Tuesday, April 12, 2022

Apple explains it accepts to be 'bound' by terms for global 5G patent license set in Texas, but not by what Ericsson originally asked the court to do

Last week, Ericsson filed a motion with the United States District Court for the Eastern District of Texas claiming that Apple "walk[ed] back its agreement to accept Ericsson's [5G patent licensing] offer if it is confirmed as FRAND" by Judge Gilstrap's court. Apple responded on Sunday, and the public version appeared on the court docket sometime yesterday (this post continues below the document):

22-04-10 Apple Response to ... by Florian Mueller

Apple's opposition makes clear what I thought before. I wrote:

The apparent disagreement may relate to whether the Texas decision should be binary.

Ericsson didn't ask the court to set a rate anywhere from 1 cent to 5 dollars per device. If Ericsson had wanted to do that, it could also have gone to the UK. Instead, Ericsson wanted to do exactly the same as in the HTC case: to have its own position blessed as FRAND.

So, we have two parties that stand ready to have the dispute resolved in the Easter District of Texas. But they have different takes on what the FRAND decision should be about:

  • Ericsson wants the decision to be about whether its $5-per-iPhone licensing offer (with the initial offer involving a $1-per-year early signing discount, which Apple has almost certainly forfeited by now) was FRAND. If the court thought that some number below $5 is the absolute upper boundary of the FRAND range, neither Apple nor Ericsson would have an obligation to do anything.

  • Apple wants the court to basically focus on the 2015 Ericsson-Apple license agreement--which was signed at a time when various parameters were different from today--and set a rate somewhere between what Apple considers fair at this stage (which Apple has already indicated in public filings would even be less than back then) and Ericsson's $5 per iPhone. Whatever the outcome would be, Apple would want Ericsson to be obligated to extend a global portfolio license on that basis.

In the filing I published further above, Apple says the following:

"That is, Ericsson cannot convert this case into a 'heads I win, tails you lose' proceeding in which Ericsson either binds Apple to the excessive rate Ericsson demands or it sneaks away, free to continue its abusive, non-FRAND worldwide injunction campaign to coerce Apple into accepting an exorbitant rate." (emphases added)

The two passages I highlighted in the above quote are more than debatable:

  • Ericsson brought this case in a certain form and still stands by that form (plus the additional claims it added later by way of an amended complaint, and it couldn't have done so until the previous license agreement expired). It is actually Apple that has been trying to "convert" this case into something else.

  • The issue I have with that "heads I win, tails you lose" characterization is that it presupposes that Apple would end up paying $5 per iPhone one way or the other, which ignores how standard-essential patent (SEP) enforcement works across jurisdictions. While Ericsson is, for instance, suing in Germany and the Netherlands and may indeed obtain injunctions there, Apple does have a FRAND defense in those places, too. It's not like Ericsson could just obtain an injunction in another country without Apple being able to argue that $5 per iPhone was never a FRAND-compliant royalty demand. That is far from the automatic "heads I win, tails you lose" effect Apple claims it to be.

There is a structural issue with Apple's suggested approach of a FRAND determination: while Ericsson could theoretically get its position confirmed that way (as could Apple, of course), the most probable outcome would be a number somewhere in the middle. In arbitration that would almost certainly happen (so far I've heard of only one SEP arbitration in which the outcome was identical to one party's initial position); in an Article III court, it's nowhere near certain to happen, but fairly likely. Here's the problem: if we want--for policy reasons--SEP holders (in this case, Ericsson, but it could be any other party) to make ex ante disclosures of what royalties they are going to seek, then we must also respect their desire to have those rates blessed. That is so because otherwise SEP owners would have to factor in the possibility of a determination that lands somewhere in the middle. They'd be forced to ask for sky-high numbers in the very beginning.

The problem is that Apple can go into a hypothetical Texas FRAND rate trial with a position like $0.50 or $1 per iPhone, Ericsson is on record with its position that $5 per device is the proper rate. Theoretically, it could try to argue at trial that $5 was too low, but even if the court (which is far from certain) allowed Ericsson to make that argument, it likely wouldn't be availing.

Other major SEP holders have done the same as Ericsson and have publicly taken positions on what rates they deem FRAND. There are some non-practicing entities that acquired SEPs from others. As those patent holders never participated in standard-setting, they typically never made a public statement on how much they would ask for. They can go into FRAND-determination proceedings with any royalty rate they want. For those companies, Apple's proposed way forward would work great--and I'm sure Apple would not want to have a FRAND rate set in Texas for a deal with, for example, an NPE that owns only 5% as many patents as Ericsson but makes a royalty demand in the beginning that may be as high as, or even higher than, Ericsson's. In that case, Apple would rightly be concerned about a number somewhere in the middle still being unacceptably high. But the same also applies the other way round. For Ericsson, a number somewhere in the middle may just be unreasonably low.

It would be too negative to say that Apple is taking unfair advantage of Ericsson's ex ante disclosure. But it is fair to say that Ericsson may have very legitimate reasons for requesting a binary determination (like in the HTC case).

The interesting question is now whether the parties' different preferences end up derailing the Texas FRAND proceedings. It could be that neither party accepts to be bound by what the other party wants the court to decide. We'll find out soon.

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