Tuesday, May 30, 2017

Supreme Court rules against Lexmark on patent exhaustion, strengthening FTC/Apple cases against Qualcomm

The long-awaited Supreme Court ruling in Impression Products v. Lexmark International (PDF) has just been handed down. It deals with two questions related to patent exhaustion, and I was aware of it before but wanted to wait until the implications of that dispute on the smartphone cases I'm primarily interested in would be clearer. The good news is that the Supreme Court has once again overruled the Federal Circuit in a way that strengthens those defending themselves against attempts to gain excessive leverage and extract overcompensation from patents. The Supreme Court is staying its course with respect to patent matters, regardless of some patent troll lobbying groups suggesting that all those decisions would result in the demise of the American inventor (quite the opposite is the case).

Lexmark tried to leverage its patents on toner cartridges against various so-called remanufacturers (companies that buy up empty toner cartridges, refill them, and then sell the refilled cartridges). Impression Products was the last man standing at some point and took this to the Supreme Court after the Federal Circuit had decided completely in--surprise, surprise--the patent holder's favor. Of the three different levels of the federal court system, the Supreme Court took the strongest and clearest position against overleveraging/overcompensation of patents; the Federal Circuit took the very opposite position; and the district court (Southern District of Ohio) had agreed with Lexmark that exhaustion didn't apply to cartridges sold in other countries, but had sided with Impression at least with respect to cartridges Lexmark sold in the U.S. and on which it sought to impose certain restrictions.

As today's Supreme Court decision explains, the Federal Circuit "started from the premise that the exhaustion doctrine is an interpretation of the patent infringement statute, which prohibits anyone from using or selling a patented article 'without authority' from the patentee." In this statutory context, "without authority" just serves the purpose of clarification: if you have a license, you don't infringe. That's self-explanatory, if not tautological. But it's also the weakest basis on which the doctrine of patent exhaustion could stand: the Federal Circuit wanted to reduce exhaustion to merely a presumption of the patent holder granting customers and the entire downstream "authority" to use and resell a product. It would have been a weak basis for the all-important concept of patent exhaustion since patent holders could then navigate around it by just imposing some restrictions. Exhaustion would have worked in a similar way to promissory estoppel: if you don't say the wrong thing, or if you say the right thing to overcome a presumption, you're not estopped.

The Supreme Court has now made it clear that exhaustion is much stronger and much more comprehensive:

"The problem with the Federal Circuit's logic is that the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is a limit on the scope of the patentee's rights. The Patent Act gives patentees a limited exclusionary power, and exhaustion extinguishes that power. A purchaser has the right to use, sell or import an item because those are the rights that come along with ownership, not because it purchased authority to engage in those practices from the patentee."

On that basis, the Supreme Court basically held that Lexmark couldn't impose the restrictions it relied upon in this litigation, and that this wouldn't work for Lexmark even if the first sale occurred outside the United States (the one scenario of the two in which the district court sided with Lexmark). The Supreme Court's disagreement with the Federal Circuit is very visible in this passage, too:

"The Patent Act promotes innovation by allowing inventors to secure the financial rewards for their inventions. Once a patentee sells an item, it has secured that reward, and the patent laws provide no basis for restraining the use and enjoyment of the product."

No overcompensation. No overleveraging. No double-dipping. No restrictions that go beyond what the Patent Act allows. That's the message here.

Presumably, some people in another Washington DC building are now reading the Supreme Court decision: the lawyers working on the FTC's case against Qualcomm. The FTC argued in its January complaint, under a headline that describes Qualcomm's "no license-no chips" policy as "anomalous among component suppliers," that "when one of Qualcomm's competitors sells a baseband processor to an OEM, the OEM can use or resell the processor without obtaining a separate patent license from the competitor—just as a consumer buying a smartphone does not have to obtain a separate patent license from the seller of the smartphone." The FTC went on to explain that "Qualcomm is unique in requiring an OEM, as a condition of sale, to secure a separate patent license requiring royalty payments for handsets that use a competitor's components." For example, this would apply to a situation in which a device maker is a customer of Qualcomm and, say, Intel or Samsung's component business.

The FTC still has to make an antitrust argument here (tying), which includes that it has to prove Qualcomm's monopoly-like power in the baseband chipset business, but at least Qualcomm can't just point to the (now-reversed) Federal Circuit decision in disputing the FTC's exhaustion argument.

Patent exhaustion as a concept has been strengthened today, and its profile in certain other cases will likely be even higher now. While Apple takes certain positions when it enforces its own patents (and would rather avoid Supreme Court review of a highly controversial Federal Circuit decision in its favor), exhaustion is not an issue in Apple v. Samsung but it does play a role in Apple v. Qualcomm: Count XXIII of Apple's antitrust complaint against Qualcomm is a request for judicial "declaration of unenforceability [of Qualcomm's patents in certain contexts] due to exhaustion." Apple alleged in its January complaint that "Qualcomm has sought, and continues to seek, separate patent license fees from Apple's [contract manufacturers] for patents embodied in the chipsets Qualcomm sells to Apple's CMs, a practice that is prohibited under the patent exhaustion doctrine." In the past, Apple had to pay those license fees indirectly (via its contract manufacturers), which it is no longer prepared to do, and that's why Qualcomm is now suing four Apple contract manufacturers and seeking a preliminary injunction against them.

Apple also wrote that "[b]y requiring Apple's CMs to take a separate patent license for the same components that they purchase, Qualcomm is double-dipping." That term is an accusation against Qualcomm that I previously heard from other industry players, so I wasn't surprised to also find it in Apple's complaint. If the Federal Circuit ruling in Lexmark had been affirmed, Qualcomm might have been able to defeat that particular count of Apple's complaint. Apple's complaint already anticipated that Qualcomm would point to its corporate structure: "Qualcomm has attempted to evade the patent exhaustion doctrine by selling baseband processor chipsets to Apple's [contract manufacturers] through QTC, which is operated by QTI, which is in turn a wholly owned subsidiary of Qualcomm." Apple then points to Qualcomm's 2012 restructuring, which I already blogged about back then with a focus on open-source licensing issues. The Supreme Court's broad and inclusive approach to exhaustion simply doesn't allow any kind of end-run around the exhaustion doctrine through a first sale outside the United States as in one of the two issues relevant in the Lexmark case. Philosophically, this also makes it hard to imagine that an end-run could be achieved through a sophisticated corporate structure.

As the district court cases in Northern (FTC v. Qualcomm) and Southern (Apple v. Qualcomm) California unfold, patent exhaustion is going to be a very interesting part of the debate. And in many other cases, though the Qualcomm cases are currently the highest-profile smartphone-related cases in which exhaustion plays a role.

Share with other professionals via LinkedIn:

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...

Share with other professionals via LinkedIn:

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.

Share with other professionals via LinkedIn:

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.

Share with other professionals via LinkedIn:

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.

Share with other professionals via LinkedIn:

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.

Share with other professionals via LinkedIn:

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.

Share with other professionals via LinkedIn: