Wednesday, June 29, 2022

Lessons from rejection of Apple's cert petition against Qualcomm: PTAB IPR can backfire depending on specific terms of patent license

The Supreme Court denies petitions for writ of certiorari without stating the reasons. It has more important things to do. In the Apple v. Qualcomm case--where the Federal Circuit held that Apple lacked standing to appeal decisions by the Patent Trial and Appeal Board (PTAB) of the United States Patent & Trademark Office (USPTO) due to a portfolio license it had taken from Qualcomm in 2019--we at least know what the Department of Justice (DOJ) thought. The Supreme Court had asked for the views (PDF) of the Solicitor General of the United States, Elizabeth Prelogar.

Central to that remnant from what could have become one of the biggest and longest-running patent spats ever is an inconsistency between standing requirements for PTAB Inter Partes Review (IPR) petitions and any appeals thereof to the Federal Circuit. Once you're past the PTAB, the appellant needs to satisfy Article III standing requirements (but not before). On appeal, the same standing questions as with respect to a declaratory judgment action in district court will be asked.

Article III standing involves the questions of injury, causation, and redressability. If you want to appeal a PTAB decision just to stick a decision invalidating the patent on a wall as a hunter's trophy, that doesn't count. Nor do you satisfy standing requirements if there's just a hypothetical possibility of being sued over the same patent(s) somewhere down the road, subject to circumstances that you may consider foreseeable but which can't be predicted with (near-)certainty.

What we know is that Apple's current license agreement with Qualcomm will expire either in 2025 or in 2027 (if a renewal option is exercised), while the two (non-standard-essential, by the way) patents at issue will expire only in August 2029 (U.S. Patent No. 7,844,037 on a "method and device for enabling message responses to incoming phone calls"; originally obtained by Palm) and, respectively, 2030 (U.S. Patent 8,683,362 on a "card metaphor for activities in a computing device"). So even if Apple didn't just breach its obligations under the existing agreement--though, if you ask Qualcomm, that's what it did with respect to the previous agreement, it might face infringement lawsuits over those patents simply as a result of the parties not being able to agree on the terms of a new license.

It's a very significant win for BakerBotts on Qualcomm's behalf, but Apple's arguments for standing (and for why the Supreme Court should have considered the matter worthy of review) weren't all that weak. In fact, compared to what I've recently seen from Apple in the 5G patent dispute with Ericsson or various antitrust contexts, Apple's arguments were pretty strong.

I even consider it quite possible that this--I mean the part on standing without taking a position on patent (in)validity--might have gone differently if Apple had bluntly stated the situation the way it is, but it probably had business as well as litigation-tactical reasons not to tell the whole story.

The peace that Apple and Qualcomm made a little over three years ago was attributable to one--and only one--factor: Apple considered Qualcomm the only reliable vendor from whom to source its 5G chips. Apple didn't see Intel on the right track. A few months prior to that agreement, Tim Cook had categorically ruled out a settlement. In a television interview earlier that year, he said Qualcomm's business model was unlawful, and Apple was going to fight it all the way.

Apple gets away with being a bit behind hardware innnovation. It was still doing extremely well with relatively small screens when comparable Android devices were much larger. It still doesn't have a foldable iPhone, though it's finally getting there. Apple is all about luxury brand image and lock-in. Two L's are the key enablers of a market cap of a couple trillion dollars. But even Apple couldn't have risked falling behind too much with 5G phones. I don't want to get into the question of whether smartphone users really have a major benefit from 5G, or whether those making most of the money from 5G should have to pay more to those making the largest investment (Politico reported on a potential EU initiative). The answer of whether smartphone users really need 5G isn't as clear as it is with respect to connected vehicles (where lower latency plays a role, as was recently discussed in an OPPO v. Nokia case). Regardless, Apple had to fear a loss of market share, and settled.

Cravath had done an incredible job defending Qualcomm against Apple and the FTC. Practically, Apple and the FTC constituted a public-private partnership. It became know that they had a common interest agreement in place. Qualcomm defeated the FTC all the way. Now, if Apple had not settled, it would have continued to support the FTC's case in different ways, and things might have turned out differently. But if the FTC case had ended identically, Apple would have lost its Qualcomm case big-time and might have owed tens of billions in enhanced damages.

The Qualcomm v. Apple infringement cases (for which Qualcomm relied on Quinn Emanuel in the U.S. and Germany) were only a sideshow at that stage and of totally negligible relevance compared to Apple's need for 5G chips, though over time pressure from that front might have piled up on Apple.

The fallout from the Apple-Qualcomm settlement was Intel's exit from the cellular baseband chipset business, with Apple first buying Intel's mobile chip division and then most of Intel's cellular SEPs (a transaction with respect to which Ericsson would now like to conduct discovery, but Apple opposes it). Apple is getting closer to using its own baseband chips. Whether it would at that point make sense for Apple to breach the existing agreement with Qualcomm and stop making royalty payments depends on the undisclosed terms of the contract(s) between them. I doubt it. I'd have doubted it anyway, but even more so now that the two Qualcomm patents at issue here are more formidable than before. What might happen, however, is that the agreement ends regularly in 2025 or 2027, and the parties might then be far apart on patent valuation questions.

Qualcomm's "No License, No Chips" policy has been cleared by the Ninth Circuit, and the FTC didn't even try to appeal it to the Supreme Court. So I'm not implying anything unlawful here. It's just a commercial reality that Qualcomm is in a privileged position among SEP licensors. It rarely ever has to sue to get paid. It has about three times as many licensees as Ericsson or Nokia, as there is a "long tail" of small implementers that wouldn't be worth suing. And from the big ones like Apple, Qualcomm can collect a lot more. The Ninth Circuit basically said that it's up to Qualcomm whether it labels a part of its chip price as a patent royalty.

Once Apple doesn't depend on Qualcomm's chips anymore, that's it for "No License, No Chips" with respect to the most important implementer. And then Qualcomm may have to enforce its patents--SEPs (which it avoided last time) as well as non-SEPs (like in 2017-2019).

In a hypothetical 2025 or 2027 Qualcomm v. Apple infringement litigation, the two above-mentioned patents would most likely be asserted again. Frankly, I'd be surprised if they weren't. The PTAB rejected Apple's validity challenge, and Apple's appeal went nowhere due to a lack of standing. Unless Apple can dig up some previously undiscovered prior art of enormous strength, those patents are going to be hard to challenge. If Qualcomm got to enforce them, especially through injunctive relief (which could also take the form an ITC import ban; indeed, Qualcomm was asserting some other patents against Apple in the ITC), that might put some pressure on Apple. The '037 patent broadly covers a well-known feature: instead of taking a voice call, you can send a (typically predefined) message to the caller to explain your unavailability. The '362 patent may--I'd have to look at it more closely to be sure--read on how one switches between apps on the iPhone.

With the ITC, the effect would be more psychological: it would be quite hard to persuade an Administrative Law Judge--or the Commission, i.e., the five people who make the agency's final decision--to deem those patents invalid. In district court, the problem is that juries rarely consider patents invalid, so you depend on a stay pending a parallel PTAB IPR proceeding.

But how would Apple get a PTAB IPR instituted? First, the most fundamental question has not been--and could not reasonably have been--addressed in the case that was just tossed: estoppel. Apple may simply be estopped from challenging those patents with essentially the same arguments again because it tried and lost. Apple would argue that the previous challenge was somewhat incomplete: Apple lacked standing to appeal. Qualcomm's positions on this are a bit inconsistent: in a parallel case, Qualcomm's counsel argued that Apple was estopped; in this one, Qualcomm said that this was a question of first impression that the Federal Circuit hasn't addressed, and given that the Supreme Court is a court of final appeal, one can't ask the Supreme Court to resolve that question as a prerequisite to addressing the question of whether Apple had standing. The DOJ agreed with Qualcomm that the Supreme Court shouldn't have to take a matter of first impression.

Second, even if Apple wasn't estopped, the PTAB would be fairly likely to decline to institute an IPR, simply because it would doubt the petitioner's chances to prevail.

What could or should Apple have done differently? And what should other licensees and litigants learn from this?

What Apple could have done--but presumably elected not to do--would have been to declare and potentially proffer evidence with respect to the risks it expects to face from those patents in the future. Apple essentially contented itself with saying that Qualcomm had already picked those patents from a portfolio of tens of thousands of patents, and would likely pick them again. Even if Apple believes (as it very well may) that those patents are commercially essential, that they're still going to be relevant a few years down the road, and that it won't be possible then to worked around them without a temporary quality degradation of its products, it can't say so because it would weaken its position too much. Apple at least wants to have a chance to dispute infringement in the future, possibly after making some technical changes ahead of any renewed litigation with Qualcomm.

Apple also couldn't say now that it was certain the parties wouldn't agree on a new license agreement in 2025 or 2027. Apple's and Qualcomm's positions on what patent royalties are reasonable have historically been far apart. They're not going to close the gap in the coming three or five years. But how could Apple have made those points then without saying here and now that it would simply be infringing those patents in a few years?

So, Apple faced a dilemma, and probably made the right choice. At least Apple has achieved one thing: Qualcomm--in this litigation, though not in another--and the DOJ stated that Apple wasn't necessarily estopped from renewing its validity challenges later. That's better than nothing.

At least with the benefit of 20/20 hindsight, it's clear, however, that it was a bad idea for Apple to pursue those PTAB IPRs post-settlement.

It seems Apple was overreliant on the MedImmune precedent in which a party licensed two patents, and royalties were patent-specific, with the net effect of the invalidation of even a single patent being that obligations to pay royalties were reduced or eliminated. By contrast, it can be inferred from the Apple v. Qualcomm documents that Apple wouldn't have saved a cent if the two patents at issue had been invalidated. That distinction also persuaded the DOJ.

What would make most sense to do then?

  • If a party has enough leverage in litigation, and enough of a desire to keep challenging certain patents, it should insist on a clause according to which the outcome of--at least pending--validity challenges will entitle it to an adjustment of the royalty rate. How material that adjustment would have to be to establish standing is then another question that would have to be considered. But even a minor injury is better than none at all.

    While we're talking about non-SEPs here, this situation reminds me of something Presiding Judge Dr. Matthias Zigann (Munich I Regional Court, Seventh Civil Chamber) was contemplating in connection with SEP license deals resulting from a Huawei v. ZTE negotation. He had potential adjustments in mind. In Huawei v. ZTE, the European Court of Justice did place some importance on an implementer's ability to challenge patents.

  • Otherwise, one should withdraw all challenges. That's also what Qualcomm and the DOJ told the Supreme Court Apple should have done. If Apple had withdrawn its petitions prior to a PTAB IPR decision, there would have been nothing to appeal.

From a policy point of view, one may indeed question the wisdom of not allowing a PTAB petitioner to appeal an adverse decision. In that regard, I understand Apple's course of action.

It's interesting to look at what the Federal Circuit decided (PDF) in parallel Intel v. Qualcomm case:

"This is not the first time this court has addressed this standing issue between these parties. In two prior cases, we found Intel had standing on appeal based on the fact that Qualcomm sued Apple Inc. for infringement of the patent at issue, and that a main component of the accused products identified in Qualcomm’s infringement contentions was manufactured by Intel.[...] We see no reason to find otherwise in this appeal. As such, Intel has demonstrated a non-speculative risk of being sued by Qualcomm for infringement and therefore has standing to bring this appeal."

Let that sink in:

Apple was indeed sued by Qualcomm. Intel was only indirectly affected (customer suit). Apple is still in the same business as before (and expanding into more and more businesses), while Intel has exited the business in question.

Still, Intel "has demonstrated a non-speculative risk of being sued by Qualcomm for infringement" but Apple does not--because Apple has a license at this stage, though it will for sure expire before those patents do. One doesn't have to find the combination of these two outcomes perfectly logical.

In the end, what might have played a role here is that Apple v. Qualcomm was simply--as Qualcomm said--a poor vehicle for asking the Supreme Court to address on how to apply MedImmune to portfolio licenses. This here had a lot to do with legal technicalities, and psychologically Apple's primary problem may have been that the Federal Circuit, the DOJ, and ultimately the Supreme Court just couldn't see a pressing and legitimate reason for which Apple kept challenging those patents after the 2019 settlement instead of leaving Qualcomm and its patents alone.

This has been a counterproductive exercise for Apple, and Qualcomm is going to feel even stronger when the parties discuss their next patent license agreement.