Thursday, February 14, 2019

Apple's workaround for German fake injunction--Qualcomm-based variants of iPhone 7 and iPhone 8--exacerbates Qualcomm's antitrust woes

At the end of my shareholder-value-focused analysis of Qualcomm's $1.5 billion deposit for the immediate enforcement of a Germany-wide patent injunction against the iPhone 7 and the iPhone 8, I predicted it was going to be "a Pyrrhic victory." By now it's clear that "Pyrrhic victory" is a euphemism. It's a total disaster for Qualcomm, actually. A waste of money; zero leverage over Apple (which as of today is again selling all iPhone models in Germany without restrictions); zero proof of patent portfolio strength; a significant risk of additional EU antitrust problems because it underpins a complaint by Apple that had already given rise to preliminary investigations by the European Commission's Directorate-General for Competition (DG COMP); and adverse effects on Qualcomm's reputation in U.S. and Asian competition circles.

I wouldn't normally call a formally-enforceable injunction a "fake injunction," especially since I try to disagree respectfully. However, there's an accumulation of reasons for which I can't help but use strong and harsh terminology:

It was unfortunately necessary to repeat all of the above because otherwise one could mistakenly see an admission of "guilt" (in terms of infringement) in the fact that Apple is, as of today, shipping a workaround--now confirmed by media reports based on official statements by Apple and Intel, while last week it was a credible but unconfirmed scoop for WinFuture.de.

This is a workaround for a patent that is almost certainly not infringed anyway, and likely invalid. The whole purpose is to keep selling (or to resume selling the iPhone 7 and iPhone 8 in the German Apple Stores) and to moot any potential enforcement dispute. Earlier this week it became known that Apple has also modified iOS to be unaffected by a potential U.S. import ban despite still having reasonably good chances of avoiding a finding of a violation anyway.

I asked someone at the Apple Store in downtown Munich and was told that they'd have the iPhone 7 and iPhone 8 on sale again in the store by early next week, and that those models can already be ordered again on Apple's German online store. Indeed, my first tweet about this new development included two screenshots from the German Apple online store (this post continues below the tweet):

There still is a possibility of the injunction being lifted by the Oberlandesgericht M√ľnchen (Munich Higher Regional Court). I asked the appeals court earlier this week whether they had any news about Apple's motion to stay enforcement. The answer was that the court had just received a convoluted filing (they didn't say from which party) and was studying it.

A stay would help to restore sanity with respect to the defendant's dilemma (give up your secrets or your adversary will be rewarded for obstruction of justice). But availability is no longer an issue, unless Qualcomm were to try to cut off its supply of Qualcomm baseband chipsets to Apple's contract manufacturers: the new variants come with Qualcomm, not Intel, baseband chips.

Intel points out that there's no patent issue relating to its chips--and that's not even because it's a fake injunction. The reason is that no Intel chip was accused of infringement in the first place. It was about a Qorvo envelope tracker. So why would Apple replace Intel's baseband chipset with a Qualcomm product? That's because the envelope tracker is technically tightly integrated with the baseband chip. The envelope tracker plays a key role in efficient power management with respect to the radio frequenty (RF) signal. For a certain range of amplitudes, an amplifier is usually activated (but not for all other amplitudes where it isn't needed). So it's key not to activate the amplifier all the time, but only as needed. However, when the battery is running empty, then it's actually the lesser evil to drain more power from the battery. Since the amplified signal is the RF signal, an envelope tracker isn't just a component for which a drop-in replacement works; it's too closely related to the baseband chip, which generates the RF signal.

This leads us to the antitrust issue I mentioned further above:

With what has happened now, Apple's warnings against the potential anticompetitive effects of Qualcomm's enforcement of patent injunctions have been validated. Indeed, the only practical alternative that Apple apparently had was to use Qualcomm chips again, which means Intel loses some potential sales. Obviously, the impact on Intel is limited as long as it's just about Germany and even there just about the iPhone 7 and the iPhone 8. But Qualcomm wanted and still wants to make far greater impact with its patent injunctions.

In fact, Qualcomm has continued to escalate the dispute with Apple (which is to some extent about getting leverage over Apple, but the effect of Apple buying Qualcomm chips again would harm Intel and, ultimately, consumers). Some more German Qualcomm v. Apple patent infringement lawsuits will be decided this year:

The contempt proceedings in Munich are going to be much less interesting now.

So far, Qualcomm has clearly failed to prove the value of its patent portfolio. An agnostic decision by one court that is clearly outweighed by two facts-based non-infringement findings in other venues won't impress anyone. Nor will some Chinese software patent injunctions that have apparently been worked around by way of an iOS upgrade. Qualcomm wants a 3.25% royalty for its standard-essential patents (with the royalty being the device price, but capped at $400), and another 1.75% (thus a total of 5.0%) if its non-SEPs are included. The royalty demand for its cellular SEPs will be history once it's determined (in FTC v. Qualcomm) that Qualcomm actually must license (in general, and not only based on two specific FRAND declarations, which has already been decided) its cellular SEPs to rival chipset makers. In that case, even device makers with their own chip divisions could seek chipset-level licenses, and it would be hard for Qualcomm to get more than a $1 per-unit royalty or so on a $10 component. And as for Qualcomm's non-SEPs, all those enforcement efforts against Apple have made noise, but have failed to deliver a proof of concept. 1.75%, capped at $7 per unit, is a lot for a patent royalty--in fact, it even makes a host of workarounds the smarter choice.

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