Wednesday, July 17, 2019

DOJ, DOE, Pentagon, Ericsson support Qualcomm's Ninth Circuit motion for stay of FTC's antitrust remedies

As the longest-standing and staunchest Donald Trump supporter among IP bloggers, I must admit I'm more than a little bit disappointed at three very recent events, two of which are related to the mobile industry. I keep my fingers crossed for Four More Years no matter what, but

  • the "go back" suggestion had a factual basis with respect to only one "Squad" member (Ilhan Omar);

  • it wasn't a good idea to conflate security and trade issues with respect to Huawei, so I honestly don't know what to think of that new bipartisan Lex Huawei proposal (was there a security issue in the first place, or was it more of a pretext? either way, the Administration's approach to Huawei doesn't look principled at this stage); and

  • yesterday the Department of Justice tripled down on its pro-Qualcomm advocacy I already criticized on previous occasions (as recently as last month), with declarations by the Department of Defense (Scribd link) and Department of Energy (Scribd link) attached (this post continues below the document):

19-07-16 DOJ Statement of I... by Florian Mueller on Scribd

Antitrust Assistant Attorney General Makan Delrahim's subordinates made a bizarre filing in early May when they asked Judge Lucy H. Koh of the United States District Court for the Northern District of California to hold a special remedies hearing. I said "bizarre" because of the substance of the brief, the timing (more than three months after the San Jose bench trial), and the way the DOJ antagonized the FTC. That was the first time they were in the tank for Qualcomm (not counting public comments by Mr. Delrahim, a former Qualcomm outside counsel). The second time, in connection with Qualcomm's appeal of Judge Koh's certification of a consumer class, their intervention was infinitely more reasonable. But yesterday's Statement of Interest (of the United States, as the DOJ is authorized to speak on behalf of the federal government regardless of whether an independent government agency like the FTC agrees) is closer in (un)reasonableness to the DOJ's first pro-Qualcomm filing than to the second.

The district court's well-reasoned ruling is the FTC's biggest success in a long time. The DOJ should have more respect for the independent Federal Trade Commission and for the independent judiciary. Instead, the brief, filed yesterday with the United States Court of Appeals for the Ninth Circuit, arrogantly asserts that the FTC and Judge Koh failed to figure out the law.

The DOJ attacks Judge Koh's decision from three angles: merits (liability), remedies, and the public interest. As for the public-interest part, the DOJ mostly relies on the aforementioned declarations by two other departments, and Reuters' Stephen Nellis accurately described the gist of those statements as follows:

While the public-interest part is the most appropriate aspect for a Statement of Interest, the accuracy and relevance of a public-interest argument is not a function of how many sister departments say essentially the same thing. This case is about patent licensing. It's not about Qualcomm's ability to develop and sell great 5G chips being hamstrung. By contrast, there have been antitrust cases that impacted product design, such as the Media Player part of the first EU case against Microsoft (though Microsoft ultimately managed to comply with the decision in a way that minimized its effects). In the Qualcomm case, we're talking about one company raking in roughly 25% of the industry's total patent licensing revenues, and collecting 80% or 90% of the totality of what some device makers such as Huawei spend on patent royalties. And this is a company that has just spent tens of billions of dollars on stock buybacks in recent years. It's not like Qualcomm would have to, or would want to, cut back on R&D as a result of this antitrust case.

If Qualcomm's supporters in the Administration really wanted to make a compelling case, then we'd find some financial analysis, even if based on only rough estimates of inherently limited reliability, in the DOJ's filing and/or the supporting declarations. They'd be talking about how many billions they believe Qualcomm would not make as a result of the immediate enforcement of the FTC's remedies, and what impact this would have on Qualcomm's R&D strength and its influence on the evolution of the 5G standard. Instead, they just posit that anything of substantial impact would automatically pose a threat to national security.

Qualcomm's dilemma is that numbers, whether provided by Qualcomm itself or by its governmental allies, would potentially impact future negotiations, in which they'll try to defend their royalty demands to the greatest extent possible. And in order to have a chance to persuade the Ninth Circuit, the numbers (right or wrong) would have to be dramatic, which would also scare investors. But without numbers, the public-interest argument here is a non sequitur. Even a non-starter. With numbers, one could at least perform a plausibility check.

On the merits (liability) side, the DOJ's filing is perfectly consistent with Mr. Delrahim's philosophy that patents are sacrosanct rights that antitrust law shouldn't interfere with. That philosophy, which one might even call a religion, is not the law, however. Nor should it be.

