Thursday, March 1, 2012

Motorola's alleged double-dipping on iPhone 4S could be massive EU antitrust violation

Yesterday, the full text of the Karlsruhe Higher Regional Court's decision to suspend Motorola's enforcement of a standard-essential patent injunction against Apple was published.

There's nothing in the decision that surprises me or that would be inconsistent with what I've written about it in recent days. Instead, it definitely validates several of the things I said, such as the following points:

  • Paragraph 29 of the ruling explicitly states that a suspension like this is not available just because of the harm a defendant suffers as an inherent consequence of enforcement. Instead, "a motion to suspend enforcement is only granted in such a case if the defendant's interests bear extraordinary weight". Paragraph 30 then clarifies that a "provisional suspension of enforcement can be appropriate in cases in which the appeals court's summary determination (the only determination the appeals court can make at this stage of the proceedings) shows that the appeal is more likely than not to succeed". The same paragraph says that Apple's appeal fulfills that requirement because, on the basis of a summary determination, Motorola "cannot refuse Apple's offer without committing a breach of its obligations under antitrust law".

  • Apple did not offer a particular percentage. It only made a commitment to pay FRAND royalties. If Motorola accepts Apple's proposal (so far there is no indication that it has), the parties will be unable to agree (without judicial and/or regulatory help) on what the FRAND rate should be, and in that case, a court would have to make that determination at a later stage. See this recent blog post for further detail.

  • This suspension is now going to be in effect for the entire duration of the appellate proceedings. In an effort not to overstate the reprieve Apple has won, I said that such an appeal could take a year or a year and a half. The court based its determination of the bond that Apple has to post to avert further enforcement on the assumption that the appeal could take two years. I still believe a year and a half is more realistic, but the court also wanted to be conservative, just from the opposite angle.

The amount of the bond is 90 million euros (no big deal for Apple, obviously). The court simply took Apple's annual sales of the accused products (all 3G-capable products), multiplied it by two (for the presumed duration of the appeal), and applied the 2.25% royalty Motorola demands. This does not mean in any way that Motorola's 2.25% demand is deemed to be in line with FRAND: the decision does not bless that royalty rate. Instead, the single most important part of that ruling is the fact that Apple will be free to raise any objections, without any restrictions, against Motorola's demands if and when a court will have to determine the appropriate FRAND royalty rate in the future.

The purpose of such a bond is only to provide a bank guarantee, given that theoretically (however hard to imagine it may be) even Apple could go bankrupt during the appeal, and then the bond should cover Motorola's royalties. I believe that the court simply didn't want to get into an argument over the FRAND rate since this is only a bond, not an actual payment. Also, Apple itself may already have applied, just to be on the totally safe side, Motorola's 2.25% rate to any bonds it proactively posted in recent months. Since Motorola's 2.25% demand is well-documented, it can't ask for more, so Apple doesn't have a risk of a 2.25% bond being considered insufficient, but the 2.25% amount (especially in light of the exceedingly wide-ranging royalty base MMI wants it to be applied against) is, in my opinion, not going to be considered FRAND by any German court in the future.

The redacted version of the ruling starts with two "Leitsätze" ("guiding rules"), which are meant to sum up the most important holdings of German appellate decisions with a view to other cases. Here's my (obviously unofficial) translation of those guidelines:

  1. The proposal to take a license made by a defendant raising the compulsory license objection under antitrust law [against an injunction] must be worded in such a way as to deprive (in the event of the patent holder's acceptance of the offer) the defendant of such objections that serve to contest the cease-and-desist obligation or the obligation to pay damages [for past infringement].

  2. However, the license-seeking defendant is not required to waive, at the stage of making a proposal, through his offer for the conclusion of a license agreement any objections relating to the amount that constitutes an appropriate royalty rate.

The first guideline relates to the way in which Apple's latest offer to Motorola was improved over the previous one. The second one dismisses objections Motorola raised against Apple's reservation of the right to raise, at the stage at which a court would have to determine the FRAND royalty rate, the argument that the iPhone 4S comes with a Qualcomm baseband chip and that, according to Apple, Motorola was not allowed to sue Apple over that product (in connection with a patent covered by the Qualcomm-Motorola patent agreement) in the first place.

But the court states in paragraphs 36 and 39 that Apple clarified that it would not raise this argument in order to have the FRAND royalty on to the iPhone 4S reduced to zero or a "symbolic" amount. The last sentence of paragraph 39 stresses that there will be no way out of this commitment for Apple.

Just to make this outrageous situation clear: even if a court determined that Motorola didn't even have the right to assert the patent-in-suit against the iPhone 4S in the first place (because of a Motorola-Qualcomm agreement), Apple would still have to pay a significant patent royalty to Motorola for patents that Qualcomm already paid for. Why? Because Apple had to address Motorola's concerns (to the extent the appeals court considered them legitimate) in order to prevent Motorola from enforcing its injunction. Otherwise, Motorola could have continued to refuse Apple's offer to take a license without being barred from enforcing the injunction.

The question of whether Motorola had the right to assert the patent-in-suit against the iPhone 4S will have to be analyzed by courts in the future. Apple already has an "antisuit lawsuit" going in the United States over this matter, in which it is seeking declaratory judgments, an injunction against further or continued litigation, and damages.

Motorola's argument for the right to sue Apple regardless of the covenant not to sue that it apparently entered into with respect to Qualcomm's customers is (primarily if not entirely) based on its claim that it was allowed to terminate its agreement with Qualcomm with respect to Apple as a third-party beneficiary. As I explained on a previous occasion, this behavior could be seen as a blatant violation of the ND (non-discriminatory) part of FRAND and Motorola's FRAND declaration to ETSI, a standards body based in France, according to which it has to grant an irrevocable license (a fact that a French court held against Samsung).

Assuming for the sake of the argument that it turns out that Motorola's termination of the Qualcomm agreement with respect to Apple was not allowed (either based on contract law alone, or on contract law in conjunction with antitrust law), the offer to take a license that Motorola's German litigation and enforcement activities -- combined with the very patent-holder-friendly stance of certain German judges -- forced Apple to make could result in Motorola "double-dipping" on the iPhone 4S, getting paid by Qualcomm on the one hand and Apple on the other hand, for the very same use of the very same patents.

On the basis of this assumption, Motorola would have used the huge leverage that the enforcement of an injunction represents for what would amount to downright extortion. Extortion is the use of illegitimate leverage in order to receive something one isn't actually entitled to.

Just this week, the EU's antitrust chief, European Commission Vice President Joaquín Almunia, told the European Parliament that "hold-up" by owners of standard-essential patents is not acceptable (there's a section on that speech in this Bloomberg article).

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