Wednesday, August 30, 2017

EU investigations of Qualcomm have come out of hibernation this summer: will anything noteworthy happen?

The European Commission's Directorate-General for Competition--the 28-nation bloc's top antitrust agency--has been criticized on various occasions (on which it went after U.S. tech companies) that it focused more on the strategic interests of competitors of their investigation targets than on consumer harm, which is the central and paramount aspect of U.S. antitrust law. And more than once it has been alleged or insinuated that draconian fines or a certain order to collect taxes were driven, in no small part, by a desire to siphon off billion-dollar amounts from highly-innovative American companies.

It's not always easy, and in some contexts I'm not at all inclined in the first place, to defend DG COMP against such criticism, though it is definitely the most impactful division of an EU institution that is, in pretty much every other regard, little more than the EU Council's de facto secretariat.

The issues raised by Qualcomm's aggressive conduct are serious from a consumer point of view since every European consumer effectively pays a Qualcomm SEP (standard-essential patents) monopoly tax on every smartphone or other cellular device sold in the EU's Single Market. There may not be any significant European smartphone maker left, nor any European chipset maker (Infineon's mobile chips division was acquired by Intel, a Silicon Valley company, and might still be a European company if not for Qualcomm's behavior). But with more than 500 million consumers living in the EU, the European aspect of Qualcomm's patent licensing and other practices is very important nonetheless.

By requiring Qualcomm to extend FRAND patent licenses to all comers, including rival chipset makers (even if those may typically be American and Asian corporations), the EU Commission could have a far greater positive impact than the fines it might impose on Qualcomm would suggest. Qualcomm's annual worldwide revenues are in the $25 billion range, so theoretically the EU could fine Qualcomm to the tune of $2.5 billion (10%), but more likely the amount would "only" be in the hundreds of millions (since 10% is the absolute maximum under EU law).

So by giving the Qualcomm matter(s) as much attention as other tech antitrust matters DG COMP is pursuing, and as much as other major competition agencies (such as the FTC and the KFTC) are giving their investigations of Qualcomm's unilateral conduct, the EU Commission could demonstrate that this is about principles of fair competition and consumer interests, not about being used by someone's competitors, and that revenue generation is not really the objective. However, should the EU just stay on the sidelines of the Qualcomm matter, some will compare such lack of follow-through against what's going on in some other cases.

There are two EU cases involving Qualcomm, but it's been quiet about them lately:

  • In late June, the Commission stopped the clock in the Phase II merger review of Qualcomm's proposed acquisition of NXP, but restarted it two weeks ago (August 16). The new deadline for a decision (which, if the Commission stayed firm and Qualcomm didn't offer meaningful concessions, would be a decision to block the merger) is December 6.

  • Further to a complaint by Icera, a once-European semiconductor company acquired by Nvidia and closed down later, DG COMP opened an investigation of Qualcomm's exclusivity arrangements and predatory pricing in July 2015 (technically, two parallel investigations) and issued Statements of Objection in December 2015. Since then there hasn't been any news. The narrow scope of those investigations hasn't been widened.

    Some delay was caused by Qualcomm's refusal to respond to a January 2017 information request by DG COMP. Qualcom argued it would cost millions of euros for "thousands of working hours" (in the aggregate of the effort made by up to 50 employees and external advisers) to comply. The EU Commission then ordered Qualcomm to produce the requested information lest it be fined more than half a million euros per day. Qualcomm took this matter to the EU General Court (formerly called the Court of First Instance), which upheld the Commission's order by decision of July 12 as Qualcomm failed to convince the judges it faced significant disruption of its business or other serious and irreparable harm.

In legal terms, and with respect to the professionals on the case teams, those are two separate matters. In practical terms, however, neither investigation exists in a vacuum. From a certain level up, the decision-makers are the same, and even below that level, people will be aware of what's going on in the other case. Qualcomm's unwillingness to cooperate with an information request does nothing to improve its relationship with the Commission--and this could also affect the merger review, which could turn into a bitter fight anytime now.

There is a potential overlap with respect to remedies, too. The most logical and most meaningful remedy would be a requirement to extend FRAND patent licenses to rival chipset makers. That wouldn't resuscitate Icera, but it would be unbelievably positive for consumers (though it would just be a reasonable interpretation of the relevant FRAND licensing promises). It's also what the FTC wants to see happen, and apparently the KFTC, too.

Hopefully there will be some positive EU developments to report in the coming months. If not, we can still talk about possible reasons then.

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Monday, August 28, 2017

Qualcomm drops a patent asserted against Apple in an ITC complaint: "we hardly knew ye"

In early July, Qualcomm brought an ITC complaint against Apple over six non-standard-essential patents (NEPs) related to efficient battery usage, seeking an import ban against iPhones with Intel (or other third-party chips) but not against devices that might include Qualcomm's own chips.

