Thursday, May 25, 2017

Qualcomm requests U.S. preliminary injunction against Apple's contract manufacturers

Last week Qualcomm filed a breach-of-contract suit against Apple's four contract manufacturers, and the focus on injunctive relief made a motion for a preliminary injunction "particularly likely" as I wrote at the time, though I also pointed out that the hardest part here is going to be that Qualcomm must show irreparable harm. So I'm not surprised in the slightest that Qualcomm has followed up with a preliminary-injunction motion (asking the court to require the contract manufacturers to pay royalties again) and that most of the legal memorandum in support of that motion deals with the question of irreparable harm. The closest thing to a surprise is that this filing wasn't accompanied by a press release published on Qualcomm's website. They have, however, given a statement to CNET and other media.

Here's the filing, including all exhibits, some of which are really essential here (this post continues below the document):

17-05-24 Qualcomm Motion for Preliminary Injunction by Florian Mueller on Scribd

Despite the qualitative and quantitative efforts undertaken by Qualcomm to establish irreparable harm, I can see some serious issues here that weigh strongly against an injunction. Only two days after disagreeing with various aspects of Apple's opposition to Samsung's latest Supreme Court petition, one part of which is related to an injunction ruling in Apple's favor, I can't help but point out which parts of Qualcomm's preliminary-injunction motion are unconvincing at a closer look.

As long as Qualcomm doesn't grant patent licenses on FRAND terms to chipset makers such as Intel (which filed a great amicus brief in support of the FTC) and Samsung (whose brief is at a level with Intel's, with a different focus in part since Samsung is affected in two roles, not just one), it is acting in contravention of an obligation to license all comers. That is the root cause of this whole constantly-escalating dispute. Qualcomm's motion mentions complaints by Apple in the same district (Southern District of California) and "in the United Kingdom, China, Japan, and Taiwan." I was previously aware of some, but not all, of those complaints. But again, this wouldn't have happened if Qualcomm had licensed chipset makers on FRAND terms. Since Qualcomm must license "all comers" on FRAND terms, chipset makers are entitled to a license, but so are device makers like Apple. Contract manufacturers are being sued now only because they are in exactly the position of the value chain where Qualcomm apparently believes it can get the best deal.

Qualcomm places a whole lot of emphasis on what those contract manufacturers have done over an extended period of time: they apparently used to meet Qualcomm's demands. Those demands are now at issue. Exhibit 16 to Qualcomm's motion (pages 67 and 68 of the PDF) is a letter sent by Apple's general counsel, Bruce Sewell, to his counterpart at Qualcomm, Donald Rosenberg. In that letter, Apple states the following:

"Despite being just one of over a dozen companies that contributed to basic cellular standards, Qualcomm forces the contract manufacturers and Apple to pay many times more in royalty payments than all the other cellular patent licensors combined! This is grossly unfair and needs to be reviewed by the courts and appropriate antitrust agencies - activities which are now underway." (emphasis added)

Qualcomm's version of the story is that everyone was paying a fair amount of royalties and that the contract manufacturers are still doing so with respect to non-Apple products:

"[Qualcomm and Apple's contract manufacturers have a] long history of operating under the license agreements makes clear that the agreements are reasonable and supported by adequate consideration. As noted, as to non-Apple products, Defendants continue to perform under the same terms that apply to Apple products."

This is a non sequitur. Royalties can be supra-FRAND even if some parties have paid up for a century. The contract manufacturers are just pass-through entities here. If other customers haven't taken the same step as Apple, it still doesn't mean that the royalty level is right. Qualcomm's motion doesn't address what the attached letter by Apple's general counsel states. Here's another quote from that letter:

"We believe Qualcomm is charging the contract manufacturers, who in turn pass back to Apple and its customers, royalties based on an illegal manipulation of the market for cellular enabled chipsets."

If what Apple says is true and Qualcomm has illegally manipulated the market and has therefore been able to charge "many times more in royalt[ies] than all the other cellular patent licensors combined," then that's an issue that needs to be addressed. Above all, what needs to be addressed before an injunction can even be contemplated in Southern California is the totality of what the Federal Trade Commission is alleging in the Northern District of California. In the contract manufacturer case, the FTC case isn't mentioned at all (unless something went wrong with my full-text PDF search). The only related case Qualcomm has notified the court of is Apple v. Qualcomm, where Qualcomm brought counterclaims including one related to tortious interference. Between now and an injunction decision, the FTC's findings will have to be discussed since they're highly relevant. If we nevertheless assume now, for the remainder of the post and just for the sake of the argument, that Qualcomm is right and the contract manufacturers are withholding royalties that they owe Qualcomm, then there still are some fundamental flaws in Qualcomm's injunction request:

  • On page 18 of the memorandum (PDF page 23), Qualcomm cites various district and state court decisions that are unrelated to patent licenses. Unlike Richard Stallman, who calls it a "seductive mirage" to view patents, copyright, trademarks etc. as part of the same larger category of rights called intellectual property, I don't oppose the term when common aspects of otherwise disparate IPRs are meant. However, I've done a fair amount of copyright and trademark licensing over the decades, mostly involving software developers and distributors. When Qualcomm's cited decisions found that it was irreparable harm if unlicensed streaming threatened the businesses or at least diminished the value of distributorships of legitimate licensees, I can relate to that in connection with exclusive licenses (such as an exclusive territorial distribution license). The copyright and trademark licenses I negotiated in the past all involved territorial exclusivity, and infringements by third parties would have been terrible. However, Qualcomm entered into the obligation to grant FRAND licenses to its standard-essential patents to everyone. If courts protected exclusive licensees through injunctive relief, that's fundamentally different from this case.

