Friday, April 18, 2014

Apple's counsel stresses USPTO's independence -- but the USPTO doubts the autocomplete patent

The Apple v. Samsung II trial continues today with Samsung's challenges to Apple's asserted patents. In this context, Apple's counsel attacked the credibility of a Samsung expert witness, as journalists including MLex' Mike Swift (on Twitter) reported, by pointing out that he was paid $220,000 for Samsung for his work (by comparison, one of Apple's two damages experts made ten times that amount) unlike the examiners of the United States Patent and Trademark Office (USPTO).

While it's obvious that either party's experts take their client's position, one doesn't have to be paid by Samsung to doubt the validity of Apple's patents.

None of the ten European judges who deemed slide-to-unlock invalid was on Samsung's payroll (a certain retired UK judge was not involved with that case). Not one judge has so far considered this patent valid, other than Judge Koh, of course.

And Morrison & Foerster's Harold McElhinny (whose Apple v. Samsung trial track record is impressive) obviously didn't tell the jury that the vaunted, neutral USPTO is having second thoughts that may very well result in the invalidation of claim 8 of the '172 autocomplete patent -- the claim Apple is asserting in this trial and which Judge Koh found (on summary judgment) to have been infringed. In this trial, invalidity is Samsung's only defense to the autocomplete patent. Samsung has credible invalidity challenges to all five Apple patents-in-suit, but in the case of the autocomplete patent it is a fact that the USPTO found an anonymous requester (almost certainly Samsung, Google, or both) had raised a substantial new question for patentability.

Substantial new question for patentability -- that's exactly why the jury should ignore Mr. McElhinny's comment about the independence of the USPTO's examiners. No one would question the independence of the examiners anyway. But they can only decide based on the prior art available to them when they make their original decision. If other prior art is presented later and is considered to raise a substantial new question for patentability, the issue is not whether the original decision to grant the patent was made independently because it was made on the basis of incomplete knowledge -- and the same independent USPTO has found that it needs to take another very close look.

Here's the procedural history of this reexamination. In June 2013, anonymous reexamination requests (again, I can't imagine that Samsung and/or Google would not be behind this) against two Apple patents including U.S. Patent No. 8,074,172 on a "method, system, and graphical user interface for providing word recommendations" became discoverable. On August 1, 2013, the USPTO issued an order to reexamine most claims of this patent (including the claim asserted against Samsung), but on August 19, a "revised" order came down and ordered reexamination only of claims 21-38. A month later, the anonymous requester petitioned for a decision by the Director of the USPTO to overrule the examiner and order reeamination of the other challenged claims. On January 13, 2014, the Director granted the request in (large) part, particularly also with respect to claim 8, the one at issue in the ongoing California trial. On March 21, more than two months after the director's decision, Apple asked the USPTO to vacate the (large) parts of the director's decision adverse to Apple's interests. The anonymous requester responded two weeks ago (on April 4) and argued that Apple's petition was filed out of time (there's a non-extendible two-month deadline and Apple filed about a week after that deadline) and, in any event, lacked merit. The USPTO has not yet decided, but I guess it will affirm the Director's decision, which means that Apple's asserted claim of the autocomplete patent remains under reexamination pressure.

Here's the January 2014 USPTO decision, which explains why the patent office now doubts the validity of (among others) claim 8:

14-01-13 Apple '172 Autocomplete Reexamination Decision by Florian Mueller

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Judge Koh's boss finds Rockstar's scare tactics advance Apple's interests against Android

In the ongoing Apple v. Samsung II trial in the Northern District of California, Apple's lawyers try hard to downplay Google's role, though it's blindingly obvious that Google is the true target of Apple's second California lawsuit against Samsung. Usually a twelve-mile drive (from Cupertino to Mountain View) is more convenient than a twelve-hour flight (from San Francisco to Seoul), but in this case, Apple seeks to benefit from the statistically-established bias of U.S. jurors against foreign companies. Also, the fact that Samsung sells actual devices is an opportunity for Apple to disingenuously make damages claims that run counter to its own, repeatedly-stated position on the proper royalty base for patent licenses and damages. The proper royalty base for Apple's asserted patents in the ongoing trial is Google's Android.

Maybe Apple's counsel can fool a jury, but Apple for sure can't fool Judge Koh's boss. The Chief District Judge of the Northern District of California, Claudia Wilken, wrote in an order (handed down yesterday) that the Rockstar Consortium's "'scare the customer and run' tactic advances Apple's interest in interfering with Google's Android business" and made various other findings relating to Apple's anti-Google/anti-Android agenda.

Before I quote the entire Apple-related passage from Chief District Judge Wilken's order denying a Rockstar motion to dismiss or move out of California a declaratory judgment action brought by Google to protect Android and the Android OEMs Rockstar sued on Halloween 2013, I'd like to defend Apple to some extent here, or to at least give it the benefit of the doubt. I agree with Judge Wilken's conclusion that Apple, since it contributed 58% of Rockstar's funding and has strategic interests relating to Android, has created a situation in which Rockstar has continuing obligations to Apple -- obligations to monetize those patents. However, the fact that Apple is (likely) a majority shareholder does not necessarily mean that Apple has a majority of the voting rights. It's actually unlikely that Apple holds a majority of the votes: its partners are large players like Microsoft and Ericsson, who would hardly have accepted to be (collectively!) Apple's junior partner in terms of control. And if my assumption is right and Apple does not have a majority, then it is possible that Apple participated in the Nortel patent-buying effort only to clear the market of those patents (so as to avoid that Google would use them against it) but perhaps never wanted Rockstar to go out and sue the world including non-smartphone companies like cable operators using Cisco equipment. Maybe Apple even voted consistently against litigation, but wasn't able to singlehandedly prevent it from happening.

