Friday, March 15, 2019

Apple obtains summary judgment against Qualcomm, can keep billions of dollars: no breach of contract by responding to antitrust regulators

In the Northern District of California, where the Federal Trade Commission is suing Qualcomm, an important summary judgment ruling came down in November, holding that Qualcomm owed rival chipset makers a cellular standard-essential patent (SEP) license on FRAND terms as per the FRAND declarations of two U.S. standard-setting organizations.

Qualcomm now has to digest a summary judgment order adverse to its interests in the Southern District of California, where Judge Gonzalo P. Curiel has determined that Qualcomm cannot claw back incentive payments made to Apple under a Business Cooperation and Patent Agreement (BCPA) based on allegations of Apple being responsible for some of Qualcomm's antitrust worries in the U.S., the EU, and South Korea, or based on Apple allegedly having induced its contract manufacturers to underreport royalties.

Considering that $1 billion out of the roughly $30 billion Apple and its contract manufacturers are seeking from Qualcomm in that San Diego action relates to Qualcomm having stopped such payments at some point, the amount at stake in this summary judgment context must be multiple billions of dollars as the BCPA took effect at the beginning of the 2013, so the period with respect to which Qualcomm was trying to claw back money must be a lot longer than the one during which Apple believes it should have received another billion dollars that Qualcomm withheld--simply because there were no signs of a dispute during most of that period. Apple's original 2017 complaint said in its § 160 that "Qualcomm conditioned billions of dollars on Apple's silence before courts and regulators about Qualcomm's business practices" (emphasis added).

Qualcomm can't get those billions of dollars back, apart from the hypothetical possibility of a successful appeal. And Apple is now virtually certain to get an extra $1 billion that Qualcomm withheld, though it may take another formal step, as I'll discuss further below.

Here's the order, followed by further analysis and commentary:

19-03-14 Apple v. Qualcomm ... by on Scribd

The final part ("CONCLUSION AND ORDER") grants summary judgment to the effect of dismissing, as requested by Apple, Counts VI-IX of Qualcomm's second amended counterclaims. The last one, Count IX, is one with which Qualcomm sought to get the court to decide that it didn't owe Apple the extra billion--and in the last passage before the final conclusion, Judge Curiel indeed finds that "Qualcomm has not shown a genuine dispute that, based on Apple filing a lawsuit, Qualcomm was relieved of its quarterly payment obligations for the second, third, and fourth quarters of 2016."

Does it mean that Qualcomm has to write a check now (in the event it can't obtain a stay)? In material terms I guess it does. In formal terms, the court still has to enter judgment on Apple's claim seeking the extra billion as the summary judgment order per se just declines to enter judgment on Qualcomm's related (declaratory judgment) counterclaim in Qualcomm's favor.

But what hurts Qualcomm even more is that it can't get back billions of dollars for the previous years.

The order is heavily redacted and I found it easier to understand after going back to a document I published a few weeks ago: the parties' trial brief on disputed contract terms, which addressed their positions on Sections 4 (based on which Qualcomm alleged interference by Apple with the contract manufacturers' relationships with its contract manufacturers) and Section 7 (based on which Qualcomm alleged a breach because of Apple's interactions with antitrust enforcement agencies). The related part of the pretrial brief on disputed contract terms (found in the older post I just linked to) begins on page 28 based on the numbering at the bottom of the page, or page 30 based on the page numbering of the PDF viewer. By the way, in that document Qualcomm, too, confirms that this issue here was about billions of dollars:

"In exchange for those commitments and other consideration, Qualcomm agreed to pay Apple billions of dollars in quarterly Business Cooperation and Patent Payments ('BCP payments')."

Note that those payments were made to Apple even though Apple wasn't making direct payments to Qualcomm itself: Apple's contract manufacturers bought the chips, paid the royalties, and charged eveything to Apple, and Apple then got an effective rebate in the form of Qualcomm paying Apple those kickbacks contingent upon some behavior (or on refraining from some behavior, to be precise).

Judge Curiel's reasoning is very balanced, but even though he agreed with Qualcomm on some subissues (such as that a safe harbor in the contract allowing Apple to respond to regulators wouldn't cover lies in the sense of things Apple would have said without reasonably believing they were true), Apple ultimately won and Qualcomm's BCPA-related clawback claims were found to have no merit--without any exception.

From a policy point of view, I'm profoundly concerned about any contract clause that prevents (by otherwise imposing a financial penalty) a party from antitrust complaints, be it with regulators or with courts. Let's look at it this way: a contract precluding a party from reporting crimes to the police would undoubtedly be unenforceable. Most antitrust violations aren't crimes--but they definitely are something that should also be reported to the appropriate authorities (competition enforcement agencies). There's a strong public interest in antitrust enforcement, and the freedom of parties to agree on certain term should end where that one is in jeopardy. However, Judge Curiel's ruling isn't that broad and general, though in one specific context he wrote:

"Under these circumstances, enforcing the BCPA so as punish Apple for responding to regulatory investigations would deter parties from responding to regulatory investigations and have the effect of concealing ongoing illegal conduct to the detriment of the public and perpetuating improper conduct."

The above sentence raises the question of why Qualcomm insists that its conduct was perfectly legal (as it did at the January FTC trial) while paying billions of dollars to ensure that no illegal conduct would be reported. The only conclusion a reasonable observer can reach is that Qualcomm has a lot of bad conduct to hide.

Judge Curiel reached his conclusion that Apple's summary judgment motion had merit by rejecting Qualcomm's theories one by one (except for some subissues that weren't sufficient for Qualcomm to get anything on the bottom line).

Qualcomm's allegations in the antitrust enforcement context come down to saying

  • that Apple "lied," but Judge Curiel can't see any credible evidence of Apple not having said things it reasonably believed to be true;

  • that Apple induced Samsung to influence the Korea Fair Trade Commission (KFTC) so it would broaden its investigation of Qualcomm's practices and impose worldwide remedies (as opposed to remedies specific to the Korean market);

  • that Apple's responses to questions from regulators such as the FTC or European Commission aren't protected by the BCPA's safe harbor for responses to regulators since Apple had played a role in instigating those investigations prior to signing the BCPA (but Judge Curiel disagreed with this because of the public interest in companies responding to questions from regulators);

  • that Apple attempted to expand the scope of the European Commission's investigation; and

  • that Apple induced the FTC to bring its 2017 lawsuit against Qualcomm.

Judge Curiel found that Apple didn't "lie" and that its answers were within the sometimes rather broad scope of the questions asked by regulators. Even if Qualcomm didn't like what Apple said or what regulators did in the aftermath, Apple was allowed to say what it said; also, some of what Qualcomm said Apple induced some agencies to do didn't even happen anyway.

The argument that Apple basically asked questions that were the effect of its pre-agreement efforts to get regulatory agencies interested didn't work because of the strong public interest in companies responding to those government agencies. Therefore, the judge disagrees with Qualcomm that Apple breached the implied covenant of good faith and fair dealing when negotiating and signing that BCPA with Qualcomm.

So before the related San Diego trial even begins (another one over "only" $31 million dollars is at the stage of jury deliberations, with no verdict reached yet), the first several billion dollars Qualcomm was seeking are already gone (again, absent a successful appeal by Qualcomm to the Ninth Circuit). Just like the FTC went into the January trial with tailwinds from summary judgment, Apple is going to go into its own Qualcomm trial next month on the basis of already having won something very significant.

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