Wednesday, June 26, 2013

Apple urges United States Trade Representative to toss iPhone, iPad import ban won by Samsung

Three weeks ago the United States International Trade Commission (USITC, or just ITC) issued its final ruling on Samsung's complaint against Apple and entered a limited exclusion order (i.e., U.S. import ban) against older iPhones and iPads over a patent Samsung once declared essential to the 3G cellular telecommunications standard and promised to license to all comers on fair, reasonable and non-discriminatory (FRAND) terms. After a series of FRAND-friendly rulings in different jurisdictions denying injunctive relief over standard-essential patents (SEPs), it came as a surprise that the ITC granted Samsung's request for a ban. "[This] decision makes the ITC an outlier internationally and domestically", argues Apple in a submission to the United States Trade Representative (USTR), to whom President Obama has delegated the authority to veto ITC exclusion orders. The term USTR refers to the special ambassador in charge of U.S. trade policy as well as to his office, which is part of the Executive Office of the President [of the United States]".

Further to its early-June decision the ITC has already instructed U.S. Customs and Border Protection to hold all shipments of devices subject to the order. But the order has not yet taken effect. There is a 60-day Presidential review period following transmittal of the order to the President. Typically the 60-day period expires without a veto, and the order enters into force. But this is a high-profile case raising serious issues, and Apple is urging disapproval of the ITC's order because "this is a case with much broader ramifications" than a mere legal or factual error that the United States Court of Appeals for the Federal Circuit could correct. (Note that Apple can appeal the ITC decision to the Federal Circuit only after the Presidential review.)

Apple's submission indicates that "USTR has decided to conduct a full review" and hopes that the ITC decision will be blocked. Samsung wants this import ban to enter into force but believes other ITC investigations involving SEPs, such as those of Ericsson and InterDigital's complaints against the Korean device maker, will be "more appropriate opportunities for the ITC and/or the USTR to weigh in on the potential abuse of SEPs at the ITC". I have obtained public redacted versions of Apple and Samsung's submissions tot he USTR's Trade Policy Staff Committee. While I have been unable to find these filings on the Internet, these documents are meant to form part of the public record and have been shared widely with U.S. government officials and lawmakers. I'm now going to show you both documents and discuss them.

Apple's submission (73 pages including a declaration)

Apple Submission to USTR Re. ITC Exclusion Order

A public redacted version of the full-length ITC decision has not become available yet. But the parties' submissions (especially Apple's) contain some indications as to the ITC's rationale, and it's not the kind of reasoning that I like.

In Apple's opinion the ITC's public-interest analysis had the wrong focus because it focused "exclusively on its views regarding the immediate, short-term effects from excluding older Apple products from the U.S. market" (emphasis in original) but "wholly failed to engage with the policy dimensions of its decision". According to Apple, "{t]he ITC did not address the dynamic and long-term harm that an exclusion order will bring to standard-setting activities and innovation for differentiating features that distinguish standard-compliant products in the marketplace" (emphasis in original). The wider ramifications are also described as "the long-term, dynamic harm to competition and innovation in the United States that would come from subverting the standard-setting process and facilitating patent hold-up". Subversion of the standard-setting process relates to Samsung's conduct of making but not really honoring a FRAND promise. The last part, "facilitating patent hold-up", is what the ITC is (in Apple's view as well as my opinion) doing in this case.

This ruling is more controversial within the ITC than I knew before. The ITC's official announcement of its decision already mentioned that "Commissioner [Dean A.] Pinkert dissents on public interest grounds from the determination to issue an exclusion order and cease and desist order". Mr. Pinkert has previously advocated "more searching inquiry" of public-interest considerations. Apple describes his dissent as saying that "this decision will have grave consequences if left unchanged", and that the patent-in-suit "constitutes at a most a 'tweak' of the TFCI [transport format combination indicator] encoding in the standard". It was also known that Commissioner Shara L. Aranoff felt that the parties already had every opportunity to brief the ITC on public-interest issues last year. But in connection with the final decision Commissioner Aranoff interestingly said "[t]he President may, should he so choose, weigh the relative risks of hold-up and reverse hold-up in deciding whether to disapprove the remedy the Commission is issuing today". In Commissioner Aranoff's view is "not a policy-making body and is not empowered to make that decision" (denying Samsung an import ban for SEP hold-up reasons).

Apple's submission quotes two things from the ITC ruling that I find troubling:

What I consider the strongest point in Apple's argument is that U.S. companies could suffer internationally if other jurisdictions adopt the ITC's stance:

"That could well cause other jurisdictions to reverse course and begin excluding American goods--including computers, mobile devices, and other consumer electronics--from their markets based on FRAND-committed patents. The United States would be unable to protest, given the actions of its own ITC."

Apple also notes that the U.S. gave "assurances to foreign countries countries--in the context of a 1989 GATT proceeding--that Section 337 exclusion orders are the 'functional equivalent' of a district court injunction against a domestic manufacturer, made necessary where the supplier of the accused infringing products is outside United States jurisdiction or otherwise difficult to reach or identify". It's certainly a problem if the ITC provides certain categories of patent holders -- SEP abusers, trolls etc. -- with remedies they couldn't obtain in U.S. district court.

While Apple would ideally like the import ban vetoed for SEP reasons, it would also be fine with a veto based on the fact that the ITC did not give Apple a grace period. I'll probably never understand why the ITC gave HTC four months to modify its products (as Apple notes, the patent-in-suit had already been deemed infringed five months earlier in a preliminary ruling) to work around the data tapping product, but did not give Apple any grace period.

Samsung's submission (8 pages)

Samsung Submission to USTR Re. ITC Exclusion Order

Samsung's argument is centered around the allegation that Apple is an "unwilling licensee to Samsung's portfolio of declared essential patents, including the '348 patent at issue here". It's difficult to verify because little is known about negotiations between the parties. Samsung says Apple "is unwilling to engage in licensing negotiations or neutral arbitration to arrive at a FRAND license", and it's not clear whether "neutral arbitration" would also include a FRAND determination by a district court or comes down to alternative extortion schemes like "baseball arbitration" (a misnomer since salary arbitration in baseball works differently). The claim that Apple is "unwilling to engage in licensing negotiations" is inconsistent with Samsung's statement that "[t]he Commission's Opinion sets forth the parties' license negotiations in great detail" -- how can there be great detail about negotiations, but no willingness to negotiate? At any rate, there's nothing that would have stopped Samsung from asking a district court to award damages for past SEP infringement and postjudgment royalties for future use. That's what Samsung could and should have done instead of seeking an ITC import ban.

Samsung mentions that the import ban Apple won and enforced against HTC was described by Apple as having "no material impact on competitive conditions" in light of the "small share of the industry" of the affected HTC products. Samsung apparently says (in a redacted passage) that if this is so, excluding older iPhones and iPads won't have any material impact either. In any event, this is a straw man. Samsung defends the part of the ITC's reasoning that isn't really the focus of Apple's argument for a veto. Samsung focuses on the case-specific impact of the exclusion order, while Apple has built its argument around the wider ramifications of SEP-based exclusion orders.

This is what Samsung says about its use of SEPs:

"Samsung has always honored its commitment to license its declared-essential patents on FRAND terms and conditions. Samsung has never refused to license its SEPs to other companies, including direct competitors like Apple. And Samsung has never offensively used its patents, essential or not, to keep competitors out of the market."

I don't know if the ITC ruling actually finds Samsung's demands to have been consistent with FRAND -- the final ruling will tell. Prior to the ITC ruling no other authority found Samsung's 2.4% royalty demand to be FRAND. Samsung claims it has "never refused to license its SEPs", but if the terms of an offer are prohibitive, then the effect is the same. As for "keep[ing] competitors out of the market", that's precisely what Samsung wants to do now with the ITC exclusion order. It says it has never done this "offensively", but as far as SEPs are concerned, it certainly is the aggressor against Apple. Apple sued first, but over non-SEPs, which Samsung can work around. SEP assertions are not an acceptable response to non-SEP infringement claims.

As I mentioned further above, Samsung wants its ban against Apple to enter into force, but it knows that there are other ITC investigations in which the shoe is on the other foot:

"Other upcoming Section 337 investigations will provide a better opportunity for the ITC or USTR to address the potential misuse of standard essential patents at the ITC

While policy grounds for disapproval of the remedial orders are not present here, there are currently several investigations involving SEPs, including complaints filed by InterDigital and Ericsson, working their way through the ITC. These investigations have far different facts regarding the patent holders' compliance with their FRAND obligations and the willingness of implementers to license on FRAND terms. There will therefore be other, and more appropriate opportunities for the ITC and/or the USTR to weigh in on the potential abuse of SEPs at the ITC. Indeed, it may be appropriate for USTR to make a public statement here, as it did after the Broadcom/Qualcomm review, that although this is not the right case, it will continue to carefully scrutinize all LEOs based on infringement of SEPs for public interest implications."

The final point about the possibility of a public statement (with a view to future cases) outlines an alternative approach to the veto Apple is urging.

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