Further discovery in the now-continuing California declaratory judgment action could shed some light on Apple's role. Until there is more evidence of Apple being the driving force, I will give it the benefit of the doubt, though Chief District Judge Wilken obviously had to make a decision based on the facts in the record and Apple's majority contribution to Rockstar's funding is indeed a good reason to find that there are continuing obligations that Rockstar has vis-à-vis Apple. The existence of continuing obligations with a company domiciled in the Northern District of California is separate from the question of whether Rockstar is an Apple front to sue Google and its Android partners. Apple tops the list of answers to the "cui bono?" question -- but again, there's a need for more transparency about the decision-making process at Rockstar. It would be utterly unjust if Apple was perceived as the primary culprit if it just got outvoted when trying to prevent this mess (and maybe couldn't sell its shares in this company without its partners' approval), so there's a need for more clarity on Apple's influence and the positions it took whenever the shareholder voted on litigation-related issues.

Here's the full text of the Apple-related passage of the order:

"Google contends that Defendants have accepted substantial obligations to Apple, a forum resident, which require Defendants 'to defend and pursue any infringement against' their patents. [...] Google alleges that Apple is a majority shareholder of Defendants and exerts substantial control over them, and as a result Defendants are obliged to act on Apple's behalf in a campaign to attack Google’s Android platform.

In support of this allegation, Google submits strong evidence that Apple is indeed the majority shareholder of Defendants based on Apple’s majority investment in Rockstar’s predecessor entity, Rockstar Bidco.7 Currently, Rockstar is a Delaware limited partnership which lists'“Rockstar Consortium LLC' located in New York as general partner. [...] But Apple contributed $2.6 billion, or fifty-eight percent of the $4.5 billion total investment in Rockstar Bidco. [...] Although Rockstar Bidco reorganized itself to become Rockstar, it does not appear that any ownership interests changed, nor do Defendants assert otherwise.

Even if Apple is a majority shareholder of Rockstar, if Defendants were able to demonstrate that Apple is a mere passive shareholder and takes no part in patent assertion strategy, then the relationship between Apple and Defendants might not be sufficient to uphold specific jurisdiction. [...] Google alleges that Apple's role extends beyond the mere receipt of profits. Rockstar’s CEO Veschi stated that he does not talk to its shareholders about potential licensing partners or infringement suits, but admitted that he has to show them 'progress and that real work is being done.' [...] Veschi holds periodic calls and meetings with the owners, primarily with their intellectual property departments, and Veschi acknowledges that they 'work well together.' [...] Although Veschi states they avoid talking about details, it does appear at least telling that Veschi speaks directly and periodically with the owners' intellectual property departments to demonstrate that 'work is being done.' [...]

Google demonstrates a direct link between Apple's unique business interests, separate and apart from mere profitmaking, and Defendants' actions against Google and its customers. Google and Apple's rivalry in the smartphone industry is well-documented. Apple's founder stated that he viewed Android as a 'rip off' of iPhone features and intended to 'destroy' Android by launching a 'thermonuclear war.' [...] Defendants' litigation strategy of suing Google's customers in the Halloween actions is consistent with Apple’s particular business interests. In suing the Halloween action defendants, Defendants here limited their infringement claims to Android-operating devices only, even where they asserted a hardware-based patent. [...] This 'scare the customer and run' tactic advances Apple's interest in interfering with Google's Android business. [...]"

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Tuesday, April 15, 2014

After 3 years of patent litigation, Apple and Samsung should settle for $3 and $1 per unit

Three years ago to the day, Apple filed its original California patent infringement complaint against Samsung. On the occasion of this anniversary, here's a scan of the cover sheet with the date stamp (click on the image to enlarge; this post continues below the document):

I've been watching this dispute for three years. I downloaded countless filings from electronic dockets in the U.S. and attended well over a dozen German Apple v. Samsung and Samsung v. Apple trials, plus an injunction hearing in France. And I can't tell you how tired I am of this.

After three years and dozens of filings in at least 10 countries, there is still no endgame in sight. Later today, these two companies will square off again in the San Jose court, where a jury will have to render a verdict that, no matter the outcome, won't have the potential to resolve this global dispute.

A couple of weeks ago I made a call for input concerning the terms on which it would make sense for both parties to settle their global dispute. A large part of the feedback I received was non-numerical and came down to saying that Apple should sue Samsung forever and keep pursuing injunctions. Some of the messages I received specified potential royalty rates, some of which basically fell into the previous category of replies.

In this post I'm now going to lay out and explain my own thinking, not influenced by anyone (in fact, I did not tell or indicate to anyone beforehand what numbers I had in mind, nor did anyone request or suggest that I take a particular position).

