute with LG). LG could potentially just go to each European port and seek a similar ban (albeit we don’t know if they would have the same success). One last point: the Daily Mail reported yesterday that the PS3 importation ban has been extended to the UK, but that has not been corroborated so far as I’m aware by HMRC, Sony or LG.
SO WHAT’S NEXT?
It’s impossible to predict the twists and turns a lawsuit can go through, but some things are clear:
- The case may or may not settle at any time of course, if the parties are able to resolve their differences. If it doesn’t, Sony and LG will need to go back before the Dutch legal authorities regarding the current ban there in the next few days.
- If LG wants to pursue its patent infringement case in Europe further, it will likely need to do so in each European country – there isn’t a simple pan-European patent framework for it to rely upon.
- The legal action in the US is ongoing and could catch up with Europe at any time – which could cause headaches for both LG and Sony.
- If the lawsuit does drag on, and if stocks of PS3s are affected, then it could quickly affect everyone in the PS3 supply chain – from Sony to its developers to the consumer.
KEY TIPS FROM THE CASE:
- Hardware manufacturers should pay attention to this case and consider how well their intellectual property rights, particularly their patents, are protected.
- Don’t just look at your home market(s) – issues in other European countries can quickly affect you too.
- Don’t assume that your legal issues will occur just within the games industry itself.
- Everyone should be aware that these kinds of bans/freezing orders aren’t restricted to patent infringement – they can in principle be obtained where there has been other IP infringement or possibly even if there is just a contract dispute.