Wednesday, June 19, 2019

Qualcomm elaborates on its theories of irreparable harm from immediate enforcement of FTC's antitrust remedies

Originally, Qualcomm asked Judge Lucy H. Koh of the United States District Court for the Northern District of California to set an extremely tight briefing schedule for the San Diego chipmaker's motion to stay the enforcement of the victorious Federal Trade Commission's antitrust remedies pending an appeal to the Ninth Circuit. If the court had adopted that schedule, Qualcomm would even have been prepared to waive its right to file a reply brief in a support of its motion.

But Judge Koh declined to give the FTC only a very few days for its opposition filing--and Qualcomm, though it still could have waived its right to file a reply brief, elected to file a reply brief yesterday (not a single day before the deadline) and counter not only what the FTC wrote but also the amicus curiae briefs submitted by LG Electronics and ACT | The App Association (this post continues below the document):

19-06-18 Qualcomm Reply Iso... by on Scribd

That reply brief is far more interesting--because it is a lot more specific especially on the question of irreparable harm--than the original motion. While I would categorize some of Qualcomm's reply arguments as non sequitur material and consider some others outright smokescreens, that reply brief does contain food for thought.

The first footnote is, however, almost a concession that a stay of the entirety of the FTC's remedies may have been too much to ask for:

"Should the Court determine that the irreparable harm Qualcomm would suffer as a result of provisions (1) and (2) of the injunction does not warrant a stay of the entire Order, Qualcomm respectfully submits that the Court should enter a partial stay of only provisions (1) and (2) of the injunction."

Accordingly, the reply brief focuses on the requirements to (re)negotiate agreements, to sell chips to unlicensed customers, and to extend exhaustive SEP licenses to rival chipset makers. Those requirements flow from the first two provisions of the injunction the FTC secured--the only ones with respect to which Qualcomm, according to the FTC and also in my observation, even attempted to make an irreparable-harm argument in its original motion.

As for any potentially renegotiated license agreements, Qualcomm insists that any harm could not be undone should Qualcomm prevail on appeal. Qualcomm labels as a "red herring" the FTC's argument that Qualcomm would still obtain "fair value" for its SEPs. Qualcomm says the problem is not that those new agreements would be negotiated without the well-known "No License-No Chips" kind of leverage, but "because of the need to negotiate in the shadow of an Order that declares—erroneously, in Qualcomm's view—that Qualcomm's typical licensing terms are unreasonable." The latter is, by the way, what I told CNN within less than 24 hours of the ruling.

Qualcomm is concerned about licensees stopping royalty payments "under valid contracts" (though Judge Koh's order obviously serves to invalidate many such agreements), "even if temporarily," and mentions Huawei as an example.

Then Qualcomm attacks the FTC's suggestion that Qualcomm could, after a successful appeal, seek "damages for any past infringement" against those who (at least temporarily) stopped royalty payments. Qualcomm states something indisputable: a license is a defense to an infringement claim as 35 U.S.C. § 271(a), the statutory definition of infringement of a U.S. patent, applies only to those who practice a patented invention "without authority."

Qualcomm is furthermore worried that the non-discrimination provision of its FRAND licensing commitment or "most favored" provisions in some of its license agreements could ultimately drive Qualcomm's royalties to the "lowest common denominator."

Qualcomm, with a declaration by one of its licensing executives (John Han), alleges that it would be impossible to prevent irreparable harm by agreeing only on "short-term or interim licenses" (as the FTC called them) or (again quoting the FTC) "contractual provisions that would mitigate or eliminate any long-term adverse consequences to Qualcomm").

All of that needs to be considered, but none of it is convincing. The appeal will take time, but we're talking about roughly a year. Negotiations, however, also take a fair amount of time. The FTC v. Qualcomm decision doesn't require Qualcomm to accept a specific set of terms within a short time frame lest the company be held in contempt. I believe it just comes down to how much of a risk Qualcomm is willing to take when betting on a successful appeal. If Qualcomm really was sure that it would prevail, then it could insist on contractual provisions that protect its rights, and there would not be any contempt sanctions before the Ninth Circuit decides. And what's practically totally impossible is that Qualcomm could not only be forced to enter into a license agreement on unfavorable terms with a first licensee and that a second licensee would then have enough time to also get a better deal (or an adjustment under a "most favored" clause) before the Ninth Circuit renders a decision. And even if the appeal surprisingly took longer, anything that happens as a result of a decision that is being appealed would hardly serve as a FRAND benchmark in any other litigation. I would expect any other case to simply be stayed in that event.

What Judge Koh could do now is provide some guidance to Qualcomm on what structural options it does have even if a stay is denied (such as that Qualcomm would not act in contempt of the injunction if it insisted on contractual provisions that protect its rights, including retroactive adjustments, in the event of a successful appeal). Maybe Qualcomm is primarily hoping to obtain such clarification while formally moving for a stay.

With a view to LG Electronics, which supports the FTC's opposition to Qualcomm's motion, Qualcomm contradicts LG's description of the state of negotiations between the parties. Qualcomm notes that it "continuously supplied chips to LGE, without any interruption, throughout the negotiations"--but if it intended to do so going forward, the injunction against its "No License-No Chips" tactics wouldn't make a difference. Qualcomm mentions "a written offer to enter into binding FRAND arbitration with LGE to try and resolve the dispute, which included an express guarantee of chip supply during the pendency of the arbitration, but LGE declined that offer." As I've explained on various occasions, including my FTC v. Qualcomm trial coverage, arbitration isn't necessarily fair. Without the right parameters, it can give an extremely unfair advantage to a patent holder making out-of-this-world royalty demands since the licensee can't counterbalance a supra-FRAND royalty demand by proposing a negative royalty.

