Monday, April 24, 2017

Qualcomm's involuntary refund to BlackBerry amounts to approximately $5 per device

About two weeks ago, BlackBerry announced that it was going to receive a refund of $814.9 million from Qualcomm (mentioned in this post), and Qualcomm confirmed that fact:

"The parties had agreed to arbitrate a contract dispute relating to one specific issue: whether Qualcomm's voluntary per unit royalty cap program applied to BlackBerry's non-refundable prepayments of royalties for sales of a specified number of subscriber units from 2010 through the end of 2015."

BlackBerry's lawyers from the Sullivan & Cromwell firm stated the basis for the payment consistently with Qualcomm's repreentations, but a bit more specifically:

"The dispute arose in 2015 following Qualcomm's agreement to cap certain royalties applied to payments made by BlackBerry pursuant to a licensing deal. Blackberry argued that it was overpaying Qualcomm."

That wording sounds even more like the "rebate" (a term rejected by Qualcomm) Apple says Qualcomm promised under a special cooperation agreement.

There still isn't any indication of the arbitration panel having made a FRAND rate determination. It all sounds like a contract dispute, including what BlackBerry wrote about this in its last annual report:

"On April 20, 2016, [BlackBerry] and Qualcomm entered into an agreement to arbitrate a dispute over the application of a royalty cap agreement related to a license agreement between the parties. The Company filed its Demand for Arbitration and Statement of Claim on May 2, 2016. Qualcomm filed its response on May 16, 2016. Proceedings are ongoing."

The term "specified number of subscriber units from 2010 through the end of 2015" in Qualcomm's press release on this month's arbitration award could mean all or some of the devices BlackBerry sold during the period in question. What I'm interested in (because I believe many readers will be curious, too) is what indication the "rebate" gives us with a view to Qualcomm's standard-essential patent (SEP) royalty demands. A couple of months ago I saw indications, by deducing and inferring information from certain public documents, that Apple may have been paying Qualcomm approximately $20 for its baseband chip and a second amount like that for patent license (a total of $40 per device for the chip and the license). The higher the rebate is on a per-unit basis, the more likely it is that Qualcomm's royalty demands are really that high (we're talking about stratospheric heights compared to what other companies are rumored to receive; for example, financial investors appear to believe that Nokia receives about $2 per device from Apple).

So let's look at publicly-available information in the light most favorable to Qualcomm: that the "royalty cap" applied to all BlackBerry smartphones sold in the years 2010-2015. Not only is that most favorable to Qualcomm but it's also a reasonable assumption.

Here are some quotes from several annual reports by BlackBerry that state unit volumes:

"The Company recognized revenue related to approximately 3.2 million BlackBerry handheld devices in fiscal 2016, compared to approximately 7.0 million BlackBerry handheld devices in fiscal 2015."

"[...] approximately 13.7 million BlackBerry handheld devices in fiscal 2014, compared to approximately 28.1 million BlackBerry handheld devices recognized in fiscal 2013."

"The Company shipped approximately 49.0 million BlackBerry handheld devices in fiscal 2012 compared to 52.3 million devices in fiscal 2011."

That's 153.3 million devices. If the arbitration award is divided by that number, the per-unit figure is $5.31. Regardless of some remaining uncertainty as to whether the royalty cap applied to all BlackBerry smartphones, that number is pseudoprecise since BlackBerry's fiscal year (March 1-February 28) overlaps with only ten months of a given calendar year. But if we round that number down to $5 per unit, then we don't imply more precision than we can deliver and we have enough of a cushion that the number should be just about right.

Theoretically, a $5 rebate could be granted on a royalty payment of $6, but more realistically the refund represents a fraction--not necessarily a small fraction, but still a fraction--of the amount that was paid. Maybe $5 per unit is exactly what BlackBerry wanted. Even arbitration can have an outcome that favors only one party, especially when merit is a binary question , though a middle ground is more common in arbitration. At any rate, I would view the $5 per-unit refund to BlackBerry as another indication of my $20 per-unit royalty estimate not having been off base.

If Qualcomm's royalty levels are indeed extremely high, it comes as no surprise that various major automative and information and communications technology companies are interested in the ongoing FTC v. Qualcomm litigation, as their open letter to President Trump shows.

It may also explain why Qualcomm doesn't want Judge Koh to treat other Qualcomm FRAND antitrust cases (particularly in the EU and in South Korea) as related cases.

But the BlackBerry story also shows that Qualcomm paints a rosy picture when it claims that the industry at large has accepted its royalty rates, with only Apple and Samsung allegedly trying to avoid paying a fair license fee. Let me quote again from that Sullivan & Cromwell PR piece: "Blackberry argued that it was overpaying Qualcomm." And who knows who else...

Finally, just a message for the professional and amateur stock traders who message me via the contact form on this blog. Please appreciate that I don't have the time to answer individual questions. Sometimes I will answer those questions on my blog. Also, I'm always grateful when someone points me to interesting publicly-available information that I may have missed. It has happened quite often. One last thing for the investment folks among you: no matter what seemingly-private email address you use or how you phrase your messages, and whether or not you refer to companies by their ticker symbol, I can easily tell your messages apart from the ones I receive from so-called (not my own terminology) "fanbois" and "phandroids." This includes a recently-received question about whether Qualcomm could obtain an injunction against Apple. I have nothing to say about that except that Qualcomm has been consistent over the years arguing that SEP holders are entitled to injunctive relief, Apple has been consistent that a FRAND commitment and injunctive relief are irreconcilable, I've been consistent in that regard since late 2010, and over the years I've seen Microsoft (which still told the FTC in 2011 that injunctive relief was available over SEPs), Google and Samsung come over to the good side of history. At this stage of the Apple-Qualcomm dispute it's premature to speculate about injunctive relief. Even Pokémon GO is more relevant to this dispute at this juncture.

Share with other professionals via LinkedIn:


Friday, April 21, 2017

Major automotive and IT companies urge President Trump to support FTC case against Qualcomm

I just received--and wanted to immediately share--an open letter addressed by major automotive and information and communications technology companies to President Donald J. Trump, urging him to shield the Federal Trade Commission (FTC) from political interference that could derail the ongoing antitrust litigation in the Northern District of California against Qualcomm (this post continues below the document):

17-04-20 Multi-Stakeholder SEP White House Letter by Florian Mueller on Scribd

The letter was signed by two industry associations--ACT | The App Association (whose sponsor members include Apple, Microsoft, Oracle, Facebook, AT&T and others) and the Alliance of Automobile Manufacturers--as well as ten companies including, notably, HP, Dell, Intel, Juniper, and--lo and behold--Samsung Electronics America, Inc.

Samsung's participation is particularly interesting. I was probably the most Samsung-critical blogger when I believed Samsung was trying to gain too much leverage from its own standard-essential patents (SEP) against Apple in multiple jurisdictions, but I was and (despite my intent to be a good citizen of the iOS ecosystem as I plan to launch my first app in a couple of months) still am among the most Apple-critical ones with respect to the merits and especially the requested remedies over certain design and software patents. It was a good thing that Samsung abandoned its SEP claims against Apple, but it wasn't enough. After Samsung stopped doing the wrong thing, I always wanted it to do the right thing and combat SEP abuse. Its support of an industry coalition in Europe (relating to the future Unified Patent Court) was a first significant step. I'm so happy to see that Samsung is now more proactive on that front than ever.

Last year then-candidate Trump publicly declared himself a Samsung user as he was angry with Apple for its lack of cooperation with the FBI in connection with an act of terrorism. Having been a Trump supporter (a fact I have mentioned several times on this blog and as anyone following me on Twitter can tell) since 2015, a Samsung Galaxy user since 2010 and an iPhone user since 2014, I paid attention. Now I hope his advisers, who obviously know about his predilection for Samsung phones, will also tell him about Samsung's signature of this Qualcomm-related open letter.

If the Korean antitrust findings relating to Samsung's Exynos baseband chipset are accurate, and considering that Samsung's margins in the mobile phone business are much tighter than Apple's, Samsung may have suffered from Qualcomm's conduct to an even greater extent than Apple. And while those two companies account for a significant part of this industry, there are many other companies of all sizes that have a problem with Qualcomm's (and some other SEP owners') practices.

