Tuesday, February 14, 2017

Hypocritical EU competition chief Vestager going after Apple while backing Madeira tax avoidance scheme

This morning I heard an interesting radio report on the European Commission's long-standing, practically unconditional support of one of Europe's worst tax avoidance schemes. In light of the Ireland-Apple "state aid" case, it would be bad enough if this merely involved the European Commission as an institution. Large organizations rarely manage to be consistent. But this is a lot worse: the very same commissioner who wants Apple to pay approximately 13 billion euros in additional taxes, Danish socialist-populist Margrethe Vestager, has given her blessings to the extension of the infamous Madeira tax avoidance scheme until 2027. The aforementioned radio report quotes her spokesman, Ricardo Cardoso, as saying that "the free trade zone is a job engine for the Madeira region and the Commission is presently not aware of any indication that the related structure is not compliant with [EU state aid] rules." That statement is absolutely ridiculous and I'll debunk it further below.

While my primary focus is and remains on patent policy issues, particularly reasonable patent remedies (mostly, but not exclusively, in connection with standard-essential patents), I do take an interest in other issues of concern to my industry, especially competition policy. There was a time when working on EU affairs was an exciting opportunity for me, but I've always viewed the EU's attempts to promote innovation as pathetic, sometimes self-contradictory (with respect to open source, for example), and in some cases downright laughable. What has me concerned now is that the EU has gone from merely failing to have a positive impact on European innovation to causing serious damage, such as by creating legal uncertainty that threatens to dissuade more and more companies from investing here.

There is no way that what Mrs. Vestager is doing against Apple and other U.S. companies (I also disagree with parts of the positions taken by the Commission in the Google investigation) is going to make Europe's own economy any more innovative or competitive. But that may not be the objective. It could be that this is just about anti-American, anti-corporate populism, and it may be driven at least in part by a desire to demonstrate strength while the EU is dealing with enormous centrifugal forces especially in this election year in several key countries.

When the EU Commission handed down its decision against Apple, it stated explicitly that Ireland's 12.5% corporate tax rate is not at issue. Instead, the Commission has made up a "state aid" case when, in reality, the whole issue, for the most part, comes down to Irish tax law not recognizing the arm's-length principle (I support that principle but on 130 pages the Commission's Directorate-General for Competition wasn't able to show that Ireland recognizes it) and the practical effects of different international tax regimes ("global deferred" system in the U.S. versus immediate taxation of global income in Europe).

Instead of blaming Apple for simply playing by the rules, I'm against Ireland's 12.5% rate because it's an abuse of the EU Single Market: it's not the result of fair tax competition but simply arbitrage at the expense of other countries whose taxpayers have to pay for the infrastructure in 99% of the Single Market. If the Commission proposed a change of Single Market rules so as to eliminate this distortion of fair tax competition, I would totally support it. But instead of focusing on the gap between Ireland's abusive 12.5% rate and a more normal corporate tax rate in the 30% range, the Commission is desperately and unconvincingly arguing that Apple unfairly paid less than 12.5%. In other words, instead of tackling two thirds of the problem (the difference betweeen roughly 30% and 12.5%), the Commission is crying foul over whatever may or may not have happened in the bottom third (i.e., whatever the difference may be between 12.5% and what Apple paid).

The EU may very well be the only club in the world that does not have rules in place to get rid of a member if need be. Any sports club, any automotive club, any stamp collectors or pigeon breeders' club can do it. If a member somehow abused the rules, a majority of members could vote to exclude the misbehaving one--and most of the time it will be enough to just threaten with it. But the EU has a bad design that has gotten worse over the years due to grossly incompetent and unbelievably irresponsible "leaders" pursuing the idea of an ever-closer union. Since Brexit, the tide has turned, except that some people in Brussels don't want to face that fact yet.

Ireland's 12.5% corporate tax rate is still high if you compare it to the tax rates that apply to the so-called International Business Centre of Madeira (IBCM) on the namesake, remote Atlantic island belonging to Portugal. According to its own representations, it offers a reduced corporate tax rate of 5% (five percent!), and this official question by a far-left Member of the European Parliament refers to tax rates "vary[ing] between 1[%] and 5%".

The investigative reporters at Bayerischer Rundfunk ("Bavarian Broadcasting") just don't buy the European Commission's claim that the Madeira tax haven is just part of a regional development initiative designed to attract foreign investment on that remote Portuguese island. Instead, it plays a role in tax minimization schemes employeed by such individuals as

  • former FIFA secretary-general Jerome Valcke,

  • someone who was close to Muammar Gaddafi,

  • soccer player Javier Mascherano (who was convicted of tax evasion in Spain),

  • another famous soccer player, Xabi Alonso, who is being investigated by Spanish authorities, and

  • a German rock band, Böhse Onkelz, that assigned all of its trademark rights to a Madeira-based entity.

Furthermore, companies such as Chevron, its Italian competitor eni, Pepsi and Russian aluminum maker Rusal have set up legal entities there.

Approximately 1,600 legal entities benefit from the rockbottom tax rates of this special deal between Madeira and the European Commission. If this were a regional development program, the objective would have to be to create employment. But the EU is lying about the true purpose. All those Madeira-based low-tax entities combined have created only 2,721 jobs according to official statistics (year 2014), which would be a pretty meager number in and of itself but even overstates the actual effect on jobs since a closer look reveals that many individuals formally hold jobs in several such companies at the time, with each job being counted once even if one person holds, as they found in one case, 300 jobs. If this fact is properly taken into account, the whole Madeira scheme has not had any noteworthy effect on employment.

Time and time again, over the course of 30 years and in one or more cases under Ms. Vestager's auspices, the EU Commission has approved the extension of Madeira's tax regime and has declared it as a category "of aid compatible with the internal market"--now even until 2027.

The Commission's decision against Apple is weak; the Commission's inconsistency is also on display in connection with the Monte dei Paschi di Siena bank bailout; but the Commission's handling of the Madeira scheme, as compared to the fabricated "state aid" allegations in the case relating to Apple's Irish taxes, is more than inconsistent. It's hypocritical beyond belief.

Bavarian Broadcasting quotes a German Member of the European Parliament, Markus Ferber, whose regional party is part of Merkel's government coalition, as saying that the EU can only enjoy credibility vis-à-vis Panama, Singapore or the Bahamas (or Switzerland) if it has its own house in order. Therefore, Mr. Ferber finds it incomprehensible that the European Commission has been tolerating the Madeira scheme so far, despite being alerted to the problem that it constitutes. I agree with Mr. Ferber up to this point, but he forgot to mention the Ireland-Apple case and the praise he heaped a few months ago on Ms. Vestager.

