Saturday, November 7, 2015

Ericsson wants to obtain Apple's carrier agreements in order to buttress its patent royalty demands

I write about discovery disputes only once or twice a year because most of them don't matter to anyone other than the parties. But two letters filed by Apple and Ericsson in the Northern District of California last night are worth taking a look because the underlying legal question is of the utmost importance--even more important than their Alice motion process.

Ericsson wants to compel Apple to show its carrier agreements so Ericsson can see which commercial benefits Apple derives form those partnerships, such as

  • volume commitments,

  • preferential marketing treatment,

  • network traffic priority,

  • agreements to sell other Apple products,

  • development subsidies,

  • lump sums for the right to resell and service Apple devices, and

  • portions of monthly subscriber fees

Ericsson argues that this information is relevant because it shows what commercial benefits Apple derives from wireless technologies (co-)developed by Ericsson, and describes other discovery methods such as depositions of Apple witnesses as inadequate (this post continues below the document):

15-11-06 Ericsson Letter Re. Apple's Carrier Agreements by Florian Mueller

Apple opposes this discovery request. Apple basically says that those carrier agreements might be relevant in connection with damages over non-standard-essential patents, but have no bearing on a fair, reasonable and non-discriminatory (FRAND) royalty, a context in which standard patent damages rules can only be applied with certain modifications of the Georgia-Pacific factors (this post continues below the document):

15-11-06 Apple Letter Re. Ericsson's Discovery Request for Carrier Agreements by Florian Mueller

When this dispute started, I wrote that the question of the proper royalty base was going to be the most important one in this dispute. Apple's position is that the difference between the price of an iPhone and that of a cheap "feature" phone (colloquially also called "dumbphone") is unrelated to wireless communications standards. I support Apple on that one; I'm just more consistent in that regard than Apple, so I believe the "smallest saleable unit" approach should, for example, also apply to mobile operating systems, which in Android's case suggests minimal royalties.

In the famous Microsoft v. Motorola "Robart case" the question of the proper royalty base was not resolved the way I'd have liked to see it addressed. In a way, Judge Robart did everything right because the Ninth Circuit handed him a first-class affirmance (even twice: the first one with respect to a preliminary injunction preventing Motorola from enforcing two German patent injunctions against Microsoft, and the second one with respect to his final FRAND ruling). First-class, wholesale affirmance is truly remarkable when someone has to actually venture into unchartered territory, as Judge Robart had. Commentators thought that Judge Alsup had made his non-copyrightability decision in Oracle v. Google very appeals-proof, but it was a flawed ruling in various respects, so very hard to defend on appeal that it would be too diplomatic to say it merely failed to impress the circuit judges. By contrast, Judge Robart really made all the right choices, and the results speak for themselves.

But Judge Robart just stopped short of holding Motorola's royalty demand to be out of the FRAND ballpark simply for using an impermissibly broad royalty base, though he did express skepticism about a FRAND royalty rate based on the entire price of a multifunctional device. It was the only context in which I was disappointed because I thought Judge Robart could have done (even) more to give meaning to FRAND.

Apple v. Ericsson is now the dispute in which this unfinished FRAND business has to be dealt with, and which (given how much is at stake between these parties) might fix the problem. Injunctive relief over standard-essential patents is still a bit of a problem because of the way the ITC approaches cases (just like the ITC is also considered to largely ignore the Alice case law), but it's no longer a pressing problem. By contrast, royalty demands based on the entire price of a complex device still are a huge issue.

Judge Robart had basically said that a percentage of the price of an entire device just has to be low enough in order for the bottom line (the royalty) still to be in compliance with a FRAND licensing obligation. He doubted that it would work, and in Microsoft v. Motorola, it obviously didn't for Google/Motorola. But he didn't rule it out categorically.

Without a bright-line rule on the royalty base, Ericsson is right to demand access to Apple's carrier agreements. But I keep my fingers crossed that Apple will ultimately prevail over Ericsson in such a way that the much-needed bright-line rule against SEP royalty demands based on entire revenues from the sale of multifunctional devices will be established. The current discovery dispute only underscores the need for such a rule. For SEP trolls (and Ericsson is unfortunately a non-practicing entity now with respect to Apple's product markets), the ability to obtain carrier agreements is desirable because someone might pay up to (among other things) avoid that details of those deals end up being discussed in public filings or at trials.

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