Wednesday, May 22, 2019

BREAKING NEWS: Federal Trade Commission wins antitrust case against Qualcomm in Northern District of California

The Federal Trade Commission (FTC) of the United States has won the first round of litigation against Qualcomm. Judge Lucy H. Koh of the United States District Court for the Northern District of California has just found that the San Diego-based chipset maker violated the FTC Act, and has ordered the following remedies:

(1) Qualcomm must not condition the supply of modem chips on a customer’s patent license status and Qualcomm must negotiate or renegotiate license terms with customers in good faith under conditions free from the threat of lack of access to or discriminatory provision of modem chip supply or associated technical support or access to software.

(2) Qualcomm must make exhaustive SEP licenses available to modem-chip suppliers on fair, reasonable, and non-discriminatory ("FRAND") terms and to submit, as necessary, to arbitral or judicial dispute resolution to determine such terms.

(3) Qualcomm may not enter express or de facto exclusive dealing agreements for the supply of modem chips.

(4) Qualcomm may not interfere with the ability of any customer to communicate with a government agency about a potential law enforcement or regulatory matter.

(5) In order to ensure Qualcomm's compliance with the above remedies, the Court orders Qualcomm to submit to compliance and monitoring procedures for a period of seven (7) years. Specifically, Qualcomm shall report to the FTC on an annual basis Qualcomm’s compliance with the above remedies ordered by the Court.

Even though some of the remedies requested by the FTC were found too vague, the FTC has practically prevailed on all counts. This is a resounding victory for the U.S. competition enforcement agency over Qualcomm.

The judgment in the narrowest sense is just one paragraph (PDF):

On May 21, 2019, the Court entered its Findings of Fact and Conclusions of Law, and found that Defendant violated the Federal Trade Commission Act. ECF No. 1490. Accordingly, the Clerk shall enter judgment in favor of Plaintiff. The Clerk shall close the file.

Judge Koh's underlying findings of fact and conclusions of law, however, span 233 pages (this post continues below the document):

19-05-21 FTC v. Qualcomm Ju... by on Scribd

Judge Koh is amazing. Just like I noticed at the January trial, she's totally focused on the facts and not interested in lawyers' rhetoric. And her ruling explains the complex commercial and technical issues in this case as well as applicable antitrust case law in a very understandable form (though it's obviously still a complex matter).

I am now still studying the findings of fact and conclusion of law in detail, and will continue to update this post accordingly, but this is a resounding victory for the FTC--and totally consistent with my coverage of and commentary on the January trial in San Jose (here and on Twitter). And a defeat for Assistant Attorney General Makan Delrahim, whose subordinates made a last-minute submission that failed to persuade Judge Koh.

What was an even greater failure for Qualcomm was the extreme degree to which its senior executives' testimony contradicted their own handwritten notes, emails, and presentation slides, including but not limited to the question of whether Qualcomm explicitly threatened device makers with a disruption of chipset supplies unless they agreed to certain patent licensing terms. As a result, "the Court largely discounts Qualcomm's trial testimony prepared specifically for this litigation and instead relies on these witnesses' own contemporaneous emails, handwritten notes, and recorded statements to the IRS." For Qualcomm's statements to the IRS, let me refer you to a previous blog post. Here's what Judge Koh noted beyond those contradictions:

"In addition to giving testimony under oath at trial that contradicted their contemporaneous emails, handwritten notes, and recorded statements to the IRS, some Qualcomm witnesses also lacked credibility in other ways. For example, Dr. Irwin Jacobs (Qualcomm Co-Founder), Steve Mollenkopf (Qualcomm CEO), and Dr. James Thompson (Qualcomm CTO) gave such long, fast, and practiced narratives on direct examination that Qualcomm's counsel had to tell the witnesses to slow down. [...] By contrast, when cross-examined by the FTC, each witness was very reluctant and slow to answer, and at times cagey."

This discrepancy between their answers to their own counsel as compared to the FTC's questions is something I also observed in my trial commentary on Twitter and on this blog. One detail that I noted was that Mr. Mollenkopf generally wears glasses, but at the trial he took his glasses off when the FTC had questions, only to complain that he couldn't quickly read some text that appeared in a smaller font on a screen.

The way Judge Koh explains Mr. Amon's self-contradiction even suggests between the lines that witnesses testifying under oath shouldn't do what he did.

Judge Koh then discussed market segmentation and agrees with the FTC that the CDMA modem chip markets (CDMA was invented by Qualcomm and is key to its leverage) and the premium LTE modem chip markets are appropriate antitrust markets. Based on this definition of markets in which Qualcomm held monopoly power during the relevant period, Judge Koh analyzes the evidentiary record, which is unusually rich for an antitrust case. These are the OEMs with respect to which Judge Koh analyzes Qualcomm's conduct:

  1. LG Electronics

  2. Sony

  3. Samsung

  4. Huawei

  5. Motorola

  6. Lenovo

  7. BlackBerry

  8. Curitel

  9. BenQ

  10. Apple

  11. VIVO

  12. Wistron

  13. Pegatron

  14. ZTE

  15. Nokia, and

  16. smaller Chinese OEMs.