The most important aspect of the DOJ's merits-based argument is that a duty to deal must be a rare exception. In this regard, the DOJ's brief focuses very much on Judge Koh's citation to the Supreme Court's Aspen Skiing decision. I have re-read the related citations in the district court's findings of fact and conclusions of law, and nowhere does Judge Koh say or suggest that Qualcomm's obligation to extend FRAND licenses to rival chipset makers is like a photographic image of the fact pattern in Aspen. The Aspen case was about competing ski resorts in Aspen, CO. Originally, there were three resorts owned by three companies, but then one of them acquired one of the others, and created a fourth. When that consolidator owned three of the four resorts, it was no longer willing to continue a previously very popular and profitable multiarea-ticket cooperation with the sole remaining competitor on the previous--or any other reasonable--terms. The district court put the case before a jury, which identified an antitrust violation in the form of a refusal to deal, and both the Tenth Circuit and the Supreme Court affirmed.

I'm aware and, while I disagree, respect that many lawyers are very skeptical of the notion of an antitrust duty to deal with competitors. For an example, I know at least one lawyer who absolutely wants the likes of Qualcomm to be required to grant SEP licenses to rival chipset makers, but, as a matter of principle, purely on the basis of contract--not antitrust--law. Granted, Aspen is not the least controversial Supreme Court antitrust ruling in history. But its key holding--that a refusal to deal may constitute an antitrust violation under special circumstances--is still the law of the land and probably won't ever be overruled. There have been decisions like Trinko that stress the importance of not imposing a duty to deal in too many cases. But none of that makes Aspen an exclusive and extremely narrow path to the conclusion Judge Koh reached in FTC v. Qualcomm with respect to chipset licensing.

The DOJ argues that Judge Koh misapplied Aspen in two ways. First, the DOJ argues Qualcomm never voluntarily licensed other chip makers, but just "erroneously relied on its interpretation of Qualcomm’s FRAND obligations to standard-setting organizations, as required by their IP policies, as contractually compelling Qualcomm to license rival chip makers." This is at odds with the way Qualcomm portrayed (in its disputes with the FTC as well as Apple) its decision to make CDMA an industry standard, and to participate in standardization in general, as an act of generosity, or at least as a sound business decision. Second, the DOJ claims Judge Koh incorrectly held that Qualcomm discontinued (for anticompetitive reasons) something profitable by stopping at some point to license other cellular baseband chipset makers: "Qualcomm realizes greater profits by licensing at the end-device rather than the chip level." That's what Qualcomm had told the IRS as we know. But there's a wealth of evidence in the record, such as testimony by Intel and MediaTek, as to the anticompetitive effects of Qualcomm's rivals being unable to sell a licensed product to customers (and unable to control the effective bottom-line cost their customers incur). And on page 43 of the findings and conclusions, Judge Koh wrote that "the Court's focus is 'upon the effect of [the defendant's] conduct, not upon the intent behind it.'" (though anticompetitive malice is relevant, too)

Qualcomm's motion cited to some Ninth Circuit decisions, trying to argue that only a refusal to deal that is a bad business decision in the short run but a good one in the long run because of competitors being driven out of the market can be an antitrust violation. But that's not even what Aspen says. The dominant ski resort operator in Aspen presumably also had some very short-term benefits because a three-resort ticket (for all three resorts owned by that operator) was an attractive package in its own right, and nothing in Aspen says that only a long-term investment in the total annihilation of competitors constitutes an antitrust violation. What appears more important is that Qualcomm's refusal to deal had and still has anticompetitive effects on the chipset market. Qualcomm is/was not just one monopoly like the Aspen defendant, but the case is about two mutually-reinforcing monopolies (chipsets and patents, which are monopoly rights by definition, especially standard-essential patents). Qualcomm killed two birds with one stone by maximizing its patent royalties and greatly reducing the competitiveness of other cellular baseband chipset makers.

While it's unsurprising that Ericsson also supports Qualcomm's motion for a stay (Scribd link), the angle is interesting. Ericsson focuses on its use of Qualcomm chips in its base stations. However, Ericsson's motivation as a patent licensor to refuse to license chipset makers is well-documented, as is the fact that Ericsson itself once complained about such refusal to deal.

Another brief in support of Qualcomm has been filed by former Federal Circuit chief judge and pro-patent extremist Paul Michel.

Without a doubt, the Ninth Circuit will give some weight to the DOJ (plus DOD plus DOE) statement. But the FTC and its amici will now get to respond, and while the DOJ brief does contain some food for thought, I believe it can be effectively countered. However, at this stage it's about a motion to stay enforcement, so there won't be a full-blown analysis of the relevant questions. Qualcomm will be granted a stay if an analysis of limited depth results in a conclusion that there would be irreparable harm from immediate enforcement, that Qualcomm is reasonably likely to prevail on the merits, and that a stay is in the public interest. This hurdle is a lower one for Qualcomm than the actual appeal.

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Friday, July 12, 2019

Ninth Circuit grant's Qualcomm motion to expedite appeal of FTC's antitrust victory

On Wednesday, the United States Court of Appeals for the Ninth Circuit granted Qualcomm's motion to expedite its appeal of the FTC v. Qualcomm antitrust ruling (this post continues below the document):

19-07-10 Order Granting Qua... by on Scribd

These are the two key paragraphs:

"The opening brief and excerpts of record are due August 9, 2019; the answering brief is due October 4, 2019; and the optional reply brief is due October 25, 2019."

