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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