Saturday, September 8, 2012

Apple leverages jury verdict on patent exhaustion against Samsung's push for ITC import ban

A soccer coach named Sepp Herberger coined the saying that "after the game is before the game". In the case of Apple and Samsung, with dozens of lawsuits going on in ten countries, that is particularly true. After the August 24 jury verdict, the next comparable decision is scheduled for this coming Friday (September 14) at the ITC, where Administrative Law Judge (ALJ) E. James Gildea will make his initial determination (preliminary ruling) on Samsung's Section 337 complaint against Apple. Samsung is seeking a U.S. import ban against various Apple products, including certain iPhones and iPads, for the alleged infringement of four (originally five) U.S. patents.

While the Commission, the six-member decision-making body at the top of the ITC, very frequently overrules the ALJs, the upcoming initial determination is nevertheless an important milestone. The prospect of a technically impactful or (in the event of standard-essential patents) truly devastasting import ban would suddenly put Samsung into the stronger position. Compared to such an import ban, a billion-dollar damages verdict and the possibility of an injunction over patents that can be worked around and designed around are minor issues.

Apple also brought an ITC complaint against Samsung last year, not long after the latter's complaint. There are currently four technical (utility) and two design patents at issue in the investigation. Both parties' complaints were on trial in June. A preliminary ruling on Apple's complaint is scheduled for October 19. Just like in the California case, Apple is not asserting standard-essential patents, so any "ban" would not mean the end of any particular Samsung product: it would merely require Samsung to make some changes.

It would make a lot of sense for the ITC to rule out import bans over SEPs except, at the most, in cases in which infringing products imported into the United States are from an unidentifiable source or one from which it's impossible or impracticable to collect damages, making the seizure of such products by customs officers the only option for the law to be enforced. Also, a company's refusal to pay non-appealable, court-determined royalties might constitute an exception. But none of that applies in Apple's case. There are calls by stakeholders, academics and lawmakers for the ITC to either address the SEP issue itself or otherwise for Congress to act. In the investigations of Google's Motorola Mobility's complaints against Apple and Microsoft, it appears that the question of SEP import bans won't have to be reached. Apple has been cleared of infringement of all patents-in-suit except a non-standard-essential one, and the Microsoft Xbox case was remanded to an ALJ with instructions that suggest to me that Google is not going to win that case anyway. But there are at least three ongoing ITC investigations in which SEPs held by other companies than Motorola are at issue: this Samsung-Apple case, an HTC-Apple case that is currently on trial and in which it may all come down to Apple's FRAND defense, and InterDigital's attack on Nokia, Huawei and ZTE.

In the Samsung-Apple case, the general SEP import ban question won't have to be reached if the ITC determines that Samsung's 3G-related patent rights are exhausted. The 3G-capable Apple products that were named in Samsung's original complaint come with Intel chips; the ones released thereafter (iPhone 4S, new iPad 4G, and presumably the forthcoming iPhone 5) use a Qualcomm baseband chipset. Samsung has patent license agreements in place with Intel as well as Qualcomm. Whether Apple's products incorporating Qualcomm chips are formally at issue in the ITC investigation of Samsung's complaint is something I may not be able to find out definitively until the initial determination is published (since I don't have access to all of the infringement contentions Samsung may have served later). I believe Qualcomm-based products are not at issue since a new Apple filing I'll discuss further below says that Samsung's infringement allegations for its 3G-essential patents are "entirely based" on two Intel chips (the PMB 9801 and 8878). But even if Qualcomm products were additionally at issue, Apple has a perfect track record in several jurisdictions concerning products that come with a Qualcomm baseband chip, while it has so far succeeded only once with its Intel-related patent exhaustion defense: the very last item of the August 24 jury verdict in the Northern District of California was a finding in favor of Apple's Intel-related patent exhaustion defense. Here's that part of the verdict form (click on the image to enlarge):

A jury verdict -- no matter how vehemently it may be criticized by a vocal group -- enjoys a lot of deference under U.S. law, and Apple can now reasonably claim that its patent exhaustion defense with respect to Intel baseband chips is, as a result of the August 24 verdict, res judicata (a once-contentious issue that has been decided and must not be relitigated) in the United States. On August 30, i.e., less than a week after the verdict, Apple's lawyers filed with the ITC a "Notice of Supplemental Authority Regarding Issue Preclusion as to Apple's Patent Exhaustion Defense". Issue preclusion is a res judicata theory. Apple's filing is still sealed, and so is "Samsung's Response to Apple's Notice of Supplemental Authority" of September 5 (last Wednesday). But Apple's reply to Samsung's response, entitled "Respondent Apple Inc.'s Rebuttal to Samsung's Response to Notice of Supplemental Authority Regarding Issue Preclusion as to Apple's Patent Exhaustion Defense", was filed on Friday afternoon and is, thankfully, publicly accessible.

Apple's reply indicates how Samsung tries to salvage the 3G SEP part of its ITC case despite Apple's trial victory.

Apple disagrees with Samsung's argument that "Federal Circuit law establishes that where alternative bases for a judgment exist, neither basis carries issue preclusive effect". Apple argues that Samsung points to a Restatement (Second) Judgments rule that the Federal Circuit (and most other U.S. appeals courts) have rejected. Apparently, that rule would have been stricter in terms of making it harder (than the rule the Federal Circuit actually does apply) for Apple to claim issue preclusion. Samsung apparently also made some argument that it's too late for Apple to point to the California jury verdict, but Apple notes that none of Samsung's alleged deadlines (such as the deadline for summary judgment) apply, given that Apple only asks for the forthcoming initial determination to address this matter and to rule in Apple's favor on its patent exhaustion defense.

Apple reiterates the three key elements of issue preclusion -- overlaps between the California case and the ITC investigation -- that it says Samsung's response does not dispute (because it can't):

"(1) the identical Samsung-Intel License was the basis for the jury's verdict of patent exhaustion; (2) the identical facts underlie the jury's determination that the Intel-Apple sales are made in the United States; and (3) the jury determined Samsung’s rights in the identical PMB 9801 baseband processor were exhausted by the Intel to Apple sale."

Since Samsung allegedly "identifies no substantive difference between the PMB 9801 sales and PMB 8878 sales, because there is none" between those two Intel baseband chips, Apple says "the only relevant distinction between the case that the jury decided and this investigation (with respect to patent exhaustion) is the patents at issue", and there won't be a difference in that regard if the ITC finds that the relevant "baseband processors embody the asserted patents". The part about "embody[ing] the asserted patents" means that the technical part of the patent exhaustion defense would be satisfied in the ITC case. Patent exhaustion would not apply if other components of those Apple products than the Intel components practiced the patented inventions.

Apple now has several chances to fend off Samsung's 3G SEP assertions in that ITC investigation. Apple wins if the ITC buys its res judicata theory and adopts the California verdict on patent exhaustion. Apple alternatively wins if the ITC disagrees on issue preclusion but simply reaches the same conclusion as the California jury did. Even if patent exhaustion fails, Apple may be able to avoid a finding of liability because of invalidity and/or non-infringement. And if all else fails, the ITC could ultimately determine that import bans over SEPs that must be licensed on FRAND terms are not available in cases in which there is no reason why a plaintiff couldn't just sue in federal court for monetary compensation. There are also other defenses that Apple raised, but the ones I just listed are most likely going to be the relevant ones.

As long as Samsung cannot block Apple's products incorporating Qualcomm chips (and there is no indication so far that Samsung is likely to succeed in that regard), the commercial impact of any import ban or injunction Samsung may win against Apple's older products using Intel baseband chips is going to be rather limited. There is speculation that after the launch of the iPhone 5, Apple may basically make a low-end version of the iPhone 4S its new entry-level phone. In that case, even the entry-level iPhone would come with a Qualcomm chip.

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