Monday, August 21, 2017

Qualcomm fighting hard to avoid adjudication of Apple's patent infringement defenses

Qualcomm has to defend itself against the Federal Trade Commission in the Northern District of California, where Judge Lucy H. Koh has so far been great for the mobile device industry, and against Apple in the Southern District of California, where Judge Gonzalo P. Curiel held a hearing on Friday. Apart from case management orders scheduling a March 22, 2018 claim construction hearing and a September 28, 2018 final pretrial conference for the non-patent claims, all I know about the hearing is what I found on the Twitter feeds of Law.com's Scott Graham and MLex's Mike Swift.

It's unsurprising that, according to these two reporters, Judge Curiel will consolidate Apple v. Qualcomm with Qualcomm's lawsuit against four Apple contract manufacturers (who in turn invited Apple to join, which Apple appeared happy to do), and that Qualcomm appears unlikely to obtain a preliminary injunction requiring those contract manufacturers to resume their royalty payments. The overlap between those cases is gigantic, and seeking a preliminary injunction for the purpose of collecting payments is--let's try to understate how hard it is--a long shot.

I would like to comment on a couple of other things I read about the hearing. The first one is that Evan Chesler, Qualcomm's counsel and chairman of the Cravath firm, told Judge Curiel the 18 patents Apple claims are invalid and not infringed were just a "drop in the bucket" and adjucating them wouldn't put the parties any closer to a settlement.

In contract negotiations as well as legislative processes, I've seen parties downplay the importance of something that actually is important. So the question to ask ourselves here is whether Qualcomm is merely trying to streamline the case or suffering from a severe case of meritophobia. If you haven't heard that term before, it may be because I just coined it. What I mean to say with this Latin-Greek mix is that Qualcomm may fear the adjudication of the merits of (various of) its standard-essential patents.

Qualcomm brought a motion in July seeking the dismissal of nine patent-related claims (involving theories of invalidity, noninfringement, and exhaustion) that Apple added to nine similar claims when it amended its complaint. According to Qualcomm, there is no controversy since the parties had never discussed those patents and Qualcomm had never accused Apple of infringing them. But Qualcomm conceded that those patents "were included on a list of thousands of patents Qualcomm has declared as potentially essential to cellular standards." That list was attached to Qualcomm's motion as a 1,977-page exhibit (the highest number of pages of any exhibit I've seen so far).

In its opposition brief, Apple says "[t]he lengths to which Qualcomm is going to prevent any real examination of its patents is astounding."

The sheer size of the declared-essential patent portfolios belonging to certain companies has always been a problem. Qualcomm is not the first, and sure won't be the last, SEP holder to argue that a FRAND rate-setting decision should be made without looking at whether the patents in that portfolio are valid and infringed. Everybody knows that no court could realistically adjudicate each and every patent from a list that is almost 2,000 pages long. But the fact that one extreme isn't feasible doesn't mean that the other extreme--the "drop in the bucket" position taken by Mr. Chesler--is acceptable.

What's certainly unacceptable is the notion that someone can collect certain royalties based on the size of a portfolio of patents declared potentially essential to one or more industry standards. Overpatenting happens because patent offices around the globe issue too many patents; overdeclaration happens due to the parameters of standard-setting organizations (including what could happen in future litigation if a participant in the process failed to disclose a patent). There's just no way that Qualcomm can expect to receive billions of dollars in annual patent royalties from Apple (whether directly or through its contract manufacturers) without a court, prior to a FRAND determination, looking at the underlying merits.

It really surprised me that Qualcomm didn't respond to Apple's declaratory judgment claims with its own infringement claims. Failure to bring infringement counterclaims has significant consequences. Someone with many thousands of declared-essential patents can afford effectively losing the ability of enforcing some of those patents against a particular company. But Qualcomm could also have decided to bring claims over any standard-essential patents of its choosing.