  • Pages 161 to 164 of the PDF contain a declaration signed by Qualcomm's licensing chief Alex Rogers. The fact that he signed it in "Brussels, Belgium" is probably attributable to developments in the European Commission investigation of Qualcomm's conduct. At least that's far more likely than licensing negotiations. Anway, Mr. Rogers's declaration is meant to support Qualcomm's claim of irreparable harm (unless the court orders Apple's licensees to pay up again), and it's a bit weak in terms of being speculative. The ninth paragraph alleges "a significant competitive imbalance" that Apple and its contract manufacturers have allegedly created because Apple's competitors "are paying to use Qualcomm's valuable intellectual property under their respective license agreements, while Apple and Defendants are not." However, there really isn't any sign of Apple gaining market share this way. Also, Qualcomm itself asserts all the time that Apple has agreed to hold the contract manufacturers harmless, so Apple can't just assume that it won't ever pay Qualcomm anything. Anyway, Apple hasn't lowered its prices or done anything else so far (such as offering more value at the same price) that would have competitive impact. The tenth paragraph contains a double "may":

    "[O]ther licensees may use Defendants' non-payment as leverage to improperly argue that they may also decline to pay under their respective agreements [...]" (emphases added)

    The eleventh paragraph contains a "may" and a "could":

    "Defendants' continued non-payment of royalties also may harm Qualcomm's ability to enter into new agreements. [...] [A] prospective licensee could claim it is disadvantageous to sign a license agreement with Qualcomm." (emphases added)

    But the legal standard cited by Qualcomm requires a plaintiff to show that he is likely to suffer irreparable harm (absent a preliminary injunction).

  • Qualcomm argues that non-payment of royalties means "less cash on hand for ongoing research and development." But Apple makes a similar claim in the aforementioned letter:

    "The more Apple innovates with unique features[,] the more money Qualcomm collects for no reason, and the more expensive it becomes for Apple to fund these innovations."

    So it's not enough for Qualcomm to claim that more cash in the bank (where it already has north of a billion dollars anyway) is going to result in less research and development. The question is whether the same applies to Apple in some way, and then, if the court has to determine which effect is worse (the one on Qualcomm's R&D or the one on Apple's R&D), then it also must be considered whether Qualcomm's royalties are within or outside the FRAND ballpark. The same district court in Southern California will make a FRAND determination as to at least some Qualcomm patents at Apple's request. It seems highly ambitious that Qualcomm now wants to convince the court in connection with a preliminary-injunction motion that it's going to prevail in that other (huge) case.

  • The last paragraph of Apple's April 25 letter is heavily-redacted. In that paragraph, Apple stresses that it doesn't want a free ride and never did. Apple states its willingness to pay a FRAND royalty. It then "specifically refer[s]" Qualcomm to an attachment to an offer it made in January and says it "believe[s] this action show [Apple's] commitment to apy FRAND royalties once the amount is finally determined by the courts on a [FRAND] basis." I don't know what exactly Apple attached to its offer, but maybe we'll find out more about it in the process. I'm curious because an offer may already (dependent on its specifics) be sufficient to show that Apple is a willing licensee, but if Apple stresses in its letter to Qualcomm that there's something important beyond the offer, then (unless Apple overstates the importance of that one) it may be something important.

    Apple's request for a FRAND rate-setting decision by the court predates Qualcomm's suit against the contract manufacturers, so apart from substantive and logical considerations, there would also be a procedural reason here to make the FRAND determination, or at least serious headway in that regard, before Qualcomm can obtain an injunction based on the assumption of its royalties always having been FRAND.

  • A part of Qualcomm's argument that I haven't understood so far is its reference to "the risk of an unenforceable judgment against foreign Defendants." In its own counterclaim against Apple and also in its filings in the contract manufacturer case, Qualcomm points to Apple's commitment to indemnify the contract manufacturers. So I can't see why Qualcomm wouldn't ultimately get paid.

  • Qualcomm argues that "[i]f [it] were limited to an award of backward-looking money damages (the legal remedy), Qualcomm would be forced to file a new suit (or amend its complaint) each and every quarter." Actually, that's what supplemental damages are for.

  • I'd like to compare this case, at a high level, to the Apple v. Samsung case in connection with which I agree with Federal Circuit Chief Judge Prost that Apple wasn't entitled to an injunction. In that other case, Apple has a decision on the merits in its favor (an undeniable fact though I disagree with that one, as does Chief Judge Prost, and would like to see it overturned). Here, Qualcomm hasn't yet proven that a single one of its patents is valid and infringed. Its claim is based entirely on the contract. It will be interesting to see what the contract manufacturers will say in their opposition to this motion about the contract terms.

As for the connection between this and the Apple v. Samsung case, it's worth noting that Qualcomm, though Quinn Emanuel (Samsung's counsel against Apple) is among the three world-class firms representing Qualcomm here, cites to a Federal Circuit decision on the public interest in protecting IP from 1996 (really old) and another one from the Northern District of California, but not to the Federal Circuit's 2015 opinion in Apple v. Samsung, which held that "the public interest nearly always weighs in favor of protecting property rights in the absence of countervailing factors, especially when the patentee practices his inventions." Maybe that's because of the pending cert petition: this holding could (and I hope will) still be overturned.

Qualcomm is undertaking a long shot here. It wants injunctive relief in a case that is only about money, and it wants a preliminary injunction despite the need to address various related issues in earlier-filed cases (FTC v. Qualcomm in the Northern District of California and Apple v. Qualcomm in the Southern District of California). Qualcomm has to give it a try, but the outside world doesn't have to believe in its chances.

The dispute is still escalating, and presumably the next level of escalation will be reached when Qualcomm brings the ITC complaint (request for U.S. import ban) it announced several weeks ago...