"This case shall be placed on the first calendar available upon completion of briefing."

That's a tight schedule for such a complex case, but the FTC's litigation team has been very efficient and will probably be able to craft a great response to Qualcomm's opening brief in the eight weeks they will have.

This schedule slightly increases Qualcomm's chances of obtaining a partial stay of enforcement while the appellate proceedings are ongoing. The length of such a stay is part of the consideration. However, even with this schedule it may still be spring or so before the Ninth Circuit actually hands down a decision, given the scope and scale of this case.

By the way, Samsung filed a motion to intervene, but only with respect to the sealing of its highly confidential effective royalty rates under its 2018 deal with Qualcomm.

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Thursday, July 11, 2019

United States Trade Representative launches investigation into France's digital tax for good reasons--and should look into copyright law, too

Yesterday the United States Trade Representative (USTR), Robert Lighthizer, announced, officially at the behest of President Donald Trump, the initiation of a Section 301 investigation (i.e., an analysis of whether a foreign government violates a trade agreement or acts unreasonably or discriminatorily against U.S. commercial interests) of France's digital services tax. The next formal step will be a Federal Register notice. This is what Mr. Lighthizer said:

"The United States is very concerned that the digital services tax which is expected to pass the French Senate tomorrow unfairly targets American companies. [...] The President has directed that we investigate the effects of this legislation and determine whether it is discriminatory or unreasonable and burdens or restricts United States commerce."

The President and the USTR are rightly concerned. France, with its almost plan-based highly-centralized economy and statist approach (= the opposite of Reagan's take that one has to get government out of the way) is an abysmal digital-industry failure, and TIMSS, the leading international math skills analysis, shows that French students are pretty much at a level with Third World countries, which means things are only going to get worse in the "Hexagon." Geographically, France is part of Europe; in educational terms, it's the worst country in the entire EU. By comparison, Singapore takes 25 times as many students (relative to the total number of students) to the top-performing level; Russia, ten times as many; and even the U.S., with its oft-criticized educational systems, seven times the number of France (again, this is a relative measure, so large countries don't have any advantage). While Germany performs 2.5 times as well as France (still far behind not only East Asia but also the U.S. and even a country like Kazakhstan), its politicans are incompetent and/or ideological enough to believe that France is their best partner in innovation policy, instead of trying to stay away from the failed French approach as much as possible.

There are two French computer game makers I think highly of: Ubisoft and (in the segment of "snackable" minigames) Voodoo.io. Other than that, I can't even think of a French technology product that would matter.

The French digital-tax initiative is ill-conceived because they don't want to tackle the real issue. The real issue is simply that the EU as a whole is a fundamentally-flawed supranational structure that does more harm than good. I sometimes recommend a great Wall Street Journal article (which doesn't even mention all of the problems), "Incredible Shrinking Europe."

Just like it was stupid and irresponsible in the first place to put a common currency in place without a common economic policy (as a result, the European Central Bank hasn't increased its interest rates even once in more than a decade, while the U.S. had half a dozen hikes during the same period), it was also incompetent and irresponsible to create a "Single Market" without some minimum tax standard or, in the alternative, an easy way to exclude members taking unfair advantage of this by positioning themselves as a low-tax access point to a market of 500 million consumers. As a conservative I'm all for tax competition, but fair tax competition and not just leeching.

The EU and the large member states of the eurozone are so poorly run that they didn't even seize the historic opportunity they had when Ireland needed a bailout. They could have conditioned the bailout on Ireland agreeing to some minimum tax standard. Obviously, leeches like Luxembourg (Juncker's country) wouldn't have liked this anyway, but Ireland is the #1 problem in this regard.

The Apple "state aid" case is the only crazy thing Mrs. Vestager did during her first term (other than that, I disagree only gradually, not fundamentally, such as with respect to some aspects of the Android case; I'm now looking forward to her second antitrust hammer--the final one for this term--coming down on Qualcomm soon; and on Twitter I repeatedly voiced the view that she was the best potential candidate for the presidency of the European Commission). That Apple-Ireland case has nothing to do with "state aid" and everything to do with "buyer's remorse" in the sense of the EU now seeing the problems that a Single Market without a common fiscal policy (at least a minimum tax standard) creates. Apple is not responsible for the EU's structural issues.

What France is doing with its digital tax is really odd. It's not a sales tax because there is no physical sale occurring in France when Facebook, for instance, displays an advertisement. Nor is it a tax on profits. Instead, France argues that because major digital platform companies are very profitable, foreign entities owe France a percentage of revenues attributable to the French market.

