I have sometimes, maybe even quite often, but not always agreed with Apple. And I have disagreed with Apple on more occasions than parts of the Android and open source communities have acknowledged. Now that I have obtained the public transcript (which you can find at the end of this post) of a January 23 hearing held by the United States District Court for the Northern District of California on Apple and Samsung's motions to toss each other's damages theories, I face the first situation in which I don't merely disagree with Apple but am rather wondering whether it has lost its mind.
Apple's damages theory for the trial that will begin in less than three weeks (on March 31) is an objective insanity, and I say so even though Judge Koh allowed Apple to present it to the jury.
A damages expert will argue on Apple's behalf that, if the parties had acted reasonably and rationally in a hypothetical negotiation, Samsung would have agreed to pay $40 -- forty dollars! -- per phone or tablet sold as a total royalty for the five patents-in-suit, which relate to (but don't even fully monopolize) the phone number tapping feature, unified search, data synchronization, slide-to-unlock, and autocomplete. The theory is that Samsung would simply have raised its prices accordingly. (You can find the final list of Apple's patents-in-suit here; that post also lists Samsung's patents-in-suit, but three more patent claims have since been dropped).
$40 per unit. For five software patents. Give me a break. Reality distortion would be a total understatement for this.
On average, that is $8 per patent per unit. About two years ago, after someone was awarded that per-patent-per-unit figure against Research In Motion (now BlackBerry), I said that such damages/royalty figures would make smartphone unaffordable and performed a simple calculation: "[E]ven if I take only half of the Google/RPX estimate (i.e., 125,000 [patents used in a modern-day smartphone]), the potential licensing cost per smartphone would amount to $1,000,000 -- yes, one million dollars per device -- if the average licensing cost per patent corresponded to this [rate]", which I called "absolutely unsustainable". And I presented a much more conservative calculation: "Even if I wanted to give [the plaintiff in that case] the benefit of the doubt that this patent is 100 times (!) as valuable as the average patent, and if I assumed that the Google/RPX estimate is 10 times the accurate number of patents, the per-device license fee would still be $2,000."
This damages theory is also irreconcilable with Apple's own numbers that have previously come to light in the same district:
At a meeting between Apple and Samsung in 2010 (the year before this litigation started), Apple proposed a royalty of $30 per unit for an entire portfolio, not just a handful of patents (to be precise, the proposal also involved a rate of $40 per unit for tablet computers, but only for the first two years).
In the first California litigation, Apple's reasonable royalty damages claim for its software patents was only a fraction of what it wants now. The per-unit royalty claims in the summer 2012 trial were $3.10 for the "pinch-to-zoom API" '915 patent (which the USPTO now considers invalid) and $2.02 each for the "overscroll bounce" (or "rubber-banding") '318 patent and the "tap-to-zoom-and-navigate" '163 patent. That was a total of §7.14 for three software patents. The total damages amount in the first case ($929 million after two trials, but prior to the appeal, which Samsung filed last week) was $929 million, but the bulk of that was related to design patents and trade dress, i.e., intellectual property rights for which U.S. statutory law explicitly allows damages theories (disgorgement of infringer's profits) that are legally unavailable for utility (i.e., technical) patents.
I have repeatedly criticized, and won't ever support, Samsung's 2.4%-of-total-device-sales royalty demand for its portfolio of wireless standard-essential patents (SEPs). Apple has argued over and over, and rightly in my opinion, that the number is not a FRAND royalty rate. Apple and I have also taken that position on Motorola Mobility's 2.25% demand for a portfolio of patents of the same kind. But 2.25% or 2.4% of the price of a $500 iPhone would be $12 per unit -- less than a third of what Apple wants for five software patents, and Samsung and Motorola hold a far greater number of wireless SEPs.
I still believe that SEP and non-SEP issues must not be mixed up in connection with injunctive relief. But when it comes to the FR part of FRAND ("fair and reasonable"), the question of double standards is legitimate (of course, provided that one takes into consideration any relevant differences between the patents or portfolios compared, but few people would probably think that patents relating to things like autocomplete are inherently more valuable than wireless SEPs).
If patents are not encumbered by a FRAND licensing pledge, a patentee can ask for anything, but here we have a situation where Apple's damages expert argues that Samsung would actually have paid the amount at the end of a hypothetical, perfectly rational negotiation. And that theory undermines Apple's FRAND arguments big time, at least psychologically, because Samsung and Motorola would also argue that Apple would have paid them $12 per phone at the end of a reasonably-led negotiation. Antitrust authorities have probably been aware of Apple's non-SEP royalty theories for a while. I still hope regulators will give meaning to FRAND, but it's only human if some decision-makers note a major discrepancy between Apple's positions on reasonable royalties and if this makes them less inclined to impose drastic sanctions on Apple's rivals.
Apple's royalty-type damages claim for five software patents is also far out of the ballpark of anything that has ever been claimed or rumored to be paid in this industry for entire portfolios. After Apple and Nokia settled in 2011, the highest per-unit royalty estimate I heard about (and this was just an analyst's claim, not official information) was in the $10 range -- for Nokia's huge portfolio of SEPs and non-SEPs, not for a handful of patents. Guesstimates of what various Android device makers pay to Microsoft -- again, for a portfolio license, not a five-patent license -- that have appeared in the media did not exceed $15-20 per unit, at least the ones I'm aware of. (And Microsoft has a stronger software patent portfolio than Apple.)
I can understand that Apple, almost three years after having filed its first lawsuit against Samsung, is disappointed with the fact that it has no enforceable remedies in place in the United States. But seeking out-of-this-world damages based on bizarre theories of what a hypothetical negotiation would result in is not the answer.
Before I show you the full Daubert (admissibility of expert reports) hearing transcript, let me publish the passages that refer to the $40 claim. You'll find some intersting facts in them, such as that Apple on the one hand argues that its theory is supported by real-world license deals, but it didn't want the jury to see those deals, which Samsung's lawyers attribute to the fact that no jury would ever award that number if it became aware of what the going royalty rates in this industry are:
MR. WATSON: GOOD AFTERNOON, YOUR HONOR.
SCOTT WATSON TO ADDRESS THE CHEVALIER MOTION.
ACTUALLY, YOUR HONOR, THE INTERESTING THING HERE IS THAT THE CONSIDERATION OF THE LICENSING DATA IN THIS CASE ACTUALLY PUSHES DR. CHEVALIER'S RATE UP, NOT DOWN.
AND IF YOU LOOK AT FOOTNOTE 1 IN APPLE'S BRIEF, THIS HAS GOT TO BE A FIRST IN THE HISTORY OF DAUBERT. APPLE SAYS, "WE'D LIKE TO EXCLUDE THIS EVIDENCE. WE DON'T TAKE ISSUE WITH THE RESULTS OF HER ANALYSIS." THEY'RE NOT ASKING TO EXCLUDE THE REASONABLE ROYALTY NUMBERS THAT DR. CHEVALIER ENDED UP WITH, THEY JUST WANT TO EXCLUDE THE ACTUAL LICENSING DATA IN THE CASE.
AND, YOUR HONOR, THE REASON FOR THAT IS BECAUSE IT IS OUT OF ALL BOUNDS FROM THE DAMAGES NUMBERS THAT APPLE WOULD LIKE TO PUT UP.
EACH -- EACH OF THESE DIFFERENT TYPES OF LICENSING EVIDENCE DIRECTLY IMPEACH THE NUMBER APPLE WANTS TO PUT UP.
IT WANTS TO PUT UP $40 A UNIT -- [...]
MR. WATSON: WELL, YOUR HONOR, IF I MAY, SHE IS A PROFESSOR WHO TEACHES IN THE TECHNOLOGY SPACE AT THE YALE BUSINESS SCHOOL. SHE IS THE PERSON WHO CHAIRED YALE'S COMMITTEE ON COOPERATIVE RESEARCH, WHICH IS THE LICENSING ARM OF YALE. SO SHE WAS THE CHAIR FOR LICENSING ALL OF YALE'S INTELLECTUAL PROPERTY FOR THREE YEARS.
