Friday, April 5, 2013

Apple filing reveals Samsung recently reduced its 2.4% royalty demand for standard-essential patents

The United States International Trade Commission recently postponed its decision on Samsung's complaint against Apple until May 31, 2013 and raised additional questions relating to FRAND licensing obligations and the impact of an exclusion order. On some questions, only Apple, Samsung and the Office of Unfair Import Investigations ("ITC staff") were asked to comment, while the general public was invited to comment on some others. A number of submissions have now shown up on the ITC's electronic document system and I'll do at least one more blog post on them. Today Apple's submission finally became available in a redacted form and I wanted to immediately share information on an interesting development in the Apple-Samsung dispute: in early December 2012, Samsung abandoned the 2.4% royalty demand for its wireless standard-essential patents (SEPs) it had been adamant about for well over a year.

Samsung's 2.4% demand was mentioned in public for the first time in September 2011 at a preliminary injunction hearing in the Netherlands. A Dutch lawyer representing Apple in a court in The Hague mentioned it in violation of a protective order, and Dutch journalist Andreas Udo de Haes shared the information on Twitter. A few weeks later the Dutch court denied Samsung's injunction request because its royalty demand was considered to be far outside of the FRAND ballpark. The 2.4% figure subsequently came up at other hearings (including a trial held in California last summer, at which a Berkeley professor defended it) and showed up in other documents, such as an Italian decision (another denial of a preliminary injunction).

But in December 2012 Samsung softened its stance in a couple of ways. The week before Christmas Samsung announced the withdrawal of all of its European SEP-based injunction requests. And Apple's submission in response to the ITC'S latest set of questions reveals that a couple of weeks prior to that withdrawal Samsung had also reduced its royalty demand. The filing does not say what the new demand is other than that is still too high "to come into compliance with FRAND". Here's the relevant passage (click on the image to enlarge or read the text below the image):

"[REDACTED] approximately one week after Ericsson sued Samsung for infringement of Ericsson's declared-essential patents, seeking to enjoin Samsung's use of the UMTS standard. Complaint, Ericsson Inc. v. Samsung Elecs. Co., Case No. 12-cv-00894 (E.D. Tex. Nov. 27, 2012). Samsung's new perspective as the target of another company's use of declared-essential patents to seek exclusion orders may have led Samsung finally to realize the problems with such tactics, and to accordingly reduce its demands to Apple--although not enough to come into compliance with FRAND."

The Ericsson v. Samsung complaint mentioned above was filed on November 27, 2012 (in fact, there were two such complaints, one of which mirrors an ITC complaint brought shortly thereafter). Samsung's reduction of its demands to Apple happened "approximately on week later", i.e., on one of the first days of December 2012.

Samsung is defending itself vigorously against Ericsson's claims (and is, of course, countersuing). This is not the only circumstance to which one may attribute the reduction of Samsung's SEP royalty demands: at the time, Samsung knew it was heading for a Statement of Objections (SO) from the European Commission, a preliminary antitrust ruling, over its alleged abuse of SEPs against Apple. Its withdrawal of its SEP-based injunction requests and the reduction of its royalty demands did not disusade the Commission from issuing the SO as Apple's filing with the ITC mentions in the next paragraph:

"Indeed, Samsung's flurry of December activity was not enough to remove the scrutiny of the European Commission, which on December 21, 2012, issued a preliminary determination that Samsung had violated European antitrust law in its use of declared-essential patents against Apple. The European Commission investigation is ongoing."

Due to redactions it's impossible to know what amount Apple proposes to pay. A footnote indicates that Apple believes FRAND rates should be set in district court. Apple also highlights that Samsung has a track record of overdeclaring patents (saying patents are essential to standards when they actually aren't) at twice the average industry rate. Apple refers to statements by Samsung itself, Nokia and others according to which the total licensing cost of a wireless standard should not exeed 5%-7%, and Samsung would then get a fraction of this. Apple argues that the proper royalty base here is the baseband processor, which sells for about $10. In this ITC investigation only one SEP is still at issue (and was presumably found infringed, as the ITC would otherwise not have had to ask another round of FRAND and public interest questions), and Apple points out that it's a minuscule part of the UMTS (3G) standard:

"Even if it were used, this functionality is trivial and accounts for far less than 0.01% of the code in an accused device and approximately 0.000375% of the UMTS standard."

"Dr. Nils Rydbeck, former Chief Technical Officer at Ericsson--where he spearheaded the development of Ericsson’s original smartphones--explains the relative importance of the constituent elements of a modern mobile device, and concludes that the '348 patent covers (at most) a minute fraction of one category of technology (cellular standardized functionality) within such a device [...] In total, the accused portion of the UMTS standard accounts for about 0.0000375% of that standard. [...] And Samsung only contributed to a portion of that 0.0000375%. [...] That technology is a relatively unimportant portion of the UMTS standard that has not received any significant mention in the press or other publications regarding the UMTS standard. [...] In any ex ante, pre-standardization license negotiation, no reasonable party would pay significant royalties for such a patent."

Samsung is not the only SEP holder to have blinked recently. After demanding for a couple of years an uncapped 2.25% royalty rate for Microsoft's alleged use of Motorola patents in its implementation of the H.264 video codec standard, Google's Motorola Mobility last year surprisingly indicated that it might agree to a $100-125 million annual royalty cap. In a court filing Microsoft reminded Google of the fact that SEP licensing "is not a rug bazaar".

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