Wednesday, May 17, 2017

Qualcomm's latest move: breach-of-contract suit against Apple's four contract manufacturers

Two weeks after Bloomberg reported that Qualcomm was preparing an ITC complaint against Apple (i.e., a request for a U.S. import ban), and less than a week after Samsung and Intel supported the FTC, Qualcomm has filed a breach-of-contract complaint in the Southern District of California against Apple's four contract manufacturers: Hon Hai (Foxconn), Pegatron, Wistron, and Compal Electronics (press release, redacted complaint (PDF)).

Today's press release also points to the previous filing of "a separate claim against Apple for its unlawful interference with the license agreements between Qualcomm and these manufacturers." That must be a reference to Count I of Qualcomm's counterclaims against Apple, filed as part of Qualcomm's April 10 answer to Apple's January complaint. While the complaint against contract manufacturers goes into more detail regarding those relationships, Count I of the April counterclaims already brought the same kinds of allegations: that the contract manufacturers were allegedly not meeting their obligations to calculate and pay royalties (with respect to the products they build for Apple) and to enable Qualcomm to audit their royalty statements.

I just noticed that the final paragraph of that Count I of the counterclaims against Apple argues that Qualcomm needs to go after Apple, on the basis of alleged interference, in order to (among other things) "prevent a multiplicity of judicial proceedings." But with today's complaint, the very thing is happening, not prevented. Alternatively, Qualcomm could have moved to amend its counterclaims. I'm wondering whether Qualcomm has somehow modified its litigation strategy since April 10.

Qualcomm's complaint against Apple's contract manufacturers puts injunctive relief front and center, starting with the headline of the complaint. The first prayer for relief asks the United States District Court for the Southern District of California to do the following:

"Enjoin Defendants from violating the terms and conditions of their License Agreements and/or require Defendants specifically to perform the obligations of their License Agreements, including (i) timely making full and complete payments of royalties for any and all sales of Subscriber Units, (ii) providing Qualcomm's auditors all necessary information and assistance to complete their regular audits of Defendants, and (iii) providing royalty reports that accurately state their Subscriber Unit sales information, with such information calculated and reported as required by their License Agreements;"

In my experience, litigants that focus so much on injunctive relief--such as Apple in both of its Samsung cases--are particularly likely to move for a preliminary injunction. But then they have to prove a likelihood to succeed on the merits, irreparable harm, that the balance of the equities favors them, and that it's in the public interest. Irreparable harm--which they also need to establish for a permanent injunction--is something else than reducing a quarterly forecast from $5.3-6.1 billion to $4.8 billion-$5.6 billion, which would have had far more impact on Qualcomm's stock price if the markets thought this was the end of the world. A full-text search over Qualcomm's complaint against Apple's manufacturers shows multiple occurrences of the word "harm," but no allegation of irreparable harm. The closest term to "irreparable harm" that appears in the complaint is "severe, immediate, and permanent harm," and an allegation that Apple seeks "to cause Qualcomm so much harm that Qualcomm will be forced to capitulate to the unfair licensing terms that Apple is demanding." Qualcomm's general counsel, Don Rosenberg, states that allegation in the following way in today's press release:

"As Apple continues to collect billions of dollars from consumer sales of its Qualcomm-enabled products, it is using its market power as the wealthiest company in the world to try to coerce unfair and unreasonable license terms from Qualcomm in its global attack on the company."

This is a common tactic. Pretty much every company facing antitrust charges (in this case, around the globe) tries to portray itself as a victim of undeserved injustice. Google and Samsung's lawyers and long-standing allies also argued that Samsung and Motorola's pursuit of injunctive relief over standard-essential patents (SEPs) against Apple and Microsoft was just a response to those companies' assertions of non-SEPs against them (and other Android device makers). But when companies face regulatory investigations and charges (such as a statement of objections in the EU oder an antitrust complaint in the U.S.) in multiple jurisdictions and their adversaries don't, it's obvious which side has a credibility problem.

Qualcomm's complaint refers to Apple's cash reserves. But Apple's cash reserves are unrelated to the question of (irreparable) harm. There isn't one thing that Qualcomm alleges that Apple can do only because it has (even) more money than Qualcomm. Both companies are highly profitable and have astronomic market capitalizations. Both have billions in the bank (hundreds of billions in Apple's case, but still, Qualcomm has billions and would have even more billions than it does if not for a relatively high dividend yield--more than twice, in terms of percentage of stock price, of Apple's). One doesn't even need to be wealthy to withhold payments in whole or in part (though it obviously makes it easier to deal with litigation costs and risks).

In Apple v. Samsung, one doesn't have to (and I, in many ways, don't) agree with everything Apple does. It collected half a billion dollars in 2015 on a premature basis. But that didn't represent a threat to Samsung. It was (in my view) bad stuff for all sorts of reasons, but it had nothing to do with Apple having (even) more money in the bank than Samsung. The right way to look at those clashes of titans is to ask ourselves whether the precedent that is or may be set will, in similar cases involving different parties, allow a weaker party, with law, facts and policy on its side, to overcome the strong (an adaptation of my favorite ancient quote).