At the current juncture (and the ongoing trial is unlikely to have a material effect on this assessment), these are the terms I would propose if I were a mediator:

  • Apple should pay $1 per cellular device to Samsung.

  • Samsung should pay $3 per device to Apple.

  • This is more favorable to Apple than it appears at first sight because Samsung's volumes are higher.

  • These terms should also apply retroactively to the last 36 months.

  • Samsung should additionally make a one-time payment of $750 million to settle any past infringement issues relating to design patents (basically, the first California case). Design patents would not be licensed going forward.

  • There should be an anti-cloning provision (something that most of the readers who gave my input stressed), but it would have to be very reasonable.

  • This proposal is a "package deal", so these two parties might very well make rather different demands in licensing negotiations with third parties.

Obviously, if the parties agreed that these are the right terms, they would already have entered into a settlement on that basis and the current California trial wouldn't have to be held anymore. Still they presumably talk all the time. I will now explain how I would defend this proposal against both parties' likely objections (if I were, in a parallel universe, their mediator), but before I do that, I'll say something about many people's fundamental misconceptions regarding the strategic and financial value of patents in a situation like this.

Jury trials are circus events, but the name of the game is not whether someone's internal benchmarking documents suggest "copying" (a term that makes sense in connection with copyright, not patent law) or whether someone revolutionized a market (there is no intellectual property right that protects market share or rewards a company for persuading consumers to use small portable touchscreen devices). The name of the game is that a patent is worth the difference between the scope of its valid claims and the best non-infringing alternative (i.e., workaround). It's about the impact on someone else's business if they are required to work around the patent.

I have recently highlighted the limited scope of Apple's patents-in-suit (and in retrospect I think I should have talked about this a lot more in the months before, though I still believed until last summer that Apple could still gain some decisive leverage at some point). I had been very patient with Apple's effort to prove the strength of its patents in court. Certain reactions to the conclusions I had to draw have focused on conspiracy theories and on evidence of "copying", all of which is pretty simple stuff, but none of the feedback I received was specific to the strength of the relevant patent claims relative to workarounds. None of those who disagreed with me pointed to Apple's exclusive ownership of particular features. Let's please not forget about the name of the game.

With the foregoing in mind, I will now outline how I as a mediator would explain the rationale behind my proposed terms to the parties.

I would tell both of them that the money they spend on lawyers is little if you compare it to the size of the relevant market, but given that those patents have turned out to be non-nuclear, costs are too high.

Another message to both of them would be that they should consider the value of a business partnership in certain areas (manufacturing of components). Companies can do business while being embroiled in litigation, but that is not the ideal climate. If those patents were much stronger than they have turned out to be, I would recommend to both of them to regard the benefits of a commercial partnership as far less important than what is strategically at stake. But that's not the case.

Either of them would argue that their patents are worth much more than I propose. In fact, my proposal comes down to almost exactly one-tenth of what both have demanded (Samsung wants 2.4% of Apple's sales for a cash-only license to its wireless SEPs (i.e., $12 on a $500 device), and Apple approached Samsung in 2010 with a $30-per-unit licensing proposal. My proposal comes down to slashing their demands by a factor of 10.

I believe Apple would probably not have a problem with the $1-per-unit fee for Samsung's patents. In 2012 Apple told a U.S. court that it would accept a FRAND royalty determination of up to $1 per iPhone to secure a license to Motorola's patents (and it didn't rule out paying more, but in that case it wanted to reserve the right to continue to litigate). I don't think Apple would claim that Samsung's patents are less valuable than Motorola's. And it has turned out that antitrust regulators are not inclined to impose sanctions on Samsung for its SEP assertions against Apple.

Samsung would probably still want a lot more than $1 per device, but I would encourage Samsung to look at this rate in the greater context of a comprehensive cross-license agreement.

I don't know how Samsung would react to the idea of paying $3 per Android device to Apple, nor whether Google would somehow contribute financially to such a settlement. Of course, Samsung could argue that Apple doesn't have any serious leverage and will ultimately get nothing, or next to nothing, out of all of these lawsuits. Conversely, Apple could also argue that it believes it would have more leverage further down the road. But on that basis they would both never settle and keep litigating forever.

By far and away the biggest obstacle to an agreement on these proposed terms would be the reality distortion field surrounding Apple's perspective on the value of its patents. This bullet point from Apple's 2010 proposal to Samsung shows just how unrealistic Apple was at the outset and still might be (click on the image to enlarge or read the text below the image):

"Since Apple's paradigm of an advanced smartphone won -> Apple's portfolio will become the most important and most valuable part of the IP stack for the next decade."

The "Since" part is true, the conclusion from it is not. Apple does not own a market because it created the market: it merely owns any technology it created, and since essentially all of the relevant technology existed before the iPhone, Apple can't claim ownership of an entire category. So far its proven ownership is limited to rubber-banding...

Apple has now been litigating against Android device makers for almost 50 months. It has tried everything. Hardware patents. Software patents. iPhone-era patents. Pre-iPhone Mac patents. And the only complete feature that it has been able to force Android device makers to remove from their devices is the overscroll bounceback.