In numerous cases Qualcomm threatened with a disruption of chipset supplies unless OEMs accepted its patent licensing terms, and there were various agreements under which OEMs paid a higher patent royalty when using third-party modem chips than Qualcomm's products (one example: "In 2003, Qualcomm charged Huawei a reduced royalty rate of 2.65% if Huawei purchased 100% of its CDMA modem chips for use in China from Qualcomm, but a 5-7% royalty rate if Huawei purchased CDMA modem chips from a Qualcomm rival."). This is the problem of Qualcomm's two mutually-reinforcing monopolies (patents and chips) that I first explained two years ago. Qualcomm even refused to provide samples for technical integration and testing purposes without a patent license in place.

With such a rich and powerful body of evidence, it's going to be hard for Qualcomm to persuade the appeals court (the Ninth Circuit) that the facts are favorable to its defenses. And the above list of industry players shows that Qualcomm-aligned op-ed authors, analysts and organizations completely overstated the weight that Huawei (the Chinese bogeyman) and Apple really have here. It's about an issue affecting an entire industry, not just two companies at the heart of conspiracy theories Qualcomm's allies planted in the media.

There is only one respect in which Qualcomm's dealings with Apple play a central role here: exclusive dealing. Qualcomm originally accomodated Apple's requests for lower effective patent royalties through a "Variable Incentive Fund" (VIF) contingent on volume commitments:

"Apple's receipt of the hundreds of millions of VIF funds also depended on the volume of chips Apple purchased from Qualcomm. [...] If Apple purchased more than 115 million Qualcomm modem chips from October 1, 2011 to September 30, 2012, Apple received the full amount of VIF funds for that year. [...] If Apple purchased fewer than 80 million Qualcomm modem chips in that period, Apple received no money. [...] In future years, Apple needed to increase purchase volumes to 125 million annual units and then to 150 million units to receive the full amount of VIF funds for that year."

Later, Apple had to agree to total exclusivity, where any shipment of a non-negligible quantity of devices with non-Qualcomm modem chips on board would have made them lose certain benefits going forward and entitled Qualcomm to a clawback, and that is the basis for one of the FTC's monopolization claims. But other than that, and Apple's importance to competition (because chipset makers gain a lot of credibility from being chosen by Apple), there is nothing special about Apple that wouldn't just be consistent with how Qualcomm treated everyone else. Arguably, Qualcomm treated some others a lot worse, and Apple wasn't the only company with which Qualcomm had exclusive agreements in place. The ruling also mentions similar arrangements with such companies as BlackBerry and Motorola. This is Judge Koh's summary of Qualcomm's anticompetitive conduct vis-à-vis Apple:

"In sum, Qualcomm engaged in anticompetitive conduct with respect to Apple by (1) refusing to sell Apple modem chips or even share sample chips until Apple signed a license; (2) eliminating a competing standard supported by Intel; (3) attempting to require Apple to cross-license its entire patent portfolio to Qualcomm; and (4) and using Qualcomm’s monopoly power to enter exclusive deals with Apple that foreclosed Qualcomm’s rivals from selling modem chips to Apple from 2011 to September 2016."

After the analysis of those dealings with device makers, Judge Koh's ruling addresses the problem of Qualcomm refusing to grant exhaustive (meaning that the downstream is protected) SEP licenses to rival chipset makers. Last year she entered summary judgment in the FTC's favor with respect to Qualcomm's obligations under FRAND commitments made to two U.S. standard-setting organizations (ATIS and TIA). But the new decision is now broader because it is based on antitrust law as opposed to specific agreements.

The obligation to license its SEPs at the component level is likely going to be Qualcomm's #1 priority with respect to the appeal, and it then won't help Qualcomm that the decision points to Qualcomm's own understanding of FRAND and the obligation to license all comers:

"Then, in 2000, Steve Altman (then a Qualcomm lawyer, and later Qualcomm President) complained in a letter to Motorola that Motorola was not licensing its modem chip SEPs to Qualcomm despite 'Motorola's commitment to the industry to license its essential patents.' [...] More recently, Qualcomm has repeated that understanding of FRAND. During a 2012 meeting with the IRS, Eric Reifschneider (QTL Senior Vice President and General Manager) explained to the IRS that when SEP holders participate in SSOs, 'as part of that you often have to make commitments that you will, you know, make that technology available to people who want to make products that practice the standard.' [...] Eric Reifschneider explained that refusing to license a rival modem chip supplier is 'not a great, you know, position to be in in terms of defending yourself against, you know, claims that you’ve broken those promises to make the technology available.'"

Qualcomm's actions may speak even louder than its words:

"Moreover, in a 1999 email, Steve Altman (then a Qualcomm lawyer, later Qualcomm President) stated to Marv Blecker (QTL Senior Vice President) that Qualcomm had licensed modem chip suppliers: 'ASIC licensees pay royalties to QUALCOMM at 3% with no minimum dollar amount.' [...] As the Court will explain below, Qualcomm later stopped licensing rivals because Qualcomm decided that it was more lucrative to license only OEMs."

And, as everyone in the industry knows, Qualcomm's inbound licensing differs from its outbound licensing in this regard: they do require their own licensees to grant exhaustive licensees that benefit Qualcomm's customers. For an example, "[Qualcomm witness Fabian] Gonell conceded that Qualcomm has an existing license from Ericsson, [...] which Christina Petersson (Ericsson Vice President of Intellectual Property) confirmed."