The final part of the first paragraph of yesterday's open letter comes across as an expression of huge concern: "we hope that the FTC's lawsuit filed on January 20, 2017 in federal court in California will be allowed to run its course without prejudice or political interference."

Judge Lucy Koh has just set a schedule for that antitrust litigation, and it's a reasonably ambitious one. Apparently there are industry players who see some lobbying going on by Qualcomm and possibly other SEP abusers seeking to derail the FTC lawsuit. There is a political risk here since the FTC filed its case in the last days of the Obama Administration, which I think was a disaster for various other reasons (such as its positioning against law enforcement officers, its irresponsible accumulation of debt, and its refusal to even acknowledge the problem of radical Islamic terrorism), but which despite all else made two really good decisions regarding SEPs: the veto of an ITC import ban and the FTC complaint against Qualcomm. It will be important to explain to the Trump Administration that the FTC case is worth pursuing--they should even double down on it--even if other parts of Obama's legacy are not. Simply put, FRAND is also a conservative cause, and Republican lawmakers have supported it before. Combating SEP abuse is perfectly consistent with the promise to Make America Great Again, as the final paragraph of the letter (without specifically mentioning MAGA) stresses:

"In short, the impartial and substantive determination of an FTC action in a U.S. court is critical to supporting a successful U.S. market and U.S. business environment. Such a process is, in the end, good for the U.S. economy and job market. We encourage the administration to support this robust agency and court process." (emphasis added)

On page 2 of the letter, the signatories note that they "take no position here on the merits of this case," but their concern is not about the merits: it's all about politics.

I wish those companies didn't even see a need to write that kind of letter. It suggests to me that there are some Washington machinations going on that could benefit the abusers and hurt companies that make real products. Such as the direct (for example, Samsung) and indirect (for example, Apple) signatories...

Share with other professionals via LinkedIn:


Wednesday, April 19, 2017

Judge Koh schedules FTC v. Qualcomm antitrust trial for the first half of January 2019

After last week's joint case management statement in FTC v. Qualcomm (Northern District of California), Qualcomm filed a revised proposed schedule on Monday. Judge Koh had denied a stay of discovery and asked Qualcomm to revise its proposed schedule accordingly. Now Judge Koh has set a schedule that is materially consistent with the FTC's proposal and a lot more ambitious than Qualcomm's revised schedule (this post continues below the document):

17-04-19 FTC v. Qualcomm Case Schedule by Florian Mueller on Scribd

The eight-day bench trial will commence on January 4. Fact discovery will close on March 30, 2018 (which was the FTC's proposal and is three months earlier than Qualcomm's proposal). Up to the August 10, 2018 deadline (for summary judgment and Daubert motions to be filed), it's all consistent with the FTC's proposal, and after that date, Judge Koh's schedule is more ambitious than either party's suggestion: the oppositions and replies concerning summary judgment and Daubert will be due almost two weeks ahead of even the FTC's proposed schedule. Also, the FTC proposed that a pretrial conference be held approximately six weeks after November 16, 2018, but it's now scheduled for December 13, 2018. By contrast, Qualcomm's revised proposal basically came down to a mid-May 2019 pre-trial conference, so Judge Koh's trial date is, on the bottom line, about five months ahead of Qualcomm's.

While I think Qualcomm's arguments for requiring more time weren't all that weak (for example, third-party international discovery can take time), the trial is rather unlikely to be postponed: Judge Koh tends to keep her schedules.

Judge Koh's far-reaching agreement with the FTC on the case schedule doesn't mean anything for how she will ultimately decide the case. I doubt any inclination will become clear before next year, if at all.

Based on my own observations of Judge Koh's handling of patent matters, I believe Qualcomm would be hard-pressed to get a judge who would be more sympathetic to the concerns of patent owners than her. I've dubbed her (with the greatest respect) "the World Wildlife Fund for endangered Apple patents" and didn't mean to suggest that this was because she wanted to help Apple in particular (in some ways she was good for Apple, definitely too good for my taste, but not in all ways, so while I disagreed with her decisions and reasonings on several occasions, there's no reason to assume she ever favors one party over the other). She just appears to be generally overly patentee-friendly because she has too much respect for granted patents. Until a Federal Circuit majority sided with Apple on slide-to-unlock (an outrageous decision in many respects that will hopefully be reversed by the Supreme Court), she was the only judge in the whole wide world to uphold the slide-to-unlock patent. All 15 European judges that looked at it deemed it invalid, and so did a three-judge Federal Circuit panel, which shows what a patentee-friendly outlier Judge Koh can be...

I never liked the fact that she had made statements in public in which she criticized alleged infringers for trying to shoot down patents that, in many cases, shouldn't have been granted in the first place. In that context she expressed a lot of sympathy for patent holders seeking to enforce their rights. That kind of thinking could potentially benefit Qualcomm here, though I do hope she will understand the FRAND-specific issues at the heart of the FTC's case. Fortunately, this isn't an infringement case.

Share with other professionals via LinkedIn:


Thursday, April 13, 2017

Software and Internet co.'s, NGOs, professors ask Supreme Court to look at 2nd Apple v. Samsung patent case

Last month, Samsung made a surprisingly early filing of its petition for writ of certiorari (request for Supreme Court review) in the second Apple v. Samsung case. On Monday, various amicis curiae ("friends of the court") made a total of four filings in support of select parts of the petition:

  1. The Software & Information Industry Association (SIIA) and the Internet Association (IA) filed a brief (PDF) in support of Samsung's petition with respect to patent invalidation on the basis of obviousness.

  2. The Public Knowledge Foundation, the Electronic Frontier Foundation (EFF) and Engine Advocacy (a group representing startup interests) support (PDF) all three parts of the petition. The brief goes into detail on obviousness and injunctive relief, and states in a footnote that the infringement-related part (which involves the "quick links" patent and, therefore, roughly 80% of the damages award in that case) "relates to a plain and egregious error on the part of the Federal Circuit with respect to the determination of patent infringement."

  3. The Hispanic Leadership Fund and the National Grange of the Order of the Patrons of Husbandry (an advocacy group representing farmers and rural communities) filed a brief (PDF) in support of Samsung's petition with respect to injunctive relief (an issue on which these amici have previously taken consistent positions) and obviousness.

  4. A group of eight law professors, with two of whom I was in contact via Twitter a few years ago (Santa Clara professors Colleen Chien, who temporarily worked at the White House, and Brian Love), urges (PDF) the Supreme Court to "instruct the Federal Circuit to require actual proof of causation when applying the irreparable harm factor of the eBay test."

One organization that has previously supported Samsung against Apple, the Computer & Communications Industry Association (CCIA), appears to have decided not to get active again at this stage. But in case certiorari is granted, I wouldn't be surprised to see CCIA get involved again. With respect to design patent damages, CCIA's work was really great. But even CCIA may at some point experience such a thing as litigation fatigue: the Apple v. Samsung dispute is now six years old.

Samsung's design patents-related petition was exceptional. It had tremendous support and, since it raised sort of a once-in-a-century type of issue, it was a slam dunk (to the extent that a cert petition can be a slam dunk at all, given overall stats). The fact that certain amici who supported Samsung on design patents aren't on board this time doesn't mean that the three issues raised last months aren't also certworthy in their own ways and their own right.

In this post I want to focus on what the amicus briefs indicate with respect to certworthiness. That has nothing to do with the merits; we'll cross that bridge if and when we get there. It also has nothing to do with the parties: I've agreed and disagreed with either company on different occasions depending on the positions they took. Actually, Federal Circuit v. Federal Circuit would be a more appropriate caption for this cert petition since Samsung is basically just doing what the circuit judges who were outvoted by a majority would presumably have loved to do: to take these issues to the Supreme Court themselves if only they could. Seriously, the most important amicus curiae briefs here are not even the ones I listed above (with the greatest respect for the people and organizations behind them): the most important amicus briefs in support of Samsung's petitions are the dissenting opinions of the outvoted circuit judges.

