Wednesday, June 28, 2017

Judge Koh shows the way: FRAND non-compliance can be established without rate-setting exercise

Qualcomm tried hard, but unsuccessfully, to get the FTC's antitrust lawsuit in the Northern District of California dismissed. Maybe Qualcomm hoped, more realistically, the FTC would have to amend the complaint in some important ways, possibly complicating the case to the point where the U.S. competition agency would find it hard(er) to justify using the resources required for pressing on. The reason I suspected the latter is because, based on hearsay from about seven years ago, the European Commission's investigation of Qualcomm's practices with a focus on Nokia (now more of a Qualcomm friend than foe), essentially got derailed by scare of conducting a resource-intensive, complex and somewhat subjective (thus more likely to be overruled) rate-setting exercise. In the FTC case here, the presently-Acting Chair of the FTC, Maureen Ohlhausen, opposed the decision authorizing the complaint, and might have been the first decision-maker to argue that the case should be dropped or settled (the latter without any useful remedies) due to litigation economics. Industry concern over such a decision by the FTC was and remains real, as an open letter to President Trump showed in April.

Fortunately (though I was sympathetic to some of the arguments in Qualcomm's motion), the case is going forward on the basis of the FTC's original complaint (congratulations to the FTC's litigation team, whose partly-minimalistic approach has worked out so far) and without the hypothetical need (in a worst-case scenario, such as after consolidation with another case that involves rate-setting) for a jury trial. And the federal judge whom Qualcomm needs to persuade at the future bench trial has taken positions on the legal issues in the case that don't bode well for the San Diego patent holder and chipset maker. There is an important caveat here since the hurdle for denying a motion to dismiss is low, but the way Judge Koh has expressed her disagreement with Qualcomm's various legal challenges does go beyond what is strictly needed to deny the motion. Seriously, I've never been happier about a decision from the Northern District of California than this one (this post continues below the document):

17-06-26 Order Denying Qualcomm Mtd by Florian Mueller on Scribd

Here's a total non-starter to begin with:

"Qualcomm contents that FTC's allegations of above-FRAND royalties are nonetheless contradcited by the fact that the Complaint also alleges that Qualcomm has historically collected a royalty rate of 5%, and that this rate has not changed over time. [...] However, FTC's allegation that Qualcomm has continued to collect the same 5% royalty on the total value of a handset supports, rather than contradicts, the FTC's allegations that Qualcomm's royalty is above FRAND. As the Complaint explains, early handsets were primarily used only to transmite voice calls. [...] Accordingly, Qualcomm's cellular communications SEPs contributed significantly to the functionality and value of a 2006 handset. [...] By contrast, handsets today contain numerous features that are unrelated to cellular network connectivity, such as camereas, Wi-Fi access, and data storage. [...] Thus, Qualcomm's SEPs contribute far less to the value of a 2017 phone [than] they contributed to the value of a 2006 phone. [...] Nonetheless, Qualcomm continues to collect a 5% royalty from the total value of the handset today for Qualcomm's cellular communications SEPs, just as Qualcomm did a decade ago."

Taken together with SEP portfolio erosion (with respect to existing standards), this point is then reinforced:

"In short, that Qualcomm collects the same 5% royalty on the total value of a 2017 smartphone as Qualcomm collected on the total value of a 2006 phone, despite the fact that both handset technology [that's the previous point] and Qualcomm's SEP portfolio [have] changed dramatically over the past decade, supports FTC's allegations that Qualcomm's SEP royalty rates are above FRAND."

The passages quoted above can be reasonably interpreted as facts-based skepticism regarding Qualcomm's claims of being FRAND-compliant, which shows what Qualcomm is up to here. There's a lot more to it than merely finding that the FTC's pleadings are sufficient. The FTC has won the single most important battle in the FRAND context that Qualcomm could possibly have lost: the royalty-base question.

Since Judge Koh believes that the FTC's FRAND non-compliance theories are potentially sufficient to determine that Qualcomm charged supra-FRAND royalties, rate setting won't be necessary. The case will stay focused, and some of these issues (such as the royalty base) may at the next stage be analyzed in light of whether a reasonable fact finder could ever disagree with the FTC...

The royalty base question hasn't been resolved before. I was profoundly disappointed when Judge Robart didn't draw a bright line in this regard (in Microsoft v. Motorola). It's great that Judge Koh has this issue totally figured out in economic and technical terms.

The FTC-internal driving forces behind this antitrust action must be very happy and feel encouraged. Apple is litigating directly against Qualcomm in San Diego; Samsung and Intel filed informative and persuasive amicus briefs; regulators in other jurisdictions agree; and Judge Koh is now a thought leader, too. All that is missing is for Acting Chairwoman Ohlhausen (and others who may have shared her views so far) to join the mainstream. What the FTC is pursuing here is a just cause and, while most citizens won't ever realize, is perfectly consistent with the Make America Great Again vision. Qualcomm has done and continues to do impressive research and deserves to be compensated fairly and reasonably, not overcompensated at the expense of companies that make real products and, by extension, consumers.

Another legally very important issue on which Judge Koh has taken a fairly clear position (clearer than would have been necessary at this stage of proceeding) relates to the antitrust duty to deal with competitors, i.e., Qualcomm's obligation to honor its FRAND licensing promise vis-à-vis Intel, Samsung's components division, and others.

In connection with (among other things) Qualcomm's "no-license-no-chips" policy and tying, there was some argument over what the proper term for royalties changed on top of the chip price should be. The FTC consistently referred to it as a "tax" (a term that is also justified by Qualcomm's anachronistic approach to the royalty base), and Qualcomm understandably didn't like that. Judge Koh now calls it a "surcharge."

The following holding by Judge Koh is another highly important point to draw attention to (and one of the things that make me wonder whether Qualcomm can defend itself at all, unless regulators in different parts of the world all got the facts totally wrong, or whether it may ultimately just have to focus on remedies since it can't win the merits part):

"Thus, by violating its FRAND obligations twice over—by not licensing its competitors and by threatening to withhold its chips to induce OEMs to pay an above-FRAND royalty rate—Qualcomm raises the 'all-in' modem chip price that OEMs pay on all modem chips."

Finally, those of use who follow Apple v. Samsung (with all the talk there about a two-horse race etc.) have or will read with great interest how Judge Koh, who is also presiding over those Apple v. Samsung cases, views the anticompetitive impact of Qualcomm's exclusive rebate-based arrangements with Apple. In that context, she agrees with the FTC as well, though here she limits her analysis to minimum pleading standards. This does not necessarily mean that she's less convinced. It may very well have to do with the nature of the beast: the anticompetitive effects of past exclusive deals (that foreclosed others from supplying chipsets to Apple for many years) involve certain facts regarding market share (and segmentation, possibly) and also some even harder-to-measure aspects such as Apple being a company whose decisions others like to follow.

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Monday, June 26, 2017

Supreme Court requests U.S. government's input on Samsung's petition (2nd Apple case)

As the docket overview now indicates, the Supreme Court of the United States has decided to ask for the views of the Solicitor General of the United States on Samsung's petition for writ of certiorari relating to the second California Apple v. Samsung case. To be precise, this CVSG (Call for Views of the Solicitor General) is a CVASG--currently there is an Acting Solicitor General, Jeffrey Wall.

This means the Supreme Court's summer recess will be a busy period for the parties--and other stakeholders--as they will both be lobbying the Department of Justice.

Just last week, a Reuters story had the following headline: "RPT-U.S. Supreme Court and top patent court rarely see eye to eye" It is true that the relationship between the Supreme Court and the Federal Circuit is, well, special. That Reuters article is about a rare case in which there was affirmance, but high-profile reversals, such as recently on patent exhaustion in the Lexmark case, are more common.

This is nice progress for Samsung. The likelihood of certiorari being granted has increased substantially.

In connection with design patents (and involving the same two litigants), the DoJ filed an amicus brief that philosophically agreed with Samsung while procedurally leaving the door open for Apple to prevail regardless. After the DoJ had taken a clear position on the high-level issue (article of manufature), the whole argument was more focused on other questions. Some may view it as an exaggeration, but one could make a defensible case that the DoJ actually did a fair amount of the Supreme Court's job in that case.

It's too early to tell what positions the DoJ is going to take here. Once we all learn more about it, I'll comment. I'm cautiously optimistic, though. This case never was the kind of slam dunk that the design patents issue represented, but what the Federal Circuit did (and how it did it) was rather strange. That's not just my opinion. Mr. "Chisum on Patents" said so. And Samsung got fairly broadbased support from amici. There obviously are stakeholders who are against Samsung's petition, and while they didn't file an amicus brief since it would have been counterproductive (it would only have raised the profile of the issues), some will probably try to influence the DoJ now in ways that would benefit Apple (with a view to this case; in the long run Apple would probably benefit from reversal, possibly even in connection with any infringement claims by Qualcomm).

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Tuesday, June 20, 2017

Apple's amended San Diego complaint against Qualcomm leaves no doubt: many billions at stake

The wireless industry's economically biggest lawsuit--Apple v. Qualcomm in the Southern District of California--just got a whole lot bigger. Contrary to popular misbelief, it was never about "only" $1 billion but always had implications and ramifications to the tune of many billions. There is no more room for doubt now that Apple, which earlier today resoundingly rejected the accusation that it had throttled any of its iPhones, has amended its complaint (this post continues below the document):

17-06-20 Apple's Amended Complaint Against Qualcomm by Florian Mueller on Scribd

Why many billions? After reading the first few lines of a U.S. complaint, I always turn to what would come first in some other jurisdictions: the prayers for relief. These three new prayers for relief are "yuuuuuuge" in economic terms:

"L. Adjudge and decree that the royalty provisions in the licenses between Qualcomm and Apple CMs Foxconn, Pegatron, Wistron, and Compal are unenforceable as against public policy;"

"M. Order Qualcomm to disgorge non-FRAND royalties and royalties for exhausted patents that Qualcomm previously extracted from Apple, including royalties paid through Apple's CMs, and pay such unjust gain to Apple;"

"T. Award restitution of all excessive license fees that Apple paid;"

Prayer for relief L relates to Qualcomm's contractual relationships with Apple's contract manufacturers, whom Qualcomm is suing in the same federal court in San Diego and even seeking a preliminary injunction against. If Apple prevails on this one, the financial impact on Qualcomm's business would already be huge with respect to those companies' work on Apple's behalf, and it could even affect devices that those manufacturers build for other partners (at least indirectly, if not even directly).

Prayer for relief M, a disgorgement of any royalties paid on exhausted patents, would likely be a double-digit dollar amount for each and every U.S. iPhone or iPad that came with a Qualcomm chip and on which Qualcomm nevertheless collected patent royalties (and in this context, too, other companies such as Samsung could then seek the same later). Obviously, there can't be any double recovery, so if L and M succeeded, some reconciliation would be required. Exhaustion (of patents) is the "Word of the Day": in the original complaint, the word or fragment "exhaust" appeared 26 times, and now, in the amended one, a whopping 112 times: more than four times as frequently. This blog's loyal readers can imagine why: it's all because of the Supreme Court's recent Lexmark ruling, which basically said that if you sell a product that embodies any of your patents, you can't collect royalties from your customers and the downstream on those patents. I connected the dots between that case and the "double-dipping" aspect of the Apple-Qualcomm dispute, but even I wouldn't have expected that the letter sequence "exhaust" would become this pervasive in Apple's complaint.

Prayer for relief T would apply to all iPhones and iPads, with or without a Qualcomm chip. It would be a disgorgement of anything that Apple had to pay in the past, even if indirectly through contract manufacturers, in excess of a FRAND rate.

What also changed about the prayers for relief is that Apple is now attacking 18 Qualcomm patents (previously 9) and that Apple is trying to get various Qualcomm patents invalidated. Multiple prior art references are cited.

All in all, this new complaint is massive. The difference between the original complaint and the new one is, in terms of the potential impact on Qualcomm's business, comparable to the significance of the original one. Apple is doubling down, not in terms of the number of jurisdictions or suits, but in terms of the economic impact that this dispute may have.

Apple's rhetoric also appears to be sharper, though I must read the amended complaint in its entirety (I just wanted to comment quickly here) to be sure of that. For example, Apple is accusing Qualcomm of "retaliation, obstruction of justice, and greed." Professional judges ignore such rhetoric at the conscious level, and Qualcomm has tried the same in its answer to the original complaint. However, for a litigation watcher like me, rhetoric is relevant in certain respects, such as for understanding how much is at stake and how likely the parties are to settle in the near term. In my eyes Apple's credibility benefits from the broadbased support it has in this industry (and I can't see even the slightest indication that what Apple, Samsung, Intel and others are advocating here wouldn't also be good for consumers), but that doesn't mean I buy everything it says. "Obstruction of justice" is a claim I'm unconvinced of. Apple argues that Qualcomm's lawsuit against the contract manufacturers is among other things an attempt to collect royalties that include the rebates it has been withholding for some time, and in this case here (Apple v. Qualcomm), the basis for those rebates should be adjudicated. To me, this isn't necessarily an obstruction of justice since Qualcomm filed its case against the contract manufacturers in the same court. I believe Qualcomm should have added the contract manufacturers to this case (as third-party counterclaim-defendants), but "obstruction of justice" takes more than this. One might say so if Qualcomm opposed a consolidation of those cases, which I think the court may very well propose at some point. Prayer for relief L strongly suggests consolidation in my view.