Qualcomm also argues that a requirement to sell chips to unlicensed OEMs would have profound implications due to patent exhaustion. Qualcomm rejects the FTC's argument that Qualcomm should simply "price[s] its modem chips to reflect the fair value of its patents" (which, by the way, pretty much every other chipset makers does, and even Qualcomm does so in some other business areas than cellular modems). Qualcomm argues that it would either lose chip sales or its ability to fully monetize its SEPs "so long as other chip makers are not licensed and thus do not price into their chip offerings the cost of Qualcomm's patents, this would leave Qualcomm in the untenable position of either charging much more for its chips than do its competitors (and therefore likely losing the sales), or reducing its chip prices so that, once again, they do not reflect the fair value of Qualcomm's patents."

The passage I just quoted may very well be the weakest one in that entire reply brief. If its chipset makers aren't licensed, then this is an apples-to-bananas comparison as device makers (as many of them--and competing chipset makers such as Intel--testified in the FTC litigation) would still have to factor in the cost of licensing Qualcomm's patents.

Finally, and as we all know, Qualcomm dreads the notion of having to extent exhaustive SEP licenses to rival chipset makers. But Qualcomm's argument for a stay of that particular provision comes down to what Judge Koh has already rejected at the merits stage: the question of efficiency of multi-level licensing (licensing cellular SEPs to baseband chipset makers and other patents to device makers) versus component-level licensing. Qualcomm says that neither OEMs nor chipset makers would jump to pay royalties, so there would be disputes over whether certain patents are practiced by particular products or not. Qualcomm describes this as a risk of "obstruction and delay," but that holdout-style argument does not appear to be sufficient to make a case for irreparable harm. Other patent holders face those challenges all the time (as the FTC noted in its opening statement back in January).

In that context, Qualcomm also demands "adjudicative comity" (respect for other jurisdictions) because its settlements with China's NDRC and the Taiwan Fair Trade Commission did not involve a requirement to extend licenses to rival chipset makers. I don't understand the comity issue here: if additional parties get licensed, it doesn't frustrate any policy or decision by other antitrust agencies. If the NDRC or the TFTC settled their cases without such a requirement, why would it hurt them if, say, MediaTek obtained a license as a result of the U.S. FTC case? I can't think of any negative effects on competition in those markets.

Part B of Qualcomm's reply brief addresses the likelihood of success of its appeal, with an emphasis on the need for a court to determine that violations are "likely to reoccur" before the FTC can be granted the injunctive relief it successfully sought here. What is missing here is a proposal for how an antitrust offender in a dynamic market could ever be enjoined from some behavior since the court would always have to set some sort of cutoff date.

Part C, finally, makes a national security-centric public-interest argument, with a particular focus on the decision by the Committee on Foreign Investment in the United States (CFIUS) to block Broadcom's attempted acquisition of Qualcomm. The FTC's position was that the CFIUS decision was unrelated to the behavior at issue in the antitrust case, but Qualcomm points to the CFIUS's position that "[c]hanges to Qualcomm's business model [as a result of an acquisition by Broadcom] would likely negatively impact the core R&D expenditures of national security concern." I tend to agree with Qualcomm that the content of the CFIUS letter is significantly more helpful in the public-interest context of the motion to stay than the FTC acknowledged. However, the CFIUS did not block Broadcom's hostile takeover of Qualcomm in order to enable continuing antitrust violations.

What I found interesting is that, with reference to ACT | The App Association's amicus brief, Qualcomm's reply brief also refers to the European SEP policy debate and, specifically, the two competing CWAs (CEN-CENELEC Workshop Agreements). One of the exhibits attached to Qualcomm's reply brief is CWA1, which Qualcomm and similarly-minded companies support, while there is far broader and stronger support for CWA2.

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Tuesday, June 18, 2019

Anatomy of a patent case gone awry: appeals court's order to stay enforcement of Munich fake injunction published

This is a long-overdue follow-up to a post of two months back on an order by the Oberlandesgericht München (Munich Higher Regional Court) granting a motion by Apple to stay the enforcement of Qualcomm's illegitimate (for multiple reasons) Germany-wide injunction over EP2724461 on a "low-voltage power-efficient envelope tracker"--a patent that an opposition panel of the European Patent Office revoked last month because it shouldn't have been granted in the first place, not even in a narrower form (Qualcomm can and likely will appeal that decision). And Judge Lucy H. Koh's landmark FTC v. Qualcomm antitrust ruling came down that same week.

Of all the cases I've watched since I started this blog nearly a decade ago, what went wrong in this Munich case makes it the worst non-standard-essential patent case by a wide margin, just like the district court's Oracle v. Google rulings were the worst in any software copyright case and the Mannheim Regional Court, in 2012, set a negative example for how to handle a standard-essential patent (SEP) case when it totally failed to recognize Motorola Mobility's blatant antitrust violation by seeking to enforce SEPs after initially making bad-faith out-of-this-world royalty demands (a royalty on computers that was effectively more than a 100% royalty rate since Microsoft would have had to pay Motorola more than it typically earned per copy of Windows sold to an OEM). Apart from that, I've certainly seen--and keep seeing--very bad stuff coming out of the Eastern District of Texas on various occasions, but those weren't cases I followed closely.

The regional government of the state of Bavaria published the December 2018 fake injunction ruling, but I still haven't been able to find a public redacted version of the appeals court's order that tears the fake injunction into pieces, so I'm going to publish it here and now (this post continues below the document):

19-04-09 OLG München Ausset... by on Scribd

There's a host of reasons any single one one of which would have been sufficient for the appeals court to conclude that Apple was more likely than not to get the lower court's ruling overturned at the end of the appellate procedings (which were cut short by the Apple-Qualcomm settlement). The likelihood of success of an appeal is also extremely key to obtaining a stay in the U.S., but even more so in Germany, where irreparable harm is just a requirement and given less weight. When Apple brought its motion in December (one day after the lower court's ruling), there would have been a stronger irreparable-harm argument than after a workaround involving Qualcomm's baseband chipsets became known, but again, what mattered here was just the likelihood of success of the appeal.

Apple requested not only a stay for the duration of the appellate proceedings (which was granted) but also a stay for the period during which the appeals court considered the motion for a stay. The latter was denied. The order explains that such a short-term stay is granted only under the most egregious of circumstances, and the unavailability of products due to the enforcement of a patent injunction is insufficient to justify such a short-term stay in its own right.

The order does not make reference to antitrust or invalidity arguments. I suspect that Apple did pursue its antitrust defense (which the appeals court didn't have to reach, however, after granting the stay on an infringement-related basis), while it is possible that the invalidity defense was not stressed in the motion for a stay. At the time the lower court handed down the injunction, the EPO's preliminary opinion was that the patent was valid, though the preliminary opinion did mention that certain issues would have to be discussed (and indeed, the patent got invalidated in May).

As the injunction had been granted on an agnostic basis (without an actual infringement having been ascertained), the appeals court's order to stay enforcement does not--because it does not have to--provide clarity as to whether or not there was an infringement. The stay was ordered because the appeals court concluded that the original reasoning of the Landgericht München I (Munich I Regional Court) could not stand, and in that situation the patent holder no longer has a legitimate interest in enforcement regardless of whether (such as on remand) an infringement might be identified later on. In other words, there was no right-for-the-wrong reasons analysis. But it's highly unlikely at any rate that there was an infringement, given that the United States International Trade Commission (first its most experienced Administrative Law Judge and then the Commission, which is the six-member decision-making body at the top of the U.S. trade agency) and the United States District Court for the Southern District of California (on summary judgment, which is relatively unusual on the factual aspects of an infringement) had all the evidence and testimony before them and agreed with Apple's primary non-infringement argument.

The standard of review for the different parts of the lower court's decision to deem Apple's non-infringement defense insufficiently substantiated (which is why it allowed Qualcomm to prevail even without actual proof of infringement) is either the equivalent of "clear error" or "abuse of discretion" under U.S. law--and since the appeals court adjudicated a motion for a stay as opposed to a full-blown appeal, the hurdle for Apple was to show clear error or an abuse of discretion in such a convincing way that the appeals court was enabled to reach such conclusion on a basis comparable to a summary judgment.

The combination of the standard of review and the limited scope of the analysis is the reason why some of Apple's attack vectors didn't succeed. They might have succeeded under the framework of full-blown appellate proceedings, but not at this stage.

While I can understand that the appeals court afforded the lower court some deference, there is one argument that Apple made in its motion that really should have succeeded even under the given circumstances. The lower court should not have condoned Qualcomm's German lawyers' refusal to submit to the protective order that the same firm had negotiated with Qorvo, the maker of the accused envelope-tracker chip, in the Middle District of North Carolina. The appeals court cites to an unpublished ruling it made in an earlier case, and apparently the Munich Higher Regional Court is uncomfortable with the implications of a plaintiff's lawyers being precluded from discussing a piece of evidence (here, the chipset schematics obtained through a U.S. discovery proceeding for the stated purpose of using them--though it never happened due to Qualcomm's about-face--in the Munich litigation) with their clients' engineers. There wouldn't have been a contempt-style sanction if Qualcomm had refused to do so, but the lower court could and in my view should have drawn an adverse inference.

Between the lines of the related passages the Munich appeals court appears to be concerned about U.S. discovery rules and the related opportunities for access to documents, but also the restrictions that are imposed by protective orders, playing too big a role in German patent infringement proceedings. What I find disappointing is that the appeals court would even have that concern in a situation in which the relevant party (here, Qualcomm) itself initiated a U.S. discovery proceeding under 28 U.S.C. § 1782 for the specific purpose of presenting the material so obtained in Munich, and negotiated a protective order there, but then deems it opportune to keep such critical evidence out of the German case by way of the German lawyers declining to enter into the protective order. This is a matter of legal culture, of course, and I could name a number of federal judges in the U.S. (outside the Eastern District of Texas, obviously) of whom I'm sure they would never ever tolerate such extreme and obvious gamesmanship. Again, the appeals court might have decided differently at the end, but my reading of the passage relating to Qualcomm's about-face (regarding the presentation of the chipset schematics) is that there was, at a minimum, a rather strong tendency on the appeals court's part to accept Qualcomm's conduct.

Nevertheless, the outcome was the right one: the injunction got lifted. The key to this result was that the appeals court concluded Apple's initial defense (we're basically talking about the answer to the complaint) was good enough that Qualcomm would have had to do more to prove an infringement. The appeals court identified two errors on the lower court's part in this regard:

  • The court-appointed expert, the narrow scope of whose engagement was just a kind of plausibility check, had opined in the November 2018 trial that an alternative solution (without an "offset," which was the claim limitation at the heart of Apple's primary non-infringement contention) would be less efficient than the method covered by the patent. But inferior or suboptimal efficiency is separate from whether Apple met its burden of showing that an "offset" wasn't necessarily required. The lower court, however, erroneously concluded from the expert's opinion on inferiority that Apple had failed to show that the desired effect could possibly be achieved in the absence of an "offset."