THIS IS A WOMAN WHO HAS READ LICENSE AGREEMENTS, WHO IS FAMILIAR WITH THE TECHNOLOGY.AND, YOUR HONOR, THEY HAVEN'T PUT A SINGLE LICENSE IN FRONT OF YOU IN THEIR PAPERS AND SAID, "LOOK AT THIS LICENSE, THIS ISN'T COMPARABLE. LOOK AT THIS TYPE OF TECHNOLOGY, IT'S NOT COMPARABLE." IF YOU LOOK AT THE BODY OF HER REPORT AT PARAGRAPH 327, SHE'S IDENTIFYING THE TYPES OF PATENTS WE HAVE IN THIS CASE.
THESE ARE SMALL FEATURES ON A VERY COMPLEX PRODUCT.
AND IF YOU LOOK AT THE DISCUSSION IN PARAGRAPH 327 OF HER REPORT, SHE HAS ILLUSTRATIVE EXAMPLES.
NOW, YOUR HONOR SAID, WELL, SHE'S EXCLUDED SOME OF THE LARGER LICENSES. THOSE ARE PORTFOLIO CROSS-LICENSES. APPLE DOESN'T DISPUTE THAT THOSE SHOULD BE EXCLUDED.
DR. VELLTURO JUST EXCLUDES EVERY LICENSE FROM HIS ANALYSIS BECAUSE TO GET TO $40 A UNIT, WHICH IS WHAT THEY WANT, THE JURY CANNOT SEE A LICENSING AGREEMENT IN THIS CASE. THERE'S NO WAY. IT'S TOTALLY DISPARATE TO ACTUAL MARKET INFORMATION. [...]
MR. WATSON: WELL, YOUR HONOR, I MEAN, THEY'RE -- SHE OBVIOUSLY HAS A LOT OF DATA POINTS THAT ARE GOING INTO A VERY SOPHISTICATED, I SUBMIT, GEORGIA PACIFIC ANALYSIS AND IT'S IN THE RECORD AND THE COURT CAN LOOK AT IT.
BUT ALL I'M SAYING IS THIS IS A CASE -- IF YOU LOOK AT RESQNET AND YOU LOOK AT THE OTHER FEDERAL CIRCUIT CASES, WHAT ARE THEY CONCERNED ABOUT? THEY'RE CONCERNED ABOUT CHERRY PICKING LICENSES IN YOUR FAVOR. YOU'RE GOING TO LOOK AT THE BENQ LICENSE AND NOT AT THE OTHER 29 BECAUSE IT'S SIX TIMES BIGGER AND YOU'RE TRYING TO SKEW THE NUMBERS.
THAT'S NOT WHAT'S GOING ON HERE. DR. CHEVALIER IS MOVING HER NUMBER UP BECAUSE OF THE LICENSING DATA. THE ONLY REASON APPLE IS BRINGING THIS MOTION IS BECAUSE THE LICENSING DATA IS COMPLETELY INCONSISTENT WITH THE IDEA THAT ANYONE WOULD PAY $40 FOR FIVE SMARTPHONE PATENTS PER UNIT.
MR. QUINN: IF WE COULD LOOK AT THAT EDGEWORTH BOX SLIDE.
THIS IS THE REASONABLE NEGOTIATION ANALYSIS THAT DR. VELLTURO DOES. HE CONCLUDED THAT SAMSUNG'S WILLINGNESS TO PAY IS ON THE RIGHT-HAND SIDE. APPLE'S WILLINGNESS TO ACCEPT FOR ALL OF THESE PATENTS, WHICH ADDS UP TO $40, $40 PER UNIT IS THE LOST PROFITS NUMBER WHICH HE TIES BACK TO HAUSER, AND HE CONCLUDED THAT THE RESULT OF A REASONABLE NEGOTIATION WOULD BE THAT SAMSUNG WOULD SIMPLY RAISE PRICES AND PAY EVERYTHING THAT APPLE IS WILLING TO ACCEPT.
Finally, here's the full hearing transcript:
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