Monday, July 8, 2013

ITC ruling on Samsung complaint puts up multiple roadblocks for Apple, other implementers

The public redacted version of the June 4, 2013 United States International Trade Commission's (USITC, or just ITC) opinion on Samsung's complaint against Apple, culminating in an exclusion order, has finally become available. I have previously published and commented on parts of it: the strongly-recommended dissenting views of Commissioner Pinkert, who held Samsung to have failed to offer Apple FRAND license terms, and the portrayal and analysis of Apple-Samsung licensing negotiations, a context in which the U.S. trade agency takes a permissive position on tying that is unprecedented. Some clues as to the ITC's rationale were previously provided by the parties' submissions to the United States Trade Representative (USTR).

Now it's time for the complete picture. I'm primarily interested in what challenges this decision poses to Apple's efforts to have it overturned and, more generally, to implementers of standards finding themselves as respondents in other ongoing and future ITC investigations involving FRAND-pledged standard-essential patents (SEPs).

Here's the ruling, in three PDFs due to size (this post continues below the three documents):

ITC Inv. 337-TA-794 Commission Opinion Part 1

ITC Inv. 337-TA-794 Commission Opinion Part 2

ITC Inv. 337-TA-794 Commission Opinion Part 3

The most important FRAND-related parts are on pages 2 (footnote 1 defines SEPs and clarifies that the ITC takes no position on essentiality), 3 (footnote 2 rejects Apple's various notices of new facts and new authority, such as this one and this one), 41-66 (ruling on Apple's SEP-specific affirmative defenses), 107-114 (rejection of Apple's public-interest arguments), and D1-D8 (Commissioner Pinkert's dissent). The page numbers I just provided are the ones stated at the bottom of each page (not the ones of the PDF documents).

In terms of Apple's chances to avoid this import ban affecting older iPhones and iPads, it's going to be difficult to prevail on the FRAND defense or the FRAND-based public interest argument on appeal. Theoretically, there are two bites at the Apple: the affirmative defenses and the public interest. With respect to the affirmative defenses, the Commission has unanimously identified a failure of proof in the proceedings before the Administrative Law Judge (yes, Commissioner Pinkert joins the majority on this particular conclusion), and a majority of the Commission furthermore found that even if all of the evidence and argument put before it for the review was considered timely, Samsung committed no FRAND violation. So there's a double hurdle for the affirmative defense. On the public-interest side the appeals court will probably afford the Commission (and the USTR, should he decline to veto) considerable deference.

Apple doesn't even need a successful appeal to eliminate the immediate impact of Samsung's win. A mere stay pending resolution of the appeal would mean that the affected products are discontinued before the import ban re-enters into force. Even an emergency stay (pending decision on the motion for a stay during the entire appeal) would significantly diminish the benefit to Samsung. Theoretically, the exclusion order would also be a potential issue for Apple if it bought baseband chips from other makers than Qualcomm, but there are various solutions. With enough time to prepare for this (carriers included), the '348 patent doesn't have to be infringed. Carriers competing with AT&T don't implement the standardized technique at issue here. Another baseband chipset maker who has a license deal with Apple could also solve the problem, but Apple would have to ensure that the requirements for patent exhaustion are met. And in any event, Apple may in the meantime be able to obligate Samsung to grant a license on court-determined FRAND terms. Antitrust pressure could also help.

But Samsung will tell the appeals court that this import ban is a now-or-never proposition. The hurdle for a stay of an exclusion order is reasonably high. If Apple primarily relied on a theory that requires it to overcome two hurdles, or one very high hurdle, a stay would probably be denied. Given that the ALJ had cleared Apple of infringement based on a different claim construction than the one adopted by the Commission, and that claim construction decisions are easily and frequently overruled, liability (even though the Commission reached unanimity on it) may be a better shot for Apple. Also, the question of location of where the sale relevant to Apple's Intel-related patent exhaustion defense occurred, could be an opportunity to prevail on liability. If Apple prevailed on a liability question, the Federal Circuit could still -- but would not need to -- reach any FRAND issues.

Now let's look at the FRAND part in more detail.

The ITC's rationale for rejecting Apple's FRAND defense

The ITC recites Samsung's December 31, 2003 FRAND declaration concerning the '348 patent:

The SIGNATORY has notified ETSI that it is the proprietor of the IPRs listed in Annex 2 and has informed ETSI that it believes that the IPRs may be considered ESSENTIAL tot he Standards listed above.

The SIGNATORY and/or its AFFILIATES hereby declare that they are prepared to grant irrevocable licenses under the IPRs on terms and conditions which are in accordance with Clause 6.1 of the ETSI IPR Policy, in respect of the STANDARD, to the extent that the IPRs remain ESSENTIAL.

The construction, validity and performance of this DECLARATION shall be governed by the laws of France.

The Commission then states the standard of proof: preponderance of the evidence. This is the lowest standard for an affirmative defense, but the Commission still believe Apple failed to meet it for multiple reasons:

  • The first point is about jurisdiction. The ITC says "Apple has cited no binding legal authority for its proposition that the Commission may not investigate a violation of [S]ection 337 based on infringement of patents subject to a FRAND undertaking". It then points to various other investigations involving FRAND-pledged SEPs and several ALJs' denials of motions to terminate investigations due to FRAND commitments. The fifth point is a narrower version of the first one: "Apple fails to city any precedent for its proposition that the Commission cannot address infringement of standard-essential patents other than in the exceptional scenarios such as where a potential licensee has refused to pay a royalty after a U.S. court has determined that royalty to be FRAND, or where no U.S. court has jurisdiction over the potential licensee in order to set a FRAND rate". The ITC doesn't want to be "a forum of last resort, when all other remedies have failed".

    I'm not against the ITC's jurisdiction over patent infringement actions involving unfair imports. Considering how time-consuming and difficult it is for patentees to win meaningful remedies in U.S. district court, I think the ITC plays a very important role beyond that of stopping infringing imports if the infringer can't be sued in district court.

    At some point I was sympathetic to the idea of importing the eBay v. MercExchange four-factor test into the ITC's rules, but considering that two of the four factors relate to a choice of remedies (legal, i.e., monetary, or equitable, i.e., injunctive relief), only one of which is relevant to the ITC, I'm not sure this makes sense. I also fear that U.S. patent enforcement will become too inefficient by international standards without the ITC's Section 337 investigations. There are voices who call for abolition of the ITC's Section 337 investigations. Some others want to import the eBay factors into the ITC's rule in order to make the ITC a forum of limited effectiveness. I'm more ITC-friendly than those two groups. But I don't think the ITC should handle FRAND-pledged SEP cases except in the two "last resort" scenarios Apple outlined.

    The ITC may fight for a maximum scope of its jurisdiction, but federal courts and regulators have already decided that injunctions -- including ITC import bans -- based on FRAND-pledged SEPs should be unavailable in most cases. Judge Robart held so in Microsoft v. Motorola (the question of whether his summary judgment decision precluded Motorola from enforcement of an ITC import ban against Microsoft was mooted -- before it even came up -- by Motorola's withdrawal of the relevant patents). The FRAND part of Judge Posner's Apple v. Motorola ruling doesn't mention the ITC either, but it can be reasonably interpreted to relate to ITC exclusion orders as well. In Realtek v. LSI/Agere, Judge Whyte enjoined the patent holders from enforcing an ITC import ban should they win one. By means of a settlement, the Federal Trade Commission prevented Bosch from the pursuit of injunctive relief over certain SEPs. And the envisioned FTC-Google consent order limits it to unwilling licensees.

    The ITC now takes an extreme position in favor of import bans based on FRAND-pledged SEPs, setting an extremely low hurdle for SEP holders to defeat a FRAND defense. It will depend on the Federal Circuit and possibly the Supreme Court (if any ITC issue ever reaches it) as well as on Congress, which is discussing a variety or reform proposals, how this plays out. When all is said and done the ITC may very well find that it overreached here and unintentionally helped its detractors. The worst-case outcome would be like in the saying that the pitcher goes to the well once too often.