The most abusive kind of behavior by patent holders is when they just point to the size of a portfolio and basically say: "We have so many of them that you will surely infringe something." There is no substitute for actual merits, and considering the track record of mobile phone patent assertions (including assertions brought by companies adverse to Qualcomm in the current situation)

In Scott Graham's observation, Judge Curiel may like the idea of setting a FRAND rate for Qualcomm's worldwide portfolio, while Apple would prefer to limit the U.S. case to U.S. patents (as patents are territorial rights, not worldwide rights). That's the second one of the two tidbits from the Friday hearing I wish to comment on.

When Judge Robart entered his famous anti-injunction-enforcement injunction in 2012, which the Ninth Circuit upheld, he prevented Google's Motorola Mobility from abusing some standard-essential German patents at a time when German courts were too patentee-friendly in this context. In terms of preventing a bad thing from happening, Judge Robart's decision was great. But there is this concept of "international comity," of countries respecting each other's sovereignty. Apple's counsel apparently stressed this notion at the hearing, saying (according to Mike Swift) that an anti-suit injunction preventing Apple from proceeding with its antitrust case in China, the UK, Japan and Korea "would be a complete insult to those countries."

Shortly after Judge Robart's anti-enforcement injunction, I saw first-hand what that abstract concept called "international comity" means in practice. I had a brief conversation with a senior German judge who wasn't personally presiding over the German Motorola v. Microsoft cases affected by Judge Robart's injunction, but who for professional reasons was very well aware of what was going on. When I said something like "that upcoming decision by your colleagues won't have impact after that order by a court in Seattle," the judge suddenly had an expression on his face and was trying hard not to say what he presumably wanted to say. While I thought Judge Robart's decision was good for the industry at large, I did feel the disappointment on the German side that a foreign court had interfered with their domestic affairs.

At this point I hope Judge Curiel won't deprive his Asian and European colleagues of jurisdiction over patents that are valid only in those jurisdictions, not in the U.S., no matter how much he may be driven by a desire to resolve an earth-spanning legal dispute. Judges generally want to be peacemakers, and that's a good thing, but since there is no such thing as a worldwide patent, it isn't always possible without creating bigger problems than the one (parallel litigation in multiple jurisdictions) that is seemingly solved.

The biggest problem, however, would be if a FRAND determination was based on roughly 2,000 pages listing potentially standard-essential patents. The fact that two separate case management orders were handed down on Friday--one with respect to the patent claims and one with respect to the non-patent claims--doesn't necessarily mean that the rate-setting decision will be made without the benefit of adjudicating some of the (in)validity and (non-)infringement questions. Qualcomm must show that its claims of being entitled to patent royalties have merit.

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Saturday, July 29, 2017

Samsung another step closer to design patent damages retrial: Judge Koh finds no waiver

Judge Lucy Koh of the United States District Court for the Northern District of California, who has been presiding over Apple v. Samsung since the Carter presidency (or not long thereafter, it feels) and recently positioned herself as a Judge Posner-like thought leader on standard-essential patent abuse, entered an order Friday evening local time that could very well (but won't necessarily) lead to another "AppSung" retrial (this post continues below the document):

17-07-28 Apple v. Samsung No Waiver of AOM Issue by Florian Mueller on Scribd

In April, Judge Koh had ordered the two perennial litigants to explain why Samsung had (as Apple claimed) or had not (as Samsung argued) waived the "article of manufacture" issue, which is central to any further determination of design patent damages in this case since the Supreme Court had overruled both the Federal Circuit and Judge Koh on that one. So the court is now dealing with the fallout of the first Apple v. Samsung matter that had made it to the top U.S. court while the Department of Justice is determining what positions to take on three issues raised in connection with the second Apple v. Samsung case.

I really like the structure and clarity of Judge Koh's analysis in her latest order because she simply declined to conflate procedures and merits. The court is now cracking one nut at a time, and the first nut was only waiver. However, in at least one context (footnote 5) the order goes beyond what was strictly necessary to arrive at a no-waiver finding and declares cases cited by Apple to be inapposite to the question of whether Apple was entitled to a disgorgement of profits on Samsung's entire phones.

