Friday, January 16, 2015

Ericsson may demand 1.5% of Apple's sales from LTE-compatible iPhones and iPads for its patents

This is a follow-up to yesterday's post on the dispute between Apple and Ericsson over standard-essential patent royalties. I published Ericsson's complaint first because, though it was filed two days later, it appeared on a publicly-accessible court docket sooner. I also want to show you Apple's complaint now and say a few things about it (below the document):

15-01-12 Apple Complaint Against Ericsson by Florian Mueller

Apple's complaint was filed by Wilmer Hale, one of the firms representing Apple against Samsung. Wilmer Hale originally focused on Apple's defense against Samsung but also became involved with offensive matters, especially in the Federal Circuit (access to injunctive relief). Mark Selwyn has been a very key player on Apple's external legal team in the Samsung cases, in the U.S. as well as abroad (there was at least one Mannheim case in which he officially attended the trial). Joseph Mueller (not a relative of mine) is a co-author of a study according to which smartphone patent royalties may exceed $120 per device and undermine industry profitability. There's no reason to assume he's responsible for Apple's damages claim in the second California Samsung case (over five patents) that I criticized so harshly last year, or the design patent and trade dress damages in the first case.

It's the fate of lawyers and their firms that they stand on different sides of debates from time to time, and in this case it's not even inconsistent per se because Apple's position is that standard-essential patents have little value while non-SEPs should be deemed very valuable. While it's intellectually consistent, I disagree with the unbelievable discrepancy between Apple and WilmerHale's positions on SEP vs. non-SEP royalties. It's like they want non-SEPs on small features to be hundreds, if not thousands, of times more valuable than SEPs without which those devices wouldn't work at all. For example, in the first Samsung case Apple sought $2.5 billion (mostly over design patents) from Samsung while arguing that half a cent per Samsung SEP was a FRAND royalty. To WilmerHale's credit, the aforementioned study raises concerns over patent royalties that are not limited to SEPs.

Apple's complaint cites a former director of patents and licensing at Ericsson who publicly stated in 2010 that Ericsson expected to seek LTE royalties of 1.5% of the end product price. The filing also says the following:

"In its public statements, Ericsson has never retreated from the position that it is entitled to an approximate 25 percent share of a total LTE 'royalty stack' based on a percentage of the end prices of entire LTE devices--such as full smartphone or full tablet computers. And Ericsson has never accepted that LTE licensing should begin with a component-focused royalty base, to which a reasonable rate is applied."

Apple's complaint then picks seven LTE patents Ericsson asserted in other litigation and asks the court to hold those patents non-essential to LTE (in which case Apple wouldn't need to license them merely because it claims its products are LTE-compatible) or, should the court disagree on non-essentiality, to determine a FRAND rate for each of them. This patent-by-patent approach is unacceptable to Ericsson, which is why it asked the court in Texas to determine a portfolio rate.

The much more fundamental controversy here is not whether a FRAND determination should be made on a patent-by-patent basis but the question of the royalty base (see also the second sentence of the paragraph quoted above).

Ericsson basically takes the position that everything you run on an iPhone or iPad depends on wireless connectivity, so they should get a percentage of the device price. Apple's position has been for a long time that the price of a baseband chip is the proper royalty base against which some percentage should be applied, arguing that a "jalopy" and an expensive sports car also pay the same highway toll.

Obviously, access to injunctive relief has become much more difficult for SEP holders as a result of certain judicial decisions and regulatory interventions and settlements in recent years, at least in the U.S. and in Europe. But there were two key FRAND-related battles that the "net implementers" (my term for companies that are implementers of standards to a far greater extent than they seek to exploit SEPs of their own) haven't been able to win. The first one is about whether the exceptional cases in which injunctive relief is available should depend exclusively on the patent holder's behavior (since that's the party that made a FRAND pledge in the first place) or on both parties' conduct. The likes of Google (Motorola) succeeded in convincing judges and regulatory authorities that FRAND is a two-way street and an absolutely unwilling licensee may be enjoined from further infringement, as opposed to one that makes a good-faith, serious effort to obtain a license. There's no reason to believe that courts and regulators will change their stance on this one anytime soon. But the second question is the one Apple has now put front and center in its California case against Ericsson, and it's one on which the jury is still out though Apple does face a significant (or maybe even steep) challenge. The royalty base.

Even Judge Robart held in the Microsoft v. Motorola FRAND contract case that a royalty based on the price of a complete product as opposed to that of the smallest saleable unit (which Microsoft proposed in that case and which Apple is arguing now in the Ericsson case) may still be FRAND, as long as the percentage is low enough. However, in a different case (in Chicago), Judge Holderman agreed with a group of defendants against Innovatio's WiFi claims that the chipset price as the proper royalty base.

It won't be easy for Apple to get a bright-line rule that a FRAND commitment is violated merely by using a different royalty base. In procedural terms, I think Apple would have to take the Ericsson case all the way up to the Supreme Court--and while there are reasons to assume that Apple will drop this case as soon as it can reach a reasonable deal with Ericsson, the question is strategically important enough to Cupertino that it may pursue this as a matter of principle.

While I'm not aware of any ruling in which a U.S. or European court categorically ruled out injunctive relief over SEPs even against unwilling licensees, it looks like the law on the royalty base isn't settled yet, so this could be an increasingly interesting case over the next few years. The days are long gone when this was mostly a "FRAND Patents" blog, but I plan to look at this dispute from time to time.

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