Wednesday, July 17, 2013

Where's the DoJ? Samsung takes extortionate position against Apple in new ITC filing

As expected, the Office of Unfair Import Investigations (OUII, commonly referred to as the "ITC staff") and Samsung oppose Apple's motion to stay the ITC's remedial orders over a FRAND-pledged standard-essential patent (SEP) (blog post on the filing of the motion, subsequent blog post containing full public version of the motion, ITC ruling). The ITC staff takes the same positions as in the build-up to the import ban, which the Commission adopted (at least the staff's latest filing does mention Commissioner Pinkert's dissent). Samsung's opposition brief, which I have uploaded to Scribd, shows a serious antitrust issue that no public filing or statement by Samsung itself revealed before in such a flagrant form.

Samsung says that Apple should simply avoid the import ban, which will enter into force on August 5 absent a veto or stay, by accepting Samsung's December 2012 cross-licensing proposal -- the one Commissioner Pinkert found inconsistent with FRAND for particularly the following reason:

"Although licenses to non-FRAND-encumbered patents may certainly be included in a consensual resolution of a dispute over a FRAND-encumbered patent, it is neither fair nor non-discriminatory for the holder of the FRAND-encumbered patent to require licenses to non-FRAND-encumbered patents as a condition for licensing its patent."

I discussed this issue in more detail in a July 6 blog post entitled, USITC denies Apple the right to differentiate its products, grants Samsung a license to commoditize. While the most likely outcome of the Apple-Samsung dispute is indeed a cross-license involving the parties' standard-essential and non-standard-essential patents, the present situation is one in which it should be the responsibility of the ITC -- and of the antitrust officials of the United States Department of Justice (DoJ), who've been looking at Samsung's conduct for some time, doing nothing -- to prevent Samsung from leveraging SEPs and the ITC process for extortionate purposes. It's key to distinguish between what the parties may and presumably will agree upon at the end of the day and the circumstances under which they negotiate. Apple must have access to a cash-only SEP license from Samsung on FRAND terms even before an agreement on non-SEPs is struck.

The following sentence in Samsung's filing should set off the DoJ's alarm bells:

"Apple could avoid any purported harm to its business by accepting Samsung's current offer, which the 'undisputed' facts show is less than the cross-license suggestion Apple made in September 2012."

(emphasis in original)

The terms of Apple's September 2012 cross-licensing proposal are not known. An earlier proposal became known, and the structure was that Apple wanted Samsung to pay a royalty from which it could deduct certain discounts, one of which related to a grant-back. The September 2012 terms may have had a similar structure. In any event, it's clear that Apple made the September 2012 proposal from a position of strength following the previous month's billion-dollar jury verdict.

When Samsung says that its current offer "is less than" Apple's September 2012 proposal, it has a purely monetary focus. It means that whatever amount of money Apple would have to pay on a per-unit basis for using Samsung's FRAND-pledged SEPs is less than the amount of money assigned to a grant-back license under Apple's proposal. Again, the September 2012 terms are unknown, but under the 2010 proposal Samsung could have received a discount of "20% ($6) in exchange for a cross-license to Samsung's own patent portfolio". Three things must be considered here:

  • Apple's offer may also involve Samsung's non-SEPs. While Samsung has so far been unable to win anything against Apple over its non-SEPs, the presence of a single non-SEP in this part of the deal Apple proposed means that the offer is not a valuation of Samsung's SEPs on their own.

  • There are psychological and tactical reasons (also with a view to future deals) for which Apple was presumably interested, as the 2010 $30 proposal showed, in a rather high nominal value of all parts of the deal. Had Samsung accepted the 2010 proposal, Apple could have told other potential licensees with weaker patent portfolios than Samsung's (there are Android device makers out there who own hardly any patents at all) that others have accepted a certain royalty level for Apple's patents. And those other licensees would not get such a high discount for a grant-back. At the same time, Apple probably wanted to make Samsung's leadership feel good about the deal. So instead of proposing, for example, a deal under which Samsung pays Apple $24 per unit and receives nothing for its own patents, Apple offered a $30 deal with a $24 discount (note that this is a simplified model assuming equal unit volumes).

    I remember a software company that told me 20 years ago that it sold its typing tutor in a consumer version and an enterprise version. The enterprise version costs twice as much, but customers receive a 50% discount.

  • In cross-license deals involving non-SEPs, field-of-use restructions such as the anti-cloning provision in the Apple-HTC agreement can be even more important than the financial terms themselves. If, for example, Apple's September 2012 proposal involved an anti-cloning clause while Samsung's December 2012 proposal didn't, that difference alone could far outweigh any difference in the nominal license fees for the parties' patents (and particularly their SEPs).

    No government agency or court must ever force Apple or any other non-SEP holder to accept any particular set of licensing terms concerning non-SEPs in order to obtain a critical SEP license.

The ITC majority has set a terrible precedent by blessing a Samsung demand for a comprehensive cross-license. Samsung is now taking advantage of the ITC majority's departure from more than a century of established antitrust rules.

Before issuing its exclusion order the ITC invited the parties and third-party stakeholders on two occasions to make submissions on various FRAND issues. Why didn't it include a question about this tying issue? In fact, this is such a fundamental problem -- and such a huge threat to the competitiveness of innovative U.S. companies around the globe, which may face demands to relinquish protection of their differentiating IP in order to have access to certain markets -- that I believe it would even have justified a third round of questions and submissions (though the second round of submissions was already too much for Commissioner Aranoff's taste). Even if not in the form of a public call for submissions, at the very, very least I believe the ITC should have asked for official input from the FTC and the DoJ. It's pretty clear that a majority of the ITC has such a bizarre perspective on antitrust rules concerning tying that it badly needed some knowledgeable help in this area.

Now that the ITC has failed to ensure consistency of its position on tying with established antitrust principles, Samsung still doesn't have the right to take extortionate positions like the one I quoted above, which comes down to saying: "Apple, you have three choices. You can pay us 2.4% on a cash-only basis. You can give us a cross-license on terms you don't like. Or you'll face exclusion of your older iPhones and iPads in a few weeks."

This. Is. Hold-up.

The European Commission has done a far better job protecting consumers in its market. Last December Samsung withdrew all of its SEP-based injunction requests pending in the European Union. Nevertheless the European Commission issued a Statement of Objections (SO). By contrast, the DoJ has been doing nothing. At some point it has to intervene. If it tolerates this kind of extortionate conduct for much longer, some people may start to wonder whether the current U.S. government (including, in a different context, U.S. Customs & Border Protection) is more loyal to Google than to U.S. consumers and the U.S. economy.

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