As I had written on more than one occasion, it appeared unlikely that, in a dispute where both parties have spent enormous resources and generally pursued a throw-in-the-kitchen-sink approach, Samsung would not have said or produced anything that one could reasonably deem to have been sufficient to preserve the "article of manufacture" issue. The order now explains the chronology of this case, and as I had also said before, Samsung had not emphasized the article-of-manufacture question that much in the beginning, but over time that question got more and more attention.

What helped Samsung here was that it had proposed a jury instruction that explicitly raised the issue. There were also other references, though Samsung's earlier arguments in the case were apportionment-centric, and apportionment didn't get traction at any of the three levels (district court, appeals court, SCOTUS). Still, some of the arguments and especially some of the evidence related to apportionment can also be used in the article-of-manufacture context.

After succeeding with an extremely strong, "slam dunk" cert petition, after avoiding that the DoJ would have sided with Apple on statutory interpretation, after winning reversal, after persuading the Federal Circuit to remand the case to California, and after avoiding "sudden death" on remand, Samsung has cleared another hurdle. But that one still wasn't the final one.

Judge Koh now wants the parties to propose a test for identifying the relevant article of manufacture--a question with respect to which the Supreme Court previously didn't feel it got much help from the parties, but that was because the name of the game was to win (Samsung) or avoid (Apple) reversal, not to solve the whole problem. The second and third questions raised in the order relate to burden of proof. In my reaction to the Supreme Court decision I had already said that, while it's obvious the Supreme Court didn't need and especially didn't want to do it, it would really have been helpful if that one could have been clarified at that stage. Whoever will lose the next round is going to appeal the test Judge Koh will adopt and/or the decision she makes on the burden of proof...

Judge Koh's order leaves the door open to a finding on her part that she had previously been right for the wrong reasons. She may find that, based on the evidence in the record, those entire Samsung phones were the correct article of manufacture, so that even under the Supreme Court's statutory interpretation, the outcome would be the same as before. In that case, there wouldn't be another trial (unless there was another successful appeal). That would be an unfortunate outcome and lead to even more litigation over design patents (though future sophisticated defendants would obviously build their article-of-manufacture argument from the get-go).

The parties have until Tuesday to propose a briefing schedule, and a case management conference will be held on Wednesday.

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Monday, July 24, 2017

Public-interest statements by Apple, Intel, CCIA and ACT oppose Qualcomm's ITC complaint

Earlier this month, Qualcomm filed an ITC complaint in pursuit of a U.S. import ban against Apple's iPhones (except for iPhones coming with a Qualcomm baseband chipset). Last week, Apple, Intel and two industries groups (CCIA and ACT) filed public-interest statements seeking to dissuade the U.S. trade agency from granting Qualcomm its requested relief and proposing, at a minimum, that the public-interest aspects of this case be referred to an Administrative Law Judge.

An outright decision by the ITC not to investigate Qualcomm's complaint would be unusual and I wouldn't bet on this happening, but in this particular case there are reasons for which Qualcomm would probably be denied an import ban at the end of the proceedings even if it prevailed on the merits (if it came to worst, by a presidential veto).

Here are links to the different stakeholders' statements:

Qualcomm's decision to request an import ban that would force Apple to sell only Qualcomm-powered iPhones in the U.S. has raised huge concerns. It's a transparent attempt by Qualcomm to get rid of its only major competitor, Intel. With all that's going on in terms of antitrust investigations and lawsuits, such as the Federal Trade Commission's progress in the Northern District of California, the ITC will (either now or at a laters stage) have to give serious consideration to the competition issues surrounding Qualcomm's complaint.

The following passage from Intel's statement describes the market landscape:

"When it comes to cellular phones and tablets, Qualcomm's anticompetitive tactics have meant that consumers who wish to purchase a premium product that operates on the LTE network have few choices but to buy a Qualcomm modem—the only real alternatives are the latest Apple handsets with Intel modems, and a modest number of Samsung handsets and tablets using Samsung's own modems."

That doesn't sound like healthy competition...

