Wednesday, September 5, 2018

Huawei is allegedly adamant about receiving 1.5% of Samsung's smartphone sales as a patent royalty

As I mentioned a month ago, Samsung had a deadline last week for its response to Huawei's Ninth Circuit appeal lodged with the Federal Circuit against the antisuit (actually, just anti-enforcement) injunction Judge William H. Orrick upheld in the Northern District of California in late June. The U.S. district court will hold a trial in December, and the purpose of the injunction is to bar Huawei from leveraging two Chinese patent injunctions (granted by the Shenzhen Intermediate People's Court) before Judge Orrick has the chance to adjudicate a related claim.

Like in the court below, Quinn Emanuel, as counsel for Samsung, is defending the Microsoft v. Motorola it once sought to prevent as Motorola's counsel, while Sidley, then counsel for Microsoft, is trying hard (but not convincingly so far) to distinguish one case from the other.

With either party having filed one brief (Huawei will file a reply at its earliest opportunity since it would like the Federal Circuit to decide sooner rather than later), it all looks like a total rehash of the district court proceedings. The one and only Yogi Berra would have said: "It's déjà vu all over again."

However, Samsung's responsive brief is still interesting from two angles. One, it sheds some additional light on the history of licensing negotiations between the parties. Two, it's interesting to watch how Samsung's lawyers position the anti-enforcement injunction as merely thwarting Huawei's plans to frustrate the forthcoming San Francisco trial (as opposed to putting U.S. law about Chinese law).

Here's the filing first (this post continues below the document):

18-08-27 Samsung Appellate Brief by Florian Mueller on Scribd

Samsung alleges that Huawei has made only token concessions and engaged in some structural maneuvering, but never went down (at least not to any meaningful degree) from its initial 1.5% royalty demand:

"Although Samsung considered different license structures and made significant concessions on royalty terms, Huawei inexplicably ping-ponged back and forth between different types of licenses, while woodenly clinging to its demand that Samsung pay its so-called 'standard' royalty rate of 1.5% of the sales price of smartphones and other devices that employ the standards in question. As discovery has shown, even with the modest concessions Huawei has offered, its demands are unreasonable and discriminatory because they exceed any valuation that is recognized as appropriate in the industry as well as terms Huawei extended to others, [...]

Huawei's original 1.5% demand was previously mentioned in the Chinese court ruling. It's also what I remember from Huawei's dispute with ZTE. Samsung's appellate brief explains why it's an excessive royalty rate:

"In August 2011, Huawei approached Samsung seeking a cross-license to the parties' respective 3G and 4G SEP portfolios. [...] By that time, Huawei had announced to the industry that it would demand a 'standard' one-way royalty of 1.5% of the sale price of devices like smartphones and tablets for its LTE/4G SEPs. [...] The industry consensus, however, was that the aggregate royalty burden for all such SEPs should be a single-digit percentage, approximately 6-8%. [...] Huawei's demand thus amounted to 18-25% of the aggregate rate for all SEPs owned by every firm. Huawei has never justified that demand; in particular it does not contend that it holds a corresponding proportionate share of total industry SEPs, and it does not contend that any other smartphone manufacturer has accepted that rate in a negotiated license."

Apparently, the discrepancy between Huawei's share of wireless SEPs and the aggregate royalty burden deemed reasonable in the industry didn't dissuade the Chinese court from granting Huawei injunctive relief--but the appeals court in Guangdong may still reach a different conclusion.

Interestingly, Samsung's position changed a lot. Initially it expected Huawei to be a net payer under the deal; later it proposed a royalty-free cross-license, and about three years ago Samsung even signaled a willingness to be the net payer:

"During the course of negotiations Samsung made reasonable offers to Huawei in the hopes of reaching a resolution. Samsung originally proposed that Huawei make a balancing payment due to Samsung's larger and stronger patent portfolio [...], then later proposed a royalty-free cross license [...], and then compromised further in July 2015 by offering to pay Huawei a net royalty fee [...]. That offer was based on an existing royalty rate set by the Guangdong High Court of China at Huawei's request in a case involving a portfolio of Chinese SEPs owned by InterDigital. [...] Huawei refused these offers."

I remember that a Chinese court had held that InterDigital was entitled to SEP royalties far below what InterDigital was seeking then and Huawei is seeking now. But that's the problem when a company is licensor in some cases and licensee in others: once the shoe is on the other foot, the positions one used to take and sometimes even the victories one scored in a different context backfire. Just like Huawei's U.S. counsel from the Sidley firm is now struggling to distinguish Huawei v. Samsung from what may have been by far the most important triumph of the firm in connection with patent enforcement.

Meanwhile, Samsung's counsel is making a lot of effort to describe the anti-enforcement injunction as no big deal. That's necessary because of the international comity considerations involved: it's about a U.S. court having enjoined a Chinese company (that elected to file a case in San Francisco), not about a U.S. court putting itself above a Chinese court, or putting U.S. law above Chinese law. As Samsung's brief puts it, the U.S. district court merely sought to "protect its own jurisdiction to decide the controversy now before it" and to "ensur[e] that the U.S. case can also proceed unimpeded."

I'd be surprised if comity considerations played out in Huawei's favor.

If Ninth Circuit didn't control this case, the question of whether all of the Supreme Court's Winter preliminary injunction factors must be analyzed would be more interesting, but only slightly so since Judge Orrick addressed them in his denial of Huawei's motion to alter judgment. Given that the Ninth Circuit has consistently (apart from maybe one clause in one sentence of a long ruling) and repeatedly held that the traditional preliminary injunction factors are replaced by the Gallo test, it's probably going to be hard for Huawei to persuade the Federal Circuit judges to depart from established Ninth Circuit law--especially since such departure probably wouldn't even make a difference.

The Federal Circuit encouraged Huawei not to exhaust the deadline for its reply brief. The appeals court did so when Huawei wanted the case to be put on a faster track. I guess we'll see a reply in the coming days, and then the Federal Circuit will hold a hearing pretty soon, but as Samsung's brief notes, "this appeal could be argued and decided before any injunction in China becomes enforceable." That's because Huawei will be able to enforce the Shenzhen injunctions only if the Guangdong appeals court rules in its favor, too.

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