Still, amicus briefs are important as they can serve to indicate to the Supreme Court that certain sectors of the economy and society, and often also academics, care about the issue(s) presented. They can also draw attention to additional reasons for granting cert. I believe the amicus briefs filed in support of Samsung's petition accomplish both objectives. The advocacy groups talk about how patent obviousness determinations can also affect the U.S. government as a defendant (maybe they wrote this with a view to a potential call for views of the Solicitor General). The Hispanic Leadership Fund-National Grange brief says the following:

"This case involves two separate Federal Circuit decisions that fundamentally alter some of patent law's most broadly applicable principles. [...] These alterations to cornerstones of patent law will shape the dynamics of every patent application, every infringement assertion, and every patent lawsuit—everywhere in the United States."

For the infringement-related part of Samsung's petition (the third part) it could be a problem but need not be the end of the story that no amicus curiae brief focuses on that issue. Samsung itself positioned it as a no-brainer kind of thing that would be very easy for the Supreme Court to decide. With or without amicus briefs discussing that particular issue, Samsung has a chance that the Supreme Court may take a look at that one. But there can be no doubt that the other issues have more traction.

Different amicus briefs stress different problematic aspects of the Federal Circuit majority positions on injunctive relief. As for my own position (and as I said, I don't want to get into the merits question per se at this stage) is that an insurmountable "causal nexus" hurdle would be just as inconsistent with the Supreme Court's eBay v. MercExchange injunctive relief standard as the "some connection" kind of standard (which the various amici disagree with) that is at issue now. By the way, the law professors make it clear in their brief that their concern relates to the way the Federal Circuit majority opinion is worded, not to why Apple formulated its injunction request.

I'm dreaming of a scenario in which the Supreme Court would grant cert with respect to (not exclusively, but also) the injunction issue and if Justice Kennedy, whose eBay concurrence has been so influential, would write the per curiam. His former clerk, Justice Gorsuch, has just been inaugurated, making Justice Kennedy the first Supreme Court Justice in history to serve together with a former clerk of his. That's a historic fact for which most people will remember him, but in the patent law community, his eBay concurrence is considered even more important.

The "some connection" language in the Federal Circuit majority opinion may get the Supreme Court (not only, but especially Justice Kennedy) interested, but some amici stress something really outrageous: the holding that the public interest would almost always weigh in favor of injunctive relief. That fact, in connection with a statement by a circuit judge at a hearing that eBay "was wrongly decided," makes it easy for the Supreme Court to see that at least one of the eBay factors would be vitiated if the Federal Circuit decision on injunctive relief governed the law in this area going forward.

The SIIA/IA brief places particular emphasis on the claim that the Federal Circuit en banc decision on patent validity marks a "return to a pre-KSR approach to obviousness." In KSR v. Teleflex, the Supreme Court clarified in 2007 that "the results of ordinary innovation are not the subject of exclusive rights under the patent laws." Otherwise, the Supreme Court said "patents might stifle, rather than promote, the progress of useful arts." Given my past activities as an anti-software patent campaigner, it won't surprise you that I am particularly skeptical of whether patents in this field--and I mean even the relatively best ones, not just the most trivial ones--promote progress. But even if one viewed software patents more favorably than I do, one may very well agree with those two industry associations (and Samsung and some of its other amici) that the Federal Circuit ruling in this case here should be reviewed because it might make it too hard for defendants to prove a patent obvious. Also, a big question here is whether obviousness is a legal question for a judge to decide or a factual question for a jury to render a verdict on. (Juries rarely invalidate patents.)

The SIIA/IA brief says

  • KSR was the only Supreme Court case concerning § 103 (the obviousness paragraph) in the past 40 years;

  • the Federal Circuit opinion that is being appealed was the "the first en banc decision of the Federal Circuit on obviousness in more than a quarter century," and

  • the Supreme Court "has not adjudicated obviousness issues i the context of that sector of the economy since Dann v. Johnston, [...]" in 1976.

All things considered, I believe Samsung's best shot is the injunction-related part of its petition, but the obviousness matter also has a lot of potential to get the Supreme Court interested. And if both succeed, then maybe the third part (infringement) will be looked at as well since the Supreme Court might then arrive at the conclusion that something went fundamentally wrong before the Federal Circuit.

In a hypothetical scenario in which Samsung's petition succeeded all the way (first cert, then on the merits), Apple would lose a $120 million damages award and would again find it relatively hard to obtain an injunction against highly multifunctional products of patent-infringing rivals, but Apple would also benefit from the relevant holdings whenever the shoe is on the other foot--such as against Qualcomm or Nokia, to name but the two most prominent patent holders presently claiming (in Qualcomm's case: counterclaiming) that Apple infringes their patents.

All four amicus briefs are pretty persuasive. Now Apple is going to oppose the petition, and its lawyers will likely put something very persuasive together as well--or "dissuasive" to be precise, since Apple will portray all three issues as totally cert-unworthy.

Share with other professionals via LinkedIn:


Qualcomm does not want European and Korean antitrust proceedings to impact its FTC litigation

Qualcomm, which would have us believe we couldn't even play Pokémon GO if not for its wireless technologies, is fighting a global, multi-front war against regulators, industry players and consumers (who are piggybacking on the FTC case in Northern California).

On one of those fronts, BlackBerry just won an arbitration award over $815 million. Unfortunately, arbitration is opaque, so the legal basis for this is unclear, other than BlackBerry having claimed to have paid too much in license fees during an unspecified past period. The kind of wrongdoing here is totally unclear, and we also don't know what an appeals court would have decided. Still, the $815 million award, which is final and binding, has made BlackBerry's share price soar by 12%. For the Canadian company, it's a huge amount of money. For Qualcomm, it's also a very significant amount, but the bigger problem is that every independent finding of Qualcomm having overcharged someone makes it harder for Qualcomm to convince the courts of law and the court of public opinion that it's just being bullied by the likes of Apple and Samsung and that all those antitrust enforcers have all just been misled by sore losers in the marketplace and by evil companies denying Qualcomm a fair compensation for its innovations.

This concern is real. A joint case management statement filed yesterday by the FTC and Qualcomm--"joint" in terms of being a single document despite virtually zero convergence on substantive questions--in the Northern District of California shows that Qualcomm is indeed concerned about how the various parallel proceedings could influence each other.

First, the filing (this post continues below the document):

17-04-12 FTC-Qualcomm Joint Case Management Statement by Florian Mueller on Scribd

The FTC would like the European and Korean proceedings to be treated as cases that are related and relevant to the U.S. antitrust litigation:

"Outside the United States, Qualcomm is currently the subject of publicly disclosed proceedings that the FTC believes are also appropriately brought to the Court's attention as related 'proceedings pending before . . . another court or administrative body.' [...] Proceedings initiated by the European Commission and Korea Fair Trade Commission involve conduct that is similar or related to the conduct alleged in the Complaint, evidence that could overlap with evidence in this action, and potential remedies that could overlap with equitable relief that the Court may find appropriate should the FTC prove the violations alleged in the Complaint."

But Qualcomm is against this:

"Qualcomm believes the foreign regulatory proceedings identified above, which are proceeding under foreign legal regimes, are not relevant to the Court's determination of the instant matter under United States law, and that the FTC has included them in this Case Management Statement to create prejudice rather than to assist the Court in the management of this litigation and avoid 'unduly burdensome duplication of labor and expense.'"

If we were talking about whether the FTC could present international antitrust findings to a U.S. jury, the analysis of whether Qualcomm is prejudiced by something that is more confusing than probative would be different. But this here is just about whether Judge Lucy Koh should officially take notice of the foreign proceedings. A professional judge obviously will consider any differences between U.S. law and the legal frameworks of other jurisdictions.

What is Qualcomm afraid of? In a footnote it stresses that "[p]roceedings before the European Commission are ongoing" and mentions its Korean appeal. Judge Koh will also understand the non-final state of the Korean case. I can't help but conclude that Qualcomm expects bad news from those other jurisdictions. Otherwise, if Qualcomm considered it more likely than not that the EU would let it off the hook and that its Korean appeal would succeed, it would have something to gain from treating the foreign proceedings as related cases.

