Thursday, July 15, 2021

Apple could PROFITABLY leave the UK market, would still sell millions of iPhones to UK resellers and make British patent judges look very bad (to say the least)

Today's my International Trade Day. The previous post discussed the Munich I Regional Court's anti-antisuit injunction in IP Bridge v. Huawei and mentioned a European Commission request for information from China at the WTO level, though in my opinion China would have far more valid reasons to question the European (meaning both the EU's and the UK's) case law relating to standard-essential patent (SEP) enforcement.

As I've said many times, including in a presentation at a European Commission webinar, the current proliferation of antisuit (and anti-antisuit) injunctions is merely a consequence of other forms of extraterritorial SEP rulings: judgments that force implementers to either take a global portfolio license (regardless of whether a single infringement of a valid SEP from that portfolio was identified elsewhere) or be subjected to a sales ban in that jurisdiction. The culprits in that respect are the courts in the UK and Germany. They started it, and the courts in jurisdictions like the U.S. and China, which have the authority to order antisuit injunctions, should absolutely defend their jurisdiction over national patents by barring SEP holders from forcing implementers into global licenses only because they won a single SEP case in some European country. Ideally, no one would engage in any kind of overreach. I suggested this much in my presentation.

British patent judges are in for a total embarrassment. They should change course before they will suffer an irreversible reputational loss at Apple's hands.

The fact that I'm actively pursuing my own (antitrust, not patent) complaints against Apple doesn't prevent me from supporting Cupertino's positions where I believe they have a point. I never found it hard to compartmentalize my mind. So when I read a couple of days ago on a UK financial website (This is MONEY) that Apple might leave the UK market if the court were to set a "commercially unacceptable" rate in a SEP dispute with non-practicing entity Optis Cellular Technology, I immediately thought to myself that this is exactly what Apple should do if necessary.

The UK patent judiciary needs an economic reality check. According to the report, Justice Meade thought it was not "remotely possible Apple will leave the UK market." Well, he's a former lawyer (I heard he also represented patent trolls, but haven't been able to verify this) and now a judge, and there are judges who understand economics very well, but there are also many who don't. You find the two kinds of judges in any jurisdiction. In the UK, however, the Unwired Planet case worked its way up from the lowest court to the highest, and there never was a single judge involved who appeared to understand. That is worrying. And maybe some just didn't want to understand: the judges on the trial court and the appeals court are just patent maximalists, and the UK Supreme Court didn't want to overrule an appellate judge who had meanwhile joined their own club.

So let's have a look at the economics that Justice Meade (and some other commentators) don't seem to understand.

Yes, Apple could PROFITABLY decline to take a license on supra-FRAND terms.

There are two reasons, any single one of which would probably be sufficient in its own right, and the combination certainly makes it an option. And should that happen, there'll presumably be a legislative override: just like the EU is now working on SEP legislation, Westminster lawmakers could do the same and that would be the end of that Unwired Planet insanity. They're not going to let any patent judges, whether their names are Meade or Birss or Kitchin, do serious damage to their economy just to attract patent litigation to the UK.

But Apple wouldn't have to bet on that legislative override--and it probably wouldn't, as there's never a guarantee and there could be delays. Even under the current legal framework, these are the two reasons that counsel in favor of not bowing to unreasonable judicial overreach:

  1. Apple sells about 7 million iPhones in the UK per year, out of more than 200 million worldwide. That's less than 4% of its worldwide sales. Now, any supra-FRAND patent royalties (for example, if they had to pay $3 per phone for a portfolio that's worth no more than a few cents per unit) would therefore have to be multiplied by a factor of (approximately) 25, as the unreasonable UK case law requires them to take a global license. So if there's a case in which Apple would have to overcompensate a patent holder by about $3 per phone around the globe, the bottom-line impact is the same as if Apple has to pay $75 (!) per phone sold in the UK only.

    Apple's gross margin is on the order of 40%. Just to have a ballpark figure, that's like $500 per iPhone. When you apply that factor of 25, it doesn't take a whole lot of patent cases until they could even reduce your UK sales to zero and still be better off that way.

  2. But some people don't seem to understand that if you "leave the UK market" in terms of simply complying with a totally unreasonable injunction, you can still sell millions of phones to UK customers.

    There are a few things Apple couldn't do if enjoined:

    • It couldn't sell iPhones in its Apple Stores. It operates almost 40 of them in the UK, and without its flagship product (or 4G/5G iPads) it would probably close most or even all of them.

    • It couldn't sell directly to UK customers via its own online store for the UK.

    • At least some repairs wouldn't be possible.

    • Apple couldn't deliver products to UK destinations, including its resellers such as the major carriers (Vodafone, O2 etc.).

    • It couldn't promote iPhones in the UK as patent injunctions typically prohibit that kind of commercial activity (and not just the act of selling goods).

    But Apple could still let the likes of Vodafone buy iPhones in, for example, Ireland. Those companies would buy them "FOB Dublin" (to use international trade lingo) and then import them into the UK market.

    The injunction would restrict only Apple itself--and, of course, the British employees it would have to lay off because of a judiciary that exercises no restraint and was totally unreceptive to some valid points throughout the Unwired Planet process.

    Now, a SEP holder like Optis (which is basically Unwired Planet) could then seek an import ban from customs authorities. It could also sue the carriers. But it would have to go through a whole new process, and in the meantime Westminster lawmakers could show that they are the final judges--just like Prime Minister Boris Johnson told British soccer clubs in the Super League context that politicians would simply legislate to achieve the desired result (and post-Brexit, they don't have to worry anymore about complying with EU law).

    British judges wouldn't win this. They would have many millions of British Apple fans against them. They would have labor unions against them because of the layoffs. And everyone would see that this is just about judges being obsessed with attracting patent cases to their jurisdiction, without any other positive effect for Britain.

Apple would still sell millions of iPhones to UK customers even if it can't advertise in the UK and has to close some or all of its stores. The gross margin forgone because of some sales being lost would clearly be less than any supra-FRAND royalties times 25.

This economic and political impact assessment would be incomplete without taking import duties into account. It's quite possible that UK resellers could avoid them 100% even under the current law. But even if not, the British government could simply waive them. The iPhone market share among British politicians is probably far in excess of 50%, but even if it was not, no one would side with patent judges on this one.

I know many companies in the wireless industry. In fact, I asked Apple for background information on this, but they didn't respond, and that's OK. Without naming the others, I can tell you I know from some of them that they previously said they would simply stop operating in the UK (which, again, does not mean UK customers don't get your stuff) if it came to worst.

Apple would get a lot of support, even from its competitors. And the political clout of major Apple resellers like Vodafone and O2 in the UK, or of major retailers, is enormous. Consumer organizations would presumably side with Apple, too.

I guess Justice Meade is now going to backtrack. If he does not, the Unwired Planet case law is going to die a shameful death. The UK Supreme Court should recognize its error and overrule it at the earliest opportunity.

By the way, the UK Supreme Court denied Apple's petition to deliver oral argument in the Unwired Planet case. If Apple carries out its absolutely legitimate threat, that action will speak louder than words.

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