Wednesday, July 19, 2017

Qualcomm now suing Apple in Munich and Mannheim over energy-efficiency patents

This here is the latest development relating to Qualcomm's dispute with (not only, but most prominently) Apple. A few hours ago I just blogged about multiple U.S. court filings by Apple and four of its contract manufacturers and noted that there is an ever stronger alliance of companies critical of Qualcomm's business model.

A German news agency, dpa, now reports that Qualcomm has filed patent infringement lawsuits against Apple in the Munich and Mannheim Regional Courts (equivalent to U.S. district courts) over one patent in each venue. Both patents-in-suit reportedly relate to battery efficiency, so they may be from a couple of the patent families Qualcomm is asserting against Apple in the ITC.

Considering Quinn Emanuel's representation of Qualcomm in the U.S. and the choice of venues, I venture to guess that QE's German branch is involved. If so, Qualcomm has great representation over here, but whoever their counsel may be, Apple has an excellent defensive track record in Germany, where it typically works with Freshfields.

The dpa story mentions that Qualcomm believes the German legal system is favorable to patent holders' interests. Qualcomm is seeking a sales ban against all iPhones sold in Germany. The ITC complaint is limited to iPhones without a Qualcomm chip, but Apple isn't selling Qualcomm-based iPhones in Germany anyway (just devices with Intel chips).

In terms of timelines, the courts in Munich (depending on which panel of judges the case is assigned to) and Mannheim tend to be faster than the ITC--and there is no equivalent to the ITC's public-interest consideration or presidential veto.

The judges at the specialized patent infringement panels in Mannheim and Munich understand smartphone technologies very well. They are also first-rate case managers. Since German law doesn't have juries and even expert testimony can normally be avoided at trial (parties usually just file expert reports, and even if they bring experts along to the courtroom, they don't get much speaking time, if any), trials often take only an hour and a half. The judges typically walk into the courtroom with a very clear idea as to the outcome-determinative issues and ask very targeted questions. When I started watching those kinds of cases, I was a bit shocked at what kinds of trivial patents sometimes win the day in German courts (and result in injunctions, which are a legal--not equitable--remedy), but over time I thought they were increasingly balanced. While I have yet to see a patent in this industry (including Apple's patents, to be sure) that I believe justifies a 20-year monopoly, I respect other views and can separate that part from the competence and fairness I saw over and over again. Qualcomm shouldn't expect a cakewalk, much less against Apple.

[Update] On Friday, Qualcomm actually filed the following in San Diego: "Qualcomm respectfully requests that the Court enjoin Apple from pursuing its Foreign Actions and from initiating additional duplicative foreign actions against Qualcomm during the pendency of the U.S. Action." I've uploaded that PDF to Scribd. So Qualcomm doesn't want Apple to sue abroad, but views patent infringement matters differently. Today's German filings don't lend extra credibility to Qualcomm's motion for an anti-suit injunction in the U.S., even though Qualcomm will have thought how to thread the needle and distinguish its own foreign action from Apple's.

dpa just told me on Twitter that the German patents-in-suit are from the same patent families as two U.S. patents:

[/Update]

Just like in the U.S., Qualcomm made a well-orchestrated announcement. At 5 AM in the morning by San Diego time (unless they already prepared it beforehand), dpa quoted Qualcomm's top lawyer. I haven't seen a more PR-oriented litigant in this industry. There was a lot of PR activity related to the Nokia-IPCom dispute, but that was nothing in terms of orchestration compared to what Qualcomm is doing now. For example, on the occasion of its ITC complaint, Qualcomm published a very professionally-crafted infographic...

Apple is very low-key in this regard. But as I wrote toward the end of my previous post, it appears to me that Qualcomm is placing a whole lot of emphasis on doing what it believes prevents investors from shorting the stock, and that priority may not always be the best choice with a view to litigation. Apple can and does afford the luxury of strictly focusing on a few key issues--and Apple has a broadbased alliance of companies and other stakeholders on its side.

There's so much that Apple and Qualcomm cannot agree on, and apparently "the name of the game" is one of those areas of disagreement.

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Apple and its contract manufacturers present united, ever stronger front against Qualcomm

On Monday, four of its contract manufacturers (the ones Qualcomm is suing in the Southern District of California) impleaded Apple into Qualcomm's breach-of-contract suit. Before midnight on Tuesday, Apple and its contract manufacturers (the most well-known of which is Foxconn) made various filings in San Diego. It will definitely take me some time to digest, but as I follow the various Qualcomm matters closely, I can share some observations here already.

First, an overview of the kinds of documents that have just been filed:

  • The contract manufacturers responded to Qualcomm's complaint. That one alone spans almost 250 pages (without exhibits). You can find it below this list or on Scribd.

  • The contract manufacturers oppose Qualcomm's motion for a preliminary injunction. I uploaded that one to Scribd as well.

  • Apple additionally opposes Qualcomm's preliminary injunction. It has asked the court for permission to file its own opposition brief, which I've uploaded to Scribd, too.

    In a recent post I got the "obstruction of justice" theory wrong. I now have to correct what I wrote then: I thought the Qualcomm suit against contract manufacturers was considered obstruction in its own right, but it's now clear that what Apple means is something I also find extremely objectionable: Qualcomm's contract terms according to which companies like Apple aren't allowed to work with competition authorities.

  • Apple filed an answer to the third-party complaints by its contract manufacturers. Apple unequivocally stands by the manufacturers and basically says: "Qualcomm isn't entitled to what it claims, but if all else fails, the manufacturers are contractually entitled to indemnification from us as per the terms of our agreements with them." That's good news for the contract manufacturers since, theoretically, Apple could have disputed both Qualcomm's claims and the contract manufacturers' entitlement to indemnity. Others have done so in comparable situations for sure.

  • Apple and the contract manufacturers jointly seek consolidation of this case with Apple's case against Qualcomm. Ever since Qualcomm brought its case against the contract manufacturers I've taken a consistent position on it. I now dare to predict that consolidation is a slam dunk. It would have been a slam dunk even if the contract manufacturers hadn't challenged some of Qualcomm's patents (which Apple is also challenging), but now there is so much overlap I can't imagine any court in the world would want to make a duplicative effort of gigantic proportions.

Here's the 268-page booklet with which the contract manufacturers responded to Qualcomm's complaint against them (this post continues below the document):

17-07-18 Contract Manufacturers' Answer to Qualcomm's Complaint by Florian Mueller on Scribd

With so many trees before us, let me make my little contribution to seeing the forest. No point in going into detail on things that are common and expected, or even boilerplate. What matters now is the strategic landscape, and when quickly going over these filings I tried to identify the parts that go that extra mile and say something about the parties' relationships and resolve.

While the contract manufacturers say they would have had to implead Apple into the case anyway (if Apple had so requested, which it may informally have done anyway), and while it's a reasonable assumption that their indemnification also depends on them at least making reasonable efforts to defend themselves, those contract manufacturers are independent parties, not like wholly-owned subsidiaries of Apple Inc.

The manufacturers raise three dozen affirmative defenses, which is at the upper end of the range but not unprecedented. The really impressive part is where they raise counterclaims: 67 counts. Those fall into two groups, either one of which is very bad news for Qualcomm:

  • FRAND-related antitrust and contractual counterclaims (on that basis they are, for example, seeking a disgorgement of whatever was paid on top of FRAND), and

  • patent invalidity, non-infringement, and exhaustion.

Through their FRAND claims, the contract manufacturers raise the kinds of issues that antitrust authorities in multiple jurisdictions, Apple, and consumers have raised (and that many others have supported through amicus briefs and an open letter to President Trump).

The patent claims aren't nearly as fundamental as the FRAND claims, but in terms of the contract manufacturers throwing down the gauntlet, they are huge: licensees are often contractually barred from challenging licensed patents, and even where they would be free to do so, they rarely do. To me, this decision on the contract manufacturers' part means that they want to bring about change regarding Qualcomm's practices, and they don't want it to any lesser degree than any of the other stakeholders I mentioned in the previous paragraph.

I'm pretty sure the motion for a preliminary injunction will fail. Qualcomm can't show a likelihood to succeed on the merits, and irreparable harm (despite the amounts being substantial) is something else than "to get our money," a quote from a public statement by Qualcomm's top lawyer (that quote appears in the manufacturers' opposition brief). Qualcomm still has the chance to argue irreparable harm in its reply brief, but so far I'm really very skeptical. And, as I said, Qualcomm won't be able to dissuade the court from consolidating those two huge cases.

The contract manufacturers could have done a lot less here than they have. A whole lot. Qualcomm has now made itself some additional enemies, and at least some of those enemies have considerable clout in China, a jurisdiction that has previously looked into Qualcomm's business model.

So far, Qualcomm's best initiative in all those U.S. cases was its motion to dismiss the FTC's complaint (there was a possibility that some kind of amendment would have been required, though it didn't happen), and it's too early to take a position on its ITC complaint, but its decision to drag the contract manufacturers into this dispute looks like its worst mistake. For now at least. Instead of hiding behind Apple, the manufacturers are now playing an active role, and their perspective is in some ways complementary to Apple's--and vice versa.

The motion for a preliminary injunction is a downright Hail Mary pass. One might say the same about any attempt by Qualcomm to oppose consolidation. It's very clear to me, and I know a lot less about all of this than Qualcomm's executives, in-house and outside counsel. So why are they doing this at all?

I can't help but make the observation that Qualcomm is struggling here because of conflicting goals:

  • antitrust investigations/decisions in different jurisdictions (sometimes it's hard enough for companies if they have to design a strategy just because of a couple of investigations, with a potential move being good in one jurisdiction and bad in another, but here there's also private litigation in parallel),

  • Apple's case,

  • the contract manufacturers' claims (consistent with Apple's, but still a new challenge that Qualcomm could have avoided),

  • PR considerations (Qualcomm basically issues a press release every time it files a complaint), and

  • investor relations (somewhat related to PR, and all about preventing the stock price from falling further and further) and fiduciary-duty considerations.

It must be incredibly difficult at times for Qualcomm to set its priorities. Just one example: its action against the contract manufacturers serves the purpose of showing to investors that it's pushing very hard to collect money, and since it's about shareholders' money, it might be that Qualcomm's decision was driven by fiduciary-duty obligations, though a preliminary injunction for the purpose of collecting money is so outlandish that I'm not sure anyone could have held them liable for not trying. It may also be a means of showing to antitrust authorities that Qualcomm believes it never committed any wrongdoing related to licensing. But the PI motion will most likely fail; Qualcomm now has additional enemies; and consolidation will almost certainly happen, so everything will only get harder and more time-consuming for Qualcomm in the end.

A related observation: public statements of the "to get our money" kind can backfire. At least that's what the contract manufacturers' lawyers think, which is why they quoted that passage.

To the extent Qualcomm tries to shield its directors and officers from liability issues, that's a necessity, but it doesn't make its complaints and motions any more meritorious. If Qualcomm goes beyond an absolute necessity and just tries to make investors feel as good as possible about an increasingly difficult situation, that will only have short-term effects because sooner or later the only thing that will matter is the actual outcome (in terms of judgments or a settlement). Technically, the jury is still out on this, but common sense suggests that Qualcomm should have tried to focus just on Apple and the regulators and should have left the Foxconns of this world alone. Dragging them into this--apparently a boomerang--makes things harder, not easier, and slower, not faster, for Qualcomm as it seeks to defend its business model and licensing terms, which are now being challenged from multiple sides and angles, in multiple jurisdictions, by multiple types of stakeholders.

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Tuesday, July 18, 2017

Apple accepts invitation by its contract manufacturers to join another Qualcomm fray

On Monday by San Diego time, the four Apple contract manufacturers who have to defend themselves against a Qualcomm contract suit in the Southern District of California (Foxconn/Hon Hai, Pegatron, Compal, and Wistron) each filed a third-party complaint for contractual indemnity against Apple, and based on what they say and what I can easily imagine, Apple is more than happy to join this additional fray. Here's Foxconn's complaint (this post continues below the document):

17-07-17 Foxconn Impleading Apple in Qualcomm Case by Florian Mueller on Scribd

Paragraph 22 of the complain with which Foxconn impleads Apple says that "at Apple's request, Foxconn must implead Apple into the action." While the complaint doesn't affirmatively say that Apple requested this invitation, paragraph 23 does state that "Apple has consented to be impleaded into the current action because it has an indemnification obligation to Foxconn, and so that it may assert various claims and defenses to Qualcomm's Complaint to minimize or eliminate its liability for such indemnification." So it's fair to say that, at a minimum, Apple gladly accepted this invitation. That presumption is based on the representation that Apple never intended to deny its indemnification obligation.

The fact that the contract manufacturers have decided to implead Apple into this case (adding yet another Qualcomm case to Apple's list of pending lawsuits) enables Apple to take even more direct control of its Qualcomm-related destiny.

In April, Qualcomm (in its counterclaims to Apple's Southern California complaint) already alleged that Apple had interfered with Qualcomm's contractual relationships with the contract manufacturers, which is why the related royalty payments ground to a halt a few months ago. Therefore, it really never made sense to me in the first place that Qualcomm brought a separate action against the contract manufacturers (in which it has meanwhile requested a preliminary injunction): the thing to do, in my view, would have been for Qualcomm to add the contract manufacturers to the case as third-party counterclaim defendants.

Now that the door has been opened to Apple in the contract manufacturers case and that Apple has apparently walked through it without anyone having to drag it into the case against its will, there are two cases pending in the same district court relating to the same patent royalty payments to Qualcomm over the same Apple products. Efficient use of judicial resources is something else.

In other news, Qualcomm's CEO has expressed his belief that the Apple dispute would be settled out of court. The question is, however, when. Depending on what decisions come down before, and also depending on what further headway the FTC and other competition authorities make against Qualcomm, the industry at large and, ultimately, consumers will hopefully benefit from it. This large-scale, cross-jurisdictional litigation will have been worth its while if, when all is said and done, chipset makers like Intel have a FRAND license to Qualcomm's standard-essential patents.

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Tuesday, July 11, 2017

Qualcomm's corporate structure and overseas patents: key issues in answer to FTC complaint

A couple of weeks ago, Judge Lucy Koh of the United States District Court for the Northern District of California denied Qualcomm's motion to dismiss the FTC's antitrust complaint. My theory is that Qualcomm was trying to necessitate an amended FTC complaint, ideally (from Qualcomm's point of view, not mine) to the effect that a FRAND rate-setting determination would have become necessary, in which case Qualcomm could have tried again to consolidate the FTC's case with Apple's case in the Southern District of California since I doubt that two federal courts (here, even in the same state) would have wanted to make duplicative and most likely inconsistent FRAND determinations. But Judge Koh was FRAND-friendlier than I would have thought, so Qualcomm had to file an answer to the FTC's complaint (almost six months after the filing of the competition authority's complaint).

As I said (in different words) in my commentary on Judge Koh's denial order, she went beyond the call of duty and explained her view of the law and many of the alleged facts beyond what would have been strictly necessary to deny a motion to dismiss. The noose is tightening for Qualcomm, and any FTC officials and commissioner(s) supportive of this case have already made so much headway--and the FTC's case has received such broadbased industry support in the form of amicus briefs and an open letter to President Trump--that I remain optimistic (not without caution, though) about the Administration's determination to fix the issue(s).

For the most part, Qualcomm's answer to the complaint is boilerplate. It's the usual deny-everything-that-is-not-110%-undeniable thing, but I'll highlight two aspects that I believe are going to be interesting as the case unfolds (this post continues below the document):

17-07-10 Qualcomm Answer to FTC Complaint by Florian Mueller on Scribd

In paragraph 17 of its complaint, the FTC described (in addition to stating Qualcomm's legal domicile and some financials) Qualcomm's corporate structure as follows:

"Qualcomm's principal businesses are the development, design, and sale of baseband processors and other semiconductor devices used in cell phones and other mobile consumer products (collectively, 'handsets'), and the licensing of intellectual property related to cellular technology. Qualcomm sells cellular baseband processors through a business unit called 'Qualcomm CDMA Technologies' or 'QCT.' Qualcomm licenses its intellectual property rights through a business unit called 'Qualcomm Technology Licensing' or 'QTL.'"

Normally, one would think that there's no reason Qualcomm would feel forced to deny the above. It's just so basic and, at first sight, nonjudgmental. Isn't Qualcomm selling baseband processors? Isn't it licensing patents? Isn't it doing the former through QCT and the latter through QTL? What's incorrect here? But Qualcomm denies the FTC's portrayal of its corporate structure and offers its own version instead:

"(ii) Qualcomm's businesses involve the development and commercialization of digital communications technologies; (iii) Qualcomm conducts business through reportable segments including Qualcomm CDMA Technologies ('QCT'), which develops and supplies integrated circuits and system software for use primarily in voice and data communications, and Qualcomm Technology Licensing ('QTL'), which grants licenses or otherwise provides rights to use portions of Qualcomm's intellectual property portfolio[.]"

I believe Qualcomm is trying to nuance its corporate structure here because it will try to somehow argue (which is going to be a tall order and I doubt it will persuade Judge Koh) that the Supreme Court's recent Lexmark ruling on patent exhaustion wouldn't apply to Qualcomm's situation.

Most of Qualcomm's nine defenses (stated at the end of the document) are legal theories that are identical or related to what didn't persuade Judge Koh in connection with the motion to dismiss, plus theories according to which whatever may appear anticompetitive is actually good for consumers (or, conversely, whatever remedy might appear procompetitive would ultimately harm consumers). Considering how much I, as a consumer, believe to have indirectly paid to Qualcomm over the years (vs. what other patent holders presumably collected), I disagree. In particular, the consumer-friendliest remedy would be to enforce Qualcomm's "to all comers" FRAND licensing obligation so that Intel, Samsung and others could sell baseband chips to device makers that come with a license to Qualcomm's standard-essential patents.

The defense that I think will raise the most interesting discussions is the ninth (and last) one:

"Any requested relief that would apply to the licensing of patents issued by a jurisdiction other than the United States would be barred as beyond the reach of the U.S. antitrust laws, including the FTC Act, and/or as an improper application of those laws due to principles of international comity."

Patents issued by other jurisdictions do raise special issues, but aren't necessarily "beyond [...] reach." For example, the Ninth Circuit upheld Judge Robart's antisuit injunction against Motorola Mobility. Presumably the FTC will explain its theories with respect to ex-U.S. patents in its reply.

Let's assume, just hypothetically (it really doesn't mean an agreement or disagreement with Qualcomm's ninth defense), a scenario in which Qualcomm would lose the wider war but win the foreign-patents battle. In the single most lucrative market for most companies in this industry, Qualcomm would then, for example, have to grant patent licenses to rival chipset makers. In the rest of the world, it could still deny a license to the likes of Intel, but only if antitrust authorities and courts in those other jurisdictions let Qualcomm get away with that behavior when the country in which Qualcomm is headquartered doesn't. It would likely be hard for Qualcomm to convince competition enforcers in places like China and the EU that they should accept behavior that was deemed anticompetitive and harmful to consumers in the United States.

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Friday, July 7, 2017

Qualcomm seeking U.S. import ban against iPhones with Intel (or other non-Qualcomm) chips

[Update on July 8, 2017] added ITC complaint, mentioned routinely request for public interest statements, domestic industry infringement claim charts [/Update]

Yesterday evening, Qualcomm did something it had already indicated a couple of months ago and finally announced the filing of an ITC complaint (request for an exclusion order, i.e., import ban by the United States International Trade Commission) against Apple (this post continues below the document):

17-07-06 Qualcomm v. Apple ITC Complaint by Florian Mueller on Scribd

The announcement also mentioned a companion complaint filed with the United States District Court for the Southern District of California in San Diego (this post continues below the document):

17-07-06 Qualcomm v. Apple Patent Infringement Complaint by Florian Mueller on Scribd

Qualcomm also published an infographic on the six patents-in-suit (PDF), which stresses a point made in the press release: the six patents Qualcomm is asserting are, according to its holder, not essential to an industry standard. About four years ago, the Obama Administration vetoed an import ban Samsung had obtained against Apple over a standard-essential patent (SEP), a decision that upped the ante for anyone trying to obtain an ITC import ban over a FRAND-pledged SEP.

Let's believe Qualcomm that those patents--hardware and software patents relating to energy efficiency--aren't standard-essential (a claim that is perfectly credible given the subject matter of those patents). Before any remedies can be ordered, Qualcomm firstly needs to prevail on the merits. I haven't watched the ITC in recent years, but I was watching it for several years during which it was a monumental smartphone patent graveyard. Unlike in district court, where juries rarely invalidate patents, ITC judges are pretty receptive to invalidity arguments, and they aren't easily persuaded of an infringement allegation either. Quite often, complainants run into a situation in which a patent claim can be construed more narrowly or a bit more broadly, and in one case it isn't infringed while in the other event it isn't valid.

Qualcomm highlights that all six patents issued in the last four years. While an exclusion order, should Qualcomm obtain one, could then stay in effect for longer than it could over very old patents, youth isn't a virtue with respect to validity. It means that there must be a whole lot of prior art out there that also deals with saving battery power when a mobile device performs certain operations. The (claimed) priority dates of all of those patents but one are from this decade, and the sixth one claims priority from a 2008 application. Many other companies in the industry were working on power-saving techniques at the time--and long before.

The non-standard-essentiality of those patents, while avoiding one major obstacle to ITC exclusion orders and (in federal court) injunctive relief, is a major limitation on the infringement side. Other major patent holders had very limited success with non-SEP infringement assertions. Typically, even where infringement was established, defendants usually came up with pretty good workarounds, often of the kind that consumers didn't even notice. However, workarounds are more complicated when patents claim certain hardware features/configurations, as some of Qualcomm's patents-in-suit do. Still, should Qualcomm prevail on the merits, the ITC has previously granted rather generous transitional periods during which defendants were able to modify their products so as to steer clear of further infringement.

Qualcomm is clearly worried about the public interest analysis that the ITC will have to perform (and that the Trump Administration may additionally perform). Its choice of asserting non-SEPs (despite the challenge this represents on the infringement side) is only one indication. In a Wall Street Journal interview, Qualcomm's top lawyer explained that the request for an import ban relates only to iPhones with non-Qualcomm (practically, that would simply mean Intel) baseband processors because of the public interest factor: Qualcomm argues that it would be OK to block some iPhones from importation into the U.S. while others (those using Qualcomm chips) would remain available. In other words: Qualcomm says that blocking all iPhones might run counter to the public interest, but blocking some (especially then the latest models at the time) would not.

Whenever an injunction (here, it's called an exclusion order, but the effect is the same) is sought, courts are potentially more willing to grant it if it's narrowly-tailored than if it appears overreaching. But Qualcomm told the Wall Street Journal that it doesn't want to "affect in unecessary ways competitive conditions in the U.S. economy." When I read that sentence, I can't help but wonder whether Qualcomm has forgotten about all those competition authorities the world over who are concerned about its exclusionary practices with respect to other chipset makers. Now Qualcomm is saying that it's better for competition if it excludes devices that come with Intel chips than excluding its own.

Is Qualcomm concerned about patent exhaustion in light of the Supreme Court's Lexmark ruling? That depends on which components of a smartphone practice the asserted patents. To its ITC complaint, Qualcomm attached domestic industry claim charts, i.e., its theories as to why its own products practice the patent technologies (that's the best way to satisfy the ITC's domestic industry requirement). So if the iPhones included those products, exhaustion would apply. In any event, the connection with the public interest context is clear, and "only" banning iPhones with Intel chips would raise serious issues. We're well over a year away from the earliest point at which the ITC would make a final initial determination and, if that preliminary ruling suggested an import ban, would request the most important round of public interest submissions (the complaint also triggered a request for input, but the most important submissions would likely be made at a later stage). Nevertheless it's easy to imagine what concerns the FTC--and even Apple's fiercest competitors--as well as industry bodies and public-interest advocacy groups would express at that stage...

What Qualcomm hopes to achieve is obvious: it hopes to gain leverage over Apple that would result in a comprehensive settlement. In that case, some of the antitrust and exhaustion issues raised by Apple in its complaint(s) against Qualcomm wouldn't get adjudicated. But the rest of the industry is presumably hoping that Apple's initiatives bring clarity and force Qualcomm to change its practices. That's why I just said that even Apple's fiercest competitors would oppose an iPhone ban in this case, even though they could theoretically hope to gain market share. Also, other smartphone device makers don't want to see their own devices banned.

It's another battle in a wide-ranging war, but once again it comes down to Qualcomm vs. device makers and other chipset makers. Apple is doing all of this proactively, but the way to look at this is that Apple is also a proxy here for the likes of Samsung, Intel, Huawei... you name them.

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Wednesday, June 28, 2017

Judge Koh shows the way: FRAND non-compliance can be established without rate-setting exercise

Qualcomm tried hard, but unsuccessfully, to get the FTC's antitrust lawsuit in the Northern District of California dismissed. Maybe Qualcomm hoped, more realistically, the FTC would have to amend the complaint in some important ways, possibly complicating the case to the point where the U.S. competition agency would find it hard(er) to justify using the resources required for pressing on. The reason I suspected the latter is because, based on hearsay from about seven years ago, the European Commission's investigation of Qualcomm's practices with a focus on Nokia (now more of a Qualcomm friend than foe), essentially got derailed by scare of conducting a resource-intensive, complex and somewhat subjective (thus more likely to be overruled) rate-setting exercise. In the FTC case here, the presently-Acting Chair of the FTC, Maureen Ohlhausen, opposed the decision authorizing the complaint, and might have been the first decision-maker to argue that the case should be dropped or settled (the latter without any useful remedies) due to litigation economics. Industry concern over such a decision by the FTC was and remains real, as an open letter to President Trump showed in April.

Fortunately (though I was sympathetic to some of the arguments in Qualcomm's motion), the case is going forward on the basis of the FTC's original complaint (congratulations to the FTC's litigation team, whose partly-minimalistic approach has worked out so far) and without the hypothetical need (in a worst-case scenario, such as after consolidation with another case that involves rate-setting) for a jury trial. And the federal judge whom Qualcomm needs to persuade at the future bench trial has taken positions on the legal issues in the case that don't bode well for the San Diego patent holder and chipset maker. There is an important caveat here since the hurdle for denying a motion to dismiss is low, but the way Judge Koh has expressed her disagreement with Qualcomm's various legal challenges does go beyond what is strictly needed to deny the motion. Seriously, I've never been happier about a decision from the Northern District of California than this one (this post continues below the document):

17-06-26 Order Denying Qualcomm Mtd by Florian Mueller on Scribd

Here's a total non-starter to begin with:

"Qualcomm contents that FTC's allegations of above-FRAND royalties are nonetheless contradcited by the fact that the Complaint also alleges that Qualcomm has historically collected a royalty rate of 5%, and that this rate has not changed over time. [...] However, FTC's allegation that Qualcomm has continued to collect the same 5% royalty on the total value of a handset supports, rather than contradicts, the FTC's allegations that Qualcomm's royalty is above FRAND. As the Complaint explains, early handsets were primarily used only to transmite voice calls. [...] Accordingly, Qualcomm's cellular communications SEPs contributed significantly to the functionality and value of a 2006 handset. [...] By contrast, handsets today contain numerous features that are unrelated to cellular network connectivity, such as camereas, Wi-Fi access, and data storage. [...] Thus, Qualcomm's SEPs contribute far less to the value of a 2017 phone [than] they contributed to the value of a 2006 phone. [...] Nonetheless, Qualcomm continues to collect a 5% royalty from the total value of the handset today for Qualcomm's cellular communications SEPs, just as Qualcomm did a decade ago."

Taken together with SEP portfolio erosion (with respect to existing standards), this point is then reinforced:

"In short, that Qualcomm collects the same 5% royalty on the total value of a 2017 smartphone as Qualcomm collected on the total value of a 2006 phone, despite the fact that both handset technology [that's the previous point] and Qualcomm's SEP portfolio [have] changed dramatically over the past decade, supports FTC's allegations that Qualcomm's SEP royalty rates are above FRAND."

The passages quoted above can be reasonably interpreted as facts-based skepticism regarding Qualcomm's claims of being FRAND-compliant, which shows what Qualcomm is up to here. There's a lot more to it than merely finding that the FTC's pleadings are sufficient. The FTC has won the single most important battle in the FRAND context that Qualcomm could possibly have lost: the royalty-base question.

Since Judge Koh believes that the FTC's FRAND non-compliance theories are potentially sufficient to determine that Qualcomm charged supra-FRAND royalties, rate setting won't be necessary. The case will stay focused, and some of these issues (such as the royalty base) may at the next stage be analyzed in light of whether a reasonable fact finder could ever disagree with the FTC...

The royalty base question hasn't been resolved before. I was profoundly disappointed when Judge Robart didn't draw a bright line in this regard (in Microsoft v. Motorola). It's great that Judge Koh has this issue totally figured out in economic and technical terms.

The FTC-internal driving forces behind this antitrust action must be very happy and feel encouraged. Apple is litigating directly against Qualcomm in San Diego; Samsung and Intel filed informative and persuasive amicus briefs; regulators in other jurisdictions agree; and Judge Koh is now a thought leader, too. All that is missing is for Acting Chairwoman Ohlhausen (and others who may have shared her views so far) to join the mainstream. What the FTC is pursuing here is a just cause and, while most citizens won't ever realize, is perfectly consistent with the Make America Great Again vision. Qualcomm has done and continues to do impressive research and deserves to be compensated fairly and reasonably, not overcompensated at the expense of companies that make real products and, by extension, consumers.

Another legally very important issue on which Judge Koh has taken a fairly clear position (clearer than would have been necessary at this stage of proceeding) relates to the antitrust duty to deal with competitors, i.e., Qualcomm's obligation to honor its FRAND licensing promise vis-à-vis Intel, Samsung's components division, and others.

In connection with (among other things) Qualcomm's "no-license-no-chips" policy and tying, there was some argument over what the proper term for royalties changed on top of the chip price should be. The FTC consistently referred to it as a "tax" (a term that is also justified by Qualcomm's anachronistic approach to the royalty base), and Qualcomm understandably didn't like that. Judge Koh now calls it a "surcharge."

The following holding by Judge Koh is another highly important point to draw attention to (and one of the things that make me wonder whether Qualcomm can defend itself at all, unless regulators in different parts of the world all got the facts totally wrong, or whether it may ultimately just have to focus on remedies since it can't win the merits part):

"Thus, by violating its FRAND obligations twice over—by not licensing its competitors and by threatening to withhold its chips to induce OEMs to pay an above-FRAND royalty rate—Qualcomm raises the 'all-in' modem chip price that OEMs pay on all modem chips."

Finally, those of use who follow Apple v. Samsung (with all the talk there about a two-horse race etc.) have or will read with great interest how Judge Koh, who is also presiding over those Apple v. Samsung cases, views the anticompetitive impact of Qualcomm's exclusive rebate-based arrangements with Apple. In that context, she agrees with the FTC as well, though here she limits her analysis to minimum pleading standards. This does not necessarily mean that she's less convinced. It may very well have to do with the nature of the beast: the anticompetitive effects of past exclusive deals (that foreclosed others from supplying chipsets to Apple for many years) involve certain facts regarding market share (and segmentation, possibly) and also some even harder-to-measure aspects such as Apple being a company whose decisions others like to follow.

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Monday, June 26, 2017

Supreme Court requests U.S. government's input on Samsung's petition (2nd Apple case)

As the docket overview now indicates, the Supreme Court of the United States has decided to ask for the views of the Solicitor General of the United States on Samsung's petition for writ of certiorari relating to the second California Apple v. Samsung case. To be precise, this CVSG (Call for Views of the Solicitor General) is a CVASG--currently there is an Acting Solicitor General, Jeffrey Wall.

This means the Supreme Court's summer recess will be a busy period for the parties--and other stakeholders--as they will both be lobbying the Department of Justice.

Just last week, a Reuters story had the following headline: "RPT-U.S. Supreme Court and top patent court rarely see eye to eye" It is true that the relationship between the Supreme Court and the Federal Circuit is, well, special. That Reuters article is about a rare case in which there was affirmance, but high-profile reversals, such as recently on patent exhaustion in the Lexmark case, are more common.

This is nice progress for Samsung. The likelihood of certiorari being granted has increased substantially.

In connection with design patents (and involving the same two litigants), the DoJ filed an amicus brief that philosophically agreed with Samsung while procedurally leaving the door open for Apple to prevail regardless. After the DoJ had taken a clear position on the high-level issue (article of manufature), the whole argument was more focused on other questions. Some may view it as an exaggeration, but one could make a defensible case that the DoJ actually did a fair amount of the Supreme Court's job in that case.

It's too early to tell what positions the DoJ is going to take here. Once we all learn more about it, I'll comment. I'm cautiously optimistic, though. This case never was the kind of slam dunk that the design patents issue represented, but what the Federal Circuit did (and how it did it) was rather strange. That's not just my opinion. Mr. "Chisum on Patents" said so. And Samsung got fairly broadbased support from amici. There obviously are stakeholders who are against Samsung's petition, and while they didn't file an amicus brief since it would have been counterproductive (it would only have raised the profile of the issues), some will probably try to influence the DoJ now in ways that would benefit Apple (with a view to this case; in the long run Apple would probably benefit from reversal, possibly even in connection with any infringement claims by Qualcomm).

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Tuesday, June 20, 2017

Apple's amended San Diego complaint against Qualcomm leaves no doubt: many billions at stake

The wireless industry's economically biggest lawsuit--Apple v. Qualcomm in the Southern District of California--just got a whole lot bigger. Contrary to popular misbelief, it was never about "only" $1 billion but always had implications and ramifications to the tune of many billions. There is no more room for doubt now that Apple, which earlier today resoundingly rejected the accusation that it had throttled any of its iPhones, has amended its complaint (this post continues below the document):

17-06-20 Apple's Amended Complaint Against Qualcomm by Florian Mueller on Scribd

Why many billions? After reading the first few lines of a U.S. complaint, I always turn to what would come first in some other jurisdictions: the prayers for relief. These three new prayers for relief are "yuuuuuuge" in economic terms:

"L. Adjudge and decree that the royalty provisions in the licenses between Qualcomm and Apple CMs Foxconn, Pegatron, Wistron, and Compal are unenforceable as against public policy;"

"M. Order Qualcomm to disgorge non-FRAND royalties and royalties for exhausted patents that Qualcomm previously extracted from Apple, including royalties paid through Apple's CMs, and pay such unjust gain to Apple;"

"T. Award restitution of all excessive license fees that Apple paid;"

Prayer for relief L relates to Qualcomm's contractual relationships with Apple's contract manufacturers, whom Qualcomm is suing in the same federal court in San Diego and even seeking a preliminary injunction against. If Apple prevails on this one, the financial impact on Qualcomm's business would already be huge with respect to those companies' work on Apple's behalf, and it could even affect devices that those manufacturers build for other partners (at least indirectly, if not even directly).

Prayer for relief M, a disgorgement of any royalties paid on exhausted patents, would likely be a double-digit dollar amount for each and every U.S. iPhone or iPad that came with a Qualcomm chip and on which Qualcomm nevertheless collected patent royalties (and in this context, too, other companies such as Samsung could then seek the same later). Obviously, there can't be any double recovery, so if L and M succeeded, some reconciliation would be required. Exhaustion (of patents) is the "Word of the Day": in the original complaint, the word or fragment "exhaust" appeared 26 times, and now, in the amended one, a whopping 112 times: more than four times as frequently. This blog's loyal readers can imagine why: it's all because of the Supreme Court's recent Lexmark ruling, which basically said that if you sell a product that embodies any of your patents, you can't collect royalties from your customers and the downstream on those patents. I connected the dots between that case and the "double-dipping" aspect of the Apple-Qualcomm dispute, but even I wouldn't have expected that the letter sequence "exhaust" would become this pervasive in Apple's complaint.

Prayer for relief T would apply to all iPhones and iPads, with or without a Qualcomm chip. It would be a disgorgement of anything that Apple had to pay in the past, even if indirectly through contract manufacturers, in excess of a FRAND rate.

What also changed about the prayers for relief is that Apple is now attacking 18 Qualcomm patents (previously 9) and that Apple is trying to get various Qualcomm patents invalidated. Multiple prior art references are cited.

All in all, this new complaint is massive. The difference between the original complaint and the new one is, in terms of the potential impact on Qualcomm's business, comparable to the significance of the original one. Apple is doubling down, not in terms of the number of jurisdictions or suits, but in terms of the economic impact that this dispute may have.

Apple's rhetoric also appears to be sharper, though I must read the amended complaint in its entirety (I just wanted to comment quickly here) to be sure of that. For example, Apple is accusing Qualcomm of "retaliation, obstruction of justice, and greed." Professional judges ignore such rhetoric at the conscious level, and Qualcomm has tried the same in its answer to the original complaint. However, for a litigation watcher like me, rhetoric is relevant in certain respects, such as for understanding how much is at stake and how likely the parties are to settle in the near term. In my eyes Apple's credibility benefits from the broadbased support it has in this industry (and I can't see even the slightest indication that what Apple, Samsung, Intel and others are advocating here wouldn't also be good for consumers), but that doesn't mean I buy everything it says. "Obstruction of justice" is a claim I'm unconvinced of. Apple argues that Qualcomm's lawsuit against the contract manufacturers is among other things an attempt to collect royalties that include the rebates it has been withholding for some time, and in this case here (Apple v. Qualcomm), the basis for those rebates should be adjudicated. To me, this isn't necessarily an obstruction of justice since Qualcomm filed its case against the contract manufacturers in the same court. I believe Qualcomm should have added the contract manufacturers to this case (as third-party counterclaim-defendants), but "obstruction of justice" takes more than this. One might say so if Qualcomm opposed a consolidation of those cases, which I think the court may very well propose at some point. Prayer for relief L strongly suggests consolidation in my view.

As for rhetoric, Apple's amended complaint repeatedly labels Qualcomm's royalty rates as "usurious," and the word or fragment "extort" is found 12 times ("exort", "extortion", "extorionate", "extortionist"). That concept will presumably play a far greater role going forward than the "obstruction of justice" label. Qualcomm can point to various contract clauses, including one under which Apple had to sign that it wouldn't seek to benefit from a future ruling on patent exhaustion, but agreements that come into being due to extortion are ultimately unenforceable.

Even without the contract manufacturer context possibly being consolidated into this case, this litigation has enormous scope in its own right. For example, Apple's amended complaint stresses that Qualcomm must prove that some of its declared-standard-essential patents must indeed be proven valid and infringed. And now there are 18 Qualcomm patents that Apple thinks it can shoot down.

I'm starting to wonder how many years it will take before this case is over. Unless they settle, this may take even longer than my iOS app development project (where we're planning to go into a larger-scale beta test next month)...

But Qualcomm doesn't have to worry about Apple running out of cash to pay whatever royalties will ultimately be awarded. Even if this company, which is too rich to fail anyway, lost all its money overnight, Apple writes the following:

"[...] that [Apple] has posted a bank guarantee reflecting a FRAND royalty rate, and expressed a willingness to provide further guarantees for future years as needed, explaining: 'We believe this action shows our commitment to pay FRAND royalties once the amount is finally determined by the courts on a fair, reasonable and nondiscriminatory basis. This guarantee does not expire until 2026, and we can provide larger or additional guarantees for future years as needed.'"

Apple attached a letter to its amended complaint that Qualcomm had attached to its answer to the original complaint and counterclaims, but now the part about that bond is public. I don't understand why Qualcomm redacted it out in the first place. While Qualcomm obviously wants payments rather than guarantees, I've watched numerous lawsuits in which there was a whole lot of argument over such guarantees. This is important, and it's a good thing for Qualcomm to have such a guarantee, though it's not what Qualcomm primarily wants.

I hope to have identified the most important new aspects of the amended complaint. I'll take another look and update this post if necessary.

[Update] Apple points to an interesting procedural fact: Qualcomm didn't bring infringement counterclaims to Apple's original request for declarations of non-infringement, though such counterclaims are compulsory, meaning that failure to bring them now and in this case will preclude Qualcomm from bringing such infringement claims later in this case or in a different case. Maybe Qualcomm has so many patents that it doesn't care if some are practically unenforceable against Apple, but let's see how Qualcomm responds to this amended complaint... [/Update]

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Apple rejects Qualcomm's allegation of throttling iPhones, says "study" is "methodologically unsound"

Under a May 30 court order, Apple has a couple of deadlines today (June 20) in its antitrust/patent litigation in the Southern District of California, and when double-checking on the deadline, I just noticed that Apple made one filing one day in advance--a motion to dismiss Qualcomm's unfair competition counterclaim based on the allegation that Apple hobbled, throttled or whatever one may call it its iPhones that come with Qualcomm chip in an effort to make Intel's chips appear equally performant (this post continues below the document):

17-06-19 Apple Motion to Dismiss Qualcomm Cc by Florian Mueller on Scribd

As I wrote ten weeks ago, the legal relevance of this to the dispute is very doubtful at best (it certainly has no bearing whatsoever on the question of fair, reasonable and non-discriminatory licensing terms), so to me it looks like more of a PR maneuver. I can't even imagine that it would influence consumers' purchase decisions (if Qualcomm' objective is to promote its brand, a new stadium naming rights deal might work while court filings won't). Also, my research methods are limited to obtaining and analyzing publicly-filed court documents, and I can go further than that only in a few cases where program code is made available (depending on the platform and programming language), but I don't have access to a wireless performance test lab. Still, I wanted to point out that Apple (a) strongly refutes Qualcomm's "hobbling" allegation and (b) is trying to get that part thrown out at the earliest possible stage.

These are the passages in which Apple contradicts on the factual level:

"With the iPhone 7, Apple procured baseband processor chipsets not only from Qualcomm but also from its competitor Intel. But after the iPhone 7's release, a methodologically unsound 'study' questioned whether Apple had succeeded in its effort to standardize performance across all iPhones. In a public response, Apple truthfully stated that it had conducted its own studies, which showed consistent performance under relevant parameters." (emphasis added)

"Apple disputes the factual allegations in Qualcomm's counterclaim [...]">

"Qualcomm alleges that third parties found that Qualcomm chipsets outperformed Intel's under unverified conditions and methodologies; [...]" (emphasis added)

"Qualcomm relies on two so-called third-party studies for its claim that Apple's statement was false, but provides no factual allegations concerning the conditions under which these tests were performed or otherwise demonstrating their reliability or trustworthiness. [...] As an initial matter, it is apparent from the face of the Bloomberg article Qualcomm cites that the methodology of these 'studies' is questionable. The article states that 'measuring phone data speeds is difficult because performance can be influenced by weather and other factors beyond the control of wireless providers and phone makers.'" (emphasis added)

Apple consistently puts the word "study" (or its plural) in quotes...

Apple states at the very beginning of this motion that Qualcomm's claim against Apple is just meant to avoid competition from Intel:

"The claim, although nominally directed at Apple, blatantly targets Qualcomm's chief competitor in the market for premium LTE baseband chipsets, Intel, who dared to try and compete with Qualcomm."

That last subclause is reminiscent of the most brilliant passage in all those Samsung filings in its dispute with Apple, where Samsung, in its answer to Apple's first complaint back in 2010, ironically conceded not having ceased to compete with Apple. Without the irony, that portrayal of Qualcomm's motivation is reiterated later in the filing:

"At bottom, Qualcomm's counterclaim is an abuse of the UCL designed to limit competition from Intel and discourage Apple and other handset manufacturers from doing business with Qualcomm's competitors."

But Apple isn't asking the court to conduct performance tests and throw out Qualcomm's claim on that basis. Instead, Apple argues that

  • if anyone could claim to have "relied" on Apple's own representation of the performance situation (i.e., Apple saying that there are no discernible differences in performance between the different iPhone models), that would be someone who made a purchase decision on that basis, which Qualcomm obviously didn't (in the Northern District of California, a group of L.A. taxi companies failed with a claim against Uber regarding safety standards, and failed in court because the taxi drivers weren't going to do Uber rides themselves);

  • none of the conduct that Qualcomm described as wrongful is actually against the law (for example, Apple can conduct its own studies and talk about the results, and it's free to make design decisions and to choose business partners); and

  • Qualcomm has not alleged an "incipient violation of the antitrust laws, a violation of their policy, or spirit, or any other threat to competition."

The hurdle for a dismissal (especially a dismissal with prejudice, which is requested here) is high, but what I've read about the L.A. Taxi v. Uber case suggests that this motion may very well succeed. For the San Diego court, Apple's motion to dismiss may be an opportunity to dispose of something that is legally unrelated to what will actually decide the case but would make a lot of noise. In the alternative, it could be that just because of the PR impact of this the parties would fight extremely hard over the testimony and evidence admitted in this context. I view the "throttling" part as a mix of a sideshow and a potential quagmire.

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Monday, June 12, 2017

Qualcomm's NXP deal raises chip- and patent-related concerns: in-depth review by European Commission

More than five years ago, Google's acquisition of Motorola Mobility was delayed significantly by merger reviews on both sides of the Atlantic and U.S. regulatory approval was subject to certain promises related to patent enforcement. At the time, Motorola Mobility (the acquisition target) was aggressively asserting FRAND-pledged standard-essential patents against Apple and Microsoft. Against that background of blatant FRAND abuse, competition enforcers weren't prepared to grant fast-track approval.

Qualcomm's planned $45 billion acquisition of NXP Semiconductors, a leader in NFC and secure elements (SE) chips, is now also undergoing an in-depth review by the European Commission and possibly also in other jurisdictions (though the deal surprisingly got fast-track clearance in the U.S.). I'm just in the process of trying to find out more about NXP's patent dealings. But it appears that, unlike in the Google-Motorola case, it's the acquirer's conduct that adds to concerns over what might happen post-transaction. That is even more problematic since the acquirer, not the acquisition target, will make the decisions post-transaction. The press release the Commission published late on Friday contains a few keywords that sound all too familiar in the ears of anyone following the current flurry of antitrust activity relating to Qualcomm:

  • "bundling": Presumably this is about chips that might be the equivalent of having a baseband processor and an NFC/SE chipset in a single product. Bundling is a sensitive issue in the EU and the Microsoft Media Player case created some case law.

  • "tying": This is also a key issue in the U.S. FRAND abuse case. The FTC would want Qualcomm to offer its chipsets without requiring a patent license on devices that use other companies' chipsets, and as far as Qualcomm's own chipsets are concerned, patent exhaustion, which is stronger in the U.S. than ever after a recent Supreme Court decision, should take care of the licensing question.

    Intel raised the issue of a dual, mutually-reinforcing monopoly in a recent amicus brief. I had written about that kind of dynamic before. The worst-case scenario in the NXP context is now that Qualcomm might expand on its monopoly. A highly simplified way to put it would be that Qualcomm will go from a dual to triple or quadruple monopoly, forcing customers to buy chipsets of one kind if they want access to others, and/or designing its patent license terms (including "rebates") in such a way that companies will end up sourcing various types of chips from Qualcomm.

  • "increased royalties for customers": Qualcomm is synonymous with out-of-this-world royalty rates. Last month I quoted an Apple letter (which Qualcomm had attached to a court filing) according to which "Qualcomm forces the contract manufacturers and Apple to pay many times more in royalty payments than all the other cellular patent licensors combined!"

    Why has Qualcomm been able to command such royalty levels? It's not just a matter of innovation. They do a lot of R&D, without a doubt, but without the two mutually reinforcing monopolies, even Qualcomm couldn't collect many times the amount of royalties of the rest of the industry combined. If Qualcomm now gets more leverage on both the chip side and the patent side because of the NXP deal, things will get even worse.

    Qualcomm already holds more NFC patents and applications than any other company such as Sony (#2) or Samsung (#3)--almost 1,000, or roughly 5.5% of the pool. After acquiring NXP, Qualcomm's position will go up to approximately 1,350 patents and applications, putting Qualcomm far ahead of the rest (almost twice as many as Samsung, for example). While consolidation of patent ownership positions is still preferable over Nokia- and Ericsson-style privateering, it does raise issues when a company is known to overcharge.

  • "exclusion of competitors": NXP's competitors, just like Qualcomm's, are chipset makers. The only remedy that could address this concern would be that the combined company would have to license other chipset makers on FRAND terms.

While the nature of the concerns is familiar, the NXP deal involves different technologies than the other Qualcomm cases--and it affects additional industries. Mobile device makers will be affected since an increasing number of smartphones come with NFC. But NXP also appears to be a key supplier to automotive companies; otherwise the Commission's press release wouldn't "particularly" mention that industry. Even independently of its contemplated acquisition of NXP, Qualcomm is trying to position itself as a technology licensor to automotive companies such as in connection with wireless electric vehicle charging. Qualcomm's inductive charging road is impressive.

In Europe, automotive companies have a lot of political clout. Maybe some of them have, directly or indirectly (through trade associations and national governments) made the EU Commission's Directorate-General for Competition (DG COMP) aware of their industry-specific concerns.

Reuters reported on Friday that Qualcomm is confident it can address the EU's concerns. I'm sure that the EU doesn't want to block the deal if it can be avoided, but any remedies would really have to have teeth. Negotiations are likely going to continue. The next key juncture is when the Commission will have to decide whether to issue a Statement of Objections (SO), which it will likely begin drafting soon in case it needs to take that step. It's been almost eight years since the SO against Oracle's acquisition of Sun Microsystems (the only SO against a merger during that entire year). At the time, I was a consultant to a complainant. Now I'm just an app developer and blogger, and I don't know how much time I'll find to dig into the details of this process, so if you can support my efforts with information, please make use of the contact form here. I protect my sources, of course.

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Tuesday, June 6, 2017

Samsung urges Supreme Court again to overrule Federal Circuit on key patent litigation questions: Apple v. Samsung

With last week's wonderful Lexmark decision, the Supreme Court again turned out to be the guardian of sanity in the patent litigation context. Presumably in an effort to get earlier and ultimately more attention from the Supreme Court clerks evaluating cert petitions, Samsung yesterday filed (once agai well ahead of a deadline) an optional reply brief in support of its request that the Supreme Court review the Federal Circuit's en banc decision in the second Apple v. Samsung case (this post continues below the document):

17-06-05 Samsung Reply Brief Iso Cert Petition by Florian Mueller on Scribd

Obviously, Apple would like to avoid Supreme Court review and just get the most favorable outcome. In some cases, what's good for Apple is also good for the industry at large. Not so here. If the Supreme Court granted Samsung's petition from writ of certiorari, the outcome could have similarly positive effects as the recent Lexmark decision. (In the long run, that would also benefit Apple, which is a defendant in the vast majority of patent cases that it's a party to.)

Samsung's reply brief stresses the importance of the issues and particularly emphasizes that all three issues Samsung submits for review involve legal, not merely factual questions. At the end of the reply brief, it becomes clear that Samsung's short-term priority is the "quick links" patent, which the Federal Circuit patent held not to be infringed but the other circuit judges, in their controversial en banc decision, reinstated the district court ruling and jury verdict.

The Supreme Court will consider the petition at its June 22 conference.

Rather than go into more detail here (since I've already blogged about all of the issues and also this cert proceeding on multiple occasions), I'd like to point you to a great source of information: a YouTube video of a recent Public Knowledge Foundation conference in Washington, DC. Here I have some highlights from the event--select quotes from each of the panelists with a focus on (non-)obviousness, one of the three parts of Samsung's petition:

Ellen Schrantz, Senior Director of Government Affairs & Counsel, the Internet Association:

  • "What the Court essentially did was take a legal determination of obviousness and make it into a factual determination for the jury, and then just presumed that the jury resolved facts that it wasn’t even charged with solving in the first place."

  • "Given the speed which with the marketplace is moving and the complex issues across circuits and courts on obviousness as well as the very strange procedural history here of there not even being a briefing ahead of the en banc decision, this really is prime for Supreme Court consideration."

  • "By lowering the bar for non-obviousness, there's a real risk that patents will issue that don't deserve patent protection, that there will be additional litigation. And ultimately, it's the consumers that are going to bear the brunt of this because they will be subsidizing the litigation costs for innovators, and suffering as a result."

Carl Cecere, Attorney for the Hispanic Leadership Fund and the National Grange:

  • "You're asking the jury to evaluate the state of the art in technologies as diverse as biotechnology, space telescopes, and evaluate whether this is a step beyond what was already there."

  • "Deferring to juries creates a lot of problems. It runs the risk of allowing a lot of obvious inventions that may not be obvious to a jury, to be validated. It also runs the risk of invalidating some good inventions."

Derek Dahlgren, Attorney, Rothwell, Figg, Ernst & Manbeck, PC:

  • "By lowering the bar for non-obviousness, there's a real risk that patents will issue that don't deserve patent protection, that there will be additional litigation."

Matthew Levy, Patent Policy Consultant and former Patent Counsel at the Computer and Communications Industry Association:

  • "It's not just the twisting of obviousness law and it's not just trying to go back to the pre eBay injunction rule. It's this whole, the battle is really for what is patents going to cover? Are they going to cover what they say they cover or are we going to allow the conflation of the tiny with the entire thing?"

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Monday, June 5, 2017

Qualcomm denies charging higher patent royalties if device makers use rivals' baseband chipsets

Two months after asking the United States District Court for the Northern District of California to dismiss the FTC's antitrust complaint, and three weeks after the FTC argued (with support from Intel, Samsung and others) that its complaint met the requirements so the case can proceed, Qualcomm replied on Friday in support of its motion to dismiss (this post continues below the document):

17-06-02 Qualcomm Reply Re. Dismissal of FTC Complaint by Florian Mueller on Scribd

One of the alleged insufficiencies of the FTC's complaint is that the FTC's complaint refers to "elevated" royalties instead of using the term "above FRAND" (as Qualcomm suggests). Qualcomm says that the FTC must allege supra-FRAND royalties, and even that would not be enough since anticompetitive harm resulting from such royalties would have to be shown as well. In this context, Qualcomm also writes the following:

"[The FTC] never identifies a single licensee whose specific rate is allegedly above FRAND."

However, I have reread the FTC's original complaint, and its paragraph 118 says this:

"Apple, like other OEMs, regards Qualcomm's license terms, including the effective royalties charged by Qualcomm under its licenses with Apple's contract manufacturers, as inconsistent with Qualcomm's FRAND commitments."

Right before that paragraph, the FTC notes that "Apple is not a direct Qualcomm licensee" but, instead, used to reimburse its contract manufacturers for the royalties they pay to Qualcomm. If one interprets the word "licensee" in economic terms, then the FTC actually did identify at least one de facto licensee that paid a supra-FRAND rate.

It's good that Qualcomm says in the first paragraph of its latest brief: "[T]he key question is not a semantic one about taxes and royalties. It is the substance that matters." But if substance matters, then Qualcomm should recognize that a device maker paying royalties through a contract manufacturer is a licensee.

"Substance matters" also means, or in my view should mean, that the anticompetitive effect of supra-FRAND royalties on devices that use Intel (or other Qualcomm rivals') chips must be analyzed on an "all-in" basis. In paragraph 88 of its complaint, the FTC defined the "all-in cost of a baseband processor" as "consisting of both (i) the nominal price of the processor; and (ii) any patent royalties that the OEM must pay to use that processor in a handset." While that passage doesn't say so, it's obvious that any rebates or discounts from such royalties must be considered as well. "All-in" means "bottom line."

Even if we believe Qualcomm that its patent royalty rates don't discriminate at first sight between devices using Qualcomm chips and other devices, rebates and discount can lead to a decisive difference. The way Qualcomm redacted its reply brief indicates that the rebate/discount question is a highly sensitive issue here. On pages 11 and 12, there are four redactions of single words, but the context makes it clear that the redacted word, in each case, was either "rebate" or "discount." The same section of the brief points to footnote 20, which cites to other cases and mentions either term:

"[...] imposed rules that restricted dental dealers from carrying competing lines of artificial teeth, but it did not offer those dealers any rebates." (emphasis added)

"Microsoft [...] granted discounts only 'as compensation for the work required' to comply with the restrictions, not to win over resisting OEMs." (emphasis added)

Rebates are also mentioned in the FTC's complaint. In paragraph 120:

"Under a 2007 agreement, Qualcomm agreed to rebate to Apple royalties that Qualcomm received from Apple's contract manufacturers in excess of a specified per-handset cap."

Four paragraphs later:

"In all, Qualcomm's 2011 and 2013 agreements with Apple provided for billions of dollars in conditional rebates from Qualcomm to Apple for baseband processor sales from 2011 to 2016. These conditional rebates effectively penalized Apple's use of any baseband processors supplied by Qualcomm's competitors." (emphasis added)

So, if substance matters, the FTC complaint isn't anywhere as lacking and wanting as Qualcomm claims. The FTC definitely tried to keep the complaint very focused. Qualcomm quotes the dissenting FTC commissioner (Mrs. Ohlhausen) as saying that "[r]ather than allege that Qualcomm charges above-FRAND royalties, the complaint dances around that essential element." What I think the FTC complaint does dance around is the need for a FRAND rate-setting decision as part of this case. Whether Judge Koh views that as a deficiency requiring an amended complaint remains to be seen. I've written in one or two earlier posts that Qualcomm's criticism of the FTC's approach may succeed to the extent of a dismissal without prejudice.

Just one last point on substance that matters. Qualcomm argues that there is no "cognizable theory" of harm in place with respect to the FTC's allegation that rival baseband processor makers felt forced to lower their prices in order to offset at least some of the higher patent licensing cost that device makers allegedly have when using non-Qualcomm chips. In other words: competition law should protect (and should particularly protect consumers) against inflated prices, not against price reductions. However, if chipset makers have to lower prices under a kind of pressure (patent royalties paid by device makers) that has nothing to do with the competing products themselves, then it adversely affects their commercial viability for no good reason, and as a result, companies will then be less competitive, which in the worst case means they'll go out of business, and that will lead to higher prices in the long run.

If Judge Koh understands all the market dynamics involved, and even more so if she takes a consumer perspective (since we're the ones who pay for all of this in the end), Qualcomm will have to defend itself either against the existing complaint or against a minimally-amended one.

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