France wanted to make this happen at the EU level, but never got real traction as Germany was reluctant to support this with a view to potential backlash affecting its automotive industry. So France decided to implement something at the national level, and I'm glad the U.S., under its best president in decades, will seriously consider some retaliation in order to dissuade France from this idiocy. Maybe the U.S. International Trade Commission, with its investigative resources, will also be of help in the process. The top-listed candidate of Macron's party in this year's EU Parliament elections made it very clear that they view Google, Amazon, Facebook and Apple as enemies of the state, or collectively as the equivalent of a rival world power, all of which is downright insane.

While I'm not going to do any more copyright reform-related posts on this blog (maybe a new blog further down the road), I would like to just say that Articles 15 and 17 (previously Articles 11 and 13) of the EU Copyright Directive adopted this year are also the equivalent of a digital tax discriminating against U.S. Internet platform makers. France was the driving force behind Article 17 (upload filters), while Germany was more interested in Article 15 (link tax). In fact, France politically blackmailed Germany by threatening to block the Nord Stream 2 pipeline deal with Russia at the EU level if Germany hadn't supported Article 17 of the copyright bill. That is not a conspiracy theory. It was confirmed by reliable sources and reported by Frankfurter Allgemeine Zeitung, and it was obviously no coincidence that both the gas pipeline issue and copyright reform were the only two "A items" on the EU Council's April 15, 2019 agenda (so as to make it clear to Germany, which was having second thoughts, that derailing copyright reform would trigger some energy-related blowback).

The "upload filter" paragraph of the copyright bill is practically a digital tax because it creates a liability regime that is so strict that even the term "strict liability" the way it is reasonably understood in the U.S. would be an understatement. It gives enormous leverage to copyright holders (many of whom are European collecting societies and publishers) against major Internet platform companies in licensing negotiations. There are, as we all know, many very significant U.S. copyright holders (Hollywood, music industry etc.), and they'll benefit from this, too, but the European share of copyrighted works consumed in Europe is hugely greater than the European share of digital platforms used by Europeans. Therefore, this is another means of unreasonably and discriminatorily sucking money out of major U.S. Internet platform companies. It's like the digital tax, but indirect: collecting societies and publishers will initially receive the money, but obviously this will result in incremental tax payments in Europe, including France.

EU member states have some limited flexibility--a modicum of wiggle room--regarding the transposition of Article 17 into their national laws. France is already pressing ahead with the most draconian and unbalanced implementation imaginable, and other European countries may follow, though there's clearly less enthusiasm for this elsewhere.

I will follow the Sec. 301 investigation of the digital tax issue, and I strongly recommend to major Internet platform companies and the industry bodies representing them to raise the EU Copyright Directive, or at least its transposition into French law, in this context. It really is an indirect digital tax. Doing so now might dissuade other EU member states from adopting France's copyright extremism. While that is not what President Trump was elected for, it would happen to have significant benefits for European Internet users, too.

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Tuesday, July 9, 2019

Qualcomm files motion with Ninth Circuit for partial stay of FTC antitrust remedies

Within only a few days of Judge Lucy H. Koh's order unsurprisingly denying Qualcomm's motion for a stay of the Federal Trade Commission's antitrust remedies, Qualcomm has taken this matter to the United States Court of Appeal for the Ninth Circuit (this post continues below the document):

19-07-08 Qualcomm Motion to... by on Scribd

I just wanted to be of service and share the document with you, though I lack the time right now to go into detail (I may do so later, most likely after Qualcomm's reply brief). Therefore, just a very few observations for the time being:

  • Originally, Qualcomm wanted Judge Koh to stay all aspects of the injunctive relief obtained by the FTC. Now Qualcomm focuses just on two parts: (i) the requirement to extend exhaustive SEP licenses to rival chipset makers, and (ii) the "No License-No Chips" part, which includes an obligation to renegotiate existing licenses.

  • On LinkedIn, the chairman of Orrick Herrington Sutcliffe's antitrust practice group, John J. "Jay" Jurata (whom I previously mentioned in connection with a paper on the UK Unwired Planet global FRAND rate case), noted an irony:

    "Even Qualcomm believes patent hold-up is real! 'If this Court does not grant a stay, Qualcomm will be forced to negotiate under the cloud of an injunction requiring it to accept terms to which it would not otherwise agree.'"

    I obviously remember Qualcomm's various policy statements and amicus curiae briefs arguing that SEP holders should be entitled to injunctions. The most outrageous one of those bashed Apple at a time when Apple was just a customer--not an adversary--of Qualcomm's, and was subsequently withdrawn. So Qualcomm has no qualms about others being "forced to negotiate under the cloud of an injunction requiring [them] to accept terms to which [they] would not otherwise agree."

