Friday, July 22, 2011

Apple says Samsung has "abusively" asserted UMTS patents to get away with "illicit" copying

Late on Thursday, Apple filed its answer to Samsung's counterclaims in their federal lawsuit in the Northern District of California. The 78-page document contains Apple's defenses and its counter-counterclaims, i.e., Apple's counterclaims to Samsung's counterclaims.

Just to make the procedural context clear: Samsung's counterclaims (to which Apple just responded) are essentially Samsung's original California countersuit against Apple. They recently consolidated that separate countersuit into Apple's lawsuit (which misled many people to think they just dismissed it) and actually increased the number of patents asserted against Apple in California by two. In my opinion, they filed a separate lawsuit initially because they wanted to strike back fast, and probably knew at the outset that the two lawsuits would be merged at some point.

Apple's answer to Samsung's counterclaims is yet another aggressive pleading in this dispute, but I found it pretty informative notwithstanding its accusatory repetitiveness. Let me start with a quick summary of the key points it raises before I elaborate on the FRAND standards issue in greater detail:

  • At least 10 courts in 8 countries on 3 continents

    My most recent battlemap was based on the information I've been able to research about the dispute. It showed eight courts in six countries on three continents, but I always suspected there might be even more going on. In its new filing, Apple claims that "Samsung has sued Apple for infringement and injunctions in no fewer than seven countries outside the United States." This means there are lawsuits in two more countries (and, as a result, at least two more courts) than previously known.

    I asked both Samsung's and Apple's PR departments a few weeks ago. Samsung responded to a couple of other questions in the past but never got back to me with a list of venues; Apple never responded in any way. But this week an Apple SEC filing revealed that France and the Netherlands were the missing countries (hat tip to EdibleApple).

    Since Samsung sued in Germany, the UK and Italy, France was the largest one of the European markets not previously named. The Netherlands is also a frequent venue for patent litigation, sometimes due to the fact that Rotterdam is the world's largest seaport and a key entry point for goods into Europe.

  • Accusations of illicit copying

    Apple continues to denounce Samsung's products as rip-offs -- they don't use that particular word, but they paraphrase it in various ways. In a previous filing they referred to Samsung as "the copyist" (Samsung countered by accusing Apple of seeking to avoid competition). Here are a couple of similar quotes from the new pleading:

    "Samsung has illicitly copied Apple's distinctive design features and innovative technologies instead of pursuing its own independent and costly product development. Samsung has launched one product after another that imitate the look, feel, and function of Apple's products by misappropriating Apple's protected designs and technologies."

    "Apple filed this case to stop Samsung's unauthorized copying of Apple's iPhone and iPad." [that one barely stops short of accusing Samsung of outright counterfeiting...]

    "Having failed to compete successfully with Apple's products (including its iPhone and iPad) by innovating and designing products that customers desire, Samsung has instead launched product after product that unlawfully misappropriate the distinctive designs and patented features that are hallmarks of Apple's success."

  • Apple's friend FRAND

    Besides the usual assertions that it doesn't infringe any valid patents, Apple raises, in great detail, an important legal issue called FRAND ("fair, reasonable and non-discriminatory"). I'll discuss that one in the (relatively long) remainder of the post. In a recent post -- on Samsung's motion to exclude some (or theoretically all) of Apple's outside lawyers from the case -- I already mentioned that Samsung fully expected Apple to raise a FRAND defense against some of its patents.

    Apple now claims that "Samsung has improperly used patents that it claims to be essential to the Universal Mobile Telecommunications Standard ('UMTS') in an attempt to disadvantage Apple", and asserts that Samsung does so in breach off a past commitment to license its declared-essential patents (essential with respect to UMTS).

    As I'll explain now, Apple argues that the related commitments limit the ways in which Samsung can use such patents in this dispute with Apple. In Apple's view, Samsung can at the most ask to be paid for Apple's use of such patents (if they're valid and infringed contrary to Apple's claims), but Apple says Samsung can't just ask for injunctions against Apple prior to offering FRAND licensing terms. In other words, it's all about whether those allegedly FRAND-committed UMTS patents have teeth in this dispute compared to the patents asserted by Apple.

    The most important legal issue in this context is the question of whether a patent holder can use FRAND-committed patents to force an (alleged) infringer to cross-license patents that are unencumbered by such a commitment. This is what Apple asserts:

    "At bottom, Samsung is attempting to coerce Apple into tolerating Samsung's infringement of its intellectual property and copying of the innovative features that distinguish Apple products by abusively asserting Declared-Essential Patents, in breach of its FRAND commitments."

    "After months of repeated Apple requests for a FRAND offer, Samsung has recently claimed that it is willing to quote Apple FRAND license terms, but it has not yet done so or given any indication what those terms will be. In particular, in breach of its FRAND commitments, Samsung has yet to provide license terms for its Declared-Essential Patents, standing alone, and has taken the position in prior talks with Apple that discussions over FRAND license terms need to be tied to a broader licensing deal that would include a cross-license to Apple non standards-essential patents – including patents covering the distinctive design and functions of the iPhone and iPad."

    This is a recurring legal issue. It came up in Apple's dispute with Nokia (which was, however, settled before any such decision was taken by a court). Apple raises a FRAND defense against Motorola. Microsoft sued Motorola pre-emptively early in their dispute to assert its rights under FRAND rules (in that case called RAND, which is however synonymous with FRAND). So this is an important concept to understand in connection with many smartphone and other patent disputes.

    In connection with this particular dispute, note that Apple doesn't claim that all 12 patents asserted by Samsung in that particular lawsuit are subject to FRAND commitments. The exact number is not specified, but there are indications in the text that Apple means seven of the twelve asserted patents (more or less). And those could be the seven most important one, so the FRAND issue could be outcome-determinative for the entire Apple-Samsung dispute.

I don't mean to jump to conclusions early in the process, but having read Apple's reasonably plausible theories concerning FRAND (even though I don't support the entirety of Apple's portrayal of Samsung as a total thief), I increasingly tend to believe that Samsung's counterclaims against Apple are fairly weak. I've been watching such processes for some time now and generally it's a sign of weakness if a party points FRAND patents against unencumbered patents. By contrast, Nokia sued Apple over FRAND patents only to secure a royalty payment on them, but asked for an injunction only for the event that Apple wouldn't pay FRAND royalties. The longer the dispute between Nokia and Apple took, the more Nokia relied on unencumbered patents, and ultimately emerged victorious. I see Motorola on the losing track against Microsoft, and Motorola appears to be doing something similar to what Samsung is doing.

While Samsung has 28,700 U.S. patents (far more than Apple) according to one of its recent pleadings, it may not have many that really matter to Apple, and that's why Samsung appears to have resorted to a legally very questionable use of FRAND patents -- that could be downright abuse (as Apple alleges) -- and lawsuits in many countries (breadth, not depth). Again, I don't agree with Apple on everything, but at the least I would say that I have serious doubt about the strength of Samsung's counterclaims against Apple at this stage. I will, of course, revisit the situation whenever anything new happens or surfaces.

The concept of FRAND business terms

A voluntary commitment (or, alternatively, a contractual or legal obligation) to do business on FRAND terms is not specific to smartphones or patents. It's a universal concept. In fact, I did a fair amount of work (officially on behalf of Real Madrid CF and in an informal alliance with FC Barcelona) on FRAND issues in connection with soccer broadcasting rights and the right of soccer clubs to participate in tournaments on FRAND terms. In that particular context -- and in some others -- I'm a big fan of FRAND.

So what does FRAND mean? To simplify this, let's not worry about the meaning of the "F" as in "fair". When Americans say "RAND", they mean essentially the same as what European law defines as "FRAND". RAND isn't unfair only because it doesn't explicitly mention the word "fair".

That leaves us with two components: "reasonable" and "non-discriminatory".

"Reasonable" means that business terms must be appropriate. There must be a valid reason for a certain price or a certain requirement, such as a limitation on someone's right to use a patent. "Asking for the moon" is unreasonable, and thus a violation of the FRAND idea.

"Non-discriminatory" means that there must be a valid reason for treating different business partners differently, but all other things being equal, you can't just discriminate based on race, gender, or any other motive that's unrelated to the transaction itself, such as discriminating against a competitor just because you don't like competition.

An example of discrimination is discriminatory pricing. If you made a FRAND commitment on the sale of, say, crude oil and you charge customer A $100.00 per barrel but customer B $150.00 for the same quantity, this could be a case of discrimination. If you have the same cost of supplying them and they buy similar quantities, it most probably is. If customer B buys much smaller quantities, the difference seems high but it might be justifiable on that basis. Or maybe customer B gets his oil shipped to a remote location that it's expensive to make deliveries to. That might also justify it. Or maybe there are several such factors that jointly serve as justification. But absent any sufficient justification, it's discrimination.

Discrimination is particularly easy to prove if there's a pattern. If a company conspicuously overcharges its competitors while it offers much more attractive prices to non-competitor customers, there's at least a strong suspicion of discrimination. Another example of such a pattern: a company consistently decides against job applicants with Asian names even though those are, on averagae, equally qualified as other candidates. Again, the pattern raises suspicion. That's not the same as conclusive evidence. There could still be a reason. If a basketball team recruits fewer Asian players than demographics suggest, it could be due to the fact that on average they aren't the tallest people (in exchange, Asian students outperform other groups in math contests).

When people are dissatisfied with a mere FRAND commitment in a certain context, such as industry standards, you may hear them say that FRAND is an "empty word [or term]". I don't agree. FRAND is very meaningful, and FRAND commitments and obligations help solve many problems on a daily basis. The term FRAND per se obviously doesn't say what the price per barrel of crude should be, recognizing that the circumstances of each sale can be different and there isn't one price that suits all situations. But FRAND is a framework. It's a line that one must not step over. There are many ways to meet FRAND criteria, but there are also clear types of behavior that courts have found (in different industries and jurisdictions) to be unfair and/or unreasonable, and anything unfair and/or unreasonable is a violation of a FRAND commitment or obligation.

Indeed, Apple's defenses against Samsung's counterclaims (i.e., Samsung's original California countersuit) don't say what terms Samsung must offer with respect to the patents in question. There are many roads that lead to Rome in terms of FRAND compliance. But Apple alleges in its defenses and counterclaims that some of Samsung's actions and demands cannot be reconciled with the concept of FRAND. They constitute -- Apple says -- a breach of a FRAND commitment. Apple wants the court to dismiss any Samsung demands that run counter to past FRAND commitments, and beyond that, to establish Samsung's breach and order damages. In other words, Apple wants the court to give meaning to FRAND.

FRAND-based industry standards

Last year I did several posts on FRAND in connection with industry standards, in particular, such industry standards that are considered open standards. There was a policy-making process going on in Europe in connection with software developed and purchased by governments. The European Commission ultimately determined that it considers standards "open" if their patent licensing terms are either royalty-free or FRAND-based, but in any case, they should be compatible with open source licenses. I had proposed that approach as a compromise.

In the build-up to that decision I also provided an overview of standards- and open source-related contexts in which the European Commission supported FRAND.

FRAND commitments in connection with standards are very common. Companies participating in a standard-setting process should not be allowed to abuse their involvement with the process by way of "patent hold-up" (that term also comes up in Apple's filing, but they didn't invent it, even though they lay exclusive claim to a term like "app store"). A FRAND commitment is designed to prohibit abuse. It can't prevent abuse from happening, but if and when it occurs, FRAND can be a powerful weapon to resolve the problem.

Standard-setting organizations typically structure FRAND commitments as contractual obligations. By the way, this also includes the Java Community Process.

FRAND is also a way for standard-setting organizations to comply with competition law. If you have a group setting an industry standard that collectively dominates a relevant market, you want to make sure it wouldn't be viewed as an (illegal) cartel under competition law. FRAND commitments can help to address that problem.

Apple's UMTS dispute with Samsung

At issue between Apple and Samsung are (more or less) seven patents that are apparently considered (at least by Samsung) essential to UMTS:

"At various times, Samsung declared seven of the Samsung Asserted Patents to the European Telecommunications Standards Institute ('ETSI'), a leading Standards Setting Organization ('SSO'), as purportedly essential to practice the UMTS standard ('Declared-Essential Patents').

Apple then complains about two problems -- it alleges Samsung's failure to abide by ETSI's rules and subsequently accuses Samsung of failure to honor its FRAND licensing commitments:

"Time and again, however, Samsung deliberately and deceptively failed to disclose its purported intellectual property rights ('IPR') to ETSI before its members decided to incorporate into the standard technologies purportedly covered by Samsung's patents, in violation of the ETSI's IPR policy. Furthermore, Samsung committed to license its Declared-Essential Patents on fair, reasonable, and non discriminatory ('FRAND') terms. In breach of those commitments, Samsung now seeks to enjoin Apple from selling its end products because those products contain UMTS chipsets – which Apples purchases from third parties – that are allegedly covered by Samsung's Declared-Essential Patents."

The "third parties" Apple mentions toward the end of the quoted passage include, primarily, Qualcomm. Several paragraphs in Apple's filing discuss the use of Qualcomm's chipsets in Apple's products and the related legal issues. Here's another sentence that makes reference to those third-party products:

"Samsung's allegations of infringement concern UMTS-compliant chipsets that Apple buys from large manufacturers and then incorporates in its end consumer products (including the iPhone and iPad) to provide cellular communication capability."

Let's look at a more specific allegation of how Samsung purportedly tried to game the standard-setting system. Apple alleges a failure on Samsung's part to declare essential patents in time. "Essential" means that a reasonable implementation of a standard is (more or less) impossible without a license to a certain patent. Standard-setting organizations want companies to tell them early and often if they have patents of that kind, and then they want to know whether they commit to license them on the terms for the relevant standard. (I recently reported on Apple's refusal to license one issued patent and a pending one under the W3C's terms.)

Apple alleges that Samsung "deceptively concealed certain of its IPR during the standards-setting process to maximize its chances of having the technology incorporated into the standard" and alleges the following:

"In fact, in some cases, a named inventor on the application for the concealed patent or other Samsung personnel participated in the relevant working group, championed Samsung's technical proposal, and affirmatively steered the SSO to standardize technology that Samsung now claims to be covered by its patents. Samsung disclosed certain of its IPR only after the relevant standard or standard specification was finalized."

That passage suggests Apple has evidence that could be quite important in this context.

The rights (and types of relief) Apple claims under FRAND

I said before that the core issue here is whether Samsung is free to use FRAND-committed patents against Apple in a way that could force Apple to cross-license its non-standars-related patents. In this context, a very important question is whether Samsung can obtain an injunction without previously offering Apple business terms within the FRAND framework. If Samsung can "only" ask for money while Apple can claim an absolute entitlement to an injunction (though there clearly are hurdles to be met under U.S. patent law at any rate), Apple is in a stronger position just because it patents-in-suit were never committed to FRAND. It's like Apple having a lethal weapon in its hands and Samsung being limited (with respect to the subset of its asserted patents that is subject to FRAND commitments) to the option of setting up a parking meter.

Apple's argument is that Samsung wants to use a partly FRAND-committed set of patents as a counterthreat against Apple -- in eight countries as I mentioned earlier on -- until Apple grants Samsung a license to its own patents, which are however not FRAND-committed (I haven't even seen Samsung make that claim, so it's a safe assumption Apple's asserted patents are unencumbered). By forcing Apple to cross-license, Samsung would effectively get away with what Apple portrays as a theft of intellectual property of major proportions. Here are some quotes that show Apple's line of thought:

"[...] Samsung has improperly used patents that it claims to be essential to the Universal Mobile Telecommunications Standard ('UMTS') in an attempt to disadvantage Apple."

"Samsung has abusively asserted patents in this action that it claims are standards-essential to further its strategy of copying Apple products. Apple has repeatedly demanded that Samsung put a halt to its persistent pattern of copying. In retaliation, and to deflect from its own copying and to pressure Apple to allow Samsung to continue to imitate, Samsung asserted counterclaims alleging that Apple infringes Samsung patents that are purportedly essential to the UMTS standard."

"Samsung's persistent attempt to compete with Apple by imitation rather than through its own innovation is manifest in its illegal efforts to coerce Apple into allowing Samsung to copy its iPhone and iPad with impunity. After Apple informally sought and eventually sued to halt Samsung's ongoing pattern of imitation and infringement regarding the iPhone and iPad, Samsung retaliated by bringing litigation and then counterclaims seeking to enjoin Apple from selling products that comply with the UMTS telecommunications standard. Samsung has done so notwithstanding that Apple is licensed or, in the alternative, has the irrevocable right to a FRAND license to Samsung’s Declared-Essential Patents by virtue of Samsung’s commitment to license those patents on FRAND terms."

"Thus, Samsung is seeking, unlawfully and in breach of its FRAND commitments, to leverage the monopoly power it wrongly obtained in the Input Technologies Markets (defined below) from its untimely disclosures and/or its false FRAND commitments to ETSI in a discriminatory manner to try to coerce Apple into tolerating Samsung’s pattern of repeatedly infringing Apple's designs, trademarks and non standards-essential patents or licensing to Samsung its proprietary technology (to which Samsung is not entitled). Left unaddressed, this conduct will chill innovation, quality, and price competition for end products that comply with the UMTS standard by allowing Samsung to free ride on Apple's massive investments in innovation and product development rather than invest in its own distinctive products that consumers desire."

The passages above show that Apple believes the relevant parts of Samsung's counterclaims against Apple should be doomed to fail because of the FRAND terms that govern the UMTS standard.

Apple's lawyers derive a variety of rights from this. Not only do they use FRAND as a defense but they also bring their own counter-counterclaims related to such theories as breach of contract, promissory estoppel, violation of Sections 1 and 2 of the Sherman Act and certain California laws, such as on unfair competition. Apple wants the court to declare that it's either already licensed to Samsung's declared-essential patents or at least has an entitlement to be licensed on FRAND terms, and that Samsung therefore has no right to seek an injunction (at least not prior to offering FRAND terms):

"There is a dispute between the parties whether Samsung is entitled to injunctive relief if it prevails on any of its patent infringement claims. Despite having admitted and contended in other litigation that a patent holder waives all rights to seek injunctive relief upon making a FRAND commitment, Samsung seeks injunctive relief against Apple in its Counterclaims. Apple contends, as Samsung has acknowledged in other litigation, that Samsung’s sole remedy in this case is to seek payment of royalties on FRAND terms."

In this wider context, Apple positions itself as a defender of the public interest:

"Apple seeks to bring this misconduct to an end and thereby prevent further harm to the wireless telecommunications industry, consumers, and Apple."

Apple even argues with "price competition" that FRAND-based standards allow. That is true. It's just funny that Apple would argue with this, given that Apple is not exactly known for bringing down prices in any particular market.

Samsung will now have to defend itself against Apple's counter-counterclaims and say what it believes to be entitled to in the event those patents are indeed standards-essential.

I will comment on this next time (at the latest) after Samsung's answer becomes available. That may take a few weeks, or even a couple of months.

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