Tuesday, June 20, 2017

Apple's amended San Diego complaint against Qualcomm leaves no doubt: many billions at stake

The wireless industry's economically biggest lawsuit--Apple v. Qualcomm in the Southern District of California--just got a whole lot bigger. Contrary to popular misbelief, it was never about "only" $1 billion but always had implications and ramifications to the tune of many billions. There is no more room for doubt now that Apple, which earlier today resoundingly rejected the accusation that it had throttled any of its iPhones, has amended its complaint (this post continues below the document):

17-06-20 Apple's Amended Complaint Against Qualcomm by Florian Mueller on Scribd

Why many billions? After reading the first few lines of a U.S. complaint, I always turn to what would come first in some other jurisdictions: the prayers for relief. These three new prayers for relief are "yuuuuuuge" in economic terms:

"L. Adjudge and decree that the royalty provisions in the licenses between Qualcomm and Apple CMs Foxconn, Pegatron, Wistron, and Compal are unenforceable as against public policy;"

"M. Order Qualcomm to disgorge non-FRAND royalties and royalties for exhausted patents that Qualcomm previously extracted from Apple, including royalties paid through Apple's CMs, and pay such unjust gain to Apple;"

"T. Award restitution of all excessive license fees that Apple paid;"

Prayer for relief L relates to Qualcomm's contractual relationships with Apple's contract manufacturers, whom Qualcomm is suing in the same federal court in San Diego and even seeking a preliminary injunction against. If Apple prevails on this one, the financial impact on Qualcomm's business would already be huge with respect to those companies' work on Apple's behalf, and it could even affect devices that those manufacturers build for other partners (at least indirectly, if not even directly).

Prayer for relief M, a disgorgement of any royalties paid on exhausted patents, would likely be a double-digit dollar amount for each and every U.S. iPhone or iPad that came with a Qualcomm chip and on which Qualcomm nevertheless collected patent royalties (and in this context, too, other companies such as Samsung could then seek the same later). Obviously, there can't be any double recovery, so if L and M succeeded, some reconciliation would be required. Exhaustion (of patents) is the "Word of the Day": in the original complaint, the word or fragment "exhaust" appeared 26 times, and now, in the amended one, a whopping 112 times: more than four times as frequently. This blog's loyal readers can imagine why: it's all because of the Supreme Court's recent Lexmark ruling, which basically said that if you sell a product that embodies any of your patents, you can't collect royalties from your customers and the downstream on those patents. I connected the dots between that case and the "double-dipping" aspect of the Apple-Qualcomm dispute, but even I wouldn't have expected that the letter sequence "exhaust" would become this pervasive in Apple's complaint.

Prayer for relief T would apply to all iPhones and iPads, with or without a Qualcomm chip. It would be a disgorgement of anything that Apple had to pay in the past, even if indirectly through contract manufacturers, in excess of a FRAND rate.

What also changed about the prayers for relief is that Apple is now attacking 18 Qualcomm patents (previously 9) and that Apple is trying to get various Qualcomm patents invalidated. Multiple prior art references are cited.

All in all, this new complaint is massive. The difference between the original complaint and the new one is, in terms of the potential impact on Qualcomm's business, comparable to the significance of the original one. Apple is doubling down, not in terms of the number of jurisdictions or suits, but in terms of the economic impact that this dispute may have.

Apple's rhetoric also appears to be sharper, though I must read the amended complaint in its entirety (I just wanted to comment quickly here) to be sure of that. For example, Apple is accusing Qualcomm of "retaliation, obstruction of justice, and greed." Professional judges ignore such rhetoric at the conscious level, and Qualcomm has tried the same in its answer to the original complaint. However, for a litigation watcher like me, rhetoric is relevant in certain respects, such as for understanding how much is at stake and how likely the parties are to settle in the near term. In my eyes Apple's credibility benefits from the broadbased support it has in this industry (and I can't see even the slightest indication that what Apple, Samsung, Intel and others are advocating here wouldn't also be good for consumers), but that doesn't mean I buy everything it says. "Obstruction of justice" is a claim I'm unconvinced of. Apple argues that Qualcomm's lawsuit against the contract manufacturers is among other things an attempt to collect royalties that include the rebates it has been withholding for some time, and in this case here (Apple v. Qualcomm), the basis for those rebates should be adjudicated. To me, this isn't necessarily an obstruction of justice since Qualcomm filed its case against the contract manufacturers in the same court. I believe Qualcomm should have added the contract manufacturers to this case (as third-party counterclaim-defendants), but "obstruction of justice" takes more than this. One might say so if Qualcomm opposed a consolidation of those cases, which I think the court may very well propose at some point. Prayer for relief L strongly suggests consolidation in my view.

As for rhetoric, Apple's amended complaint repeatedly labels Qualcomm's royalty rates as "usurious," and the word or fragment "extort" is found 12 times ("exort", "extortion", "extorionate", "extortionist"). That concept will presumably play a far greater role going forward than the "obstruction of justice" label. Qualcomm can point to various contract clauses, including one under which Apple had to sign that it wouldn't seek to benefit from a future ruling on patent exhaustion, but agreements that come into being due to extortion are ultimately unenforceable.

Even without the contract manufacturer context possibly being consolidated into this case, this litigation has enormous scope in its own right. For example, Apple's amended complaint stresses that Qualcomm must prove that some of its declared-standard-essential patents must indeed be proven valid and infringed. And now there are 18 Qualcomm patents that Apple thinks it can shoot down.