  • What Qualcomm's attorneys, now led by Goldstein & Russel's Tom Goldstein, put front and center is that the FTC brought the lawsuit with only two commissioners voting in favor (at the time, there were only three commissioners), and that former Qualcomm attorney (in terms of his positions, forget the "former") and now-Antitrust Assistant Attorney General Makan Delrahim and FTC commissioner Christine Wilson disagree. So they're trying to discredit the case and the ruling, and I have my doubts that this will impress the Ninth Circuit, especially given Judge Koh's stellar reputation throughout and beyond that circuit as well as the fact that her judgment is simply in the global antitrust mainstream in light of other decisions in the EU and in Asia (with a second EU antitrust hammer having been unofficially announced by DG COMP to come down in the months ahead, possibly just at a time when the Ninth Circuit will be working on a decision on this motion).

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Sunday, July 7, 2019

Nokia privateer Conversant keeps on losing: UK court declares patent invalid due to added matter

Conversant, a privateer asserting former Nokia patents against different industry players (though Nokia denies any economic interest or revenue share in Conversant), has suffered some significant setbacks lately in France (against LG) and the United States (against Apple). On Thursday (Independence Day), it also lost a UK case (this post continues below the document):

19-07-04 Conversant v Huawe... by on Scribd

Justice Richard Arnold of the England & Wales High Court (EWHC)--see this post on a panel speech he gave in Munich a few months ago--has ruled that EP1797659 on a "slow Mac-E for autonomous transmission in High Speed Uplink Packet Access (HSUPA) along with service[-]specific transmission time control" is invalid due to added matter. HSUPA is a 3G protocol. Huawei's primary invalidity contention was that the claims of the '659 patent were amended pre-grant so as to read onto a particular technology in HSUPA called Uplink DRX (DRX = discontinuous reception) by adding matter into the claim beyond the content of the application as filed. Under Art. 123(2) of the European Patent Convention, such additions are not allowed, and patent claims containing such added matter are invalid.

According to the judgment, Huawei "dispute[d] essentiality, and hence infringement, and counterclaim[ed] for revocation on the grounds of added matter, obviousness and insufficiency." With the added-matter allegation having been found to be meritorious, it's game over for this Conversant patent in this UK court.

In an attempt to piggyback on that terrible Unwired Planet precedent (which Justice Birss, not the far more balanced Justice Arnold, is responsible for), which the Supreme Court of the UK agreed to hear, Conversant is seeking a global FRAND rate determination against Huawei in the UK. But apart from whether the related appeal (which Justice Arnold was well aware of, but which did not prevent him from holding a purely technical trial last month anyway) will succeed (I hope and believe it will), Conversant needs to prevail on the merits of at least one patent claim in order to have a basis for claiming anything, be the regional scope global, multinational, national, regional, or local.

So where does Conversant's overall patent assertion campaign against Huawei stand?

It all stated in July 2017. The original claim form alleged that Huawei was infringing four Conversant patents:

  • EP1031192 on "packet radio telephone services";

  • EP0978210 on "connecting a multimode terminal to the network in a mobile communication system";

  • EP'659, which the judgment shown and discussed above has disposed of; and

  • EP1878177 on a "fixed HS-DSCH or E-DCH allocation for VoIP (or HS-DSCH without HS-SCCH/E-DCH without E-DPCCH)".

The first decision had to be made on Huawei and ZTE's jurisdiction challenge. Justice Henry Carr heard that challenge in early 2018. He held that there was no irreparable harm that Huawei and ZTE would suffer from the denial of a stay, however, provided that Conversant would be precluded, by way of a stipulation, from later claiming that Huawei and ZTE submitted to UK jurisdiction by continuing on the technical side. Conversant agreed, so the case continued.

In April 2018, EP'210 expired, and EP'192 had only six months left. Against that background, Justice Carr scheduled two technical trials: a "Trial A" for EP'177, and a "Trial B," further to which the judgment by Justice Arnold that is shown and discussed above came down.

Back then, Justice Carr already had a certain premonition. He stated that in the event of Conversant losing both of those trials (A and B) over allegedly standard-essential patents that had not yet expired, "then it [would be] very unlikely that a FRAND hearing [would] proceed."

With Conversant having lost Trial B (over EP'659), its fate now depends on Trial A. In fact, Conversant even agreed to delay entry of partial judgment, which means it can't immediately appeal the added-matter ruling.

Trial A was originally going to be about just one patent--EP'177--but Conversant amended that one further and injected two divisionals (EP3267722 and EP3197206) into the Trial A proceedings. In order to do so, Conversant had to bring the UK equivalent of a U.S. motion for leave to amend a complaint, which Justice Birss (who held a case management conference) granted.

An interesting detail regarding the three Trial A patents is that Conversant claims EP'177 and EP'722 are essential to LTE, while EP'206 is allegedly essential to UMTS. Originally, Conversant's UMTS patent in this dispute was EP'659, but that's the one that was just held invalid due to added matter.

Conversant is running out of ammo. Time is not on its side either. How come it doesn't fare better with those former Nokia patents? Maybe Conversant's management and investors simply lacked the knowledge they'd have needed to understand what they were buying. But it's also possible that Nokia itself overrated the relevant portfolio.

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Thursday, July 4, 2019

Judge Koh (not unexpectedly) denies Qualcomm's motion to stay enforcement of FTC antitrust remedies

Yesterday, on the eve of the Fourth of July, Judge Lucy H. Koh of the United States District Court for the Northern District of California ruled on Qualcomm's May 28 motion to stay the enforcement of the Federal Trade Commission's antitrust remedies as well as on a motion by the FTC to strike material that Qualcomm sought to inject into the NorCal record from its settled SoCal litigation with Apple (this post continues below the document):

19-07-03 Order Denying Qual... by on Scribd

Like in that Bruce Springsteen song, "Just say goodbye it's Independence Day." Goodbye to the Northern District, I mean. Now there's nothing left to do in San Jose, and on to the Ninth Circuit.

The only thing that surprised me in this context was when someone told me on Twitter Qualcomm's stock was down 3% after hours on this news. At least the investors who talk to me, individually or on group calls, perfectly knew that this was the most likely outcome, especially since Qualcomm for the most part would have required Judge Koh to contradict her own ruling (a true opus magnum), at least implicitly. It wasn't 100% unthinkable that maybe some irreparable-harm argument might have gotten some traction, but I couldn't really find a totally pressing reason for a stay, for the reasons I explained in previous posts.

What's going to be different now before the Ninth Circuit is that there will be a panel of new judges. Judge Koh is still sitting on the district court, but only because Donald Trump's 2016 victory derailed her already fairly advanced nomination process. Frankly, it might even have been good for her in the short term because she then got this historic FTC case just a couple of months later. On the Ninth Circuit, she most likely wouldn't have had a similar opportunity, and she doesn't seem to care about titles or salaries as much as about doing high-quality meaningful work. But I really do wish her the best for being promoted as soon as possible at this stage. With so much partisan divide it may be difficult, and I totally agree with those Republicans who would like to bring more political balance to the Ninth Circuit (which has already happened under this President to some extent), but Judge Koh is so obviously a perfect choice for the next Ninth Circuit nomination and certainly not the kind of ideological judge because of whom Rush Limbaugh calls the Ninth Circuit the "Ninth Circus." She would be a great consensus candidate, and that would be a politically smart move for Republicans (not with a view to California, which they obviously won't carry anytime soon, but from a broader perspective). But that's a separate story, though it is related to this process at this procedural juncture.

The order doesn't specifically discuss the parties' (or the amici's) arguments. The decision is what it is.

As a secondary item, Judge Koh granted an FTC motion I hadn't previously reported on. The FTC moved to strike Qualcomm's opening slides from the Apple v. Qualcomm antitrust and FRAND trial in San Diego. While Qualcomm's lead counsel in that case, Evan "Fire!" Chesler, was delivering his opening statement and showing those slides to the jury, the settlement was already a done deal. In fact, the settlement was already announced on Apple's websites when he still had about 20 minutes left for that opening statement.

Antitrust AAG Delrahim's folks also tried to leverage that material in a footnote of their filing asking Judge Koh to hold a separate hearing on remedies. They're obviously Qualcomm's best friends in DC--they and FTC commissioner Christine Wilson, I mean.

So what is that about? It's all about diverting attention away from the real issues surrounding Qualcomm's business practices by trying to blame it all on a huge conspiracy between Apple and the FTC. Those opening slides contain statements that, if taken out of context, may be understood by many people to believe Apple was basically just an evil empire trying to squeeze a highly innovative supplier and licensor. So there were some Apple internal documents about a strategy designed to "hurt" Qualcomm and to "devalue SEPs." Like I said, if taken out of context, one may interpretin a certain way. Some important context was, however, given in January. Qualcomm treated Apple in such a way that Apple, in the aftermath of a "watershed moment" as an Apple executive described it, determined it had to fact because otherwise it was going to be at Qualcomm's mercy and Qualcomm was going to shamelessly exploit that leverage. (The question now is again to what extent Apple was at Qualcomm's mercy with a view to 5G modems that it had to settle despite having brought some fairly strong claims against Qualcomm's conduct.)

Procedurally, the problem there is that neither the FTC nor Apple ever got to react to that material, at least not in the FTC case. No discovery, no cross-examinations, nothing. That's why the FTC moved to strike those opening slides. The material quoted in them was available to Qualcomm long before, and if they had wanted, they could have discussed any of that in January (when the FTC trial took place).

As for the term "devalue SEPs," it's something that I've been accused of contributing to by a formerly significant smartphone maker in a private conversation outside the Mannheim court. The way I see it, "devalue" can have a nonjudgmental meaning and a slanted one. The nonjudgmental one is to bring a price down, and if you do that because the original price is outrageous, then there's nothing objectionable or reproachable about it. Of course, there is that common connotation that it's about bringing the price of something down below its fair value. That's the way Qualcomm would obviously like to interpret that quote from some Apple-internal document. But they apparently preferred to do so without testimony on what was really meant and why and how.

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Wednesday, June 19, 2019

Qualcomm elaborates on its theories of irreparable harm from immediate enforcement of FTC's antitrust remedies

Originally, Qualcomm asked Judge Lucy H. Koh of the United States District Court for the Northern District of California to set an extremely tight briefing schedule for the San Diego chipmaker's motion to stay the enforcement of the victorious Federal Trade Commission's antitrust remedies pending an appeal to the Ninth Circuit. If the court had adopted that schedule, Qualcomm would even have been prepared to waive its right to file a reply brief in a support of its motion.

But Judge Koh declined to give the FTC only a very few days for its opposition filing--and Qualcomm, though it still could have waived its right to file a reply brief, elected to file a reply brief yesterday (not a single day before the deadline) and counter not only what the FTC wrote but also the amicus curiae briefs submitted by LG Electronics and ACT | The App Association (this post continues below the document):

19-06-18 Qualcomm Reply Iso... by on Scribd

That reply brief is far more interesting--because it is a lot more specific especially on the question of irreparable harm--than the original motion. While I would categorize some of Qualcomm's reply arguments as non sequitur material and consider some others outright smokescreens, that reply brief does contain food for thought.

The first footnote is, however, almost a concession that a stay of the entirety of the FTC's remedies may have been too much to ask for:

"Should the Court determine that the irreparable harm Qualcomm would suffer as a result of provisions (1) and (2) of the injunction does not warrant a stay of the entire Order, Qualcomm respectfully submits that the Court should enter a partial stay of only provisions (1) and (2) of the injunction."

Accordingly, the reply brief focuses on the requirements to (re)negotiate agreements, to sell chips to unlicensed customers, and to extend exhaustive SEP licenses to rival chipset makers. Those requirements flow from the first two provisions of the injunction the FTC secured--the only ones with respect to which Qualcomm, according to the FTC and also in my observation, even attempted to make an irreparable-harm argument in its original motion.

As for any potentially renegotiated license agreements, Qualcomm insists that any harm could not be undone should Qualcomm prevail on appeal. Qualcomm labels as a "red herring" the FTC's argument that Qualcomm would still obtain "fair value" for its SEPs. Qualcomm says the problem is not that those new agreements would be negotiated without the well-known "No License-No Chips" kind of leverage, but "because of the need to negotiate in the shadow of an Order that declares—erroneously, in Qualcomm's view—that Qualcomm's typical licensing terms are unreasonable." The latter is, by the way, what I told CNN within less than 24 hours of the ruling.

Qualcomm is concerned about licensees stopping royalty payments "under valid contracts" (though Judge Koh's order obviously serves to invalidate many such agreements), "even if temporarily," and mentions Huawei as an example.

Then Qualcomm attacks the FTC's suggestion that Qualcomm could, after a successful appeal, seek "damages for any past infringement" against those who (at least temporarily) stopped royalty payments. Qualcomm states something indisputable: a license is a defense to an infringement claim as 35 U.S.C. § 271(a), the statutory definition of infringement of a U.S. patent, applies only to those who practice a patented invention "without authority."

Qualcomm is furthermore worried that the non-discrimination provision of its FRAND licensing commitment or "most favored" provisions in some of its license agreements could ultimately drive Qualcomm's royalties to the "lowest common denominator."

Qualcomm, with a declaration by one of its licensing executives (John Han), alleges that it would be impossible to prevent irreparable harm by agreeing only on "short-term or interim licenses" (as the FTC called them) or (again quoting the FTC) "contractual provisions that would mitigate or eliminate any long-term adverse consequences to Qualcomm").

All of that needs to be considered, but none of it is convincing. The appeal will take time, but we're talking about roughly a year. Negotiations, however, also take a fair amount of time. The FTC v. Qualcomm decision doesn't require Qualcomm to accept a specific set of terms within a short time frame lest the company be held in contempt. I believe it just comes down to how much of a risk Qualcomm is willing to take when betting on a successful appeal. If Qualcomm really was sure that it would prevail, then it could insist on contractual provisions that protect its rights, and there would not be any contempt sanctions before the Ninth Circuit decides. And what's practically totally impossible is that Qualcomm could not only be forced to enter into a license agreement on unfavorable terms with a first licensee and that a second licensee would then have enough time to also get a better deal (or an adjustment under a "most favored" clause) before the Ninth Circuit renders a decision. And even if the appeal surprisingly took longer, anything that happens as a result of a decision that is being appealed would hardly serve as a FRAND benchmark in any other litigation. I would expect any other case to simply be stayed in that event.

What Judge Koh could do now is provide some guidance to Qualcomm on what structural options it does have even if a stay is denied (such as that Qualcomm would not act in contempt of the injunction if it insisted on contractual provisions that protect its rights, including retroactive adjustments, in the event of a successful appeal). Maybe Qualcomm is primarily hoping to obtain such clarification while formally moving for a stay.

With a view to LG Electronics, which supports the FTC's opposition to Qualcomm's motion, Qualcomm contradicts LG's description of the state of negotiations between the parties. Qualcomm notes that it "continuously supplied chips to LGE, without any interruption, throughout the negotiations"--but if it intended to do so going forward, the injunction against its "No License-No Chips" tactics wouldn't make a difference. Qualcomm mentions "a written offer to enter into binding FRAND arbitration with LGE to try and resolve the dispute, which included an express guarantee of chip supply during the pendency of the arbitration, but LGE declined that offer." As I've explained on various occasions, including my FTC v. Qualcomm trial coverage, arbitration isn't necessarily fair. Without the right parameters, it can give an extremely unfair advantage to a patent holder making out-of-this-world royalty demands since the licensee can't counterbalance a supra-FRAND royalty demand by proposing a negative royalty.

Qualcomm also argues that a requirement to sell chips to unlicensed OEMs would have profound implications due to patent exhaustion. Qualcomm rejects the FTC's argument that Qualcomm should simply "price[s] its modem chips to reflect the fair value of its patents" (which, by the way, pretty much every other chipset makers does, and even Qualcomm does so in some other business areas than cellular modems). Qualcomm argues that it would either lose chip sales or its ability to fully monetize its SEPs "so long as other chip makers are not licensed and thus do not price into their chip offerings the cost of Qualcomm's patents, this would leave Qualcomm in the untenable position of either charging much more for its chips than do its competitors (and therefore likely losing the sales), or reducing its chip prices so that, once again, they do not reflect the fair value of Qualcomm's patents."

The passage I just quoted may very well be the weakest one in that entire reply brief. If its chipset makers aren't licensed, then this is an apples-to-bananas comparison as device makers (as many of them--and competing chipset makers such as Intel--testified in the FTC litigation) would still have to factor in the cost of licensing Qualcomm's patents.

Finally, and as we all know, Qualcomm dreads the notion of having to extent exhaustive SEP licenses to rival chipset makers. But Qualcomm's argument for a stay of that particular provision comes down to what Judge Koh has already rejected at the merits stage: the question of efficiency of multi-level licensing (licensing cellular SEPs to baseband chipset makers and other patents to device makers) versus component-level licensing. Qualcomm says that neither OEMs nor chipset makers would jump to pay royalties, so there would be disputes over whether certain patents are practiced by particular products or not. Qualcomm describes this as a risk of "obstruction and delay," but that holdout-style argument does not appear to be sufficient to make a case for irreparable harm. Other patent holders face those challenges all the time (as the FTC noted in its opening statement back in January).

In that context, Qualcomm also demands "adjudicative comity" (respect for other jurisdictions) because its settlements with China's NDRC and the Taiwan Fair Trade Commission did not involve a requirement to extend licenses to rival chipset makers. I don't understand the comity issue here: if additional parties get licensed, it doesn't frustrate any policy or decision by other antitrust agencies. If the NDRC or the TFTC settled their cases without such a requirement, why would it hurt them if, say, MediaTek obtained a license as a result of the U.S. FTC case? I can't think of any negative effects on competition in those markets.

Part B of Qualcomm's reply brief addresses the likelihood of success of its appeal, with an emphasis on the need for a court to determine that violations are "likely to reoccur" before the FTC can be granted the injunctive relief it successfully sought here. What is missing here is a proposal for how an antitrust offender in a dynamic market could ever be enjoined from some behavior since the court would always have to set some sort of cutoff date.

Part C, finally, makes a national security-centric public-interest argument, with a particular focus on the decision by the Committee on Foreign Investment in the United States (CFIUS) to block Broadcom's attempted acquisition of Qualcomm. The FTC's position was that the CFIUS decision was unrelated to the behavior at issue in the antitrust case, but Qualcomm points to the CFIUS's position that "[c]hanges to Qualcomm's business model [as a result of an acquisition by Broadcom] would likely negatively impact the core R&D expenditures of national security concern." I tend to agree with Qualcomm that the content of the CFIUS letter is significantly more helpful in the public-interest context of the motion to stay than the FTC acknowledged. However, the CFIUS did not block Broadcom's hostile takeover of Qualcomm in order to enable continuing antitrust violations.

What I found interesting is that, with reference to ACT | The App Association's amicus brief, Qualcomm's reply brief also refers to the European SEP policy debate and, specifically, the two competing CWAs (CEN-CENELEC Workshop Agreements). One of the exhibits attached to Qualcomm's reply brief is CWA1, which Qualcomm and similarly-minded companies support, while there is far broader and stronger support for CWA2.

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