  • Qualcomm's infringement theory, based on an inherently unreliable teardown report, involved the presence of a digital-analog converter (DAC). While Apple conceded that there was one around, its lawyers also stressed that it was not used in the mode of operation relevant to the alleged infringement. The appeals court has thankfully corrected the lower court's plaintiff-friendly error that consisted in a misreading and misapplication of the Rangierkatze (Shunting Trolley) ruling by the Bundesgerichtshof (Federal Court of Justice; the highest court in Germany for the substantive aspects of patent infringement and patent validity cases). In September 2018 I discussed Shunting Trolley in connection with another Munich Qualcomm v. Apple infringement case.

    In 2016, Judge Dr. Matthias Zigann (for whom this envelope tracker case here is really an outlier!) gave a great presentation (PDF) at a Federal Patent Court conference on predicting and applying the guidance provided by the Federal Court of Justice.In that one he discussed the difficulties involved, including threshold questions where the top court agreed with a defendant in one case and with a plaintiff in a structurally similar case. No doubt about those troublesome issues--but when it comes to Shunting Trolley, I really think it's a pretty straightforward one to understand to apply:

    In the narrowest sense, Shunting Trolley said that a manual containing a recommended mode of operation cannot cure an infringement that occurs regardless, be it by a user choosing a different mode, by environmental conditions, or even happenstance. The guidance resulting from that narrow issue is admittedly a bit broader. But even the German equivalent of a SCOTUS syllabus here still makes it clear that an infringement requires each claim limitation to be practiced. So whenever a patentee or a court suggests (as Qualcomm did in a different Apple case involving the Spotlight search) that Shunting Trolley provides a substitute for the infringement of each and every claim limitation, I would like to ask them: "Which part of 'each' don't you understand?"

    In the envelope-tracker case (unlike the Spotlight case), the issue was not the "each" but the question of whether a user could modify the product as to render it infringing. The Munich Higher Regional Court convincingly explains that Shunting Trolley does not have scope for an infringement in that Qualcomm v. Apple case, where the DAC would only come into play in the relevant mode of operation if an iPhone user modified the firmware (program code) executed by Intel's baseband chip, which then controls the Qorvo envelope-tracker chip in a certain way. Unlike the "each" question, this isn't a binary one. However, Shunting Trolley was about the manual operation of a brake, or even totally automatic events, and, therefore, lightyears away from reverse engineering and tampering with the firmware of a baseband chip (which presumably consists of millions of lines of code, by the way).

Against the background of those errors, the appeals court found that Apple's non-infringement argument was sufficiently substantiated; that Apple's request to reopen the proceedings should have been granted; and that the lower court should have allowed Mike Kay, the chief designer of the accused Qorvo chip (who waited outside the courtroom for 12 hours, in vain and possibly even in pain), to testify.

I submitted information on this extreme case of wrongful enforcement of a Germany-wide patent injunction to the government officials working on what may be an injunction-centric German patent reform bill, and I was positively surprised that they acknowledged my unsolicited input (I was not among the recipients of a related questionnaire) with a rather thoughtful answer.

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Wednesday, June 12, 2019

Broadbased IoT industry support for CWA2 set of standard-essential patent (SEP) licensing guidelines and best practices

At times, courts are asked to clarify what FRAND (fair, reasonable and non-discriminatory) means for standard-essential patent (SEP) licensing terms. The two most fruitful U.S. cases in this regard have been Microsoft v. Motorola (Judge James L. Robart, Western District of Washington) and FTC v. Qualcomm (Judge Lucy H. Koh, Northern District of California). In the EU, Huawei v. ZTE proved reasonably helpful, though definitely not at a level with the aforementioned U.S. cases.

But besides litigation, policy initiatives as well as efforts by standardization bodies can and do provide orientation. In the U.S., the IEEE has become a particularly important discussion forum, and the arguably most important European guideline-development effort, a workshop under the umbrella of European standard-setting organizations CEN and CENELEC with support from Germany's DIN, has just concluded with the publication of a 51-page "CEN Workshop Agreement" on the "Core Principles and Approaches for Licensing of Standard-Essential Patents" after more than a year of discussions. The official dcoument number is "CWA 95000." The shorter name is "CWA2." Why the number 2? Because there's another set of recommendations by another group of companies, and it advocates pretty much the opposite approach, but it has considerably less support from industry than CWA2.

This is an important time for the publication of such proposed guidelines for different reasons. The industry is transitioning to 5G, and in an Internet of Things world, ever more--and an ever greater diversity of--devices will implement wireless industry standards. Also, a new EU Commission will be appointed this year, and the incoming Commission will have to address SEP licensing principles in different fields of policy-making as well as in competition enforcement.

The Fair Standards Alliance issued a press release on CWA2 this morning. The FSA partnered with ACT | The App Association. ACT already pointed to CWA2 yesterday evening in an amicus brief supporting the FTC against Qualcomm's motion for an enforcement stay. FSA and ACT teamed up with the leading German standard-development body, Deutsches Institut für Normung (DIN), and DIN served as the secretariat for this workshop.

All in all, 56 organizations have already expressed their support for the document, even including some who were not involved in the process but agree with the conclusions. Europe's largest automotive association, ACEA, and IP2Innovate, an industry group whose membership significantly overlaps with that of the FSA and which promotes reasonable patent enforcement policies (unlike the FSA, without focusing on SEPs), also agree with the CWA2 guide. Here are some of the household names among the companies listed in the CWA2 document: Apple, BMW, Cisco, Deutsche Telekom, Renault, Honda, Juniper, Volkswagen, Daimler, Ford, Hitachi, HP, Lenovo, and Toyota. If your company or other organization would also like to throw its weight behind the CWA2 guide, please get in touch with the FSA.

The supporters of CWA2 own and generate many patents, and some of them have actively enforced their intellectual property rights. In other words, they're the opposite of "infringers." But they do understand both sides of the licensing equation, and that's why the recommendations made in the CWA2 document appear reasonably balanced. They don't seek to devalue SEPs, or to enable "holdout" (the act of refusing for an extended period of time to take a license). At the same time, the CWA2 guide promotes principles that greatly reduce the risk of patent holdup (the following summary is consistent with my terminology on this blog, not always identical to the terms used in the CWA2 document):

  1. access to injunctions only as a last resort

  2. availability of licenses to all comers including chipset makers

  3. FRAND valuation based on technical contribution at time of standard-setting, without capturing post-standardization increases in value or collecting percentages of components beyond the smallest salable patent-practicing unit (SSPPU)

  4. separate availability of SEP license on FRAND terms without tying this to a license to non-SEPs

  5. no overbroad NDAs that would complicate an implementer's evaluation of assertions of essentiality or infringement in the negotiation process

  6. no circumvention of FRAND licensing obligations through tranfers ("privateering"); if SEPs are transferred, implementers shouldn't be worse off

Obviously, some patent holders with a particularly strong interest in aggressive monetization don't want any of the above. That's why there's also "CWA1" as I mentioned before. The FSA and ACT expressed their disagreement with the CWA1 approach in an open letter earlier this year. While that letter apparently didn't have the desired effect of creating more balance, it shouldn't be too hard for policy makers (such as the incoming EU Commission) to figure out which of the two sets of recommendations is conducive (CWA2), and which one is detrimental (CWA1), to innovation and competition. That's easy to tell based not only content but also by simply looking at the backers:

  • CWA2 already has 56 backers, including some of the most significant technology companies in the worldand especially in Europe, versus the 17 organizations behind CWA1.

  • While CWA2's supporters have a rather reasonable track record in patent enforcement, almost a third of CWA1's backers have been on the receiving end of antitrust complaints or antitrust lawsuits: Qualcomm (around the globe), Dolby (see this blog post by a Korean IP law firm), Ericsson (in China), Nokia, and InterDigital, which I sometimes refer to as "InterDigitroll" (they were investigated in China and sued in the U.S.).

Thanks to CWA2, there now is a comprehensive proposal for a FRAND licensing framework on the table that has the support of many large players from the automotive and information and communications technology industries. That document will be referenced on many occasions going forward, in Europe and beyond.

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LG Electronics and industry group support FTC's opposition to Qualcomm's motion to stay enforcement

This is the second part of today's little trilogy of FRAND posts. Like the previous one, it deals with some Qualcomm antitrust litigation pending in the U.S. and involves third-party submissions (amicus curiae briefs).

Yesterday evening, the FTC filed its opposition to Qualcomm's motion to stay the enforcement of antitrust remedies pending its Ninth Circuit appeal. Qualcomm had unsuccessfully moved to shorten time. The FTC's opposition brief argues that the delay requested by Qualcomm "would adversely affect competition at a critical time, just as the cellular industry is transitioning to 5G technology" (this post continues below the document):

19-06-11 FTC Opposition to ... by on Scribd

The legal standard for an enforcement stay has four prongs. Two of them merge into one when the government (as in this case) is the opposing party, as the government itself can't be harmed, so the harm to third parties (consumers or other vendors) and the public interest are then essentially the same type of concern. The other factors are whether the moving party has made a strong showing that it is likely to succeed on the merits and irreparable harm to the moving party.

Obviously, Judge Koh is not going to agree with Qualcomm that the appeal is likely to succeed. That question will become more relevant when Qualcomm takes this motion to the Ninth Circuit after Judge Koh denies the motion in whole or in part.

As for irreparable injury to Qualcomm, the FTC points out that Qualcomm doesn't even attempt to make such a showing with respect to certain provisions such as a prohibition to impose antitrust-related "gag order" (that term doesn't appear in the FTC's filing) clauses on other parties. And to the extent Qualcomm claims there would be irreparable harm, the FTC naturally disagrees. With respect to license agreements Qualcomm would have to negotiate now (absent the stay it seeks) with third parties, the FTC notes that "Qualcomm and its counsel are entirely capable of negotiating (i) short-term or 'interim' licenses and (ii) contractual provisions that would mitigate or eliminate any long-term adverse consequences to Qualcomm of a license agreement concluded during the pendency of its appeal."

I've had some discussions recently, such as with a journalist just yesterday, on whether Qualcomm would be irreparably harmed by having to renegotiate existing agreements. What I've been telling people is that there certainly would be contractual ways to address any such concerns. For an example, a "condition subsequent" could result in the rescission of a new agreement in the event Qualcomm prevails on appeal, and in that case any previously-existing agreements could enter into force and effect again, even retroactively so as to enable Qualcomm to be made whole. Where there's a will, there's a contractual way.

The point that the FTC makes about the viability of short-term interim agreements is an important one. Based on what Qualcomm tells investors, it currently has an interim agreement in place with Huawei--and an amicus curiae brief filed yesterday in support of the FTC's opposition to Qualcomm's motion for an enforcement stay shows that there also is a provisional agreement in place between Qualcomm and LG, which will expire at the end of this month (this post continues below the document):

19-06-11 LG Amicus Brief IS... by on Scribd

LG tells the court about the status of its relationship with Qualcomm and outlines its concerns that an enforcement stay would enable Qualcomm to gain leverage over LG by using some of the very tactics Judge Koh held to be anticompetitive. In December, LG (re)joined the Korean antitrust case against Qualcomm. What makes its amicus brief in Northern California interesting from a cross-jurisdictional perspective is that Qualcomm is at risk of sanctions, even under Korean criminal law, for failing to comply with a KFTC antitrust order (Qualcomm wanted its enforcement to be stayed, but the Korean court said no). Once Judge Koh's order gets enforced in the U.S., there is an increased likelihood of the Korea Fair Trade Commission putting pressure on Qualcomm to comply with the Korean decision as well.

In addition to LG, ACT | The App Association, an industry body with corporate members of different sizes, also supports the FTC against Qualcomm's motion for a stay (this post continues below the document):

19-06-11 ACT Amicus Brief I... by on Scribd

ACT frequently partners with other industry associations to promote FRAND licensing principles. Yesterday's amicus brief notes that ACT, "together with another leading industry association [= the Fair Standards Alliance], [ACT] recently co-sponsored a CEN-CENELEC Workshop bringing together more than fifty small and large industry companies to document Core Principles and Approaches for SEP Licensing, particularly for 5G applications and industries." In a footnote, ACT links to the result of that European effort, the CEN-CENELEC Workshop Agreement 2 ("CWA2"), a document describing "Core Principles and Approaches for Licensing of Standard-Essential Patents." My next post (the third and final one of today's FRAND trilogy) will discuss CWA2.

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On DOJ's behalf, former Qualcomm lawyers file amicus brief in support of Qualcomm and point to paper co-authored by Qualcomm lobbyist: Ninth Circuit appeal of consumer class certification

This is the first part of today's little trilogy of FRAND-related posts.

In early May, the Antitrust Division of the DOJ, under Qualcomm's former outside counsel and now-Assistant Attorney General Makan Delrahim, filed an amicus brief with the United States District Court for the Northern District of California more than three months after the FTC v. Qualcomm trial (!), seeking to dissuade--to no avail, as we know by now--Judge Lucy H. Koh from ordering injunctive remedies against the chipset maker that generates two thirds of its profits from patent licensing, not product sales. The FTC sharply disagreed with this attempt by a government department to influence the outcome of an antitrust case brought by an independent government agency, and Judge Koh, in her late-May ruling, gave the DOJ's initiative short shrift.

The Antitrust Division of the DOJ, which has so far been disproportionately more active filing amicus briefs than actually enforcing the antitrust laws (though Mr. Delrahim is now apparently taking aim at Apple and Google). And on Monday, the AAAG (Antitrust AAG), did it again. The latest filing supports Qualcomm's Ninth Circuit appeal of Judge Koh's certification of a 250-million-consumer class seeking an average of $20 per U.S. smartphone purchaser from Qualcomm on the grounds of supra-FRAND patent license fees ultimately having been passed on to consumes (this post continues below the document):

19-06-10 Amicus Brief by US... by on Scribd

This latest DOJ amicus brief is at least timely (filed one week after Qualcomm's opening brief in accordance with applicable rules); it is a joint filing by the DOJ with the states of Texas, Ohio and Louisiana; and while the consumer class action got consolidated with the FTC case, a reversal of class certification wouldn't weaken the FTC's case in any way, so I was going to say that at least the DOJ is not antagonizing a federal government agency again. But... unfortunately there's footnote 7, and that footnote is so insane that it makes the early-May request for a hearing on remedies appear reasonable by comparision:

"7 Caution is particularly appropriate with respect to this case because the interaction of antitrust law and patent rights in cases like this one is in flux. Although claims of the sort in this case are grounded in certain scholarly literature, see Fiona M. Scott Morton & Carl Shapiro, Strategic Patent Acquisitions, [...] (2014), such claims and theories of liability remain controversial, and more recent scholars have questioned their viability, see Douglas H. Ginsburg, Koren W. Wong-Ervin & Joshua D. Wright, The Troubling Use of Antitrust to Regulate FRAND Licensing, [...] (2015); Assistant Attorney General Makan Delrahim Delivers Keynote Address at University of Pennsylvania Law School: The 'New Madison' Approach to Antitrust and Intellectual Property Law (Mar. 16, 2018),"

First, FRAND abuse is not just a subject of academic debate as the term "grounded in certain scholarly literature" suggests. There's FRAND case law in the U.S., especially in the Ninth Circuit. Decisions, not just writings.

But the unbelievable absurdity here is something else. AAG Delrahim was outside counsel for Qualcomm for many years (which may be the reason for which he didn't formally sign last month's filing with Judge Koh's court); as I already pointed out last month, his deputy Andrew Finch joined him from a law firm that has also done a lot of high-profile work for Qualcomm. So the two first signatories of the filing are former Qualcomm lawyers who behave as if they were still were. That would be a credibility issue, but what is really an insanity here is that they seek to support their claim of FRAND antitrust laws being "in flux" by pointing to "scholars" taking that position--and then they point to a paper co-authored by Qualcomm lobbyist Koren W. Wong-Ervin (whom I already mentioned last fall) and a speech by Mr. Delrahim (again, a former Qualcomm lawyer) himself.

Mrs. Wong-Ervin is just one of three authors of that paper; but the fact that someone who shortly thereafter was hired to become a Qualcomm lobbyist was involved taints that paper in this Qualcomm-specific context.

So they ignore U.S. case law on standard-essential patent (SEP) abuse by portraying it as just a subject of academic debate, and then they suggest there's a more recent countercurrent, but they base that claim on a paper co-authored by a Qualcomm lobbyist and a speech by Qualcomm's best friend in the U.S. government (and the first signatory of the amicus brief in question), Mr. Delrahim.

The DOJ can do better than that. I really do have the greatest respect for the department and have supported the DOJ's positions on various occasions (once even in the "travel ban" context), but--sorry to say so--no matter how hard I try, I can't have respect for such idiocies as footnote 7.

Other than that footnote, that amicus brief is reasonable, even though reasonable people can disagree with it. The key antitrust issue here is this: Illinois Brick doesn't give indirect purchasers (here, the consumers bought phones, but the makers of those devices paid patent royalties to Qualcomm) standing to seek damages under federal antitrust laws; but many states have, as some say, "repealed" (or one might also say "worked around") Illinois Brick by allowing such claims under state competition laws. California is one of those "repealer" states, while the states that joined the DOJ in this week's filing (Louisiana, Ohio, and Texas) are among the states that declined to do so. The biggest question in this appeal is whether Judge Koh correctly held that states like the three I just mentioned have no interest in precluding their citizens from seeking compensation from a California company (here, Qualcomm) under California state law, given that many or even most of them presumably purchased their phones in their home states, not California.

The U.S. Chamber of Commerce has also filed a brief in support of Qualcomm's appeal of the class certification decision, as has the Washington Legal Foundation.

While I think Judge Koh's class certification decision should be upheld, I wouldn't deny that Qualcomm and its amici reasonably dispute that California law should benefit non-Californian smartphone purchasers. The federal government as well as some "non-repealer" states can legitimately raise a federalist issue here, whether or not one ultimately agrees with them. But footnote 7 is just too much. It shows that the DOJ's Antitrust Division, under AAG Delrahim, is simply in the tank for Qualcomm. "Qualcomm, right or wrong, our former client"--that appears to be the attitude. And it led those Qualcomm allies to claim that "scholars" disagree on how to handle the complicated intersection of patent rights and antitrust laws only because Qualcomm and its allies, unsurprisingly, have a certain position.

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Sunday, June 9, 2019

The winner of the 'battle royale' of FTC v. Qualcomm expert witnesses: Richard Donaldson (ex-Texas Instruments)

Credit where credit is due. This is a post I decided to write within 24 hours of Judge Lucy H. Koh's landmark FTC v. Qualcomm antitrust ruling. Then I procrastinated because of so much else going on.

For the non-gamers reading this I'll quote Wikipedia's "battle royale" definition first:

"A battle royale game is an online multiplayer video game genre that blends the survival, exploration, and scavenging elements of a survival game with last-man-standing gameplay. Battle royale games involve a large number of players, ranging from dozens to hundreds, that start with minimal equipment who then must eliminate all other opponents while avoiding being trapped outside of a shrinking 'safe area', with the winner being the last player or team alive." (emphasis in original)

The FTC v. Qualcomm trial in the Northern District of California in January was a colossal clash of expert witnesses opining on licensing terms, negotiation dynamics, component-level licensing, ultimate consumer harm, and various related issues. A recent op-ed by a notoriously 100% Qualcomm-aligned "analyst" may serve as an indication that Qualcomm's Ninth Circuit appeal will accuse Judge Koh of not having paid enough attention to Qualcomm's economic theories (I disagree because I think she was underwhelmed by that nonsense for all the right reasons).

It's not just that Qualcomm's experts failed to impress. Judge Koh also declined to subscribe to parts of FTC expert Michael Lasinski's methodology--and she didn't mention the FTC's economic expert witness, Professor Carl Shapiro (UC Berkeley), at all in her ruling. That doesn't mean that Professor Shapiro's efforts didn't contribute to the outcome. What he explained about how Qualcomm's different anticompetitive tactics resulted in supra-FRAND royalties and how those were ultimately passed on, at least in part, to consumers (and affected consumers indirectly by reducing competition at the chipset level) made a lot of sense. He also dismantled Qualcomm's experts' testimony very effectively, such as pointing out the "bankruptcy" of Professor Aviv Nevo's argument. By not mentioning Professor Shapiro at all, Judge Koh made it impossible for Qualcomm to argue on appeal that she relied on Professor Shapiro's testimony in any way (Qualcomm accused him of failing to take an empirical perspective, but whether or not his approach was too theoretical is mooted by Judge Koh's ruling). The strong parts of the evidence and testimony supporting the FTC are actual industry testimony and Qualcomm-internal communications, and that combination--not economic theories--is going to complicate matters for Qualcomm on appeal.

The single most impactful expert witness in this case was Richard Donaldson, who prior to becoming a consultant and expert witness on patent licensing spent 31 years at Texas Instrument in capacities including that of General Patent Counsel. In my trial coverage I mentioned how he got cut off by one of the attorneys representing Qualcomm. Judge Koh was also upset about that. But rudeness was no path to victory. Instead, Mr. Donaldson's testimony turned out more relevant than what any other expert witness in this case (if not even all of them combined) said.

I'll now quote and briefly comment on the passages of the ruling that mention Mr. Donaldson:

"Expert testimony was consistent with the documentary evidence and OEM testimony. Richard Donaldson, the FTC's licensing expert, explained that Qualcomm's royalty rates should decline over time because handsets are now essentially computers:

"[I]n the case of Qualcomm when rates were first established back when CDMA was used in telephones were our cell phones were – it was just a cell phone. No other capabilities. And those products have changed dramatically over the life since then and we now have smartphones with many, many features that do not infringe the cellular patents, the SEPs. So I would expect that to drive a lower royalty rate."

COMMENTARY: The term "lower royalty rate" implicitly presupposes an unchanged royalty base (and, more generally, all other things being equal). Of course, the royalty rate poses a new question once the base changes.

"Richard Donaldson, the FTC's expert, testified consistently: 'Many of Qualcomm's early patents are expiring which, in my experience in license negotiations, when your portfolio is weakened by expiring significant patents, the royalty rate would typically decrease.' [...] Yet Qualcomm's rates have not decreased, which further indicates that Qualcomm's royalty rates are unreasonably high."

COMMENTARY: This was also pointed out by current industry executives (thus the word "consistently" after "testified"). What's important here is not to just count patents because obviously Qualcomm's portfolio kept growing. It's about how important the relevant patents are/were, about how much leverage they gave or continue to give Qualcomm.

"Richard Donaldson, the FTC's licensing expert, offered expert testimony consistent with Qualcomm's documents and OEM testimony. Donaldson testified that in a typical negotiation, a licensee always has FRAND litigation as a recourse: '[I]f he is of the opinion that what is being proposed, the rates being proposed are unreasonably high, he would have an expectation that a reasonable court would lower what a reasonable – his determination of a reasonable royalty.' [...] However, Qualcomm's licensing practices removed that option: '[I]t would put the licensee at a severe disadvantage. He's basically – and as the testimony reflects – he's basically in the position, I agree to the license or basically go out of business.' [...] Consistent with the trial evidence, Donaldson opined that this dynamic 'results in a disproportionately high royalty rate.'"

COMMENTARY: The above was also explained by Professor Shapiro on the basis of general bargaining theory. But Judge Koh apparently determined that testimony from someone who had spent 31 years in the field of wireless standard-essential patent licensing was the most reliable and appeal-proof basis for her decision.

"In addition, Donaldson testified that from 2006 to 2016, Qualcomm was involved in only two patent litigation lawsuits 'unrelated to enforcing the SEP patents.' [...] By contrast, other SEP holders like Ericsson, Nokia, and InterDigital each were involved in more than twice as many patent litigations over the same period. [...] (chart comparing litigation by company). According to Donaldson, those figures undersell the effect of Qualcomm's licensing practices:

Ericsson, Nokia, and InterDigital did not have a no license, no chip policy, so their negotiations would have always included, or been negotiated in the shadow of what possible legal remedies might exist, which would have – which would suggest that they would have been more reasonable in setting what their royalty demands were and avoiding litigation in a number of cases that aren't reflected here.

[...] Because Donaldson's testimony was consistent with Qualcomm's documents and the trial evidence, the Court finds reliable his opinion that Qualcomm's monopoly chip power both sustains Qualcomm's unreasonably high royalty rates and prevents litigation to challenge those royalty rates."

COMMENTARY: When "the Court finds reliable" what someone's testimony is all about, agrees with the reasoning and bases a historic decision on it, it's "mission accomplished" for the expert.

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Saturday, June 1, 2019

Upcoming conferences (U.S., EU) on chipset-level patent licensing and the royalty base in automotive and other high-tech products in light of FTC v. Qualcomm

While I routinely talk to professional investors about key IP and antitrust developments (such as on a highly successful conference call hosted by Susquehanna International Group last week), I haven't spoken at, much less organized, conferences in a long time. But Judge Lucy H. Koh's FTC v. Qualcomm antitrust ruling in the Northern District of California is--while this kind of clear-cut guidance was overdue in my view--a watershed moment for patent licensing practices and damages theories. By virtue of having followed FRAND licensing issues since 2010 and FTC v. Qualcomm from the get-go (including that I attended the entire January trial) it's fair to say that I'm uniquely positioned to discuss the impact, implications and ramifications of the decision as well as related matters, such as certain antitrust complaints Daimler and its suppliers lodged with the European Commission and a Continental complaint against the Avanci patent pool company in the Northern District of California.

Judge Koh's ruling is now being appealed. The notice of appeal was filed on Friday, and a motion to stay enforcement is pending as well. But even if Qualcomm obtained some kind of enforcement stay, there will be important developments in various jurisdictions, and Judge Koh, arguably the world's leading technology judge by now, has the potential for thought leadership not only in other U.S. federal districts and circuits, but even overseas.

Component-level patent licensing is a hot topic particularly (though not exclusively) for the automotive industry, which sees itself increasingly exposed to demand letters and lawsuits.

At a one-day conference in Northern California (for U.S. and Asian attendees) and another one in the Munich area (for a European audience), I am going to discuss the following aspects and implications of the chipset-level licensing and royalty-base parts of Judge Koh's opus magnum:

  1. The FTC v. Qualcomm ruling, the underlying testimony, and the parties' arguments

  2. Outlook: next procedural steps; prospects of affirmance, reversal, certiorari, or settlement

  3. Comparison to other U.S. case law (Microsoft v. Motorola, GPNE Corp v. Apple, HTC v. Ericsson); Entire Market Value Rule and smallest salable patent-practicing unit (SSPPU); influence of FTC v. Qualcomm on other U.S. decisions

  4. Patent exhaustion and its attempted circumvention (covenants not to sue, covenants to exhaust remedies)

  5. Chipset licensing and standard-setting organizations' FRAND licensing guidelines

  6. Automotive antitrust complaints (Continental v. Avanci, DG COMP complaints by Daimler, Bury et al.)

  7. Potential for adoption of Judge Koh's reasoning in Europe under Art. 102 TFEU

  8. Is legislative action warranted/desirable or can case law solve the problem?

  9. Panel discussion (ideally, a neutral moderator and two speakers from each side of the debate)

It's no secret that I've taken pretty clear positions on the issues. However, that never prevents me from accurately summarizing what the other side claims and argues, as my Wall Street clients and listeners know.

I thought about possibly partnering with law firms on this, but frankly, I can't think of a firm that wouldn't also represent at least some clients seeking to maximize their patent licensing revenues, so I felt it would be better for me to stay independent. However, I would entertain sponsorships, provided they can be properly disclosed and don't constitute a conflict of interests affecting what I will say at the conferences, much less what I write on this blog (not an issue if an organization's views on component-level patent licensing are consistent with mine).

At this point there are no definitive conference dates, but I do plan to turn this around rather quickly. I'll be very receptive to what you have to say, and it would really help to know how many of you are interested in attending at a market-level attendance fee (and in which of the two locations). So please drop me an email at if these conferences are potentially relevant to your work. Thanks in advance!

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