As I've stated on previous occasions, while I am an app developer (next week we'll start out final beta test with many new testers invited every day), I don't necessarily feel that ACT represents me (a non-member anyway) on all policy issues (nor does any other organization). But when they do, I say so, and they do speak for me when they point out the following in their public-interest statement:

"Thousands of our members reach their customers through the ubiquitous mobile communications devices manufactured by Apple which are the articles at issue in the complaint at hand. App Association members rely on a competitive environment in the information and communications technology hardware space, without which our members would have no means to provide countless Americans (both in the consumer and enterprise context) with new and innovative software products and services that require an increasing amount of bandwidth and computing power."

Finally, it's worth noting that CCIA (the Computer & Communications Industry Association) has frequently filed amicus briefs and other submissions adverse to Apple's interests, but with respect to Qualcomm's complaint, even CCIA (which counts various fierce Apple competitors among its members) is on Apple's side.

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Wednesday, July 19, 2017

Qualcomm now suing Apple in Munich and Mannheim over energy-efficiency patents

This here is the latest development relating to Qualcomm's dispute with (not only, but most prominently) Apple. A few hours ago I just blogged about multiple U.S. court filings by Apple and four of its contract manufacturers and noted that there is an ever stronger alliance of companies critical of Qualcomm's business model.

A German news agency, dpa, now reports that Qualcomm has filed patent infringement lawsuits against Apple in the Munich and Mannheim Regional Courts (equivalent to U.S. district courts) over one patent in each venue. Both patents-in-suit reportedly relate to battery efficiency, so they may be from a couple of the patent families Qualcomm is asserting against Apple in the ITC.

Considering Quinn Emanuel's representation of Qualcomm in the U.S. and the choice of venues, I venture to guess that QE's German branch is involved. If so, Qualcomm has great representation over here, but whoever their counsel may be, Apple has an excellent defensive track record in Germany, where it typically works with Freshfields.

The dpa story mentions that Qualcomm believes the German legal system is favorable to patent holders' interests. Qualcomm is seeking a sales ban against all iPhones sold in Germany. The ITC complaint is limited to iPhones without a Qualcomm chip, but Apple isn't selling Qualcomm-based iPhones in Germany anyway (just devices with Intel chips).

In terms of timelines, the courts in Munich (depending on which panel of judges the case is assigned to) and Mannheim tend to be faster than the ITC--and there is no equivalent to the ITC's public-interest consideration or presidential veto.

The judges at the specialized patent infringement panels in Mannheim and Munich understand smartphone technologies very well. They are also first-rate case managers. Since German law doesn't have juries and even expert testimony can normally be avoided at trial (parties usually just file expert reports, and even if they bring experts along to the courtroom, they don't get much speaking time, if any), trials often take only an hour and a half. The judges typically walk into the courtroom with a very clear idea as to the outcome-determinative issues and ask very targeted questions. When I started watching those kinds of cases, I was a bit shocked at what kinds of trivial patents sometimes win the day in German courts (and result in injunctions, which are a legal--not equitable--remedy), but over time I thought they were increasingly balanced. While I have yet to see a patent in this industry (including Apple's patents, to be sure) that I believe justifies a 20-year monopoly, I respect other views and can separate that part from the competence and fairness I saw over and over again. Qualcomm shouldn't expect a cakewalk, much less against Apple.

[Update] On Friday, Qualcomm actually filed the following in San Diego: "Qualcomm respectfully requests that the Court enjoin Apple from pursuing its Foreign Actions and from initiating additional duplicative foreign actions against Qualcomm during the pendency of the U.S. Action." I've uploaded that PDF to Scribd. So Qualcomm doesn't want Apple to sue abroad, but views patent infringement matters differently. Today's German filings don't lend extra credibility to Qualcomm's motion for an anti-suit injunction in the U.S., even though Qualcomm will have thought how to thread the needle and distinguish its own foreign action from Apple's.

dpa just told me on Twitter that the German patents-in-suit are from the same patent families as two U.S. patents:

[/Update]

Just like in the U.S., Qualcomm made a well-orchestrated announcement. At 5 AM in the morning by San Diego time (unless they already prepared it beforehand), dpa quoted Qualcomm's top lawyer. I haven't seen a more PR-oriented litigant in this industry. There was a lot of PR activity related to the Nokia-IPCom dispute, but that was nothing in terms of orchestration compared to what Qualcomm is doing now. For example, on the occasion of its ITC complaint, Qualcomm published a very professionally-crafted infographic...

Apple is very low-key in this regard. But as I wrote toward the end of my previous post, it appears to me that Qualcomm is placing a whole lot of emphasis on doing what it believes prevents investors from shorting the stock, and that priority may not always be the best choice with a view to litigation. Apple can and does afford the luxury of strictly focusing on a few key issues--and Apple has a broadbased alliance of companies and other stakeholders on its side.

There's so much that Apple and Qualcomm cannot agree on, and apparently "the name of the game" is one of those areas of disagreement.

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Apple and its contract manufacturers present united, ever stronger front against Qualcomm

On Monday, four of its contract manufacturers (the ones Qualcomm is suing in the Southern District of California) impleaded Apple into Qualcomm's breach-of-contract suit. Before midnight on Tuesday, Apple and its contract manufacturers (the most well-known of which is Foxconn) made various filings in San Diego. It will definitely take me some time to digest, but as I follow the various Qualcomm matters closely, I can share some observations here already.

First, an overview of the kinds of documents that have just been filed:

  • The contract manufacturers responded to Qualcomm's complaint. That one alone spans almost 250 pages (without exhibits). You can find it below this list or on Scribd.

  • The contract manufacturers oppose Qualcomm's motion for a preliminary injunction. I uploaded that one to Scribd as well.

  • Apple additionally opposes Qualcomm's preliminary injunction. It has asked the court for permission to file its own opposition brief, which I've uploaded to Scribd, too.

    In a recent post I got the "obstruction of justice" theory wrong. I now have to correct what I wrote then: I thought the Qualcomm suit against contract manufacturers was considered obstruction in its own right, but it's now clear that what Apple means is something I also find extremely objectionable: Qualcomm's contract terms according to which companies like Apple aren't allowed to work with competition authorities.

  • Apple filed an answer to the third-party complaints by its contract manufacturers. Apple unequivocally stands by the manufacturers and basically says: "Qualcomm isn't entitled to what it claims, but if all else fails, the manufacturers are contractually entitled to indemnification from us as per the terms of our agreements with them." That's good news for the contract manufacturers since, theoretically, Apple could have disputed both Qualcomm's claims and the contract manufacturers' entitlement to indemnity. Others have done so in comparable situations for sure.

  • Apple and the contract manufacturers jointly seek consolidation of this case with Apple's case against Qualcomm. Ever since Qualcomm brought its case against the contract manufacturers I've taken a consistent position on it. I now dare to predict that consolidation is a slam dunk. It would have been a slam dunk even if the contract manufacturers hadn't challenged some of Qualcomm's patents (which Apple is also challenging), but now there is so much overlap I can't imagine any court in the world would want to make a duplicative effort of gigantic proportions.

Here's the 268-page booklet with which the contract manufacturers responded to Qualcomm's complaint against them (this post continues below the document):

17-07-18 Contract Manufacturers' Answer to Qualcomm's Complaint by Florian Mueller on Scribd

With so many trees before us, let me make my little contribution to seeing the forest. No point in going into detail on things that are common and expected, or even boilerplate. What matters now is the strategic landscape, and when quickly going over these filings I tried to identify the parts that go that extra mile and say something about the parties' relationships and resolve.

While the contract manufacturers say they would have had to implead Apple into the case anyway (if Apple had so requested, which it may informally have done anyway), and while it's a reasonable assumption that their indemnification also depends on them at least making reasonable efforts to defend themselves, those contract manufacturers are independent parties, not like wholly-owned subsidiaries of Apple Inc.

The manufacturers raise three dozen affirmative defenses, which is at the upper end of the range but not unprecedented. The really impressive part is where they raise counterclaims: 67 counts. Those fall into two groups, either one of which is very bad news for Qualcomm:

  • FRAND-related antitrust and contractual counterclaims (on that basis they are, for example, seeking a disgorgement of whatever was paid on top of FRAND), and

  • patent invalidity, non-infringement, and exhaustion.

Through their FRAND claims, the contract manufacturers raise the kinds of issues that antitrust authorities in multiple jurisdictions, Apple, and consumers have raised (and that many others have supported through amicus briefs and an open letter to President Trump).

The patent claims aren't nearly as fundamental as the FRAND claims, but in terms of the contract manufacturers throwing down the gauntlet, they are huge: licensees are often contractually barred from challenging licensed patents, and even where they would be free to do so, they rarely do. To me, this decision on the contract manufacturers' part means that they want to bring about change regarding Qualcomm's practices, and they don't want it to any lesser degree than any of the other stakeholders I mentioned in the previous paragraph.

I'm pretty sure the motion for a preliminary injunction will fail. Qualcomm can't show a likelihood to succeed on the merits, and irreparable harm (despite the amounts being substantial) is something else than "to get our money," a quote from a public statement by Qualcomm's top lawyer (that quote appears in the manufacturers' opposition brief). Qualcomm still has the chance to argue irreparable harm in its reply brief, but so far I'm really very skeptical. And, as I said, Qualcomm won't be able to dissuade the court from consolidating those two huge cases.

The contract manufacturers could have done a lot less here than they have. A whole lot. Qualcomm has now made itself some additional enemies, and at least some of those enemies have considerable clout in China, a jurisdiction that has previously looked into Qualcomm's business model.

So far, Qualcomm's best initiative in all those U.S. cases was its motion to dismiss the FTC's complaint (there was a possibility that some kind of amendment would have been required, though it didn't happen), and it's too early to take a position on its ITC complaint, but its decision to drag the contract manufacturers into this dispute looks like its worst mistake. For now at least. Instead of hiding behind Apple, the manufacturers are now playing an active role, and their perspective is in some ways complementary to Apple's--and vice versa.

The motion for a preliminary injunction is a downright Hail Mary pass. One might say the same about any attempt by Qualcomm to oppose consolidation. It's very clear to me, and I know a lot less about all of this than Qualcomm's executives, in-house and outside counsel. So why are they doing this at all?

I can't help but make the observation that Qualcomm is struggling here because of conflicting goals:

  • antitrust investigations/decisions in different jurisdictions (sometimes it's hard enough for companies if they have to design a strategy just because of a couple of investigations, with a potential move being good in one jurisdiction and bad in another, but here there's also private litigation in parallel),

  • Apple's case,

  • the contract manufacturers' claims (consistent with Apple's, but still a new challenge that Qualcomm could have avoided),

  • PR considerations (Qualcomm basically issues a press release every time it files a complaint), and

  • investor relations (somewhat related to PR, and all about preventing the stock price from falling further and further) and fiduciary-duty considerations.

It must be incredibly difficult at times for Qualcomm to set its priorities. Just one example: its action against the contract manufacturers serves the purpose of showing to investors that it's pushing very hard to collect money, and since it's about shareholders' money, it might be that Qualcomm's decision was driven by fiduciary-duty obligations, though a preliminary injunction for the purpose of collecting money is so outlandish that I'm not sure anyone could have held them liable for not trying. It may also be a means of showing to antitrust authorities that Qualcomm believes it never committed any wrongdoing related to licensing. But the PI motion will most likely fail; Qualcomm now has additional enemies; and consolidation will almost certainly happen, so everything will only get harder and more time-consuming for Qualcomm in the end.

A related observation: public statements of the "to get our money" kind can backfire. At least that's what the contract manufacturers' lawyers think, which is why they quoted that passage.

To the extent Qualcomm tries to shield its directors and officers from liability issues, that's a necessity, but it doesn't make its complaints and motions any more meritorious. If Qualcomm goes beyond an absolute necessity and just tries to make investors feel as good as possible about an increasingly difficult situation, that will only have short-term effects because sooner or later the only thing that will matter is the actual outcome (in terms of judgments or a settlement). Technically, the jury is still out on this, but common sense suggests that Qualcomm should have tried to focus just on Apple and the regulators and should have left the Foxconns of this world alone. Dragging them into this--apparently a boomerang--makes things harder, not easier, and slower, not faster, for Qualcomm as it seeks to defend its business model and licensing terms, which are now being challenged from multiple sides and angles, in multiple jurisdictions, by multiple types of stakeholders.