A couple of weeks ago, the ITC instituted the investigation. As I wrote last month, it would have been unusual for the ITC not to investigate the complaint, despite the partly valid points raised in various public-interest statements.

But something unusual has happened now. On Friday, Qualcomm filed a motion (unopposed by Apple) for partial termination of the investigation by withdrawal of U.S. Patent No. 8,487,658 on a "compact and robust layout shifter design."

What's unusual here is not Qualcomm's decision to drop a patent. I'm sure they'll drop more as this investigation unfolds because that's what the ITC expects complainants to do so it can keep its relatively ambitious timelines (Qualcomm's motion makes reference to the normal course of business at the ITC, though the motion tends to portray a totally ordinary ITC timeline as something special, which it is not in my observation). What is strange and even pretty much unprecedented is the timing: two weeks into a just-launched investigation. In all other cases I've watched, with an exception I'll discuss next, parties withdrew patents after significant procedural progress. At a minimum, parties would want to review the respondent's non-infringement and/or invalidity arguments. Here, Qualcomm withdrew the patent without anything happening other than Qualcomm having changed its mind.

Approximately five years ago, then-Google-owned Motorola Mobility withdrew its entire second ITC complaint against Apple at the same procedural stage. But a withdrawal of an entire complaint is not the same thing as streamlining an investigation that is continuing. My guess is now, with the benefit of 2020 hindsight, that Apple would otherwise have filed a second complaint of its own against Moto, so maybe they agreed to at least cease further aggression. It still took a while (until May 2014) before Apple and Google withdrew all claims pending against each other, but there weren't any further infringement accusations between them (just fights over remedies and invalidity, and of course, appeals) between that withdrawal of Moto's second ITC complaint against Apple and the spring 2014 settlement. At a minimum, it was a gesture of deescalation--and "deescalation" doesn't appear to be in Qualcomm's vocabulary in connection with the Apple dispute.

Qualcomm produced a beautiful infographic to promote its ITC complaint. Unfortunately, it's outdated now, but I've just decided to exercise my fair-use rights to provide an update. Maybe Qualcomm itself will produce an up-to-date, clean version of that infographic (click on the image to enlarge):

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Thursday, August 24, 2017

Qualcomm's credibility squeezed between conflicting goals: litigation and investor relations

About a month ago I shared the observation that Qualcomm's approach to its FTC and Apple litigations was in part driven by investor relations (IR) considerations. That same day, Qualcomm delivered another piece of that particular puzzle by filing two German patent infringement lawsuits against Apple just before a quarterly earnings report--they can file lawsuits whenever they want, but that was hardly a coincidence.

In the wake of last Friday's San Diego hearing(s), the call related to that July earnings report was mentioned in a letter by Qualcomm's lead counsel, Cravath chairman Evan Chesler, to United States District Judge Gonzalo P. Curiel, referring to something Mr. Chesler said as part of his irreparable-harm argument relating to Qualcomm's preliminary-injunction request:

"Your Honor, we write to provide one clarification regarding statements made during oral argument today on the preliminary injunction motion in Qualcomm's action against the Contract Manufacturers. While I correctly stated that the other licensee (as referenced in Mr. Rogers' reply declaration) had not yet stopped paying all royalties at the time of the April 2017 earnings statement shown during oral argument (Contract Manufacturers' slide 20), I may have misstated that the other licensee had not stopped paying before the July 2017 earnings call, in which Mr. Aberle made other remarks shown during argument (slides 29-30); it in fact had stopped paying prior to Mr. Aberle's remarks in July."

Retractions of that kind are not a routine follow-up to court hearings, and especially not when a litigant is clearly ready, willing and able to spend enormous resources to defend itself on multiple fronts and when the lawyer in question has been in this business for more than four decades and is regarded as one of the best trial lawyers in the United States.

Apple's contract manufacturers appear to have shared their slides with a number of people at and after the hearing. It has, however, taken me a while to obtain all of the information about the hearing that I needed. So here are the key quotes from Qualcomm president Derek Aberle's statements on that July 19 earnings conference call:

"[...] I don't think, as we sit here, we have any indication that this is somehow going to result in a bunch of other licensees deciding not to report and pay royalties."

"As we've had disputes, we've been able to work through and resolve them without other licensees necessarily just deciding they're not going to comply with their agreement."

Then, in response to an analyst question's whether that kind of contagion was actually happening:

"No. That's not what's happening. We have a dispute with Apple and their contract manufacturers, and we have a dispute with one other licensee." (emphasis added)

I'd still like to know who that other licensee is, especially since I still sometimes talk to Wall Street professionals over the phone (who obviously don't want to receive, and could never receive from a litigation watcher like me, material non-public information). What I've been able to find out is that Qualcomm describes that unnamed company as "one of the largest handset manufacturers in the world" and that, as a result of that company's and Apple's decisions, about 25% of all mobile phones are now made by companies rejecting Qualcomm's royalty rates. Samsung and Huawei have the volume that would fit that description; some others would, too, but if they're mostly or exclusively focused on Asia, the FTC and Apple cases wouldn't matter to them (Qualcomm says Apple's lawsuit triggered the other company's decision to withhold payments).

Since Qualcomm's counsel said at the hearing that everything was going great for his client in China despite an antitrust investigation of a couple of years ago, I would then consider Huawei less likely to be the one than Samsung. But--and this is a really big "but"--if Qualcomm misrepresented the timing of the decision to withhold payments, can we really believe them that there's no problem in China?

Can investors still trust Qualcomm's representations? Obviously, Qualcomm has every right to take the position it deems most advantageous in each context. In litigation, Qualcomm wants to argue that Apple is causing enormous harm. It wants to portray Apple as the bad guy and bully and itself as the innocent victim of undeserved injustice (which Judge Curiel, who pointed to international antitrust rulings, doesn't really appear to buy). In investor relations, Qualcomm wants everyone to feel good about its prospects. Within reason, Qualcomm can optimize its message for each audience: judges and the court of public opinion in one context, investors in the other. But this is a constant threading-the-needle kind of challenge, and the Friday letter suggests it's not working out well.

The Sanford Bernstein analyst who asked the question about contagion on that July 19 earnings call, and everyone she effectively spoke for, deserved a more specific answer. If Qualcomm can tell Judge Curiel how big the other non-royalty-paying device maker is and how much this impacts its business (one in four devices), why can't it--or one might say "why doesn't it have an obligation to"--tell the same to investors on an earnings call?

At the hearing, Qualcomm made stock market fluctuations part of its irreparable-harm argument, pointing Judge Curiel to the fact that Apple's market cap has increased by $200 billion since the beginning of the year while Qualcomm's declined by 16-18%.

Interestingly, Qualcomm tried to leverage statements on an earnings call against Apple. Apple CEO Tim Cook had said in early May that Apple "needed the courts to decide" how much it should (directly or through its contract manufacturers) pay Qualcomm in patent royalties. In connection with a request for an anti-suit injunction that would prevent Apple from pursuing antitrust litigation in other jurisdictions, Qualcomm tried to interpret Mr. Cook's statement as a desire to have one court determine a worldwide royalty rate. Apple's counsel disagreed, and Judge Curiel explained that the parties could obviously point to what each other's executives say on earnings calls but ultimately he was going to focus on court filings and hard facts.

Qualcomm's litigation/IR conundrum appears to be exacerbating, and I feel that there may be more situations, as those different FRAND-related cases unfold, in which Qualcomm won't be able to have its cake and eat it. For Apple the risk of inconsistencies, and especially the impact of any hypothetical inconsistencies, should be much less of an issue, though one can never know what might happen during multi-year litigation.

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Monday, August 21, 2017

Qualcomm fighting hard to avoid adjudication of Apple's patent infringement defenses

Qualcomm has to defend itself against the Federal Trade Commission in the Northern District of California, where Judge Lucy H. Koh has so far been great for the mobile device industry, and against Apple in the Southern District of California, where Judge Gonzalo P. Curiel held a hearing on Friday. Apart from case management orders scheduling a March 22, 2018 claim construction hearing and a September 28, 2018 final pretrial conference for the non-patent claims, all I know about the hearing is what I found on the Twitter feeds of's Scott Graham and MLex's Mike Swift.

It's unsurprising that, according to these two reporters, Judge Curiel will consolidate Apple v. Qualcomm with Qualcomm's lawsuit against four Apple contract manufacturers (who in turn invited Apple to join, which Apple appeared happy to do), and that Qualcomm appears unlikely to obtain a preliminary injunction requiring those contract manufacturers to resume their royalty payments. The overlap between those cases is gigantic, and seeking a preliminary injunction for the purpose of collecting payments is--let's try to understate how hard it is--a long shot.

I would like to comment on a couple of other things I read about the hearing. The first one is that Evan Chesler, Qualcomm's counsel and chairman of the Cravath firm, told Judge Curiel the 18 patents Apple claims are invalid and not infringed were just a "drop in the bucket" and adjucating them wouldn't put the parties any closer to a settlement.

In contract negotiations as well as legislative processes, I've seen parties downplay the importance of something that actually is important. So the question to ask ourselves here is whether Qualcomm is merely trying to streamline the case or suffering from a severe case of meritophobia. If you haven't heard that term before, it may be because I just coined it. What I mean to say with this Latin-Greek mix is that Qualcomm may fear the adjudication of the merits of (various of) its standard-essential patents.

Qualcomm brought a motion in July seeking the dismissal of nine patent-related claims (involving theories of invalidity, noninfringement, and exhaustion) that Apple added to nine similar claims when it amended its complaint. According to Qualcomm, there is no controversy since the parties had never discussed those patents and Qualcomm had never accused Apple of infringing them. But Qualcomm conceded that those patents "were included on a list of thousands of patents Qualcomm has declared as potentially essential to cellular standards." That list was attached to Qualcomm's motion as a 1,977-page exhibit (the highest number of pages of any exhibit I've seen so far).

In its opposition brief, Apple says "[t]he lengths to which Qualcomm is going to prevent any real examination of its patents is astounding."

The sheer size of the declared-essential patent portfolios belonging to certain companies has always been a problem. Qualcomm is not the first, and sure won't be the last, SEP holder to argue that a FRAND rate-setting decision should be made without looking at whether the patents in that portfolio are valid and infringed. Everybody knows that no court could realistically adjudicate each and every patent from a list that is almost 2,000 pages long. But the fact that one extreme isn't feasible doesn't mean that the other extreme--the "drop in the bucket" position taken by Mr. Chesler--is acceptable.

What's certainly unacceptable is the notion that someone can collect certain royalties based on the size of a portfolio of patents declared potentially essential to one or more industry standards. Overpatenting happens because patent offices around the globe issue too many patents; overdeclaration happens due to the parameters of standard-setting organizations (including what could happen in future litigation if a participant in the process failed to disclose a patent). There's just no way that Qualcomm can expect to receive billions of dollars in annual patent royalties from Apple (whether directly or through its contract manufacturers) without a court, prior to a FRAND determination, looking at the underlying merits.

It really surprised me that Qualcomm didn't respond to Apple's declaratory judgment claims with its own infringement claims. Failure to bring infringement counterclaims has significant consequences. Someone with many thousands of declared-essential patents can afford effectively losing the ability of enforcing some of those patents against a particular company. But Qualcomm could also have decided to bring claims over any standard-essential patents of its choosing.

The most abusive kind of behavior by patent holders is when they just point to the size of a portfolio and basically say: "We have so many of them that you will surely infringe something." There is no substitute for actual merits, and considering the track record of mobile phone patent assertions (including assertions brought by companies adverse to Qualcomm in the current situation)

In Scott Graham's observation, Judge Curiel may like the idea of setting a FRAND rate for Qualcomm's worldwide portfolio, while Apple would prefer to limit the U.S. case to U.S. patents (as patents are territorial rights, not worldwide rights). That's the second one of the two tidbits from the Friday hearing I wish to comment on.

When Judge Robart entered his famous anti-injunction-enforcement injunction in 2012, which the Ninth Circuit upheld, he prevented Google's Motorola Mobility from abusing some standard-essential German patents at a time when German courts were too patentee-friendly in this context. In terms of preventing a bad thing from happening, Judge Robart's decision was great. But there is this concept of "international comity," of countries respecting each other's sovereignty. Apple's counsel apparently stressed this notion at the hearing, saying (according to Mike Swift) that an anti-suit injunction preventing Apple from proceeding with its antitrust case in China, the UK, Japan and Korea "would be a complete insult to those countries."

Shortly after Judge Robart's anti-enforcement injunction, I saw first-hand what that abstract concept called "international comity" means in practice. I had a brief conversation with a senior German judge who wasn't personally presiding over the German Motorola v. Microsoft cases affected by Judge Robart's injunction, but who for professional reasons was very well aware of what was going on. When I said something like "that upcoming decision by your colleagues won't have impact after that order by a court in Seattle," the judge suddenly had an expression on his face and was trying hard not to say what he presumably wanted to say. While I thought Judge Robart's decision was good for the industry at large, I did feel the disappointment on the German side that a foreign court had interfered with their domestic affairs.

At this point I hope Judge Curiel won't deprive his Asian and European colleagues of jurisdiction over patents that are valid only in those jurisdictions, not in the U.S., no matter how much he may be driven by a desire to resolve an earth-spanning legal dispute. Judges generally want to be peacemakers, and that's a good thing, but since there is no such thing as a worldwide patent, it isn't always possible without creating bigger problems than the one (parallel litigation in multiple jurisdictions) that is seemingly solved.

The biggest problem, however, would be if a FRAND determination was based on roughly 2,000 pages listing potentially standard-essential patents. The fact that two separate case management orders were handed down on Friday--one with respect to the patent claims and one with respect to the non-patent claims--doesn't necessarily mean that the rate-setting decision will be made without the benefit of adjudicating some of the (in)validity and (non-)infringement questions. Qualcomm must show that its claims of being entitled to patent royalties have merit.

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