Saturday, November 30, 2019

Four IT industry bodies support FTC against Qualcomm's appeal: once again, The Industry v. Qualcomm

In the January 2019 trial, Qualcomm's #1 problem was that virtually the entire mobile device industry testified against it (apart from a very few companies who, like Qualcomm, refuse to license chipset makers, though a couple of them once lodged their own antitrust complaints against Qualcomm for that reason). In terms of amicus briefs filed with the Ninth Circuit, it's pretty much the same picture again: companies who failed in the mobile phone business and trolls support Qualcomm (as does Makan "Macomm" Delrahim, the Antitrust Assistant Attorney General who used to work for Qualcomm), while the rest of the industry presents a united front and supports the FTC.

The collective membership of the four high-tech industry bodies who filed amicus curiae briefs in support of the FTC goes far beyond the ones whose testimony mattered to the district court. That's because those organizations have many members who care about standards but don't necessarily implement the cellular standards at issue in this particular case.

The groups who have now made filings for the FTC and against Qualcomm cound companies like Amazon, Apple, Google, Facebook, Microsoft (those five are sometimes collectively referred to as "GAFAM") among them, but also the likes of Intel, Cisco, eBay, Salesforce, Uber, and major carriers like Sprint, T-Mobile, and Verizon.

That's basically the most vibrant part of the U.S. economy. (We'll also talk about a couple of briefs filed by automotive industry groups, but not in this post.) And as the briefs note, those companies invest huge amounts in R&D and hold vast numbers of patents.

Unfortunately, Macomm Delrahim can make--or tell his subordinates to make--filings in the name of "the United States." But in reality he just advances his own agenda, which is precisely that of his former long-time (and presumably future) client--and it has nothing to do with MAGA. With almost the entire U.S. tech industry against him, he's clearly a liability for the Trump Administration. Former Republican government officials such as former Secretary of Homeland Security (under President George W. Bush) Michael Chertoff and former FTC chairman (under the same president, but also in senior FTC positions under President Reagan) Professor Timothy Muris publicly disagree with Mr. Delrahim.

I regret to say so despite, to the best of my knowledge, being the only tech/IP blogger to have declared himself a Trump supporter roughly four years ago and having repeatedly (mostly on social media) supported the President. But the DOJ Antitrust Division's amicus briefs in this context here are absurd, and that's why I'm glad the industry tells the United States Court of Appeals for the Ninth Circuit what's truly in the interest of the U.S. economy.

For the most part, the four briefs just reinforce the FTC's points and explain the importance of standard-setting and compliance with FRAND licensing commitments (including licenses to chipset makers) from an industry perspective. While it's very important that the industry at large makes this effort, there's nothing surprising in there, apart from a reference in ACT | The App Association's brief--which also talks about the need for thousands of small IoT innovators to have access to SEPs on FRAND terms--to a case in which SEP-related issues allegedly prevented innovative products from being created:

"The Association has direct experience with the deleterious effect of SEP abuses. For example, one of our members sought to develop a novel drone device (and associated software platform) for firefighting agencies, which would have enabled firefighters to monitor and address dangerous conditions. Concerns over after-the-fact SEP abuses ultimately swayed the member not to bring the product to market, however. In short, the company’s inability to have certainty regarding product costs undermined an otherwise-innovative new business."

It's important to know that ACT's members are thousands of small and medium-sized companies, though it also has a few supporters among large players.

Here are the four filings by tech industry associations (in alphabetical order--ACT | The App Association, CCIA, Fair Standards Alliance, and High Tech Inventors Alliance):

19-11-27 ACT acb by Florian Mueller on Scribd

19-11-27 CCIA acb by Florian Mueller on Scribd

19-11-29 FSA acb by Florian Mueller on Scribd

19-11-29 HTIA acb by Florian Mueller on Scribd

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Former Secretary of Homeland Security, former FTC chairman, and conservative think tank dismiss Qualcomm's and DOJ's "national security" arguments

In its answering brief to Qualcomm's Ninth Circuit antitrust appeal, the FTC says Qualcomm simply "abandoned" its national security argument before the district court and can't revive it now. Nevertheless, many of the (by now) 14 amicus curiae briefs supporting the FTC address the topic to some extent--and the one filed by the R Street Institute (a think tank close to the GOP) even focuses entirely on why any "national security" concerns over Judge Lucy H. Koh's ruling are unfounded because, if anything, Qualcomm's monopoly poses a threat to national security (this post continues below the document):

19-11-28 R Street Institute... by Florian Mueller on Scribd

The author, Charles Duan, is a well-known amicus brief writer. He always writes persuasively and comes up with interesting thoughts. In the past I agreed with his views in some cases and disagreed in others. With respect to FTC v. Qualcomm, I find parts of his brief a bit far-fetched, but in principle I agree with most of what he wrote.

The R Street Institute argues that "patents and even market concentration can also foster innovation, but only to a degree." Healthy competition is still required: "[S]trong patent protection is complementary to strong competition; the former does not promote innovation without the latter."

The brief gives examples of cases in which there was either hard evidence or at least some indication that patent holders who enforced their monopolies too aggressively or sought to charge unreasonably high royalties imperiled U.S. national security. Those examples include the Wright Brothers' patent enforcement against competitors, which had a chilling effect on the U.S. aviation industry (compared to European counterparts) in the early 19th century, a temporary shortage of torpedoes (which forced the U.S. to buy them from a power that was on the verge of becoming an enemy), or the problems the U.S. government faced when chemical company Bayer wanted to charge a rather high per-unit price for Cipro, its anthrax drug, at a time when the U.S. (after 9/11) had to fear a large-scale anthrax attack. Mr. Duan describes those situations in a balanced way, also pointing to criticism of certain views.

What doesn't convince me is his "monoculture" argument. That's a strong point with respect to software (operating systems and key applications) that can be infected by viruses. I can't imagine a virus could take control of a Qualcomm baseband chip.

But he does have a point that competition fosters innovation and, ultimately, is the best recipe for U.S. technological superiority. The notion that Qualcomm should now be afforded special protection because it drove various U.S. competitors out of business (which is basically what Qualcomm and its friends at the DOJ suggest) is truly absurd.

The R Street Institute's brief points to a recent op-ed by former Secretary of Homeland Security (under President George W. Bush) Michael Certoff in the Wall Street Journal, arguing that it's actually Qualcomm's monopoly that poses a threat to national security.

Another official who served in Republican administrations, Professor Timothy Muris, filed an amicus curiae brief this week (this post continues below the document):

19-11-29 Timothy Muris Acb by Florian Mueller on Scribd

Professor Muris was a senior FTC official under President Reagan, and FTC chairman under President George W. Bush. His brief is mostly about general principles of sound competition enforcement. This is a Republican, not a statist. More than anything else Professor Muris's brief is a response to Antitrust Assistant Attorney General Makan (I tend to call him "Macomm" because of his constant support of Qualcomm and his Qualcomm past) Delrahim's filing(s) in support of Qualcomm against the FTC--just a "historical anomaly" as Professor Muris explains.

Professor Muris recalls how somewhat similar concerns were raised almost 50 years ago in connection with the "MaBell" (AT&T) breakup, but ultimately competition had huge benefits for everyone and actually made the U.S. even more secure.

He shares a concern I also had immediately when I saw the Ninth Circuit motion panel's order granting Qualcomm a stay of the enforcement of two parts of the FTC's injunction: the order says that Judge Koh's ruling may be affirmed, but in that case it would be a "trailblazing application of the antitrust laws." Professor Muris contradicts and says the decision "fits squarely within traditional antitrust law." With respect to Qualcomm's "No License--No Chips" policy, Professor Muris notes that "[c]onditioning purchase of a monopoly product on taking a patent license is standard antitrust fare, ripe for examination under well-accepted antitrust principles."

Macomm Delrahim has a position that, according to the brief, "departs sharply from historical practices" and "abandoned the consensus among policymakers, SSOs, and courts concerning patent holdup in favor of an unprecedented position that impermissibly treats patents like natural rights—all of which underlie its position in this case." It's a widespread fallacy to consider patents a type of property like real estate with respect to the right to exclude (or to deny licenses). It's a problem in other jurisdictions as well.

Toward the end, Professor Muris also addresses "national security." He, too, points to former Secretary of Homeland Security Michael Chertoff's op-ed and argues that "[t]he better view is that the loss of innovation from Qualcomm's anticompetitive conduct, giving Qualcomm monopoly protection, is as much, if not more, a national security issue. Some reduction in SEP royalties that Qualcomm may receive going forward doesn't pose a fundamental threat to a company that "is extremely well capitalized with over $12 billion in cash, cash equivalents, and marketable securities on its balance sheet at the end of its last fiscal year—more than half of its annual revenues," and "[since 2015] has authorized double that amount in stock buybacks."

In light of all of that, Professor Muris rejects the idea of givign Qualcomm "special treatment" and instead wants the company to "play by the rules and focus on contributing to American innovation without illegally excluding its rivals."

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Antitrust think tanks urge Ninth Circuit to affirm Judge Koh's FTC v. Qualcomm ruling

As of Saturday morning, 14 (!) amicus curiae briefs supporting the FTC against Qualcomm before the Ninth Circuit have been filed. The previous post discussed Professor Jorge Contreras's submission as well as a brief signed by 40 law and economics professors. It'll take a few more posts before I'm done with that flood of filings...

The American Antitrust Institute (AAI) and Public Knowledge (PK)--the latter is, as the name suggests, more IP-focused, while the former is all about competition enforcement and has more than 130 antitrust lawyers, professors, economists and executives on its advisory board--made a joint submission (this post continues below the document):

19-11-29 AAI and Public Kno... by Florian Mueller on Scribd

The AAI/PK brief is largely about the evidentiary standard for finding one or more antitrust violations in a case like this. The evidentiary standard already came up in Qualcomm's opening statement on the very first day of the January trial. Qualcomm disagreed then, and still disagrees now, with the FTC that a Section 2 Sherman Act violation can be established based on conduct that reasonably appears capable of making a significant contribution to maintaining monopoly power--which was the standard in United States v. Microsoft Corp. (D.C. Cir., 2001). Instead, Qualcomm would like direct evidence of an actual anticompetitive effect--with a highly specific causal nexus between certain conduct and the effects on competition--to be required.

In their joint filing, the AAI and PK accuse Qualcomm of "insisting on unavailable and unnecessary evidence [while] urg[ing] the [Ninth Circuit] to disaggregate or ignore the available, relevant evidence." They also say that Qualcomm's "demand that plaintiffs [here, the FTC] reconstruct the but-for world absent the defendant's conduct also has been rejected, because it would convert a recurring 'proof problem' into an insurmountable defense."

The distinction that the AAI/PK brief stresses is the one between the initial acquisition of a monopoly and the maintenance of a monopoly. The latter is what applies here. The case is not about how Qualcomm originally became so very powerful. It's about conduct that threatens to perpetuate the monopoly by means that have nothing to do with competition on the merits.

In two somewhat interrelated ways, the AAI/PK brief disagrees with Qualcomm's perspective on price as an indication of anticompetitive conduct. The first one is the "Price-Up Trap", defined in an earlier publication as "[m]istaking a firm's inability to profitably raise price above the current level for an inability to exercise market power by preventing competitors' conduct that otherwise would reduce price below the current level, thereby mislabeling a maintenance of market power as a lack of market power":

"In a monopoly maintenance case, the relevant benchmark is a competitive price, not the pre-existing monopoly price, and the anticompetitive effect is not that prices rise or output falls but rather that pre-existing monopoly conditions persist. Qualcomm's failure to account for this dynamic causes it to make several analytical errors."

This is consistent with Professor Contreras's warning--based on a write-up by Professor Cotter--against "circular logic" by comparing current prices (here, royalty rates) with former prices that already resulted from a monopoly position.

In this context, the AAI and PK explain the difference between the two most common types of disclosure: raising rivals' costs ("RRC") and predatory pricing. They agree with Judge Koh that this here is an RRC case.

Toward the end, the AAI/PK brief says Qualcomm "makes a category error in comparing this case to price-based monopolization claims." The AAI and PK seek to (re)focus the Ninth Circuit on "the fact that the royalty imposes a tax on rivals sales," and "[t]he elevated royalties are evidence of an anticompetitive effect, not the anticompetitive effect itself.

That's an important point because Qualcomm likes to argue that nothing is per se illegal about maximizing patent licensing income.

All in all, the AAI/PK brief takes positions that I consider very reasonable and far from overreaching. I also like the position that prospective Section 2 remedies have to be ordered because "to delay suit until harm has actually occurred would be to increase the social cost of monopoly unnecessarily." The analogy to drunk driving (quoting Phillip Areeda & Herbert Hovenkamp) is interesting: "The point is that drunken driving is highly likely to cause social harm, and it is less costly to arrest such a driver before rather than after that harm occurs."

Before I show you--and comment on--another filing by an antitrust-focused think tank, I have to point out that the Open Markets Institute is a radical group funded by none other than George Soros. Their ideas of breaking up various major technology companies are extremist and unrealistic, though a Democratic senator and presidential candidate the President sometimes (and for good reason) calls "Fauxcahontas" has embraced them.

The name "Open Markets Institute" is misleading because, in reality, they want hyperenforcement and overregulation. Soros made a fortune from shortselling, and I wish he could just buy some island, turn it into a sovereign state run on the basis of his crazy, unworkable proposals (especially, but not only, on migration, where he's basically in favor of adverse selection), go public and let others short his stock--it would be a huge opportunity. But instead he uses his money with an agenda to ruin existing countries. As the great Rush Limbaugh said a few years ago:

"George Soros' objective is to agitate and vibrate the United States into a crumbling state of disrepair."

In a panel discussion on the EU's software patents directive (which I successfully campaigned against) shortly before the decisive July 2005 vote in the European Parliament, a patent attorney baselessly claimed that I was funded by Soros--seriously, I'd much rather be linked to Vladimir Putin. I wasn't on that panel, but one of the companies supporting my campaign was and clarified that they were a backer, they knew the other backers, and Soros was nowhere to be seen...

But even Soros's hacks and stooges occasionally--though those instances are few and far between--say something that makes sense. Despite my apprehensions regarding anything Soros funds, I did find a few good passages in the "Open Markets" (again, they're about the opposite most of the time) Institute's brief (this post continues below the document):

19-11-27 Open Markets Insti... by Florian Mueller on Scribd

What I consider hyperbole in that "Open Markets" Institute brief is the emphasis on "deception" ("bait and switch") as the type of antitrust violation at issue here. They argue that Qualcomm's breach of its FRAND licensing pledges amounts to deception. But not every kind of abusive behavior--or every broken promise--constitutes deception. The question is what Qualcomm really intended when it participated in standardization. I'm sure that at least for some time, Qualcomm didn't have any deceptive intention. What's debatable, however, is whether Qualcomm's continued participation in standards development was possibly deceptive because of Qualcomm not intending to honor the promise to license all implementers, as the ATIS and TIA declarations unambiguously require. It's a tricky question, and in Qualcomm's defense it's important to note that they always made their intentions (not to license other chipset makers) perfectly clear, so who was really deceived?

That said, the "Open Markets" Institute's brief is worth reading. It contains a variety of interesting references to antitrust cases in other centuries, and the following quote from 19th-century Republican Senator George Frisbie Hoar about distinguishing between market success on the merits and the result of exclusionary conduct:

"I suppose, therefore, that the courts of the United States would say in the case put by the Senator from West Virginia that a man who merely by superior skill and intelligence, a breeder of horses or raiser of cattle, or manufacturer or artisan of any kind, got the whole business because nobody could do it as well as he could was not a monopolist, but that it involved something like the use of means which made it impossible for other persons to engage in fair competition, like the engrossing, the buying up of all other persons engaged in the same business."

That quote is also interesting with a view to the recently-filed Intel and Apple v. Fortress case.

There are some good points in the "Open Markets" Institute's brief, and my favorite passage explains why it's usually a very good deal for a patent holder to contribute a patented technique to a standard despite then losing the exclusionary (monopoly) rights that normally come with patents:

"For the owner of this patent, the voluntarily foregone monopoly royalties can often be more than made up through fair, non-discriminatory royalties paid by manufacturers on countless standard-compliant products and components. [...] In other words, for the owner of a patent incorporated into a standard in exchange for a FRAND licensing pledge, the gain in royalty volumes can more than offset the reduction in unit-specific royalty margins."

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Friday, November 29, 2019

40 law and economics professors supporting FTC against Qualcomm's appeal contradict themselves just two pages apart

Last week, the Federal Trade Commission (FTC) filed its answering brief (prior coverage and commentary: 1, 2, 3) to Qualcomm's Ninth Circuit appeal of the agency's antitrust victory in the Northern District of California. This week, amicus curiae briefs in support of the FTC are due, with industry sources expecting a dozen or more submissions, and Professor Jorge Contreras (University of Utah) was first to file (this post continues below the document):

19-11-26 Jorge Contreras Acb by Florian Mueller on Scribd

Professor Contreras is not only a lawyer but also understands technology very well. He's cited all the time, including by some other amicus briefs that have meanwhile been filed in the same case. The first part of Professor Contreras's brief discusses what is also my #1 priority here: chipset-level licensing. After explaining the history of FRAND, which starts with competition law, and other legal aspects, Professor Contreras says that baseband chips are "highly complex" and "embody the principle technical features of the standard." That is, by the way, consistent with what Qualcomm's German outside counsel (then defending Daimler against Nokia) told the Munich I Regional Court last month. In the related footnote (#6), Professor Contreras notes:

"Moreover, it is not clear that a smartphone implements the entirety of the relevant standards either, as Qualcomm seems to argue, given that some functionality described in those standards is implemented in base stations and other central facilities."

At least one other amicus brief I've downloaded by now makes that point as well, and it's too important for a mere footnote. Those monetization-focused SEP holders who refuse to license component makers--Qualcomm, Nokia, Ericsson, and various trolls (though there's only a floating border between former handset makers and trolls)--come up with arbitrary and shifting-sand-style positions on what hardware components are needed in order to implement a standard. For an example, in its German infringement actions against Daimler, Nokia argues that only an end product--in that case, a car--implements a standard, but car makers purchase telematics control units (TCUs) that, in turn, come with connectivity modules (often called network access devices, or NADs), and the NADs actually are like a complete phone, just without a screen, and cars add absolutely nothing that is required to practice the standard.

Even if the debate is about chipsets used in smartphones (as in FTC v. Qualcomm), the phone is an arbitrary choice: as the footnote quoted above notes, only the combination of an entire network (with all its base stations) and the end-user devices would implement the standard if one followed Qualcomm's (or Nokia's or Ericsson's) logic. As a result, no company other than a Huawei or Samsung (which make base stations as well as end user devices) would be entitled to a cellular SEP license--or maybe telcos that operate networks and resell phones could obtain a license, too. Such a nonsensical result would be an invalid outcome that would make it impossible to give any remotely reasonable interpretation to FRAND licensing pledges.

The second part of Professor Contreras's amicus brief explains that Qualcomm's reference to its own past license agreements as a point of reference for determining reasonable (the "R" in "FRAND") royalties is "circular logic." Here, Professor Contreras cites to a publication by Professor Thomas Cotter (University of Minnesota and author of the highly recommended Comparative Patent Remedies blog): Reasonable Royalties, in Patent Remedies and Complex Products: Toward a Global Consensus.

In the third and final part, Professor Contreras takes aim at Qualcomm's "national security" argument. He provides examples of comparable companies that are doing well without Qualcomm-like misconduct:

"[B]ased on publicly-reported 2018 financial information, Intel achieved a profit margin of approximately 62% on net revenue of $70.8 billion, and Broadcom achieved a profit margin of approximately 52% on net revenue of $20.8 billion. [...] Qualcomm, by comparison, reported a profit margin of 55% on revenue of $22.7 billion."

Related to this--and also very interesting--is the comparison of R&D investments:

"In 2018, Intel invested $13.5 billion in R&D (19% of revenue) and Broadcom invested $3.7 billion in R&D (18% of revenue). [...] Qualcomm, by comparison, invested $5.6 billion in R&D (25% of revenue)."

The brief also shows that "Qualcomm is not the global leader in 5G standards or technology development, nor does the U.S. lead in this technology sector." Pointing to an IAM article by IPLytics founder Tim Pohlmann, a table is shown according to which Qualcomm is just #7 in the world in terms of 5G patent families held (with Intel, the only other U.S. company among the top 10, following closely, and those patents were acquired by Apple this summer).

Whatever the reason may be, Professor Contreras filed a separate brief from the one submitted by 40 (precisely twice as many as their colleagues who supported Qualcomm in August) law and economics professors (this post continues below the document):

19-11-27 Law & Econ Pro... by Florian Mueller on Scribd

The passage of the "40 profs" brief I like best is the one that explains the economic dynamics resulting from Qualcomm charging a patent royalty separately from selling its chipsets and making it harder for others to compete with them in the chipset business.

In connection with Qualcomm's "No License-No Chips" policy, the 40 professors address the Supreme Court's linkLine decision which said that a margin squeeze is not enough to prove an antitrust violation: instead you either need to show a duty to deal at the wholesale level or exclusionary conduct (predatory pricing) at the retail level. The FTC's explanations as to why linkLine is inapposite here are very strong, though it obviously doesn't hurt if amici address the same (critical) question, too.

Unfortunately, the O'Melveny & Myers and Hausfeld lawyers who represent the 40 professors made a mistake that the signatories--many of whom I know (a few of them I've even met) and respect, but all of whom are presumably extremely busy--didn't notice...

The brief first argues (on page 14 based on the numbering at the bottom of each page; or page 20 of the PDF) that Qualcomm can't engage in a price squeeze affecting chipset manufacturers because it doesn't license or assert patents against them:

"As to form, the input here is the license to Qualcomm’s SEPs, and the non-integrated competitors are the rival chipset manufacturers. Because Qualcomm refuses to license chipset manufacturers, it is not squeezing them with a higher license fee."

But then, only two pages later, comes footnote #14, which flatly contradicts that formalistic approach:

"Qualcomm argues that the [No License-No Chips] policy is not anticompetitive because the cost is not levied directly on the competing chipset makers. [...] But as demonstrated by the Microsoft "per processor" royalty cases, there is no requirement that a monopolist impose costs directly on its competitor. [...] What is significant is that the monopolist imposes a charge on the transaction involving the competitor." (emphasis added)

One mistake doesn't devalue an entire (otherwise very strong) amicus brief. I agree with the 40 professors that the FTC's win should be affirmed; I largely agree with their reasoning. And again, the professors themselves presumably just lacked the time to identify the flaw highlighted above before they signed. It changes nothing about my respect for all of them. While I do want Qualcomm to be required to license rival chipset makers and to stop its "No License-No Chips" policy, there are cases where Qualcomm is right and/or Qualcomm's adversaries are wrong. I commented favorably on parts of Qualcomm's motion to dismiss (2007), I criticized the methodology used by one of the FTC's experts, and I pointed out months ago that it isn't easy to "shoehorn" Qualcomm's refusal to license rival chipset makers into the Aspen Skiing pattern. Now I believe the professors' footnote #14 is right (yes, the focus should be on the economic effect of a charge as opposed to just form), but then Qualcomm, too, is entitled to the benefit of that approach in the linkLine context.

No matter how hard I try to find an element that reasonably sets one context apart from the other (the wider context is actually the same: No License-No Chips), I can't find one. Either one wants to argue that indirectly-imposed costs count, or one doesn't.

Expect more posts on FTC v. Qualcomm amicus briefs in the days ahead.

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Wednesday, November 27, 2019

Law professor claims top priority for U.S. in trade negotiations with South Korea was Qualcomm antitrust case

A Korea-based source has just drawn my attention to an article (in Korean, but I received a translation) by Kyungsin Park, Professor of Law, Korea University Law School. Professor Park accuses the Korea Fair Trade Commission (KFTC) of a failure to act forcefully in "the legal case of the century," i.e., the Qualcomm case. As I reported in March, Qualcomm could face criminal charges in Korea over its refusal to license chipset makers, but so far--and more than eight months later, it's apparently still the situation--the KFTC hasn't referred this contempt matter to the Prosecutor General's office.

Meanwhile, Qualcomm is--according to the article--spending hundreds of millions of dollars on the appeal. What Professor Park explains based on publicly available data is that it's not primarily about the 900 million dollars of fines the KFTC imposed in its late-2016 decision. The professor says it's just about 1% of Qualcomm's Korean revenues over the last 25 years, or 2% of what "Qualcomm generated through its illegal activities in South Korea." Instead, he writes, it's about the KFTC's corrective orders, which are about Qualcomm's business model.

The article talks about how Samsung ceased to complain about Qualcomm's practices after its new (early 2018) deal. Well, during the course of those Qualcomm antitrust investigations in multiple jurisdictions, Samsung was far from the only company to sign a new chipset purchasing and patent licensing agreement. Apple settled during opening statements at the April 2019 trial in San Diego--as did Korea's LG Electronics a few months later. There's no basis for pointing fingers at those companies: they're in the smartphone business, not in the antitrust enforcement business. But I do agree with the professor that Korea's competition authority (and, needless to say, the courts) have a responsibility here. (As for the companies that settled their formal or informal disputes with Qualcomm, there's plenty of testimony from the time before those deals were struck, and that testimony is still useful, as it was in the U.S. FTC v. Qualcomm case--where Samsung also filed a great amicus curiae brief.)

Professor Park argues--in other words--that South Korea's economy simply can't afford Qualcomm's sky-high patent royalties: LG Electronics, he says, has been incurring losses for 20 fiscal quarters in a row, and some Korean phone makers like Sewon Telecom, Telson, VK, Pantech, Curitel, and SKY, are no longer in business. Most mobile phone makers in the world have single-digit profit margins except for Apple and Samsung (but even Samsung isn't comfortably in the double digits, he claims).

All of that is interesting, but one claim really surprised me:

"Qualcomm is eexrting political and diplomatic pressure to influence the outcome of the appeal currently pending in the Seoul High Court. The #1 subject of the bilateral negotiations of the U.S.-South Korea Free Trade Agreement that resumed in July 2019 after a seven-year hiatus was the KFTC's investigation of Qualcomm's practices. The U.S. delegation alleges that Qualcomm was denied due process though it is guaranteed under the US-Korea FTA."

I don't know what happened in that investigation, but just like Professor Park it also strikes me that the findings in Korea were simply consistent with what other jurisdictions--particularly Judge Lucy H. Koh of the United States District Court for the Northern District of California--also found.

But there's one thing I just don't understand: assuming that the claim of Qualcomm's antitrust woes being the #1 priority for the U.S. in trade talks with South Korea is true, how can Qualcomm possibly influence the U.S. Administration to such an unbelievable extent?

It obviously makes sense for any U.S. government, regardless of the party or people in power, to ensure that its companies are treated fairly abroad. There have been cases of hyperaggressive antitrust enforcement against some U.S. companies in different places at different times. But in this case, Apple and Intel--both larger than Qualcomm--were actually among the complainants, or at least respondents to questions from the KFTC whose answers played a key role in the decision against Qualcomm.

If the Seoul High Court upholds the most important one of the KFTC's decisions--that Qualcomm needs to extend exhaustive SEP licenses to rival chipset makers--, it will simply be in the mainstream of global antitrust law:

  • Judge Koh identified such an obligation first on the basis of contract law (Qualcomm's FRAND declarations), then on a duty-to-deal basis (the FTC is now pursuing an antitrust theory that relies on the contract-related finding as opposed to a contractless duty to deal).

  • Five automotive companies (Daimler, Continental, Valeo, Gemalto, and BURY Technologies) lodged antitrust complaints with the European Commission's Directorate-General for Competition (DG COMP) against Nokia, and they're all about component-level SEP licensing. Just today the new European Commission was confirmed by the European Parliament (with a two-thirds majority), so I guess we will very soon see a decision to investigate those complaints.

  • Huawei is suing Nokia in a German court (Dusseldorf Regional Court), on the basis of EU antitrust law, to secure component-level SEP licenses. It's almost a given that Huawei will prevail, given that Presiding Judge Dr. Thomas Kuehnen of the Dusseldorf appeals court outlined the related legal theory in an article. Also, the Court of Justice of the EU made it reasonably clear in its Huawei v. ZTE ruling that EU antitrust law gives every implementer of a standard the right to a FRAND license.

In light of the global trend toward enforceable component-level licensing obligations, I hope Korea's courts and the KFTC won't make decisions that would disadvantage their local smartphone makers and other electronics companies compared to those based in other jurisdictions.

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Tuesday, November 26, 2019

FTC leverages its assets against Qualcomm's appeal: "strikingly consistent" industry testimony, Qualcomm's own documents, heightened deference to witness credibility findings

In its answering brief to Qualcomm's Ninth Circuit antitrust appeal, the Federal Trade Commission (FTC) downplays the importance of Judge Lucy H. Koh's holding that Qualcomm has an antitrust duty to license rival chipset makers. The FTC describes that part as "secondary" in the greater scheme of things. But that's a gross understatement. The FTC may take a holistic perspective and/or may be more interested in Qualcomm's "No License-No Chips" policy, but a firm obligation to extend exhaustive licenses, on FRAND terms, to rival chipset makers has enormous problem-solving potential and definitely matters to the industry at large.

By electing to rely on a contract-antitrust combination (arguing that the violation of competition law lies in a breach of a contract that is, as I put it, a cartel remedy), the FTC actually makes the chipset licensing part even more applicable to automotive supplier Continental's antitrust lawsuit in the same district as Nokia, too, signed ATIS' and TIA's FRAND licensing pledges, and could be held in violation of antitrust law on the same grounds as Qualcomm. By contrast, even if an attempt to push the Aspen Skiing duty-to-deal envelope succeeded to the extent that Judge Koh's related decision could be upheld on the original grounds, one would still have to prove--in order to establish an antitrust violation--that a company like Nokia abandoned a prior voluntary and profitable course of dealing, which would be hard to do in most if not all cases.

Prioritization aside, it would do the FTC's brief injustice to comment exclusively on the component-level licensing part and the way the agency ridicules Qualcomm's "national security" fallacy. There's a lot more in that 131-page document. Let me share a few observations:

  • The answering brief is far more compelling than the FTC's opposition to Qualcomm's motion for a stay of two parts of the injunction was. I described that opposition-to-stay brief as "solid but lackluster." They can do better than that, but the answering brief filed last week recalls the key results of the January trial while still remaining focused on the questions the appeals court is presumably interested in--and will likely receive far more support from amici curiae (their deadline is on Friday).

  • What made me so sure during the course of the trial that the FTC was going to win was the combination of roughly a dozen industry players validating the agency's competition concerns and Qualcomm's own witnesses being, at best, evasive. Then, when Qualcomm's economic experts failed to an extent I wouldn't have thought possible before it happened, the FTC had an unassailable lead. There was hardly a judge who could have helped Qualcomm in that situation--short of appointing Qualcomm's General Counsel to the Northern District of California just for that case.

    But trials and appeals are different types of battles, and some parties who won a trial rely too much on their original success factors. The FTC, however, strikes a balance between recapturing the most important revelations from the trial and addressing the issues that matter now. What the appeals court will see very clearly when reading the answering brief is that the FTC's competition concerns are shared by almost the entire industry. The FTC notes that Judge Koh's factual findings "were supported by an extensive trial record, including Qualcomm's own ordinary-course documents and strikingly consistent testimony from its rivals and customers."

  • "Qualcomm's own ordinary-course documents" (and Qualcomm's IRS interview) contrast starkly with the testimony of Qualcomm's employees. Judge Koh found that those witnesses lacked credibility; it was all prepared and unconvincing. Since the district court ruling came down, many observers of this case have said that this complicates Qualcomm's efforts to get the ruling overturned on appeal. The FTC, too, notes that "[s]pecial deference is paid to a trial court's credibility findings," as the Ninth Circuit stated in Exxon Co. v. Sofec, Inc. back in 1995 (affirmed by the Supreme Court the following year).

    Large parts of the appeal are about legal arguments. Qualcomm masterfully tries to raise the standard for an antitrust violation involving patent licenses in different ways. But the level of abstraction isn't infinitely high: even the strongest legal argument typically involves at least some case-specific facts. That's where Qualcomm faces a huge problem that the FTC's footnote 3 highlights:

    "Although Qualcomm does not challenge any of these credibility findings, its brief pervasively relies on testimony from witnesses the district court declined to credit. See, e.g., Br. 9-18, 44-45, 78-79, 91, 94-95, 97, 100, 120, 122, 127-28, 132."

  • What I wish the FTC had made very clear is that even if Qualcomm can point to companies who accepted its patent license terms without depending on chip supplies at the time, it doesn't disprove anything. All it takes for a SEP holder is to force significant players in the market into a license on certain terms--and even those immune to such coercion would still face the problem that comparable license agreements would bear a lot of weight with a court setting a FRAND rate.

  • Of the passages of the FTC's brief that address precedent, I liked the part on linkLine best. I've talked about that case before and will address it again between now and the appellate hearing--but that's not a suitable topic for this bird's-eye view post.

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Sunday, November 24, 2019

FTC to Ninth Circuit: Qualcomm "abandoned" national security argument by failing to introduce evidence

This is a follow-up to yesterday's post on the Federal Trade Commission's answering brief to Qualcomm's opening brief on appeal. Before talking about another aspect--national security--I'd like to share some further thoughts about the FTC's right-for-the-wrong reasons strategy.

I believe a private party would have been fairly likely to defend Judge Lucy H. Koh's ruling on either ground: her Aspen Skiing approach and the FTC's Third Circuit Broadcom logic. That's because private parties--and especially their counsel--try to leave no stone unturned. It would have been possible for the FTC to argue that the Aspen Skiing standard is too high, but that it's met regardless if one makes a certain effort to shoehorn this case into that pattern (by arguing that Qualcomm might not have known what it was doing when it temporarily granted exhaustive licenses to chipset makers, but it didn't do so involuntarily). But it appears that the FTC's litigation team felt it was prudent to focus completely on a Third Circuit precedent that the Ninth Circuit doesn't have to, but may very well adopt. The fact that Qualcomm won a (partial) stay of the injunction likely played a role here. At the stay stage, the FTC didn't attempt to defend the Aspen Skiing reasoning (as Qualcomm noted in its reply brief), but now it's clear that the FTC is rather confident that the summary judgment on contract interpretation regarding licenses to rival chipset makers will stand (that's a precondition now for the chipset licensing-related antitrust theory), and is more optimistic that the Ninth Circuit will agree with the Third Circuit.

Maybe some amici curiae will still defend the chipset licensing part of the district court's ruling. But the focus is now going to be on what the FTC has chosen as its appellate strategy for chipset licensing. As I wrote yesterday, it comes down to viewing the FRAND licensing commitments that participants in standard-setting enter into as a cartel remedy, and the fact that there already is a remedy in place under competition law then lowers the hurdle for finding non-compliance to be an antitrust violation (not every non-compliance, but under certain conditions).

The likelihood of this case going all the way up to the Supreme Court (where Oracle v. Google has finally arrived, by the way) has just increased. Should the Ninth Circuit decide along similar lines as the Third Circuit, Qualcomm will point to other circuits (such as the Fifth Circuit) to argue there's a circuit split. The FTC could argue the same if it had to appeal, but whether the FTC, given its internal stalemate, could actually bring an appeal is another question.

What helped Qualcomm tremendously when seeking a stay from the Ninth Circuit was the national security argument that the Antitrust Division of the Department of Justice--run by a former Qualcomm lawyer--stressed. Statements by officials from the Department of Defense and the Department of Energy were attached to the DOJ's filing.

It's hard to think of a more important factor in the public-interest context of an injunction than national security. It's a big term. But here it rings hollow. It's a non sequitur.

The FTC case has the potential to reduce Qualcomm's margins, but not to render it unprofitable. The security concern relates to Qualcomm's chips, not patents (a patent can't be secure or insecure, but an embodiment of an invention can be). So Qualcomm would have to lose such a huge part of its revenues that it couldn't be competitive in the chipset business (where it's currently the undisputed leader).

In its intragovernmental quarrel with the DOJ's Antitrust Division, the FTC points to the DOJ Antitrust Division's poor timing: just like a request for a separate hearing on remedies was made months after the trial, the DOJ also raised those national-security concerns late in the game.

According to the FTC, "Qualcomm alluded in passing to national security in a pretrial filing, it introduced no evidence on the topic," which is why the FTC says Qualcomm "abandoned it."

Qualcomm simply couldn't have shown that the viability of the company was at stake, much less in light of its financials. The FTC says in a footnote what it noted on at least one prior occasion: "Qualcomm spends more on stock buybacks and dividends than it does on R&D. [...] (showing 2015-2017 R&D of $16.13 billion versus combined stock buybacks and dividends of $25.63 billion)."

Qualcomm's (and its Antitrust Assistant Attorney General friend's) "national security" strategy is not about rules of procedure or economic logic. It's all about diverting attention away from the merits and, more than anything else, about politicizing what should be a straightforward matter of competition law.

It worked for Qualcomm at the stay stage: a motions panel with a conservative majority explicitly placed a lot of emphasis on the Administration's input. Now they hope it will help again--or, at the latest, when this matter reaches the Supreme Court.

When politics is the name of the game Qualcomm is trying to play, who cares about whether an argument was presented to the district court in time? Who cares about evidence, or abandonment as a result of not introducing evidence? It's all just about influencing the judges. The FTC makes a compelling argument that there's no substance to Qualcomm's national security concern, and that there's a strong public interest in competition enforcement. As the FTC recalls, competition also works wonders for product quality, so having more than one U.S. baseband chipset maker is ultimately also the best-case outcome for national security. I hope the Ninth Circuit will see through the "national security" smokescreen, and not be swayed by it when adjudicating the antitrust issues before it.

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Saturday, November 23, 2019

FTC seeks to defend chip-level licensing part of Qualcomm antitrust ruling with right-for-the-wrong-reasons strategy

Late on Friday, the Federal Trade Commission (FTC) filed its answering brief to Qualcomm's appeal (this post continues below the document):

19-11-22 FTC Answering Brie... by Florian Mueller on Scribd

The part I'm most interested in--as always in this context--is chipset-level licensing. When I commented on Qualcomm's opening brief in the summer, I agreed with them in part. The problem with the Aspen Skiing (more recently endorsed in Trinko) logic applied by Judge Lucy H. Koh of the United States District Court for the Northern District of California is that the abandonment of a prior profitable and voluntary conduct is key--and in Qualcomm's case the problem is that they didn't really want to grant exhaustive licenses to rival chipset makers and only did so because they relied on an exhaustion theory that the Supreme Court disagreed with in Quanta. So at a minimum they can argue that they did not do knowingly and willingly what they did until the Quanta decision came out and they changed their licensing strategy.

Another--potential--problem with the Aspen Skiing logic is that the refusal to license rival chipset makers allows Qualcomm to collect more from end-product makers ("humongously more lucrative" as Qualcomm told the IRS), but there isn't a lot of time that passes between the two steps (refusal at chip level and collection at end-product level)--much less is it a strategy that works only by forcing someone else out of business in order to then turn a monopolist's profit (even with competitors around, it's more profitable).

In order to affirm the district court's ruling under the Aspen/Trinko standard, one would have to overcome some hurdles. The FTC apparently concludes it's smarter to lower the standard in order to prevail.

On pages 69 and 70, the FTC clearly spells it out. Just like at the stay stage, they're not going to try to defend Judge Koh's reasoning--but they do seek to defend the outcome:

"The FTC does not argue that Qualcomm had a duty to deal with its rivals under the Aspen/Trinko standard. But that heightened standard does not apply here, because—unlike the defendants in Aspen, Trinko, and the other duty-to-deal precedents on which it relies—Qualcomm entered into a voluntary contractual commitment to deal with its rivals as part of the SSO process, which is itself a derogation from normal market competition. And although the district court applied a different approach, this Court 'may affirm on any ground finding support in the record.' [...]"

So what does the FTC consider to be a better mouse trap?

They still appear to feel they're in a very strong position on contract law. Judge Koh's summary judgment that held Qualcomm to have a contractual obligation under its FRAND declarations to U.S. standard-setting organizations (ATIS and TIA) to license rival chipset makers is also under attack from Qualcomm (with a "more equal than others"-like argument), but it's going to be far harder for Qualcomm to get that one overturned. They couldn't even get it overturned directly--at most they could get a remand for the purpose of a trial where they could present extrinsic evidence, and even that is unlikely to happen because it's simply not necessary under California law when a contract is perfectly clear.

As for Qualcomm's "more equal than others" argument, the FTC's answering brief notes that "Qualcomm does not deny that it has received chip-level licenses from over 120 companies—including Ericsson," and recalls that Nokia, another amicus curiae supporting Qualcomm on this issue, once "argued to the European Commission 'that Qualcomm's termination of a modem chip license agreement' violated its 'duty to license on FRAND terms.'" (Ironically, Nokia itself is now the target of five automotive-industry complaints over a refusal to license component makers.)

The FTC is very likely to defend Judge Koh's sumamry judgment on contract interpretation. But that will not, in and of itself, result in an affirmance (for different reasons) of the finding that Qualcomm acted anticompetitively by refusing to license rival chipset makers. The FTC makes it clear that "[o]f course, a breach of contract, 'standing alone,' does not 'give rise to antitrust liability.'" But it can be a violation "when it satisfies traditional Section 2 standards--that is, only when it 'tends to impair the opportunities of rivals and either does not further competition on the merits or does so in an unnecessarily restrictive way.'" (citing to the Ninth Circuit's Cascade Health ruling, which does point to Aspen Skiing in that particular context, but without finding that the Aspen Skiing standard as a whole applied to Cascade Health)

Based on the record it's then not hard for the FTC to argue that the opportunities of Qualcomm's chipset rivals were impaired and that this behavior didn't advance competition on the merits. There's plenty of industry testimony to that effect.

In its efforts to avoid the Aspen/Trinko standard ("a generalized duty to deal with its rivals" as the FTC describes it), the FTC's brief distinguishes the cases because there was no equivalent of a voluntary FRAND licensing commitment in order to have one's inventions included in a standard in Aspen Skiing. The FTC argues that "the antitrust violation lies in the failure to act as agreed"--again, not just because a breach of contract would be an antitrust violation in all cases related to competition issues but because Qualcomm's FRAND commitments "are among the 'meaningful safeguards' that SSOs have adopted to mitigate this serious risk to competition":

"Courts have therefore recognized that conduct that breaches or otherwise 'side-steps' these safeguards is appropriately subject to conventional Sherman Act scrutiny, not the heightened Aspen/Trinko standard. Of particular relevance here, the Third Circuit held that a rival chipmaker had adequately alleged that Qualcomm itself violated Section 2 because it falsely promised an SSO that it would license its technology on FRAND terms, 'but then breached those agreements.' Broadcom [...]. The Third Circuit declined to apply the Aspen/Trinko test, emphasizing that the case 'd[id] not involve a refusal to deal.' [...] It would thus be inappropriate to apply the heightened Aspen/Trinko standard to a monopolist's exploitation of the SSO process to reinforce its anticompetitive conduct."

The FTC then points to a case in which the Ninth Circuit also "applied traditional antitrust standards to breaches of voluntary commitments made to mitigate antitrust concerns" (in that case, a merger remedy) and a similar approach in the District of New Jersey:

"In Mount Hood Stages, Inc. v. Greyhound Corp., [...] (9th Cir. 1977), this Court upheld a judgment holding that Greyhound violated Section 2 by refusing to interchange bus traffic with a competing bus line after voluntarily committing to do so in order to secure antitrust approval from the Interstate Commerce Commission for proposed acquisitions. [...[; see also, e.g., Biovail Corp. Int'l v. Hoechst Aktiengesellschaft, [...] (D.N.J. 1999) (breach of commitment to deal in violation of FTC merger consent decree exclusionary under Section 2).

What I like conceptually about the FTC's line of reasoning here is that FRAND commitments don't come out of nowhere: if the companies sitting at the standard-setting table didn't make those commitments, competition enforcers would have to take action against them at that stage, given that standard-setting is by definition exclusionary. The FRAND commitment is what enables the positive aspects of standardization, which no one would deny, to outweigh concerns over its potentially exclusionary effects--by making exclusion impossible (as long as each participant honors their FRAND pledge). Just like I called Greyhound's commitment in the Mount Hood Stages case a "merger remedy," the FRAND pledge a company makes to a standard-setting organization is a cartel remedy. Then, provided that non-compliance has anticompetitive effects, it constitutes an antitrust violation if the Ninth Circuit adopts the Third Circuit's application of the law.

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Friday, November 22, 2019

EU-based industry body outlines criteria for standard-essential patent pools to have positive impact on innovation

Earlier this month, the Brussels-based Fair Standards Alliance (FSA) announced (press release) a set of recommendations on standard-essential patent (SEP) pools (document). The primary conclusion is that patent pools can increase the efficiency of SEP licensing and, provided that the terms are FRAND (which, among other things, includes the availability of licenses to all levels of the supply chain), make a net-positive contribution to innovation, with a particular focus on the Internet of Things (IoT).

Let's start with terminology. The FSA's paper mostly uses the term "patent pool" and makes a few references, mostly when quoting other documents, to "licensing platforms." So what's the difference between a pool and a platform? A European Commission competition enforcement official explained how the 3G Patent Platform Partnership ("3G3P")--not to be confused for the 3G Project Partnership ("3GPP")--sets itself apart from a "patent pool":

  1. the Platform [referring to 3G3P] is open to both licensors and licensees, whereas a patent pool consists only of licensors;

  2. the licensors retain their freedom to license outside the Platform (non-exclusivity) and they do not assign patent rights to the Platform;

  3. the patents are not bundled, i.e. no real pooling of patents occurs: instead licensees have the opportunity to pick and choose between patents and the licensing is carried out on a bilateral basis;

  4. there is no single licence between a given licensee and the Platform, whereas in a patent pool a licensee typically has one licence agreement with the patent pool;

  5. the Parties to a licence can choose between the Platform's Standard Licence and a negotiable individual licence.

The negotiability of individual licenses is presumably always a given unless a patent holder actually assigns (transfers) patents to a pool firm. Otherwise, companies would be reluctant to give up their right to enter into individual license agreements for various reasons, one of which is the ability to enter into full-portfolio cross-license agreements.

Avanci generally calls itself a platform, but on LinkedIn, Eric Stasik was surprised to see that even Avanci's lawyers, in the Continental v. Avanci et al. litigation in the Northern District of California, referred to their client as a "pool."

The FSA's paper on patent pools doesn't mention any particular pool, but the most controversial pool at the moment is Avanci: three of its contributors are suing Daimler in a total of 16 German patent infringement actions; Daimler and four suppliers have lodged antitrust compaints with the European Commission over Nokia's refusal to license component makers; Huawei is suing Nokia in Dusseldorf for the purpose of obtaining a component-level license; and Continental is doing the same in the Northern District of California.

Avanci arguably fails to meet the criteria the FSA summarized in its press release as follows:

  • "[patent pools must be FRAND and at the very least] not discriminate against any entity that practices the standard and seeks a license;

  • grant licenses on FRAND terms to those companies that want a license;

  • ensure that royalty rates:

    • take into account the value of SEPs in the patent pool’s portfolio as part of the entire SEP landscape relevant to the standard;

    • reflect the value of the patented inventions included in the pool – and not the added value of standardization or innovations and features not covered by the SEPs.

  • be transparent about license(s) offered by the pool ie publish information about the relevant SEPs and proposed licensing terms and conditions in a timely manner."

Avanci's license fees for cars ($15/unit) are supra-FRAND and that firm licenses only end-product makers (with some indirect effect of such a license on tier 1 suppliers, but not to the effect of actually licensing the suppliers on an exhaustive basis). While Avanci's agreements with its contributors apparently don't preclude them from entering into separate license agreements, Sharp apparently referred Daimler only to the availability of the Avanci pool license when bringing its German infringement actions.

At last week's Brussels conference, three small or medium-sized companies (AirTies, Kamstrup, and Nordic Semiconductor) explained their problems related to SEP licensing. Nordic's problem is that various SEP holders refuse to grant them exhaustive licenses, and AirTies and Kamstrup are companies that would benefit if they could either buy components that come with the SEP licenses they need or if they could--at least--obtain such a license from a pool.

The FSA's paper also says "[m]ultiple patent pools for a given standard may lead to duplicative royalty demands that do not take into account the aggregate royalty burden for a standard." The potential problem of royalty stacking is well-known (and even rampant). However, it may in some cases actually be better to have at least two types of pools--one with FRAND terms and one for the unreasonable ones among the licensors. Then competition enforcers--or parties that have the ability and the determination to challenge supra-FRAND demands--can focus on the unreasonable group. If there's only one pool for a standard, there is a risk of companies that would actually make more reasonable demands deciding to joina pool for convenience--even if it means they have to support license terms that go beyond what they would normally seek. Getting back to the Avanci example, it's not like all Avanci contributors are unreasonable licensors--but the convenience Avanci promises may have led some of them to join a pool that makes supra-FRAND demands.

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Thursday, November 21, 2019

Apple joins Intel in suing Softbank-owned Fortress for anticompetitive patent abuse through web of trollish subsidiaries

Last month, Intel brought an antitrust ocmplaint in the Northern District of California over Softbank-owned Fortress Investment's patent aggregation, obfuscation, and litigation tactics. Fortress's web of hyperaggressive patent assertion entities includes a huge and growing number of legal entities, some of whom have such names as Uniloc (which sued Apple 25 times and Google even 35 times), VLSI, DSS, Inventergy (which threatened an alleged infringer with an "IP bloodbath"), IXI, Seven Networks, and KIP CR (the CR in that name stands for "crossroads").

The good news for the trolls is that Intel withdrew its complaint. The bad news for them--but excellent news for product-focused companies who feel that enough is enough--is that the complaint came back with a vengeance as Intel and Apple made a joint filing yesterday as Reuters's Stephen Nellis was first to report (this post continues below the document):

19-11-20 Intel-Apple Antitr... by Florian Mueller on Scribd

In terms of the claims and prayers for relief, what's changed is mostly that Apple alleges FRAND violations. Uniloc is mostly or exclusively asserting--against Apple--standard-essential patents (SEPs) that previously belonged to Philips. (I've just recently become aware of a Philips patent licensing tactic in the LED segment that raises some very serious questions as well.)

The new complaint states some numbers I hadn't seen in the original one. For an example, there are estimates that tens of billions of dollars have been invested in patent litigation, and "the largest litigation investor reported having investments of $2.8 billion in 2019."

The amounts that some Fortress trolls are seeking from Apple are shocking. For an example, "VLSI claims up to $7.1 billion in connection with eight patents in the California Action and multiple billions of dollars in damages in the Delaware I Action." And that's just a small and limited part of the overall litigation activity by Fortress-controlled companies against Apple. Another group of Fortress entities, Uniloc, is seeking damages from Apple in the range of $2.6 billion to %5.1 billion from only 4 (!) of the 25 aforementioned Uniloc v. Apple cases as you can see on pages 30 and 31 of the complaint. According to Apple, "Uniloc "simply adopted the amounts that Apple sought from Samsung in litigation for Apple's patents." What Apple means is what Uniloc wants on a per-unit basis. I've criticized Apple very strongly for some of its damages claims against Samsung, but even if one agreed with what Apple wanted from Samsung at the time, it just wouldn't make sense to copy and paste an amount when it's about completely unrelated patents.

The fact that Apple has thrown its weight behind the case--in addition to Intel, which took the initiative last month--has several effects:

  • Intel's complaint already mentioned the cases against Apple, but having the target of dozens of the relevant cases directly involved raises the profile of the problem.

  • While most Silicon Valley jurors will likely have heard of Intel, Apple is more of a household brand.

  • It would presumably have been difficult for Intel to make some of the FRAND breach arguments that Apple, as a target of SEP assertions by Softbank, has brought in the joint complaint.

  • With both Intel and Apple based on the outskirts of San Jose, it should be easiser this time to keep the case in San Jose (where the complaint was filed) rather than having it reassigned within the district to San Francisco.

Now I only wish Google--another target of dozens of Fortress-funded patent lawsuits--could also join so the industry presents a united front to those industrialized patent trolls. But even if Google elected to stay on the sidelines, the combination of Intel and Apple will put Fortress and--by extension--Softbank under serious pressure.

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Wednesday, November 20, 2019

Short summary of November 12, 2019 Brussels conference on Component-Level SEP Licensing

This is the final part of a post-conference "trilogy." After publishing the slide decks used by seven panelists and an abstract of one presentation and reporting on the patent injunctions panel (with a particular focus on the German reform project) (where I just added the German-language version of Maurits Dolmans's slides), I'll now summarize the component-level licensing panels.

It's normally easier to report and comment on other people's conferences. What makes it equally easy in this case is simply that all the feedback I received was extremely favorable on the bottom line. There was one panel where maybe things appeared a bit repetitive during the last third or quarter to parts of the audience, but that was the only criticism I heard.

It was part of the plan to kick off the day in a way that would energize everyone. With Pat Treacy (Bristows), Paul Lugard (BakerBotts), Jay Jurata (Orrick, Herrington & Sutcliffe) and Professor Christian Donle (Preu Bohlig & Partner) I had four great lawyers--well-respected in the legal community including some of their adversaries--whom I was able to ask a few questions on component-level licensing and the royalty base. Like all other lawyers who spoke at my conference, they didn't express the views of any particular client (nor did Mrs. Treacy speak for the England & Wales High Court, on which she serves as a Deputy Judge).

The first question to them was about component makers' entitlement to a SEP license on FRAND terms under the antitrust laws. Mr. Jurata and Professor Donle explained their conclusion that it's necessary for competition to work. In those opening statements, Professor Donle made the funniest remark of the day when he said that SEPs are like railroad station toilets--not that nice, but you need to use them.

Mrs. Treacy and Mr. Lugard didn't rule out categorically that there might be circumstances under which there could be an antitrust case, but spoke out against the notion of a bright-line rule. Mrs. Treacy said that as a competition lawyer she'd like the idea of competition law being able to solve all of the world's problems, but doesn't view it that way. What she said came down to saying that an antitrust injury would need to be proven in a particular case, and otherwise contract law (FRAND declarations) might be the answer in some additional cases. Mr. Lugard used different terms to express a view that was materially consistent with this: to him, too, it's a case-by-case question. Mr. Lugard stressed the deference afforded to intellectual property rights in an antitrust context.

After the first round of statements, there appeared to be a sharp divide between Mrs. Treacy and Mr. Lugard on one side of the table (their seats hadn't been pre-assigned) and Mr. Jurata and Professor Donle on the other side. But as we went back and forth, it turned out they weren't worlds apart. All four panelists were extremely constructive, and I had the impression that one statement by Mr. Jurata--who in his introduction noted that his clients included licensors as well as licensees--was key to starting the partial "rapprochement".

The second panel addressed a fundamental question: access to licenses under contract laws. PacTechLaw's Dave Djavaherian made an initial presentation (with slides) before asking Professor Philippe Stoffel-Munck from Universite Paris I - Panthéon Sorbonne and Marc Hansen (Latham & Watkins) questions. Professor Stoffel-Munck explained contract interpretation principles under French law, which sounded familiar to California-based Mr. Djavaherian because they make universal sense. There was consensus on that panel that component makers are entitled to licenses under the ETSI FRAND declaration. (Needless to say some parties have presented expert testimony to the contrary in U.S. cases.)

The "experiences from the field" session with three medium-sized companies on the panel and Cisco's Ief Daems as the moderator addressed the issue of SEP licensing from an angle that should (and hopefully will) matter to policy makers. Metin Taskin (AirTies), Svein-Egil Nielsen (Nordic Semiconductor) and Rasmus Søby Dupont (Kamstrup) shared with us how difficult it is for companies their size to deal with patent licensing issues--and how much better things would be if all SEP holders licensed chipset makers.

One of them gave an example of 200 patents a troll wanted to license to them on the basis of those patents having been declared to be essential to the WiFi standard--but the company so approached could easily rule out for 180 (90%) of them that they were WiFi-essential. The claims were simply not closely related to the specification of the WiFi standard.

I wish someone could conduct a research project on the difficulties facing such companies in patent licensing. Apparently a lot of funding goes into efforts to get companies like that to file more patents of their own. But the unreasonable burden placed on them impedes innovation.

Professor Joachim Henkel (Technical University of Munich) presented the economics perspective on patent licensing in the IoT business. The advantages that component-level licensing offers over device-level licensing in his view are that royalties are directly tied to the implementation quality of patented technology (example: high-end vs. mid-tier or low-end baseband chip), the lower transaction cost, the fact that startups and small-volume device makers (which would include the panelists I just mentioned, though AirTies has sold tens of millions of devices and still struggles to deal with patent issues), and that all tiers of the supply chain are then licensed consistently.

In the second half of the conference, Mr. Jurata provided a quick overview of the FTC v. Qualcomm ruling by Judge Lucy H. Koh and the next procedural steps, followed by presentations by Eric Stasik (licensing practitioner's perspective on the fallout from that decision) and the Secretary-General of the Fair Standards Alliance, Evelina Kurgonaite, who applied EU statutes and case law to the facts in FTC v. Qualcomm based on Judge Koh's findings of fact and conclusions of law.

Mr. Stasik made it clear that he's not a lawyer, but he has extensive licensing experience (as a former Ericsson licensing director and, more recently, a consultant and expert witness). He's not of the opinion that component-level licensing is the answer, and he basically made the case against the case against Qualcomm. Mr. Stasik is a gifted speaker, and everyone could see his strong background in technology, standards, and licensing.

Mrs. Kurgonaite demonstrated that she's a competition lawyer, but also an articulate exponent of her organization's interpretation of FRAND. Assuming that the facts underlying an EU competition case would be the same as in FTC v. Qualcomm, Mrs. Kurgonaite concluded that such behavior would also be deemed anticompetitive in Europe.

At some point Mrs. Kurgonaite made reference to something Mr. Stasik had said before (and disagreed), but then came a point when Mr. Stasik agreed with her on an important part of her analysis, prompting Mr. Jurata to say: "Who says we can't find consensus."

It had been my goal to bring together panelists representing a diversity of views. What complicated that effort is the fact that companies who just don't want to engage in component-level licensing turned me down when I invited themn. But we still had some lively debate (not on each panel, but on multiple occasions).

Intel's director of IP policy in the EU, Dr. Rebekka Porath, moderated a panel on some antitrust complaints over component-level licensing. Professor Rafal Sikorski (Adam Mickiewicz University) gave an overview that went back to the first antitrust cases in the U.S. about 100 years ago were (F)RAND was established as a principle. His cross-jurisdictional knowledge is impressive, and since SEP cases are generally not litigated in Poland for practical reasons, he's neutral, though it appeared to me that his views on FRAND weren't far from my own. After Professor Sikorski's presentation, I filled in for Kent Baker of u-blox, who wasn't able to travel that week, to give a quick overview of the Continental v. Avanci et al. case pending in the Northern District of California. (As we were running behind schedule, I requested to hold a vote, but there was a lot of interest in that part, too, and maybe that's because Continental is also among the five companies who complained to the European Commission's Directorate-General for Competition over Nokia's refusal to license component makers.)

Thereafter, the bonus session on access to injunctive relief (which I covered a couple of days ago) took place.

I wish to thank once again all moderators and panelists, and a wonderful audience.

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