In the chipset-licensing context, testimony from Nokia and Ericsson ultimately didn't benefit Qualcomm here, simply because those companies used to take the very opposite position originally when they were dealing with Qualcomm:

"Nokia and Ericsson's contemporaneous documents and statements contradict Nokia's and Ericsson's self-serving and made-for-litigation justifications for refusing to license modem chip suppliers."

That is Judge Koh's polite and professional way of saying, "I don't buy that BS."

After a thorough analysis of the anticompetitive impact of Qualcomm's exclusive agreements with Apple and others, Judge Koh finds that "Qualcomm’s royalty rates are unreasonably high" (Section G). That holding will hurt Qualcomm, though it's common sense. They simply charge a lot more than the rest of the industry--from the perspective of some major OEMs, more than the rest of the industry combined.

What's particularly important to mention in the royalty context is that Judge Koh disagrees with Qualcomm's royalty base (the entire phone, though capped at $400). She notes that it's not modem chips that drive the value of smartphones, and she sees Qualcomm's conduct fundamentally at odds with the Entire Market Value Rule (EMVR): "Qualcomm's use of the handset device as the royalty base is inconsistent with Federal Circuit law on the patent rule of apportionment." Just like she did in GPNE Corp. v. Apple a couple of years ago (a fact I repeatedly mentioned, though hardly anyone else pointed to it), she stresses the need to base a royalty on the smallest salable patent-practicing unit (SSPPU).

As I predicted during and after the January trial, it was really industry testimony more so than expert testimony that mattered in the royalty context. And Judge Koh wasn't impressed by Qualcomm's economic experts Professor Nevo and Snyder ("It makes little sense to evaluate whether conduct 'reasonably appears capable' of causing anticompetitive harm [...] by ignoring evidence of that conduct altogether.") or with one of the FTC's experts, Mr. Lasinski ("the Court does not rely on Lasinski's testimony") any more than I was, as it appears. Interestingly, the FTC's economic expert Professor Carl Shapiro (Berkeley) isn't even mentioned once. I liked his testimony in January, but ultimately, industry testimony trumps expert testimony in this case. Professor Shapiro's testimony may have had some persuasive impact nonetheless, but apparently isn't needed here from an evidentiary point of view.

In the analysis of actual anticompetitive harm caused by Qualcomm's business practices, Judge Koh shows a very telling Qualcomm-internal slide according to which the company was well aware of antitrust implications of its behavior (click on the image to enlarge; this post continues below the image):

Patent exhaustion is mentioned at multiple points. Qualcomm's separation of patent royalties from chipset sales, and the games Qualcomm plays on that basis, are key, and the Supreme Court's Lexmark ruling on patent exhaustion (which came down a few months after the FTC filed its complaint) ups the ante for Qualcomm.

This is Judge Koh's summary of her conclusions on anticompetitive conduct and harm:

"In combination, Qualcomm’s licensing practices have strangled competition in the CDMA and premium LTE modem chip markets for years, and harmed rivals, OEMs, and end consumers in the process. Qualcomm's conduct 'unfairly tends to destroy competition itself.' [...] Thus, the Court concludes that Qualcomm's licensing practices are an unreasonable restraint of trade under § 1 of the Sherman Act and exclusionary conduct under § 2 of the Sherman Act. [...] Therefore, Qualcomm's practices violate § 1 and § 2 of the Sherman Act, and that Qualcomm is liable under the FTC Act, as “unfair methods of competition” under the FTC Act include 'violations of the Sherman Act.'"

This decision, which Qualcomm will obviously appeal (and they will try to get the injunctive remedies stayed, especially with respect to the renegotiation of existing license agreements), is an unbelievable success for the FTC's litigation team led by Jennifer Milici and Daniel Matheson. They did some amazing work and put on a really strong case. And they've prevailed to an extent that I would describe as "100% minus a rounding error."

Judge Koh's ruling is a piece of art. I enjoyed reading it, though it's a bit hard to read a few pages, then add details to a blog post, and then resume reading. So I'll re-read it, and probably do some follow-up posts in the coming weeks and months--and I'll follow the appellate proceedings, of course.

(By the way, this blog was--to the best of my knowledge--the first medium worldwide to report on and publish the decision.)

Share with other professionals via LinkedIn:

Monday, May 20, 2019

USPTO drifting out of balance under Director (Undersecretary) Andrei Iancu: PTAB under attack

The previous director of the United States Patent & Trademark Office, Michelle Lee, had previously worked at Google and was well respected by all major product- and service-focused tech companies for her understanding of the need for a balance in the patent system: a balance between the interests of right holders in valid and enforceable intellectual property rights as well as the interest of the general public in preventing overbroad patents and, particularly, the enforcement of patents that should never have been granted in the first place.

Mrs. Lee's predecessor, David Kappos, came from IBM, a company that has for some time been known for rather aggressive patent monetization (though they rarely litigate) and has, since leaving the USPTO, been lobbying hard for broad and strong patents. That said, he respected legislative and judicial decisions without a doubt, and compared to the current USPTO director Andrei Iancu his actual decisions at the helm of the USPTO were the ones of a centrist, and clearly not those of an extremist. He had his views and beliefs, but a reasonable agenda.

Director Iancu used to be the managing partner of Irell & Manella, a renowned L.A. law firm with a particular focus on patent enforcement. Presuambly they also represent defendants, but interestingly, I've always heard of them only when they were counsel for plaintiffs.

There are various respects in which Director Iancu is trying hard to turn the legislative and judicial tide--which is an agenda that the executive branch of government shouldn't have, but sometimes that's unfortunately the way it is.

Earlier this month I mentioned a recent open letter to Director Iancu and his boss with which numerous major companies and industry organizations urged him not to withdraw the USPTO's support for a position paper on standard-essential patents (SEPs) that goes back to the Kappos era. At around that time, Professor Thomas Cotter's Comparative Patent Remedies blog mentioned a Federalist Society event at which both Director Iancu and Assistant Attorney General Makan Delrahim spoke. AAG Delrahim and his subordinates are an anti-FRAND activist cell in the U.S. government, swimming against the judicial tide--and given Director Iancu's one-sided support of the interests of patent holders, there definitely is a risk of the two becoming (not in a literal sense, of course!) partners in crime against FRAND.

So far, however, Director Iancu's focus has not been on SEPs. The two areas of activity in which his decisions and his rhetoric raise concerns on my part are patent-eligibility law (he'd like examiners to apply the Supreme Court's guidance from Alice and related cases in a way that would simply gut the case law of the top U.S. court) and, especially, the ways he tries to weaken the Patent Trial and Appeal Board (PTAB). The PTAB plays an important hygienic role and contributes to balance in patent litigation by invalidating countless patent claims that should never have been granted, but would otherwise do significant--in some cases even enormous--damage in litigation.

When Director Iancu testified before the House Subcommittee on Courts, IP, and the Internet on May 9, his statement didn't reveal his anti-PTAB agenda. Whatever he said about PTAB just sounded like ensuring greater efficiency and higher quality. But the introductory part of the speech reflected his unbalanced perspective:

"Our overall goal is to ensure that rights owners and the public alike have confidence in, and can rely on, a predictable and well-functioning IP system. This confidence spurs inventors to invent, investors to invest, companies to grow and create new jobs, and science and technology to advance. I will continue to work with my team at the USPTO, with Secretary Ross and his team, others in the Administration, this Committee, and our stakeholders to identify and advance policies and initiatives that are working and reassess those that are not."

This is the mission statement of a patent radical and of someone who doesn't appear to understand that he has a responsibility not only for patentees and for litigation firms like the one he used to chair, but also--in fact, even more so--for the economy and society at large.

The unspecified reference to "the public alike" doesn't counterbalance his focus on "rights owners" and their interests.

The way Director Iancu modified the claim construction standard for post-grant reviews (by instructing PTAB judges to apply the narrower standard used in infringement proceedings) has nothing to do with greater predictability: decisions were equally predictable before, but it used to be harder to defend weak patents.

I may go into more detail on claim construction in post-grant reviews on another occasion. What has me concerned with a view to what might happen next is a letter by Senators Tillis (R-N.C.) and Coons (D-Del.) urging him to do something he'd presuambly be more than happy to do: to disallow so-called "serial [PTAB] petitions." Those senators, and others, are also behind an attempt to vitiate § 101 (patent eligibility), which the Electronic Frontier Foundation has accurately described as a "disaster for innovation."

The "serial petition" matter is a more imminent threat because Director Iancu might take some executive action, while changing patent-eligiblity law would require a legislative process that reasonable forces could still influence.

By "serial petition," the enemies of PTAB mean that more than one petition challenges a given patent. But as a litigation watcher I know that for most patents in the field of information and communications technology there isn't just one prior art reference. Typically there are several that come very close, and sometimes ten or more. Multiple petitions challenging a patent are absolutely legitimate and positive as long as they aren't merely duplicative of each other in terms of the invalidity contentions they are based on.

The Computer & Communications Industry Association (CCIA) wrote an open letter last month that sharply disagrees with the senators. I'm concerned that the senators may even have coordinated the letter with Director Iancu beforehand so as to give him an excuse for something that he, the most aggressive and radical enemy the PTAB ever faced in such an influential position, would presumably like to do unless there is so much backlash from industry that he'll refrain from it.

Those of us promoting a balanced patent system must keep a close eye on what's going on at the USPTO under Director Iancu. I anticipate more posts on the USPTO, and especially on inter partes reviews, going forward.

Share with other professionals via LinkedIn:

Tuesday, May 14, 2019

Nokia privateer Conversant can't enforce SEP against standards-compliant Apple products due to Nokia's late disclosure: inequitable conduct

Conversant, previously known under other names such as Core Wireless, may very well be the wireless SEP privateer with the highest failure rate in litigation. And it's probably because Nokia sold them weak patents, more so than I would attribute this lack of success to the work performed by Conversant's litigators.

Last month Conversant lost a French appeal, and it became known that LG had offered Conversant less than 1% of what it wanted. Conversant has also been grossly unsuccessful against Apple in the U.S., with dozens of patent assertions having failed. They're now increasingly looking to the UK as a last resort, attempting to leverage the England & Wales High Court's and UK Court of Appeal's decisions in favor of global portfolio rate-setting--but Huawei and ZTE may get that precedent overturned as the UK Supreme Court granted their petitions to appeal (the UK equivalent of a cert petition) last month.

Conversant's latest failure in its U.S. litigation campaign against Apple reflects highly unfavorably on Nokia's behavior as a participant in standard-setting processes. On Friday (May 10, 2019), U.S. Magistrate Judge Nathanael M. Cousins granted--on remand from the Federal Circuit--an Apple motion to hold U.S. Patent No. 6,477,151 on "packet radio telephone services" unenforceable against Apple products practicing the (fairly old) GPRS (General Packet Radio Service) data communications standard related to GSM (this post continues below the document):

19-05-10 Order Holding Late... by on Scribd

Judge Cousins is in charge of discovery and similar matters in the FTC v. Qualcomm antitrust case Judge Lucy H. Koh is presiding over. Here, however, he's himself presiding over a Conversant v. Apple case, and there is a Qualcomm connection because of an old Qualcomm v. Broadcom case in which "Qualcomm's manipulation of its intellectual property made its nondisclosure [of a patent to the standard-setting organization until after its litigation against Broadcom began] particularly exceptional and therefore egregious."

Judge Cousins's order analyzes Nokia's misconduct with respect to the '151 patent for the purpose of determining (as the Federal Circuit instructed him to do on remand) "whether Nokia or [Conversant] inequitably benefited from Nokia's failure to disclose [the '151 patent to ETSI on a timely basis], or whether Nokia's conduct was sufficiently egregious to justify finding implied waiver without regard to any benefit that Nokia or [Conversant] may have obtained as a result of that misconduct." In other words, the question here is whether Nokia's inequitable conduct was just inequitable conduct or whether it was as outrageous as what Qualcomm did back in the day. Of course, Conversant (and, by extension, Nokia) would have preferred for the court not to identify any wrongdoing, but that wasn't realistically going to happen based on what the Federal Circuit had already stated in its decision to remand. For an example, the Federal Circuit had written that Nokia "had a duty to disclose its IPR no later than June 1998 [and] its later disclosure was clearly untimely and not sufficient to cure the earlier breach of its duty."

While the fact that Nokia disclosed its IPR to ETSI (the leading wireless standard-setting organization) four years later than it actually had to gave Judge Cousins pause, but ultimately he found that Nokia had not done much: it basically had just failed to disclose in time, as opposed to Qualcomm, which in Judge Cousins's words had "conspired to 'extend' its pre-existing patents, which, in the words of its own employees, covered 'almost exclusively' different material."

All in all, Nokia's "misconduct does not clearly and convincingly rise to the level of 'affirmative egregious misconduct' required," but misconduct it is, and the court then does find that "Nokia and Conversant have obtained ...] an unfair competitive advantage" in the sense of Conversant (and, by extension, Nokia) now trying to leverage the fact that the patent is standard-essential, which it might never have become if ETSI, prior to adopting the related technique, had been aware of the existence of this patent.

Judge Cousins wasn't persuaded by Conversant's argument that its FRAND licensing commitment rules out inequitable benefits.

The sanction here is that the United States District Court for the Northern District of California has granted Apple's motion for unenforceability on the basis of an implied waiver that now precludes Conversant from enforcing the '151 patents and any derivatives thereof against products practicing the GPRS standard, including the Apple products accused in that particular case.

Conversant can appeal this order, but since the Federal Circuit had already taken some pretty clear positions in its decision to remand the case to San Jose, it's not likely that the order granting Apple's motion would be reversed.

This will hopefully serve to discourage companies participating in standard-setting from similar misconduct. It's absolutely key that those sitting at the standard-development make timely disclosures of any intellectual property rights they hold that might read on certain techniques before those are formally adopted.

Share with other professionals via LinkedIn:

Friday, May 10, 2019

FTC calls DOJ statement in Qualcomm antitrust case "untimely," says it "misconstrues applicable law and the record": inter-institutional quarrel

On Thursday, one week after the Department of Justice submitted its puzzling Statement of Interest in the FTC v. Qualcomm antitrust case awaiting Judge Lucy H. Koh's judgment in the Northern District of California, the Federal Trade Commission filed a response that is as concise as it is informative at different levels (this post continues below the document):

19-05-09 FTC Response to DO... by on Scribd

After the ninth word ("untimely" before "Statement of Interest") it's already clear that the FTC doesn't appreciate the DOJ's bewildering kind of intervention. The FTC doesn't talk about why the DOJ would make such a filing now (and not long before, if at all), but it's easy to see: after the Apple-Qualcomm settlement, Qualcomm's allies in the federal government such as DOJ antitrust chief Makan Delrahim (whose subordinates submitted the Statement of Interest) are now concerned that Judge Koh's impending decision might have an impact on the Apple-Qualcomm deal. The DOJ primarily expressed concerns over the FTC's request that the court order Qualcomm to renegotiate all patent license agreements, and who knows what clauses in the Apple-Qualcomm contract might provide for some adjustments based on the outcome of the FTC case. Within the universe of its own that is the FTC v. Qualcomm antitrust litigation, however, the separate and now-settled Apple-Qualcomm dispute is not an outcome-determinative or even just procedurally relevant factor.

What's funny is that the FTC clarifies it "did not participate in or request [the DOJ's] filing." It's a diplomatic way of saying that the filing is unwanted, unwarranted, and unhelpful.

The related footnote (footnote 1) then notes that another district court (in Minnesota) declined to consider a Statement of Interest by the DOJ's Antitrust Division in light of "unjustified delay and the fact that [the] case [had] been fully and thoroughly briefed by all other parties." Generally, the FTC's short filing says between the lines that they totally trust that Judge Koh is not going to be impressed, swayed, or much less fooled by the DOJ's statement anyway, so while they (the FTC) "disagree with a number of contentions in the [DOJ] Statement," they just provide some examples in a footnote. The final sentence of that statement is particularly interesting in my view:

  • "The Statement also cites documents that Qualcomm chose not to introduce at [the FTC v. Qualcomm] trial [...]:

    This is about an Apple-internal document that Qualcomm presented in its opening statement last month in San Diego, according to which Apple just sought to hurt Qualcomm financially but considered its technology the best. While Qualcomm would have tried to leverage that document in front of the San Diego jury (just that the case was settled before the trial began in earnest), it's interesting that it didn't bring this up in January, considering how much time Qualcomm actually had for all sorts of seemingly less relevant issues such as its (undisputed) innovation culture.

  • "[...] and cites a commentator whom Qualcomm chose not to offer as a witness at trial.":

    Tihs refers to the following sentence in footnote 6 of the DOJ statement: "One commentator has observed that these documents 'potentially reveal[] that Apple was engaging in a bad faith argument both in front of antitrust enforcers as well as the legal courts about the actual value and nature of Qualcomm's patented innovation.'"

    The "commentator" is Professor Adam Mossoff, a law professor at GMU and director of the Centor for the Protection of the Intellectual Property. He's in the tank for Qualcomm and generally for patent holders; he has been for a long time, be it at Congressional hearings, conferences, or in the media. He's extremely good at it, but to portray him as a "commentator" when Qualcomm was contemplating calling him as a witness in the January trial is a distortion.

The FTC notes that it "supports and is prepared to provide further briefing and argument on remedy should the Court’s liability ruling make such briefing and argument necessary," but in yesterday's filing also notes that the question of whether liablity and remedy should be evaluated separately had already been addressed earlier, and the parties had in fact provided briefing on remedy as the FTC's summaries of various documents (or passages thereof) show:

  • ECF No. 314: "Court rejecting Qualcomm bifurcation proposal"

  • ECF No. 916: "extensive discussion of remedy issues"

  • ECF Nos. 928, 929, 932, 933: "party briefs on remedy evidence"

  • ECF No. 967: "Qualcomm proposed conclusions of law on remedy"

There's no question that the DOJ's Antitrust Division is trying to help Qualcomm against the FTC (and, by extension, Apple, whose credibility the DOJ's statement calls into question), but this effort is unlikely to bear any weight whatsoever with Judge Koh and, with respect to the FTC, may even have been counterproductive. The FTC is a government agency, but it's independent: the President appoints the commissioners, but he can't fire them during their term. The DOJ's Antitrust Division, by contrast, reports to the Attorney General, whom the President can replace whenever he wants. The FTC cherishes its independence, and by interfering with its case, the DOJ may actually just have created a situation in which it's institutionally important for the FTC to show its independence by statements such as the one filed yesterday and whatever statements, decisions or actions may follow. There comes a point where even a commissioner inclined or prepared to settle the case with Qualcomm on a certain set of terms may have to worry about institutional implications.

Share with other professionals via LinkedIn:

Friday, May 3, 2019

DOJ urges Judge Koh to order additional briefing and hold hearing on remedies in FTC v. Qualcomm if liability is established

Yesterday evening the United States Department of Justice filed a statement in Federal Trade Commission v. Qualcomm that is reflective of some internal division within the federal government with respect to standard-essential patent (SEP) enforcement and of a certain network of Qualcomm-aligned government officials (in this case, a former partner of a law firm that represented Qualcomm in connection with the two most important potential transactions in its history). It's a bit strange when government officials take their disagreements to court, even if only in the form of filing a statement of interest that I'll talk about in a moment.

While I guess I'm the most staunchly pro-Trump IP and tech policy blogger and frequently defend, especially on social media, the President's and his Administration's unorthodox approach to problems that multiple Democratic and Republican predecessors failed to address effectively by conventional means, there are some undeniable problems concerning the federal government's approach to IP and antitrust issues. I particularly disagree with efforts by USPTO Director Andrei Iancu to weaken the highly important Patent Trial and Appeal Board (PTAB) and to draw the wrong conclusions from the Supreme Court's Alice opinion, and with pretty much everything that Assistant Attorney General Makan Delrahim says about SEP enforcement, especially a completely absurd threat against standard-setting organizations that merely seek to promote patent peace and to give FRAND meaning.

Without going into too much detail on this here and now, I'd like to draw attention to an open letter addressed on April 22, 2019 to Secretary of Commerce Wilbur Ross and USPTO Director Andrei Iancu regarding calls by some organizations that the USPTO should withdraw from the 2013 "Policy Statement on Remedies for [SEPs] Subject to Voluntary F/RAND Commitments" that was originally supported by the USPTO, the DOJ, and the FTC, though the DOJ withdrew last December (a decision made by AAG Delrahim, an anti-FRAND extremist). The statement explains why and how SEP injunctions can result in patentee overcompensation that is bad for innovation, and its signatories include industry organizations like ACT | The App Association, the Computer & Communications Industry Association (CCIA), the Software & Information Industry Association (SIIA), the Fair Standards Alliance, and the Alliance of Automobile Manufacturers as well as companies including, but not limited to, Apple, AT&T, Cisco, Ford, HP, Intel, Samsung, and Verizon. Footnote 4 of that letter quotes U.S. Attorney General William Barr's 2010 testimony on potential overleveraging of patents through injunctive relief:

"[O]nce an industry has made massive investments itself in a technology covered by the patent, then the amount that the industry would be willing to pay to avoid shutting down completely are all the switching costs to retrofit its business to avoid the infringement. It no longer bears any relationship to the economic value of the patent that's being asserted.… And the amount that a company caught in that position is willing to pay, again, is grossly excessive and ends up hurting innovation …."

So yesterday AAG Delrahim's folks made a filing with the United States District Court for the Northern District of California in FTC v. Qualcomm, urging Judge Koh not to order remedies prior to further remedy-focused briefing and a hearing (this post continues below the document):

19-05-02 DOJ Statement in F... by on Scribd

It's more than a bit strange to see one government agency file a position in the name of the United States when there actually is another government agency that is party to the proceedings--and especially when the one that is the plaintiff (here, the FTC) is seeking certain remedies, including an obligation on Qualcomm to renegotiate all patent license agreements, that another agency (here, the DOJ) opposes. As most of you may remember, I attended the January FTC v. Qualcomm trial in San Jose, and I remember how Qualcomm's lead counsel, Keker van Nest's Bob van Nest, referred to the FTC as "the Government." Now the DOJ is basically saying: "No, the FTC is not the Government--we are." And it's not even necessarily the DOJ as a whole, given that AG William Barr appears to be quite aware of the issues created by SEP overleveraging as his aforementioned 2010 testimony indicated. It comes down to Mr. Delrahim and the people reporting to him.

There are Qualcomm-aligned individuals in different government agencies. Last fall I did some research on certain key players at the FTC that revealed a certain proximity to Qualcomm. As for the DOJ's Antitrust Division, even Wikipedia mentions that Mr. Delrahim used to represent Qualcomm . He's behaving as if this had never changed. Yesterday's statement was filed by his Principal Deputy Assistant Attorney General, Andrew C. Finch, who according to his LinkedIn profile was a partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and he was with that firm for almost twelve years before being appointed Acting AAG for the Antitrust Division (for a period of six months) and then, after Mr. Delrahim's appointment to that role, became Principal Deputy AAG. Paul Weiss is a great firm, but it also happens to be the very firm that represented Qualcomm in connection with two M&A transactions that failed to materialize and would have been the two biggest and most important ones in the company's history: Broadcom's failed takeover bid (Paul Weiss helped Qualcomm fend off that hostile bid with the help of a presidential veto) and Qualcomm's attempted takeover of NXP.

Just yesterday I also mentioned the fact that we're all waiting for Judge Lucy H. Koh's ruling in FTC v. Qualcomm, and I'm sure that whatever the outcome will be, she'll give her best for all the world to see. The DOJ statement, which also comes at a rather unusual time (more than three months after the trial), suggests that Qualcomm still isn't in a position to settle the FTC case, so after the recent agreement with Apple, this is now Qualcomm's biggest problem on the litigation front and an opportunity for certain people who (or, at a minimum whose firms) worked for Qualcomm in the past to try to influence the course of events.

If Judge Koh orders additional briefing and a hearing on remedy, I'm sure she'll have good reasons to do so. But I don't think she needs advice from the DOJ or anyone else. She can manage her case very well without some Qualcomm-aligned people telling her what to do, or what not to do. Unfortunately some people at the DOJ don't seem to think so, even though other federal judges (such as Judge James L. Robart of the Western District of Washington and Judge Gonzalo P. Curiel of the Southern District of California) have recently commented very favorably on Judge Koh's work.

Share with other professionals via LinkedIn:

Thursday, May 2, 2019

Qualcomm effectively granted Apple a late-payment discount worth billions of dollars: earnings forecast mentions one-time payment

After Apple, its contract manufacturers and Qualcomm settled their antitrust and contradict dispute at the beginning of a trial in San Diego (Southern District of California) two weeks ago, both parties declined to disclose any financial terms. Apparently Apple obtained a direct patent license from Qualcomm, and will use 5G modem chips from Qualcomm in some future iPhone models, and it became known that Apple would make a one-time payment to Qualcomm under the new agreement. On a conference call, Qualcomm CEO Steve Mollenkopf only said this (see a transcript published by CNBC) when asked about the financials of the deal: "Well, a deal like this, there’s a lot of value back and forth, and it's just best to keep it confidential."