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Tuesday, May 23, 2017

Apple discourages Supreme Court from granting Samsung's petition; Washington panel discussion on Thursday

Yesterday, Apple had a deadline for responding to Samsung's mid-March petition for writ of certiorari" (request for Supreme Court review) in the second California Apple v. Samsung case, which had received very significant support from software and Internet companies, non-governmental organizations and law professors. Here's Apple's responsive brief (this post continues below the document):

17-05-22 Apple Opposition to Samsung Cert Petition by Florian Mueller on Scribd

Before sharing a few observations on the brief, I'd like to recommend a Washington, DC panel discussion that will take place at the National Press Club the day after tomorrow (Thursday, March 25) at 9 AM Eastern Time. The panel breakfast wil be presented by the Public Knowledge Foundation, an amicus curiae, and feature speakers who are working or have worked for other amici curiae, such as former CCIA patent counsel Matt Levy (who was a thought leader on design patent damages) and Carl Cecere (representing the Hispanic Leadership Fund and the National Grange in the current cert proceedings), and Ellen Schrantz, the Internet Association's Counsel and Senior Director of Government Affairs.

If you're in or near DC and interested in patent litigation (and particularly in the rules governing patent (in)validity), I'm confident that attending the Public Knowledge event will be interesting.

Apple's brief does what one would expect from a sophisticated respondent to such a petition: they argue that the decision below was right, that the issues aren't certworthy (since they're just about applying settled law to the specific facts of the case), and that even if they were certworthy, this case wouldn't be a good vehicle. In addition, Apple argues that an injunction that has practically been worked around with respect to two patents (the third one, "quick links," having expired) is irrelevant in practical terms even in this case. And Apple says Samsung's second cert petition (this here is already the third in this dispute) should already have raised the issues concerning the standard for injunctive relief that Samsung's latest (third) petition presents, and since Samsung didn't do it before, it's "far from clear" that the Supreme Court could even hear the matter.

Samsung's petition has three parts and Apple is attacking each of them from multiple angles. I may go into more detail on this some other time. One thing I do find interesting is that WilmerHale's Seth Waxman, the Solicitor General of the United States during President Clinton's second term and The American Lawyer's 2016 Intellectual Property Litigation Lawyer of the Year, is on the brief. (Bill Lee, also of WilmerHale, is counsel of record as in other Apple v. Samsung matters.) Mr. Waxman is a Supreme Court expert--and they are normally not involved at the cert stage. In the design patents case, he became involved only after certiorari was granted. While Apple and its lawyers naturally seek to downplay the importance of the issues Samsung raises, Mr. Waxman's involvement does nothing to lower the profile of the case and of the questions for review.

Any case-specific (non-)impact arguments won't bear much weight with the Supreme Court. Even if a patent has expired or been worked around here, the Supreme Court is primarily concerned with the transcendental question of the legal standard. However, if Apple's other arguments against certiorari got traction, then the case-specific arguments could "seal the deal." I hope that won't happen. The issues Samsung raises regarding obviousness, injunctions, and even infringement (though it's only a small part of the petition and didn't get traction among amici cuirae) are central to countless patent litigations.

Apple points to statements by the panel judges (who sided with Samsung on obviousness and non-infringement but were then outvoted by eight other judges in what a leading author on patent law, Professor Donald Chisum, called the Federal Circuit's potentially "most controversial decision ever") and by Samsung, according to which statements there shouldn't have been a full-court review (en banc) after the panel ruling since no "exceptionally important question" had to be addressed here. However, that doesn't automatically and necessarily mean that the issues raised by Samsung aren't certworthy. Before the other eight judges decided to grant an en banc review and overrule the panel, the question was whether the panel decision raised exceptionally important questions. Now the question is whether the en banc decision does. It's a different situation now. In the very same case, an issue can be uncertworthy as long as settled law is applied and become certworthy when "unsettling" things occur.

As for the injunction part, Apple's argument that Samsung should have raised the issues in a previous cert petition (that didn't go anywhere) may have the desired effect of discouraging the Supreme Court from looking at this, but I disagree with Apple on this one, too:

Samsung's second cert petition (the one that failed) just asked the Supreme Court to moot the injunction decision after the Federal Circuit panel opinion had sided with Samsung on the merits. In other words, the merits rug had been pulled out from under the remedies. But Samsung had jumped the gun: Apple's petition for an en banc review was still pending. The Supreme Court denied the petition.

Apple says Samsung could also have tackled the equitable analysis underlying the injunction decision, as a fallback. But how could that have worked? At least with respect to the "quick links" patent, I can't see how. The Federal Circuit panel found it wasn't infringed. Without an underlying infringement, it's either hard or (depending on the specifics of a case) downright impossible to talk about the causal nexus between an infringement and irreparable harm. Under the Posner claim construction as applied by the Federal Circuit panel, even the iPhone itself doesn't practice the patented invention.

Even Apple doesn't deny that an interlocutory (before the case is over) matter is properly raised in an appeal from a final judgment, and that the Supreme Court has allowed "multiple petitions" in connection with interlocutory decisions. But Apple tries to distinguish those cases from Apple v. Samsung:

"[In those other cases] the interlocutory decisions led to further proceedings from which the petitioner appealed. Here, by contrast, the permanent injunction decision proceeded independently from the Federal Circuit's liability decision. As a result, Samsung is now challenging the same Federal Circuit judgment (dated December 16, 2015) as it did in its last petition."

What I take issue with is the term "independently." A permanent injunction does depend on an underlying merits decision. At the time of Samsung's second petition, the state of affairs in this case was that a Federal Circuit panel had held that there was no underlying merit. It was the totally surprising en banc decision that ended up breathing new life into the injunction decision. If one focuses on that dependency, then Apple's claim that Samsung should have raised any eBay factor questions on what was then highly unlikely (a reversal of fortunes on the merits) doesn't appear efficient (if practicable at all; actually, any number of outcomes, also with respect to "quick links" claim construction, would have been imaginable at the time Samsung filed its premature second petition).

Apple wants Samsung to pay the price for its decision to bring a second petition. But the whole distinction here between an injunction appeal and a merits appeal is actually due to Apple's decision to appeal Judge Koh's denial of a permanent injunction before the merits part was ready to be appealed.