Before yesterday's filing I couldn't see a clear indication of Qualcomm trying to accelerate or to stall its California cases. It sought a transfer of everything to its home district, but it didn't want consolidation in NorCal. But now there are some potential indications--I'm not saying "evidence"--of stalling:

  • The FTC doesn't want to stay discovery, arguing that "prompt resolution of this enforcement action is essential to accomplish the objective of restoring competition in the affected markets." Qualcomm, however, wants the court to rule on its motion to dismiss before discovery. Qualcomm obviously has a point that the FTC is not your average plaintiff: it has been investigating Qualcomm for some time, which was like a massive discovery effort (but not exactly the same). Still, if Qualcomm wanted to get rid of the FTC case quickly, it would want to proceed to discovery right away since resource constraints can't be an issue here.

  • With respect to confidential business information, the FTC proposes "a single protective order covering this action and other actions" such as Apple's case, but Qualcomm is hesistant to agree to that. Instead, it "proposes to discuss coordination and other discovery matters with the appropriate parties in due course." It doesn't rule out a single protective order but does appear skeptical. Under other circumstances, a preference for case-specific protective orders wouldn't mean anything, but since Qualcomm initially proposed that all California cases be consolidated in one venue (the Southern District of California), I would have assumed that Qualcomm would continue to favor consolidation wherever it's an option.

With respect to remedies, Qualcomm says "[it] believes the FTC's statement of the relief sought is insufficiently detailed and that Qualcomm and the Court are entitled to a clearer understanding of the conduct sought to be enjoined and any other relief requested." While I philosophically agree with what the FTC is trying to accomplish here, I would agree with Qualcomm that the FTC's prayers for relief are less than perfectly clear. The FTC just wants the court to hold Qualcomm's conduct in violation of Section 5(a) of the FTC Act and then wants an enjoinder against that conduct but also against "similar and related conduct in the future." Other litigants have shown that prayers for relief of the specific-performance type can be stated with greater specificity. For example, with respect to FRAND licensing, the FTC could ask the court to require Qualcomm to offer FRAND licenses to specific companies (such as Intel and MediaTek or Samsung's wireless chipset business division).

Share with other professionals via LinkedIn:


Tuesday, April 11, 2017

In response to Apple's complaint, Qualcomm claims credit for enabling Pokémon GO

In response to a complaint Apple filed in the Southern District of California in January (PatentlyApple article), and following a decision that the case remains in Qualcomm's home district, Qualcomm has filed a 139-page reply (this post continues below the document):

17-04-10 Qualcomm Answer to Apple Complaint by Florian Mueller on Scribd

As the number of pages (the original complaint was approx. 100 pages, now the answer and the counterclaims fill 140 pages) shows, this is a huge commercial litigation and threatens to turn into a battle of materiel. Both parties have enlisted multiple major law firms. The first surprise here is that Quinn Emanuel is among the three firms representing Qualcomm, given that Qualcomm's filing (in paragraph 192 of the counterclaims part) accuses Samsung--another company QE is defending against Apple--of sharing (with Apple) "a common interest in diminishing Qualcomm's ability to obtain fair value for its innovations" and trying "to avoid paying fair value for Qualcomm's intellectual property and to impede Qualcomm's licensing program." I wonder how Samsung feels about its own lawyers not distancing themselves from such allegations...

The first part of the filing--spanning the first 44 pages--denies all of Apple's allegations and raises three dozen (minus one) defenses including the proverbial kitchen sink. This is different from Qualcomm's procedural decision in the Federal Trade Commission case in the Northern District of California. Against the FTC complaint, Qualcomm brought a motion to dismiss. But the types of plaintiff and the issues in those cases are different. The FTC's case is rather narrowly-focused. Among other things, the FTC tried to navigate around the need for a FRAND rate determination in its case. It's not inconceivable that Judge Koh may find the FTC's current pleadings a bit too narrow in one or two areas. By contrast, Apple's complaint is comprehensive and Apple's case was always going to be fact-intensive, including the need for rate setting. So it would have been hard for Qualcomm to argue that anything essential was missing from Apple's original complaint.

After denying everything (often in a very vague way that just refers to lengthy external documents instead of making specific statements), Qualcomm brings its own counterclaims against Apple. Qualcomm argues that the truth is just the opposite of what Apple alleges: according to Qualcomm, it's Apple that wields huge power and abuses it. There's this saying that the best defense is a good offense. Qualcomm's offense is very well-executed in some ways, but in some other ways it's surreal.

Let's use commmon sense. Qualcomm itself is forced to admit that there are regulatory investigations underway around the globe. Apple sued after the FTC had filed its complaint. Qualcomm itself concedes that Samsung is unhappy with its licensing terms, too. I can also tell from my experience that different industry players--the first one was Research In Motion (BlackBerry) back in 2006--told me they considered Qualcomm's royalty rates excessive and took issue with Qualcomm's conduct. Then there's this relatively new story of Qualcomm allegedly having kept Samsung out of the baseband chipset business. By contrast, no regulator has ever investigated Apple over the wrongdoing that Qualcomm alleges. So Qualcomm comes across as the wrong-way driver saying that everyone else is on the wrong track. I just don't buy it that all those regulators are totally misguided and have all been manipulated by Apple and Samsung and whomever else. It's just not credible.

Early reports on Qualcomm's filing have focused on something that is highly unlikely to be outcome-determinative but has the potential to get some people interested: Qualcomm's accusation that Apple hobbled Qualcomm's chips in the iPhone 7 just to hide a performance advantage over Intel chips. I can't verify either party's claims in this regard. There could be compatibility or other technical reasons. I can't see how this, even if it was proven to be true, would be a "get out of jail free" card for Qualcomm since it changes nothing about any other issue in the case, such as what the right royalty level should be. It could be that Qualcomm primarily hopes Apple will consider a settlement before a trial at which this issue--which Qualcomm also portrays as a consumer issue--could be the subject of testimony and argument, possibly adversely affecting Apple's reputation (depending on what would be said).

In its filings and in some interviews with media that have already reported on it, Qualcomm points, again and again, to Apple's damages claims against Samsung, including in the second one of two paragraphs that suggest Apple's objective is to bring down Qualcomm's per-device royalty (from what I suspect to be on the order of $20) to a couple of dollars per device:

"180. Just as baseless was the royalty Apple counteroffered: [REDACTED] When broken down to a per-iPhone royalty using Apple's 2015 sales figures, the proposed royalty would amount to less than [REDACTED] per device—a small fraction of the royalties Qualcomm currently receives from the Contract Manufacturers.

181. Apple's counteroffer is irreconcilable with its approach to valuing its own patents. As noted above, in its recent litigation with Samsung, Apple claimed that three Apple patents on user-interface features were worth $7.14 per phone. That is, Apple claims that thousands of Qualcomm patents on fundamental technologies that are essential to cellular communication—critical to the usefulness of the iPhone itself—pale in comparison to just three Apple patents on user-interface features."

I've disagreed with Apple's damages claims against Samsung for some time, despite a lot of blowback from Apple fans, which is obviously something that I don't take lightly (being an iOS app developer). If it were up to me, I would let Qualcomm tell a jury (in a rate-setting case) what Apple has demanded in the two Samsung cases, but I'm quite certain the court just won't allow this. Under the case law, this here will almost certainly be deemed to be a case where the resulting confusion (since a jury would have to understand a whole lot of differences between those cases) far outweighs any probative value. Courts have even precluded parties from pointing juries to royalties paid for a portfolio including one or more patents-in-suit. So, like the throttled-chip story, this may be more of a PR thing than a potentially-winning legal strategy.

There are three fundamental issues with Qualcomm's argument that I'd like to focus on (other issues may come up at a different point in time).

The first major issue is that Qualcomm is the one with huge leverage here, not Apple. Whatever market power and economic weight Apple has (and Qualcomm points to), I still can't see how anything that Apple might do, even if it flexed its marketing muscle to the maximum extent, would make it harder for Qualcomm to sell devices to other customers. By contrast, Qualcomm itself points to its standard-essential patents, and those bestow monopoly power on it. It doesn't matter what Apple's market capitalization or cash reserves (Qualcomm mentions both) may be: the problem is that Apple's market cap and cash reserves would quickly go down to zero if it couldn't practice certain industry standards.

The second major issue is that Qualcomm places a lot of emphasis on the smallest salable patent-practicing unit (SSPPU) argument. In its complaint, Apple pointed to innovations such as touch ID or to features such as additional memory that have nothing to do with the baseband chipset functionality Qualcomm's patents relate to, yet Qualcomm wants a percentage of the net selling price of a device (with a cap, but the cap appears to be very high, so it doesn't really solve the problem). Now Qualcomm says "[its] technological contributions enable popular smartphone apps such as Uber, Snapchat, Spotify, Apple Music, Skype, Google Maps, and Pokémon GO, among others."

That still doesn't explain why Qualcomm would be entitled (as it appears to believe) to royalties on such features as TouchID and extra memory. But it's also absurd in its own right. Qualcomm simply ignores that there have always been technical alternatives but once an industry standard is set and carriers build their network infrastructure, device makers like Apple don't have a choice: they must implement the standard. However, Qualcomm is not entitled to a royalty based on the value of standard-setting. As Judge Posner already clarified in that big Apple v. Motorola case in the Northern District of Illinois, the question is what value a standard-essential patent offered over an alternative at the time that it was included in the standard.

Pokémon GO needs mobile Internet access, and it needs certain access speeds. True. Qualcomm is one of the contributors to industry standards with which this is possible. True. But alternative industry standards capable of powering something like Pokémon GO could have been developed entirely without Qualcomm's patents. Even if one believed Qualcomm that its innovations are key to delivering the best performance, others could provide sufficiently fast data transfers that one could play Pokémon GO...

The third huge issue is that Qualcomm is, as its own representations confirm, withholding payments to Apple because of Apple having said certain things to regulatory agencies. Qualcomm now argues that Apple can provide true information, but according to Qualcomm it has said untrue things, so Qualcomm believes it can penalize Apple for this. But the bottom line is that Qualcomm wants to contractually limit Apple's ability to provide information to antitrust authorities. I find that completely unacceptable. If Qualcomm disagrees with something Apple tells a government agency, then Qualcomm can (and absolutely should) tell its own version of the story. I hope this case will result in clarification that any clauses preventing someone from communicating with regulatory agencies are unenforceable in the first place.

The next two pleadings will be Apple's reply in support of its complaint and answer to Qualcomm's counterclaims, and then Qualcomm will file a reply in support of its counterclaims.

Share with other professionals via LinkedIn:


Thursday, April 6, 2017

Further briefing on Apple v. Samsung design patent damages, no transfer of Apple v. Qualcomm

Procedural decisions relating to two major Apple cases have come down this week. With respect to design patent damages in Apple v. Samsung, Apple did not get its preferred way forward (affirmance of prior damages verdict and an immediate re-retrial necessitated by the Federal Circuit's dismissal of Apple's trade dress claims), but the United States Judicial Panel on Multidistrict Litigation has granted Apple's wish that its contract, patent and antitrust action against Qualcomm be kept separate from a long list of (consumer) antitrust cases related to the FTC's mid-January complaint against Qualcomm.

There isn't much to say right now about the Apple v. Samsung design patents case. In a case management order handed down on Tuesday, Judge Lucy Koh disagreed with Apple's most aggressive suggestions, which would have cut the remand proceedings short (after the Federal Circuit decided that the district court should take a closer look at the record in light of the December Supreme Court ruling). I'm not surprised and I doubt Apple itself was.

The retrial proceedings remain stayed for now, and further briefing has been ordered with respect to Apple's argument that Samsung waived its arguments about what the "article of manufacture" (with respect to which Apple could seek a disgorgement of infringer's profits) should be. Filings are due on April 21 and May 5, and a hearing will be held on June 15. I'll follow the process and comment on the parties' detailed arguments. So far, my impression is that the court could easily decide either way, but what would be in the interest of justice is that Samsung gets the chance to make its "article of manufacture" case before a new jury (a jury would be needed in any event for the re-retrial, so justice would be available at almost no incremental cost here). That said, the waiver argument does present a significant hurdle for Samsung to overcome, so this is now going to be a very important phase for that litigation, which will "celebrate" its sixth anniversary in a few days.

In connection with Qualcomm's alleged FRAND violations and allegedly anticompetitive conduct, both Apple and Samsung are on the receiving end, and it's hard to tell which of the two is suffering to a greater extent. It's totally unknown what royalties Qualcomm has been collecting from Samsung, but there are court filings indicating that the amount in dispute between Apple and Qualcomm must be huge, and it's unlikely Samsung got much sweeter deal terms for its devices. Unlike Apple, Samsung is also in the components business, and it recently became known that Qualcomm allegedly prevented Samsung from selling its Exynos wireless chip--or at least its CDMA-compatible versions--to third parties. It would actually make a lot of sense for Samsung to bring its own case against Qualcomm, but maybe Samsung hopes that the earlier-filed FTC and Apple cases will pave the way in the meantime.

At a minimum, Samsung will presumably have to provide witnesses in one or more Qualcomm cases. The aforementioned multidistrict litigation (MDL) panel decision notes that the Northern District of California "also will be convenient for the third parties and witnesses based in Asia (where a number of foreign government investigations of Qualcomm's licensing practices have been conducted or are underway)."

The MDL panel has concluded that various consumer cases brought against Qualcomm should be consolidated with the FTC action in the Northern District of California because of "share[d] factual questions" and in order to avoid duplicative discovery, inconsistent pretrial rulings, and a waste of resources. The FTC case stays in the Northern District of California. The law governing the MDL panel's work shields antitrust cases brought by the FTC (or the DoJ) from venue transfers, and the FTC didn't want to go down to Southern California.

In the Northern District, Judge Koh is also in charge of FTC v. Qualcomm (and will then be handling all the cases merged into that one). The MDL panel decision notes Judge Koh's "multidistrict litigation experience and the ability to steer this complicated litigation on an efficient and prudent course." By now, Judge Koh has a much higher profile than at the outset of Apple v. Samsung, not only because of that particular case but even more so because then-President Obama nominated her for the Ninth Circuit and Hillary Clinton had her on a shortlist of potential Supreme Court nominees.

The two Samsung cases are far from the only Apple cases Judge Koh has already presided over, but Apple v. Qualcomm won't be among them since the MDL panel left it in Southern California:

"We are persuaded that Apple’s action, listed on Schedule B, should be excluded from this MDL. Although Apple asserts antitrust claims similar to those asserted by plaintiffs in the actions listed on Schedule A, it also asserts unique contract and patent claims against Qualcomm. Apple allegedly entered into a rebate program in order to ameliorate the effects of Qualcomm's anticompetitive conduct. Apple seeks nearly $1 billion in unpaid rebates that were allegedly withheld by Qualcomm in retaliation for Apple's responding to requests for information by certain foreign antitrust regulators. Apple also claims that certain of Qualcomm's patents are either not essential or not licensed on FRAND terms. While Apple will seek to obtain some of the same documentary and testimonial evidence relating to Qualcomm's licensing practices as the class plaintiffs, we are convinced that any common discovery can be coordinated among the parties and the involved courts, whereas inclusion of Apple’s action in the MDL could significantly complicate the proceedings and cause delay or other inefficiencies."

The decision notes that Apple had a preference for keeping those cases separate, while Qualcomm wanted centralization. But as the passage quoted above says (at the end), Qualcomm's preferred course of action would have had the potential to complicate matters and cause delay. Does this mean Qualcomm is stalling?

It's too early to tell. It will take some other procedural move(s) before it becomes clear whether Qualcomm is trying to drag these antitrust cases out. For now it looks to me like Qualcomm's stance on centralization had more to do with how it believes it can maximize its chances of getting away unscathed. The panel decision says that Qualcomm wanted centralization only in the Southern District of California but otherwise asked "that Apple's action be excluded from the MDL." That looks very much like forum shopping and hoping for a home team advantage.

The Motley Fool has a story on this week's motion by Qualcomm to dismiss the FTC case. I agree with Evan Niu that Apple's case is the bigger one and share his assessment that Apple would "aggressively carry on" regardless of a dismissal or withdrawal of the FTC's case. But at least for now I wouldn't view the FTC case as skeptically as Mr. Niu does. It's true that now-Chairwoman Ohlhausen was the dissenter from the FTC's decision--just before President Trump's inauguration--to go after Qualcomm. I've previously seen dissents by Mrs. Ohlhausen in FRAND cases and I was disappointed in each case. I don't think her positions on FRAND are representative of what Republicans (since there will be some more Republican commissioners soon) generally believe should be done to curb abuse of standard-essential patents (SEPs). For example, Senator Mike Lee (R.-Utah) played a very proactive role a few years ago, and he's staunchly conservative. I wish Mrs. Ohlhausen had an exchange of FRAND views with Sen. Lee and other Republican lawmakers who share his views (he got a lot of support). There also isn't any indication on the Internet that combating SEP abuse is a leftist cause or ideological issue. Case in point, I've consistently taken pro-FRAND positions over the last ten years and I'm not aware of any other IP/tech law/antitrust blogger who would have linked to Rush Limbaugh's website several times or would have declared himself as clearly and early in support of then-candidate Donald Trump as I did.

It remains to be seen how vigorously the FTC will pursue the case. Regardless of elections and appointments, it's a fact that competition authorities often content themselves with minor cosmetic remedies. That is also a risk in this case. Qualcomm might make some vague and unhelpful promises to modify its conduct and then get away, but Apple is not going to be interested in anything purely symbolic. If Qualcomm wants to settle with Apple, there will be a substantial cost involved.

Here's Qualcomm's motion to dismiss the FTC case (this post continues below the document):

17-04-03 Qualcomm Motion to Dismiss FTC Case by Florian Mueller on Scribd

I doubt that Qualcomm will be able to get rid of the FTC case this way, but what is possible is that the FTC might have to amend its pleadings here and there. I may talk about it in more detail after the FTC has responded. Just a couple of observations for now:

  • Qualcomm argues in its motion that a FRAND violation isn't an antitrust violation until it actually causes exclusion, and then goes on to say the following:

    "Specifically, the Complaint does not allege that Qualcomm has ever sought to interfere with a competitor's business by asserting its standard-essential (or any other) patents against a competitor; that rival chip suppliers are unable to compete without a license from Qualcomm; or that the lack of a license has actually excluded any competitor from making sales in any relevant market. Instead, the Complaint alleges only that a license from Qualcomm would 'provide substantial benefits' to chip makers. But Qualcomm has no duty under the antitrust laws to assist its competitors."

    This here is the opposite of what the Korea Fair Trade Commission appears to have concluded with respect to Samsung's Exynos chips. It furthermore doesn't convince me since a patent holder doesn't have to actually litigate (which Qualcomm does from time to time at any rate) to cause exclusion. And if the FTC's case was centered around some actual litigation, Qualcomm would probably be making a Noerr-Pennington argument (saying that litigation cannot give rise to antitrust claims) as certain SEP abusers have in other cases...

  • Qualcomm appears to be trying to make the question of FRAND rate-setting an inevitable, indispensable aspect of the FTC case. Generally, regulatory agencies really struggle with rate-setting. They much prefer to leave those questions to litigation between companies. I remember from the early stages of my interest in FRAND/SEP issues that the European Commission's attempt toward the end of the last decade to do something about Qualcomm's business model and conduct (at the time, Nokia was the key complainant) got derailed in no small part because the Commission didn't feel it could make a FRAND rate determination.

The next key deadline in the various Qualcomm cases is this Friday: Qualcomm will then respond to Apple's San Diego complaint.

Share with other professionals via LinkedIn:


Wednesday, April 5, 2017

New IP advocacy group warns: trolls now accounting for 20% of German patent suits

In mid-December, a new Brussels-based advocacy group named IP2Innovate (Intellectual Property 2 Innovate) made its first announcement. Its members include Google, Intel, Daimler, Spotify, Bull, adidas, Proximus, Wiko, and two other associations (the European Semiconductor Industry Association and the Syndicat de l'industrie des technologies de l'information). The new industry body is primarily concerned about the impact of patent trolls on innovative companies in Europe and believes that the situation will exacerbate dramatically if and when the Unified Patent Court is put in place.

Today, IP2Innovate (ip2i) issued a press release I'd like to draw additional attention to. According to the statement, "[t]he EU is facing a new explosion of patent infringement lawsuits from so-called patent trolls that are abusing Europe's legal system(s) for financial gain." Some examples of filings in France and Germany are provided, and IP2Innovate says that "[i]n Germany [lawsuits brought by patent trolls] now make up a staggering 20 percent of all patent lawsuits."

That's one of the two most disconcerting parts of the press release. The other one is this:

"But European Commissioner for the Digital Single Market, Andrus Ansip disagrees that new action is needed."

That is, however, not surprising to me. Since I became active in EU patent policy in 2004, I have not seen a single public statement on IP policy by any EU internal market commissioner (the first one whose statements I followed was Frits Bolkestein) or DG MARKT (Directorate-General for the Internal Market) official that was even remotely balanced. On various occasions I've had private correspondence, meetings and conversations with DG MARKT officials and in some cases I heard moderate and balanced things, but in the public debate, DG MARKT (whose input has presumably shaped Mr. Ansip's thinking) has always been promoting an expansive patent system and has consistently put the interests of the abusers of the system above those of legitimate innovators.

After all those years it's time for other commissioners and other DGs to take a more active role in patent policy. Europe's innovation policy, going back to the total disaster called "Lisbon Agenda," is just ridiculous. It's time for Europe's political leadership to recognize that DG MARKT's patent radicalism--it's basically behaving as if it were a division of the European Patent Office--has failed the European economy and European citizens alike.

Hopefully, the companies that have already thrown their weight behind such initiatives as IP2Innovate (and I hope that other key players and other associations will join them soon) will be able to convince other EU commissioners and other DGs that Europe will fall further behind in innovation if the patent extremists and fundamentalists continue to get their way.

Share with other professionals via LinkedIn:


Thursday, March 30, 2017

Qualcomm allegedly kept Samsung out of the wireless chipset market: unconvincing denial

When routinely checking for Twitter news about Qualcomm's antitrust issues, I found a job ad for an antitrust counsel at Qualcomm. Seriously, if you're an antitrust lawyer looking for a job, this might be one of the most interesting places to be in the months and years ahead. While some secondary issues such as a case brought over oversight duties go away from time to time, various regulators on multiple continents are currently doing everything to provide job security for San Diego-based antitrust attorneys:

Three months after a Korean antitrust ruling against Qualcomm, which was appreciated by industry groups on both sides of the Atlantic, another antitrust front in Qualcomm's multi-front, cross-jurisdictional fight against regulators and device makers has become known: the Korea Fair Trade Commission's (KFTC) concerns are apparently not limited to Qualcomm's licensing terms in general but also Qualcomm's practice (since 1993) of allegedly preventing Samsung from selling its Exynos wireless baseband chips, with CDMA (code division multiple access) technology, to other companies. I read about it on AndroidAuthority, which quotes Qualcomm's denial:

"Qualcomm has never stood in the way of Samsung selling chips to third parties, and nothing in our agreements has ever prevented Samsung from doing so. Any statement to the contrary is false."

At first sight, that denial appears to be complete and clear, but at a closer look it doesn't convince me. Apart from the fact that Qualcomm obviously could never admit to totally anticompetitive behavior (restriction of competition), in this case going back to an agreement signed in 1993 and failed negotiations a few years ago, the denial merely says that Samsung could somehow have sold chips to third parties, but not that Samsung could have sold, for example, CDMA-capable chips to third parties.

As AndroidAuthority notes, Qualcomm sued a Chinese Samsung customer (Meizu), which built some devices incorporating Samsung's Exynos chipset, and I agree with AndroidAuthority that "we have to wonder why the Korean giant only sells its mobile SoCs to one small company in China" (in light of Samsung's large customer base for other types of chipsets).

One of the things I learned from Apple's complaint against Qualcomm was that Qualcomm withheld "rebates" claiming, among other things, that Apple had persuaded Samsung to complain about Qualcomm's conduct to South Korea's antitrustauthority. Now that a competition enforcer has concluded that Qualcomm anticompetitively kept Samsung (for the most part) out of the baseband chipset market, it takes more than an incredible stretch of the imagination to believe that Samsung needed to be persuaded by Apple. By the way, Apple and Samsung can soon celebrate the 6th anniversary of the first Apple v. Samsung patent infringement action (the first California case, which among other types of intellectual property rights also involves design patents and still hasn't been settled or definitively decided). I'm mentioning this because it additionally--though the fact that Samsung was apparently harmed by Qualcomm in two respects (as a device maker and as a supplier of components) is the strongest point in this context--makes it hard to believe that Apple basically talked Samsung into taking action against Qualcomm. Apple and Samsung are rivals in the marketplace, they're adversaries in the courtroom, and while I like both companies' products and admire both companies in different ways, I've also criticized both of them at different times (since Samsung withdrew its standard-essential patent assertions but had--and still has--to fight against patentee overcompensation, I've largely agreed with Samsung in recent years, but before that happened, I was mostly on Apple's side and throughout all those years I usually agreed with Apple to the extent that it was a defendant).

Just this week it became known that Samsung will ship its next flagship Android phone, the S8, in two variants, one incorporating Samsung's own Exynos chipsets and another one with Qualcomm's Snapdragon chip. I read on Twitter that the Exynos version of the S8 is going to be sold in certain markets but not in the U.S., where Qualcomm probably has a lot more leverage based on its CDMA patent portfolio. That is a pity if certain benchmarks, which appear to show a major advantage for the Exynos variant, are true.

The plot is thickening with respect to Qualcomm's two mutually-reinforcing monopolies, and while Apple's antitrust cases against Qualcomm in three jurisdictions are at this stage the best source of information with respect to Qualcomm's practices, Samsung has even been affected in two roles (as a device maker and as a chipset maker), so the longer this takes, the more we'll likely learn about how Qualcomm acquired and held onto its monopoly power (see another AndroidAuthority article: "A lack of alternatives to Qualcomm is hurting the ecosystem").

Share with other professionals via LinkedIn:


Monday, March 27, 2017

Guest post: Nokia’s aggressive patent suits and recent share buybacks; are they related?

The following post was written by Peter W. Rudder, a graduate student at the University of Sydney Business School, who contacted me with some observations and potential conclusions regarding Nokia's share repurchase program and its earth-spanning patent litigation against Apple. I found Peter's analysis insightful, and the fact that Nokia put unusual pressure on Apple through litigation in numerous countries right at the start of a dispute (as opposed to escalating over time, which is the more common approach and also what Nokia did against HTC) could be attributed to some of what Peter has noticed.

Generally speaking, a share repurchase in a situation in which a certain percentage of a company's profitability is being renegotiated either means positive leverage (Nokia's stock would later be worth more that way) if the outcome is good or it can also make things worse (if the stock price goes and stays below where it was at the time of a buyback).

Now the actual guest post:

Nokia's aggressive patent suits and recent share buybacks; are they related?

Back in December Nokia launched several patent suits against long-time adversary, Apple. This was an event that drew much media attention to Nokia, with many calling it a return to their patent trolling days. What didn’t draw nearly as much attention however, was the commencement of a massive share repurchase program that began just over a month before the announcement of the litigation

The announcement came during Nokia's June, 2016 Annual General Meeting in which the board was authorised to repurchase a maximum of 575 million shares, with the authorisation set to expire in December, 2017. Large corporations repurchase shares all the time, most commonly to return capital to existing shareholders or to alter capital structure and almost always when it believes its shares are undervalued. Nokia has made no allusion that it believes its shares are undervalued, stating that the repurchases are only part of its ongoing capital structure optimisation program, which it has invested a total of €7 billion in since October 2015, mainly for de-leveraging purposes as a consequence of the Alcatel-Lucent acquisition.

While it is fair to assume Nokia did not believe its shares were undervalued at the time, the evidence tends to suggest otherwise. The actual repurchase of shares did not commence until November 16, 2016 when Nokia shares were at a 3-year low. This low can mainly be attributed to Nokia's poor Q3’16 earnings results announced in October 2016, compounded with a later announcement from CEO Rajeev Suri on November 15, offering an additional 2% decrease in Networks sales to the existing 2017 guidance figures. The market reaction was harsh, with Nokia's share price falling 18% after the Q3’16 announcements, and many writing off Nokia, saying poor global network sales would stifle any "catalyst for rebound". Despite the prophesised doom and gloom, from November 16, 2016 to March 17, 2017 (the date of the last recorded repurchase) Nokia purchased 93.1 million (€416.6 million in value) of its own shares and saw a 32% increase in its share price.

Even with poor Networks sales and a gloomy outlook from the market, Nokia went ahead with its ambition repurchase program, seemingly unfazed; why? Analysts had already priced in these revenue figures into their models, and concluded that Nokia's share price wouldn’t recover until there was tangible evidence that Networks sales could improve. From this, one could conclude that either Nokia believed it could quickly deliver these results to the market, or that it had an ace up its sleeve that could deliver value to shareholders another way. Sure enough, just over a month later, Nokia announced a slew of patent suits against Apple.

With the launch of these suits, analysts have estimated that Nokia has lost around €150 million in royalty revenues per year from Apple. On the surface, it seems like Nokia is taking an extraordinarily large risk to renegotiate a seemingly small amount of revenue, after all, €150 million is less than a percent of the almost €24 billion Nokia generated in net sales in FY2016. So why go to so much trouble over such little revenue?

Since the disputed patents are mostly to do with smartphone and other consumer electronics devices, all the lost revenue has impacted on Nokia’s Technologies segment. The Technologies segment, once the core of Nokia’s business, now plays a relatively small part, making up only 4.6% of revenues in Q4’16. When it comes to profitability however, the Technologies segment becomes a much more important part of the business, making up 14.3% of positive EBITDA and an EBITDA margin of 52.4% in Q4’16 (report). When compared to the backbone of Nokia’s business, the Networks segment, which has a much lower EBITDA margin of 16%, we can see why Nokia has taken this risk, as each Euro of revenue earned in the Technologies segment contributes to earnings over three times more than it would in the Networks segment. The reason for this is mainly that much of the revenues generated in the Technologies segment come from royalties which are very low risk, high margin cash flows. With an operating profit of €2.2 billion in FY2016, the €150 million represents approximately a 7% loss to Nokia's bottom line, which is a significant hit to its profitability.

The timing of the share repurchases and the announcement of litigation against Apple soon after, seems to suggest that Nokia is confident in its ability to quickly resolve the patent disputes and renegotiate its contracts on more favourable terms. This could possibly entail larger yearly royalty payments and a large sum paid as compensation for the alleged infringement, similar to the resolution of the Ericsson v Apple case in 2015 (Financial Times article; paywall).

The market tends to agree, although a little more conservatively. Analysts from JP Morgan stated that the €150 million in lost revenues should be returned by no later than the end of FY 2017, and are not factoring in the potential for greater royalty payments or a lump sum paid as compensation either. Surely, you’d think, by taking this risk, Nokia is aiming for a much better result than just the return of €150 million. The fact that the potential upside is not priced in to many analyst’s models tends to suggest that they believe future licensing revenues will not be significantly different from the past, and could mean they’re undervaluing Nokia somewhat. The continuing share repurchase and the ongoing litigation, which they are reportedly willing to spend €100 million per year to resolve, seems to support that Nokia believes the potential upside will far exceed the downside, and are expecting a successful result which will have a significant positive impact on their earnings.

Considering the recent share repurchases, the fact that Nokia is willing to spend €100 million per year on this litigation, the success it has had in settling patent suits in the past, and the broadening of Nokia's patents thanks to the recent Alcatel-Lucent acquisition, strongly suggests that Nokia is very confident that it will triumph over Apple. But are they being too confident? As Florian has written previously, Nokia may possibly not receive the outcome it evidently wishes to seek. Given Apple's vast resources, incredibly powerful market position and subsequent leverage over Nokia (see: Apple pulling Withings products from Apple stores), Apple has the potential to draw out this case for years. The longer the case goes on, the longer Nokia are without a significant portion of their earnings, and combined with a shaky outlook for its Networks segment, it could see a significant loss to its share price if shareholders are not delivered relatively quick results. Time is of the essence, so could Nokia's confidence be a risk to its investors? That remains to be seen, but what we do know is that there are certainly interesting times ahead for Nokia.