  • The Commission's second point is that "Apple has not properly argued any recognized affirmative defense that would preclude the Commission from finding a violation based on assertion of a declared-essential patent". In particular, the ITC says "Apple has not identified the basic elements necessary to prove a contract: the parties, the offer, the acceptance, the consideration, and definite terms". And "[f]urther, Apple has not argued the elements of other recognized defenses, for example promissory estoppel, laches, or fraud". The third point is closely related: "Apple has not identified what the [sic] specific obligations may be that flow from Samsung's FRAND declaration".

    These proceedings are too opaque for me to know everything that Apple argued in this regard. The publicly-accessible part of the record of this investigation does, however, include order no. 47, dated March 30, 2012, denying Apple summary determination with respect to Samsung's two FRAND-pledged patents-in-suit. The order, though heavily-redacted, indicates that Apple put a lot of effort into this, including that it presented argument under "the laws of France". But the final ruling says that "at the hearing in this investigation Apple presented no evidence of how 'the laws of France' would view Samsung's obligations with respect to declared-essential patents in this forum". In a footnote the Commission says that "[b]y failing to petition for review of the order in its petition for review of the final ID, Apple waived any challenge to the ALJ's conclusions".

    U.S. courts have so far considered such FRAND pledges to be enforceable agreements.

  • The fourth point is about whether Samsung's pledge applies, given that it only relates to patents that are and remain essential. Again, these proceedings are opaque. I don't remember seeing anything to the effect of Samsung disputing that the '348 patent falls within the scope of the pledge. It's obvious that Apple, as part of its non-infringement argument, disputed essentiality: admitting essentiality would have been an outcome-determinative concession of infringement. The ITC now suggests that in order for a FRAND defense based on a pledge relating to truly-essential patents to apply, a party (with the respondent usually having the stronger interest) would have had to request a determination that the patent is essential. This is a requirement I didn't see in other, similar cases. Sometimes SEP holders base their infringement contentions on the standard. Here, Samsung argued on the basis of what Apple's accused products actually do. Of all the points the ITC makes about a failure of proof on Apple's part before the ALJ, this one is -- unless Samsung never actually disputed that the patent falls under the pledge -- the relatively strongest one in my view. Without a doubt, respondents in other ITC investigations involving SEPs will now, if a SEP infringement contention is based on implementation rather than the specifications of a standard, request a determination. They will dispute infringement, but for the event that they are found to infringe, they will ask for an essentiality finding.

  • There's also a burden-of-proof issue here. Samsung declared the patent at least potentially essential to the standard. Wouldn't it make sense to then require Samsung to dispute essentiality in response to a FRAND defense? At the very least it should have to allege non-essentiality lest the patent be considered to be FRAND-encumbered. That's what I would consider reasonable.

  • After these failure-of-proof issues, the ITC argues that, even if Apple had satisfied the aforementioned requirements, the Commission "would still find no merit in Apple's arguments". It then describes and analyzes the history of negotiations, which I previously published and commented on. I take issue with the ITC's unprecedented stance on tying, allowing SEP holders to require non-SEP holders to give up their right to exclude based on non-SEPs. It's also disconcerting that the Commission's opinion almost appears to suggest that a SEP holder just has to engage in negotiations in order to be entitled to an import ban. Again and again the decision finds that what Samsung did was not unreasoanble or didn't lack good faith -- but that's a lower hurdle for Samsung than FRAND, and so far, decisions and opinions by courts and regulators in the U.S. have made clear that an implementer who is a willing licensee won't have to fear an injunction. (The European Commission also said in the Samsung-Apple context that it was, based on its preliminary assessment, anticompetitive to seek injunctions against a willing licensee.) The ITC almost turns this logic on its head. Instead of denying injunctive relief against a willing licensee, the ITC almost makes it the rule that it can't be denied to a willing licensor, defining the licensor's willingness in such a way that even non-FRAND demands are acceptable.