I'm starting to wonder how many years it will take before this case is over. Unless they settle, this may take even longer than my iOS app development project (where we're planning to go into a larger-scale beta test next month)...

But Qualcomm doesn't have to worry about Apple running out of cash to pay whatever royalties will ultimately be awarded. Even if this company, which is too rich to fail anyway, lost all its money overnight, Apple writes the following:

"[...] that [Apple] has posted a bank guarantee reflecting a FRAND royalty rate, and expressed a willingness to provide further guarantees for future years as needed, explaining: 'We believe this action shows our commitment to pay FRAND royalties once the amount is finally determined by the courts on a fair, reasonable and nondiscriminatory basis. This guarantee does not expire until 2026, and we can provide larger or additional guarantees for future years as needed.'"

Apple attached a letter to its amended complaint that Qualcomm had attached to its answer to the original complaint and counterclaims, but now the part about that bond is public. I don't understand why Qualcomm redacted it out in the first place. While Qualcomm obviously wants payments rather than guarantees, I've watched numerous lawsuits in which there was a whole lot of argument over such guarantees. This is important, and it's a good thing for Qualcomm to have such a guarantee, though it's not what Qualcomm primarily wants.

I hope to have identified the most important new aspects of the amended complaint. I'll take another look and update this post if necessary.

[Update] Apple points to an interesting procedural fact: Qualcomm didn't bring infringement counterclaims to Apple's original request for declarations of non-infringement, though such counterclaims are compulsory, meaning that failure to bring them now and in this case will preclude Qualcomm from bringing such infringement claims later in this case or in a different case. Maybe Qualcomm has so many patents that it doesn't care if some are practically unenforceable against Apple, but let's see how Qualcomm responds to this amended complaint... [/Update]

Share with other professionals via LinkedIn:

Apple rejects Qualcomm's allegation of throttling iPhones, says "study" is "methodologically unsound"

Under a May 30 court order, Apple has a couple of deadlines today (June 20) in its antitrust/patent litigation in the Southern District of California, and when double-checking on the deadline, I just noticed that Apple made one filing one day in advance--a motion to dismiss Qualcomm's unfair competition counterclaim based on the allegation that Apple hobbled, throttled or whatever one may call it its iPhones that come with Qualcomm chip in an effort to make Intel's chips appear equally performant (this post continues below the document):

17-06-19 Apple Motion to Dismiss Qualcomm Cc by Florian Mueller on Scribd

As I wrote ten weeks ago, the legal relevance of this to the dispute is very doubtful at best (it certainly has no bearing whatsoever on the question of fair, reasonable and non-discriminatory licensing terms), so to me it looks like more of a PR maneuver. I can't even imagine that it would influence consumers' purchase decisions (if Qualcomm' objective is to promote its brand, a new stadium naming rights deal might work while court filings won't). Also, my research methods are limited to obtaining and analyzing publicly-filed court documents, and I can go further than that only in a few cases where program code is made available (depending on the platform and programming language), but I don't have access to a wireless performance test lab. Still, I wanted to point out that Apple (a) strongly refutes Qualcomm's "hobbling" allegation and (b) is trying to get that part thrown out at the earliest possible stage.

These are the passages in which Apple contradicts on the factual level:

"With the iPhone 7, Apple procured baseband processor chipsets not only from Qualcomm but also from its competitor Intel. But after the iPhone 7's release, a methodologically unsound 'study' questioned whether Apple had succeeded in its effort to standardize performance across all iPhones. In a public response, Apple truthfully stated that it had conducted its own studies, which showed consistent performance under relevant parameters." (emphasis added)

"Apple disputes the factual allegations in Qualcomm's counterclaim [...]">

"Qualcomm alleges that third parties found that Qualcomm chipsets outperformed Intel's under unverified conditions and methodologies; [...]" (emphasis added)

"Qualcomm relies on two so-called third-party studies for its claim that Apple's statement was false, but provides no factual allegations concerning the conditions under which these tests were performed or otherwise demonstrating their reliability or trustworthiness. [...] As an initial matter, it is apparent from the face of the Bloomberg article Qualcomm cites that the methodology of these 'studies' is questionable. The article states that 'measuring phone data speeds is difficult because performance can be influenced by weather and other factors beyond the control of wireless providers and phone makers.'" (emphasis added)

Apple consistently puts the word "study" (or its plural) in quotes...

Apple states at the very beginning of this motion that Qualcomm's claim against Apple is just meant to avoid competition from Intel:

"The claim, although nominally directed at Apple, blatantly targets Qualcomm's chief competitor in the market for premium LTE baseband chipsets, Intel, who dared to try and compete with Qualcomm."

That last subclause is reminiscent of the most brilliant passage in all those Samsung filings in its dispute with Apple, where Samsung, in its answer to Apple's first complaint back in 2010, ironically conceded not having ceased to compete with Apple. Without the irony, that portrayal of Qualcomm's motivation is reiterated later in the filing:

"At bottom, Qualcomm's counterclaim is an abuse of the UCL designed to limit competition from Intel and discourage Apple and other handset manufacturers from doing business with Qualcomm's competitors."

But Apple isn't asking the court to conduct performance tests and throw out Qualcomm's claim on that basis. Instead, Apple argues that

  • if anyone could claim to have "relied" on Apple's own representation of the performance situation (i.e., Apple saying that there are no discernible differences in performance between the different iPhone models), that would be someone who made a purchase decision on that basis, which Qualcomm obviously didn't (in the Northern District of California, a group of L.A. taxi companies failed with a claim against Uber regarding safety standards, and failed in court because the taxi drivers weren't going to do Uber rides themselves);

  • none of the conduct that Qualcomm described as wrongful is actually against the law (for example, Apple can conduct its own studies and talk about the results, and it's free to make design decisions and to choose business partners); and

  • Qualcomm has not alleged an "incipient violation of the antitrust laws, a violation of their policy, or spirit, or any other threat to competition."