Share with other professionals via LinkedIn:


Thursday, March 16, 2017

Samsung files petition for Supreme Court review of 2nd Apple case weeks ahead of deadline

Stalling is something else: even though the Chief Justice of the United States had granted Samsung an extension until March 29 for a petition for writ of certiorari (request for Supreme Court review) relating to the second California Apple v. Samsung case , it made its filing on March 10, almost three weeks ahead of the deadline:

17-03-10 Samsung Cert Petition 2nd Apple Case by Florian Mueller on Scribd

Timing is often an interesting indication of a party's priorities. Over these past seven years of Apple v. Android lawsuits (it all started with HTC in March 2010), Android companies--HTC more than anyone else--have often shown the behavior of stallers, at least when they were (as Samsung is here) on the defending end of a litigation (obviously not when they were asserting standard-essential patents themselves). Even parties that don't intend to stall in the slightest (such as Oracle when enforcing its copyrights against Google) typically wait until the end of a filing deadline. It provides them with an opportunity to wait for further relevant developments (case law, public statements by key persons and entities, etc.). So I really am surprised here. Further remedies-related proceedings in that case are ongoing in district court, and a case management conference has just been postponed to next month. With a view to that conference, the Supreme Court is unlikely to make any decision either way in the meantime.

Maybe Samsung believes Apple is going to bring a motion for contempt in connection with an injunction and believes that a more advanced state of its Supreme Court petition will be helpful when seeking stays. It could also be the opposite: with the most important one of the patents-in-suit ('647, often called "quick links") having expired, Samsung might not fear anything and, instead, be pursuing this Supreme Court appeal mostly because of the fundamental principles at stake: overarching issues that affect Samsung in other cases, and not just Samsung, but even Apple would benefit from some of Samsung's proposed statutory interpretations here whenever and wherever its shoe is on the other foot.

The petition as a whole does look very principled. I've never seen a litigant of this nature and stature--no matter which party--who would have managed to be 100% consistent and principled, but of all the motions, petitions and other procedural steps taken by Android companies defending against Apple's (or, in other cases, Microsoft's or Oracle's) patent infringement assertions, I really can't remember a more principled initiative. Obviously, a petitioner's intentions aren't considered by the Supreme Court when deciding on certworthiness, but while the Supreme Court will just focus on the questions presented and their implications, I've been following the entire Apple v. Samsung dispute for almost six years, so I am trying to understand what the parties are trying to achieve. Their last filing with Judge Koh in San Jose said there was no progress regarding a settlement. But neither party has brought a new case against the other in years; instead, various pending lawsuits were withdrawn, with only two U.S. district court cases still awaiting final resolution.

What's ambitious about Samsung's petition is that it raises three questions for review, covering the big three patent litigation questions:

  • validity (here, obviousness),

  • remedies (here, injunctive relief, which is always a more important issue than damages unless damages would really be devastating), and

  • infringement (here, whether all elements of the relevant "quick links" claim were infringed).

If the Supreme Court granted all three, it would be the most comprehensive patent case ever before the top U.S. court, and the implications of a decision could, collectively, go beyond Alice. How did Samsung's petitions fare in the past? The one regarding design patents was a slam dunk. I believed in it 100% from the start, at least in the "article of manufacture" theory, with respect to which cert was granted while a different theory wasn't evaluated. Last year, Samsung brought a little-noticed (I, too, had failed to notice before it was "game over") injunction-related petition that went nowhere, maybe because it wasn't deemed ripe for review. But when evaluating Samsung's track record with cert petitions involving Apple, "1 out of 3" would be the wrong conclusion since one has to weight the importance of the issues and the fact that Samsung only needed to prevail on one of its design patent damages theories, which it did except that there still is some uncertainty as to what the ultimate outcome would be.

The three questions raised have unique strengths-weaknesses profiles from a certworthiness point of view (just talking about certworthiness, not merits):

  • The injunction part is where the petition says something that may get the Supreme Court, especially justices who either were involved with the famous eBay v. MercExchange appeal or care about the related principles anyway, very interested. Samsung argues that the Federal Circuit would basically (and this is my choice of words) gut eBay. I bet Apple will argue (as it did in the past) that a "causal nexus" between infringement and irreparable harm is none of the four eBay factors, while Samsung argues that it is needed. Justice Kennedy's eBay concurrence is nowadays, by far and away, the most influential concurrence in a patent case, and what he wrote in 2006 is probably the closest authority to its own position that Samsung could point to. But the strongest "argument" for getting the Supreme Court interested (which has nothing to do with the merits) is cited at the bottom of page 2 and the top of page 3 of Samsung's petition:

    "As to the injunction decision, its author stated at oral argument, 'I think eBay was wrongly decided .... I think patentees should get injunctions.'"

    The decision's author is Circuit Judge Moore. That statement might persuade the Supreme Court that this case is indeed about eBay reloaded, 11 years after. Samsung also quotes from Chief Judge Prost's dissent, which is quite persuasive, too. What makes Judge Moore's statement so powerful is that even a Supreme Court Justice who doesn't necessarily believe a reasonably strict "causal nexus" requirement is dictated by eBay (or even someone who disagrees with eBay altogether) might find that attitude so dismissive of the highest U.S. court's decision that the Supreme Court would want to take a look. Samsung's cert question quote the two words of the Federal Circuit's majority opinion that sound most eBay-incompatible: "some connection" (between an infringing feature and asserted irreparable harm)

  • As far as the merits are concerned, Samsung's petition exudes maximum confidence with respect to the infringement-of-all-claim-elements part: they say that even if the Supreme Court didn't want to hear this case, the "quick links" infringement judgement "should be summarily reversed or vacated."

    This is the part that would be economically most impactful (about 80% of the $120 million verdict at issue), yet Samsung raised it only as the last of three cert questions. Samsung portrays its position here as what one might call a "no-brainer" that won't be difficult or time-consuming to decide.

    As a software developer, the problem I see with the way the Federal Circuit interpreted the patent here against a previous claim construction is that there's a huge number of client-server software patents out there and if (maybe not all, but still a number of) client-server patents could also be asserted successfully against single pieces of software (here, the client side alone), it would expose to developers to far greater risks. If I were in Apple's shoes, I would probably place particular emphasis on my resistance to this part of the petition because, even if Samsung succeeded on anything else, the net effect would be that roughly 80'% of the original verdict would be affirmed that way (with the rest potentially still going well for Apple), so Apple's PR message could be "most (if not all) of what we won got upheld." But Apple, just like Samsung with its petition, may set priorities based on key principles, and considering how hard Apple fought over the years, the injunction question is probably going to be even more meaningful to it, even if the most important one of the three patents-in-suit in this particular case has already expired.

  • The strongest part of Samsung's argument for cert regarding (non-)obviousness is that it's the most litigated issue in connection with patents but the three judges of the Federal Circuit's panel, who got overruled by an en banc majority, all wrote dissenting opinions that warn against the consequences of the majority decision.

    The patents at issue in this context cover particular aspects of autocomplete and slide-to-unlock functionalities. So Samsung's first cert question relates to the two patents that are substantially less important from a damages point of view than the "quick links" patent.

There is an unofficial fourth issue that Samsung raises and it relates to the proceedings in the Federal Circuit. Samsung points to Professor Chisum's ("Chisum on Patents") and other legal experts' criticism of how things were handled procedurally, with an en banc decision overruling a panel without a hearing and even without further briefing. That part is relevant in connection with the merits questions (validity and infringement), but not to the injunction case, which was a separate appeal. Maybe Samsung felt that a formal cert question about Federal Circuit interna wouldn't be likely to get the Supreme Court's attention, so the procedural part is raised only as a means of undermining the crediblity of the en banc majority decision.

In the design patent damages case, the cert question that the amicus briefs submitted in support of Samsung focused on was also the one that succeeded (it simply was the most interesting question). It will be interesting to see what any amici supporting Samsung will focus on. If past amicus brief activity in different patent cases is any indication, the standard for injunctive relief may very well be the #1 issue for amici. However, if different amici focus on different ones of Samsung's cert questions, then we may see even more amicus brief activity in total here than we did in the design patents case.

The most interesting de facto amicus briefs may already have been filed: the dissents by Chief Judge Prost in the injunction case and by all three panel members, including Chief Judge Prost, in the merits case. Outside of the Samsung group, no one may be more interested in this cert petition succeeding (at least in part) than Chief Judge Prost, whose dissents were very passionate and persuasive in both cases. Samsung quotes her a lot, including among other things her position that the second Apple v. Samsung case "is not a close case" for an injunction.

Share with other professionals via LinkedIn: