Below is an update note from Hedgeye Telecom and Media Policy Analyst Paul Glenchur on the ongoing court battle between Oracle and Google:
Takeaway: We give the edge to Oracle as it seeks billions in licensing fees from Google for the Android mobile operating system.
A federal appellate court held arguments late this afternoon in Oracle v. Google, the next phase of Oracle's multi-year legal battle seeking licensing fees from Google for its Android operating system. We think it was a good day for Oracle (ORCL) as it asserts entitlement to more than $9 billion (thus far) in licensing fees from Google (Alphabet - GOOGL).
We think a decision could come down by late first quarter or in the second quarter of next year.
The courts have already established that key elements of Oracle's Java programming language were incorporated in the Android operating system and that these elements are protected under copyright law. The only question on appeal before a three-judge panel of the Federal Circuit Court of Appeals is whether Google could assert a "fair use" defense, exempting it from liability for copyright infringement.
Fair Use Defense: At least two of the judges today seemed to be leaning toward Oracle's position. Under the fair use provisions of the copyright statute, licensing obligations can be excused if the trial court (a jury, in this case) concludes the alleged infringer did not simply copy or plagiarize a protected work but instead made transformational use of the copyrighted material without unreasonably foreclosing commercial opportunities for the copyright owner.
The law delineates four factors to determine whether the fair use defense applies in a given case. Today, the judges spent the vast majority of argument time on whether lifting Java API's (application programming interface) for use in a Google's mobile operating system (Android) transformed Java from a utility for desktop computers into a substantially new species of operating system for use in Google's mobile ecosystem.
Google won in the lower court (a federal trial court in San Francisco) but it seems the appellate court was skeptical of Google's position. First, the judges seemed to view the mobile environment as a derivative opportunity for Oracle in much the same way a motion picture opportunity could be a derivative opportunity for the writer of a compelling short story. Whether the writer could produce the movie is irrelevant. The licensing opportunity to a major studio would fall under the writer's copyright protection. Similarly, the shift to a mobile opportunity should still benefit Oracle. At least that was the impression given by the judges at today's hearing.
In other words, taking a portion of Java to facilitate the development of applications for Google's mobile ecosystem did not "transform" Java by shifting its use out of the desktop or laptop environment. It was simply an extension into a new product area that should benefit Oracle as the Java licensor.
Moreover, Google and Oracle engaged in several years of licensing negotiations over using Java in the mobile environment, reinforcing that both parties viewed mobile as a natural extension of Java's potential, a derivative opportunity. At a certain point, the negotiations failed to culminate in a licensing deal and Google simply used the Java APIs as a small but critically functional portion of the Android operating system. One of the three panel members, Judge Richard Tarranto, pressed this issue. There was also a discussion of preliminary efforts to use Java in the mobile environment.
The other two members of the panel today were Judges Kathleen O'Malley and Jay Plager. We thought the tone of Judge O'Malley's questioning seemed favorable to Oracle.
Oral arguments are not a slam dunk indicator of potential judicial outcomes so caution is always warranted. But we think the judges appeared sympathetic to Oracle's position and are probably leaning toward protecting Oracle's right to benefit from the migration of Java into the mobile environment.
Large Damages Claim: The $9 billion damages claim Oracle asserts in this case has not been vetted in the trial court. If Oracle prevails in the case that was argued today, the matter would be remanded to the district court in San Francisco for a trial on the damages issues. Of course, Google could also seek an en banc rehearing (all active judges) of the Federal Circuit or even Supreme Court review and these appellate options could drag the proceedings out for quite some time.
But Oracle had a good day in court and if it wins a majority of today's judges (or a unanimous opinion), it would be a major victory bringing it closer to a favorable resolution of the entire matter. This is actually the second trip to the Federal Circuit for this dispute as Oracle had to win a previous appeal to clarify that its Java APIs were entitled to copyright protection in the first place.
Google and several other tech industry interests have complained that an Oracle victory could disrupt innovation by complicating the interoperability of software applications, putting companies like Oracle in a gatekeeper position.
A second victory stemming from today's arguments could encourage settlement discussions. Regardless, a win for Oracle edges the company closer to a potentially large pay day. Android is the mobile operating system for roughly 85 percent of the world's mobile devices.