The public version of the parties' motion to terminate a pending ITC investigation wasn't exceedingly informative either (this post continues below the document):

Apple-Qualcomm Motion to Te... by on Scribd

Despite the parties' efforts to keep the terms of the deal confidential, the impact on Qualcomm's financials is more than big enough that the patent licensing and chipset company had to say something in its earnings report for its second fiscal quarter of 2019, which also contains guidance on the third quarter and beyond:

"On April 16, 2019, we entered into settlement agreements with Apple and its contract manufacturers to dismiss all outstanding litigation between the parties. We also entered into a six-year global patent license agreement with Apple, effective as of April 1, 2019, which includes an option for Apple to extend for an additional two years, and a multi-year chipset supply agreement with Apple. While we continue to assess the accounting impacts of the agreements, our financial guidance for the third quarter of fiscal 2019 includes estimated revenues of $4.5 billion to $4.7 billion resulting from the settlement (which will be excluded from our Non-GAAP results), consisting of a payment from Apple and the release of our obligations to pay or refund Apple and the contract manufacturers certain customer-related liabilities. In addition, our financial guidance for the third quarter of fiscal 2019 includes estimated QTL revenues for royalties due from Apple and its contract manufacturers for sales made in the June 2019 quarter. Our financial guidance for the third quarter of fiscal 2019 also includes $150 million of QTL revenues from Huawei, which represents a minimum, non-refundable amount for royalties due by Huawei while negotiations continue. This payment does not reflect the full amount of royalties due under the underlying license agreement."

So we know now that the one-time payment is in the range from $4.5 billion to $4.7 billion. Let's compare this to the economically most important ones of the parties' positions in the just-settled San Diego case:

Instead of interest (or: interest on interest) on top of the $7 billion or more in previously-unpaid patent royalties, Qualcomm apparently had to discount its claim by several billion dollars in order to reach an agreement with Apple. The $4.5 billion to $4.7 billion amount of Apple's one-time payment is clearly a lot less than the royalties Qualcomm would have received if Apple, through its contract manufacturers, had made payments in accordance with the earlier agreement. In fact, just the "clawback" of de facto rebates would have amounted to roughly $2 billion, and if you add the "late payment charge" of $1.3 billion, then those secondary charges are almost at a level with the total amount of Apple's one-time payment.

What we don't know, of course, is whether Apple in exchange made some concessions with respect to ongoing royalties. And, of course, the hypothetical worst-case outcome of the San Diego litigation could even have resulted in a payment going north (from Qualcomm in San Diego to Apple in Cupertino).

The passage I quoted further above also mentions Huawei and the fact that there is only a short-term, provisional agreement in place between Huawei and Qualcomm. While Qualcomm is now optimistic that it's in a better position (after settling with Apple last month, and let's not forget they also signed a new agreement with Samsung last year) to work things out with Huawei, time will tell what's going to happen on that front. Huawei, with its HiSilicon chipset division, is in a very strong position vis-à-vis Qualcomm. And its U.S. revenues are practically zero now, so it's hard to see where Qualcomm could get any legal leverage over Huawei.

Here's a passage from Qualcomm's fine-print warnings concerning its forecasts:

"attacks on our licensing business model, including current and future legal proceedings and governmental investigations and proceedings, including potential adverse outcomes relating to the Federal Trade Commission lawsuit against us, and actions of quasi-governmental bodies and standards and industry organizations; potential changes in our patent licensing practices, whether due to governmental investigations, private legal proceedings challenging those practices, or otherwise; the difficulties in enforcing and protecting our intellectual property rights"

The FTC antitrust case in San Jose (Northern District of California) is still pending, and there hasn't been any motion to stay the case. Judge Lucy H. Koh may issue a ruling anytime now. She had already said at the end of the January trial that "this opinion [was] gonna take some time," and given the complexity, magnitude and profile of the case, that's understandable.

It's very hard (way harder than "bench reading") to infer much from the amount of time it takes a court to make a decision, but the passage of time does suggest to me that Judge Koh hasn't identified any quick "get out of jail free" card in Qualcomm's favor. As I noted in my commentary on the trial, Qualcomm basically dug itself in behind a last line of defense, claiming that the FTC hadn't proven actual anticompetitive harm (i.e., consumer harm resulting from its business-to-business practices), and that there were "procompetitive justifications." I think the allegedly "procompetitive" part is easy for the court to dismiss, but in order to get there, and to address actual anticompetitive harm (whatever the outcome may be on the different claims), the ruling has to address everything else.

In my opinion, the FTC is doing the right thing by giving Judge Koh the time she needs to rule on the case. They can still settle with Qualcomm after that decision, which will provide important guidance on a number of questions.

The Apple-Qualcomm dispute, too, involved some interesting legal questions. Fortunately, the Munich Higher Regional Court still seized its chance before the settlement to overturn (by ordering a stay, but based on the prediction that Apple's appeal would have been highly likely to succeed) a Germany-wide patent injunction that had come down without actually establishing an infringement. And now I hope there will be a chance for Judge Koh to adjudicate some key antitrust questions before the FTC settles with Qualcomm--and it appears we are still going to see that opinion.

Share with other professionals via LinkedIn: