Sunday, February 24, 2019

Contours of Apple-Qualcomm dispute: Apple emphasizes antitrust, FRAND, patent exhaustion -- Qualcomm says contracts are contracts

On April 15, the Apple & contract manufacturers v. Qualcomm trial will start in San Diego (Southern District of California), and the stakes are high.

This is a key month for pretrial filings. I've gleaned from the parties' joint pretrial brief on disputed contract terms that Qualcomm charges a 5% patent royalty on iPhone repairs performed by Foxconn and wants an extra $1.3 billion from three of Apple's four contract manufacturers as a late "processing and handling" charge. Beyond the joint pretrial brief, the parties have also filed literally dozens of motions, and yesterday (Saturday) they filed a total of more than 1,100 pages (!) relating to, and including, their proposed jury instructions and verdict forms.

It's obviously impossible to discuss everything in detail. The purpose of this post is to provide a bird's-eye view of the parties' priorities in the upcoming trial. Those priorities are reflected by what Apple writes about its plans for its case-in-chief, by what the parties would like to go into or be kept out of the jury instructions, and by their preferences for the order of items on the jury form as well as what should be put before a jury in the first place (as opposed to being decided by the judge).

I've uploaded some key documents and will share my observations below the list:

  1. Apple and its contract manufacturers' position statement

  2. Qualcomm's position statement

  3. joint proposed jury instructions

  4. Apple and its contract manufacturers' proposed verdict form

  5. Qualcomm's proposed verdict form

The most fundamental difference is that Apple and its contract manufacturers place the emphasis on antitrust claims and FRAND licensing issues, while Qualcomm would like to focus the judge and the jury primarily on the contracts it has, or used to have, in place with the parties. In legal Latin, one could sum up Qualcomm's mantra as "pacta sunt servanda" (contracts must be fulfilled). I don't remember seeing that phrase in those documents, but that's the philosophy. While this sounds clear and logical, it's actually not that simple when antitrust issues come into play. Antitrust law always trumps contract law, provided that there is an antitrust violation.

The freedom of parties to define contract terms freely is important. Even very important. But it's not absolute. Contract terms can be unenforceable as a matter of contract law, or due to other laws, such as competition laws. That's why professionally-written contracts almost always come with a salving clause that states what to do if a court of law holds one or more clauses of a contract invalid or unenforceable. If "pacta sunt servanda" was a self-sufficient answer, a salving clause wouldn't be needed because everything would be valid and enforceable.

Not only can clauses be held invalid or unenforceable but there can also be restrictions based on, for instance, reasonableness principles.

Apple has now announced in its position statement that it will begin its case-in-chief (which will be the first case-in-chief since Apple brought the original complaint) with antitrust and FRAND matters. There's nothing Qualcomm can do about that. But Qualcomm would at least like to structure the jury instructions and proposed verdict form in a way that downplays the importance of antitrust and FRAND claims, and draws the jury's attention primarily to the contract terms Qualcomm imposed on the plaintiffs (and some of which Qualcomm says have been breached).

The importance of psychological considerations is underscored by Apple objecting to Qualcomm's proposals that always list Qualcomm first when the jury, on the verdict form, has to find whom it found for. Apple says as plaintiff it should come first. While such details can also make a difference, there are some more substantive disagreements.

Both parties assert affirmative defenses, but Apple and its contract manufacturers

  • propose to let the jury indicate its decision on the various affirmative defenses right after finding on a claim, and

  • lists affirmative defenses that Qualcomm believes should not be put before the jury.

Qualcomm generally seeks to minimize what the jury will be told. Affirmative defenses are a key part of that, but it goes beyond. Apple would even like the jury to take advisory positions on certain matters to be decided by the court, which Qualcomm opposes. Typically, such disagreements are always just about how a party believes the jury will view the parties' conduct (good guys vs. bad guys) if it hears about certain defenses and claims. In another California FRAND case, Huawei unsuccessfully sought to avoid that Samsung could present its FRAND breach case to a San Francisco jury next September. And one of the ways in which Judge Alsup (who's not involved with the Apple-Qualcomm dispute) disadvantaged Oracle against Google was that he allowed Google to raise open-source arguments that jurors apparently conflated with the actual "fair use" factors. Back to Apple-Qualcomm, it appears that Qualcomm simply wants the focus to be on what the contract say, and anything that calls the language of the contracts into question or limits its relevance is undesirable from Qualcomm's view, be it an antitrust issue, FRAND licensing obligations, or affirmative defenses.

In one of its numerous motions in limine, Qualcomm doesn't want Apple to refer to chipset-level licensing (smallest salable patent-practicing unit). That's the most interesting issue in FTC v. Qualcomm. It's also key to Apple & contract manufacturers v. Qualcomm because nothing has a greater potential impact on a FRAND determination than the identification of the royalty base.

Another question is almost as important as the parties' disagreement on whether the case is primarily about antitrust and FRAND or about contracts: the question of whether it's a patent case to some degree. It's not a patent infringement case in a strict sense as Qualcomm, in its efforts to avoid an exhaustion finding, waived its rights related to various patents and got some declaratory-judgment claims thrown out by the court. Qualcomm's "exhaustophobia" is quite extreme. Therefore, Qualcomm also brought a motion in limine regarding any references to patent exhaustion, and more generally, it just doesn't want Apple to dispute that Qualcomm's patents are valid and infringed.

In other words, Qualcomm wants to tell the San Diego jury in the Apple case, as it told Judge Koh last month in the FTC case, that it owns 130K patents and believes those are worth a 5% royalty (3.25% for standard-essential patents and 1.75% for non-SEPs).

But as I wrote ten days ago, Qualcomm's infringement lawsuits against Apple haven't really delivered results, after almost two years, that support Qualcomm's royalty demands. Many of those patent assertions have been unsuccessful (obviously, at this stage everything can still be appealed), and even the ones that have succeeded have just resulted in injunctions that could be worked around (one of which is based on an agnostic ruling that is contradicted by two facts-based U.S. decisions involving a patent from the same patent family).

By contrast, at this stage Nokia's assertions of SEPs and mostly non-SEPs against HTC (a huge number of patents in the end) resulted in a settlement under which HTC met Nokia's royalty demands; BlackBerry had caved even earlier. Last time, Apple settled with Nokia pretty quickly, presaumably to focus on the Qualcomm dispute. Ericsson typically achieves settlement before its assertions even go to trial. Nokia and Ericsson are two patent holders in this industry that are reasonably comparable to Qualcomm, with the most important difference apparently being that their royalty demands are substantially lower, thus licensees are more likely to accept them. (Otherwise Apple would probably not have done a deal with Nokia in order to focus on Qualcomm.)

Whether it's about Qualcomm's portfolio or anyone else's, it just doesn't make sense to assume that an entire portfolio consists of valid and infringed patents when discussing reasonable royalties. But Qualcomm argues it owns so many patents that it could just enter into a Super Sack non-assertion covenant with respect to some patents Apple sought to challenge in the San Diego case, just to get rid of the related declaratory-judgment claims.

Qualcomm is not the only one to seek royalties based on portfolio size rather than actual proof of an infringement of valid patents. However, so far no one has gone as far as Qualcomm has in its efforts to avoid any determination on the merits sought by the other party.

Just like in that Munich case in which an apparently non-infringing Qorvo chip was successfull accused by Qualcomm by preventing the court from analyzing the hard facts, Qualcomm favors agnosticism (in this case, with respect to whether the patents in its portfolio are valid, infringed, and not exhausted) over analysis.

There are obviously reasons why the parties had to file north of 1,000 pages on a Saturday just to tell Judge Gonzalo P. Curiel about their disagreements on jury instructions and the verdict form. However, they may still be able to narrow the issues the court must rule on. They explained that they made the filings yesterday to meet the deadline, but efforts are continuing to reach an agreement on at least some questions. That is another reason for which I believe this is not the time to go into too much detail on those filings. For now, what's key is to know the countours of the clash.

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