In a footnote, Apple accuses Samsung of unfairness because Samsung pointed to Circuit Judge Moore's statement at oral argument that she disagreed with the Supreme Court's eBay ruling since she "immediately acknowledged that she was of course bound by it." Apple's other point in the footnote is stronger: it's the written opinion that matters. In my words, statements at oral hearing are not reviewable. I agree with Apple that the focus must be on the written opinion. But what Circuit Judge Moore said at the oral hearing is also part of the record (even of the public record). It's fair to point to it since it shows a certain attitude.

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Wednesday, May 17, 2017

Qualcomm's latest move: breach-of-contract suit against Apple's four contract manufacturers

Two weeks after Bloomberg reported that Qualcomm was preparing an ITC complaint against Apple (i.e., a request for a U.S. import ban), and less than a week after Samsung and Intel supported the FTC, Qualcomm has filed a breach-of-contract complaint in the Southern District of California against Apple's four contract manufacturers: Hon Hai (Foxconn), Pegatron, Wistron, and Compal Electronics (press release, redacted complaint (PDF)).

Today's press release also points to the previous filing of "a separate claim against Apple for its unlawful interference with the license agreements between Qualcomm and these manufacturers." That must be a reference to Count I of Qualcomm's counterclaims against Apple, filed as part of Qualcomm's April 10 answer to Apple's January complaint. While the complaint against contract manufacturers goes into more detail regarding those relationships, Count I of the April counterclaims already brought the same kinds of allegations: that the contract manufacturers were allegedly not meeting their obligations to calculate and pay royalties (with respect to the products they build for Apple) and to enable Qualcomm to audit their royalty statements.

I just noticed that the final paragraph of that Count I of the counterclaims against Apple argues that Qualcomm needs to go after Apple, on the basis of alleged interference, in order to (among other things) "prevent a multiplicity of judicial proceedings." But with today's complaint, the very thing is happening, not prevented. Alternatively, Qualcomm could have moved to amend its counterclaims. I'm wondering whether Qualcomm has somehow modified its litigation strategy since April 10.

Qualcomm's complaint against Apple's contract manufacturers puts injunctive relief front and center, starting with the headline of the complaint. The first prayer for relief asks the United States District Court for the Southern District of California to do the following:

"Enjoin Defendants from violating the terms and conditions of their License Agreements and/or require Defendants specifically to perform the obligations of their License Agreements, including (i) timely making full and complete payments of royalties for any and all sales of Subscriber Units, (ii) providing Qualcomm's auditors all necessary information and assistance to complete their regular audits of Defendants, and (iii) providing royalty reports that accurately state their Subscriber Unit sales information, with such information calculated and reported as required by their License Agreements;"

In my experience, litigants that focus so much on injunctive relief--such as Apple in both of its Samsung cases--are particularly likely to move for a preliminary injunction. But then they have to prove a likelihood to succeed on the merits, irreparable harm, that the balance of the equities favors them, and that it's in the public interest. Irreparable harm--which they also need to establish for a permanent injunction--is something else than reducing a quarterly forecast from $5.3-6.1 billion to $4.8 billion-$5.6 billion, which would have had far more impact on Qualcomm's stock price if the markets thought this was the end of the world. A full-text search over Qualcomm's complaint against Apple's manufacturers shows multiple occurrences of the word "harm," but no allegation of irreparable harm. The closest term to "irreparable harm" that appears in the complaint is "severe, immediate, and permanent harm," and an allegation that Apple seeks "to cause Qualcomm so much harm that Qualcomm will be forced to capitulate to the unfair licensing terms that Apple is demanding." Qualcomm's general counsel, Don Rosenberg, states that allegation in the following way in today's press release:

"As Apple continues to collect billions of dollars from consumer sales of its Qualcomm-enabled products, it is using its market power as the wealthiest company in the world to try to coerce unfair and unreasonable license terms from Qualcomm in its global attack on the company."

This is a common tactic. Pretty much every company facing antitrust charges (in this case, around the globe) tries to portray itself as a victim of undeserved injustice. Google and Samsung's lawyers and long-standing allies also argued that Samsung and Motorola's pursuit of injunctive relief over standard-essential patents (SEPs) against Apple and Microsoft was just a response to those companies' assertions of non-SEPs against them (and other Android device makers). But when companies face regulatory investigations and charges (such as a statement of objections in the EU oder an antitrust complaint in the U.S.) in multiple jurisdictions and their adversaries don't, it's obvious which side has a credibility problem.

Qualcomm's complaint refers to Apple's cash reserves. But Apple's cash reserves are unrelated to the question of (irreparable) harm. There isn't one thing that Qualcomm alleges that Apple can do only because it has (even) more money than Qualcomm. Both companies are highly profitable and have astronomic market capitalizations. Both have billions in the bank (hundreds of billions in Apple's case, but still, Qualcomm has billions and would have even more billions than it does if not for a relatively high dividend yield--more than twice, in terms of percentage of stock price, of Apple's). One doesn't even need to be wealthy to withhold payments in whole or in part (though it obviously makes it easier to deal with litigation costs and risks).

In Apple v. Samsung, one doesn't have to (and I, in many ways, don't) agree with everything Apple does. It collected half a billion dollars in 2015 on a premature basis. But that didn't represent a threat to Samsung. It was (in my view) bad stuff for all sorts of reasons, but it had nothing to do with Apple having (even) more money in the bank than Samsung. The right way to look at those clashes of titans is to ask ourselves whether the precedent that is or may be set will, in similar cases involving different parties, allow a weaker party, with law, facts and policy on its side, to overcome the strong (an adaptation of my favorite ancient quote).

As I wrote when Qualcomm announced the adjustment of its quarterly forecast, it would be unfortunate if this dispute got decided by leverage (no matter who would benefit from that extra leverage) since an entire industry is affected by the underlying problems. A top-notch analyst left the following comment on my LinkedIn profile a few days ago:

"No surprise everyone lines up vs QCOM - [...] The more disclosure we get - long overdue, given economic implications - the better!"

