Tuesday, May 15, 2012

Apple's amended FRAND counterclaims against Samsung largely withstand motion to dismiss

At close of business on Monday, Judge Lucy Koh of the United States District Court for the Norther District of California ruled on a Samsung motion (filed on November 22, 2011) to dismiss Apple's amended FRAND counterclaims brought in the first California litigation between the two which started in April 2011 (a second lawsuit between these players in the same district started in February 2012).

Samsung's motion to dismiss has failed for the most part. On a scale from 1 to 10, Apple scored at least an 8, and more likely a 9. Apple successfully defended its antitrust counterclaims (at the federal as well as the state level) and its breach-of-contract claims relating to Samsung's obligation to grant Apple a FRAND license as well as to Samsung's alleged failure to disclose essential patents during the 3G/UMTS standard-setting process it participated in. Samsung only persuaded Judge Koh to throw out a couple of long-shot claims: Apple's assertion that it was presently licensed to Samsung's 3G-essential patents under French law (a theory that other courts, including in Europe, have also dismissed in light of the requirements for a license agreement to constitute a contract under French law) and a similarly far-fetched theory that the U.S. legal concept of promissory estoppel should apply to Samsung's agreement with ETSI despite the fact that French law does not recognize a substantive claim for promissory estoppel.

This means that the FRAND part of Apple's California case against Samsung is in fantastic shape with a view to the trial that is still scheduled to begin on July 30, 2012 after both parties dropped various claims. In order to prevent Samsung from winning a U.S. injunction over any standard-essential patents against Apple, it would be completely sufficient for Apple to succeed either with one of its breach-of-contract claims or with one of its antitrust claims -- and it may very well succeed with more of these defenses and counterclaims than it needs to. I would be very surprised if all of Apple's remaining FRAND counterclaims failed at trial.

Since FRAND issues are a key focus of my work, I'll provide some more detail on the procedural context and the substantive issues in the remainder of this post. But before I do this, I'll digress for a moment into another filing in the other California Apple v. Samsung case.

Apple talks about two-horse market, points to anti-iPhone advertising campaigns and quadrupled sales

Apple filed a reply brief at midnight local time to defend its second (i.e., February 2012) motion for a preliminary injunction against Samsung. That's the one targeting the Galaxy Nexus. A hearing on that motion is scheduled for June 7. Last month I commented on Samsung's defenses. My assessment of the likely outcome (I believe Apple will most likely prevail on one or two of the four asserted patents) hasn't changed. I'd just like to highlight three statements made by Apple in its reply brief (all of which I consider very much to the point) before I then elaborate on the FRAND ruling in the original California litigation:

  • "Samsung's entire discussion of public interest is its claim that the public has an interest in promoting competition. [...] There is, of course, no public interest served by 'competition' based on Samsung's serial, willful and wide-spread patent infringement."

    (of course, Apple has yet to prove this allegation in court)

  • "The 'two horse' nature of the market also belies Samsung's speculation that 'likely, other sellers of Android-based phones lost sales to the Galaxy Nexus,' [...], and explains why Samsung targets Apple, not Android manufacturers, in its advertising."

  • "Moreover, whatever Apple’s market share is, it would be higher, and grow more quickly, had Samsung not been selling infringing competing devices, all the while targeting the iPhone in advertising for its products. [...] And, Samsung's strategy has worked. While Apple's shipments less than doubled over the last year, Samsung's nearly quadrupled."

Now back to the FRAND issues in the 2011 case.

Procedural context: original motion to dismiss, amended counterclaims, new motion to dismiss

After both Apple and Samsung brought their original infringement claims against each other in California, Apple filed, along with its answer to Samsung's counterclaims, its mostly FRAND-related counterclaims (more precisely, theywould be called "counter-counterclaims" or "counterclaims in reply", but I'll simply refer to them as conterclaims here) in July 2011. I commented on those. In mid-August 2011, Samsung brought a motion to dismiss and strike Apple's FRAND counterclaims. Two weeks later, Apple responded to defend those counterclaims. Samsung's motion succeeded to a certain degree but mostly the court just sent Apple back to the drawing board: Apple got the chance to cure many deficiencies identified. Apple amended its FRAND counterclaims in late October 2011. In November 2011, Samsung brought another motion to dismiss -- the one Judge Koh ruled on yesterday, largely in Apple's favor.

Some of Apple's original FRAND counterclaims weren't necessarily weak but lacked particularity in Judge Koh's view. Apple's lawyers did a great job heeding Judge Koh's guidance. Apple also did an impressive amount of reseearch in order to be more specific about the 3G-related wrongdoings it accuses Samsung of.

I'll discuss the details of Judge Koh's decision in the remaining two sections of this post: one on Apple's antitrust claims, and one on Apple's breach-of-contract claims. Those are the two relevant categories of claims.

Antitrust counterclaims: Samsung made zero headway

Apple alleges that Samsung has violated Section 2 of the Sherman Antitrust Act (i.e., federal U.S. antitrust law) as well as California state law (by engaging in unfair competition under California Business and Professions Code § 17200).

the standard for evaluation of whether Apple has properly pled its counterclaims is pretty much the same. Judge Koh firstly determines that Apple has brought actionable claims under federal law and then says that "[b]ecause Apple has adequately alleged a violation of Section 2 of the Sherman Act, Apple has also stated a claim that Samsung's conduct violates the California UCL [Unfair Competition Law]". Under California law, Samsung additionally claimed some kind of "immunity", but the judge dismissed that argument because "Apple's claim is based on Samsung's allegedly extortionist conduct in attempting to file a patent infringement suit, despite the fact that Apple either owns a license or has a right to license on FRAND terms", as opposed to basing its claim on "the publication or communication of the pleadings in Samsung's counterclaims". In other words, Samsung can't say that its behavior is protected because it's related to what it does in litigation.

Samsung's general (not California-specific) criticism of Apple's FRAND-related antitrust counterclaims has three parts. Samsung said that Apple failed to state a relevant market under antitrust law, to prove that Samsung is dominant in such relevant market, and that Apple's different theories of antitcompetitive conduct by Samsung should be dismissed. Judge Koh disagreed with Samsung on all of that.

For the relevant market pursuant to antitrust law, Judge Koh believes Apple's proposal ("[t]he relevant markets in which to assess the anticompetitive effects of Samsung's conduct . . . are the various markets for technologies that -- before the standard was implemented -- were competing to perform each of the various functions covered by each of Samsung’s purported essential patents for UMTS") meets the pleading requirements. Also, "for each of Samsung's technologies adopted as part of the UMTS standard, Apple alleges that pre-standardization there existed alternative substitutes for the technologies covered by Samsung’s patents, and that after ETSI adopted the proposed standard, viable alternative technologies were excluded".

Judge Koh also believes that Apple's allegations relating to Samsung's market power collectively do the job. The related allegations by Apple are that Samsung has obtained "the power to raise prices and exclude competition" in the relevant markets, that Apple is locked in because of ETSI's standard-setting decisions, and that it couldn't switch to alternative technologies absent undue cost.

In this context, Judge Koh makes a statement that is absolutely right, and very important:

"Moreover, a number of courts have recognized a legal distinction between a normal patent -- to which antitrust market power is generally not conferred on the patent owner, and a patent incorporated into a standard -- to which antitrust market power may be conferred on the patent owner. In so doing, these courts have found similar allegations of market power conferred as a result of a patent incorporated into a standard to be sufficient to state a claim upon which relief can be granted."

With respect to actual anticompetitive conduct (a dominant position in a relevant market isn't in and of itself abusive), Apple relies on a False Frand Theory and a Failure to Disclose IPR Theory. The False FRAND Theory would have been dismissed if Apple had failed to meet the heightened standard for making a fraud-related claim, but Apple's amended counterclaims "allege specific facts about when the false FRAND declarations were made, by whom, and for which patents" and are therefore sufficient. Apple also added specific facts to its Failure to Disclose IPR Theory, for example, by presenting viable alternatives to each of Samsung's declared-essential patent (in the sense of having been viable at the time when ETSI was defining the standard, and before everyone was locked in)

Apple still has to prove its antitrust claims and to defend its legal theories. But Samsung's two motions to dismiss presented a kind of plausibility test that those claims have clearly passed at this stage.

Breach-of-contract counterclaims: Apple can't claim to have a license, but it appears entitled to a FRAND license

Breach of contract is another key theory for FRAND issues. It is, by the way, the basis for Microsoft's FRAND enforcement lawsuit against Motorola in the Western District of Washington (which belongs to the Ninth Circuit along with the Northern District of California and many other Western U.S. districts) -- except that Microsoft v. Motorola is a FRAND case governed by U.S. law, while Judge Koh agreed with Apple, and with courts in other jurisdictions (including some European ones and Australia), that any ETSI-related contract issues must be evaluated under French law. ETSI has a choice-of-law provision.

Samsung made a highly unpersuasive attempt to dispute that these contract issues are governed by French law. Besides disputing that French law applies, it also claimed that Apple didn't give notice of its reliance on French law -- but as Judge Koh notes, Samsung was apparently quite well aware of it and hired a French law professor early on to write declarations.

The parties filed many hundreds of pages of certified translations of French legal documents (mostly court rulings) to present their arguments under French law to Judge Koh. Apple made two contract claims (which are actually mutually exclusive): on the one hand, it said that it already "is licensed to any valid patents" at issue, and on the other hand, it said that it "has the right to a FRAND license to the Declared-Essential Patents by virtue of Samsung's FRAND commitments". It's not against the rules to make claims that contradict each other. But it comes as little surprise that Apple can't have its cake and eat it. It would have been a stretch to defend both theories in parallel. Judge Koh simply joins the general cross-jurisdictional consensus on the ETSI situation: it's not the same as an actual license agreement (there's too much missing for that), but there's a strong case for an entitlement to a license: "The agreement between Samsung and ETSI can plausibly be interpreted as granting Apple 'the right to a FRAND license to the Declared- Essential Patents by virtue of Samsung's FRAND commitments.'"

In this regard, Judge Koh disagreed with Samsung that Apple didn't sufficiently plead a claim for breach of a contractual obligation to negotiate. Furthermore, Apple may have a case that "Samsung’s breach of the ETSI's IPR disclosure policy has resulted in harm to Apple".

In a formal sense, Judge Koh denied Samsung's motion to dismiss Apple's breach-of-contract claims, but she effectively granted a subset of this by ruling that "Apple’s theory that it has an existing license of Samsung's Declared-Essential Patents is implausible, and Apple may not proceed under this theory." (Again, it was at least very difficult, if not virtually impossible, for Apple to simultaneously convince the court that it had both an actual contract and an entitlement to get one, based on the very same document.)

As I mentioned further above, Judge Koh dismissed Apple's promissory estoppel theory because that one does not exist under French law except under theories that the judge considers "speculative" at best. The promissory estoppel counterclaims is the only one on which Samsung prevailed even in a strictly formal sense. And Judge Koh is so underwhelmed by the promissory estoppel theory that she dismissed it with prejudice, saying that it "cannot be cured by amendment". I'm sure Samsung was hoping for a much better outcome. It won nothing (as far as this second motion to dismiss is concerned) against Apple's antitrust claims, and very little against the breach-of-contract (and related) claims.

If this case goes to trial (it probably will since a settlement between these two companies is very difficult to make imagine at this stage), and if Samsung proves at least one valid standard-essential patent to be infringed by Apple, then these FRAND issues will be discussed immediately thereafter. The first part of the trial will deal with Apple's infringement claims, then Samsung's infringement claims will go to trial, and thereafter, if necessary, the FRAND issues.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Share with other professionals via LinkedIn: