Thursday, January 3, 2019

Qualcomm posts security bonds over $1.5 billion to enforce German iPhone 7/8 sales ban: separating facts from fake news

The day before the FTC v. Qualcomm antitrust trial will start in San Jose, there's some news again from the patent enforcement front. This (Thursday) morning, Qualcomm announced that it "has posted security bonds totaling €1.34 billion (Euros). The bonds are required for Qualcomm to be able to enforce the remedies ordered by the [Munich I Regional] Court on December 20, 2018." May I refer you to my posts

Before we get into fact checking (since this blog was the only publication to have stated the correct amount of the seurity--an amount confirmed by today's press release--while everyone else reported only half of it), let's it's worth noting that Qualcomm actually had two choices (plus the third choice of simply not enforcing the injunctions for now):

  • Based on the announcement, Qualcomm opted for "security bonds," which means this here is a boon for some bank that will charge Qualcomm fees for providing this kind of guarantee to Apple.

  • Qualcomm could also have elected to make a deposit with the Local Court of Munich (a court below the one that ruled on the patent case). There would have been no bank charges (other than for the wire transfer), but a liquidity disadvantage.

The purpose of the guarantee (regardless of how it is provided) is just that, if Qualcomm's immediate enforcement later (after all appeals are exhausted) turns out wrongful, Apple can be ade whole up to this amount even if Qualcomm went out of business in the meantime. A finding of wrongful enforcement would be far from unprecedented; probably most patent enforcement in Germany is wrongful (just that cases normally get settled prior to such a finding). But we all know Qualcomm isn't going to go out of business in the years ahead.

The security amount is just meant to provide reasonable protection to Apple. Should there be a finding of wrongful enforcement when all is said and done, and should the parties be unable to settle the matter, then a court of law will have to determine the amount of the wrongful-enforcement damages. That amount can ultimately be lesser or greater--ad Qualcomm will have to pay the exact amount regardless of the security amount. (This works the same way in the United States, by the way.)

The actual economic impact of this enforcement on Apple remains to be seen. The two injunctions (over the same patent but targeting different Apple entities) don't have an effect on third parties, particularly resellers. Apple now has to stop selling certain devices (iPhone 7, 7 Plus, 8, and 8 Plus) in Germany, and it will have to send a recall letter to its resellers, but those resellers are not at risk of contempt sanctions by the court. In fact, the resellers (such as T-Mobile or Vodafone) could even keep buying such iPhones in other countries, and if they buy them from other EU member states (such as Austria or the Netherlands), then there won't even be any import duties involved.

According to the numbers the analyst community has, Apple generates only about 3% of its German sales directly (through its online store and the 15 official German Apple Stores). And if people walk into an Apple Store but are told they can still buy an iPhone 7 or 8 from retailers or cariers, I doubt that too many of them will drop their plans to buy such a device. Some may actually opt for a newer iPhone anyway, especially if there are price reductions or promotions. For an example, I saw a promotion on the German Apple website for trading in older iPhones to get newer ones at a major discount.

Enforcement is now going to have some effects (though limited for the reasons just explained). But it remains to be seen for how long Qualcomm will actually get to enforce this pair of injunctions. The same lawyer--Quinn Emanuel's Dr. Marcus Grosch--enforced a standard-essential patent (SEP) injunction by the Mannheim Regional Court against Apple on Motorola's behalf in early 2012, and after a day or two the appeals court stayed enforcement. I asked the Munich appeals court on December 21 whether tehy could already confirm that Apple has appealed and moved for a stay, and they told me to come back to them a couple of weeks later. In Southern Germany, business largely just resumes after January 6 (Epiphany holiday).

The Munich Higher Regional Court (the appeals court for the Munich I Regional Court) is not the only institution that could terminate this patent enforcement. The European Commission started preliminary investigations last year based on a complaint by Apple over how Qualcomm is leveraging its German patent infringement lawsuits against (effectively) Intel. Years ago, Samsung dropped its European SEP injunction requests because of pressure from the EU Commission. Quinn Emanuel represented Samsung in some other cases (mostly in the U.S., and some non-SEP cases in Germany), and knows about this.

As always, there's the possibility of a U.S. antisuit injunction. This, too, is well-known to Dr. Grosch, whose many victories include a couple of patent injunctions he obtained in 2012 for Motorola Mobility against Microsoft, but never got to enforce due to Judge Robart's antisuit injunction, which was affirmed by the Ninth Circuit.

And now the fact-checking part. As I mentioned further above, all other media reports on the December 20 announcement of the Munich decisions got the security amount wrong. The security required under the court ruling is € 668.4 million per case. There are two cases (one against Apple Inc., the U.S. parent company, and another one against Apple's European distribution company and the German entity operating 15 Apple Stores in the country). So the total (since it wouldn't make sense for Qualcomm to enforce one of the rulings but not the other) is €1.337 billion, or more than US$1.5 billion, and that's validated by today's press release by Qualcomm.

Why did all others get this wrong? Or how could they have figured it out like I did?

There were actually three ways on December 20 but one had to pay attention to important details:

  1. The court's press release on the decisions stated that this was about two cases (same patent but different Apple entities named as defendants), and that the security amount was "jeweils" (in that context meaning "per case") € 668.4 million. Just one word, but an important one.

  2. At the beginning of the announcement, Presiding Judge Dr. Matthias Zigann firstly announced a procedural order to combine the two cases for the purposes of announcing the decision. He had to read the decision aloud (not the rationale, but all the remedies, which involve a lot of detail including the language of the asserted patent claim). It would have been a waste of time to do so twice, so he combined the two cases, but he said clearly that he was now going to read just one of the two decisions, with the other one being identical. On that basis, he couldn't have doubled the number: that would have been against the rules. He could only have explained later--after announcing the formal decision--that the aggregate amount would be twice that amount, but presumably he thought people were going to figure it out (at least based on the court's press release).

  3. When Judge Dr. Zigann explained the reasoning after the formal part of the announcement, he actually mentioned that the security amount was the same for either case because the parties had not provided information based on which the court would have set divergent security amounts for the two cases.

In addition to those three options, people could simply have read my blog post, which went live pretty shortly after the announcement.

While Qualcomm was not responsible for inaccurate reporting on the security amount, I do take issue with Qualcomm claiming in today's press release that "the Court found that Apple is infringing Qualcomm's patented power savings technology used in smartphones." The term "infringing" comes up twice more in that press release, and it's simply not supported by the evidence:

The Qorvo envelope tracker chip in those older iPhones may or may not actually infringe the patent-in-suit. The Munich I Regional Court stated clearly (also in its press release) that it wasn't able to find out. In other words, it's an agnostic infringement ruling.

As the court explained, German courts can't order pretrial discovery. It's all based on the parties' pleadings. The parties must allege the facts that support their position. If an outcome-determinative fact is disputed, then some evidence may be taken, and such evidence must be proffered by a party. Here, Apple actually did dispute the infringement accusation, but the court found that Qualcomm's assertion, based on a teardown report (though such reports aren't 100% reliable as the court also acknowledged), was a more substantive pleading than Apple's denial. Qorvo actually would have been happy to let the court (and the court-appointed expert) look at its chipset schematics, and they had the designer of the accused chipset available (for almost twelve hours) to testify. But the court didn't call this witness because the court believed that, given the way things work in German courts, Apple firstly had the burden to substantiate its denial. The problem was, however, that Qorvo's technical secrets would then have been disclosed to Qualcomm, and not only to Qualcomm's outside and inhouse counsel but also to Qualcomm's engineers, which Qorvo didn't allow because Qualcomm is a competitor in this field (though a Qorvo partner in some other context).

That's the defendant's dilemma I explained in the third one of the posts linked to further above: if you don't give up your secrets, they'll rule against you and ban your product.

But on this basis, Qualcomm makes an unproven assertion by referring to "infringing iPhones," which is particularly questionable when considering that the ITC, which unlike the Munich court saw the chipset schematics and listened to the chipset designer, cleared Qorvo of infringement of a claim (slightly different, but only slightly so, from the one asserted in Munich) of a U.S. patent from the same patent family.

I understand that Qualcomm, like everyone else, wants to keep its messages short and simpe. But "infringing" goes too far. I would just have referred to the "adjudicated" iPhone models, for instance.

As I just mentioned the ITC, there was also a fair amount of inaccurate reporting out there regarding last month's notice by the ITC of a determination to review Administrative Law Judge Thomas B. Pender's initial determination on Qualcomm's first ITC complaint against Apple. And once again it was due to some reporters and commentators not researching and analyzing the procedural framework and situation properly:

  • Both parties had filed petitions to review the ALJ's determination on the merits (which is separate from his recommendation on remedies and, in that context, the public interest!). Apple wanted to get the finding f a violation (which, just to be clear, is totally unrelated to the one in Munich) overruled. Qualcomm wanted it affirmed, but told the ITC that in the event it was going to take another look at the finding of a violation, then (and only then) Qualcomm also wanted the chance to maybe prevail on the other patents.

  • Apple's petition was granted. In fact, it resulted in nine merits-relate questions, any single one of which could be answered in a way that would reverse the holding of a violation. Or, to look at it from Qualcomm's perspective, Qualcomm has to overcome nine hurdles to preserve the infringement finding it had obtained from the ALJ, while Apple has nine match points in tennis lingo.

  • After agreeing with Apple that a review was warranted, the ITC also had to rule on Qualcomm's contingent petition. And it flatly denied that one.

  • So with respect to the merits (whether or not a valid patent is infringed, and whether there's a domestic industry for it), Apple's petition succeeded and Qualcomm's failed.

  • Then the ITC also raised five public-interest-related questions. Some reports inaccurately suggested that this meant Qualcomm had made headway toward an import ban, given that the ALJ had actually recommended that, despite his finding of a violation, no import ban be ordered. Unfortunately, not only some news outlets but also an industry body that is generally critical of Qualcomm's conduct simply didn't consider a simple fact:

    The ITC's procedural rules required a public-interest analysis regardless of whatever the parties (Apple and Qualcomm) petitioned for or not. In fact, there was no petition for a "review" of the ALJ's recommendation on remedies since a recommendation cannot be reviewed in a formal sense: the Commission, the six-member decision-making body at the top of the U.S. trade agency, can affirm an ALJ's merits decisions (by not reviewing them), but it absolutely must conduct its own public-interest analysis unless it finds that there is no violation. The Commission can just base its own public-interest analysis on extensive quotes from the ALJ's recommendation, but technically that's different from affirming a determination.

    In other words, the fact that the Commission raised public-interest questions is totally unrelated to whether or not it may or may not be inclined to agree with the ALJ. If the Commission thought the ALJ was 100% right on the public interest, it would still have to do this analysis; and if the Commission was inclined to think that the ALJ was 100% wrong, it would also have to write up its own opinion. By contrast, if the Commission declines to review the entirety or a specific part of an initial determination, then it is directly affirmed like an appeals court affirming a lower court's ruling.

    In the first Qualcomm v. Apple case at the ITC, it was 100% certain that the Commission was going to ask stakeholders and the general public for input. That's because the ALJ had found a violation (even though he advised against an import ban). As long as there is a procedural possibility in an ITC case that a violation may be found at the end of the investigation, the public interest must be analyzed at certain stages such as the one where the finding on the merits is analyzed.

The ITC may ultimately affirm (if Qualcomm prevails on all nine merits-related review questions) or reverse (if Apple prevails on at least one of the nine merits-related review questions) the finding of a violation. If there is a final finding of a violation, it may or may not adopt the ALJ's recommendation on remedies. But the one thing that certainly didn't happen last month was that Qualcomm made headway. In fact, the package of nine merits-related review questions was a setback for Qualcomm; the denial of its own petition (based on which Qualcomm sought to prevail on maybe one or two other patents-in-suit) was a setback; and the five public-interest questions posed to the general public were an inevitable consequence of the ITC's procedural rules and the fact that the ALJ had identified a violation.

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