If litigation drags on and on and on, Apple will over time be granted new patents that it may assert in litigation. But that is also true of Samsung. Both can also make patent acquisitions anytime. On that basis, they would never settle.

If Apple thought $3 was too little, I'd remind them of their own position on an appropriate royalty base (given that most of their patents-in-suit against Samsung are software patents) and tell them that based on the leverage they presently have in litigation, a royalty-free cross-license would make a lot of sense, and if Apple didn't settle now on these proposed terms, a zero-zero deal could easily be the ultimate outcome.

If Samsung thought $3 was too much to pay to someone who doesn't have serious leverage, I would tell Samsung to consider that as long as there is no settlement, Apple will keep trying to gain leverage, and there is some economic value in eliminating the remaining uncertainty. While I would agree with Samsung that Apple's current non-leverage does not justify $3 per device, there could also be a situation further down the road (not as a result of the ongoing trial, but later on) in which a per-unit royalty of $5 or more (though always below $10 as long as the U.S. is the only jurisdiction in which Apple, which has not scored a single lasting win over Samsung in Europe, can prevail on anything other than rubber-banding) would be the correct outcome.

These are the key messages I would have for them. I would also be able to go into much more detail with them on the results (or absence of results) of three years of litigation, the scope of claims, and the workaround options. But in this post I just wanted to focus on my conclusions from having watched this dispute for three long years and having finally arrived at the conclusion that Apple can basically just score symbolical wins. So far at least. If Apple came up with a "killer patent" and proved it in court, then we could talk again. I doubt it.

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Sunday, April 13, 2014

Apple's damages claim, Windows freebie raise question of patent royalty base for Android

In all the patent cases I watch, the only defendant with which I have sided (and continue to side) against two different right holders (Samsung and Google/Motorola Mobility) is Apple. By comparison, I've sided with others against only one plaintiff each (BlackBerry against Mformation, Marvell against CMU, Micromax against Ericsson, Microsoft against Google's Motorola, and now Samsung against Apple in connection with the ongoing trial).

When I became aware of Apple's $40-per-device damages claim last month, the first reaction is that I was thoroughly disappointed because Apple's positions up to that point had been reasonably consistent (design patent damages have a different legal framework). Not just disappointed but even angry. Angry because I had called for antitrust sanctions against Samsung because of its SEP royalty demand of approximately $12 per device (for a whole portfolio of wireless SEPs), which I still think is way too much but which now looks cheap compared to Apple's demand of $40 for only five Android-related patents. Apple is actually seeking damages for just one patent (the '647 patent) -- more than $12 per unit -- that are at a level with Samsung's total SEP royalty demand. It didn't take me even one second to figure out that I would now have to side on this key issue with Samsung for basically the same reasons for which I still side with Apple in two other disputes -- even more so in light of Samsung's voluntary withdrawal of two standard-essential patents-in-suit from the second California case, as a result of which Samsung went into the retrial with a perfectly consistent position on patent damages.

It's obviously imperative to distinguish between the criteria for reasonable royalty rates (and royalty-type damages) on the one hand and the consequences of excessive demands on the other hand (remedies, antitrust fines etc.). Absent a FRAND commitment and what is called a license of right, it's not impossible but far more difficult to allege violations of competition law. And patents are, in principle, exclusionary rights, so someone who does not have a FRAND licensing obligation due to a FRAND pledge or some other valid reason can elect to withhold a license altogether. But that does not make the sky the limit for non-SEP royalties in the context of Georgia-Pacific royalty-type damages: a damages theory that is all about what royalty rate the parties would have agreed upon at the end of a reasonably-led negotiation. The way to enforce exclusivity is through injunctions.

One key aspect of a reasonable royalty is the appropriate royalty base. It's often the most important question. More than two years ago, I published a letter that Apple had sent to standard-setting organization ETSI with suggestions to ensure that right holders honor their FRAND licensing commitments, and I supported Apple's advocacy of a "common royalty base" for wireless baseband patents: "This common base, as between two negotiating parties, should be no higher than the industry average sales price for a basic communications device that is capable of both voice and data communications."

About a year ago Apple made this argument again in a filing with the ITC (in its efforts to avoid an import ban, which was ultimately vetoed). It argued that the proper royalty base for Samsung's wireless SEPs is the price of a baseband chip, i.e., approximately $10. Apple frequently compares (as do defendants against SEP damages claims and royalty demands all the time) the royalties sought by Samsung and Google to the price of the baseband chip, and on that basis (rightly in my opinion!) finds those royalty demands excessive.

But what's good for the goose is good for the gander.

Apple's patents-in-suit in the ongoing trial are software patents relating to Android. Four of them are just about Android, and the fifth one, slide-to-unlock, is a feature all Android device makers add to "stock Android" (and it involves mostly Google's program code as well). I'm unaware of any explanation by Apple of why the total cost of patent licenses relating to Android should not be limited to a percentage of the contribution that Android makes to the market value of a smartphone or tablet computer.

Only because Judge Koh is much more permissive with respect to damages claims than Judge Alsup (in the same district), Apple apparently didn't have to explain this striking contradiction between its "royalty base" position and its damages claims in the ongoing trial. The apportionment question came up in Oracle v. Google, and in that case it was not about the difference between the operating system and the complete device but just about the part of the Android mobile operating system that Oracle's asserted intellectual property rights represent. (I have said repeatedly that I consider the most likely next step in that case to be a remand to the district court, so there will likely be a damages trial.) Judge Alsup made very clear, however, that a zero royalty -- just because Google gives Android away for free -- was out of the question. Oracle was allowed to base claims on the mobile advertising revenue generated by Google and even the indirect network effects of Android benefitting Google's non-mobile businesses.

It would also be preposterous, of course, to argue (which no one has tried in any of the disputes I watch) that Apple should not be entitled to any royalty-type damages relating to Android because Google gives Android away for free. But Apple can't ignore -- and the court should never ever have allowed Apple to ignore -- the fact that mobile operating systems do not account for sky-high percentages of the entire market value of a smartphone or tablet computer. The fact that Microsoft now grants royalty-free Windows licenses to makers of small devices (anything with a screen smaller than 9") -- a decision by Microsoft that makes a lot of sense to me and is procompetitive -- makes it even clearer that Apple is out of touch with reality as far as reasonable royalties (and damages) relating to Android are concerned.

There's no shortage of right holders asserting patents against Android, so this question is going o continue to be an important one.

Last summer I found out that a replacement screen for the phone I used then (the Note 2, but I then bought the Galaxy Mega 6.3 instead of having it repaired) would cost me almost 300 euros ($400). The replacement would not have been limited to the screen: the spare part contained various other hardware components. Still this is one of various indications of the non-operating-system components of the total cost and market value of a smartphone (or tablet). Apple can't just ignore the value of all the high-end hardware that goes into these devices when making royalty demands over software patents.

On the other hand, the price at which a component lacking key patent licenses (whether it's an operating system or a baseband chip) is sold is not a sufficient royalty base because infringement can't have the effect of devaluing intellectual property. That is another reason why the royalty-free Windows deal for smaller devices is so interesting. Microsoft does secure patent licenses it needs, and shields its customers from patent assertions. The combination of Microsoft and Google's operating system-related pricing decisions is relevant. Apple should not turn a blind eye to such market parameters.

The purpose of this post was to raise a question and to highlight some key facts in this context, not to give a definitive answer on a highly complex issue. I will address this question on more occasions going forward and will, over time, take reasonably firm positions. But that is not necessary to establish the unjustifiability of Apple's damages claim in the Samsung case. On Tuesday I mentioned several experts who agree with me on Apple's damages claim in the ongoing trial. I still haven't become aware of anyone supporting it, but I have Rutgers Law School's Professor Michael Carrier to add to the list based on this interview with Bloomberg Law.

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Thursday, April 10, 2014

Google's 'bargaining chip' argument has traction, but Apple may still get a FRAND determination

As of tomorrow, seven months will have gone by since the Federal Circuit's hearing in the Apple v. Motorola "Posner (cross-)appeal", and there is still no ruling. In two ways, the fact that the same parties have another appeal involving FRAND issues pending before this appeals court may have contributed to the delay. One, at the Tuesday hearing in the "Wisconsin FRAND dismissal" case (official recording), a circuit judge audibly vented her frustration with the scattershot litigation that is going on between these parties. When judges feel that a party, or in this case both parties, could have made things more efficient for the courts, they're less inclined to reward their tactics with swift decisions. Two, there is a certain overlap between the FRAND-related part of the "Posner appeal" and the Wisconsin case (the latter is exclusively about FRAND issues). This also became clear at the Tuesday hearing when the court asked counsel for Motorola about the scenario of a certain hypothetical decision on its '898 standard-essential patent (SEP) in the Posner case. Maybe the appeals court preferred to wait with its decision in the Posner appeal so as to ensure absolute consistency.

In my commentary on the briefing in the Wisconsin case, I had noted that this was the most difficult one for Apple to win of its current and recent Federal Circuit appeals in the cases I watch (which are almost exclusively disputes between two large companies and very rarely NPE cases). I felt, as I wrote at the time (in different words), that Apple might have a stronger case in light of Wisconsin (patent-unrelated) precedent but Motorola had a reasonable policy argument that a FRAND determination Apple didn't commit unconditionally to accept would basically just set a ceiling (a term that a circuit judge indeed mentioned at the hearing) and give Apple a bargaining chip without putting the dispute to rest.

Having listened to the official recording of the hearing, I now know that this "bargaining chip" issue is, in fact, the appeals court's primary policy concern. This term came up again and again. But the court did not indicate a firm position either way. Anything is still possible, including a remand on which Apple will get the FRAND determination it's seeking. It's also still a possibility that the case might be referred to the Seventh Circuit, as Motorola requested.

Apple's lead counsel, Orrick Herrington Sutcliffe's Joshua Rosenkranz, has so far had an amazing track record on Apple's behalf, and the hearing in Oracle v. Google also went perfectly for him. If you listen to the recording of the hearing, you'll notice that it was at times difficult for him to make his points because the appeals court sometimes asked questions that appeared to be related to the antitrust claims in this case (I'd be surprised if Apple prevailed on those) and the more important "specific performance" issue under contract law (Apple's request that the court order Motorola to make an offer on court-determined FRAND terms) and then switched back to antitrust. But in his reply argument (more than 30 minutes into the hearing), he made some very compelling points and demonstrated once again what a fabulous appellate lawyer he is.

One thing Mr. Rosenkranz explained to the court is that while Apple believes Motorola is entitled to a maximum of $1 per device, Motorola is seeking 12 times that amount, and if you multiple the $11 difference by half a billion devices sold, it's a difference amounting to several billion dollars.

Besides harm and injury from Motorola's behavior, Apple also had to explain why it couldn't just file a new case to pursue the claims that were dismissed without prejudice. Mr. Rosenkranz explained that another judge looking at the same claims and an unchanged set of facts would be rather likely to dismiss again. But the appeals court stressed that District Judge Crabb had merely exercised her discretion in dismissing Apple's related claims. The reasonably high hurdle for Apple to overcome here is to show an abuse of discretion.

Usually I would say that if an appeals court does not appear to disagree in one or more rather important respects with the district court, affirmance is most likely. In this case, however, Motorola also faced some critical questions. I don't think there is a sufficiently clear basis for predicting the outcome either way, except that Apple's antitrust claims are probably a long shot. I also think Apple probably won't get the broad ruling from the Federal Circuit that it would like to see: a holding that district courts can set a FRAND rate if an implementer of a standard so requests because of a disagreement with a SEP holder on licensing terms. Should Apple win, then the decision will probably be narrow and based on Wisconsin contract law rather than a general rule.

Google (which owns Motorola Mobility and will keep most of its patents after selling its devices business to Lenovo) is clearly pursuing a more aggressive strategy with respect to SEPs than Samsung, and I actually see an increasing divergence between the two companies' approaches. It's no coincidence that Samsung now appears to be close to settling its FRAND- and Apple-related EU matter while the European Commission is working on a prohibition decision against Google's Motorola Mobility. Also, Google isn't backing off on any SEP assertions, while Samsung unilaterally withdrew its SEPs-in-suit ahead of the California trial, which gives it the benefit of a consistent position on what reasonable patent damages should amount to (by now, Apple is unfortunately the inconsistent one of those two parties).

There are good reasons for Samsung and Google's different approaches to SEP assertions. Google is in a FRAND dispute not only with Apple but also (unlike Samsung) with Microsoft, a patent holder that has proven an ability to have, at least temporarily (in Germany) an impact on Android devices that Apple has not been able to demonstrate in more than four years of Android-related patent infringement litigation. Google wants to use Motorola's patents to protect Android as a whole, while Samsung just needs to take care of its own needs. And while Samsung as the global market leader has an overarching strategic interest in FRAND terms being honored, Google is soon going to be pretty much (with some Nexus devices etc. being an exception to the rule) a non-practicing entity with respect to wireless SEPs.

The fact that Samsung's focus against Apple is more on the defensive side than on SEP-based countersuits is no small part of the reason why I consider Samsung's positions in the ongoing California trial much more reasonable and consistent than I did in previous contexts (such as the first California trial).

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Wednesday, April 9, 2014

Apple wants to show the jury a blog post but redact certain user comments that would help Samsung

On a trial-free day, Apple and Samsung still find a way to keep the court busy. They just filed letters relating to a trial exhibit that Apple would like to show to the jury, which is this TmoNews ("The Unofficial T-Mobile Blog") post on Samsung's reactivation of the universal search feature of the Galaxy Nexus, which apparently happened in late 2012 after the Federal Circuit lifted the injunction.

Samsung would accept the admission of that document per se, but only if Apple showed the complete document including user comments, while Apple wants to redact certain user comments (some in total, some others in part). The redacted comments and passages largely fall into two categories: negative sentiment about Apple's lawsuits and the validity of its asserted patents, and comments that refer to potential workarounds by Samsung and Google for the injunction patent.

Here are the comments Apple has redacted out (Samsung filed the complete article, and it's still on the Internet anyway):

  • atari37: "I thought the universal search patent was invalidated but I'm not too sure. Can't find it anywhere. The Bounce back patent was however invalidated and that might be what I was thinking of. [...]"

  • bumrocky: "[...] They must have bypassed the patent, and found a loophole to do it using a new process."

  • vinterchaos: "[...] Hate this lawsuit garbage."

  • Jamille Browne: "The people that were deprived of such privileges due to crapple's non-sense"

  • gpt2010: "[...] Not sure how Samsung and Google are getting away with this since one of the major reasons for the lawsuit was local search. [...]"

  • Chris: "They are getting away with it because it's not doing a 'Siri' like search. That's what the whole lawsuit is about.

    So technically, if you don't do a siri like search, you would then be allowed to go on.

    Like Google said before, they found a work around and that lifted the ban."

  • Josue: "ismell another stupid lawsuit by crapple"

  • Chris: "The ban was already lifted because Google got a workaround a week after the ban was issued. You can find this article/google statement if you google it.

    That's what allowed the GNexus to continue selling."

  • Jamille Browne: "I think they restored it because the verdict was overturned maybe? I'm not 100% sure but that may be the reason."

  • Josue: "hope so i hate when apple sues ppl for BS things"

I distance myself from all of those comments and, in particular, a certain offensive modification of Apple's name. It's a great company. I prefer Android as a platform over theirs, and I disagree with some of their patent-related positions and claims (the damages claim in the ongoing trial, for example), but my quoting those commenters doesn't have anything to do with my own views. I only provided the quotes above to show exactly what Apple doesn't want the jury to see.

According to Samsung's brief, Apple wants to use that blog post and the redacted version of the comments to show "consumer sentiment" in terms of consumers having temporarily missed the universal search feature (which Apple argues shows that the feature is valuable). But Samsung points to a deal between Apple and the court that any reference by Apple to that story would allow Samsung to discuss the appeals court's reversal of the injunction.

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Tuesday, April 8, 2014

Apple demands 20 times more for a patent from Samsung ($12.49) than from Motorola ($.60)

We're approaching the end of Apple's case-in-chief in Apple v. Samsung II. Rutgers law professor Michael Carrier has noted on Twitter that the first week of this trial did not go as well for Apple as in 2012 because it's "not clearly winning on themes" while Samsung manages to show that the patents-in-suit are "not central". Professor Carrier appears to feel that Apple's case gets bogged down in detail: "The more time spent in the minutiae, the less a huge damages award or injunction for Apple seems appropriate." He added: "And minutiae also don't support themes from 1st trial of Apple as revolutionary innovator and Samsung as flagrant copyist."

Based on a list submitted by Apple, its damages experts MIT professor Dr. John Hauser and Dr. Christopher Vellturo will be called today (Tuesday) or, at the latest, on Friday. Therefore, I looked at the complete Daubert (pretrial motions against unreliable expert testimony) record in this case relating to those two experts, including a hearing transcript I uploaded to Scribd last month.

On page 38 of that PDF document you can find a data point that I haven't previously highlighted (but ArsTechnica's Joe Mullin, who thankfully credited me for publishing the transcript, has):

Counsel for Samsung: "Look at the '647 patent. In [Apple v. Motorola in the Northern District of Illinois, the 'Judge Posner case'], Apple says that patent is worth $.60 [per device]. In this case, they're asking for $12.49 for it."

While $.60 is less than one-twentieth of Apple's per-unit damages demand from Samsung, it was still way too high for Judge Posner, who threw this claim out (in a May 2012 Daubert ruling) and described the amount as "senseless" in light of the limited cost of a work-around. It's a very safe assumption that if Judge Posner was presiding over Apple v. Samsung II (I said that it would have been a nice April Fools' Day joke for Judge Koh to enter the courtroom and announce the transfer of the case to Chicago so that Judge Posner could handle it, sitting by designation), Apple would not have had any chance to put a $40-per-unit (or $2 billion in total) damages figure before the jury. I think he would not even have allowed $4 per unit, and rightly so.

Samsung's counsel called the $2 billion claim an insult to jurors' intelligence. I actually think it's even more of an insult to Chief Judge Rader of the Federal Circuit. The appellate hearing in the "Posner case" took place in September 2013. Chief Judge Rader called Motorola's $300 million damages demand from Apple over one wireless patent "crazy" because they were talking about "one patent in a crowded field". In that case, it was good for Apple. But Apple didn't heed the chief judge's clear guidance when the shoe was on the other foot. Apple should have noted that Chief Judge Rader's perspective on the value of one patent in this crowded field was unrelated to the fact that Motorola had made a FRAND licensing commitment and declared the patent essential to a standard. It was a general position on patent damages, not a SEP-specific position in any way, as the official recording of the hearing proves.

On average, Apple is now seeking $400 million per patent per unit from Samsung. If $300 million was "crazy" in the eyes of America's -- and probably the world's -- leading patent judge, what is $400 million? Judge Koh should have stood up to Apple, America's and Silicon Valley's richest corporation, instead of hiding behind a jury. Of course the jury could just give little or no weight to Dr. Hauser's testimony (and Dr. Vellturo's conclusions from it), but that's a gamble that could and should have been avoided. If the appeals court later decides in a manner consistent with Chief Judge Rader's perspective on reasonable per-patent per-unit damages claims in this crowded field, then whatever damages Apple may be awarded at the end of this trial will just be vacated.

I restated (in a slightly softer form) my criticism of this (non-)decision in a pre-trial interview with the Associated Press, and I have seen knowledgeable people share my views. Yankee Group Senior Analyst Boris Metodiev said he had no idea how Apple came up with that figure that is "nothing short of extraordinary" and "raising eyebrows around both the tech and legal industries". The Verge and other media quoted Santa Clara Professor Brian Love, who specializes in patent remedies and found that these patents are "stylistic glosses on top of the underlying technology" rather than breakthrough inventions. According to Professor Love, "it's hard to make the argument that those patents are worth hundreds of thousands of times their value" (which is what Dr. Hauser is nevertheless going to try today or on Friday). Derek Khanna, a Yale Law Fellow, just adopted my extrapolations of Apple's per-patent-per-unit damages claims to the totality of smartphone-related patents. I would have quoted others for the sake of a balance but I am not aware of any recognized expert who would have publicly defended Apple's damages claim in this case...

A Daubert ruling against a damages claim must be based on methodology. The absurd amount shows that something is wrong with the methodology. Judge Koh could have easily thrown out the damages claim on that basis. On this key issue (way more important than the patents video shown at the start of the trial or the question of whether Apple practices its own patent claims), she disagrees not only with Chief Judge Rader but also with Judge William Alsup, a colleague of hers in the same district who tossed an Oracle damages claim against Google because a conjoint analysis (value of particular features of multifunctional product) was used to simulate the impact of infringement on market share (which also appears to be the case in Apple v. Samsung II as the net effect of the Vellturo/Hauser testimony). And, actually, she is less than consistent with herself.

No matter how hard I try, I can't reconcile her permissive Daubert approach to Dr. Hauser's testimony with the low esteem she had for his methodology as well as its implausible results when ruling on Apple's renewed motion for a permanent injunction. What she wrote in that context is closer to Judge Alsup's concerns in Oracle v. Google than her laissez-faire in the Daubert context. In a brief and at the hearing, counsel for Samsung stressed that no judge previously allowed a conjoint analysis to form the basis of a theory regarding how market share would evolve or would have evolved. Everything can happen for the first time, but when a judge can see that the results of a study are so unbelievable that "reality distortion" would be an understatement and furthermore sees that her own concerns are not really addressed properly, she could, and in my view should, send an expert back to the drawing board.

There are two differences here that I want to point out. One, a Daubert decision to let some testimony be presented to a jury is a question of admissibility, not weight (but if something has very little weight, it's normally confusing and flawed and, therefore, inadmissible), while a judge's equitable analysis in connection with an injunction motion is about weighing factors. Two, there is a difference between Dr. Hauser's conjoint analysis in Apple v. Samsung I and the one in Apple v. Samsung II: while he focused in the first case only on what consumers would be willing to pay for certain features, according to a web-based (and misleading, as Judge Koh noted) survey, he has meanwhile allowed participants to choose not only between different (mostly hypothetical) Samsung phones with particular features but also offered an "outside option" -- and he's now trying to show not only a willingness to pay for features but also a willingness (or, conversely, unwillingness in the absence of certain features) to buy particular products.

Those differences are undeniable, but I don't think they address three (partly interrelated) fundamental problems of this kind of analysis when the question is how relevant Apple's asserted patent claims are to multifunctional smartphones and tablets:

  1. It appears to be conventional wisdom in the field of conjoint analysis that you can't conduct a survey with too many distracting features (features that are added to the survey beyond the ones that are the subject of the study). Apparently you have to basically let respondents focus on half a dozen features in total. If that is so, then it may just not be the right methodology for such extremely multifunctional products (a fact that Judge Koh did recognize in the injunction denial decision) as smartphones and tablet computers. The limitations of a methodology are not an excuse for fundamental flaws and gross distortions.

  2. The reality for (not all, but) most patents is that it's not a binay question of having a feature or not. If patents cover less than complete features (so far Apple has proven in court, in 49 months of litigation, only its ownership of rubberbanding), then the alternative to a product that practices a given patent (claim) is one that works around it in the best possible way, preserving as much as possible of the functionality. In this regard, it's unfortunate that Samsung has not provided workarounds for at least three of the patents (unlike in the ITC case, for example, where Apple won an import ban that has meanwhile turned out to be so toothless it can hang it on a wall in Cupertino but won't get any leverage whatsoever out of it). This is probably due to tactical reasons. Samsung thinks it's not infringing anyway, it points to Apple's own products as examples of workarounds for some of the asserted claims, and if it was found to infringe, it would obviously modify its products accordingly. While this is not an excuse for a fundamentally-flawed methodology employed by Apple's expert(s) and the irrational results this methodology was destined to lead to, Samsung would clearly be in a stronger position if it had delivered some evidence that even if Apple prevailed, consumers would still buy Samsung's products in the same quantities as before.

  3. The last point is closely related to the previous one. Those conjoint surveys just let end users choose between products that have certain characteristics described in simple terms. Apple and Judge Koh agree in the Daubert context that it would be too much to ask that a conjoint survey form contain a detailed claim construction guide. However, if patents don't truly cover complete features, then this may just not be the right form of analysis, period. Judge Koh actually knows very well that everything depends on what's in the claims, even in this specific context. At the Daubert hearing she said she was inclined to toss at least the part of Dr. Hauser's report that relates to the '414 synchronization patent because he based his study on the broader claim 11, not the narrower (thus, easier to work around) claim 20.

    In her Daubert ruling Judge Koh then changed mind and allowed Dr. Hauser's testimony anyway because she thought Samsung should have persuaded her that it could, contrary to Apple's representations that it wouldn't be a viable option due to Android's architecture, work around claim 20 (by having no more than two parallel synchronizations running). I don't understand this. If Apple's damages theory is based on the wrong patent claim, then how would that shift the burden of proof to Samsung?

    (By the way, the Daubert hearing transcript shows that Judge Koh considered claim 11 "likely invalid", which is why Apple withdrew it. Meanwhile Apple is lobbying against patent reform that would make it harder to enforce patents that should never have been granted in the first place. Guess why.)

So, as a result, the jury will hear highly confusing and misleading testimony that seemingly supports some out-of-this-world numbers -- numbers that are totally detached from the rates at which Apple and others in the industry license patents, and in the case of the '647 patent, 20 times higher than Apple's own damages claim against Google's Motorola Mobility.

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