Monday, June 13, 2022

Apple doesn't want App Store abuse to be discussed in Ericsson FRAND case--meanwhile, UK Competition & Markets Authority opens new Apple, Google antitrust investigation over mobile browsers, cloud gaming

Right after the first Ericsson v. Apple patent infringement cases of the current series were filed, I expected Apple to face an "Epicsson" dilemma because Apple's positions on fair, reasonable, and non-discriminatory (FRAND) royalties are quite the opposite when it's officially relying on its own intellectual property rights in the "app tax" context from when others, such as Ericsson, are asking to get paid for the use of their standard-essential patents (SEPs):

  • Apple's total SEP royalty payments per iPhone amount to less than $15 according to an FTC v. Qualcomm court document (as Nokia noted in a recent filing with the EU Commission), which is like 1-2% of the price of an iPhone for tens of thousands of patents.

  • But just last Friday, Apple publicly stated that Dutch dating app providers would have to pay Apple a 27% commission in most scases and 12% in exceptional cases (small businesses, subscriptions after a customer has already used it for a year) if they use third-party payment systems. Apple's counsel in the dispute with Epic Games stated very clearly during closing argument last year that Apple bases its demand for compensation--if payments don't have to go through its own payment system, which is currently required in almost every case--on its intellectual property rights. In that particular antitrust context, it was clear that they were talking about a FRAND royalty. In fact, Epic's counsel had previously replied to the court's question (of how Apple would be compensated in a scenario in which app developers like Epic could use other payment systems) that Apple could seek compensation "as long as it's reasonable and non-discriminatory."

    As I explained last year, it's extremely doubtful whether Apple would be entitled to significant compensation--if any-- in a scenario in which it would have to enforce its claimed IP against app developers. Apple is simply leveraging its gatekeeper position, but it is on the record as claiming that compensation on the order of 30% of in-app purchasing revenues is justified by its IP.

The short version is this:

Apple: Using tens of thousands of standard-essential patents for a 1%-2% aggregate royalty is FRAND. That's all they're worth.

Also Apple: If we believe you infringe a few hundred patents when making iOS apps--and some API copyrights in a way that is a crystal clear case of fair use--, you owe us 27% in most scenarios (otherwise "only" 12%).

Considering that Apple would never be able to impose its app tax without first making use of others' (including--but not limited to--Ericsson's) SEPs, it's pretty obvious to me that Apple's dual FRAND standards for IP licenses are highly relevant to the Ericsson v. Apple FRAND dispute--as they would be to hypothetical Nokia v. Apple, Qualcomm v. Apple or InterDigital v. Apple disputes of the same kind.

Unsurprisingly, Apple wants its inconsistencies to be ignored. That's what all litigants want when they have something to hide. So they tell the courts that certain topics are "irrelevant" when they're actually important, but inconvenient.

Apple's reluctance to address its App Store abuse in a FRAND context became clear earlier this month when Ericsson brought a motion to compel Apple to identify fact witnesses with respect to a few topics Ericsson had noticed, among them the App Store. But meanwhile Ericsson has filed with the United States District Court for the Eastern District of Texas a second motion to compel that once again relates to, inter alia, the App Store:

In this new motion, Ericsson explains the following:

"Apple generates substantial revenue by charging fees for all downloads and in-app purchases made from or through its App Store. By some estimates, App Store revenue exceeded $75 billion in 2021, alone. Because App Store downloads are routinely made from cellular devices that utilize technology covered by Ericsson’s SEPs, Ericsson asked Apple to produce documents showing 'Apple’s revenue, expense, and profit related to the App Store platform' [Request 27]; 'the percentage of Apple’s App Store sales or traffic [that] occurs on Apple’s devices with wireless capabilities' [Request 28]; the 'way that Apple does, has considered, or plans to . . . derive revenue or profit from the App Store' including with downloads on cellular technology [Request 29]; 'the fees or royalties that Apple charges in connection with the App Store” and “analyses that Apple considered in deriving [] its 30% fee' [Request 30]; and 'the downloads and/or in-app purchases made through the App Store' over time and any 'statistics for each individual app (or game)” or category of apps that Apple tracks [Request 96].

"Apple objected on April 6 that the discovery 'appears irrelevant' and again on May 20, arguing any such discovery is irrelevant and 'a burdensome fishing expedition only designed to delay the case.' For more than two months, Apple has refused to commit to producing any App Store revenue information, including during the parties’ meet and confers. But Apple’s relevancy objection is wrong. The App Store is a primary way that Apple monetizes cellular devices. Apple profits not only from the sale of devices themselves, but also from the downloads on the App Store that are driven by the devices’ cellular functionality (similar to how cellular providers historically provided cell phones for free and generated revenue exclusively by providing cellular service for the 'free' devices). In fact, the 5G technology at issue has been credited with revolutionizing apps such as gaming which, in turn, have driven a significant surge in Apple’s App Store revenue. Ericsson is entitled to discovery into all the revenue and value that Apple generates from its cellular devices, including its decision of how to monetize the cellular activity on the App Store."

The App Store business model is the first topic, but Ericsson's motion to compel also raises the following ones:

  • Apple's 5G launch ("Apple’s evaluation of 5G’s benefits and development of marketing material—for devices and for Apple’s App Store users and developers—discussing the value of 5G.")

  • Apple's SEP devaluation efforts

  • Apple's acquisition of Intel's 5G portfolio and the related business cases it analyzed

  • Apple's payments to component suppliers that also license SEPs to Apple (quite often, SEP licenses are just part of broader commercial agreements; the Apple-Qualcomm business relationship is a famous example, but apparently not the only one)

The following serves to further erode Apple's credibility (an issue that is also reflected by Judge Rodney Gilstrap's recent order denying Apple's motion to stay a parallel case that Apple itself had brought), given that Apple itself originally pushed hard for a short time to trial in the E.D. Tex. FRAND litigation:

"[E]ven after the passage of nearly three months, and despite Ericsson’s attempts to facilitate orderly discovery and move this litigation efficiently toward trial, Apple has refused to produce relevant documents and failed to commit to producing material in a timely fashion."

I wouldn't be completely surprised if Apple's delays ultimately resulted in a continuation (the formal way of saying "postponement") of that Texas trial. Ericsson itself never insisted on taking the case to trial in what would almost be a record time for the Eastern District of Texas.

With respect to the App Store, there's an extremely important development that I'll talk about more in a separate post (not necessarily today or tomorrow, but soon): the UK's antitrust enforcement agency, the Competition & Markets Authority (CMA), has announced a new antitrust investigation of how Apple and Google use their control over mobile browsers and app stores. Those two issues are indeed closely related: with Apple and (to a lesser extent--but still to some degree) Google preventing others from providing competive cloud gaming services on their platforms, some providers such as Microsoft with its xCloud service have tried web-based streaming. But then Safari (Apple's browser) is effectively the only iOS browser: other browsers can have a different look and feel, but Chrome on iOS is not Chrome--it's Safari with a Chrome-like interface. It would be technically easy for many types of websites, including web-based cloud streaming services, to provide a far better user experience on iOS if Apple didn't abuse its control of Safari (and exclusion of competing browser engines).

With respect to dating apps in the Netherlands, Apple may be fine (at least for now), and Match Group may just never have been the most credible and reputable complainant. But the UK CMA's inquiry into mobile browsers and cloud gaming--especially in that particular combination--has tremendous potential to bring about much-needed change. The App Store tyranny is the worst anticompetitive conduct the technology industry has ever had to deal with. Whatever IBM may have done with its mainframe monopoly or Microsoft with media players and network protocols was nothing--almost literally nothing--compared to what Apple has gotten away with for so long. But the tide has turned, and the tyrant is getting its comeuppance. Step by step. Sort of a death by 1,000 cuts maybe, with regulators and lawmakers in different parts of the world--and at some point hopefully also the courts of law--taking decisive action.

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