Thursday, January 31, 2019

Four Qualcomm patent suits against Apple dismissed by Munich court, four others in zombie mode

This last day of January 2019 dealt another setback--technically, a set of setbacks--to Qualcomm as half of its patent infringement lawsuits against Apple's Spotlight search in Munich have been tossed and the other half is going down the tubes. On the legal front, this month as a whole has gone, for the most part, as if Qualcomm had set out to prove Murphy's law. A summary will be provided further below.

The Munich I Regional Court thankfully published a press release on its website (in German) regarding the decisions the 7th Civil Chamber under Presiding Judge Dr. Matthias Zigann announced today in Qualcomm's eight Spotlight cases.

It was already clear before today's announcement that some of those lawsuits were bound to be dismissed because there was no doubt at the hearing that a claim limitation (a "standby" feature for apps) wasn't practiced. I reported that fact after the trial and mentioned it again in my most recent post relating to this set of cases, which I wrote after the European Patent Office sided, in a preliminary opinion, with Apple and Intel (I should even say Intel and Apple because Intel was first to challenge those patents), represented by the patent attorneys of the Samson & Partner firm (which consistently delivers great work, and was on the winning side in another case today--involving totally different parties--as I'll mention at the end of this post).

These are eight cases because there are two cases for each of the four patents, always one against Apple Inc.--the U.S. HQ--and one against two European Apple entities. The older ones of the four patents-in-suit (too old to be challenged before the European Patent Office post-grant, but they are being challenged in the Federal Patent Court of Germany), EP1956806 and EP1955529, are not infringed--for the aforementioned reason (no "standby"). That disposes of four of the eight cases. Qualcomm can appeal, but the "standby" question appears to be an insurmountable hurdle for Qualcomm, and the EPO opinion on the other two patents, while neither final nor binding on the Federal Patent Court of Germany, strongly suggests that the entire patent family is doomed to be invalidated.

Non-infringement was successfully argued for Apple by Freshfields Bruckhaus Deringer's Prince Wolrad of Waldeck and Pyrmont.

Instead of outright ordering a stay of the other four cases (over the two younger patents the EPO deems invalid on a preliminary basis), the court made the procedural decision to give Qualcomm a chance---by way of a reopening of the proceedings--to respond to the EPO's preliminary findings of invalidity. That's because the EPO opinion came in so shortly (just about a week) before today's ruling date in the infringement cases.

Obviously the cases will be decided by the court, not by a blog, but I really view those four cases as "zombie cases": a quartet of dead men walking. No matter what Qualcomm will say (and Quinn Emanuel's Dr. Marcus Grosch won't leave a stone unturned; after all, he even salvaged a narrowed version of Motorola's infamous push notification patent by creatively crafting a cascade of amended claims), the EPO's preliminary position on revocation will bear enormous weight with the court unless a very clear legal error were to be identified. That's because the courts of law hearing infringement cases in Germany recognize that the EPO (which also applies to the Federal Patent Court of Germany) not only spends a lot of time evaluating validity challenges but also has technical expertise on board.

Also, the EPO's opposition hearings will take place later this year, so if the Munich I Regional Court allowed enforcement (which wouldn't matter because iOS 12 contains a workaround) but the EPO issued a final (though appealable) revocation decision later, it wouldn't look good, while the EPO's preliminary opinion justifies a stay of those four cases (short of a silver bullet on Qualcomm's part), and should the EPO change mind, Qualcomm wouldn't have lost much time for enforcement.

Getting back to the reference to Murphy's law further above, this is a summary of legal developments for Qualcomm during this month (it may read as if this had been authored by those shortsellers, but it's simply the way it is:

All that bad news is not counterbalanced by the symbolical victory that is a preliminary injunction in Germany, barring Apple from saying that the iPhone 7 and 8, against which Qualcomm secured a pair of injunctions in December (with the court ordering remedies while being agnostic as to the merits), remains available at more than 4,000 points of sale. But whether or not Apple is allowed to say it, there really doesn't appear to be an availability problem. On the Internet, those devices are just one Google search away from Apple's German online shop, and in the real world, I doubt there's any Apple Store from which people couldn't find the next point of sale (where those devices continue to be sold) in walking distance--in many cases, it will be like just crossing a street.

Headed for an antitrust defeat and failing to gain leverage from patent infringement actions against Apple and Intel, Qualcomm is trying to influence its fate out of court.

In other news, totally unrelated to Qualcomm, the Munich I Regional Court today rejected a complaint by Netlist against HP and SK hynix because it found no infringement. That case involves a standard-essential utility model, which is why I got interested in it. In my trial report I had already expressed my view that a rejection or stay appeared more likely than a victory for Netlist. I've already told some Qualcomm-aligned Twitter trolls that, in other words, my highest priority is to have a strong prediction record.

The utility model case was won by a Bardehle team led by Professor Peter Chrozciel and Dr. Anna Giedke as well as patent attorneys Dr. Georg Jacoby and Dr. Robert Baier from the Samson firm (mentioned further above for its accomplishments before the EPO against Qualcomm's Spotlight patents). In the United States, SK hynix is represented by Sidley Austin against Netlist. Sidley and Professor Chrocziel (at the time, with Freshfields) already worked together very successfully when representing Microsoft in the United States and Germany.

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Wednesday, January 30, 2019

Half fun, half serious: How tech CEOs react to an antitrust investigation

General counsel to CEO: "Sir, we have a problem. I just got a call from the Federal Trade Commission. In one hour, the FTC will announce a formal investigation of our allegedly anticompetitive conduct."

11 tech leaders and how they respond to this development:

Jeff Bezos (Amazon): "I thought the Washington Post would shield us from this forever! Now I gotta buy the New York Times, too. And if all else fails, CNN. Take that, Trump!"

Tim Cook (Apple): "Political crap! But finally Android is useful for something. We'll point to all those dumbphones to prove we don't have monopoly power. I'll just have to keep my mouth shut about people not using them to access the Internet. And maybe that Qualcomm guy had a point about duct tape?"

Mark Zuckerberg (Facebook): "Was there no prior indication on those FTC lawyers' Facebook profiles? I thought we'd figure this out early. But here's the biggest question: Can I run for President if we're still being investigated then or will we have to temporarily restructure the company?"

Larry Page (Google parent Alphabet): "We're innocent because 'Don't Be Evil.' Why are they doing this to the most politically correct company in the world? Are they confusing data privacy for competition enforcement by any chance?"

Ren Zhengfei (Huawei): "Those American trade warriors will stop at nothing to shut us out of their market. Unfortunately, we have to cancel all executive travel to countries that might extradite any of us. I trust those white-collar prisons in America are good, but I'll pass."

Ginni Rometty (IBM): "They could at least have waited until the last mainframe is switched off for good. Call Chuck Schumer and tell him how bad this is for the New York State job market. But don't tell him that New York banks will save money on their IT infrastructure if the government gets its way. That would be too much of a conflict for him to digest, and I don't want to have to outdonate Goldman Sachs."

Searching... (Intel): "I know it's counterintuitive, but it's actually good news. Being in the crosshairs of competition enforcers is the best benchmark. After all those boring years, we're now more relevant than ever."

Satya Nadella (Microsoft): "This is so 1990s! Don't they realize how much we've changed? We're now a genuine open-source cloud AI company while Steve Ballmer is watching basketball all day and Bill Gates is growing GMOs in Africa. They'll have to let the NEW Microsoft off the hook, I'm confident."

Larry Ellison (Executive Chairman & CTO, Oracle): "Who are the damn complainants? Can't we just buy'em all on our next acquisition spree? That would be my preferred strategy for dealing with this."

Steve Mollenkopf (Qualcomm): "We already have a dozen law firms on the case and now we'll double down on investor relations, public relations, sponsorship of researchers and analysts, think tanks, everything that money can buy! Blame Obama, Apple or Huawei-or all three, depending on whom you talk to--and tell Wall Street we'll settle this soon on very favorable terms. And now you have ten months to secure a patent injunction against the FTC's mobile phones and email servers."