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Friday, February 10, 2017

Apple may have paid Qualcomm approx. $40 per iPhone, accounted for third of Qualcomm's revenues

At the end of my previous post on Qualcomm's business model I wrote I would follow up with an analysis of the economic magnitude of the various antitrust investigations and civil complaints concerning Qualcomm's two mutually-reinforcing business areas, baseband processor chipsets and wireless standard-essential patent licensing. While it will probably take a while before a publicly-accessible court filing by either Qualcomm or Apple makes reference to a particular damages claim or royalty rate, some information is already available and I'll take the liberty of connecting some dots. If you consider some of it speculative, that's fine, but someone has to do the job of trying to infer and deduce information even in the early stages of a dispute.

Many media reports on Apple's recent complaint (see PatentlyApple's report, which includes the document) portrayed it as a $1 billion case. However, $1 billion is just the only somewhat precise number that the complaint states but relates to merely a subset of the issue. Paragraph 4 is clear about that:

"Apple, which has been overcharged billions of dollars on Qualcomm's illegal scheme, brings this action to recover its damages, enjoin Qualcomm from further violations of the law, and request declaratory relief. Among Apple's damages are nearly $1 billion that Qualcomm owes to Apple under an agreement between the two companies." (emphases added)

So without much effort or speculation, we know it's about "billions of dollars." But how many billions? Apple's prayers for relief don't say. After the court has determined a fair, reasonable and non-discriminator (FRAND) royalty rate for certain Qualcomm patents, Apple may be more specific.

"Billions of dollars" can mean anything from $2 billion to ten times that amount or more. If we were talking about substantially more than $20 billion, the complaint would almost certainly say "tens of billions." But in the aggregate of damages recovered for the allegedly excessive charges of the past and lower payments being made in the future, that dispute may indeed be about tens of billions of dollars.

The $1 billion part of the overall claim is just about one year's "rebate" (a term that, according to the complaint, Apple uses though Qualcomm rejects it) paid by Qualcomm to Apple. Paragraph 100 provides the following clarification:

"The rebates reduced, but by no means eliminated, Apple's overpayment of royalties to Qualcomm. Taken together, these rebates reduced the effective royalty burden on Apple to around [REDACTED] per iPhone and iPad through 2016. This represents an amount that is still significantly larger than the royalty Apple pays for [REDACTED]—licenses that collectively represent a far greater percentage of the patents declared as essential to the cellular standard."

The second sentence is consistent with other factual representations made by Apple in its complaint, such as the second sentence of paragraph 79:

"In 2016, this was an order of magnitude greater than the royalties that Apple pays to any other patent holder, and indeed is more than Apple pays to all other cellular patent holders combined."

Paragraph 80 focuses on four other licensors (presumably including such companies as Nokia and Ericsson):

"By way of illustration, in 2016, Apple's four largest direct licenses for cellular-related SEPs, excluding Qualcomm, were with [REDACTED], each of which has made claims similar to Qualcomm about the strength and value of their respective portfolios of 3G and 4G cellular SEPs. Together, these four licensors represent [REDACTED] of all 4G cellular SEP declarations, significantly above the 23.5% self-declared by Qualcomm [...]"

The second sentence of paragraph 81 suggests the problem is exacerbating:

"Moreover, Qualcomm currently is demanding Apple pay [REDACTED] that amount starting January 1, 2017."

If we knew how much Apple pays licensors like Nokia and Ericsson, we'd now be able to estimate what Qualcomm has received. I would guess that the four largest cellular patent holders except Qualcomm collectively get something on the order of $10 per iPhone, but this guess could also be very wrong (in whatever direction).

What the complaint makes clear is that Apple has to pay Qualcomm for the baseband processor chipset (except that it's now using Intel chips in part) and for a patent license. Paragraph 83 is a very important one: its first sentence states that "a baseband processor chipset sells for around $10 to $20." It's a reasonable assumption that Qualcomm as the market leader is at the higher end of the range, while anyone still trying to somehow compete with Qualcomm will have to sell products at a much lower price.

The last sentence of paragraph 83 compares Qualcomm's patent royalty demands to the price at which it sells its baseband processors. In the image below, I've added some possibilities for what is hidden under the blackout rectangle (click on the image to enlarge; this post continues below the image):

Note that the numbers are not meant literally: they are just meant to show the width of different kinds of numbers (or the word "half") in the same font. For example, 100% has the same width as 199%, but not the same as 200% ("2" is wider than "1").

A triple-digit percentage with a "1" (all other numbers are wider) in the beginning looks like the most probable scenario. Let's now assume 100% because it's the lowest (i.e., most conservative) percentage that would match the width of the redacted area. The other examples in the above image just aren't wide enough, and it's really very hard to imagine anything else there than a percentage.

So, if Qualcomm sold its baseband processors at approx. $20 per unit and collected or demanded royalties from Apple amounting to more or less the same amount, that would correspond to $40 per iPhone (or cellular iPad). Since 2015, annual iPhone sales have been north of 200 million units. If one multiplied that number with the $40 hypothesis, that would be a total (even before adding cellular iPads) of $8 billion a year, or roughly a third of Qualcomm's revenues.

This is now the right moment for a first plausibility check. Is it possible that Apple alone accounts for approximately a third of Qualcomm's revenues? I believe it is. Qualcomm reports revenues for its two divisions, the chipset division and the patent licensing division. Chipset sales are more than twice as big as patent licensing revenues (see the table on page 10 of Qualcomm's last annual report), but presumably the chipset price doesn't vary nearly as much from customer to customer as patent royalties, given that Qualcomm seeks a percentage of the sales price of a device. The average sales price of the iPhone was $695 last quarter and not much lower in the previous quarters. That's a whole lot more than for other companies in the industry (and part of the reason why Apple is by far and away the most profitable device maker). Apple is also selling the highest number of units (it has surpassed Samsung again, and Samsung's average sales price is substantially lower).

Another plausibility check is based on what is publicly known about Qualcomm's commitments and representations to China's National Development and Reform Commission (NDRC). In this press release (PDF), Qualcomm refers to "royalties of 5% for 3G devices (including multimode 3G/4G devices) and 3.5% for 4G devices (including 3-mode LTE-TDD devices) that do not implement CDMA or WCDMA, in each case using a royalty base of 65% of the net selling price of the device." Multiplying 5% with 65% of the average iPhone sales price is also roughly a $20 per-unit amount.

By the way, while Qualcomm's press release portrays those percentages as having been approved and/or mandated by the NDRC, footnote 10 of this third-party document says:

"The [NDRC] Decision does not define what would constitute a lawful royalty base or royalty rate. It thus stops short of imposing on Qualcomm a 'compulsory license' with any specific rates or terms."

I don't know what exactly the purpose of those percentages is then, but here we just need them for a plausibility check.

What I have no doubt about is that Apple v. Qualcomm is way bigger than Apple v. Samsung, and if Apple succeeds in getting its terms improved, or if further headway is made on the antitrust front, I wouldn't be surprised to see Samsung and others seek refunds and price reductions... actually, in that scenario I'd be surprised if it didn't happen.

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Wednesday, February 8, 2017

Federal Circuit sends Apple v. Samsung design patent damages back to where things started

Apple and Samsung have now been embroiled in litigation for almost 70 months--the dispute's sixth anniversary is just about two months away. Many issues have been resolved over the years (at least to the extent that the parties stopped pursuing certain claims), but unless there is a surprise settlement, it could take several more years for the part relating to design patent damages to reach the point of a final ruling where all appeals have been exhausted.

Yesterday, the United States Court of Appeals for the Federal Circuit remanded (PDF) the matter to the United States District Court for the Northern District of California. A week before I had written that I was "fairly optimistic" about that direction.

The Federal Circuit stresses in the remand opinion that it technically hasn't agreed with either party's proposed course of action. Apple wanted the appeals court to determine that the record didn't support Samsung's theory regarding the appropriate article of manufacture. Samsung wanted a remand for the purpose of a retrial. The Federal Circuit just wants the district court to "parse the record" and determine whether any further proceedings are needed, which could be the retrial Samsung is seeking but could also be the kind of finding of evidentiary failure that Apple is hoping for.

Since the Federal Circuit initially affirmed the original ruling by the district court, Samsung has had to surmount three hurdles, at any one of which it could have faced final defeat but didn't:

  1. The first hurdle was Samsung's cert petition. Getting the Supreme Court to hear a case is statistically a long shot, but I was very optimistic about that one from the beginning. The statistical odds are long against a cert petition if one looks at the totality of all petitions, even including pro se litigants. In this case, the importance of the matter was easy to figure out and the Supreme Court hadn't looked at a design patent case in well over a century.

  2. At the outset of the Supreme Court proceedings it still wasn't a given that the original Federal Circuit opinion (according to which there was no room for any other interpretation than considering an entire phone the article of manufacture with respect to which Samsung owed Apple a disgorgement of infringer's profit) would be overturned. The tipping point was probably when the Department of Justice filed an amicus curiae brief that formally supported neither party, still backed Samsung's key point about the Federal Circuit having made a mistake. Apple subsequently stopped short of defending the original Federal Circuit opinion. But even with the parties and the DoJ agreeing on a particular question of law, the Supreme Court could still have reached a different conclusion. The Supreme Court could still have said that the law is what it is and any policy concerns would have to be directed to Congress. It didn't say that, but it didn't pronounce a new rule either.

  3. After the court of third instance remanded the case to the court of second instance, Apple already had a better chance of prevailing on its "unsupported by the record" argument. But it makes sense for the appeals court to say that this kind of discussion belongs into the trial court. There must be millions of documents in the record and the devil could be in the detail, with the case potentially hinging on whether some testimony in connection with some passage from an expert report is or is not sufficient to support a particular "article of manufacture" theory.

Some of the experts who participated in a media briefing conference call last month (organized and moderated by Carl Cecere, an appellate attorney who filed amicus curiae briefs in support of Samsung's position for non-governmental organizations) talked about how likely it was that the case would be decided on the basis of the record not supporting Samsung's article-of-manufacture argument, and while they agreed that one would actually have to see the whole record (which isn't possible), it didn't seem to be the most likely way in which the case would be resolved. What also came up on that call was the question of who has the burden of proof for the "article of manufacture": plaintiff or defendant? The parties disagree on that one. I consider yesterday's Federal Circuit decision the most efficient way forward for this dispute with only one exception: I think it would have been (even) better if the appeals court could have given guidance to the district court with respect to the burden of proof. It didn't have to, and it might have been a bit unusual to do so, but it would have helped because otherwise the burden of proof alone could give rise to another sequence of appeals...

The district court will, unless the case is decided on the basis of the alleged evidentiary failure, have to pronounce a rule for identifying the relevant article of manufacture. As I wrote last month, I believe the Federal Circuit would have been in a great position to do it, and that panel in particular. But it's understandable that the Federal Circuit wouldn't want to pronounce a rule that may not even be relevant in the further proceedings here (though it may be forced to do just that in connection with some other case, such as Nordock v. Systems).

In my opinion, rule-setting benefits greatly from a multi-judge panel, or (even better) a full-court review. Judge Lucy Koh, who would be a Ninth Circuit judge by now or even a nominee for the Supreme Court if not for the outcome of the presidential election, will have to do it all alone. Over the years of this Apple v. Samsung litigation, she has proven that she can manage a complex, high-stakes case very well. In connection with the standard for injunctive relief, I felt sorry for her because she had to deal with a constantly-moving target--even worse than that, a target that would almost always adjust its position in such a way that she got overruled. No matter what rule for the "article of manufacture" she pronounces, one party will believe to have been prejudiced by her decision and appeal, and then this could even go back all the way to the Supreme Court. On the aforementioned conference call, Carl Cecere asked Rothwell Figg's Derek Dahlgren whether there was "a decent change it'll boomerang right back to the Supreme Court as to the design, whatever the test they fashion?" Mr. Dahlgren replied:

"I think that it's possible. I would suspect that if there were issues in the implementation of the test after [unintelligible] on remand, for example, if that was necessary, that then depending on the outcome, if it was something that the Supreme Court disagreed with, I think that you look at the massive damage adjustment that that will receive in this case and I think that just the [unintelligible] of it certainly lent itself to getting scrutiny from the Supreme Court.

So if there's something that happens after, like some sort of [unintelligible] test, they kind of present the same type of [unintelligible], something that says 'This isn't right, this is out of balance,' then I think there's a pretty reasonable chance that the Supreme Court may want to take this issue on."

In that hypothetical scenario, the case might go all the way back to the district court for yet another trial...

So much for the worst-case time frame. What about the stakes?

For the parties, it's still about enough money and to some degree also a reputational concern that it makes sense for them to keep going. The worst case for Samsung would have been that Apple's judgment gets affirmed and that the industry at large, with Samsung being (besides Apple) the main target of patent assertions by non-practicing entities, would have had to deal with the consequences. That very worst case has been avoided thanks to the Supreme Court opinion. Samsung still faces some remaining uncertainty as to whether it will have the burden of proof for the "article of manufacture" and, if so, what the district court's findings related to the record are going to be. For Apple, it's now a nothing-to-lose-something-big-to-gain situation. Apple itself would have been a target of extortionate design patent assertions if the original Federal Circuit opinion had been affirmed, but that's not going to happen and future defendants like Apple will present tons of evidence regarding the article of manufacture. Apple can still try to get the most out of this litigation. I understand that desire but I would consider it unfortunate because no matter on what basis Apple would get an outsized design patent damages award, it would encourage more litigation of that kind and could lead courts and (to the extent they hear about it) juries to award excessive amounts.

Judge Koh is a hard-working judge. No doubt she will soon provide a roadmap.

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Sunday, February 5, 2017

On Friday, Judge Robart denigrated Donald Trump before the President said a word about him

Almost five years ago I enthusiastically reported on Judge Robart's temporary restraining order (TRO) against then-Google subsidiary Motorola Mobility. Some others criticized the decision because a U.S. court practically took away jurisdiction from a court in my own country, which I believed then and believe now (as did the Ninth Circuit) was justified under the very specific circumstances of a negotiation between two U.S. companies over a worldwide patent license and in light of ongoing proceedings in the Western District of Washington.

On Friday, Judge Robart entered a TRO of far greater media impact, preventing the U.S. federal government from acting in accordance with President Donald J. Trump's Executive Order of January 27, 2017, entitled "Protecting the Nation from Foreign Terrorist Entry into the United States." Once again Microsoft is on the winning side (it supported Washington State). We're also back to the Ninth Circuit again, which denied an administrative stay but will probably rule on the Trump Administration's emergency motion on Monday evening Pacific Time. I believe Judge Robart went too far this time around, and that he did so for the wrong reason.

The first thing I wish to clarify is that I totally understand and respect the fact that certain major U.S. companies (including some technology giants) demonstrate their appreciation of highly-qualified immigrants working for them through open letters and amicus curiae briefs. This was all the more understandable before there was clarity that the executive order does not apply to lawful permanent residents of the United States (as the White House clarified on Wednesday). However, some of those companies themselves are potential targets of radical Islamic terrorism. A few decades ago, terrorists taking aim at U.S. retailers or restaurants would probably have targeted a Sears department store or a McDonald's restaurant. Nowadays, no place would be more iconically American than a crowded Apple Store or a Starbucks café. I hope the decision-makers at those companies will focus not only on their employees from and customers in certain countries but also appreciate the President's efforts to protect them.

Thankfully, the United States Court of Appeals for the Ninth Circuit has published several documents relating to State of Washington & State of Minnesota v. Trump on this page. Under the time constraints and considering other factors, including that he wanted to enable an immediate appeal, I didn't expect Judge Robart to hand down another 207-page opinion as he did in 2013 (FRAND rate-setting), but I am disappointed at the lack of a reasonably comprehensive explanation as to why he concluded that the states of Washington and Minnesota were likely to prevail in the further proceedings.

So I watched the video recording of the hearing. The transcript of that one is attached to the Government's emergency motion. The part where Judge Robart apparently got on the completely wrong track starts at 39:09 in the video recording, or line 12 on page 32 of the transcript (page 105 of the PDF document containing the emergency motion and its attachments):

THE COURT: Well, let me walk you back, then. You're from the Department of Justice, if I understand correctly?

It's a bit strange that after reading the DoJ's brief (which he commented very favorably on) he needed to ascertain who the Administration's trial attorney (Michelle Bennett) works for. She probably sensed that this wasn't going to lead to anything positive (even though she lost, I thought the way she handled the situation was terrific), and she just confirmed.

THE COURT: So you're aware of law enforcement. How many arrests have there been of foreign nationals for those seven countries since 9/11?

I've previously read questions Judge Robart asked at hearings, but this question here is bad beyond imagination, at least in connection with how the discussion continued. Let's look at the statute (8 U.S.C. § 1182 f):

"Whenever the President finds that the entry of any aliens or of any class of aliens into the United States would be detrimental to the interests of the United States, he may by proclamation, and for such period as he shall deem necessary, suspend the entry of all aliens or any class of aliens as immigrants or nonimmigrants, or impose on the entry of aliens any restrictions he may deem to be appropriate."

Judge Robart's backward-oriented analyis makes no sense since the statute doesn't say that the President has to find that the entry of a class of aliens has been detrimental before. No, the statute says "would be".

So, back to the hearing transcript:

MS. BENNETT: Your Honor, I don't have that information. I'm from the civil division if that helps get me off the hook.

THE COURT: Let me tell you. The answer to that is none, as best I can tell. So, I mean, you're here arguing on behalf of someone that says: We have to protect the United States from these individuals coming from these countries, and there's no support for that.

"No support," seriously? Give me a break. First, the statute does not establish a requirement that a particular thing has happened. The statute talks about what might happen in the absence of restrictions. But "no support for that" is also outrageous when considering three very important factors:

  • The President has access to intelligence that cannot and will not be discussed in a courtroom.

  • Nationals from those countries have committed acts of terrorism in other parts of the world--parts that are geographically remote from the Western District of Washington but on the Trump Administration's radar screen.

  • As Judge Robart had been told but elected to practically ignore, Congress itself had determined that two of those countries posed a threat, and the other five countries had been identified by the Obama Administration in connection with terrorism.

This here is a case of unbelievable hubris and I hope the Ninth Circuit, or otherwise the Supreme Court, will not accept that a district judge--whom I used to think extremely highly of until recently--simply substitutes his knowledge based on what is hearsay at best (that he didn't hear about any such arrests in the media) for the President's assessment of the threat, with so much more information available to him.

After Ms. Bennett argued that the court simply isn't supposed to "look behind those determinations" by the President, Judge Robart claimed to be a defender of rationality while being the very opposite:

THE COURT: Well, counsel, I understand that from your papers, and you very forcefully presented that argument. But I'm also asked to look and determine if the Executive Order is rationally based. And rationally based to me implies that to some extent I have to find it grounded in facts as opposed to fiction.

Again, "rationally based" here is not a matter of whether there have been arrests that were reported in the media so that all district judges would inevitably hear about them. It also doesn't mean that the DoJ, when defending the executive order, had to walk into a courtroom to explain the underlying rationale.

But the part that I find most outrageous is this: the passage I just quoted from the transcript means, in connection with the decision that came down, that Judge Robart suspected President Trump had made a decision on an irrational basis.

I have no idea whether the President read the transcript. But presumably he was told what apparently tipped the scales in favor of the two states' motion. Whether or not that was the case, it's important to consider that this illogical and disrespectful insinuation by Judge Robart preceded the following tweet by the President:

Judge Robart is a real judge and at least in the one case I watched in his district he was an extremely thorough judge, but unfortunately he's nowhere near as great when his political leanings (maybe the Bush Administration failed to do the necessary vetting before nominating him or he mutated into an ultraliberal later on) influence his decisions.

It appears that he was misled by the two states' Establishment Clause argument about preference for refugees from religious minorities. It is simply a fact that religious minorities like the Yazidis and, of course, also Christians face particular persecution in those countries (as do, as far as I know, atheists and agnostics, too). But that's a lesser concern than Judge Robart's ex-post perspective on a threat. The statute supports an ex-ante, prophylactic approach. The president who nominated Judge Robart, George W. Bush, once explained in a television interview in the Oval Office why he liked to look at a picture of a sunrise as opposed to focusing on the sunset. President Bush said that the president has to focus on the day that comes, not the day that has ended. That definitely applies to homeland security. Prior to 9/11, the number of casualties from airplanes guided by Islamic terrorists into buildings was also zero (on a worldwide basis, unlike now).

Friday's TRO was the second example in six months of Judge Robart taking a position on a political basis without considering everything that had to be taken into account. His standard-essential patent rulings were very well-thought-out, but something is preventing him from thinking things through completely when political issues come up. Just watch this short video that is less than six months old. It's unbelievable that a federal judge would say "black lives matter" in court without distancing himself from the namesake questionable movement, not because there's anything wrong with the literal meaning of those three words (of course, the right to live has nothing to do with the color of someone's skin) but when a political slogan is used frequently for biased anti-police campaigns and gives rise to violent protest and looting. As Sheriff David Clarke, who himself is black, has pointed out on numerous occasions including this one, the Black Lives Matter movement is silent in many situations where black lives are lost (such as in the terrible Chicago situation).

Judge Robart said "black lives matter" after merely pointing out a discrepancy between two percentages, without duly considering so many other factors, such as crime rates or the circumstances of particular shootings. There can be no doubt that Sheriff Clarke would condemn in the strongest terms (as would I) a law enforcement officer who would shoot an African-American suspect just because of the color of his skin. But African-American Sheriff Clarke's first advice is "Don't resist arrest", and he says politicians should "fix the ghetto" instead of "trying to fix the police." So there's a lot more to it than just a discrepancy between a group's share of the population and the percentage of people who get shot by law enforcement officers, just like there's a lot more to the identification of a threat from terror groups than statistics based on past immigrants from those places.

Sheriff Clarke, by the way, tweeted in August that "Judge Robart should be impeached for his judicial activism in using propaganda to rule."

When determining a fair, reasonable and non-discriminatory royalty rate for standard-essential patents, Judge Robart looked at the question from all angles. It's too bad his decision has now opened the door for terrorists (ISIS may view this as a potentially-closing window of opportunity) because he substitutes his political inclinations and slogans for the kind of high-quality, meticulous analysis he conducted in Microsoft v. Motorola. The stakes are so much higher now.

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Thursday, February 2, 2017

Qualcomm's two mutually-reinforcing monopolies: SEP thicket, baseband processor chipsets

In late December, the Korea Fair Trade Commission held Qualcomm in violation of antitrust laws, and after a reader pointed me to what appears to be Qualcomm's unofficial translation of the decision, I promised "further discussion here at a later stage." Then, a couple of weeks later, the United States Federal Trade Commission sought injunctions against Qualcomm (a complaint was filed in the Northern District of California). A little later, Apple brought its own lawsuit against Qualcomm (see PatentlyApple's post, which contains the complaint, according to paragraph 4 of which Apple claims to have been "overcharged billions of dollars on Qualcomm's illegal scheme" and now "seeks to recover its damages").

It appears that Samsung played a more active role in Korea, as the KFTC decision lists an expert who participated in the investigation on Samsung's behalf (Professor Sang-Seung Yi of the School of Economics of Seoul National University) but not one for Apple. In the U.S., Apple has now been more proactive as it filed its own complaint against Qualcomm, though I wouldn't be surprised to see a similar one by Samsung.

While we're on the subject of Apple and Samsung, or #appsung, just a quick update. If you don't care about design patents, please just click here.

I've been watching the dispute between those two companies for almost six years and most of the time I agreed with whomever was the defendant. Since Samsung dropped its own standard-essential patent (SEP) assertions against Apple, the main concern has been about Apple's assertions of design patents and non-standard-essential utility (technical) patents against Samsung. In December, Samsung prevailed in the Supreme Court, though the ultimate outcome of that dispute remains to be seen. Apple filed a statement in late December asking the Federal Circuit to uphold the original judgment, while Samsung ideally wants a new trial or, at a minimum, new appellate proceedings (briefings and oral argument).

I wouldn't want Apple to win affirmance of the original judgment against Samsung. Even though the Supreme Court ruling should enable future defendants to avoid a total disgorgement of infringer's profits over a design patent infringement and Apple's argument is now all about Samsung having allegedly failed to present evidence regarding the "article of manufacture" question, the signal would be that draconian damage awards are still available, and that would have chilling effects and encourage extortion. I'm fairly optimistic that Samsung will get a remand to the district court simply because there will have to be a damages retrial anyway (with the same design patents at issue again), so the Federal Circuit may very well consider it more efficient to just have the design patent damages question addressed there.

An industry issue

For now, there is every indication that Apple and Samsung, despite Apple's still-disappointing design patent damages claims and Samsung's once-disconcerting royalty demands and injunction requests over SEPs, agree on the huge Qualcomm issue--and so many others agree with them, including Intel and the Brussels-based Fair Standards Alliance, whose members include (among others) Google and several automotive and other Internet-of-things companies. Antitrust enforcers in multiple jurisdictions agree as well, but they don't always act forcefully enough to bring about change.

Over time the different Qualcomm proceedings will make plenty of news and bring interesting facts to light. I'll write about this from time to time, depending on how interesting the revelations are. For now, while one can already find a number of interesting tidbits in the various complaints and decisions (also including the Chinese NDRC's Qualcomm order), let's focus on the biggest issue:

Qualcomm has a patent-based monopoly as well as monopoly power (one might argue it's not a monopoly in a strict sense but "merely" market superdominance) in the baseband processor chipset market, and beyond appearing to abuse such monopoly power to extract supra-FRAND royalties and anticompetitive concessions, Qualcomm is (based on what certain regulatory agencies have held) leveraging each monopoly to reinforce the other.

This is a vicious circle for the mobile industry, and I hate to even think about all the money that I have indirectly paid to Qualcomm as I've bought roughly half a dozen Samsung Galaxy phones and almost as many iPhones over the years. Qualcomm deserves to get fair compensation for its contributions to innovation, but the vicious circle I just mentioned must be broken, lest it turn into a spiral with Qualcomm potentially gaining control over additional smartphone components. Monopolies are always a problem, but monopolies that spawn additional ones are a worst-case scenario for competition and innovation.

SEPs are monopolies by definition--but the problem is even bigger here

Courts and regulatory agencies in different jurisdictions (including the U.S. FTC and the KFTC) have recognized that even a single patent, if it is truly standard-essential (meaning you can't implement the standard without licensing or infringing the patent), confers monopoly power on its holder. A very few outlier opinions that denied this on the basis of more than one patent holder owning SEPs to a specific standard were plain ridiculous as a patent is not a right to do something but a license to sue someone, so even if you own one patent or have a license to one patent, it won't serve as a defense in case you infringe someone else's patent.

One SEP can be powerful (as a Motorola expert once said, "it only takes one bullet to kill"), but if your only concern as an implementer of a standard was a single patent, you would at least have the chance to evaluate the patent, identify prior art to get it invalidated if necessary, and analyze whether the patent actually is essential to any implementation of the relevant standard.

Not so with an entire patent thicket. In 2010, told Samsung that it owned an entire "thicket of patents" around the iPhone. Depending on your definition of a patent thicket, it did, but the portfolio Apple was referring to back then is dwarfed by those thousands of Qualcomm patents declared (by Qualcomm itself, which means court would still have to verify) essential to wireless standards.

Baseband processor chipsets: Qualcomm's competition is somewhere between a heavily-endangered and an extinct species

What regulators have found is that Qualcomm's position in the market for baseband processor chipsets--the basic component that handles the low-level (i.e., basic) communication of the device with the base stations of mobile network operators--is extremely dominant. Without a baseband processor chipset, it's impossible to make a phone call, but even the dumbest dumbphone has one, which shows that it takes Samsung a whole lot more to build a Galaxy smartphone and Apple a whole lot more to build an iPhone.

It's obviously not impossible from an engineering point of view to build chipsets that implement different cellular standards. The market is huge. So why is there a lack of competition? After reading multiple decisions and complaints, I believe it's because of the way Qualcomm has made it next to impossible for others to compete in certain market segments. If a company like Intel struggles to stay in this business at all, despite its ability to develop and manufacture even the most complex chips, the answer must be non-technical.

Qualcomm holds patents related to different wireless standards and makes chips implementing different standards, but its position in the baseband processor market is particularly strong with respect to CDMA (code division multiple access), a standard that the existing network infrastructure of Verizon and Sprint, a large chunk of the market in the U.S., supports. It's a 2G (GSM-level) standard, but backwards compatibility is still key. This gives Qualcomm particular leverage--and an incentive to prevent CDMA from being replaced by competing standards that might work over the same existing network infrastructure.

No license, no chips--no chips, no affordable license

One of the antics that the FTC and apparently also other regulators don't want to put up with anymore is that Qualcomm has a "no license, no chips" policy: unless you take a patent license from them, you won't get to buy their chips. This is a huge issue given that the principle of patent exhaustion says a maker of a product can't allege infringement of its patents by any direct or indirect ("downstream") customer. Basically, Qualcomm wants to get paid for patents that have already been exhausted. (According to what I read in a complaint, Qualcomm also wants to get paid for patents that have expired...)

The even bigger problem is that Qualcomm allegedly charges far higher license fees if a company doesn't exclusively use its chips. Apparently, the way it works is that Qualcomm charges fairly high fees but pays some of the money back (Apple's complaint describes this as "rebates" in spite of Qualcomm apparently rejecting the term) in exchange for exclusivity commitments and other concessions that may be similarly anticompetitive.

But the biggest issue in my view is this: Qualcomm refuses to grant licenses to other baseband processor chipset makers. How could such conduct not be discriminatory, i.e., the opposite of FRAND (fair, reasonable and non-discriminatory)? Qualcomm is not the only SEP holder to refuse to license chipset makers. Ericsson even explained publicly why it likes that strategy. The Qualcomm cases in different parts of the world may be the most splendid opportunity in a long time to have that practice be declared anticompetitive and non-FRAND. By the way, as I already discussed here almost five years ago, Qualcomm once changed its corporate structure just in an effort to avoid patent exhaustion.

A cornerstone of Qualcomm's strategy is that it has positioned itself as the primary clearing house for cellular patents. It requires its licensees to enter into a covenant not to sue Qualcomm's customers. Apple benefitted from this in the early stages of its dispute with Samsung (patent exhaustion), but patent pools with FRAND licensing terms are a much better vehicle to achieve this than a private, allegedly predatory enterprise that has simply leveraged monopoly power to elevate itself to this.

For device makers, this means that if you don't buy from Qualcomm, you're exposed to patent infringement claims that Qualcomm may bring against you; but if you do buy from them (which includes that you need to take a license), you'll be protected from infringement assertions by a long list of cellular SEP holders.

SEPs should be licensed on FRAND terms, and chipset makers should compete on the technical and economic merits. Regulators, customers, the sole remaining competitor (Intel) and industry associations are now trying to get Qualcomm to offer licenses on FRAND terms to everyone, including its competitors and its competitors' customers.

This blog has been pro-FRAND since the year I started it (2010). While I'm not as prolific a writer nowadays as I used to be, I'll try to follow the various Qualcomm cases. In light of Apple's latest financials (with record iPhone sales), I also intend to talk about the economic dimension of this issue based on the information available to me, i.e., regulatory decisions, publicly-accessible complaints, and SEC filings.

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Tuesday, January 24, 2017

The European Unified Patent Court: what can still go wrong?

Guest author: Rechtsanwalt Dr. Ingve Björn Stjerna, LL.M., Certified Specialist for Intellectual Property Law, Düsseldorf

This article reflects the personal opinion of the author.

I. A reform for a reform's sake

The European patent reform has been long in the making. Although the project has always been treated as highly urgent (for reasons still unknown), it has faced significant fallbacks on a regular basis. These were mostly being dealt with along the lines of the "three wise monkeys principle", pressing ahead with convenient, but poorly considered "solutions" which, over time, made the reform lose much of its initial coherence. If there ever was the desire to make the acquisition of territorially broader patent protection and its enforcement easier in the interest of fostering innovation as it was frequently declared, this motif appears to have long been abandoned in favor of a reform for a reform's sake and regardless of its practical utility for the innovators.

The initially promised affordability of the "unitary patent" and Unified Patent Court (UPC) especially for small and medium-sized enterprises (SMEs), which was repeated almost mantra-like throughout the EU legislative proceedings as one reason why the reform was of utmost importance, ultimately turned out to be pretty much the opposite, with the level of representation costs to be reimbursed by the losing to the winning party amounting to up to more than five times the sum which can currently be claimed in patent litigation proceedings before the German courts (for more details on the cost situation created by the reform, cf. the article "Unitary patent and court system – A poisoned gift for SMEs" here).

Most recently, political operators and those close to them have engaged in reassuring the professional circles that the Unified Patent Court Agreement (UPCA) will enter into force later this year, envisaging its provisional application period to start in May 2017 with the aim of the UPC opening its doors for business in December 2017 (cf. the communication by the UPC Preparatory Committee here).

While such declarations of intent are neither new nor unusual, bearing in mind the function and background of the UPC Preparatory Committee, and also seem to serve the purpose of reassuring the user circles that everything was going as planned, the real situation does not appear to be as bright as these bodies would like to have the public believe.

II. Is "Brexit" going to break it?

The "Brexit" vote of the majority of the British electorate in June 2016 is the latest blow delivered to the patent reform and certainly has the potential to finally collapse it. It should be borne in mind that the UK – together with Germany and France – is one of the countries whose ratification is obligatory for the UPCA to enter into force. Furthermore, it is worthwhile noting that the initial draft Agreement for the creation of a European patent judiciary was rejected as incompatible with Union law by the European Court of Justice (CJEU) back in 2011. As a consequence, it was afterwards decided by the political operators that membership to the UPCA would be limited to EU Member States, with the obvious implications for a UK getting ready to "brexit" the EU.

It does not come as a surprise that UPCA supporters shifted into high gear after the "Brexit" vote, indicating that the UPC had nothing to do with the EU and that it was an international organization (cf. Art. 4(1) UPCA), thus trying to imply that the "Brexit" vote would not hinder the UK from pressing ahead with ratifying the UPCA. Of course, they stayed quiet as to the several obligations from Union law incumbent on the UPC and the inevitable involvement of the CJEU (for more details, cf. the paper "Unitary patent and court system - Squaring the circle after the 'Brexit' vote" here).

Suffice it here to just point out recitals 9 and 10 from the introduction of the UPCA which make it very clear that the UPC's much cited formal status as an international organization primarily serves as a smoke screen used to hide its profound obligations from Union law:

"RECALLING the obligations of the Contracting Member States under the Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU), including the obligation of sincere cooperation as set out in Article 4(3) TEU and the obligation to ensure through the Unified Patent Court the full application of, and respect for, Union law in their respective territories and the judicial protection of an individual's rights under that law;

CONSIDERING that, as any national court, the Unified Patent Court must respect and apply Union law and, in collaboration with the Court of Justice of the European Union as guardian of Union law, ensure its correct application and uniform interpretation; the Unified Patent Court must in particular cooperate with the Court of Justice of the European Union in properly interpreting Union law by relying on the latter's case law and by requesting preliminary rulings in accordance with Article 267 TFEU;"

Most recently, certain circles from the UK, involving two associations of patent practitioners and one from industry, all of them interested in making the UPC a reality quickly, commissioned the preparation of an expert opinion by two allegedly neutral barristers on whether the "Brexit" vote and the UK's withdrawal from the EU hindered its participation in the UPCA. In their opinion, which became known as the "Gordon/Pascoe Opinion" and was widely circulated by its initiators, the authors reached the conclusion that "Brexit" was mostly unproblematic for the UK partaking in the UPCA.

Having a closer look at this piece, however, created the impression that it was nothing more than a mere courtesy expertise which, while being based on several doubtful assumptions and containing various contradictions, promotes results favorable to the initiating associations which they can use as a marketing tool to foster their interests. The commissioning associations still deny making public the voluminous written instructions which they had provided to the barristers and based on which their opinion was afterwards prepared, hence creating the impression that there is something to hide.

The full review of the "Gordon/Pascoe Opinion" can be found here.

III. Contradictions in recent UK government statements

Nonetheless, the UK government seems to be eager to ratify the UPCA, relying on said concept of emphasizing the UPC's formal status as an international organization and rather closing their eyes on the Union law obligations inevitably tied to it. After a statement on how the UK intended to proceed in terms of the UPCA after the "Brexit" vote had been long in the waiting, it was announced at the end of November 2016 at the EU Competitiveness Council meeting that the UK "is proceeding with preparations to ratify the Unified Patent Court Agreement", pointing out that "The UPC itself is not an EU institution, it is an international patent court." (cf. the press statement here).

This approach was also followed in a recent meeting of the Science and Technology Committee of the UK House of Commons in a statement by the new "Minister of State for Universities, Science, Research and Innovation, Department for Business, Energy and Industrial Strategy", Joseph Johnson, who is also responsible for intellectual property aspects (cf. footage here, starting at 11:07.22). Indicating once more that the UPC was "not an EU institution" and describing it as being "independent of our membership in the European Union", Mr Johnson started to flounder when asked whether non-EU members could remain members of the UPCA and just answered: "These are questions which will form part of the bigger discussion around the Brexit negotiations."

In short, the plan of the UK government appears to be ratifying the UPCA without knowing whether a continued membership will be possible after a withdrawal of the UK from the EU. Bearing in mind the industry's overarching fundamental need to be provided legal certainty on questions like these, this is a remarkable approach and reaffirms the impression of a reform for a reform's sake.

In order to take the confusion even further, Prime Minister May's speech on "The government's negotiating objectives for exiting the EU" (cf. here) given on 17 January 2017 to some extent contradicts the path described by Mr Johnson and casts doubt on whether the UK government will truly be able to follow it. In this speech, Mrs May named the following as a central objective of the "Brexit" negotiations:

"That means taking control of our own affairs, as those who voted in their millions to leave the European Union demanded we must. So we will take back control of our laws and bring an end to the jurisdiction of the European Court of Justice in Britain. Leaving the European Union will mean that our laws will be made in Westminster, Edinburgh, Cardiff and Belfast. And those laws will be interpreted by judges not in Luxembourg but in courts across this country. Because we will not have truly left the European Union if we are not in control of our own laws."

While it may be unclear what "our laws" in fact refers to, the desire to end the jurisdiction of the CJEU in the UK seems to be clearer. However, if the plan is to abolish the legal authority of CJEU decision for the UK as announced by Mrs May, how can the UK government even consider ratifying an international Agreement like the UPCA which will create a new court which is bound by Union law and subject to the jurisdiction of the CJEU, while its decisions are binding in all the UPCA Contracting States (Art. 34 UPCA)? At first sight, the positions taken by Mr Johnson and Mrs May appear difficult to reconcile. There will need to be further political explanations on how they intend to align the further with the latter. From a legal point of view, this will not be a straight-forward task, but considering the various legal twists and turns applied in the procedure so far some sort of more or less convincing theory can be expected to emerge sooner or later.

IV. Violation of German Constitutional law?

Apart from the "Brexit" implications, further obstructions to the UPCA's entry into force may well happen in the ratification procedure in Germany, the German ratification, as indicated, also being required for the UPCA to come into effect. The ratification procedure was initiated by the German government at the end of May 2016, with the first reading in the German Parliament taking place in the late evening of 23 June 2016, the day of the "Brexit" vote in the UK, only to be suspended immediately afterwards. Despite its limited practical use due to its apparent bias, the mentioned Gordon/Pascoe Opinion has – unintentionally, as it would seem – underlined the UPCA's doubtful compatibility with Union law by noting that the political approach to align the two after the aforementioned CJEU decision in 2011 is merely an unworkable legal fiction, thereby joining sides with a number of commentators who have been arguing that the UPCA was incompatible with Union law for a number of reasons all along. More details can be found in the aforementioned article "Unitary patent and court system – The Gordon/Pascoe Opinion and the UPCA's incompatibility with Union law" here.

The specific relevance of the German ratification proceedings for this aspect lies in the fact that, in Germany, it is, in principle, possible to directly subject any legislative act approving an international Agreement to judicial review by the German Constitutional Court for its compatibility with the German Constitution before it will be allowed to enter into effect. The UPCA's doubtful compatibility with Union law is only one of a number of aspects on the basis of which its compatibility with the German Constitution might be challenged. Should judicial review indeed be requested on this basis, the German Constitutional Court will usually request a preliminary ruling from the CJEU on the Union law issues in question. Should the CJEU confirm the understanding that the UPCA is incompatible with Union law, this could well be the end of the UPCA, at least in its present form. As the legal effectiveness of the two European regulations on the "unitary patent" and its translation regime is bound to the UPCA's entry into force, the whole reform would be affected by such finding. Thus, such judicial review procedure could well constitute yet another major obstacle on the way to making the UPC a reality.

V. Conclusion

Ultimately, different from what political circles and the usual UPC proponents want to make the public believe, the UPCA's entry into force is not at all secured. Major political as well as legal decisions may still have to be made before the UPCA, and with it the European patent reform, will be allowed to come into effect.

[Update on February 3, 2017] The author of this guest post has now published a new article on the recent political statements as regards a ratification of the UPCA in the United Kingdom and their legal implications. [/Update]

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Tuesday, January 17, 2017

FTC sues Qualcomm over antitrust violation; Apple may buy baseband chipsets from other suppliers

Late last month, a ruling against Qualcomm by Korea's Fair Trade Commission (KFTC) was significant and elicited positive reactions in the U.S. and in Europe. From today's perspective, the KFTC decision seems to have been little more than a prelude to what Qualcomm is now facing in its own country: an antitrust action brought by the Federal Trade Commission of the United States. The FTC has filed the following complaint with the the United States District Court for the Northern District of California (this post continues below the document):

17-01-17 FTC Complaint v. Qualcomm by Florian Mueller on Scribd

I'm not surprised that Qualcomm's stock is tanking. This antitrust action is huge. Basically, what the FTC is saying is that Qualcomm is leveraging its monopolies (some in the form of patent rights and others due to the market position of its baseband processors) in ways that enable it to charge several times more for its standard-essential wireless patents than market prices and that its "no license-no chips" policy threatens to force the last remaining competitors, such as Intel, out of the market.

The KFTC decision had mentioned parties that participated in the proceedings, and they included Samsung, Apple, and Intel. Today's FTC complaint places particular emphasis on how Qualcomm has abused its monopoly against Apple and basically forced Apple into an exclusive deal. I remember from various Samsung v. Apple and Motorola v. Apple cases five years ago that Apple originally used Infineon chips; Intel acquired Infineon's baseband chip business; and then Apple switched to Qualcomm. As the FTC complaint notes in its paragraph 129, "Apple is a particularly important OEM from the perspective of a nascent baseband processor supplier and confers benefits on a nascent supplier that make the supplier a stronger contender for other OEMs' business" thanks to the large volumes of premium handsets it sells, the ways in which suppliers would benefit from engaging with Apple's engineering teams, the technical validation that being chosen by Apple means for a supplier (given Apple's high requirements), the opportunity to field-test processors in a global market, and a "reputation halo effect from selling to Apple."

The fact that the FTC brought this case in the Northern District of California (though Qualcomm is based further down south) suggests that Apple witnesses will play a key role in the further proceedings.

In terms of what conduct by Qualcomm is anticompetitive, a strategy described by the FTC as a "no license-no chips" policy is front and center:

"3. Qualcomm has excluded competitors and harmed competition through a set of interrelated policies and practices:

a. Qualcomm withholds its baseband processors unless a customer accepts a license to standard-essential patents on terms preferred by Qualcomm, including elevated royalties that the customer must pay when using competitors' processors ('no license-no chips').

[...]"

The first three parts of paragraph 77 show that Qualcomm's business terms may have to change fundamentally now:

"a. Qualcomm's royalties are disproportionately high relative to the value contributed by its patented inventions, and often are several times higher than the royalties of other SEP licensors that have made similar technical contributions;

b. Qualcomm has continued to calculate royalties as a percentage of a handset's price, even though handsets today offer a number of features—including cameras, high-resolution touch-screen displays, powerful applications and graphics processors—other than cellular connectivity;

c. Qualcomm's standard royalty rate has not fallen, even though many of Qualcomm's patents related to CDMA technology have expired; [...]"

I've consistently opposed royalties based on the entire price of a highly multifunctional end product. The smallest salable unit should be determinative. Now, with this FTC lawsuit, that principle may finally be recognized by U.S. case law.

The FTC is seeking a permanent injunction against what it deems anticompetitive, abusive behavior.

I'm sure it's no coincidence that the FTC decided to bring this complaint more or less on the eve of the inauguration of the 45th president of the United States, Donald J. Trump. The incoming administration will inherit this lawsuit. It will then have to decide how (and how vigorously) to pursue it.

While some antitrust offenders have previously been let off the hook by Republican federal governments after a transition, I'm optimistic that this case here is different. First, the president-elect is not an old-school Republican when it comes to certain aspects of economic policy and regulation. My loyal readers know that I've been a Trump fan for a long time; I already wrote about his "increasingly possible" presidency more than a year ago. I was amazed when a Republican convention, for the first time ever, supported the notion of penalizing companies for moving jobs out of the United States. To me, that is not the antithesis of conservatism but a long-overdue realization of what needs to be done, and similarly, there's no reason why antitrust enforcement would be incompatible with conservative principles. Without fair competition, there is no economic conservatism. Second, it's hard to imagine that the 45th POTUS would be more sympathetic to patent holders than to companies that make highly multifunctional products.

The FTC has a case against Qualcomm that has nothing to do with ideology. This is not about "big government" or "small government," let alone about "capitalism" versus "socialism." It's all about defending the principle of fair competition. I'll go into more detail on the issues here over time. What I can say is that the FTC's complaint is very impressive. The only question it raises is why it took so long. Well, better late than never.

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