    The ITC points to the relevance of the duty of good faith and fair dealing to the Microsoft v. Motorola case in the Western District of Washington, arguing that Judge Robart did not necessarily find a supra-FRAND initial demand to constitute a breach of contract as long as it was made in compliance with the i,plied duty of good faith and fair dealing. The ITC then applies that standard to its assessment of Samsung's royalty demands. But in terms of the effects of the legal framework and proceedings on the commercial negotiations between parties, the ITC is not at all consistent with Judge Robart's standard. In the Seattle FRAND contract case, injunctive relief was denied (including a summary judgment ruling and, previously, an anti-enforcement injunction relating to a set of German SEP injunctions was granted) long before the breach-of-contract question was addressed, which will happen at next month's second trial in that case, and at this stage it will be about Microsoft's entitlement to damages, not about Motorola's entitlement to an injunction. In denying (and preventing the enforcement of) injunctive relief Judge Robart placed significant emphasis on Microsoft's willingness to take a license. Microsoft formally committed to take a license on court-ordered terms. Apple has not made such a binding commitment to Samsung as far as I can tell based on the public record, but the ITC can't set a royalty rate anyway. Apple is also a willing licensee. The commercial effect is that the ITC allows someone to make a supra-FRAND demand and then, as the U.S. antitrust scholar the Supreme Court cites more than anyother, Iowa Professor Herbert Hovenkamp, describes it, makes "the patent holder the dictator of the royalties".

    It's one of the most fundamental shortcomings of the Commission opinion that it fails to explain how a situation in which a company wins and enforces an exclusion order while making a supra-FRAND demand can result in a FRAND royalty. In this particular case here, only older iPhones and iPads are affected. But next time someone's primary revenue source(s) may be affected, and what happens then? The respondent will be forced to conclude a deal on supra-FRAND terms, with decisive help from the abusers' friends at the ITC. This is alarming.

    It's also amazing that the 2.4% demand, which can easily be extrapolated to a huge aggregate royalty rate for all 3G SEPs, wasn't clearly found to be a non-FRAND demand.

  • The Commission's public-interest decision addresses some concerns such as hold-up, but none of this persuades the ITC majority. And, in any event, the majority opinion says "Apple has not proved that Samsung violated a FRAND obligation, and Samsung has widely licensed the '348 patent". The last part is really bad. Of course Samsung has widely licensed the patent in other contexts. But the fact that it has a dispute with Apple over widespread non-SEP infringement is why it insists on prohibitive cash-only terms or otherwise demands a comprehensive cross-license involving Apple's non-SEPs. That wasn't the case in those other disputes. And the ITC now sees that there are also serious FRAND issues between Samsung and Ericsson. Basically, Samsung will grant licenses on reasonable terms if it doesn't feel it needs to leverage its SEPs against someone else's patents. The ITC should not support such a strategy.

The ITC majority's pro-SEP-holder bias is particularly clear where it talks about "reverse hold-up". Commissioner Aranoff didn't join in that paragraph, and I also think it's inconsistent with what Commissioner Pinkert wrote in his dissenting views. In the paragraph before "reverse hold-up", the ITC shockingly calls Apple "somewhat hypocritical" because it wants to challenge the validity and infringement of the asserted patents as a precondition for taking a license. The "reverse hold-up" argument, too, implies that patent holders must be given enough leverage to force others to take a license even before they've proven that their patents are valid and infringed.

The ITC ruling was the first piece of good news for SEP holders in a while. Previously there was a series of decisions (and indications of inclinations) around the globe that favored implementers. I don't think this ITC stance on FRAND-pledged SEPs will stand. Whether an appeal from this decision or appeals from future ITC rulings (or related district court rulings, like in Realtek v. LSI/Agere will provide clarity, the door won't be wide open to ITC exclusion orders over FRAND-pledged SEPs when all is said and done. In the meantime, however, there is considerable legal uncertainty. It doesn't help Google's Motorola Mobility against Apple and Microsoft, however. Those companies will be licensed on court-ordered FRAND terms anyway. And ultimately Samsung will also have to content itself with a truly fair, reasonable and non-discriminatory compensation.

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