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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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).

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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.

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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.

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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.

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