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Tuesday, July 18, 2017

Apple accepts invitation by its contract manufacturers to join another Qualcomm fray

On Monday by San Diego time, the four Apple contract manufacturers who have to defend themselves against a Qualcomm contract suit in the Southern District of California (Foxconn/Hon Hai, Pegatron, Compal, and Wistron) each filed a third-party complaint for contractual indemnity against Apple, and based on what they say and what I can easily imagine, Apple is more than happy to join this additional fray. Here's Foxconn's complaint (this post continues below the document):

17-07-17 Foxconn Impleading Apple in Qualcomm Case by Florian Mueller on Scribd

Paragraph 22 of the complain with which Foxconn impleads Apple says that "at Apple's request, Foxconn must implead Apple into the action." While the complaint doesn't affirmatively say that Apple requested this invitation, paragraph 23 does state that "Apple has consented to be impleaded into the current action because it has an indemnification obligation to Foxconn, and so that it may assert various claims and defenses to Qualcomm's Complaint to minimize or eliminate its liability for such indemnification." So it's fair to say that, at a minimum, Apple gladly accepted this invitation. That presumption is based on the representation that Apple never intended to deny its indemnification obligation.

The fact that the contract manufacturers have decided to implead Apple into this case (adding yet another Qualcomm case to Apple's list of pending lawsuits) enables Apple to take even more direct control of its Qualcomm-related destiny.

In April, Qualcomm (in its counterclaims to Apple's Southern California complaint) already alleged that Apple had interfered with Qualcomm's contractual relationships with the contract manufacturers, which is why the related royalty payments ground to a halt a few months ago. Therefore, it really never made sense to me in the first place that Qualcomm brought a separate action against the contract manufacturers (in which it has meanwhile requested a preliminary injunction): the thing to do, in my view, would have been for Qualcomm to add the contract manufacturers to the case as third-party counterclaim defendants.

Now that the door has been opened to Apple in the contract manufacturers case and that Apple has apparently walked through it without anyone having to drag it into the case against its will, there are two cases pending in the same district court relating to the same patent royalty payments to Qualcomm over the same Apple products. Efficient use of judicial resources is something else.

In other news, Qualcomm's CEO has expressed his belief that the Apple dispute would be settled out of court. The question is, however, when. Depending on what decisions come down before, and also depending on what further headway the FTC and other competition authorities make against Qualcomm, the industry at large and, ultimately, consumers will hopefully benefit from it. This large-scale, cross-jurisdictional litigation will have been worth its while if, when all is said and done, chipset makers like Intel have a FRAND license to Qualcomm's standard-essential patents.

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Tuesday, July 11, 2017

Qualcomm's corporate structure and overseas patents: key issues in answer to FTC complaint

A couple of weeks ago, Judge Lucy Koh of the United States District Court for the Northern District of California denied Qualcomm's motion to dismiss the FTC's antitrust complaint. My theory is that Qualcomm was trying to necessitate an amended FTC complaint, ideally (from Qualcomm's point of view, not mine) to the effect that a FRAND rate-setting determination would have become necessary, in which case Qualcomm could have tried again to consolidate the FTC's case with Apple's case in the Southern District of California since I doubt that two federal courts (here, even in the same state) would have wanted to make duplicative and most likely inconsistent FRAND determinations. But Judge Koh was FRAND-friendlier than I would have thought, so Qualcomm had to file an answer to the FTC's complaint (almost six months after the filing of the competition authority's complaint).

As I said (in different words) in my commentary on Judge Koh's denial order, she went beyond the call of duty and explained her view of the law and many of the alleged facts beyond what would have been strictly necessary to deny a motion to dismiss. The noose is tightening for Qualcomm, and any FTC officials and commissioner(s) supportive of this case have already made so much headway--and the FTC's case has received such broadbased industry support in the form of amicus briefs and an open letter to President Trump--that I remain optimistic (not without caution, though) about the Administration's determination to fix the issue(s).

For the most part, Qualcomm's answer to the complaint is boilerplate. It's the usual deny-everything-that-is-not-110%-undeniable thing, but I'll highlight two aspects that I believe are going to be interesting as the case unfolds (this post continues below the document):

17-07-10 Qualcomm Answer to FTC Complaint by Florian Mueller on Scribd

In paragraph 17 of its complaint, the FTC described (in addition to stating Qualcomm's legal domicile and some financials) Qualcomm's corporate structure as follows:

"Qualcomm's principal businesses are the development, design, and sale of baseband processors and other semiconductor devices used in cell phones and other mobile consumer products (collectively, 'handsets'), and the licensing of intellectual property related to cellular technology. Qualcomm sells cellular baseband processors through a business unit called 'Qualcomm CDMA Technologies' or 'QCT.' Qualcomm licenses its intellectual property rights through a business unit called 'Qualcomm Technology Licensing' or 'QTL.'"

Normally, one would think that there's no reason Qualcomm would feel forced to deny the above. It's just so basic and, at first sight, nonjudgmental. Isn't Qualcomm selling baseband processors? Isn't it licensing patents? Isn't it doing the former through QCT and the latter through QTL? What's incorrect here? But Qualcomm denies the FTC's portrayal of its corporate structure and offers its own version instead:

"(ii) Qualcomm's businesses involve the development and commercialization of digital communications technologies; (iii) Qualcomm conducts business through reportable segments including Qualcomm CDMA Technologies ('QCT'), which develops and supplies integrated circuits and system software for use primarily in voice and data communications, and Qualcomm Technology Licensing ('QTL'), which grants licenses or otherwise provides rights to use portions of Qualcomm's intellectual property portfolio[.]"

I believe Qualcomm is trying to nuance its corporate structure here because it will try to somehow argue (which is going to be a tall order and I doubt it will persuade Judge Koh) that the Supreme Court's recent Lexmark ruling on patent exhaustion wouldn't apply to Qualcomm's situation.

Most of Qualcomm's nine defenses (stated at the end of the document) are legal theories that are identical or related to what didn't persuade Judge Koh in connection with the motion to dismiss, plus theories according to which whatever may appear anticompetitive is actually good for consumers (or, conversely, whatever remedy might appear procompetitive would ultimately harm consumers). Considering how much I, as a consumer, believe to have indirectly paid to Qualcomm over the years (vs. what other patent holders presumably collected), I disagree. In particular, the consumer-friendliest remedy would be to enforce Qualcomm's "to all comers" FRAND licensing obligation so that Intel, Samsung and others could sell baseband chips to device makers that come with a license to Qualcomm's standard-essential patents.

The defense that I think will raise the most interesting discussions is the ninth (and last) one:

"Any requested relief that would apply to the licensing of patents issued by a jurisdiction other than the United States would be barred as beyond the reach of the U.S. antitrust laws, including the FTC Act, and/or as an improper application of those laws due to principles of international comity."

Patents issued by other jurisdictions do raise special issues, but aren't necessarily "beyond [...] reach." For example, the Ninth Circuit upheld Judge Robart's antisuit injunction against Motorola Mobility. Presumably the FTC will explain its theories with respect to ex-U.S. patents in its reply.

Let's assume, just hypothetically (it really doesn't mean an agreement or disagreement with Qualcomm's ninth defense), a scenario in which Qualcomm would lose the wider war but win the foreign-patents battle. In the single most lucrative market for most companies in this industry, Qualcomm would then, for example, have to grant patent licenses to rival chipset makers. In the rest of the world, it could still deny a license to the likes of Intel, but only if antitrust authorities and courts in those other jurisdictions let Qualcomm get away with that behavior when the country in which Qualcomm is headquartered doesn't. It would likely be hard for Qualcomm to convince competition enforcers in places like China and the EU that they should accept behavior that was deemed anticompetitive and harmful to consumers in the United States.

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