As I wrote when Qualcomm announced the adjustment of its quarterly forecast, it would be unfortunate if this dispute got decided by leverage (no matter who would benefit from that extra leverage) since an entire industry is affected by the underlying problems. A top-notch analyst left the following comment on my LinkedIn profile a few days ago:

"No surprise everyone lines up vs QCOM - [...] The more disclosure we get - long overdue, given economic implications - the better!"

I'm sure this is the way a lot of companies in the industry feel. Neither company should just overcome the other through some kind of power play. The ultimate outcome should benefit not only one company, be it Qualcomm or be it Apple. It should be good for companies of different sizes. For the Samsungs and Huaweis of the world as well as the little guys. Apple is now embroiled in a particularly intense and escalating fight with Qualcomm, and there may be reasons for which they're particularly proactive, though Samsung isn't just sitting by idly. So far, the regulators and Apple haven't taken a position of the kind that benefits only the behemoths and not the midgets. If they ever do, I'll be sure to talk about what's good only for the giants.

I hope (and guess) Apple will help those contract manufacturers to the best of its ability so that they won't end up being held hostage. There is an indication of that in Qualcomm's new complaint: "Apple had instructed Foxconn's legal team to contact Apple's legal team."

In connection with its interference claim against Apple itself, Qualcomm alleges that "Apple has consciously and repeatedly disregarded Qualcomm's independent business relationships with the Contract Manufacturers, and continues to do so." But how "independent" are Qualcomm's business relationships with the likes of Foxconn if Qualcomm enters into rebate agreements with Apple, BlackBerry, and presumably others? Qualcomm itself calls the independence of those relationships into question through the structure of its multi-level dealings.

If the FTC gets its way, Qualcomm will have to extend licenses (on FRAND terms) to chipset makers such as Intel, MediaTek, and a certain Samsung division. In that case, Qualcomm can have perfectly independent business relationships with those companies, and then it won't have to deal with contract manufacturers or device makers at all. So far, Qualcomm doesn't want that at all. Qualcomm is focusing on the problems resulting from its refusal to license chipset makers, while the FTC and its supporters are focusing on what would be a terrific solution for this entire industry.

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Tuesday, May 16, 2017

Intel supports FTC against Qualcomm, says antitrust investigations enabled its new deal with Apple

On Friday, the FTC opposed Qualcomm's motion to dismiss the pending antitrust litigation in the Northern District of California, and got support from several amici curiae, with Samsung stressing that it is harmed by Qualcomm in two capacities: as a device maker and as a chipset vendor.

Intel is "only" the latter, and it's very actively involved in the fight to open up the market. It filed an amicus curiae brief (PDF) and explained on its website why it decided to take this kind of action.

In my analysis of Qualcomm's response to Apple's Southern California complaint, I already noted that some of the issues raised and claims made by Qualcomm in that filing appeared to be directed at the court of public opinion more so than the court of law. The fact that Qualcomm engaged in rapid response to the FTC's opposition filing on Friday (as quoted by CNET and other media) reaffirms that impression:

"The Federal Trade Commission's latest submission to the court does nothing to cure the fundamental flaws in its complaint against Qualcomm: no coherent theory of competitive harm and no allegations of the type of conduct that the antitrust laws are designed to address," Qualcomm said. "The complaint therefore should be dismissed."

Well, an opposition to a motion to dismiss can't "cure" anything. If there were flaws to be cured (I doubt that the court will agree with Qualcomm on "fundamental" flaws, though the devil may be in the detail), the only way to cure them would be an amended complaint. So Qualcomm could have (and maybe actually had) prepared that statement even before seeing the FTC's brief because, from Qualcomm's perspective, it would have been certain to be correct no matter what the FTC might submit. It's just a bit unusual that a litigant given three weeks by the court to respond to that opposition filing issues such a statement, well ahead of the reply brief. They're in their right to speak out just like I can read court filings and comment on them quickly. Again, it's just a bit unusual at this particular procedural stage.

But, as I mentioned before, Intel also issued a statement, the strongest passage of which is this:

"Qualcomm has maintained an interlocking web of abusive patent and commercial practices that subverts competition on the merit."

This is what I described (three months ago) as two mutually-reinforcing monopolies. Intel's brief contains an entire paragraph on these dynamics:

"These anticompetitive stratagems reinforce each other: By refusing to license its competitors and by coercing its customers into exclusivity deals, Qualcomm fences other chipset manufacturers out of the market. The resulting lack of alternative supply options, in turn, makes Qualcomm’s customers increasingly more dependent on a consistent supply stream from Qualcomm. And this dependence means that a threatened disruption in chipset supply from Qualcomm has a powerful coercive effect. Rather than risk losing access to Qualcomm chipsets, Qualcomm's customers quickly acquiesce to the company’s desired terms and policies. These understandable capitulations, in turn, further entrench Qualcomm's monopoly. Because Qualcomm can expect acquiescence, it has the latitude to insist upon license terms that impose huge unjustified barriers in the path of competitors seeking to enter the market."

When I tweeted the "interlocking web of abusive [...] practices" statement from Intel's press release, another blogger said that this would also apply to Intel. I don't have an opinion on that, but tech market leaders generally aren't saints and it's not like they all readily license their direct competitors (what an understatement). However, the question of whether Intel would extend a license to AMD or whether Apple would grant one to Samsung or Samsung to you-name-them is really distinguishable from Qualcomm's refusal to license other chipset makers and from Qualcomm's extremely high royalties. Intel's brief explains something that is not new but that is true: standard-setting would be anticompetitive without a FRAND licensing commitment. This is the central part of that argument (from Intel's brief):

"Because private standard-setting associations are comprised of firms with horizontal and vertical business relations, the only way SSOs are 'permitted at all under the antitrust laws' is if 'meaningful safeguards' are put in place to 'prevent the standard-setting process from being biased by members with economic interests in stifling product competition.'"

The dual-monopoly dynamics mentioned further above are also unique to Qualcomm. I can't think of anything similar involving the complainants.

Three more observations on Intel's brief:

  • Section 2 of the Sherman Act distinguishes unlawful acquisition or maintenance of monopoly power from success in the marketplace "as a consequence of a superior product [or other legitimate factors]." Therefore, Qualcomm obviously takes the position that Intel's products just can't compete on the merits, while Intel emphasizes in its brief and its press release its readiness, willingness and ability to compete with Qualcomm on the merits. It argues that "[Qualcommm's] dominance arises not from Qualcomm's inherent superiority, but rather from its anticompetitive practices."

    Qualcomm obviously has to argue that its products are just so great that customers are willing to pay a lot for them, and its patents are just more valuable than other companies' patents, which is a bit hard to argue in connection with newer standards such as LTE. It's becoming harder and harder for Qualcomm to persuade courts and regulators. With every finding of anticompetitive conduct somewhere in the industrialized world, with every antitrust complaint, and with every amicus brief such as the ones filed on Friday, judges and observers will be more inclined to believe that there really is an issue. Qualcomm will need to make some headway as it defends itself in multiple jurisdictions, and it needs allies. But so far it appears Qualcomm can merely deter other companies from speaking out; it can't force them to file amicus briefs in support of its positions.

    Maybe Qualcomm's products are indeed superior. But is it just superiority that has created the current situation? With all that's known about Qualcomm's practices already, it's hard to imagine it was all about superiority. Of course, Judge Koh will want the FTC to prove its claims, not just to make a certain theory conceivable.

  • With respect to apposite case law, Intel makes an interesting point. It argues that the FTC complaint is about whether Qualcomm will be allowed to continue its practices and not really about historic conduct. It's about the "future effect" of the outcome of this case, Intel argues. Therefore, "[m]onpoly-maintenance cases [...] are [...] more informative" than cases about how someone might have obtained a monopoly earlier on (past-conduct cases).

  • In the final paragraph, Intel forcefully and persuasively counters Qualcomm's claim that Intel's renewed business relationship with Apple "definitively refutes" the FTC's claim of exclusionary conduct:

    "But that argument gives short shrift to why Intel finally was able to supply Apple after all of these years. It is far more plausible that the many investigations across the globe deterred Qualcomm from imposing another illegal exclusive deal on Apple. [...] If Qualcomm were unconstrained by investigations like these, there is no telling what anticompetitive arrangements it would seek to impose on Apple (or other purchasers) to entrench its monopoly. Put simply, actions by courts and regulators have played a crucial role in shining a light on Qualcomm's anticompetitive behavior. Without that scrutiny, and the safeguards that suits like this one can provide, Intel never could have competed on even terms with Qualcomm in a multi-billion dollar market that impacts the lives and livelihoods of millions of people around the world."

    That statement is probably also meant to make antitrust regulators feel good about their Qualcomm-related efforts. And it is plausible. I had heard from various companies over the years (going back to BlackBerry, then Research In Motion, in 2006) how unhappy they were about Qualcomm's royalty demands and business terms. I just didn't expect much to change. Then came the Korea Fair Trade Commission's ruling just between Christmas and New Year's. A few weeks later, the FTC's lawsuit in Northern California. And then Apple filed its own suit and Samsung filed that amicus curiae brief last Friday. In the litigation space, the chicken-and-egg question has a clear answer: regulatory action apparently paved the way for private-sector action. Similarly, regulatory action may also have been a key enabler, or maybe even the key enabler, of Intel's new deal with Apple.

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Saturday, May 13, 2017

Samsung joins the fray, supports FTC against Qualcomm: "directly harmed" in two capacities

In today's opposition to a Qualcomm motion to dismiss the FTC's antitrust complaint, the FTC says "[o]ther chipmakers may not wish to sue Qualcomm for a number of reasons, including fear of countersuit for infringement, escalation, litigation fees, disrupted relationships with OEMs [...]." While all of that can affect a chipmaker's calculus, the situation is far worse for device makers: they have to fear massive disruption should Qualcomm cease to supply its chipsets to them. Also, Qualcomm's rebate deals (that effectively result in some patent royalties being paid back) appear to be tied to total abstention from any kind of antitrust action against Qualcomm. All in all, it's like a strangehold on an entire industry.

Without the fears described above, I'm sure Qualcomm would face even more antitrust lawsuits than it currently has to deal with (the FTC case plus complaints by Apple in several jurisdictions around the globe). It's too early to tell, but it could be that Qualcomm itself will at some point conclude that certain practices (such as entering into agreements under which other companies are not allowed to take antitrust action) aren't advisable. Courts and competition enforcers now get to see those contracts and they learn about other ways in which Qualcomm tries to prevent those affected by its conduct from complaining. Regardless of legality and enforceability (important questions, but this is not the time and place to address them), what will judges and regulators think? This is psychological, not legal, but common sense suggests that someone who goes to extreme lengths to prevent others from raising a whole category (antitrust) of issues may really have something to hide.

After the FTC sued Qualcomm in January, Apple also brought a complaint, followed up by parallel complaints in other jurisdictions. At this point, Apple is still the only private-sector plaintiff against Qualcomm on antitrust grounds (not the first one, but the only one at the moment). But Apple is not alone among device makers. In a clear sign of how widespread concerns over Qualcomm's practices are, major automotive and information technology companies wrote an open letter to President Trump about the Qualcomm matter, urging the Trump Administration to pursue the antitrust case in the Northern District of California. And now Samsung has gone a very meaningful step further than answering questions from the Korea Fair Trade Commission: Samsung has just filed an amicus curiae brief in support of the FTC's opposition to Qualcomm's motion to dismiss the antitrust complaint (this post continues below the document):

17-05-12 Samsung Amicus Brief Iso FTC Opp to QCOM m2d by Florian Mueller on Scribd

For formal reasons, Samsung also had to request permission to file that brief. Since Qualcomm doesn't even object, that permission will hardly be withheld.

The two-pronged nature of the competitive harm Samsung has suffered at Qualcomm's hands is reflected by the legal entities making the submission: Samsung Electronics Co. Ltd. (the world's largest mobile device maker) and Samsung Semiconductor (a chipset maker allegedly kept out of the wireless baseband chipset market, at least with respect to certain markets, by Qualcomm's behavior, which appears to have to do with some old contracts as well as the way Qualcomm leverages its patents).

Apple and Samsung are doing the industry at large, and (by extension) consumers, a great service. They are doing what many others presumably would like to do but don't dare. But a few years ago, Samsung was aggressively asserting FRAND-pledged standard-essential patents against Apple, and now it's actually citing Judge Koh herself (who is presiding over FTC v. Qualcomm as well as two Apple v. Samsung cases) on the "legal distinction between a normal patent—to which antitrust market power is generally not conferred on the patent owner, and a patent incorporated into a standard—to which antitrust market power may be conferred on the patent owner." When Judge Koh wrote this, Samsung was trying to gain undue leverage from its SEPs. But those efforts came to an end, and in any event, companies can cite decisions even if the shoe was on the other foot at the time.

In the following sentence from the request for permission to file a brief, the two Samsung entities are explaining what they bring to the table as "friends of the court":

"As a Qualcomm licensee ([Samsung Electronics'] handset manufacturing business) and an excluded competitor ([Samsung Semiconductor's] chipset sales arm, to which Qualcomm refuses to grant a license to make and sell licensed chipsets), proposed amici are uniquely positioned to assist the Court in understanding the impact of Qualcomm's conduct on competition in the upstream market to make and sell chipsets and in the downstream handset market."

In the amicus brief itself, Samsung stresses this role of a dual victim as well:

"Samsung, which employs approximately 17,000 people in the United States, is both Qualcomm's customer (as a handset supplier) and Qualcomm's potential competitor (as a manufacturer and potential seller of chipsets). In both capacities, Samsung has directly experienced, and been directly harmed by, the exclusionary conduct alleged in the FTC's Complaint [...]: Qualcomm refuses to license its SEPs on fair, reasonable, and non-discriminatory ('FRAND') terms so that Samsung can make and can sell licensed chipsets."

Samsung explains that licensing "all comers" (including rival chipset makers) is an essential part of the standardization bargain (FRAND licensing commitment in exchange for having one's technologies included in a standard). By not doing so (and by seeking supra-FRAND royalties from device makers), "Qualcomm not only violated FRAND but its conduct excluded potential competitors (like Samsung) and harmed consumers."

The Korea Fair Trade Commission is also concerned about Qualcomm's dealings with device makers as well as the ways in which Qualcomm prevents Samsung's chipset business from competing with it. Footnote 11 of Samsung's amicus brief points to a Qualcomm SEC filing and notes that "Qualcomm reports it has over 300 licensees, none of which are chipset rivals."

Probably the most important chipset rival that should get a FRAND license to Qualcomm's patents is (with the greatest respect for Samsung's huge semiconductor business) Intel. And while I was writing this post, Intel also submitted an amicus brief in support of the FTC. With so much going on, I'm going to need more time to digest all of this, but I will do a follow-up next week.

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Friday, May 12, 2017

FTC says Qualcomm is "using both carrots and sticks together" in dealings with device makers

The Federal Trade Commission (FTC) has just responded to Qualcomm's motion to dismiss its antitrust complaint in the Northern District of California (this post continues below the document):

17-05-12 FTC Opposition to QCOM Motion to Dismiss by Florian Mueller on Scribd

I published Qualcomm's motion in early April (toward the end of this blog post) and wrote at the time that Qualcomm would hardly get rid of the FTC case altogether. It's much less unlikely that the court might want the FTC to be a bit more specific in one respect or another, but in today's opposition filing the FTC has just explained very well how Qualcomm's exploitation of its dual monopoly (which does appear unique in some ways, at least to me) falls within established patterns of anticompetitive conduct.

The FTC filing helps Judge Lucy Koh, who will (after Qualcomm's forthcoming reply brief and a hearing) have to rule on the motion, in various ways. A particularly valuable aspect of the FTC brief is that it identifies and describes certain patterns of conduct and, basically, asks the court not to get confused by Qualcomm's labeling tactics. Qualcomm's argument that its conduct is legal depends heavily on terminology. That's why the very first parapgraph of today's filing by the FTC argues that Qualcomm's supra-FRAND patent royalties are a "tax" no matter how much Qualcomm insists that it's just "royalties" on its patents.

The FTC notes that "[a]ntitrust law eschews such formal labels and instead examines market realities." That's true. But no field of law is more closely related to politics and policy than antitrust law, and just like the fight over terminology is often the decisive battle in political matters, labels do matter in a competition context.

What makes the intersection of antitrust and intellectual property law so very interesting is an inherent dichotomy: intellectual property rights are monopolies (limited to 20 years in the specific case of patents), but antitrust law is an anti-monopoly law. If every legitimate patent royalty was considered a "tax" imposed by a "monopolist," antitrust law would apply very broadly, but patent rights would be devalued. However, if every (actual) monopolist could just make an end run around competition law by labeling a monopoly tax as a "patent royalty," patent rights would serve as a (powerful) pretext and anyone wielding a patent would be immune to antitrust scrutiny.

The FTC argues that Qualcomm's customers "accept elevated patent royalties they otherwise would refuse" only because they are forced "to negotiate in the shadow of Qualcomm's threat to withhold chips." As a result, "Qualcomm collects far more in royalties than other licensors in the industry with comparable patent portfolios."

I've been trying to find out as much as possible from the outside about Qualcomm's royalties (and how they compare to the license fees other wireless standard-essential patent holders receive). If you consider that Wall Street believes Nokia gets approximately $2 from Apple per device, and if you compare that number to the $5 per-device discount from Qualcomm that an arbitration panel awarded BlackBerry (strongly suggesting that it's merely a fraction of what BlackBerry paid), or Qualcomm's reduction of a quarterly forecast by $500 million after Apple stopped its payments, then the FTC's allegation is very plausible. And unlike me, the FTC does have access to a lot of confidential information. That's the beauty of investigative authority.

I just saw that Samsung has submitted an amicus brief in support of the FTC brief, so for now I'll keep my commentary on the FTC filing short, though I may very well write a follow-up next week or so. Just a few more observations I wanted to share immediately:

  • The FTC has the royalty base problem figured out:

    "Moreover, Qualcomm assumes that if its rate was ever FRAND, it must remain FRAND today because it has not changed. But the complaint alleges that 'handsets today offer a number of features' not offered by older handsets, and 'many of Qualcomm’s patents related to CDMA technology have expired.' [..] Thus, a 5% royalty on a 2006 phone is not economically equivalent to a 5% royalty on a 2017 smartphone." (emphasis added)

  • Just like the FTC refuses to play Qualcomm's labeling game, it also seeks to (re)focus the court's analysis on economic realities with respect to Qualcomm's agreements with companies like Apple under which Qualcomm effectively pays back some of the royalties it receives, provided that the recipients of such paybacks behave in certain ways or refrain from behaving in other ways:

    "Qualcomm argues that its payments show that it lacked the power to coerce OEMs into accepting anticompetitive license terms. [...] But the notion that using both carrots and sticks together undermines a finding of monopoly power or anticompetitive conduct runs counter to both economic logic and legal precedent." (emphasis added)

  • With respect to Qualcomm's refusal to grant patent licenses to competitors (i.e., rival chip makers), the FTC explains that a refusal to extend patent licenses to competitors may be acceptable under other circumstances but here, in light of a FRAND licensing commitment and when all aspects of Qualcomm's behavior are seen together, it's anticompetitive. In my initial reaction (of early April) I had also disagreed with Qualcomm's emphasis on litigation against competitors and noted that sometimes they do sue. So does the FTC, which points to Qualcomm's patent assertions against Broadcom. Admittedly, it's been a while since that happened, but it is not and should not be forgotten.

There appears to be some amicus brief activity. Yesterday, a lawyer for an industry body (ACT | The App Association) filed a notice of appearance, and Samsung has (as I mentioned further above) just filed a brief, which I'll study now and, if it contains some interesting new information, blog about immediately.

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Saturday, April 29, 2017

Qualcomm reduces quarterly forecast by $500 million as Apple stops license fee payments

Bloomberg reports that Apple confirms having "suspended [license fee] payments [via its contract manufacturers in China to Qualcomm] until the correct [fair, reasonable and non-discriminatory = FRAND] amount can be determined by the court" and that Qualcomm therefore has reduced its revenue forecast for the quarter ending June by $500 million. Given that the spring quarter is not the strongest one for mobile phones (the closer the next iPhone model is, the more customers wait until they buy), this indicates more than a $2 billion impact on Qualcomm's annual revenue and profit.

Just like the analyst quoted by Bloomberg, I've previously described patent disputes as an "all-out war," but I try to use the term sparingly. I'm not saying that's not what it is. I just want to wait and see how the dispute unfolds. There can be no doubt, however, that the stakes are high.

The $500 million figure for a quarter that is not the strongest one of the year is not really inconsistent with what I recently estimated to be Qualcomm's royalty demands.

It's worth noting that it was Qualcomm, not Apple, who withheld payments first. There is some kind of "rebate" (as Apple calls it) agreement in place between the two, under which Qualcomm pays back to Apple some of the royalties it collects from its contract manufacturers, and Qualcomm stopped its payments to Apple under that contract, alleging (most recently in its answer to Apple's complaint) that Apple breached that agreement by, for example, talking to regulatory agencies. A recent filing by Qualcomm in a procedural context shows that Qualcomm is none too pleased with what's going on antitrustwise in Korea, the European Union and elsewhere.

Apple's position, according to the Bloomberg report, is that Qualcomm will get paid again once a FRAND rate has been determined by the courts. This reminds me of an issue that a lot of industry players (including, but by far not limited to, Apple) were profoundly concerned about years ago when standard-essential patent (SEP) holders sued them in Germany and the courts here applied the Orange Book ruling by the Federal Court of Justice in such a way that defendants had to make totally outsized deposits in order to avoid injunctive relief. I remember Claudia Tapia, then a BlackBerry IP policy executive (now at Ericsson), saying at a 2012 FRAND conference in Amsterdam that a company could be driven out of business by having to make X number of deposits of 2% to 5%, if not more, of its sales receipts during the course of a multi-year litigation. And if my memory doesn't fail me, I think she said that Apple might be able to afford it but others might not.

Since my campaign against software patents in 2004-2005, I've consistently opposed anything that comes down to "might makes right." My favorite ancient quote (after nine years of Latin and three years of Ancient Greek in school) is from line 880 of Sophocles' Oedipus at Colonus: "In a just cause, the weak will overcome the strong [alternative translations of "mégas": the mighty/great/large]." ("Τοῖς τοι δικαίοις χὠ βραχὺς νικᾷ μέγαν.")

Against that background, I want the dispute between Apple and Qualcomm to be decided by the merits, not by leverage or by who's the bigger bully. I want an outcome that will improve the situation for the industry at large, including the little guys who couldn't afford or take the risk of picking this kind of fight with Qualcomm. While I can easily understand that Apple, after Qualcomm was first to withhold payments, doesn't want to meet royalty demands it considers completely unreasonable, there could be different circumstances under which I would consider it unfair. Also, I still haven't forgotten that Apple once collected roughly half a billion dollars from Samsung on procedurally proper but, in my personal view, unfair grounds in 2015 (I was the lone voice criticizing Apple for it). Here, Qualcomm's strangehold on the entire industry (as it leverages its two mutually-reinforcing monopolies) probably necessitates that someone says "enough is enough" and puts pressure on Qualcomm to change its ways. But again, the outcome should be positive for everyone in the industry, not just one company, and, by extension, it should bring prices down for consumers.

What just makes no sense to me is Qualcomm's claim that "the same terms [that Apple is contesting now in court] have applied to iPhones and cellular-enabled iPads for a decade." This, again, is a might-makes-right kind of approach. If Qualcomm was able to command certain terms because of its leverage, that doesn't make the amount a FRAND rate. That's just circular logic. It's symptomatic of Qualcomm's might-makes-right vicious circle.

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Monday, April 24, 2017

Qualcomm's involuntary refund to BlackBerry amounts to approximately $5 per device

About two weeks ago, BlackBerry announced that it was going to receive a refund of $814.9 million from Qualcomm (mentioned in this post), and Qualcomm confirmed that fact:

"The parties had agreed to arbitrate a contract dispute relating to one specific issue: whether Qualcomm's voluntary per unit royalty cap program applied to BlackBerry's non-refundable prepayments of royalties for sales of a specified number of subscriber units from 2010 through the end of 2015."

BlackBerry's lawyers from the Sullivan & Cromwell firm stated the basis for the payment consistently with Qualcomm's repreentations, but a bit more specifically:

"The dispute arose in 2015 following Qualcomm's agreement to cap certain royalties applied to payments made by BlackBerry pursuant to a licensing deal. Blackberry argued that it was overpaying Qualcomm."

That wording sounds even more like the "rebate" (a term rejected by Qualcomm) Apple says Qualcomm promised under a special cooperation agreement.

There still isn't any indication of the arbitration panel having made a FRAND rate determination. It all sounds like a contract dispute, including what BlackBerry wrote about this in its last annual report:

"On April 20, 2016, [BlackBerry] and Qualcomm entered into an agreement to arbitrate a dispute over the application of a royalty cap agreement related to a license agreement between the parties. The Company filed its Demand for Arbitration and Statement of Claim on May 2, 2016. Qualcomm filed its response on May 16, 2016. Proceedings are ongoing."

The term "specified number of subscriber units from 2010 through the end of 2015" in Qualcomm's press release on this month's arbitration award could mean all or some of the devices BlackBerry sold during the period in question. What I'm interested in (because I believe many readers will be curious, too) is what indication the "rebate" gives us with a view to Qualcomm's standard-essential patent (SEP) royalty demands. A couple of months ago I saw indications, by deducing and inferring information from certain public documents, that Apple may have been paying Qualcomm approximately $20 for its baseband chip and a second amount like that for patent license (a total of $40 per device for the chip and the license). The higher the rebate is on a per-unit basis, the more likely it is that Qualcomm's royalty demands are really that high (we're talking about stratospheric heights compared to what other companies are rumored to receive; for example, financial investors appear to believe that Nokia receives about $2 per device from Apple).

So let's look at publicly-available information in the light most favorable to Qualcomm: that the "royalty cap" applied to all BlackBerry smartphones sold in the years 2010-2015. Not only is that most favorable to Qualcomm but it's also a reasonable assumption.

Here are some quotes from several annual reports by BlackBerry that state unit volumes:

"The Company recognized revenue related to approximately 3.2 million BlackBerry handheld devices in fiscal 2016, compared to approximately 7.0 million BlackBerry handheld devices in fiscal 2015."

"[...] approximately 13.7 million BlackBerry handheld devices in fiscal 2014, compared to approximately 28.1 million BlackBerry handheld devices recognized in fiscal 2013."

"The Company shipped approximately 49.0 million BlackBerry handheld devices in fiscal 2012 compared to 52.3 million devices in fiscal 2011."

That's 153.3 million devices. If the arbitration award is divided by that number, the per-unit figure is $5.31. Regardless of some remaining uncertainty as to whether the royalty cap applied to all BlackBerry smartphones, that number is pseudoprecise since BlackBerry's fiscal year (March 1-February 28) overlaps with only ten months of a given calendar year. But if we round that number down to $5 per unit, then we don't imply more precision than we can deliver and we have enough of a cushion that the number should be just about right.

Theoretically, a $5 rebate could be granted on a royalty payment of $6, but more realistically the refund represents a fraction--not necessarily a small fraction, but still a fraction--of the amount that was paid. Maybe $5 per unit is exactly what BlackBerry wanted. Even arbitration can have an outcome that favors only one party, especially when merit is a binary question , though a middle ground is more common in arbitration. At any rate, I would view the $5 per-unit refund to BlackBerry as another indication of my $20 per-unit royalty estimate not having been off base.

If Qualcomm's royalty levels are indeed extremely high, it comes as no surprise that various major automative and information and communications technology companies are interested in the ongoing FTC v. Qualcomm litigation, as their open letter to President Trump shows.

It may also explain why Qualcomm doesn't want Judge Koh to treat other Qualcomm FRAND antitrust cases (particularly in the EU and in South Korea) as related cases.

But the BlackBerry story also shows that Qualcomm paints a rosy picture when it claims that the industry at large has accepted its royalty rates, with only Apple and Samsung allegedly trying to avoid paying a fair license fee. Let me quote again from that Sullivan & Cromwell PR piece: "Blackberry argued that it was overpaying Qualcomm." And who knows who else...

Finally, just a message for the professional and amateur stock traders who message me via the contact form on this blog. Please appreciate that I don't have the time to answer individual questions. Sometimes I will answer those questions on my blog. Also, I'm always grateful when someone points me to interesting publicly-available information that I may have missed. It has happened quite often. One last thing for the investment folks among you: no matter what seemingly-private email address you use or how you phrase your messages, and whether or not you refer to companies by their ticker symbol, I can easily tell your messages apart from the ones I receive from so-called (not my own terminology) "fanbois" and "phandroids." This includes a recently-received question about whether Qualcomm could obtain an injunction against Apple. I have nothing to say about that except that Qualcomm has been consistent over the years arguing that SEP holders are entitled to injunctive relief, Apple has been consistent that a FRAND commitment and injunctive relief are irreconcilable, I've been consistent in that regard since late 2010, and over the years I've seen Microsoft (which still told the FTC in 2011 that injunctive relief was available over SEPs), Google and Samsung come over to the good side of history. At this stage of the Apple-Qualcomm dispute it's premature to speculate about injunctive relief. Even Pokémon GO is more relevant to this dispute at this juncture.

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Friday, April 21, 2017

Major automotive and IT companies urge President Trump to support FTC case against Qualcomm

I just received--and wanted to immediately share--an open letter addressed by major automotive and information and communications technology companies to President Donald J. Trump, urging him to shield the Federal Trade Commission (FTC) from political interference that could derail the ongoing antitrust litigation in the Northern District of California against Qualcomm (this post continues below the document):

17-04-20 Multi-Stakeholder SEP White House Letter by Florian Mueller on Scribd

The letter was signed by two industry associations--ACT | The App Association (whose sponsor members include Apple, Microsoft, Oracle, Facebook, AT&T and others) and the Alliance of Automobile Manufacturers--as well as ten companies including, notably, HP, Dell, Intel, Juniper, and--lo and behold--Samsung Electronics America, Inc.

Samsung's participation is particularly interesting. I was probably the most Samsung-critical blogger when I believed Samsung was trying to gain too much leverage from its own standard-essential patents (SEP) against Apple in multiple jurisdictions, but I was and (despite my intent to be a good citizen of the iOS ecosystem as I plan to launch my first app in a couple of months) still am among the most Apple-critical ones with respect to the merits and especially the requested remedies over certain design and software patents. It was a good thing that Samsung abandoned its SEP claims against Apple, but it wasn't enough. After Samsung stopped doing the wrong thing, I always wanted it to do the right thing and combat SEP abuse. Its support of an industry coalition in Europe (relating to the future Unified Patent Court) was a first significant step. I'm so happy to see that Samsung is now more proactive on that front than ever.

Last year then-candidate Trump publicly declared himself a Samsung user as he was angry with Apple for its lack of cooperation with the FBI in connection with an act of terrorism. Having been a Trump supporter (a fact I have mentioned several times on this blog and as anyone following me on Twitter can tell) since 2015, a Samsung Galaxy user since 2010 and an iPhone user since 2014, I paid attention. Now I hope his advisers, who obviously know about his predilection for Samsung phones, will also tell him about Samsung's signature of this Qualcomm-related open letter.

If the Korean antitrust findings relating to Samsung's Exynos baseband chipset are accurate, and considering that Samsung's margins in the mobile phone business are much tighter than Apple's, Samsung may have suffered from Qualcomm's conduct to an even greater extent than Apple. And while those two companies account for a significant part of this industry, there are many other companies of all sizes that have a problem with Qualcomm's (and some other SEP owners') practices.

The final part of the first paragraph of yesterday's open letter comes across as an expression of huge concern: "we hope that the FTC's lawsuit filed on January 20, 2017 in federal court in California will be allowed to run its course without prejudice or political interference."

Judge Lucy Koh has just set a schedule for that antitrust litigation, and it's a reasonably ambitious one. Apparently there are industry players who see some lobbying going on by Qualcomm and possibly other SEP abusers seeking to derail the FTC lawsuit. There is a political risk here since the FTC filed its case in the last days of the Obama Administration, which I think was a disaster for various other reasons (such as its positioning against law enforcement officers, its irresponsible accumulation of debt, and its refusal to even acknowledge the problem of radical Islamic terrorism), but which despite all else made two really good decisions regarding SEPs: the veto of an ITC import ban and the FTC complaint against Qualcomm. It will be important to explain to the Trump Administration that the FTC case is worth pursuing--they should even double down on it--even if other parts of Obama's legacy are not. Simply put, FRAND is also a conservative cause, and Republican lawmakers have supported it before. Combating SEP abuse is perfectly consistent with the promise to Make America Great Again, as the final paragraph of the letter (without specifically mentioning MAGA) stresses:

"In short, the impartial and substantive determination of an FTC action in a U.S. court is critical to supporting a successful U.S. market and U.S. business environment. Such a process is, in the end, good for the U.S. economy and job market. We encourage the administration to support this robust agency and court process." (emphasis added)

On page 2 of the letter, the signatories note that they "take no position here on the merits of this case," but their concern is not about the merits: it's all about politics.

I wish those companies didn't even see a need to write that kind of letter. It suggests to me that there are some Washington machinations going on that could benefit the abusers and hurt companies that make real products. Such as the direct (for example, Samsung) and indirect (for example, Apple) signatories...

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