I'm sure this is the way a lot of companies in the industry feel. Neither company should just overcome the other through some kind of power play. The ultimate outcome should benefit not only one company, be it Qualcomm or be it Apple. It should be good for companies of different sizes. For the Samsungs and Huaweis of the world as well as the little guys. Apple is now embroiled in a particularly intense and escalating fight with Qualcomm, and there may be reasons for which they're particularly proactive, though Samsung isn't just sitting by idly. So far, the regulators and Apple haven't taken a position of the kind that benefits only the behemoths and not the midgets. If they ever do, I'll be sure to talk about what's good only for the giants.

I hope (and guess) Apple will help those contract manufacturers to the best of its ability so that they won't end up being held hostage. There is an indication of that in Qualcomm's new complaint: "Apple had instructed Foxconn's legal team to contact Apple's legal team."

In connection with its interference claim against Apple itself, Qualcomm alleges that "Apple has consciously and repeatedly disregarded Qualcomm's independent business relationships with the Contract Manufacturers, and continues to do so." But how "independent" are Qualcomm's business relationships with the likes of Foxconn if Qualcomm enters into rebate agreements with Apple, BlackBerry, and presumably others? Qualcomm itself calls the independence of those relationships into question through the structure of its multi-level dealings.

If the FTC gets its way, Qualcomm will have to extend licenses (on FRAND terms) to chipset makers such as Intel, MediaTek, and a certain Samsung division. In that case, Qualcomm can have perfectly independent business relationships with those companies, and then it won't have to deal with contract manufacturers or device makers at all. So far, Qualcomm doesn't want that at all. Qualcomm is focusing on the problems resulting from its refusal to license chipset makers, while the FTC and its supporters are focusing on what would be a terrific solution for this entire industry.

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Tuesday, May 16, 2017

Intel supports FTC against Qualcomm, says antitrust investigations enabled its new deal with Apple

On Friday, the FTC opposed Qualcomm's motion to dismiss the pending antitrust litigation in the Northern District of California, and got support from several amici curiae, with Samsung stressing that it is harmed by Qualcomm in two capacities: as a device maker and as a chipset vendor.

Intel is "only" the latter, and it's very actively involved in the fight to open up the market. It filed an amicus curiae brief (PDF) and explained on its website why it decided to take this kind of action.

In my analysis of Qualcomm's response to Apple's Southern California complaint, I already noted that some of the issues raised and claims made by Qualcomm in that filing appeared to be directed at the court of public opinion more so than the court of law. The fact that Qualcomm engaged in rapid response to the FTC's opposition filing on Friday (as quoted by CNET and other media) reaffirms that impression:

"The Federal Trade Commission's latest submission to the court does nothing to cure the fundamental flaws in its complaint against Qualcomm: no coherent theory of competitive harm and no allegations of the type of conduct that the antitrust laws are designed to address," Qualcomm said. "The complaint therefore should be dismissed."

Well, an opposition to a motion to dismiss can't "cure" anything. If there were flaws to be cured (I doubt that the court will agree with Qualcomm on "fundamental" flaws, though the devil may be in the detail), the only way to cure them would be an amended complaint. So Qualcomm could have (and maybe actually had) prepared that statement even before seeing the FTC's brief because, from Qualcomm's perspective, it would have been certain to be correct no matter what the FTC might submit. It's just a bit unusual that a litigant given three weeks by the court to respond to that opposition filing issues such a statement, well ahead of the reply brief. They're in their right to speak out just like I can read court filings and comment on them quickly. Again, it's just a bit unusual at this particular procedural stage.

But, as I mentioned before, Intel also issued a statement, the strongest passage of which is this:

"Qualcomm has maintained an interlocking web of abusive patent and commercial practices that subverts competition on the merit."

This is what I described (three months ago) as two mutually-reinforcing monopolies. Intel's brief contains an entire paragraph on these dynamics:

"These anticompetitive stratagems reinforce each other: By refusing to license its competitors and by coercing its customers into exclusivity deals, Qualcomm fences other chipset manufacturers out of the market. The resulting lack of alternative supply options, in turn, makes Qualcomm’s customers increasingly more dependent on a consistent supply stream from Qualcomm. And this dependence means that a threatened disruption in chipset supply from Qualcomm has a powerful coercive effect. Rather than risk losing access to Qualcomm chipsets, Qualcomm's customers quickly acquiesce to the company’s desired terms and policies. These understandable capitulations, in turn, further entrench Qualcomm's monopoly. Because Qualcomm can expect acquiescence, it has the latitude to insist upon license terms that impose huge unjustified barriers in the path of competitors seeking to enter the market."

When I tweeted the "interlocking web of abusive [...] practices" statement from Intel's press release, another blogger said that this would also apply to Intel. I don't have an opinion on that, but tech market leaders generally aren't saints and it's not like they all readily license their direct competitors (what an understatement). However, the question of whether Intel would extend a license to AMD or whether Apple would grant one to Samsung or Samsung to you-name-them is really distinguishable from Qualcomm's refusal to license other chipset makers and from Qualcomm's extremely high royalties. Intel's brief explains something that is not new but that is true: standard-setting would be anticompetitive without a FRAND licensing commitment. This is the central part of that argument (from Intel's brief):

"Because private standard-setting associations are comprised of firms with horizontal and vertical business relations, the only way SSOs are 'permitted at all under the antitrust laws' is if 'meaningful safeguards' are put in place to 'prevent the standard-setting process from being biased by members with economic interests in stifling product competition.'"

The dual-monopoly dynamics mentioned further above are also unique to Qualcomm. I can't think of anything similar involving the complainants.

Three more observations on Intel's brief:

  • Section 2 of the Sherman Act distinguishes unlawful acquisition or maintenance of monopoly power from success in the marketplace "as a consequence of a superior product [or other legitimate factors]." Therefore, Qualcomm obviously takes the position that Intel's products just can't compete on the merits, while Intel emphasizes in its brief and its press release its readiness, willingness and ability to compete with Qualcomm on the merits. It argues that "[Qualcommm's] dominance arises not from Qualcomm's inherent superiority, but rather from its anticompetitive practices."

    Qualcomm obviously has to argue that its products are just so great that customers are willing to pay a lot for them, and its patents are just more valuable than other companies' patents, which is a bit hard to argue in connection with newer standards such as LTE. It's becoming harder and harder for Qualcomm to persuade courts and regulators. With every finding of anticompetitive conduct somewhere in the industrialized world, with every antitrust complaint, and with every amicus brief such as the ones filed on Friday, judges and observers will be more inclined to believe that there really is an issue. Qualcomm will need to make some headway as it defends itself in multiple jurisdictions, and it needs allies. But so far it appears Qualcomm can merely deter other companies from speaking out; it can't force them to file amicus briefs in support of its positions.

    Maybe Qualcomm's products are indeed superior. But is it just superiority that has created the current situation? With all that's known about Qualcomm's practices already, it's hard to imagine it was all about superiority. Of course, Judge Koh will want the FTC to prove its claims, not just to make a certain theory conceivable.

  • With respect to apposite case law, Intel makes an interesting point. It argues that the FTC complaint is about whether Qualcomm will be allowed to continue its practices and not really about historic conduct. It's about the "future effect" of the outcome of this case, Intel argues. Therefore, "[m]onpoly-maintenance cases [...] are [...] more informative" than cases about how someone might have obtained a monopoly earlier on (past-conduct cases).

  • In the final paragraph, Intel forcefully and persuasively counters Qualcomm's claim that Intel's renewed business relationship with Apple "definitively refutes" the FTC's claim of exclusionary conduct:

    "But that argument gives short shrift to why Intel finally was able to supply Apple after all of these years. It is far more plausible that the many investigations across the globe deterred Qualcomm from imposing another illegal exclusive deal on Apple. [...] If Qualcomm were unconstrained by investigations like these, there is no telling what anticompetitive arrangements it would seek to impose on Apple (or other purchasers) to entrench its monopoly. Put simply, actions by courts and regulators have played a crucial role in shining a light on Qualcomm's anticompetitive behavior. Without that scrutiny, and the safeguards that suits like this one can provide, Intel never could have competed on even terms with Qualcomm in a multi-billion dollar market that impacts the lives and livelihoods of millions of people around the world."

    That statement is probably also meant to make antitrust regulators feel good about their Qualcomm-related efforts. And it is plausible. I had heard from various companies over the years (going back to BlackBerry, then Research In Motion, in 2006) how unhappy they were about Qualcomm's royalty demands and business terms. I just didn't expect much to change. Then came the Korea Fair Trade Commission's ruling just between Christmas and New Year's. A few weeks later, the FTC's lawsuit in Northern California. And then Apple filed its own suit and Samsung filed that amicus curiae brief last Friday. In the litigation space, the chicken-and-egg question has a clear answer: regulatory action apparently paved the way for private-sector action. Similarly, regulatory action may also have been a key enabler, or maybe even the key enabler, of Intel's new deal with Apple.

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Saturday, May 13, 2017

Samsung joins the fray, supports FTC against Qualcomm: "directly harmed" in two capacities

In today's opposition to a Qualcomm motion to dismiss the FTC's antitrust complaint, the FTC says "[o]ther chipmakers may not wish to sue Qualcomm for a number of reasons, including fear of countersuit for infringement, escalation, litigation fees, disrupted relationships with OEMs [...]." While all of that can affect a chipmaker's calculus, the situation is far worse for device makers: they have to fear massive disruption should Qualcomm cease to supply its chipsets to them. Also, Qualcomm's rebate deals (that effectively result in some patent royalties being paid back) appear to be tied to total abstention from any kind of antitrust action against Qualcomm. All in all, it's like a strangehold on an entire industry.

Without the fears described above, I'm sure Qualcomm would face even more antitrust lawsuits than it currently has to deal with (the FTC case plus complaints by Apple in several jurisdictions around the globe). It's too early to tell, but it could be that Qualcomm itself will at some point conclude that certain practices (such as entering into agreements under which other companies are not allowed to take antitrust action) aren't advisable. Courts and competition enforcers now get to see those contracts and they learn about other ways in which Qualcomm tries to prevent those affected by its conduct from complaining. Regardless of legality and enforceability (important questions, but this is not the time and place to address them), what will judges and regulators think? This is psychological, not legal, but common sense suggests that someone who goes to extreme lengths to prevent others from raising a whole category (antitrust) of issues may really have something to hide.

After the FTC sued Qualcomm in January, Apple also brought a complaint, followed up by parallel complaints in other jurisdictions. At this point, Apple is still the only private-sector plaintiff against Qualcomm on antitrust grounds (not the first one, but the only one at the moment). But Apple is not alone among device makers. In a clear sign of how widespread concerns over Qualcomm's practices are, major automotive and information technology companies wrote an open letter to President Trump about the Qualcomm matter, urging the Trump Administration to pursue the antitrust case in the Northern District of California. And now Samsung has gone a very meaningful step further than answering questions from the Korea Fair Trade Commission: Samsung has just filed an amicus curiae brief in support of the FTC's opposition to Qualcomm's motion to dismiss the antitrust complaint (this post continues below the document):

17-05-12 Samsung Amicus Brief Iso FTC Opp to QCOM m2d by Florian Mueller on Scribd

For formal reasons, Samsung also had to request permission to file that brief. Since Qualcomm doesn't even object, that permission will hardly be withheld.

The two-pronged nature of the competitive harm Samsung has suffered at Qualcomm's hands is reflected by the legal entities making the submission: Samsung Electronics Co. Ltd. (the world's largest mobile device maker) and Samsung Semiconductor (a chipset maker allegedly kept out of the wireless baseband chipset market, at least with respect to certain markets, by Qualcomm's behavior, which appears to have to do with some old contracts as well as the way Qualcomm leverages its patents).