As for rhetoric, Apple's amended complaint repeatedly labels Qualcomm's royalty rates as "usurious," and the word or fragment "extort" is found 12 times ("exort", "extortion", "extorionate", "extortionist"). That concept will presumably play a far greater role going forward than the "obstruction of justice" label. Qualcomm can point to various contract clauses, including one under which Apple had to sign that it wouldn't seek to benefit from a future ruling on patent exhaustion, but agreements that come into being due to extortion are ultimately unenforceable.

Even without the contract manufacturer context possibly being consolidated into this case, this litigation has enormous scope in its own right. For example, Apple's amended complaint stresses that Qualcomm must prove that some of its declared-standard-essential patents must indeed be proven valid and infringed. And now there are 18 Qualcomm patents that Apple thinks it can shoot down.

I'm starting to wonder how many years it will take before this case is over. Unless they settle, this may take even longer than my iOS app development project (where we're planning to go into a larger-scale beta test next month)...

But Qualcomm doesn't have to worry about Apple running out of cash to pay whatever royalties will ultimately be awarded. Even if this company, which is too rich to fail anyway, lost all its money overnight, Apple writes the following:

"[...] that [Apple] has posted a bank guarantee reflecting a FRAND royalty rate, and expressed a willingness to provide further guarantees for future years as needed, explaining: 'We believe this action shows our commitment to pay FRAND royalties once the amount is finally determined by the courts on a fair, reasonable and nondiscriminatory basis. This guarantee does not expire until 2026, and we can provide larger or additional guarantees for future years as needed.'"

Apple attached a letter to its amended complaint that Qualcomm had attached to its answer to the original complaint and counterclaims, but now the part about that bond is public. I don't understand why Qualcomm redacted it out in the first place. While Qualcomm obviously wants payments rather than guarantees, I've watched numerous lawsuits in which there was a whole lot of argument over such guarantees. This is important, and it's a good thing for Qualcomm to have such a guarantee, though it's not what Qualcomm primarily wants.

I hope to have identified the most important new aspects of the amended complaint. I'll take another look and update this post if necessary.

[Update] Apple points to an interesting procedural fact: Qualcomm didn't bring infringement counterclaims to Apple's original request for declarations of non-infringement, though such counterclaims are compulsory, meaning that failure to bring them now and in this case will preclude Qualcomm from bringing such infringement claims later in this case or in a different case. Maybe Qualcomm has so many patents that it doesn't care if some are practically unenforceable against Apple, but let's see how Qualcomm responds to this amended complaint... [/Update]

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Apple rejects Qualcomm's allegation of throttling iPhones, says "study" is "methodologically unsound"

Under a May 30 court order, Apple has a couple of deadlines today (June 20) in its antitrust/patent litigation in the Southern District of California, and when double-checking on the deadline, I just noticed that Apple made one filing one day in advance--a motion to dismiss Qualcomm's unfair competition counterclaim based on the allegation that Apple hobbled, throttled or whatever one may call it its iPhones that come with Qualcomm chip in an effort to make Intel's chips appear equally performant (this post continues below the document):

17-06-19 Apple Motion to Dismiss Qualcomm Cc by Florian Mueller on Scribd

As I wrote ten weeks ago, the legal relevance of this to the dispute is very doubtful at best (it certainly has no bearing whatsoever on the question of fair, reasonable and non-discriminatory licensing terms), so to me it looks like more of a PR maneuver. I can't even imagine that it would influence consumers' purchase decisions (if Qualcomm' objective is to promote its brand, a new stadium naming rights deal might work while court filings won't). Also, my research methods are limited to obtaining and analyzing publicly-filed court documents, and I can go further than that only in a few cases where program code is made available (depending on the platform and programming language), but I don't have access to a wireless performance test lab. Still, I wanted to point out that Apple (a) strongly refutes Qualcomm's "hobbling" allegation and (b) is trying to get that part thrown out at the earliest possible stage.

These are the passages in which Apple contradicts on the factual level:

"With the iPhone 7, Apple procured baseband processor chipsets not only from Qualcomm but also from its competitor Intel. But after the iPhone 7's release, a methodologically unsound 'study' questioned whether Apple had succeeded in its effort to standardize performance across all iPhones. In a public response, Apple truthfully stated that it had conducted its own studies, which showed consistent performance under relevant parameters." (emphasis added)

"Apple disputes the factual allegations in Qualcomm's counterclaim [...]">

"Qualcomm alleges that third parties found that Qualcomm chipsets outperformed Intel's under unverified conditions and methodologies; [...]" (emphasis added)

"Qualcomm relies on two so-called third-party studies for its claim that Apple's statement was false, but provides no factual allegations concerning the conditions under which these tests were performed or otherwise demonstrating their reliability or trustworthiness. [...] As an initial matter, it is apparent from the face of the Bloomberg article Qualcomm cites that the methodology of these 'studies' is questionable. The article states that 'measuring phone data speeds is difficult because performance can be influenced by weather and other factors beyond the control of wireless providers and phone makers.'" (emphasis added)

Apple consistently puts the word "study" (or its plural) in quotes...

Apple states at the very beginning of this motion that Qualcomm's claim against Apple is just meant to avoid competition from Intel:

"The claim, although nominally directed at Apple, blatantly targets Qualcomm's chief competitor in the market for premium LTE baseband chipsets, Intel, who dared to try and compete with Qualcomm."

That last subclause is reminiscent of the most brilliant passage in all those Samsung filings in its dispute with Apple, where Samsung, in its answer to Apple's first complaint back in 2010, ironically conceded not having ceased to compete with Apple. Without the irony, that portrayal of Qualcomm's motivation is reiterated later in the filing:

"At bottom, Qualcomm's counterclaim is an abuse of the UCL designed to limit competition from Intel and discourage Apple and other handset manufacturers from doing business with Qualcomm's competitors."

But Apple isn't asking the court to conduct performance tests and throw out Qualcomm's claim on that basis. Instead, Apple argues that

  • if anyone could claim to have "relied" on Apple's own representation of the performance situation (i.e., Apple saying that there are no discernible differences in performance between the different iPhone models), that would be someone who made a purchase decision on that basis, which Qualcomm obviously didn't (in the Northern District of California, a group of L.A. taxi companies failed with a claim against Uber regarding safety standards, and failed in court because the taxi drivers weren't going to do Uber rides themselves);

  • none of the conduct that Qualcomm described as wrongful is actually against the law (for example, Apple can conduct its own studies and talk about the results, and it's free to make design decisions and to choose business partners); and

  • Qualcomm has not alleged an "incipient violation of the antitrust laws, a violation of their policy, or spirit, or any other threat to competition."

The hurdle for a dismissal (especially a dismissal with prejudice, which is requested here) is high, but what I've read about the L.A. Taxi v. Uber case suggests that this motion may very well succeed. For the San Diego court, Apple's motion to dismiss may be an opportunity to dispose of something that is legally unrelated to what will actually decide the case but would make a lot of noise. In the alternative, it could be that just because of the PR impact of this the parties would fight extremely hard over the testimony and evidence admitted in this context. I view the "throttling" part as a mix of a sideshow and a potential quagmire.

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Monday, June 12, 2017

Qualcomm's NXP deal raises chip- and patent-related concerns: in-depth review by European Commission

More than five years ago, Google's acquisition of Motorola Mobility was delayed significantly by merger reviews on both sides of the Atlantic and U.S. regulatory approval was subject to certain promises related to patent enforcement. At the time, Motorola Mobility (the acquisition target) was aggressively asserting FRAND-pledged standard-essential patents against Apple and Microsoft. Against that background of blatant FRAND abuse, competition enforcers weren't prepared to grant fast-track approval.

Qualcomm's planned $45 billion acquisition of NXP Semiconductors, a leader in NFC and secure elements (SE) chips, is now also undergoing an in-depth review by the European Commission and possibly also in other jurisdictions (though the deal surprisingly got fast-track clearance in the U.S.). I'm just in the process of trying to find out more about NXP's patent dealings. But it appears that, unlike in the Google-Motorola case, it's the acquirer's conduct that adds to concerns over what might happen post-transaction. That is even more problematic since the acquirer, not the acquisition target, will make the decisions post-transaction. The press release the Commission published late on Friday contains a few keywords that sound all too familiar in the ears of anyone following the current flurry of antitrust activity relating to Qualcomm:

  • "bundling": Presumably this is about chips that might be the equivalent of having a baseband processor and an NFC/SE chipset in a single product. Bundling is a sensitive issue in the EU and the Microsoft Media Player case created some case law.

  • "tying": This is also a key issue in the U.S. FRAND abuse case. The FTC would want Qualcomm to offer its chipsets without requiring a patent license on devices that use other companies' chipsets, and as far as Qualcomm's own chipsets are concerned, patent exhaustion, which is stronger in the U.S. than ever after a recent Supreme Court decision, should take care of the licensing question.

    Intel raised the issue of a dual, mutually-reinforcing monopoly in a recent amicus brief. I had written about that kind of dynamic before. The worst-case scenario in the NXP context is now that Qualcomm might expand on its monopoly. A highly simplified way to put it would be that Qualcomm will go from a dual to triple or quadruple monopoly, forcing customers to buy chipsets of one kind if they want access to others, and/or designing its patent license terms (including "rebates") in such a way that companies will end up sourcing various types of chips from Qualcomm.

  • "increased royalties for customers": Qualcomm is synonymous with out-of-this-world royalty rates. Last month I quoted an Apple letter (which Qualcomm had attached to a court filing) according to which "Qualcomm forces the contract manufacturers and Apple to pay many times more in royalty payments than all the other cellular patent licensors combined!"

    Why has Qualcomm been able to command such royalty levels? It's not just a matter of innovation. They do a lot of R&D, without a doubt, but without the two mutually reinforcing monopolies, even Qualcomm couldn't collect many times the amount of royalties of the rest of the industry combined. If Qualcomm now gets more leverage on both the chip side and the patent side because of the NXP deal, things will get even worse.

    Qualcomm already holds more NFC patents and applications than any other company such as Sony (#2) or Samsung (#3)--almost 1,000, or roughly 5.5% of the pool. After acquiring NXP, Qualcomm's position will go up to approximately 1,350 patents and applications, putting Qualcomm far ahead of the rest (almost twice as many as Samsung, for example). While consolidation of patent ownership positions is still preferable over Nokia- and Ericsson-style privateering, it does raise issues when a company is known to overcharge.

  • "exclusion of competitors": NXP's competitors, just like Qualcomm's, are chipset makers. The only remedy that could address this concern would be that the combined company would have to license other chipset makers on FRAND terms.

While the nature of the concerns is familiar, the NXP deal involves different technologies than the other Qualcomm cases--and it affects additional industries. Mobile device makers will be affected since an increasing number of smartphones come with NFC. But NXP also appears to be a key supplier to automotive companies; otherwise the Commission's press release wouldn't "particularly" mention that industry. Even independently of its contemplated acquisition of NXP, Qualcomm is trying to position itself as a technology licensor to automotive companies such as in connection with wireless electric vehicle charging. Qualcomm's inductive charging road is impressive.

In Europe, automotive companies have a lot of political clout. Maybe some of them have, directly or indirectly (through trade associations and national governments) made the EU Commission's Directorate-General for Competition (DG COMP) aware of their industry-specific concerns.

Reuters reported on Friday that Qualcomm is confident it can address the EU's concerns. I'm sure that the EU doesn't want to block the deal if it can be avoided, but any remedies would really have to have teeth. Negotiations are likely going to continue. The next key juncture is when the Commission will have to decide whether to issue a Statement of Objections (SO), which it will likely begin drafting soon in case it needs to take that step. It's been almost eight years since the SO against Oracle's acquisition of Sun Microsystems (the only SO against a merger during that entire year). At the time, I was a consultant to a complainant. Now I'm just an app developer and blogger, and I don't know how much time I'll find to dig into the details of this process, so if you can support my efforts with information, please make use of the contact form here. I protect my sources, of course.

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Tuesday, June 6, 2017

Samsung urges Supreme Court again to overrule Federal Circuit on key patent litigation questions: Apple v. Samsung

With last week's wonderful Lexmark decision, the Supreme Court again turned out to be the guardian of sanity in the patent litigation context. Presumably in an effort to get earlier and ultimately more attention from the Supreme Court clerks evaluating cert petitions, Samsung yesterday filed (once agai well ahead of a deadline) an optional reply brief in support of its request that the Supreme Court review the Federal Circuit's en banc decision in the second Apple v. Samsung case (this post continues below the document):

17-06-05 Samsung Reply Brief Iso Cert Petition by Florian Mueller on Scribd

Obviously, Apple would like to avoid Supreme Court review and just get the most favorable outcome. In some cases, what's good for Apple is also good for the industry at large. Not so here. If the Supreme Court granted Samsung's petition from writ of certiorari, the outcome could have similarly positive effects as the recent Lexmark decision. (In the long run, that would also benefit Apple, which is a defendant in the vast majority of patent cases that it's a party to.)

Samsung's reply brief stresses the importance of the issues and particularly emphasizes that all three issues Samsung submits for review involve legal, not merely factual questions. At the end of the reply brief, it becomes clear that Samsung's short-term priority is the "quick links" patent, which the Federal Circuit patent held not to be infringed but the other circuit judges, in their controversial en banc decision, reinstated the district court ruling and jury verdict.

The Supreme Court will consider the petition at its June 22 conference.

Rather than go into more detail here (since I've already blogged about all of the issues and also this cert proceeding on multiple occasions), I'd like to point you to a great source of information: a YouTube video of a recent Public Knowledge Foundation conference in Washington, DC. Here I have some highlights from the event--select quotes from each of the panelists with a focus on (non-)obviousness, one of the three parts of Samsung's petition:

Ellen Schrantz, Senior Director of Government Affairs & Counsel, the Internet Association:

  • "What the Court essentially did was take a legal determination of obviousness and make it into a factual determination for the jury, and then just presumed that the jury resolved facts that it wasn’t even charged with solving in the first place."

  • "Given the speed which with the marketplace is moving and the complex issues across circuits and courts on obviousness as well as the very strange procedural history here of there not even being a briefing ahead of the en banc decision, this really is prime for Supreme Court consideration."

  • "By lowering the bar for non-obviousness, there's a real risk that patents will issue that don't deserve patent protection, that there will be additional litigation. And ultimately, it's the consumers that are going to bear the brunt of this because they will be subsidizing the litigation costs for innovators, and suffering as a result."

Carl Cecere, Attorney for the Hispanic Leadership Fund and the National Grange:

  • "You're asking the jury to evaluate the state of the art in technologies as diverse as biotechnology, space telescopes, and evaluate whether this is a step beyond what was already there."

  • "Deferring to juries creates a lot of problems. It runs the risk of allowing a lot of obvious inventions that may not be obvious to a jury, to be validated. It also runs the risk of invalidating some good inventions."

Derek Dahlgren, Attorney, Rothwell, Figg, Ernst & Manbeck, PC:

  • "By lowering the bar for non-obviousness, there's a real risk that patents will issue that don't deserve patent protection, that there will be additional litigation."

Matthew Levy, Patent Policy Consultant and former Patent Counsel at the Computer and Communications Industry Association:

  • "It's not just the twisting of obviousness law and it's not just trying to go back to the pre eBay injunction rule. It's this whole, the battle is really for what is patents going to cover? Are they going to cover what they say they cover or are we going to allow the conflation of the tiny with the entire thing?"

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Monday, June 5, 2017

Qualcomm denies charging higher patent royalties if device makers use rivals' baseband chipsets

Two months after asking the United States District Court for the Northern District of California to dismiss the FTC's antitrust complaint, and three weeks after the FTC argued (with support from Intel, Samsung and others) that its complaint met the requirements so the case can proceed, Qualcomm replied on Friday in support of its motion to dismiss (this post continues below the document):

17-06-02 Qualcomm Reply Re. Dismissal of FTC Complaint by Florian Mueller on Scribd

One of the alleged insufficiencies of the FTC's complaint is that the FTC's complaint refers to "elevated" royalties instead of using the term "above FRAND" (as Qualcomm suggests). Qualcomm says that the FTC must allege supra-FRAND royalties, and even that would not be enough since anticompetitive harm resulting from such royalties would have to be shown as well. In this context, Qualcomm also writes the following:

"[The FTC] never identifies a single licensee whose specific rate is allegedly above FRAND."

However, I have reread the FTC's original complaint, and its paragraph 118 says this:

"Apple, like other OEMs, regards Qualcomm's license terms, including the effective royalties charged by Qualcomm under its licenses with Apple's contract manufacturers, as inconsistent with Qualcomm's FRAND commitments."

Right before that paragraph, the FTC notes that "Apple is not a direct Qualcomm licensee" but, instead, used to reimburse its contract manufacturers for the royalties they pay to Qualcomm. If one interprets the word "licensee" in economic terms, then the FTC actually did identify at least one de facto licensee that paid a supra-FRAND rate.

It's good that Qualcomm says in the first paragraph of its latest brief: "[T]he key question is not a semantic one about taxes and royalties. It is the substance that matters." But if substance matters, then Qualcomm should recognize that a device maker paying royalties through a contract manufacturer is a licensee.

"Substance matters" also means, or in my view should mean, that the anticompetitive effect of supra-FRAND royalties on devices that use Intel (or other Qualcomm rivals') chips must be analyzed on an "all-in" basis. In paragraph 88 of its complaint, the FTC defined the "all-in cost of a baseband processor" as "consisting of both (i) the nominal price of the processor; and (ii) any patent royalties that the OEM must pay to use that processor in a handset." While that passage doesn't say so, it's obvious that any rebates or discounts from such royalties must be considered as well. "All-in" means "bottom line."

Even if we believe Qualcomm that its patent royalty rates don't discriminate at first sight between devices using Qualcomm chips and other devices, rebates and discount can lead to a decisive difference. The way Qualcomm redacted its reply brief indicates that the rebate/discount question is a highly sensitive issue here. On pages 11 and 12, there are four redactions of single words, but the context makes it clear that the redacted word, in each case, was either "rebate" or "discount." The same section of the brief points to footnote 20, which cites to other cases and mentions either term:

"[...] imposed rules that restricted dental dealers from carrying competing lines of artificial teeth, but it did not offer those dealers any rebates." (emphasis added)

"Microsoft [...] granted discounts only 'as compensation for the work required' to comply with the restrictions, not to win over resisting OEMs." (emphasis added)

Rebates are also mentioned in the FTC's complaint. In paragraph 120:

"Under a 2007 agreement, Qualcomm agreed to rebate to Apple royalties that Qualcomm received from Apple's contract manufacturers in excess of a specified per-handset cap."

Four paragraphs later:

"In all, Qualcomm's 2011 and 2013 agreements with Apple provided for billions of dollars in conditional rebates from Qualcomm to Apple for baseband processor sales from 2011 to 2016. These conditional rebates effectively penalized Apple's use of any baseband processors supplied by Qualcomm's competitors." (emphasis added)

So, if substance matters, the FTC complaint isn't anywhere as lacking and wanting as Qualcomm claims. The FTC definitely tried to keep the complaint very focused. Qualcomm quotes the dissenting FTC commissioner (Mrs. Ohlhausen) as saying that "[r]ather than allege that Qualcomm charges above-FRAND royalties, the complaint dances around that essential element." What I think the FTC complaint does dance around is the need for a FRAND rate-setting decision as part of this case. Whether Judge Koh views that as a deficiency requiring an amended complaint remains to be seen. I've written in one or two earlier posts that Qualcomm's criticism of the FTC's approach may succeed to the extent of a dismissal without prejudice.

Just one last point on substance that matters. Qualcomm argues that there is no "cognizable theory" of harm in place with respect to the FTC's allegation that rival baseband processor makers felt forced to lower their prices in order to offset at least some of the higher patent licensing cost that device makers allegedly have when using non-Qualcomm chips. In other words: competition law should protect (and should particularly protect consumers) against inflated prices, not against price reductions. However, if chipset makers have to lower prices under a kind of pressure (patent royalties paid by device makers) that has nothing to do with the competing products themselves, then it adversely affects their commercial viability for no good reason, and as a result, companies will then be less competitive, which in the worst case means they'll go out of business, and that will lead to higher prices in the long run.

If Judge Koh understands all the market dynamics involved, and even more so if she takes a consumer perspective (since we're the ones who pay for all of this in the end), Qualcomm will have to defend itself either against the existing complaint or against a minimally-amended one.

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