Elon Musk (Tesla): "I have a plan for our planet: in the middle of the night I'll lay off another 5,000 people and let the underpaid remaining employees work even harder to offset the impact of this on our business. That's what I--I mean, THEY--just have to do to combat climate change."

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Tuesday, January 29, 2019

FTC v. Qualcomm closing arguments: in a bench trial before Judge Koh, lawyers are just there to supply facts

When Judge Lucy H. Koh (Northern District of California) denied Qualcomm's motion to dismiss the FTC'a antitrust complaint, her perspective on the key legal issues in the case became clear. Since that moment, about 19 months back, Qualcomm has known that the law, as interpreted by this experienced judge, was not on its side--and if the facts weren't going to be on its side either, it knew, or it should have known, it was bound to lose.

The Federal Trade Commission had the burden of proof in this trial, but Qualcomm also faced a significant challenge as the FTC's legal theories could hardly be defeated (otherwise the motion to dismiss would have succeeded least in part). Failure was not an option for Qualcomm.

After ten trial days, the FTC had indisputably received far more--and far stronger--industry testimony for its purposes than Qualcomm. That was to be expected, given the long list of known complainants. The only surprise in that regard was that even Ericsson (a company with similar interests regarding patent monetization) took positions adverse to Qualcomm's defense (except in connection with rival chipset licensing). The FTC's comfortable lead in connection with industry testimony would have allowed it to prevail even with a reasonably narrow defeat in the battle of the experts. But neither Qualcomm's experts nor its lawyers were able to impeach Professor Shapiro or Mr. Donaldson (their victory over Mr. Lasinski was an exception), while the selectivity Qualcomm's experts needed to employ under the circumstances (the facts being what they are) was thinly veiled and easily exposed.

Today's closing arguments weren't going to bring up anything fundamentally new: that would have had to happen during the first ten days. Nothing was surprising today. Of course, the FTC said it had met is burden of proof, and Qualcomm tried to move the goal posts for that hurdle and denied that the FTC had provided enough evidence to win. And since the opening statements, the FTC's lawyers had always been relatively low-key, but never to the extent that they wouldn't have been forceful--just forceful with their style.

After being there on all trial days, I knew I wasn't going to learn anything fundamentally new today. But there was something fascinating to watch, and that's Judge Koh's immovable, inexorable, almost superhuman focus on facts.

There's no question that Qualcomm's lead counsel Bob van Nest delivered a really great performance in terms of persuasiveness. If it had been allowed to film it, it would have been the audiovisual equivalent of a textbook example of a lead counsel really giving his best to surmount the considerable challenges his client faces. But in Judge Koh's courtroom, the name of the game is not persuasiveness.

Just like during testimony, she remained almost exclusively focused on her screen and the printouts in front of her, and sometimes highlighted a passage or took notes. But her eyes were always on her material, not on counsel.

I seriously believe she didn't even look at Mr. van Nest, who was gesticulating a lot, for more than a total of 60 seconds during his 60-minute statement. She wasn't paying more attention to the FTC's Jennifer Milici either, so this was neither party-specific nor personal.

Had this been a jury trial, Qualcomm would have had a much better chance. And in that case, the FTC would either have had to match Qualcomm's courtroom theatrics--which weren't extreme, but there was quite some contrast between the parties' communication style--or it would have been likely to lose.

Even the flipchart trick--Mr. van Nest wrote something on a flipchart only the judge could see--didn't work. She dignified it with her attention for a fraction of a second.

For the FTC's Mrs. Milici, that wasn't a problem. She just made point after point in an almost monotonous form ("monotonous" not in absolute terms, but compared to how others would have displayed outrage over Qualcomm's conduct). But for Mr. van Nest it must have been frustrating to throw all his experience and skills behind a closing argument without that effort ultimately making any difference--not because the judge wouldn't have been attentive, but because the judge was interested in substance.

After what I observed today, I would recommend to any lawyer appearing before Judge Koh in a bench trial to understand one thing: your role is not going to be an attorney of the kind shown in some movies: just be realistic about your role, which is very limited when Judge Koh decides the case alone. In that case, just like today, the only thing the lawyers are really expected to do is to supply outcome-determinative facts. Don't try to "mansplain" the law to her. She can handle that part herself.

Qualcomm had facts to present, but some of them were called into question and others just fell short of turning the tide. For an example, if some company executives said in some videotaped depositions that they didn't feel threatened by Qualcomm, that still doesn't do away with other testimony of real and perceived threats.

The FTC's trial team contented itself from the beginning with just being Judge Koh's water boy or girl--"water" standing for "outcome-determinative facts." The only departure from this approach was just gradual: Mrs. Milici's cross-examination of Qualcomm's economic expert Professor Nevo, whose theories Qualcomm didn't try hard to defend today (focusing instead on re-rebutting Professor Shapiro's rebuttal, delivered yesterday.

Judge Koh actually showed great consideration for all the people who came to listen today, and gave instructions for how to make room so everyone could be seated. Quite often one can see she's a nice and positive person. Not a robot, much less a stone. But when she listens to argument or testimony, it's all about what you say, not how you say it.

No matter how often and how masterfully Qualcomm's lawyers claim that its royalty rate was justified: testimony shows the industry at large views it differently. It's not Qualcomm's lawyers' fault that the facts are what they are. But no judge could have made it harder to compensate for structural shortcomings of a party's position than Judge Koh. It is that focus on facts and interpretation of the law--not bias or anything like it--that doesn't bode well for Qualcomm.

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Will Apple v. Qualcomm (April 15 in San Diego) be a $50 billion trial?

The FTC v. Qualcomm trial in a narrow sense (ten days of testimony) has just wrapped up, and closing arguments will be delivered later today. Not only has the underdog team--the FTC's litigation staff--had (and managed) to square off with multiple top-notch law firms but Qualcomm, through its allies and hacks, has intensified a barrage of opinion pieces in different media to pressure the competition enforcer to settle the case. Yesterday, the Wall Street Journal's website published an op-ed by star attorney Ted Olson (I first heard about him in connection with the dispute in 2000 over ever more recounts in Florida). He explains why it's a good thing that the FTC is pursuing this case.

Mr. Olson does disclose the fact that his law firm, Gibson Dunn, represents Apple's contract manufacturers in the San Diego Apple v. Qualcomm case. But all those Qualcomm puff pieces bashing the FTC weren't any more balanced. I'm not aware of anyone else right now who would express clear opinions on the issue in the case but also acknowledge when the other side has a point like I agreed with Qualcomm's 2017 motion to dismiss in part, found Qualcomm had a potential point in the timing of a consumer antisuit motion (which Judge Koh denied, for the time being, for that very reason), and in connection with the trial I concluded that part of MediaTek's testimony was useful to Qualcomm and that Qualcomm destroyed one of the FTC's three experts, Mr. Lasinski, whom I've criticized sharply. Also, I commented favorably on the testimony of a Qualcomm employee-expert, Mr. Casaccia, and gave Qualcomm unsolicited advice on who should be their lead counsel and deliver their closing argument.

I sincerely wish I could find someone who, unlike me (a FRAND advocate for 12 years), promotes maximum leverage for standard-essential patent holders, but who would also concede at least from time to time where the FTC has a point--and who would focus on the issues rather than a Chinese bogeyman or FTC-Apple conspiracy theories. Should I find such a counterpart, I'd really like to have a reasonable debate, which is impossible with trolls and hacks. Until then, I'll welcome the modest incremental balance the debate gains from contributions such as Mr. Olson's WSJ piece, knowing that he (described by IPWatchdog as "undoubtedly" one of the two most famous U.S. attorneys) is someone who even with his firm being involved in the wider dispute simply wouldn't have to take positions that aren't his own.

Mr. Olson's op-ed mentions that Apple's contract manufacturers (Foxconn, Wistron, Pegatron, Compal) are suing Qualcomm over $27 billion. I wasn't aware of that number, but googled it in this Yahoo Finance article and another place. Apparently, it's three times $9 billion: treble damages.

In October, Qualcomm's lead counsel in the San Diego case, Cravath chairman Evan Chesler, claimed "$7 billion in property damages" because of royalties not paid by Apple's contract manufacturers on devices made for Apple between the spring of 2017 and October 2018 (therefore, the actual number is likely already north of $8 billion, and may be even closer to $9 billion or $10 billion by the time of the mid-April trial). In a hypothetical scenario in which Qualcomm would get this amount, it might try to seek damages enhancements as well. Let's assume $8 billion (and I would almost guarantee Qualcomm will want more), and a hypothetical attempt by Qualcomm (whether meritorious or not) of treble damages, then the total amount of money at stake in the San Diego case is already more than $50 billion: that's the differential between the best-case scenario for Qualcomm (getting approximately $30 billion and not paying anything to Apple's contract manufacturers) and its worst-case scenario (paying $27 billion and getting nothing).

Those numbers dwarf the $1 billion in contractual payments Apple is seeking (which almost all of the original reports on this case focused on).

Even if one discounted all those numbers aggressively, the financial implications of that trial will probably represent an opportunity for event-driven investors.

In light of those quantities, it's also clear now why the extremely limited leverage Qualcomm gained from the enforcement of a pair of German patent injunctions (requiring Qualcomm to post bonds over more than $1.5 billion)--it's just symbolical--didn't make Apple cave.

The San Jose trial concluding today is/was "David vs. Goliath" (given the resource constraints of the FTC's litigation team). In San Diego there'll be a "Clash of Titans." Over tens of billions of dollars.

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Monday, January 28, 2019

Short final trial day exposes "intellectual bankruptcy" of Qualcomm's economic expert, lead counsel as sore loser

Today was the tenth, final and shortest day of the FTC v. Qualcomm antitrust trial before Judge Lucy H. Koh in the Northern District of California. It was also the only one of the ten trial days without a break. Tomorrow we'll hear closing arguments (with a break between the two parties' one-hour presentations).

The short amount of time in court today was enough for Qualcomm's extremely weak position to be on full display again. As I wrote yesterday, it's time look past the question of merits (where the facts and the law are overwhelmingly on the FTC's side) and on to the subject of remedies. But for the sake of complete coverage, a few things from today's session are worth mentioning:

  1. Professor Shapiro's direct examination for the sake of a rebuttal of various Qualcomm experts went like his original testimony the week before last: he was confident, and explained everything in clear and simple terms. He confirmed that he stood by all of his conclusions, and while he pointed out to some major flaws in Professor Snyder's and Dr. Chipty's testimony, he didn't use the kind of dismissive terminology that they had used when commenting on Professor Shapiro's analysis. On Twitter I described this as "respectfully ridiculing" those reports.

  2. However, with respect to Professor Nevo's report and testimony, he used such as terms as "intellectual bankruptcy" and "all messed up." He also said "sloppy work." What a litigation watcher like me always asks oneself in such a situation is whether someone resorts to strong rhetoric from a position of weakness (lacking strong arguments) or does so because something really is so absurd that euphemisms are unwarranted. In this case, it's clearly the latter. The first example I'll give is that Professor Nevo used all sorts of agreements Qualcomm had concluded with companies (as we've known since Friday, with out-of-this-world selectivity rather than the focus on "real-world results" he pretended to have) to show that a certain royalty rate level (we're talking about 5%) was FRAND.

    Professor Shapiro today highlighted how those agreements allegedly negotiated without anticompetitive leverage are just totally unsuitable for this purpose. Five of seven contracts shown on one slide involved Japanese device makers, and the Japan Fair Trade Commission had actually handed down an order according to which those agreements came into being under unfair circumstances. On cross-examination, Qualcomm's lead counsel Bob van Nest kept insisting that the JFTC had not found any chipset-based leverage, but that was besides the point. Coercion is coercion, leverage is leverage, no matter the lever.

    In many other cases, companies concluded agreements and didn't immediately ship phones with Qualcomm chips, but did so a little later; or they bought chips from Via, but Via had an agreement with Qualcomm under which it was not allowed to ship chips to OEMs lacking a Qualcomm patent license (Lenovo testified to that effect, for instance). So basically, there was a lot of leverage, often the same leverage as the one the FTC is concerned about, sometimes maybe a different one, but the bottom line is those other license agreements don't serve as an indicator of a FRAND rate (which negotiation results never prove conclusively anyway).

  3. Professor Shapiro, who has served twice as chief economist of the DOJ's antitrust division, pointed out the very same misrepresentation of Microsoft's past operating system license agreements (a per-hardware charge even if no Microsoft software was installed) that I explained on Friday in my live tweets as well as in my blog post. Professor Shapiro said his "charitable interpretation" (in other words, he didn't want to allege that Mr. Nevo is a liar) was that Mr. Nevo "failed to understand" the Microsoft case, showing "the bankruptcy of [Nevo's| arguments."

    Just imagine this: Qualcomm spent millions on an "expert" who told the court such unbelievably wrong things that the errors were pointed out live on Twitter, and my live tweets and subsequent blog post have just been validated now by Professor Shapiro's rebuttal testimony.

  4. On cross-examination, Qualcomm's lead counsel in the FTC case, Mr. van Nest, first only got Professor Shapiro to confirm obviously true characteristics of his analysis. He got back to the JFTC order mentioned above, arguing that the alleged leverage there was not about chipsets, which was pointless because the exact nature of coercion doesn't make a negotiation result any more reliable. The Japanese case may have been over infrastructure or cross-licenses, but whatever it was, those license deals can't be viewed as a benchmark.

  5. Then, toward the end of the first cross today, Mr. van Nest displayed a different kind of bankruptcy--I'm hesitant to call it an "intellectual" bankruptcy, though. He confronted, over the FTC's objection (overruled by Judge Koh), Professor Shapiro with quotes from a district court ruling related to the AT&T Time Warner merger case, in which the judge disagreed with Professor Shapiro's analysis because it allegedly ran counter to all the trial testimony. Mr. van Nest sought to discredit Professor Shapiro in Judge Koh's eyes. Like in other situations in this trial, I'm not sure that a tactic for a jury trial is appropriate for a bench trial, though in this case it can't be ruled out that it may also have an effect in a bench trial (just far less certain than with a jury). My feeling is Judge Koh will make the necessary determinations herself regardless of what Judge Leon in Washington D.C. wrote.

    Professor Shapiro pointed out that many other judges (he's been testifying in such cases for a long time) relied upon his analysis and this one was an "outlier." He also noted that the DOJ was appealing the decision and one would have to await the outcome in the D.C. Circuit.

    A quick Google search shows the AT&T decision is controversial.

    Even if the judge who handled that merger case was right (I don't have an opinion on that other case as I haven't researched it), real-world evidence in the form of trial testimony and documents shown in FTC v. Qualcomm does support Professor Shapiro.

    Bringing up not only an unrelated case but also an issue (analysis running counter to relevant testimony) that just doesn't apply to FTC v. Qualcomm showed one thing: Qualcomm's huge, high-profile trial team had to resort to an attempted competence assassination because the facts are not on Qualcomm's side. The law isn't really on Qualcomm's side either as we know particularly from Judge Koh's wholesale denial of the 2017 motion to dismiss.

In light of how the trial went, including its final day today, the most likely scenario for tomorrow is that the FTC will continue to just present its facts and theories in a low-key way, while Qualcomm (presumably Mr. van Nest will deliver the closing argument, though I believe Cravath's Mr. Bornstein would be the better choice in light of the nature of the case and Judge Koh's apparent immunity to any attempts to manipulate her) will probably use stronger rhetoric and get more emotional.

With ever more Qualcomm allies writing op-eds for different media falsely describing Huawei as the FTC's "star witness" (which is totally false because Apple and Intel played far greater roles here and we even heard testimony from more Samsung than Huawei executives), Qualcomm is apparently trying to make its primary closing argument (for a settlement that wouldn't be helpful) outside of Judge Koh's courtroom anyway. Like I said, the focus is now on remedies as Qualcomm has realistically lost the merits part of the case by a wide margin.

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Sunday, January 27, 2019

Changes in Qualcomm's market power over the years and their relevance to antitrust remedies

Tomorrow (Monday) the FTC will get a couple of hours for its rebuttal, and its sole live witness will be Professor Carl Shapiro. Qualcomm's experts tried to discredit his analysis. Reasonable people can always disagree on methodology: economics is not an exact science. But those Qualcomm experts taking aim at Professor Shapiro's approach by claiming it wasn't sufficiently numbers-driven were, to put it mildly, a case of the pot calling the kettle black. One of them, Dr. Chipty, couldn't deny having failed to consider more than 200 million baseband chips in Samsung phones; two others, Professor Snyder and Professor Nevo, had little more to offer than a convoluted version of "you can't argue with success." The latter spouted nonsense about Microsoft's past per-hardware vs. per-software operating system licensing strategy and the practical implications of chipset licensing, and in a language spoken widely in San Jose and even more widely in Qualcomm's town, he was simply "hundido" after he had to concede his FRAND "analysis" ignored key contract terms and multiple major licensees to the point he might have excluded most of the market.

As I said before, I thought Qualcomm could win the battle of the experts, and the FTC would overcompensate for a defeat there (provided it would have been narrow) with its huge victory related to industry testimony. But where things stand now, even prior to Professor Shapiro's rebuttal, the FTC has the upper hand in both respects. It does have the burden of proof, and I don't mean to say the FTC would necessarily win on all counts, but I really can't imagine Qualcomm could successfully defend itself all the way. My prior predictions in this case played out as follows:

The FTC and Professor Shapiro have to take Qualcomm seriously, just like the way to win a sprint is to keep going at full speed for a few more yards. But I'm just an observer, and I'm already looking past the question of merits and on to the subject of remedies.

In order to preserve the record for an appeal, Qualcomm filed an 11th-hour offer to submit evidence related to the post-cutoff period, such as dozens of additional (5G-related) license agreements. Judge Koh denied the motion (as Qualcomm knew she would), just like she had denied a closely-related one in December. And just like before, Qualcomm stressed that it primarily wanted the additional material to be considered with a view to the prospective remedy that is injunctive relief.

Qualcomm argues that injunctive relief is no longer warranted because, according to testimony it elicited, the big three device makers that use premium LTE chips--Samsung, Apple, Huawei--either buy them from Intel (Apple) or build a high percentage of them internally (Huawei has HiSilicon, Samsung has Exynos). Therefore, Qualcomm says it no longer has market power in premium LTE chips, and injunctive relief wouldn't be warranted anymore even in the event of the FTC convincing the court of anticompetitive conduct and harm in the past. During the trial, Qualcomm also elicited such testimony on every occasion, though it had to ask witnesses to limit their answer to the state of affairs as per March 2018, just to comply with the cutoff date.

The FTC already addressed this, without a lot of detail, in the final section of its pretrial brief.

I don't want to go into full detail either, but I want to explain a few general principles here, especially since some Qualcomm-aligned Internet trolls and fake analysts try to make this question of current (or March 2018) market power look like a "get out of jail free" card, which it definitely isn't:

  1. The relevance of market power is a statute-by-statute question. As the DOJ explains, "a finding of market power is a prerequisite to a section 2 [of the Sherman Act] violation." But the FTC also has Section 1 theories in this case.

  2. My favorite cause here is the duty to extent SEP licenses on FRAND terms to rival chipset makers. The market power from Qualcomm's standard-essential patents, however, is monopoly power (because if a patent is truly standard-essential, you could exclude someone from an entire market with it), and it is powerful enough even without a single chipset being sold. All FRAND-related rulings in the case law were based on the power of SEPs, not that of chips.

  3. As the FTC explained toward the end of its pretrial brief, antitrust injunctions have been granted in other cases based on past market power.

  4. In practical terms, courts must have some discretion with respect to cutoff dates. Otherwise an antitrust defendant could constantly produce new "evidence," and justice delayed would be justice denied.

  5. Even if one or more of the FTC's injunctions were denied for a combination of diminished market power and Section 2, Qualcomm would still be held responsible for its past conduct. The FTC is seeking not only injunctive but, prior to that, also declaratory relief. The FTC itself isn't seeking damages. But:

    • A consumer class action seeking $5 billion to be distributed to up to 250 million people is part of this case. Judge Koh has stayed it because Qualcomm successfully petitioned the Ninth Circuit to hear an interlocutory appeal against class certification. This means Qualcomm has a chance to get rid of the consumer class, but it's far from a foregone conclusion that the class certification will be overruled. Ironically, if Apple loses Apple v. Pepper in the Supreme Court (my impression of the November hearing was that only the Chief Justice is firmly on Apple's side, and no one appeared to agree with Apple on a statutory basis--at best there's just some case law that could be overruled), it will adversely affect the prospects of Qualcomm's class certification appeal. In the most extreme case, Qualcomm might then be left with just a feasibility argument based on the size of the class, pointing to pre-Internet-era case law on how to manage large classes that just doesn't apply to our cloud age.

    • Apple, regardless of that App Store case, has its claims against Qualcomm in San Diego (the trial will start in mid-April). MLex attended a motion hearing there on Friday while also following the FTC case.

    • Anyone else such as Intel or Huawei could bring damages claims against Qualcomm following a declaratory judgment in the FTC's favor regardless of whether or not the FTC is granted injunctive relief.

Some of the stuff in this case may be water under the bridge. For an example, Qualcomm's exclusive deal with Apple is history because Apple is now buying baseband chips from Intel--but even the question of whether there would (if not for Qualcomm's conduct) have been true competition in the merchant (= chipmakers willing to sell to third parties) market for premium LTE chips at an earlier stage could still give rise to significant damages claims. In that particular context, Qualcomm's best shot is its claim that the deal allegedly didn't actually cause anticompetitive harm because, in Qualcomm's opinion that was supported by some of its witnesses, Intel couldn't have supplied chips meeting Apple's requirements. But the question of licenses to rival chipset makers is going to remain important for many years--even decades--to come. The procompetitive effects of the FTC prevailing on that claim would be immeasurable.

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Friday, January 25, 2019

The FTC has defeated Qualcomm with respect to industry as well as expert testimony: checkmate

Before today's trial session (Day 9), it was already clear (based on what had happened on the first eight days and Qualcomm's witness list for today) that there was no way Qualcomm could even come close to equalizing the score with respect to industry testimony. But Qualcomm's only meaningful partial victory had been how Cravath's Gary Bornstein impeached one of the FTC's three expert witnesses, Michael Lasinski, and different experts will always have different methodologies with strengths and weaknesses even the most reasonable people can normally disagree on. My thinking before today's bench trial session was that the FTC was going to win based on the combination of three factors: Qualcomm's royalty rates being totally out of line (so no one can possibly rationalize them); Judge Koh's pretrial rulings, which already resolved or expressed an opinion on some central issues; and a huge advantage with respect to industry testimony--which, if given significant weight, could outweigh other considerations and, along with the Donaldson Report based on 31 years of active licensing expertise, could provide a solid basis for Professor Carl Shapiro's theory of anticompetitive harm in the form of supra-FRAND royalties being passed on, in part, to consumers.

I thought Qualcomm would save the best for last, calling Professor Aviv Nevo (Pennsylvania) on the final day of its case-in-chief. And I expected him to be a worthy adversary for Professor Shapiro. He might have been on an equal footing with him under different circumstances, but to my surprise, the FTC's lead counsel, Jennifer Milici, has already impeached him beyond recognition before Professor Shapiro will rebut on Monday.

I seriously don't think the FTC even needs a rebuttal anymore in order to prevail on at least a couple of key claims. If Judge Koh canceled (as she obviously couldn't and wouldn't) the rebuttal and the closing arguments in order to take the case under advisement, the FTC would be in great shape already. By beating Qualcomm at the game where its vast resources could have given it an advantage (expert testimony), after thrashing it with respect to industry testimony, the FTC's litigators have reached the point at which I guess we're going to see ever more Apple- and Huawei-related conspiracy theories between now and Judge Koh's opinion, all of which is to no avail as long as Qualcomm can't get a third commissioner to support some fake settlement based on arbitration.

Arbitration is a topic that the FTC addressed today in response to testimony Qualcomm's outside counsel had elicited from inhouse counsel. The FTC pointed to where the real issue is: Qualcomm wants to collect royalties set by arbitrators based on portfolio size, without previously establishing that valid patents are actually infringed (and not exhausted; patent exhaustion is a Godzilla-size specter down in San Diego). This month we've all seen what happens when Qualcomm's (like anybody else's, to be fair) patents in this field are challenged: the USPTO instituted 21 inter partes reviews of Qualcomm patents at Apple's request, and the European Patent Office preliminarily agrees with Apple and Intel on two patents Qualcomm is asserting over there.

I can claim without fear of substantiated contradiction that I'm the longest-standing and most loyal "Trumpian" among tech law and policy bloggers, and I'm disappointed that some conservatives with whom I agree on many other issues think it's conservative when companies try to manipulate government decisions to their competitive advantage. Rush Limbaugh explained a long time ago that conservatism is about fair competition and not about corporatism, not about lobbying, not about pandering. Applying this to FTC v. Qualcomm, I can't see what would be conservative about Qualcomm securing a settlement based on an unfairly parameterized arbitration mechanism allowing it to get paid for 130K patents when ligitation statistics for the industry at large suggests only a minority of them, possibly just a small minority, are actually valid and infringed.

The battle of the experts was the final battle here, and Qualcomm has lost it, too (even prior to rebuttal). When the FTC's Mrs. Milici cross-examined Professor Nevo, it was the equivalent of a Waterloo.

Compared to him, Dr. Chipty (another Qualcomm economist seeking to rebut a part of Professor Shapiro's analysis) had performed well up to a certain point, though it obviously impeached her big-time that she couldn't even say whether Samsung had possibly bought more than 200 million thin models during a certain period, and had to concede she wouldn't have considered such a fact. And Professor Andrews was just a dreamer talking about patents he deemed superstrong, but if a judge--such as patent-savvy Judge Koh--had handed down a claim construction after a defendant making the case for narrow interpretation, and if they had been challenged like the 23 Qualcomm patents that came under pressure just over the last 9 or 10 days, the result would be sobering. However, Professor Nevo lost too much credibility today.

Mrs. Milici asked him what (unless something better comes up on Day 10) was the single best question of the entire trial:

She was the star today. Big Law should consider making her and other members of her team an offer.

What was just as impactful: she showed that Professor Nevo had based his analysis on what he called "contractual" royalty rates and Mrs. Milici more descriptively labeled "headline royalty rates": if there was a royalty clause in a contract, he took that one, but in most cases it wasn't the actual royalty after considering rebates, kickbacks, and all sorts of other deal terms. That is, by the way, also an issue with how Qualcomm presented its 2018 amendment to an old agreement with Samsung: as the FTC's Dan Matheson (who also did very good cross-examinations during this trial) pointed out, the royalty rate under that contract gets adjusted downwards in various ways, through direct payments to Samsung, and was just part of a package deal that also involved Qualcomm receiving manufacturing services ("foundry") from Samsung. In such a package deal, you can theoretically also have a nominal royalty rate of 50%, not just 5%, but bring it down elsewhere. It means nothing for the purposes of a FRAND-compliance analysis.

Even before the cross-examination I had already noticed that Professor Nevo didn't consider all contract terms, as I highlighted on Twitter.

On redirect, Professor Nevo attempted to rationalize his selectivity--which is still selectivity, even if there were criteria as he claimed--by saying that Professor Shapiro had also listed those "contractual" ("headline" as per the FTC) royalties in his report. But that's an apples-to-bananas comparison given that the two experts undertook disparate things here:

Professor Shapiro had made it very clear that he didn't endeavor to quantity the damages resulting from Qualcomm's allegedly anticompetitive conduct. He merely sought to show that if there was whatever quantity of damage, there was also anticompetitive harm in the form of supra-FRAND royalties being passed on to consumers, and because of indirect effects on competition in the chipset market. So for Professor Shapiro's purposes, there simply wouldn't have been any point in digging deeper.

But Professor Nevo tried with respect to patent royalties what Professor Snyder had previously attempted with respect to design wins (getting one's chipset into devices): to call the presence of anticompetitive conduct into question by explaining it away, saying that other factors simply explain the real-world outcomes. (There are some gradual differences, and this time around Qualcomm itself asked its expert the question that came down to conceding that if there had been anticompetitive behavior, some effects such as falling prices would have been even stronger under fair conditions.)

The expert who doesn't even pretend to quantify harm--Professor Shapiro--doesn't need to look at all deal terms bringing down an effective royalty. But the expert attempting to explain away anticompetitive conduct on the basis that the outcome (the royalties companies ended up paying) of real-world processes (such as negotiations) supports Qualcomm's royalty rate must be precise. He cannot possibly afford shortcomings that materially affect the numbers. Nor can he afford such selectivity that several of the largest licensees during a relevant period are just ignored.

It's a mystery why Qualcomm couldn't at least win the battle of the experts. In the end, its best expert indeed was its own employee Lorenzo Casaccia, who definitely knows everything about 3GPP. He's an employee, which adversely affects his credibility as an expert (even if an external experts makes millions, he still has a reputation to defend because he wants to be hired by others later), and Mr. Casaccia's topic was narrow, but he knew it inside out.

It could be that some people wouldn't even have been willing to testify for Qualcomm (if Qualcomm approached them at all, which I cannot know) but looked at the facts and said "thanks, but no thanks" even to a multi-million dollar Mission Impossible.

Even before Mrs. Milici's brilliant cross-examination, Professor Nevo had already lost his credibility with me. Apart from little things that didn't convince me, there were two fundamental flaws during his direct examination that showed me his testimony in this case (again, he may be great in other industries or other cases) can't be taken seriously, to put it mildly:

  1. He made reference to an analogy that already came up during Professor Shapiro's initial testimony: Microsoft's operating system license deals that raised antitrust issues. Professor Nevo said the difference was that Qualcomm wasn't giving away chipsets, but selling them at a profit (even under the exclusive deal with Apple, for instance), while Microsoft was giving away operating systems. #FACEPALM

    At this trial, there were at least two people in the audience who know what utter nonsense he spouted. One is a former DOJ official who was involved with the related investigation. The other person is yours truly because I did business with a company named Berkeley Softworks, later renamed GeoWorks, at the time headquartered on 2150 Shattuck Avenue in Berkeley, CA. In 1990 I received stock options in that company--the first time I owned "a piece of America." And that company, which I already knew several years before because of a Commodore home computer software product range, was trying to compete with Microsoft Windows. GeoWorks' product was named GeoWorks Ensemble, and contained the proprietary PC/GEOS operating system.

    We were selling the product through retailers, but also to OEMs. From them I learned the term OEM. And I remember the problem we had with Microsoft's strategy. Microsoft gave OEMs two alternative choices: they could pay per actual installation of MS-DOS/Windows (so if they shipped 200K personal computers, but only 100K came with MS-DOS/Windows, they paid 100K times price A); or they could sign a contract under which they paid a price B, much lower than A (so they didn't have a rational alternative), but committed to paying it on each and every PC they sold, whether or not MS-DOS/Windows was included. The choice between A and B was a rhetorical question: of course everyone opted for B.

    The effect was that an OEM had the Microsoft "tax" on a PC even if another operating system was installed instead of Microsoft's product. So if an OEM with such a deal wanted to ship a product like Digital Research's DR-DOS or GeoWorks' PC GEOS, they had to pay Microsoft anyway and had the alternative system's royalty on top, so they had to sell those non-Microsoft-run PCs at a higher price and/or lower margin.

    By saying Microsoft was giving away software, he completely failed to understand the issue. The issue was that Microsoft's competitors would have had to give away their competing product to get a sizable installed base. At the time, venture capital wasn't available in such quantities that anyone could have survived it. But Professor Nevo also got this wrong for another reason: those OEM deals were pure license deals. The OEMs had to preinstall and/or duplicate the software on floppy discs, and had to print the manual. It was a 100% threshold-margin business for Microsoft--which is impossible for chips, which do involve cost of goods and manufacturing.

    The parallel between the Microsoft issue of about three decades ago and Qualcomm's patent tax on competitor's products is simply that device makers have to pay Qualcomm anyway, whether or not they use one of its chips, and it gets even worse when someone like Apple, during the term of those meanwhile-expired exclusive agreements, faced a de facto contractual penalty for shipping a single unit with a competitor's baseband chip. Compared to such a penalty, the Microsoft "per hardware unit regardless of actual software" operating system license was less of a problem because it only had a gradual effect on competitiveness, not a "clawback provision" over huge amounts.

  2. In connection with licenses to rival chipsets, he said the same nonsense about chipset makers being more competitive without paying royalties--a fallacy debunked even before the trial. Then, in this context, he also argued it was more efficient not not grant licenses to chipset makers since some patents would still have to be licensed at the device level. But the question of licensing rival chipset makers is only about cellular SEPs, and Judge Koh has already taken a clear position on the smallest salable patent-practicing unit (in GPNE Corp. v. Apple and, in practical terms, in her summary judgment in the FTC case). The worst part, however, is that Professor Nevo warned against having too many license agreements in place, when there's only a few baseband chipset makers (like Intel and MediaTek), but huge numbers of device makers. For instance, Qualcomm's licensing president Mr. Rogers later testified about a meeting with about 30 Chinese device makers. So the number of license agreements doesn't really increase much if you license a few chipset makers, but the net efficiency gain results from the fact that you then have fewer patents to sort out with those huge numbers of device makers.

Even though Cravath's Mr. Bornstein is extremely good at the intersection of law and economic analysis, and he and Professor Nevo were a highly efficient tandem (probably the highest text-to-time ratio of the whole trial), this day was dreadful for Qualcomm. In the courtroom, it's now practically Game Over. The FTC won't necessarily get all the injunctive relief it's seeking, but a resounding victory is the most likely outcome. Qualcomm's PR and lobbying efforts, with the Chinese bogeyman named Huawei and other theories, won't end until all appeals have been exhausted, however. When I read such crap as in the Washington Post (which President Trump dislikes even more than the New York Times, with which I think it's actually a hate-love relationship) about Huawei testifying for the FTC, I wonder whether some of those Qualcomm-aligned columnists would also defend the flat-Earth theory only because Huawei says the Earth is round: let's face it, Huawei is just one piece of a huge puzzle here and merely says what American companies and companies from an ally nation like South Korea have said as well. Of course, Huawei should not get an unfair advantage, or (a subject on which I don't have an opinion) pose a security risk, but letting Qualcomm get away with its conduct does nothing to address those actual or potential problems.

As for the FTC's huge advantage with respect to industry testimony, Qualcomm only gained limited ground before resting its case. The three companies supporting it through testimony are also often seen alongside Qualcomm as members of anti-FRAND lobbying efforts: Nokia, Ericsson (this one only with respect to rival chipset licensing, while it supports the FTC in other ways), and InterDigital. Nokia and Ericsson stopped making handsets a while ago, and InterDigital never made any product (unless litigation counts as a product--they've been quite prolific in that regard). Two European failed businesses (with respect to handsets) and a U.S. patent assertion entity (PAE)--those are not the kinds of allies that would Make America Great Again.

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Thursday, January 24, 2019

Preliminary opinion of European Patent Office sides with Apple and Intel: two Qualcomm patents invalid

While the Ninth Circuit's decision to let Qualcomm appeal the certification of a 250-million consumer class and Judge Koh's related announcement to stay the $5 billion class action (which builds upon the FTC case, but not the other way round) pending the appeal is good news for Qualcomm, Kerrisdale Capital's opinion that Qualcomm's stock may lose half its value and a whopping number of 21 (twenty-one!) inter partes reviews (post-grant proceedings that may result in the invalidation of patents) instituted over the last eight days by the Patent Trial and Appeal Board (PTAB) of the United States Patent & Trademark Office (USPTO) against Qualcomm are significant setbacks.

Now there's bad news from Munich, the very city in which a regional court (comparable to a U.S. district court, though only the nation's top courts are federal courts) recently granted Qualcomm a pair of injunctions over a chip patent against Apple that Qualcomm is enforcing despite an ongoing appeal after posting bonds over more than $1.5 billion--but without getting any serious leverage over Apple as the enjoined products (iPhone 7 and 8) remain widely available through carriers and retailers. Qualcomm has obtained a preliminary injunction barring Apple from telling it like it is, so Apple must not issue press releases or give answers to journalists according to which those devices are available at more than 4,000 points-of-sale. But that preliminary injunction, which according to media reports is based on misleading promotional statements, just puts the next symbolical victory on top of another without representing actual leverage.

I asked the Munich I Regional Court, but the court declined to comment. I also asked the Munich Higher Regional Court about the status of Apple's appeal of the injunctions, but received no new information. The last thing I heard was that Qualcomm still had time to respond to Apple's motion to stay the enforcement of those injunctions.

In a week from today, the Munich I Regional Court's Seventh Civil Chamber under Presiding Judge Dr Matthias Zigann will rule on eight Qualcomm complaints over a set of four patents. The number of eight cases is due to two complaints having been filed over each of the four patents (one against Apple Inc., the U.S. parent entity, and another one against a couple of European Apple entities). The patents-in-suit are the German parts of four European patents from the same family, each covering a "method and device for communication channel selection": EP1956806, EP1955529, EP3054658, and EP3094067. The claimed "inventions" were made by SnapTrack, a GPS-focused Silicon Valley startup aquired by Qualcomm in 2000 for $1 billion.

Even if Qualcomm won any of those eight cases (which is highly unlikely now in light of what I'll explain below), it wouldn't get any leverage as iOS 12 contains a workaround.

But Qualcomm won't realistically win a single one of those eight cases.

Some of those cases were already dead in the water at the time of the trial because the particular patents asserted in those cases require a "standby" functionality where an app does not have to be started by the user by means of tapping on an icon.

There's a strong case for non-infringement (the absence of a filter that a correct claim construction would require), but even if the court wasn't sure about non-infringement, those cases are in all likelihood going to be stayed (they just wouldn't be stayed if they could be thrown out altogether).

As I reported in May, Apple and Intel are attacking two of those four Spotlight patents (the two youngest ones) in opposition proceedings before the European Patent Office. Yesterday (January 23, 2019), the EPO's Opposition Division scheduled a hearing in those two parallel proceedings for November 28, 2019, and tue summons to the hearing came with an annex: a preliminary opinion according to which those patents are invalid.

Here's one of the two near-identical opinions, and here's a link to the other (this post continues below the document with an explanation of the EPO's findings and a summary of Qualcomm's poor results in Germany):

19-ß1-23 Annex to EPO Commu... by on Scribd

Let me explain:

  • First, the decision looks at the relevant independent claims in their granted form, and finds them to be non-novel.

  • It then analyzes the relevant dependent claims and finds that what they add to the independent claims they're based on doesn't make them any more patentable.

  • Earlier in the infringement proceedings, Qualcomm already realized that those patents weren't going to survive in their granted form. That's why Qualcomm's counsel, Quinn Emanuel's Dr. Marcus Grosch, altered course and henceforth sought to prevail on the basis of amended (in the sense of "narrowed") claims.

    In the EPO documents, those amended claims are called "auxiliary requests."

    The two EPO opinions find that the amended claims ("auxiliary requests") aren't patentable because the additional elements introuced aren't supported by the patent specifications.

As a result, those two patents are (unless the EPO changes its opinion before or at the late-November 2019 hearing, which I doubt very much) finished. German courts hearing infringement cases attach significant weight to such preliminary holdings by the EPO because they know that the EPO's examiners have technical knowledge and give a fair amount of thought to such matters.

Those opinions relate to only two of the four patents-in-suit: EP3054658, and EP3094067. However, they're all from the same family and largely identical. The only reason for which Apple and Intel couldn't file oppositions with the EPO is a statute of limitation: Opposition to an EPO patent must be filed within nine months of the publication of the notice that the patent has been granted. But the other two patents are being challenged before the Federal Patent Court of Germany (Bundespatentgericht), which is even stricter than the EPO.

Some other German Qualcomm v. Apple cases have yet to go to trial (or a Munich first hearing; at some point one was scheduled for late March over an antenna patent).

The ones that have gone to trial are a mix of one symbolical victory that doesn't give Qualcomm leverage and a long list of defeats:

Qualcomm's patent infringement cases haven't delivered, apart from reports that overstated the significance of some symbolical victories. Too many gullible people write about patent cases. I know that last statement sounds arrogant, but unfortunately it's true. If everyone writing about them understood what the actual, practical, technical and economic consequences are, many misunderstandings could be avoided. Qualcomm has first-rate PR people, internally as well as externally. But I look at the substance of those cases and the actual impact, and I'm underwhelmed for the time being.

Neither has Qualcomm gained leverage nor has it had a "hit rate" that would support its claims of having an unbelievably strong patent portfolio compared to other companies in the industry. And some of the patents-in-suit aren't even original Qualcomm patents but were acquired at some point.

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Google's petition for Supreme Court review of Android-Java copyright decisions should be granted--but Oracle should still win

Several months after requesting an extension to file a petition for writ of certiorari (request for Supreme Court review), Google today announced the filing of that petition today (one day before the extended deadline), and published the document (PDF).

As I suspected, Google is seeking a review of both the Federal Circuit's 2014 copyrightability finding and the same appeals court's 2018 holding that the way Google incorporated many thousands of lines of Java API declaring code does not constitute fair use.

My positions on the issues have not changed. However, I do keep my fingers crossed for Google's petition, and here's why:

At the cert stage, it's not about whether a petitioner's theories have merit. It's about whether the issues raised are important enough to warrant review because clarification is needed.

I want Google to win at the cert stage, even on both counts (copyrightability and fair use), but then I hope (and think it's very likely) that the Supreme Court of the United States will affirm the Federal Circuit's well-reasoned opinions, which are good for innovation.

No one can blame Oracle for preferring that the Supreme Court deny the petition: then the case, filed in 2010, could finally proceed to the remedies stage, where it would have been a long time ago if not for totally outrageous decisions by Judge William H. Alsup in San Francisco.

But Oracle's interest in saving time, no matter how understandable and legitimate, doesn't make the issues any less important.

If the Federal Circuit's decisions had been handed down by the United States Court of Appeals for the Ninth Circuit, I'd still prefer a ruling by the top U.S. court, but then the benefit of a denial of cert would at least be legal certainty in the most important circuit.

Here, however, the case went to the Federal Circuit because Oracle had originally also asserted software patents, which went nowhere but made this a case that must be appealed to the Federal Circuit and not the regional circuit (here, the Ninth Circuit).

In such a situation, the Federal Circuit applies the regional circuit's law. But it doesn't make or modify another circuit's case law. As a result, those two beautiful Oracle v. Google appellate opinions--which I welcomed as an app developer and trivia content author (the latter is also a field where the fact-expression dichotomy plays a role)--aren't really binding on anyone. In theory, even the Federal Circuit, next time it applies Ninth Circuit law, could easily take a new position (though it probably wouldn't).

This means that if the Supreme Court didn't agree to hear the matter, all the people I disagree with (respectfully in most cases, though admittedly not in all) would keep running around telling everybody that the Oracle v. Google appellate rulings aren't binding.

I have confidence in the Supreme Court, especially in its conservative majority, protecting us software developers. Oracle's appellate counsel, Orrick Herrington Sutcliffe's Joshua Rosenkranz, and his team are so great they can do it again.

But even if, contrary to what I expect, the Supreme Court sided with Google on one or both issues, I'd rather have clarity on that basis than a situation where some are still going to point to Ninth Circuit rulings that I believe don't support those other people's positions at a closer look.

I want strong software copyright, and I view software as something where it's very hard to imagine "fair use" when significant amounts of code (not just a dozen bytes) are distributed in large numbers (as opposed to a few private copies). So I hope the Supreme Court will grant Google's petitions on both counts and then affirm the Federal Circuit 100%.

Neither copyrightability nor fair use are, in my view, the appropriate level at which to ensure software interoperability. Trying to protect interoperability at those levels would throw out the baby with the bath water and do too much harm to software copyright, which someone who's invested and keeps investing in software development doesn't want.

If, when and where there is a case where an API (Application Programming Interface) really must be available to other parties even without the copyright holder being prepared to extend a license, the solution is a compulsory license under antitrust law on FRAND (fair, reasonable and non-discriminatory) terms. There are standard-essential patents; in Germany and possibly some other jurisdictions, they additionally have standard-essential utility models; and there's no reason why the same FRAND rules wouldn't and couldn't apply just as well to standard-essential copyrighted works.

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Comments on Kerrisdale Capital's analysis of Qualcomm's antitrust-related risks

Yesterday I became aware of a 19-page document (PDF) explaining why research-centric investment group Kerrisdale Capital has decided to shortsell Qualcomm's (QCOM) shares, with a particular emphasis on the fallout from the ongoing FTC v. Qualcomm antitrust trial in the Northern District of California. Unlike a lot of fake analysis on the Internet that looks like having been funded and more or less dictated by Qualcomm, Kerrisdale has done some very thorough work (they appear to have obtained all trial transcripts; I must admit that, since I attended eveything, I haven't even done so yet), and most importantly, they put their money where their mouth is. Even more than that, the risk of shortselling is substantial (theoretically infinite, though one can limit the risk with call options, which they may or may not have purchased). All I can say is that I'm extremely risk-averse and don't short as a matter of principle.

Kerrisdale's PDF document links to this blog on several occasions, and this is what they have to say about yours truly:

"Florian Mueller, an anti-software-patent advocate who has followed the various legal cases against Qualcomm very closely for years and is attending the current trial in person, [...]"

"To be sure, Mueller can be regarded as a biased observer in light of his personal opposition to Qualcomm's business model, but his analytical track record is nothing to scoff at; for instance, he correctly predicted that the FTC would win its important motion for summary judgment."

All of the above is fair--or "FRAND" :-)

It's true that I got into the patent business almost 15 years ago as an anti-software-patent campaigner, and when software patents are at issue in the cases I blog about, I sometimes mention that fact.

What I'd like to add, however, is that my advocacy of giving FRAND meaning is almost as longstanding as my opposition to software patents. My first write-up promoting FRAND principles was a submission to the European Commission I authored for the world's most famous sports club, Real Madrid, in 2007. The bone of contention was soccer broadcasting rights in the context of wider sports governance principles. Sports bodies are typically monopolists and their tournaments can pratically be to sports teams what one would be more inclined to call an "essential facility" in other areas. Therefore, organizations like UEFA must show that their rules are FRAND (many of them still aren't, but that's another topic).

When this blog was less than a year old, it had already taken the position that, under the law, injunctive relief should not be available over standard-essential patents (SEPs). At the time, there were only a few companies in the industry sharing this view as a matter of policy. Apple was embroiled in its first dispute with Nokia (and shortly thereafter, Motorola, followed by a Samsung complaint); and the likes of Broadcom and Cisco took similar positions, and I believe Intel, too. But even Microsoft (which made FRAND history with its antisuit injunction against Motorola and was already a client of mine at the time, but like all other clients I've ever had, respected my independence) would still submit a position paper to the FTC in 2011 that sought to justify SEP injunctions. Google, when and after acquiring Motorola, wanted SEP injunctions, as did Samsung--an by now, Microsoft, Google and Samsung are all on the FRAND side.

Qualcomm wasn't of great interest to this blog for a long time. From industry players like BlackBerry and Nokia I heard about them even before I started this blog in 2010. But prior to the current wave of antitrust enforcement and litigation, Qualcomm appeared on my radar screen only as a submitter of amicus curiae briefs (including one that bashed Apple as a patent infringer who should be embarassed, and which they withdrew), and because of a restructuring that appeared to be driven by concerns over patent exhaustion through open-source software. It was like lightning from the blue when the Korea Fair Trade Commission (KFTC) slammed Qualcomm with a fine between Christmas 2016 and New Year's Day 2017. Then came the FTC (U.S.) lawsuit and Apple's lawsuit in January 2017.

Since then, various Qualcomm investigations and lawsuits have become the industry's biggest battlefield ever. That said, I also see serious issues in Huawei v. Samsung, just that a Chinese-Korean dispute on U.S. soil gets a lot less attention than U.S.-only matters, though Huawei and Samsung are both known to more consumers than Qualcomm. I may also attend a motion hearing (about whether the jury should hear Samsung's claim that Huawei breached its FRAND obligations) in San Francisco on February 13.

There will be a time when Qualcomm is going to be of less interest to me again. But for the time being it's an interesting mix of issues that are presently unique to Qualcomm ("No License-No Chips"), yet could become a rampant problem if Qualcomm got away with such conduct, and overarching questions the industry cares about--first and foremost, the licensing of rival chipset makers.

Kerrisdale Capital has correctly identified that one--SEP licenses on FRAND terms to the likes of Intel--as the key aspect of the FTC's case, followed by a requirement to renegotiate existing agreements. Just like me, they don't seem to be overly interested in whether or not the FTC has established actual anticompetitive harm from an exclusive deal between Qualcomm and Apple (I view that one as water under the bridge).

The Kerrisdale analysis says that it should be easy for the FTC to prevail post-trial on its pursuit of an injunction requiring Qualcomm to extend FRAND licenses to rival chipset makers because of its summary-judgment win. I'd like to nuance that part a bit:

First, even if the FTC hypothetically (and unrealistically in my opinion) lost all post-trial decisions, the summary judgment on rival chipset licensing would stand unless Qualcomm successfully appealed it. Under its FRAND declarations made to ATIS and TIA (two U.S. standard-setting organizations), the likes of Intel are entitled to a license to all Qualcomm SEPs covered by those ATIS and TIA declarations, period.

Second, what the FTC is seeking now is a broader-based ruling. It would not be specific to particular FRAND declarations and dependent upon their interpretation, but basically say that only FRAND can preserve competition despite the exclusionary nature of standard-setting, and there's no reason why only device makers, but not chipset makers, should be protected that way. So this would involve more standards and more companies.

Three, some of the subissues, such as whether baseband chips materially implement the standards at issue, were decided in the summary-judgment context and Qualcomm's attempts to reargue those subissues at trial were a non-starter with Judge Koh, though Qualcomm obviously needs to preserve its record for an appeal.

I think the FTC is in a pretty strong position with regard to licenses to rival chipset makers, but it's basically seeking a very significant "upgrade" of the summary judgment. Let's not underestimate that hurdle and the significant further effects an FTC victory in this context would (and hopefully will) have.

Kerrisdale says this about the potential impact on Qualcomm's business, giving that two thirds of its profits historically came from patent licensing:

"Indeed, in the words of the United States Federal Trade Commission (FTC), quoting an internal Qualcomm assessment from 2015, 'granting a FRAND license to Intel 'would destroy the whole current QTL [licensing] business.''

"If Qualcomm is right about that, then destruction is imminent. [...]"

"Indeed, just last week the FTC confronted one of Qualcomm's witnesses, the company's senior vice president of licensing strategy, with his own past statement, recorded on audio tape, that when “having to choose between licensing chips and licensing at the handset, the handset was humongously more lucrative.' But this 'humongously more lucrative' way of doing business – part and parcel of Qualcomm's overall pattern of monopolistic tactics – will likely collapse when Judge Koh issues her final ruling."

Qualcomm's lawyers and witnesses made a lot of effort to provide legitimate business justifications for device-level licensing. But none of what they said is convincing, and even less so when considering that Qualcomm itself acts as a SEP clearinghouse for the wireless industry by demanding royalty-free, exhaustive cross-licenses that then benefit its customers when they have to defined themselves. Qualcomm's actions contradict its words, and even what it says isn't consistent because internal documents state the real reason for device-level licensing. What those Qualcomm executives said internally is perfectly consistent, however, with what Ericsson once said in public about why it chooses to strike license deals with device makers, not chipset makers.

Again, there is a hurdle involved (going from the interpretation of two contracts to a general FRAND obligation), but none of what Qualcomm has said in its attempts to explain why it shouldn't be obligated to extend FRAND licenses to rival chipset makers is even remotely persuasive--and this is a judge who won't buy things that juries or judges less familiar with these issues might give more weight to.

Kerrisdale's report is the only one apart from my own writings (and it's possible they got the relate hint from this blog) to highlight something important regarding Judge Koh's judicial philosophy in the SEP context: her finding in GPNE Corp v. Apple that the royalty base should be the smallest salable patent-practicing unit (SSPPU), which in a wireless standards context is the modem chip. It's not like GPNE established a bright-line rule, but it showed an approach that is technically, commercially and legally right--but not in Qualcomm's rent-seeking interest.

Kerrisdale points to various situations during the trial where Judge Koh rebuked or disagreed with Qualcomm's lawyers. By contrast, the FTC steered clear of annoying her. However, I don't think (and Kerrisdale doesn't say so either) Judge Koh would penalize Qualcomm for the fact that its lawyers may have gone too far in some of their maneuvering. I believe Judge Koh is simply well aware of the FTC's resource constraints (even regardless of the shutdown) and, on the other hand, sees Qualcomm's enormous legal resources. Those resources are so vast that a lawyer from a major firm, Norton Rose Fulbright, appeared on Tuesday, but that firm doesn't even appear on the filings that already list three other firms. So Judge Koh, like other judges in the U.S. and abroad (another example would be Judge Dr. Zigann in Munich), sometimes doesn't understand why litigants with an army of lawyers on a case can't just provide everything on a timely basis and structured in a way that conserves court resources.

However, it was only in connection with rival chipset licensing that a disagreement between Judge Koh and Qualcomm's lawyers was related to outcome-determinative issues. Everything else was of a purely procedural nature that is not going to play any role in her post-trial decision-making.

In general, I agree with Kerrisdale's high-level perspective that the FTC presented strong evidence (by which I mean testimony from device makers and various documents confirmed by testimony) and that Qualcomm, to put it that way, has been able for an extraordinarily long time to capitalize on its CDMA innovation of several decades ago. By comparison, if Motorola had been able to benefit from its status as the first company to make a functional mobile phone for such a long period, Motorola Mobility wouldn't have been sold to Google earlier this decade and to Lenovo more recently.

I've had to block a whole bunch of "Qualcommies" on Twitter because they just make unreasonable points and don't appear prepared to adjust their position based on facts that are presented to them. But I do respect Qualcomm apart from those FRAND-related issues. Unlike Kerrisdale, I'm not going to take a position on Qualcomm's overall outlook. They do appear to do some interesting things in connection with electric vehicles. In an ideal scenario, I'd like to see Qualcomm successfully modify its business model, continue to innovate, and maybe--though from today's vantage point it sounds like hell freezing over--it will further down the road end up on the good side of FRAND, just like Microsoft, Samsung and Google adopted policy positions I advocated long before them. If anybody sought SEP-based injunctions against them, or demanded supra-FRAND royalties from them, and if I was still active as a blogger (next year this blog will celebrate its tenth anniversary), I'd support them without hesitation. But they now have to go, for the sake of fair competition and innovation, through a process that may be painful.

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