This week the United States Court of Appeals for the Federal Circuit scheduled its hearing on the Apple-Google (Motorola) cross-appeal of Judge Posner's dismissal of a two-way patent infringement action in the Northern District of Illinois in the late spring of 2012. The "Posner appeal" will be heard on September 11, 2013. There's another, less famous but also rather important Apple-Motorola FRAND matter pending before the Federal Circuit: the appeal of Judge Barbara Crabb's November 2012 dismissal (initially with, ultimately without prejudice) of a FRAND contract and antitrust action in the Western District of Wisconsin. The appellate hearing in this case will most likely be held in the spring of 2014. This week Apple just filed its opening brief.
Google's Motorola is appealing Apple's partial summary judgment win in Wisconsin and still believes the dismissal should have been with prejudice. But it doesn't want the Federal Circuit to adjudge this matter in the first place: it believes this appeal should have been brought in the Seventh Circuit (where Judge Posner is an appellate judge; for the Chicaco infringement case he was sitting on a district court by designation). The Federal Circuit declined to agree with Google at this stage, but allows it to raise jurisdictional arguments in the further process.
The "Posner appeal" involves standard-essential patents (SEPs) asserted by Google's Motorola and non-SEPs asserted by Apple. With respect to both categories of patents it's about the standard for remedies in infringement cases: injunctive relief and damages. The "Wisconsin appeal" is not about remedies in an infringement case but about the enforcement of a FRAND pledge under antitrust and contract laws, such as by asking a court to obligate a SEP holder to make an offer on FRAND terms ("specific performance" of contractual obligations). So it's entirely SEP-specific.
The Motorola-Apple dispute, which started in October 2010, has a complex procedural history. Even the "Posner case" at some point passed through the Western District of Wisconsin, but Judge Crabb passed it on to "a kind judge in Chicago who enjoys trying patent cases" -- i.e., Judge Posner. Subsequently, Apple would have liked to see the two cases consolidated in Illinois, but just to be clear, the procedural origin of the Wisconsin FRAND antitrust and contract case is that Apple brought counterclaims to Motorola's ITC complaint, and counterclaims must be immediately removed from ITC investigations to a district court. Apple selected Wisconsin for this purpose. The ITC investigation went nowhere: the U.S. trade agency tossed the remainder of Motorola's complaint (one non-SEP) in April 2013. In August 2012 the ITC had already sided with Apple on three Motorola patents, including a SEP that a judge held Apple (in an April 2012 preliminary ruling) to infringe. Two Google appeals relating to that one ITC investigation are before the Federal Circuit (1, 2).
Now that I've outlined the procedural background of this appeal and how it relates to the higher-profile "Posner appeal", let me show you the public redacted version (published today) of Apple's opening brief and then discuss what it tells us about the Apple-Motorola (by now, Apple-Google) dispute and the issues on appeal:
The most interesting economic information is that Motorola, according to the brief, "demand[s] that Apple take a license at a rate that was more than 12 times what Motorola was charging other licensees for the same technology--a rate that was unfair, unreasonable, and decidedly discriminatory". The public version of the brief obviously does not contain any such thing as a list of various Motorola license deals. But it becomes clearer and clearer that Motorola's 2.25% demand is unrealistic and not supported by the deals it actually concluded. Apple says that the demand, corresponding to about $12 per iPhone, "was more than 12 times what Apple was already paying to license Motorola's SEPs", apparently referring to what Apple was paying indirectly through the use of Motorola-licensed baseband chips. What lends further credibility to Apple's position is the fact that the Mannheim Regional Court indicated last month that it was "rather optimistic" on Google's (Motorola's) part to argue that its existing license deals support its 2.25% demand. (Unlike the Federal Circuit, the Mannheim court is the one Google's Motorola used to love more than any other in the whole wide world, but that court wants to get things right more than it wants to be loved.)
It's now important to look at Apple's $1-per-iPhone position, which it took shortly before the Wisconsin trial that never took place because the court considered this an unacceptable precondition, in light of these numbers. Apple's $1 position wasn't arbitrary. Apple looked at what its baseband chip suppliers were actually paying to Google's Motorola and didn't want to pay more. (Apple also has a patent exhaustion-related lawsuit going against Motorola in the Southern District of California, where Qualcomm is based.)
Apple explains in its brief that it would have accepted that kind of rate just to "buy litigation peace and move on" even though Google's Motorola has thus far failed to prevail on any of its SEP infringement claims against Apple:
"Motorola has sued Apple in various forums for infringement of eight SEPs (presumably, its eight strongest SEPs) and is batting 0-for-8 in establishing liability in U.S. actions. Motorola asserted the '223 and '697 patents before the ITC, but the Commission determined that the '223 patent was obvious and that Apple did not infringe either patent. [...] Motorola asserted the '898, '559, '516, '712, '230, and '193 patents in [the "Posner case"]. Motorola withdrew the '516 and the '230 patents from suit. On summary judgment, the district court found the '193 patent invalid and the '712 and '559 patents not infringed, and concluded that Motorola could not prove damages or entitlement to an injunction as to the '898 patent."
The fact that FRAND determinations are typically not based on a full and final adjudication of essentiality/infringement and validity raises very interesting questions for courts setting rates based on such concepts as a hypothetical Georgia-Pacific negotiation (as Judge Robart did in his Microsoft v. Motorola rate-setting opinion in the Western District of Washington, and as Judge Crabb might have done if she hadn't canceled the trial in the decision that gave rise to this appeal here). I'm not going to go into more detail on this complex question here and now, but I do wish to recommend Professor Thomas Cotter's Comparative Patent Remedies blog, which discusses the impact of uncertainty regarding liability on FRAND negotiations and probabilistic rate-setting decisions from time to time.
For the purposes of this blog post here, suffice it to say that Apple's $1 position wasn't nearly as arrogant or whimsical as it might have appeared at the time. It was the price Apple was willing to pay even without Motorola having proven Apple's actual use of a single valid Motorola SEP, just to put this issue behind it. Apple didn't rule out paying more. As its appeal brief explains, its position was and still is that Motorola had and has an obligation to offer a FRAND rate -- while Apple does not have an obligation to accept a court's determination. Even without Apple accepting the determination, the parties would have had additional, valuable guidance in further negotiations. Judge Crabb agreed with Motorola that this would simply allow Apple to use the court's rate-setting decision (and the requested order of the "specific performance" by Motorola, i.e., an offer Motorola would have been required to make so as to comply with its FRAND contract) as a bargaining chip and try to negotiate the rate down from there. Apple's position on this is basically that whatever may happen after an offer, the offer must be made. Up to $1, Apple would have just bought peace regardless of whether Motorola would ever prevail on a single U.S. SEP. Above that rate, Apple "would have had to make the difficult business judgment whether to accept the license or the litigation risk inherent in continuing to challenge the essentiality, validity, and exhaustion of Motorola's patents". Apple doesn't say so, but this "business judgment" obviously relates, in practical terms, to negotiations: Apple might have told Motorola that the court set a rate of $X, and if Motorola accepted 80% of $X, Apple would do a deal, but above that, Apple would continue to litigate. Then Motorola could have said "OK, we'll keep suing you", or it could have said "80% is not enough, but if you give us 85%, we won't keep fighting for the remaining 15%". According to Apple, "that is the choice that Motorola committed to give every business in Apple's position" -- through its FRAND pledge.
I'd like to point out that Judge Robart, contrary to the way some litigants and commenters now portray his position on this, never said that there's an absolute, indispensable requirement for an implementer to commit to accepting a court-determined rate. In his Microsoft v. Motorola case, Microsoft made that commitment, and it was important to Judge Robart when he barred Motorola from enforcing a set of German SEP injunctions against Microsoft. That's different from the Wisconsin case.
Judge Crabb not only canceled the trial because she disliked Apple's position but she also declined to issue declaratory judgments on certain questions such as whether Motorola's 2.25% ($12 per iPhone) demand was consistent with FRAND. Apple also wants to get those DJs now.
The FRAND rate-setting part of the Wisconsin case is closely-related to the FTC consent decree and order in the Google (Motorola) SEP antitrust case, finalized this week. Apple's appeal brief still refers to the FTC's original finding (in January 2013) of anticompetitive conduct by Motorola, which the FTC subsequently dropped in order to make a concession to Google. But the FTC confirmed that Google can still seek injunctions against Apple, as it is doing in its appeals of the Posner and ITC decisions. It just can't enforce injunctions without complying with the consent order, which involves rate-setting. So far, Motorola has been unable to prevail over any of its U.S. SEPs against Apple, and as long as it doesn't, Apple can simply wait. But if Google ever does win a favorable U.S. SEP liability ruling, Apple is going to need a rate-setting decision by a U.S. court (I don't think it's enthusiastic about the prospect of arbitration) -- and the Wisconsin case could already have provided one, had it not been dismissed for what Apple believes are all the wrong reasons.
I've previously stated that I agree with Apple's take that a FRAND promise is comparable to an enforceable options contract: Google's Motorola must give Apple the option to take a license on FRAND terms. But an option is not an obligation, and if Apple convinces the Federal Circuit of this, then this will have important implications for many FRAND cases.
Another legal issue in this appeal also relates to the FTC investigation: Apple is appealing Judge Crabb's summary judgment against its antitrut claims based on the Noerr-Pennington doctrine that lends a fair amount of immunity to a party's defense or assertion of legal rights in an antitrust context. The FTC rejected claims by public commenters that Noerr-Pennington puts SEP assertions beyond the reach of antitrust enforcement. Apple is now arguing that its antitrust claims against Google's Motorola are based not merely on its litigation (even though its damages claims were specific to the cost of its legal defense) but that the anticompetitive wrongdoing began with Motorola's alleged deceipt of standard-setting organizations, making a FRAND promise it didn't ultimately honor and delaying disclosures of potentially essential patents until after adoption of a standard. Apple, which relies in no small part on the Third Circuit's Broadcom-Qualcomm decision, makes a policy argument:
"To hold otherwise is to declare that Apple cannot pursue a blatant antitrust violation because it so far has refused to capitulate to Motorola's anticompetitive threat. [...] Those who are too weak to resist the threat are also the least likely to challenge the anticompetitive conduct. The result would be a perverse 'under-supply of challenges to patent hold ups.'"
We may see more Noerr-Pennington arguments in FRAND disputes. And we may also see more and more private antitrust litigation involving FRAND-pledged SEPs given the weak and very limited action taken so far by U.S. antitrust regulators.
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