In all the patent cases I watch, the only defendant with which I have sided (and continue to side) against two different right holders (Samsung and Google/Motorola Mobility) is Apple. By comparison, I've sided with others against only one plaintiff each (BlackBerry against Mformation, Marvell against CMU, Micromax against Ericsson, Microsoft against Google's Motorola, and now Samsung against Apple in connection with the ongoing trial).
When I became aware of Apple's $40-per-device damages claim last month, the first reaction is that I was thoroughly disappointed because Apple's positions up to that point had been reasonably consistent (design patent damages have a different legal framework). Not just disappointed but even angry. Angry because I had called for antitrust sanctions against Samsung because of its SEP royalty demand of approximately $12 per device (for a whole portfolio of wireless SEPs), which I still think is way too much but which now looks cheap compared to Apple's demand of $40 for only five Android-related patents. Apple is actually seeking damages for just one patent (the '647 patent) -- more than $12 per unit -- that are at a level with Samsung's total SEP royalty demand. It didn't take me even one second to figure out that I would now have to side on this key issue with Samsung for basically the same reasons for which I still side with Apple in two other disputes -- even more so in light of Samsung's voluntary withdrawal of two standard-essential patents-in-suit from the second California case, as a result of which Samsung went into the retrial with a perfectly consistent position on patent damages.
It's obviously imperative to distinguish between the criteria for reasonable royalty rates (and royalty-type damages) on the one hand and the consequences of excessive demands on the other hand (remedies, antitrust fines etc.). Absent a FRAND commitment and what is called a license of right, it's not impossible but far more difficult to allege violations of competition law. And patents are, in principle, exclusionary rights, so someone who does not have a FRAND licensing obligation due to a FRAND pledge or some other valid reason can elect to withhold a license altogether. But that does not make the sky the limit for non-SEP royalties in the context of Georgia-Pacific royalty-type damages: a damages theory that is all about what royalty rate the parties would have agreed upon at the end of a reasonably-led negotiation. The way to enforce exclusivity is through injunctions.
One key aspect of a reasonable royalty is the appropriate royalty base. It's often the most important question. More than two years ago, I published a letter that Apple had sent to standard-setting organization ETSI with suggestions to ensure that right holders honor their FRAND licensing commitments, and I supported Apple's advocacy of a "common royalty base" for wireless baseband patents: "This common base, as between two negotiating parties, should be no higher than the industry average sales price for a basic communications device that is capable of both voice and data communications."
About a year ago Apple made this argument again in a filing with the ITC (in its efforts to avoid an import ban, which was ultimately vetoed). It argued that the proper royalty base for Samsung's wireless SEPs is the price of a baseband chip, i.e., approximately $10. Apple frequently compares (as do defendants against SEP damages claims and royalty demands all the time) the royalties sought by Samsung and Google to the price of the baseband chip, and on that basis (rightly in my opinion!) finds those royalty demands excessive.
But what's good for the goose is good for the gander.
Apple's patents-in-suit in the ongoing trial are software patents relating to Android. Four of them are just about Android, and the fifth one, slide-to-unlock, is a feature all Android device makers add to "stock Android" (and it involves mostly Google's program code as well). I'm unaware of any explanation by Apple of why the total cost of patent licenses relating to Android should not be limited to a percentage of the contribution that Android makes to the market value of a smartphone or tablet computer.
Only because Judge Koh is much more permissive with respect to damages claims than Judge Alsup (in the same district), Apple apparently didn't have to explain this striking contradiction between its "royalty base" position and its damages claims in the ongoing trial. The apportionment question came up in Oracle v. Google, and in that case it was not about the difference between the operating system and the complete device but just about the part of the Android mobile operating system that Oracle's asserted intellectual property rights represent. (I have said repeatedly that I consider the most likely next step in that case to be a remand to the district court, so there will likely be a damages trial.) Judge Alsup made very clear, however, that a zero royalty -- just because Google gives Android away for free -- was out of the question. Oracle was allowed to base claims on the mobile advertising revenue generated by Google and even the indirect network effects of Android benefitting Google's non-mobile businesses.
It would also be preposterous, of course, to argue (which no one has tried in any of the disputes I watch) that Apple should not be entitled to any royalty-type damages relating to Android because Google gives Android away for free. But Apple can't ignore -- and the court should never ever have allowed Apple to ignore -- the fact that mobile operating systems do not account for sky-high percentages of the entire market value of a smartphone or tablet computer. The fact that Microsoft now grants royalty-free Windows licenses to makers of small devices (anything with a screen smaller than 9") -- a decision by Microsoft that makes a lot of sense to me and is procompetitive -- makes it even clearer that Apple is out of touch with reality as far as reasonable royalties (and damages) relating to Android are concerned.
There's no shortage of right holders asserting patents against Android, so this question is going o continue to be an important one.
Last summer I found out that a replacement screen for the phone I used then (the Note 2, but I then bought the Galaxy Mega 6.3 instead of having it repaired) would cost me almost 300 euros ($400). The replacement would not have been limited to the screen: the spare part contained various other hardware components. Still this is one of various indications of the non-operating-system components of the total cost and market value of a smartphone (or tablet). Apple can't just ignore the value of all the high-end hardware that goes into these devices when making royalty demands over software patents.
On the other hand, the price at which a component lacking key patent licenses (whether it's an operating system or a baseband chip) is sold is not a sufficient royalty base because infringement can't have the effect of devaluing intellectual property. That is another reason why the royalty-free Windows deal for smaller devices is so interesting. Microsoft does secure patent licenses it needs, and shields its customers from patent assertions. The combination of Microsoft and Google's operating system-related pricing decisions is relevant. Apple should not turn a blind eye to such market parameters.
The purpose of this post was to raise a question and to highlight some key facts in this context, not to give a definitive answer on a highly complex issue. I will address this question on more occasions going forward and will, over time, take reasonably firm positions. But that is not necessary to establish the unjustifiability of Apple's damages claim in the Samsung case. On Tuesday I mentioned several experts who agree with me on Apple's damages claim in the ongoing trial. I still haven't become aware of anyone supporting it, but I have Rutgers Law School's Professor Michael Carrier to add to the list based on this interview with Bloomberg Law.
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