Monday, October 24, 2011

ITC staff now advocates six-month exception for 4G devices from potential HTC Android import ban

The ITC staff's initial position on a potential import ban against HTC's Android-based devices was that such a sanction "is not contrary to the public interest", especially since other devices (devices made by other companies as well as HTC's own Windows Phone-based products) could easily replace HTC's Android devices. However, the ITC staff has softened its stance and now advocates a "narrow exception" that would allow HTC's 4G-capable Android devices to be unaffected for a period of six months following an exclusion order.

The public version of the ITC staff's position (dated October 17) became available today (October 24). In the first paragraph of the brief's section on remedy and the public interest, the ITC staff tries to describe its new position as consistent with the previous one:

"In its opening submission, OUII recommended that, in the event a violation is found, a limited exclusion order should issue against the HTC Respondents. In OUII's view, the issue raised by the submissions of HTC and third parties (Google and T-Mobile) is not whether an exclusion order should issue, but whether any exceptions to such an order are appropriate based upon the public interest. As discussed below, OUII submits that, based upon the parties' and third-party submissions regarding the public interest, any exclusion order should contain a narrow exception to allow for the continued importation of HTC's 4G-capable devices for a limited duration."

The above paragraph contains a major factual error. Contrary to the above mischaracterization, the three named companies (HTC, Google and T-Mobile) clearly attempted to convince the ITC that there shouldn't be any import ban at all. In fact, Google's letter doesn't say anything about exceptions. I have run a search (with Adobe Acrobat Reader in this case, not Google) and the word "exception" does not appear in that entire document.

In the subsequent section, the ITC staff then makes a distinction between HTC's "more generalized concerns" and that part of its argument that "focuses solely on the availability of HTC Android phones that are capable of utilizing wireless carriers' newly-launched 4G networks".

There is precedent for an exception to an exclusion order: a case involving Qualcomm and Broadcom. In that case, the ITC wanted to mitigate the effects of an import ban on network operators and ordered an exception related to 3G devices.

What works in HTC's favor here is that it has a disproportionately large share of the 4G phone market in the United States:

"The effect of the exclusion of HTC's 4G capable phones on the development of 4G networks would be exacerbated by the relatively small number of alternative suppliers of 4G-capable phones. Presently, there are very few companies that offer phones capable of operating on 4G networks, and those companies each offer only a few models of 4G-capable phones. Indeed, by OUII’s estimates, there are only five companies other than HTC that appear to offer any 4G smartphones. Insofar as HTC currently provides an estimated 50-60% of the share for all 4G phones sales [...], the remaining companies each provide for a corresponding smaller share of the 4G market. Moreover, Apple does not offer a phone capable of operating on a 4G network (Id. at 54), and will thus be unable to drive demand for 4G networks at the current time. As another major carrier, T-Mobile, explained 'Without these HTC Android smartphones, T-Mobile would be unable to meet the customer demand for smartphones that take advantage of its new, faster [4G] network.' [...] Thus, prohibiting the importation of HTC's 4G phones (which currently command the largest share in sales) may mean that 'consumers would lose access to [the] fastest technology.'"

In a related footnote, the ITC staff says that it knows of only three 4G-capable phones that run on other platforms than Android:

"Indeed, if one were to exclude all Android-based 4G phones as alternative to HTC's 4G phones, this would leave virtually no substitutes. In fact, OUII is only aware of three products currently offered that are non-Android-based smartphones that are capable of operating on the 4G networks – i.e., Samsung Focus, RIM Torch; and RIM Bold."

The ITC staff then claims that Apple should be able to live with such an exception, but I'm sure Apple views this differently:

"In contrast, the harm to Apple from an exception to the exclusion order is likely to be small. Apple currently does not have a competing 4G device. Additionally, the number of 4G HTC devices is fairly small at this time. Thus, Apple will still enjoy the benefit of an exclusion order that is limited , for the present, to only HTC’s 3G devices."

This is how the ITC staff concludes the public interest section of its reply brief:

"OUII is of the view that a six month limitation on the exception is adequate to mitigate any harm to the public interest based upon an immediate exclusion of 4G smartphone by prevent any quelling of innovation, deployment and acceptance of the 4G networks, maintaining supply of the limited number of available 4G capable phones while still benefitting Apple by excluding all of HTC's 3G phones as well as 4G phones after expiration of the 6 month exception. In sum, OUII submits that an exclusion order against all HTC Android-based phones should issue with the exception for HTC's 4G devices, but that exception will expire six months from the date of the exclusion order (i.e., June 6, 2011) based upon the current target date of December 6, 2011."

Note that the above is the ITC staff's recommendation. It's for the Commission (the six-member decision-making body at the top of the ITC) to decide.

For HTC, being able to continue to sell 4G phones would greatly reduce the impact of an import ban (and for now it's not even clear whether there will be an import ban at all) during the exception period. HTC already sells mostly 4G phones in the U.S. market, and in the event of an import ban against its 3G devices, consumers seeking to buy an HTC product would opt for a 4G phone.

In this scenario, HTC would benefit in another very important way from having positioned itself as the leader in 4G devices.

For the time following such an exception period, the impact of an import ban would depend on the technical scope of the final decision. HTC and Google will have begun a while ago to work around at least the two patents that the ALJ believes are infringed. If they can finalize any workaround between now and June 2012 in a way that doesn't degrade Android's user experience, performance or compatibility with existing applications, then the exception period would be extremely valuable to them. Otherwise, if the technical scope of the decision is too broad and negative effects can't be avoided, six months would make only a limited difference.

From Apple's point of view, even an import ban with an exception would be a milestone. This is the first litigation Apple ever brought against Android, and regardless of its actual business impact, Apple wants a victory that it can build upon. If one or two patents are held valid and infringed by Android, Apple can claim that Steve Jobs was right in calling Android a "stolen product". In any event, Apple will continue to assert many other patents in order to identify a set of winning patents with which it could have major disruptive impact on Android. Once Apple has its "winning team" in place, it can go against all Android device makers and, potentially, Google itself.

In the immediate future, it will be interesting to see how Judge Lucy Koh of the United States District Court for the Northern District of California rules on Apple's motion for a preliminary injunction against four Android-based Samsung products. 4G-related public interest issues were also raised in that litigation (by Verizon and T-Mobile).

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