Apple and Samsung are doing the industry at large, and (by extension) consumers, a great service. They are doing what many others presumably would like to do but don't dare. But a few years ago, Samsung was aggressively asserting FRAND-pledged standard-essential patents against Apple, and now it's actually citing Judge Koh herself (who is presiding over FTC v. Qualcomm as well as two Apple v. Samsung cases) on the "legal distinction between a normal patent—to which antitrust market power is generally not conferred on the patent owner, and a patent incorporated into a standard—to which antitrust market power may be conferred on the patent owner." When Judge Koh wrote this, Samsung was trying to gain undue leverage from its SEPs. But those efforts came to an end, and in any event, companies can cite decisions even if the shoe was on the other foot at the time.

In the following sentence from the request for permission to file a brief, the two Samsung entities are explaining what they bring to the table as "friends of the court":

"As a Qualcomm licensee ([Samsung Electronics'] handset manufacturing business) and an excluded competitor ([Samsung Semiconductor's] chipset sales arm, to which Qualcomm refuses to grant a license to make and sell licensed chipsets), proposed amici are uniquely positioned to assist the Court in understanding the impact of Qualcomm's conduct on competition in the upstream market to make and sell chipsets and in the downstream handset market."

In the amicus brief itself, Samsung stresses this role of a dual victim as well:

"Samsung, which employs approximately 17,000 people in the United States, is both Qualcomm's customer (as a handset supplier) and Qualcomm's potential competitor (as a manufacturer and potential seller of chipsets). In both capacities, Samsung has directly experienced, and been directly harmed by, the exclusionary conduct alleged in the FTC's Complaint [...]: Qualcomm refuses to license its SEPs on fair, reasonable, and non-discriminatory ('FRAND') terms so that Samsung can make and can sell licensed chipsets."

Samsung explains that licensing "all comers" (including rival chipset makers) is an essential part of the standardization bargain (FRAND licensing commitment in exchange for having one's technologies included in a standard). By not doing so (and by seeking supra-FRAND royalties from device makers), "Qualcomm not only violated FRAND but its conduct excluded potential competitors (like Samsung) and harmed consumers."

The Korea Fair Trade Commission is also concerned about Qualcomm's dealings with device makers as well as the ways in which Qualcomm prevents Samsung's chipset business from competing with it. Footnote 11 of Samsung's amicus brief points to a Qualcomm SEC filing and notes that "Qualcomm reports it has over 300 licensees, none of which are chipset rivals."

Probably the most important chipset rival that should get a FRAND license to Qualcomm's patents is (with the greatest respect for Samsung's huge semiconductor business) Intel. And while I was writing this post, Intel also submitted an amicus brief in support of the FTC. With so much going on, I'm going to need more time to digest all of this, but I will do a follow-up next week.

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Friday, May 12, 2017

FTC says Qualcomm is "using both carrots and sticks together" in dealings with device makers

The Federal Trade Commission (FTC) has just responded to Qualcomm's motion to dismiss its antitrust complaint in the Northern District of California (this post continues below the document):

17-05-12 FTC Opposition to QCOM Motion to Dismiss by Florian Mueller on Scribd

I published Qualcomm's motion in early April (toward the end of this blog post) and wrote at the time that Qualcomm would hardly get rid of the FTC case altogether. It's much less unlikely that the court might want the FTC to be a bit more specific in one respect or another, but in today's opposition filing the FTC has just explained very well how Qualcomm's exploitation of its dual monopoly (which does appear unique in some ways, at least to me) falls within established patterns of anticompetitive conduct.

The FTC filing helps Judge Lucy Koh, who will (after Qualcomm's forthcoming reply brief and a hearing) have to rule on the motion, in various ways. A particularly valuable aspect of the FTC brief is that it identifies and describes certain patterns of conduct and, basically, asks the court not to get confused by Qualcomm's labeling tactics. Qualcomm's argument that its conduct is legal depends heavily on terminology. That's why the very first parapgraph of today's filing by the FTC argues that Qualcomm's supra-FRAND patent royalties are a "tax" no matter how much Qualcomm insists that it's just "royalties" on its patents.

The FTC notes that "[a]ntitrust law eschews such formal labels and instead examines market realities." That's true. But no field of law is more closely related to politics and policy than antitrust law, and just like the fight over terminology is often the decisive battle in political matters, labels do matter in a competition context.

What makes the intersection of antitrust and intellectual property law so very interesting is an inherent dichotomy: intellectual property rights are monopolies (limited to 20 years in the specific case of patents), but antitrust law is an anti-monopoly law. If every legitimate patent royalty was considered a "tax" imposed by a "monopolist," antitrust law would apply very broadly, but patent rights would be devalued. However, if every (actual) monopolist could just make an end run around competition law by labeling a monopoly tax as a "patent royalty," patent rights would serve as a (powerful) pretext and anyone wielding a patent would be immune to antitrust scrutiny.

The FTC argues that Qualcomm's customers "accept elevated patent royalties they otherwise would refuse" only because they are forced "to negotiate in the shadow of Qualcomm's threat to withhold chips." As a result, "Qualcomm collects far more in royalties than other licensors in the industry with comparable patent portfolios."

I've been trying to find out as much as possible from the outside about Qualcomm's royalties (and how they compare to the license fees other wireless standard-essential patent holders receive). If you consider that Wall Street believes Nokia gets approximately $2 from Apple per device, and if you compare that number to the $5 per-device discount from Qualcomm that an arbitration panel awarded BlackBerry (strongly suggesting that it's merely a fraction of what BlackBerry paid), or Qualcomm's reduction of a quarterly forecast by $500 million after Apple stopped its payments, then the FTC's allegation is very plausible. And unlike me, the FTC does have access to a lot of confidential information. That's the beauty of investigative authority.

I just saw that Samsung has submitted an amicus brief in support of the FTC brief, so for now I'll keep my commentary on the FTC filing short, though I may very well write a follow-up next week or so. Just a few more observations I wanted to share immediately:

  • The FTC has the royalty base problem figured out:

    "Moreover, Qualcomm assumes that if its rate was ever FRAND, it must remain FRAND today because it has not changed. But the complaint alleges that 'handsets today offer a number of features' not offered by older handsets, and 'many of Qualcomm’s patents related to CDMA technology have expired.' [..] Thus, a 5% royalty on a 2006 phone is not economically equivalent to a 5% royalty on a 2017 smartphone." (emphasis added)

  • Just like the FTC refuses to play Qualcomm's labeling game, it also seeks to (re)focus the court's analysis on economic realities with respect to Qualcomm's agreements with companies like Apple under which Qualcomm effectively pays back some of the royalties it receives, provided that the recipients of such paybacks behave in certain ways or refrain from behaving in other ways:

    "Qualcomm argues that its payments show that it lacked the power to coerce OEMs into accepting anticompetitive license terms. [...] But the notion that using both carrots and sticks together undermines a finding of monopoly power or anticompetitive conduct runs counter to both economic logic and legal precedent." (emphasis added)

  • With respect to Qualcomm's refusal to grant patent licenses to competitors (i.e., rival chip makers), the FTC explains that a refusal to extend patent licenses to competitors may be acceptable under other circumstances but here, in light of a FRAND licensing commitment and when all aspects of Qualcomm's behavior are seen together, it's anticompetitive. In my initial reaction (of early April) I had also disagreed with Qualcomm's emphasis on litigation against competitors and noted that sometimes they do sue. So does the FTC, which points to Qualcomm's patent assertions against Broadcom. Admittedly, it's been a while since that happened, but it is not and should not be forgotten.

There appears to be some amicus brief activity. Yesterday, a lawyer for an industry body (ACT | The App Association) filed a notice of appearance, and Samsung has (as I mentioned further above) just filed a brief, which I'll study now and, if it contains some interesting new information, blog about immediately.

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Saturday, April 29, 2017

Qualcomm reduces quarterly forecast by $500 million as Apple stops license fee payments

Bloomberg reports that Apple confirms having "suspended [license fee] payments [via its contract manufacturers in China to Qualcomm] until the correct [fair, reasonable and non-discriminatory = FRAND] amount can be determined by the court" and that Qualcomm therefore has reduced its revenue forecast for the quarter ending June by $500 million. Given that the spring quarter is not the strongest one for mobile phones (the closer the next iPhone model is, the more customers wait until they buy), this indicates more than a $2 billion impact on Qualcomm's annual revenue and profit.

Just like the analyst quoted by Bloomberg, I've previously described patent disputes as an "all-out war," but I try to use the term sparingly. I'm not saying that's not what it is. I just want to wait and see how the dispute unfolds. There can be no doubt, however, that the stakes are high.

The $500 million figure for a quarter that is not the strongest one of the year is not really inconsistent with what I recently estimated to be Qualcomm's royalty demands.

It's worth noting that it was Qualcomm, not Apple, who withheld payments first. There is some kind of "rebate" (as Apple calls it) agreement in place between the two, under which Qualcomm pays back to Apple some of the royalties it collects from its contract manufacturers, and Qualcomm stopped its payments to Apple under that contract, alleging (most recently in its answer to Apple's complaint) that Apple breached that agreement by, for example, talking to regulatory agencies. A recent filing by Qualcomm in a procedural context shows that Qualcomm is none too pleased with what's going on antitrustwise in Korea, the European Union and elsewhere.

Apple's position, according to the Bloomberg report, is that Qualcomm will get paid again once a FRAND rate has been determined by the courts. This reminds me of an issue that a lot of industry players (including, but by far not limited to, Apple) were profoundly concerned about years ago when standard-essential patent (SEP) holders sued them in Germany and the courts here applied the Orange Book ruling by the Federal Court of Justice in such a way that defendants had to make totally outsized deposits in order to avoid injunctive relief. I remember Claudia Tapia, then a BlackBerry IP policy executive (now at Ericsson), saying at a 2012 FRAND conference in Amsterdam that a company could be driven out of business by having to make X number of deposits of 2% to 5%, if not more, of its sales receipts during the course of a multi-year litigation. And if my memory doesn't fail me, I think she said that Apple might be able to afford it but others might not.

Since my campaign against software patents in 2004-2005, I've consistently opposed anything that comes down to "might makes right." My favorite ancient quote (after nine years of Latin and three years of Ancient Greek in school) is from line 880 of Sophocles' Oedipus at Colonus: "In a just cause, the weak will overcome the strong [alternative translations of "mégas": the mighty/great/large]." ("Τοῖς τοι δικαίοις χὠ βραχὺς νικᾷ μέγαν.")

Against that background, I want the dispute between Apple and Qualcomm to be decided by the merits, not by leverage or by who's the bigger bully. I want an outcome that will improve the situation for the industry at large, including the little guys who couldn't afford or take the risk of picking this kind of fight with Qualcomm. While I can easily understand that Apple, after Qualcomm was first to withhold payments, doesn't want to meet royalty demands it considers completely unreasonable, there could be different circumstances under which I would consider it unfair. Also, I still haven't forgotten that Apple once collected roughly half a billion dollars from Samsung on procedurally proper but, in my personal view, unfair grounds in 2015 (I was the lone voice criticizing Apple for it). Here, Qualcomm's strangehold on the entire industry (as it leverages its two mutually-reinforcing monopolies) probably necessitates that someone says "enough is enough" and puts pressure on Qualcomm to change its ways. But again, the outcome should be positive for everyone in the industry, not just one company, and, by extension, it should bring prices down for consumers.

What just makes no sense to me is Qualcomm's claim that "the same terms [that Apple is contesting now in court] have applied to iPhones and cellular-enabled iPads for a decade." This, again, is a might-makes-right kind of approach. If Qualcomm was able to command certain terms because of its leverage, that doesn't make the amount a FRAND rate. That's just circular logic. It's symptomatic of Qualcomm's might-makes-right vicious circle.

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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.

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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...

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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.

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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.

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