The hurdle for a dismissal (especially a dismissal with prejudice, which is requested here) is high, but what I've read about the L.A. Taxi v. Uber case suggests that this motion may very well succeed. For the San Diego court, Apple's motion to dismiss may be an opportunity to dispose of something that is legally unrelated to what will actually decide the case but would make a lot of noise. In the alternative, it could be that just because of the PR impact of this the parties would fight extremely hard over the testimony and evidence admitted in this context. I view the "throttling" part as a mix of a sideshow and a potential quagmire.

Share with other professionals via LinkedIn:

Monday, June 12, 2017

Qualcomm's NXP deal raises chip- and patent-related concerns: in-depth review by European Commission

More than five years ago, Google's acquisition of Motorola Mobility was delayed significantly by merger reviews on both sides of the Atlantic and U.S. regulatory approval was subject to certain promises related to patent enforcement. At the time, Motorola Mobility (the acquisition target) was aggressively asserting FRAND-pledged standard-essential patents against Apple and Microsoft. Against that background of blatant FRAND abuse, competition enforcers weren't prepared to grant fast-track approval.

Qualcomm's planned $45 billion acquisition of NXP Semiconductors, a leader in NFC and secure elements (SE) chips, is now also undergoing an in-depth review by the European Commission and possibly also in other jurisdictions (though the deal surprisingly got fast-track clearance in the U.S.). I'm just in the process of trying to find out more about NXP's patent dealings. But it appears that, unlike in the Google-Motorola case, it's the acquirer's conduct that adds to concerns over what might happen post-transaction. That is even more problematic since the acquirer, not the acquisition target, will make the decisions post-transaction. The press release the Commission published late on Friday contains a few keywords that sound all too familiar in the ears of anyone following the current flurry of antitrust activity relating to Qualcomm:

  • "bundling": Presumably this is about chips that might be the equivalent of having a baseband processor and an NFC/SE chipset in a single product. Bundling is a sensitive issue in the EU and the Microsoft Media Player case created some case law.

  • "tying": This is also a key issue in the U.S. FRAND abuse case. The FTC would want Qualcomm to offer its chipsets without requiring a patent license on devices that use other companies' chipsets, and as far as Qualcomm's own chipsets are concerned, patent exhaustion, which is stronger in the U.S. than ever after a recent Supreme Court decision, should take care of the licensing question.

    Intel raised the issue of a dual, mutually-reinforcing monopoly in a recent amicus brief. I had written about that kind of dynamic before. The worst-case scenario in the NXP context is now that Qualcomm might expand on its monopoly. A highly simplified way to put it would be that Qualcomm will go from a dual to triple or quadruple monopoly, forcing customers to buy chipsets of one kind if they want access to others, and/or designing its patent license terms (including "rebates") in such a way that companies will end up sourcing various types of chips from Qualcomm.

  • "increased royalties for customers": Qualcomm is synonymous with out-of-this-world royalty rates. Last month I quoted an Apple letter (which Qualcomm had attached to a court filing) according to which "Qualcomm forces the contract manufacturers and Apple to pay many times more in royalty payments than all the other cellular patent licensors combined!"

    Why has Qualcomm been able to command such royalty levels? It's not just a matter of innovation. They do a lot of R&D, without a doubt, but without the two mutually reinforcing monopolies, even Qualcomm couldn't collect many times the amount of royalties of the rest of the industry combined. If Qualcomm now gets more leverage on both the chip side and the patent side because of the NXP deal, things will get even worse.

    Qualcomm already holds more NFC patents and applications than any other company such as Sony (#2) or Samsung (#3)--almost 1,000, or roughly 5.5% of the pool. After acquiring NXP, Qualcomm's position will go up to approximately 1,350 patents and applications, putting Qualcomm far ahead of the rest (almost twice as many as Samsung, for example). While consolidation of patent ownership positions is still preferable over Nokia- and Ericsson-style privateering, it does raise issues when a company is known to overcharge.

  • "exclusion of competitors": NXP's competitors, just like Qualcomm's, are chipset makers. The only remedy that could address this concern would be that the combined company would have to license other chipset makers on FRAND terms.

While the nature of the concerns is familiar, the NXP deal involves different technologies than the other Qualcomm cases--and it affects additional industries. Mobile device makers will be affected since an increasing number of smartphones come with NFC. But NXP also appears to be a key supplier to automotive companies; otherwise the Commission's press release wouldn't "particularly" mention that industry. Even independently of its contemplated acquisition of NXP, Qualcomm is trying to position itself as a technology licensor to automotive companies such as in connection with wireless electric vehicle charging. Qualcomm's inductive charging road is impressive.

In Europe, automotive companies have a lot of political clout. Maybe some of them have, directly or indirectly (through trade associations and national governments) made the EU Commission's Directorate-General for Competition (DG COMP) aware of their industry-specific concerns.

Reuters reported on Friday that Qualcomm is confident it can address the EU's concerns. I'm sure that the EU doesn't want to block the deal if it can be avoided, but any remedies would really have to have teeth. Negotiations are likely going to continue. The next key juncture is when the Commission will have to decide whether to issue a Statement of Objections (SO), which it will likely begin drafting soon in case it needs to take that step. It's been almost eight years since the SO against Oracle's acquisition of Sun Microsystems (the only SO against a merger during that entire year). At the time, I was a consultant to a complainant. Now I'm just an app developer and blogger, and I don't know how much time I'll find to dig into the details of this process, so if you can support my efforts with information, please make use of the contact form here. I protect my sources, of course.

Share with other professionals via LinkedIn:

Tuesday, June 6, 2017

Samsung urges Supreme Court again to overrule Federal Circuit on key patent litigation questions: Apple v. Samsung

With last week's wonderful Lexmark decision, the Supreme Court again turned out to be the guardian of sanity in the patent litigation context. Presumably in an effort to get earlier and ultimately more attention from the Supreme Court clerks evaluating cert petitions, Samsung yesterday filed (once agai well ahead of a deadline) an optional reply brief in support of its request that the Supreme Court review the Federal Circuit's en banc decision in the second Apple v. Samsung case (this post continues below the document):

17-06-05 Samsung Reply Brief Iso Cert Petition by Florian Mueller on Scribd

Obviously, Apple would like to avoid Supreme Court review and just get the most favorable outcome. In some cases, what's good for Apple is also good for the industry at large. Not so here. If the Supreme Court granted Samsung's petition from writ of certiorari, the outcome could have similarly positive effects as the recent Lexmark decision. (In the long run, that would also benefit Apple, which is a defendant in the vast majority of patent cases that it's a party to.)

Samsung's reply brief stresses the importance of the issues and particularly emphasizes that all three issues Samsung submits for review involve legal, not merely factual questions. At the end of the reply brief, it becomes clear that Samsung's short-term priority is the "quick links" patent, which the Federal Circuit patent held not to be infringed but the other circuit judges, in their controversial en banc decision, reinstated the district court ruling and jury verdict.

The Supreme Court will consider the petition at its June 22 conference.

Rather than go into more detail here (since I've already blogged about all of the issues and also this cert proceeding on multiple occasions), I'd like to point you to a great source of information: a YouTube video of a recent Public Knowledge Foundation conference in Washington, DC. Here I have some highlights from the event--select quotes from each of the panelists with a focus on (non-)obviousness, one of the three parts of Samsung's petition:

Ellen Schrantz, Senior Director of Government Affairs & Counsel, the Internet Association:

  • "What the Court essentially did was take a legal determination of obviousness and make it into a factual determination for the jury, and then just presumed that the jury resolved facts that it wasn’t even charged with solving in the first place."

  • "Given the speed which with the marketplace is moving and the complex issues across circuits and courts on obviousness as well as the very strange procedural history here of there not even being a briefing ahead of the en banc decision, this really is prime for Supreme Court consideration."

  • "By lowering the bar for non-obviousness, there's a real risk that patents will issue that don't deserve patent protection, that there will be additional litigation. And ultimately, it's the consumers that are going to bear the brunt of this because they will be subsidizing the litigation costs for innovators, and suffering as a result."

Carl Cecere, Attorney for the Hispanic Leadership Fund and the National Grange:

  • "You're asking the jury to evaluate the state of the art in technologies as diverse as biotechnology, space telescopes, and evaluate whether this is a step beyond what was already there."

  • "Deferring to juries creates a lot of problems. It runs the risk of allowing a lot of obvious inventions that may not be obvious to a jury, to be validated. It also runs the risk of invalidating some good inventions."

Derek Dahlgren, Attorney, Rothwell, Figg, Ernst & Manbeck, PC:

  • "By lowering the bar for non-obviousness, there's a real risk that patents will issue that don't deserve patent protection, that there will be additional litigation."

Matthew Levy, Patent Policy Consultant and former Patent Counsel at the Computer and Communications Industry Association:

  • "It's not just the twisting of obviousness law and it's not just trying to go back to the pre eBay injunction rule. It's this whole, the battle is really for what is patents going to cover? Are they going to cover what they say they cover or are we going to allow the conflation of the tiny with the entire thing?"

Share with other professionals via LinkedIn:

Monday, June 5, 2017

Qualcomm denies charging higher patent royalties if device makers use rivals' baseband chipsets

Two months after asking the United States District Court for the Northern District of California to dismiss the FTC's antitrust complaint, and three weeks after the FTC argued (with support from Intel, Samsung and others) that its complaint met the requirements so the case can proceed, Qualcomm replied on Friday in support of its motion to dismiss (this post continues below the document):

17-06-02 Qualcomm Reply Re. Dismissal of FTC Complaint by Florian Mueller on Scribd

One of the alleged insufficiencies of the FTC's complaint is that the FTC's complaint refers to "elevated" royalties instead of using the term "above FRAND" (as Qualcomm suggests). Qualcomm says that the FTC must allege supra-FRAND royalties, and even that would not be enough since anticompetitive harm resulting from such royalties would have to be shown as well. In this context, Qualcomm also writes the following:

"[The FTC] never identifies a single licensee whose specific rate is allegedly above FRAND."

However, I have reread the FTC's original complaint, and its paragraph 118 says this:

"Apple, like other OEMs, regards Qualcomm's license terms, including the effective royalties charged by Qualcomm under its licenses with Apple's contract manufacturers, as inconsistent with Qualcomm's FRAND commitments."

Right before that paragraph, the FTC notes that "Apple is not a direct Qualcomm licensee" but, instead, used to reimburse its contract manufacturers for the royalties they pay to Qualcomm. If one interprets the word "licensee" in economic terms, then the FTC actually did identify at least one de facto licensee that paid a supra-FRAND rate.

It's good that Qualcomm says in the first paragraph of its latest brief: "[T]he key question is not a semantic one about taxes and royalties. It is the substance that matters." But if substance matters, then Qualcomm should recognize that a device maker paying royalties through a contract manufacturer is a licensee.

"Substance matters" also means, or in my view should mean, that the anticompetitive effect of supra-FRAND royalties on devices that use Intel (or other Qualcomm rivals') chips must be analyzed on an "all-in" basis. In paragraph 88 of its complaint, the FTC defined the "all-in cost of a baseband processor" as "consisting of both (i) the nominal price of the processor; and (ii) any patent royalties that the OEM must pay to use that processor in a handset." While that passage doesn't say so, it's obvious that any rebates or discounts from such royalties must be considered as well. "All-in" means "bottom line."

Even if we believe Qualcomm that its patent royalty rates don't discriminate at first sight between devices using Qualcomm chips and other devices, rebates and discount can lead to a decisive difference. The way Qualcomm redacted its reply brief indicates that the rebate/discount question is a highly sensitive issue here. On pages 11 and 12, there are four redactions of single words, but the context makes it clear that the redacted word, in each case, was either "rebate" or "discount." The same section of the brief points to footnote 20, which cites to other cases and mentions either term:

"[...] imposed rules that restricted dental dealers from carrying competing lines of artificial teeth, but it did not offer those dealers any rebates." (emphasis added)

"Microsoft [...] granted discounts only 'as compensation for the work required' to comply with the restrictions, not to win over resisting OEMs." (emphasis added)

Rebates are also mentioned in the FTC's complaint. In paragraph 120:

"Under a 2007 agreement, Qualcomm agreed to rebate to Apple royalties that Qualcomm received from Apple's contract manufacturers in excess of a specified per-handset cap."

Four paragraphs later:

"In all, Qualcomm's 2011 and 2013 agreements with Apple provided for billions of dollars in conditional rebates from Qualcomm to Apple for baseband processor sales from 2011 to 2016. These conditional rebates effectively penalized Apple's use of any baseband processors supplied by Qualcomm's competitors." (emphasis added)

So, if substance matters, the FTC complaint isn't anywhere as lacking and wanting as Qualcomm claims. The FTC definitely tried to keep the complaint very focused. Qualcomm quotes the dissenting FTC commissioner (Mrs. Ohlhausen) as saying that "[r]ather than allege that Qualcomm charges above-FRAND royalties, the complaint dances around that essential element." What I think the FTC complaint does dance around is the need for a FRAND rate-setting decision as part of this case. Whether Judge Koh views that as a deficiency requiring an amended complaint remains to be seen. I've written in one or two earlier posts that Qualcomm's criticism of the FTC's approach may succeed to the extent of a dismissal without prejudice.

Just one last point on substance that matters. Qualcomm argues that there is no "cognizable theory" of harm in place with respect to the FTC's allegation that rival baseband processor makers felt forced to lower their prices in order to offset at least some of the higher patent licensing cost that device makers allegedly have when using non-Qualcomm chips. In other words: competition law should protect (and should particularly protect consumers) against inflated prices, not against price reductions. However, if chipset makers have to lower prices under a kind of pressure (patent royalties paid by device makers) that has nothing to do with the competing products themselves, then it adversely affects their commercial viability for no good reason, and as a result, companies will then be less competitive, which in the worst case means they'll go out of business, and that will lead to higher prices in the long run.

If Judge Koh understands all the market dynamics involved, and even more so if she takes a consumer perspective (since we're the ones who pay for all of this in the end), Qualcomm will have to defend itself either against the existing complaint or against a minimally-amended one.

Share with other professionals via LinkedIn:

Tuesday, May 30, 2017

Supreme Court rules against Lexmark on patent exhaustion, strengthening FTC/Apple cases against Qualcomm

The long-awaited Supreme Court ruling in Impression Products v. Lexmark International (PDF) has just been handed down. It deals with two questions related to patent exhaustion, and I was aware of it before but wanted to wait until the implications of that dispute on the smartphone cases I'm primarily interested in would be clearer. The good news is that the Supreme Court has once again overruled the Federal Circuit in a way that strengthens those defending themselves against attempts to gain excessive leverage and extract overcompensation from patents. The Supreme Court is staying its course with respect to patent matters, regardless of some patent troll lobbying groups suggesting that all those decisions would result in the demise of the American inventor (quite the opposite is the case).

Lexmark tried to leverage its patents on toner cartridges against various so-called remanufacturers (companies that buy up empty toner cartridges, refill them, and then sell the refilled cartridges). Impression Products was the last man standing at some point and took this to the Supreme Court after the Federal Circuit had decided completely in--surprise, surprise--the patent holder's favor. Of the three different levels of the federal court system, the Supreme Court took the strongest and clearest position against overleveraging/overcompensation of patents; the Federal Circuit took the very opposite position; and the district court (Southern District of Ohio) had agreed with Lexmark that exhaustion didn't apply to cartridges sold in other countries, but had sided with Impression at least with respect to cartridges Lexmark sold in the U.S. and on which it sought to impose certain restrictions.

As today's Supreme Court decision explains, the Federal Circuit "started from the premise that the exhaustion doctrine is an interpretation of the patent infringement statute, which prohibits anyone from using or selling a patented article 'without authority' from the patentee." In this statutory context, "without authority" just serves the purpose of clarification: if you have a license, you don't infringe. That's self-explanatory, if not tautological. But it's also the weakest basis on which the doctrine of patent exhaustion could stand: the Federal Circuit wanted to reduce exhaustion to merely a presumption of the patent holder granting customers and the entire downstream "authority" to use and resell a product. It would have been a weak basis for the all-important concept of patent exhaustion since patent holders could then navigate around it by just imposing some restrictions. Exhaustion would have worked in a similar way to promissory estoppel: if you don't say the wrong thing, or if you say the right thing to overcome a presumption, you're not estopped.

The Supreme Court has now made it clear that exhaustion is much stronger and much more comprehensive:

"The problem with the Federal Circuit's logic is that the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is a limit on the scope of the patentee's rights. The Patent Act gives patentees a limited exclusionary power, and exhaustion extinguishes that power. A purchaser has the right to use, sell or import an item because those are the rights that come along with ownership, not because it purchased authority to engage in those practices from the patentee."

On that basis, the Supreme Court basically held that Lexmark couldn't impose the restrictions it relied upon in this litigation, and that this wouldn't work for Lexmark even if the first sale occurred outside the United States (the one scenario of the two in which the district court sided with Lexmark). The Supreme Court's disagreement with the Federal Circuit is very visible in this passage, too:

"The Patent Act promotes innovation by allowing inventors to secure the financial rewards for their inventions. Once a patentee sells an item, it has secured that reward, and the patent laws provide no basis for restraining the use and enjoyment of the product."

No overcompensation. No overleveraging. No double-dipping. No restrictions that go beyond what the Patent Act allows. That's the message here.

Presumably, some people in another Washington DC building are now reading the Supreme Court decision: the lawyers working on the FTC's case against Qualcomm. The FTC argued in its January complaint, under a headline that describes Qualcomm's "no license-no chips" policy as "anomalous among component suppliers," that "when one of Qualcomm's competitors sells a baseband processor to an OEM, the OEM can use or resell the processor without obtaining a separate patent license from the competitor—just as a consumer buying a smartphone does not have to obtain a separate patent license from the seller of the smartphone." The FTC went on to explain that "Qualcomm is unique in requiring an OEM, as a condition of sale, to secure a separate patent license requiring royalty payments for handsets that use a competitor's components." For example, this would apply to a situation in which a device maker is a customer of Qualcomm and, say, Intel or Samsung's component business.

The FTC still has to make an antitrust argument here (tying), which includes that it has to prove Qualcomm's monopoly-like power in the baseband chipset business, but at least Qualcomm can't just point to the (now-reversed) Federal Circuit decision in disputing the FTC's exhaustion argument.

Patent exhaustion as a concept has been strengthened today, and its profile in certain other cases will likely be even higher now. While Apple takes certain positions when it enforces its own patents (and would rather avoid Supreme Court review of a highly controversial Federal Circuit decision in its favor), exhaustion is not an issue in Apple v. Samsung but it does play a role in Apple v. Qualcomm: Count XXIII of Apple's antitrust complaint against Qualcomm is a request for judicial "declaration of unenforceability [of Qualcomm's patents in certain contexts] due to exhaustion." Apple alleged in its January complaint that "Qualcomm has sought, and continues to seek, separate patent license fees from Apple's [contract manufacturers] for patents embodied in the chipsets Qualcomm sells to Apple's CMs, a practice that is prohibited under the patent exhaustion doctrine." In the past, Apple had to pay those license fees indirectly (via its contract manufacturers), which it is no longer prepared to do, and that's why Qualcomm is now suing four Apple contract manufacturers and seeking a preliminary injunction against them.

Apple also wrote that "[b]y requiring Apple's CMs to take a separate patent license for the same components that they purchase, Qualcomm is double-dipping." That term is an accusation against Qualcomm that I previously heard from other industry players, so I wasn't surprised to also find it in Apple's complaint. If the Federal Circuit ruling in Lexmark had been affirmed, Qualcomm might have been able to defeat that particular count of Apple's complaint. Apple's complaint already anticipated that Qualcomm would point to its corporate structure: "Qualcomm has attempted to evade the patent exhaustion doctrine by selling baseband processor chipsets to Apple's [contract manufacturers] through QTC, which is operated by QTI, which is in turn a wholly owned subsidiary of Qualcomm." Apple then points to Qualcomm's 2012 restructuring, which I already blogged about back then with a focus on open-source licensing issues. The Supreme Court's broad and inclusive approach to exhaustion simply doesn't allow any kind of end-run around the exhaustion doctrine through a first sale outside the United States as in one of the two issues relevant in the Lexmark case. Philosophically, this also makes it hard to imagine that an end-run could be achieved through a sophisticated corporate structure.

As the district court cases in Northern (FTC v. Qualcomm) and Southern (Apple v. Qualcomm) California unfold, patent exhaustion is going to be a very interesting part of the debate. And in many other cases, though the Qualcomm cases are currently the highest-profile smartphone-related cases in which exhaustion plays a role.

Share with other professionals via LinkedIn:

Thursday, May 25, 2017

Qualcomm requests U.S. preliminary injunction against Apple's contract manufacturers

Last week Qualcomm filed a breach-of-contract suit against Apple's four contract manufacturers, and the focus on injunctive relief made a motion for a preliminary injunction "particularly likely" as I wrote at the time, though I also pointed out that the hardest part here is going to be that Qualcomm must show irreparable harm. So I'm not surprised in the slightest that Qualcomm has followed up with a preliminary-injunction motion (asking the court to require the contract manufacturers to pay royalties again) and that most of the legal memorandum in support of that motion deals with the question of irreparable harm. The closest thing to a surprise is that this filing wasn't accompanied by a press release published on Qualcomm's website. They have, however, given a statement to CNET and other media.

Here's the filing, including all exhibits, some of which are really essential here (this post continues below the document):

17-05-24 Qualcomm Motion for Preliminary Injunction by Florian Mueller on Scribd

Despite the qualitative and quantitative efforts undertaken by Qualcomm to establish irreparable harm, I can see some serious issues here that weigh strongly against an injunction. Only two days after disagreeing with various aspects of Apple's opposition to Samsung's latest Supreme Court petition, one part of which is related to an injunction ruling in Apple's favor, I can't help but point out which parts of Qualcomm's preliminary-injunction motion are unconvincing at a closer look.

As long as Qualcomm doesn't grant patent licenses on FRAND terms to chipset makers such as Intel (which filed a great amicus brief in support of the FTC) and Samsung (whose brief is at a level with Intel's, with a different focus in part since Samsung is affected in two roles, not just one), it is acting in contravention of an obligation to license all comers. That is the root cause of this whole constantly-escalating dispute. Qualcomm's motion mentions complaints by Apple in the same district (Southern District of California) and "in the United Kingdom, China, Japan, and Taiwan." I was previously aware of some, but not all, of those complaints. But again, this wouldn't have happened if Qualcomm had licensed chipset makers on FRAND terms. Since Qualcomm must license "all comers" on FRAND terms, chipset makers are entitled to a license, but so are device makers like Apple. Contract manufacturers are being sued now only because they are in exactly the position of the value chain where Qualcomm apparently believes it can get the best deal.

Qualcomm places a whole lot of emphasis on what those contract manufacturers have done over an extended period of time: they apparently used to meet Qualcomm's demands. Those demands are now at issue. Exhibit 16 to Qualcomm's motion (pages 67 and 68 of the PDF) is a letter sent by Apple's general counsel, Bruce Sewell, to his counterpart at Qualcomm, Donald Rosenberg. In that letter, Apple states the following:

"Despite being just one of over a dozen companies that contributed to basic cellular standards, Qualcomm forces the contract manufacturers and Apple to pay many times more in royalty payments than all the other cellular patent licensors combined! This is grossly unfair and needs to be reviewed by the courts and appropriate antitrust agencies - activities which are now underway." (emphasis added)

Qualcomm's version of the story is that everyone was paying a fair amount of royalties and that the contract manufacturers are still doing so with respect to non-Apple products:

"[Qualcomm and Apple's contract manufacturers have a] long history of operating under the license agreements makes clear that the agreements are reasonable and supported by adequate consideration. As noted, as to non-Apple products, Defendants continue to perform under the same terms that apply to Apple products."

This is a non sequitur. Royalties can be supra-FRAND even if some parties have paid up for a century. The contract manufacturers are just pass-through entities here. If other customers haven't taken the same step as Apple, it still doesn't mean that the royalty level is right. Qualcomm's motion doesn't address what the attached letter by Apple's general counsel states. Here's another quote from that letter:

"We believe Qualcomm is charging the contract manufacturers, who in turn pass back to Apple and its customers, royalties based on an illegal manipulation of the market for cellular enabled chipsets."

If what Apple says is true and Qualcomm has illegally manipulated the market and has therefore been able to charge "many times more in royalt[ies] than all the other cellular patent licensors combined," then that's an issue that needs to be addressed. Above all, what needs to be addressed before an injunction can even be contemplated in Southern California is the totality of what the Federal Trade Commission is alleging in the Northern District of California. In the contract manufacturer case, the FTC case isn't mentioned at all (unless something went wrong with my full-text PDF search). The only related case Qualcomm has notified the court of is Apple v. Qualcomm, where Qualcomm brought counterclaims including one related to tortious interference. Between now and an injunction decision, the FTC's findings will have to be discussed since they're highly relevant. If we nevertheless assume now, for the remainder of the post and just for the sake of the argument, that Qualcomm is right and the contract manufacturers are withholding royalties that they owe Qualcomm, then there still are some fundamental flaws in Qualcomm's injunction request:

  • On page 18 of the memorandum (PDF page 23), Qualcomm cites various district and state court decisions that are unrelated to patent licenses. Unlike Richard Stallman, who calls it a "seductive mirage" to view patents, copyright, trademarks etc. as part of the same larger category of rights called intellectual property, I don't oppose the term when common aspects of otherwise disparate IPRs are meant. However, I've done a fair amount of copyright and trademark licensing over the decades, mostly involving software developers and distributors. When Qualcomm's cited decisions found that it was irreparable harm if unlicensed streaming threatened the businesses or at least diminished the value of distributorships of legitimate licensees, I can relate to that in connection with exclusive licenses (such as an exclusive territorial distribution license). The copyright and trademark licenses I negotiated in the past all involved territorial exclusivity, and infringements by third parties would have been terrible. However, Qualcomm entered into the obligation to grant FRAND licenses to its standard-essential patents to everyone. If courts protected exclusive licensees through injunctive relief, that's fundamentally different from this case.

  • Pages 161 to 164 of the PDF contain a declaration signed by Qualcomm's licensing chief Alex Rogers. The fact that he signed it in "Brussels, Belgium" is probably attributable to developments in the European Commission investigation of Qualcomm's conduct. At least that's far more likely than licensing negotiations. Anway, Mr. Rogers's declaration is meant to support Qualcomm's claim of irreparable harm (unless the court orders Apple's licensees to pay up again), and it's a bit weak in terms of being speculative. The ninth paragraph alleges "a significant competitive imbalance" that Apple and its contract manufacturers have allegedly created because Apple's competitors "are paying to use Qualcomm's valuable intellectual property under their respective license agreements, while Apple and Defendants are not." However, there really isn't any sign of Apple gaining market share this way. Also, Qualcomm itself asserts all the time that Apple has agreed to hold the contract manufacturers harmless, so Apple can't just assume that it won't ever pay Qualcomm anything. Anyway, Apple hasn't lowered its prices or done anything else so far (such as offering more value at the same price) that would have competitive impact. The tenth paragraph contains a double "may":

    "[O]ther licensees may use Defendants' non-payment as leverage to improperly argue that they may also decline to pay under their respective agreements [...]" (emphases added)

    The eleventh paragraph contains a "may" and a "could":

    "Defendants' continued non-payment of royalties also may harm Qualcomm's ability to enter into new agreements. [...] [A] prospective licensee could claim it is disadvantageous to sign a license agreement with Qualcomm." (emphases added)

    But the legal standard cited by Qualcomm requires a plaintiff to show that he is likely to suffer irreparable harm (absent a preliminary injunction).

  • Qualcomm argues that non-payment of royalties means "less cash on hand for ongoing research and development." But Apple makes a similar claim in the aforementioned letter:

    "The more Apple innovates with unique features[,] the more money Qualcomm collects for no reason, and the more expensive it becomes for Apple to fund these innovations."

    So it's not enough for Qualcomm to claim that more cash in the bank (where it already has north of a billion dollars anyway) is going to result in less research and development. The question is whether the same applies to Apple in some way, and then, if the court has to determine which effect is worse (the one on Qualcomm's R&D or the one on Apple's R&D), then it also must be considered whether Qualcomm's royalties are within or outside the FRAND ballpark. The same district court in Southern California will make a FRAND determination as to at least some Qualcomm patents at Apple's request. It seems highly ambitious that Qualcomm now wants to convince the court in connection with a preliminary-injunction motion that it's going to prevail in that other (huge) case.

  • The last paragraph of Apple's April 25 letter is heavily-redacted. In that paragraph, Apple stresses that it doesn't want a free ride and never did. Apple states its willingness to pay a FRAND royalty. It then "specifically refer[s]" Qualcomm to an attachment to an offer it made in January and says it "believe[s] this action show [Apple's] commitment to apy FRAND royalties once the amount is finally determined by the courts on a [FRAND] basis." I don't know what exactly Apple attached to its offer, but maybe we'll find out more about it in the process. I'm curious because an offer may already (dependent on its specifics) be sufficient to show that Apple is a willing licensee, but if Apple stresses in its letter to Qualcomm that there's something important beyond the offer, then (unless Apple overstates the importance of that one) it may be something important.

    Apple's request for a FRAND rate-setting decision by the court predates Qualcomm's suit against the contract manufacturers, so apart from substantive and logical considerations, there would also be a procedural reason here to make the FRAND determination, or at least serious headway in that regard, before Qualcomm can obtain an injunction based on the assumption of its royalties always having been FRAND.

  • A part of Qualcomm's argument that I haven't understood so far is its reference to "the risk of an unenforceable judgment against foreign Defendants." In its own counterclaim against Apple and also in its filings in the contract manufacturer case, Qualcomm points to Apple's commitment to indemnify the contract manufacturers. So I can't see why Qualcomm wouldn't ultimately get paid.

  • Qualcomm argues that "[i]f [it] were limited to an award of backward-looking money damages (the legal remedy), Qualcomm would be forced to file a new suit (or amend its complaint) each and every quarter." Actually, that's what supplemental damages are for.

  • I'd like to compare this case, at a high level, to the Apple v. Samsung case in connection with which I agree with Federal Circuit Chief Judge Prost that Apple wasn't entitled to an injunction. In that other case, Apple has a decision on the merits in its favor (an undeniable fact though I disagree with that one, as does Chief Judge Prost, and would like to see it overturned). Here, Qualcomm hasn't yet proven that a single one of its patents is valid and infringed. Its claim is based entirely on the contract. It will be interesting to see what the contract manufacturers will say in their opposition to this motion about the contract terms.

As for the connection between this and the Apple v. Samsung case, it's worth noting that Qualcomm, though Quinn Emanuel (Samsung's counsel against Apple) is among the three world-class firms representing Qualcomm here, cites to a Federal Circuit decision on the public interest in protecting IP from 1996 (really old) and another one from the Northern District of California, but not to the Federal Circuit's 2015 opinion in Apple v. Samsung, which held that "the public interest nearly always weighs in favor of protecting property rights in the absence of countervailing factors, especially when the patentee practices his inventions." Maybe that's because of the pending cert petition: this holding could (and I hope will) still be overturned.

Qualcomm is undertaking a long shot here. It wants injunctive relief in a case that is only about money, and it wants a preliminary injunction despite the need to address various related issues in earlier-filed cases (FTC v. Qualcomm in the Northern District of California and Apple v. Qualcomm in the Southern District of California). Qualcomm has to give it a try, but the outside world doesn't have to believe in its chances.

The dispute is still escalating, and presumably the next level of escalation will be reached when Qualcomm brings the ITC complaint (request for U.S. import ban) it announced several weeks ago...

Share with other professionals via LinkedIn: