Wednesday, July 19, 2017

Apple and its contract manufacturers present united, ever stronger front against Qualcomm

On Monday, four of its contract manufacturers (the ones Qualcomm is suing in the Southern District of California) impleaded Apple into Qualcomm's breach-of-contract suit. Before midnight on Tuesday, Apple and its contract manufacturers (the most well-known of which is Foxconn) made various filings in San Diego. It will definitely take me some time to digest, but as I follow the various Qualcomm matters closely, I can share some observations here already.

First, an overview of the kinds of documents that have just been filed:

  • The contract manufacturers responded to Qualcomm's complaint. That one alone spans almost 250 pages (without exhibits). You can find it below this list or on Scribd.

  • The contract manufacturers oppose Qualcomm's motion for a preliminary injunction. I uploaded that one to Scribd as well.

  • Apple additionally opposes Qualcomm's preliminary injunction. It has asked the court for permission to file its own opposition brief, which I've uploaded to Scribd, too.

    In a recent post I got the "obstruction of justice" theory wrong. I now have to correct what I wrote then: I thought the Qualcomm suit against contract manufacturers was considered obstruction in its own right, but it's now clear that what Apple means is something I also find extremely objectionable: Qualcomm's contract terms according to which companies like Apple aren't allowed to work with competition authorities.

  • Apple filed an answer to the third-party complaints by its contract manufacturers. Apple unequivocally stands by the manufacturers and basically says: "Qualcomm isn't entitled to what it claims, but if all else fails, the manufacturers are contractually entitled to indemnification from us as per the terms of our agreements with them." That's good news for the contract manufacturers since, theoretically, Apple could have disputed both Qualcomm's claims and the contract manufacturers' entitlement to indemnity. Others have done so in comparable situations for sure.

  • Apple and the contract manufacturers jointly seek consolidation of this case with Apple's case against Qualcomm. Ever since Qualcomm brought its case against the contract manufacturers I've taken a consistent position on it. I now dare to predict that consolidation is a slam dunk. It would have been a slam dunk even if the contract manufacturers hadn't challenged some of Qualcomm's patents (which Apple is also challenging), but now there is so much overlap I can't imagine any court in the world would want to make a duplicative effort of gigantic proportions.

Here's the 268-page booklet with which the contract manufacturers responded to Qualcomm's complaint against them (this post continues below the document):

17-07-18 Contract Manufacturers' Answer to Qualcomm's Complaint by Florian Mueller on Scribd

With so many trees before us, let me make my little contribution to seeing the forest. No point in going into detail on things that are common and expected, or even boilerplate. What matters now is the strategic landscape, and when quickly going over these filings I tried to identify the parts that go that extra mile and say something about the parties' relationships and resolve.

While the contract manufacturers say they would have had to implead Apple into the case anyway (if Apple had so requested, which it may informally have done anyway), and while it's a reasonable assumption that their indemnification also depends on them at least making reasonable efforts to defend themselves, those contract manufacturers are independent parties, not like wholly-owned subsidiaries of Apple Inc.

The manufacturers raise three dozen affirmative defenses, which is at the upper end of the range but not unprecedented. The really impressive part is where they raise counterclaims: 67 counts. Those fall into two groups, either one of which is very bad news for Qualcomm:

  • FRAND-related antitrust and contractual counterclaims (on that basis they are, for example, seeking a disgorgement of whatever was paid on top of FRAND), and

  • patent invalidity, non-infringement, and exhaustion.

Through their FRAND claims, the contract manufacturers raise the kinds of issues that antitrust authorities in multiple jurisdictions, Apple, and consumers have raised (and that many others have supported through amicus briefs and an open letter to President Trump).

The patent claims aren't nearly as fundamental as the FRAND claims, but in terms of the contract manufacturers throwing down the gauntlet, they are huge: licensees are often contractually barred from challenging licensed patents, and even where they would be free to do so, they rarely do. To me, this decision on the contract manufacturers' part means that they want to bring about change regarding Qualcomm's practices, and they don't want it to any lesser degree than any of the other stakeholders I mentioned in the previous paragraph.

I'm pretty sure the motion for a preliminary injunction will fail. Qualcomm can't show a likelihood to succeed on the merits, and irreparable harm (despite the amounts being substantial) is something else than "to get our money," a quote from a public statement by Qualcomm's top lawyer (that quote appears in the manufacturers' opposition brief). Qualcomm still has the chance to argue irreparable harm in its reply brief, but so far I'm really very skeptical. And, as I said, Qualcomm won't be able to dissuade the court from consolidating those two huge cases.

The contract manufacturers could have done a lot less here than they have. A whole lot. Qualcomm has now made itself some additional enemies, and at least some of those enemies have considerable clout in China, a jurisdiction that has previously looked into Qualcomm's business model.

So far, Qualcomm's best initiative in all those U.S. cases was its motion to dismiss the FTC's complaint (there was a possibility that some kind of amendment would have been required, though it didn't happen), and it's too early to take a position on its ITC complaint, but its decision to drag the contract manufacturers into this dispute looks like its worst mistake. For now at least. Instead of hiding behind Apple, the manufacturers are now playing an active role, and their perspective is in some ways complementary to Apple's--and vice versa.

The motion for a preliminary injunction is a downright Hail Mary pass. One might say the same about any attempt by Qualcomm to oppose consolidation. It's very clear to me, and I know a lot less about all of this than Qualcomm's executives, in-house and outside counsel. So why are they doing this at all?

I can't help but make the observation that Qualcomm is struggling here because of conflicting goals:

  • antitrust investigations/decisions in different jurisdictions (sometimes it's hard enough for companies if they have to design a strategy just because of a couple of investigations, with a potential move being good in one jurisdiction and bad in another, but here there's also private litigation in parallel),

  • Apple's case,

  • the contract manufacturers' claims (consistent with Apple's, but still a new challenge that Qualcomm could have avoided),

  • PR considerations (Qualcomm basically issues a press release every time it files a complaint), and

  • investor relations (somewhat related to PR, and all about preventing the stock price from falling further and further) and fiduciary-duty considerations.

It must be incredibly difficult at times for Qualcomm to set its priorities. Just one example: its action against the contract manufacturers serves the purpose of showing to investors that it's pushing very hard to collect money, and since it's about shareholders' money, it might be that Qualcomm's decision was driven by fiduciary-duty obligations, though a preliminary injunction for the purpose of collecting money is so outlandish that I'm not sure anyone could have held them liable for not trying. It may also be a means of showing to antitrust authorities that Qualcomm believes it never committed any wrongdoing related to licensing. But the PI motion will most likely fail; Qualcomm now has additional enemies; and consolidation will almost certainly happen, so everything will only get harder and more time-consuming for Qualcomm in the end.

A related observation: public statements of the "to get our money" kind can backfire. At least that's what the contract manufacturers' lawyers think, which is why they quoted that passage.

To the extent Qualcomm tries to shield its directors and officers from liability issues, that's a necessity, but it doesn't make its complaints and motions any more meritorious. If Qualcomm goes beyond an absolute necessity and just tries to make investors feel as good as possible about an increasingly difficult situation, that will only have short-term effects because sooner or later the only thing that will matter is the actual outcome (in terms of judgments or a settlement). Technically, the jury is still out on this, but common sense suggests that Qualcomm should have tried to focus just on Apple and the regulators and should have left the Foxconns of this world alone. Dragging them into this--apparently a boomerang--makes things harder, not easier, and slower, not faster, for Qualcomm as it seeks to defend its business model and licensing terms, which are now being challenged from multiple sides and angles, in multiple jurisdictions, by multiple types of stakeholders.

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