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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