Wednesday, July 6, 2022

Jail sentences for execs of Apple, Google, other gatekeepers over abuse of market power contemplated by German government-appointed expert group's proposal for enforcement of Digital Markets Act

The European Parliament made tech policy history yesterday with its vote on the Digital Markets Act (DMA), which was adopted by 588 votes (more than 98%) in favor versus only 11 against (31 abstentions). It is a mere formality that the EU Council will formalize--after the summer hiatus--a political agreement previously reached between Commission, Parliament, and Council.

The near-unanimous vote shows that the need to combat the abuse of market power by digital gatekeepers is not an ideological issue. It's simply common sense. There is a similarly encouraging trend in the United States, with ever more lawmakers from both sides of the aisle backing the Open App Markets Act (OAMA). It's not a question of left or right that conventional competition law is simply not equipped to deal with the multitude of abuses seen in connection with Apple's and Google's app stores as well as some other digital platforms.

The recitals thoughtfully explain the need for swift and decisive intervention and reflect a profound understanding of the issues involved. Traditional antitrust investigations that take years (and even more years including the appeals) provide abusers of market power with too many excuses--and take too long before they bring about change. The scope and scale of the abuse of market power by some gatekeepers is so dramatic that new laws are needed to remedy market failures. Measures that would have seemed (and actually been) way overreaching 20 years ago must now be put in place because the alternative--letting the abusers get away with the increasing returns of their misconduct--would do too much harm to innovation, competition, the economy at large, and society.

The next steps are for the European Commission to flesh out guidelines and to designate the initial set of gatekeepers to whom the regulation will apply.

The Commission will be the primary--but fortunately not the exclusive--enforcer of the DMA. It is now key that the Commission allocate the prerequisite resources for the monumental tasks ahead. The EU Parliament's DMA rapporteur, Andreas Schwab MEP (EPP-Germany), originally wanted the Commission to assign a staff of at least 180 full-time public servants to the enforcement of the DMA, and is at this stage calling for a headcount of at least 150. In a LinkedIn article, EU internal market commissioner Thierry Breton outlined how the Directorate-General for Communications Networks, Content and Technology (DG CONNECT)--one of two DGs working for him--will staff up for this purpose. The Directorate-General for Competition (DG COMP) under Executive Vice President Margrethe Vestager will also play a key role.

After the DMA has formally taken effect and the Commission has designated gatekeepers in certain markets, the new law can be enforced in national courts, provided that inconsistencies with the Commission's enforcement decisions are avoided. The Commission's decisions are, just like in traditional competition law, reviewable by the Court of Justice of the EU.

EU member states must not enact legislation that conflicts with the DMA, but they are free (if not encouraged) to pass national laws that bolster its enforcement. In Germany, some high-level suggestions for such a legislative initiative have been made by the Monopolies Commission, which is independent but appointed by the country's federal government.

Those proposals are part of a voluminous report on a number of competition issues. In light of the international importance of tackling non-contestable digital ecosystems, the Monopolies Commission published an official English translation (24 pages, PDF) of Chapter V on the potential need for further regulation. The experts welcome the DMA, saying that "the EU has indeed placed itself at the forefront of a global development."

The second paragraph of the executive summary is particularly interesting--especially its last sentence:

"The German legislator can support the enforcement of the DMA in particular with rules to facilitate private actions for injunctive relief and damages. As an accompanying regulatory measure, it could foresee administrative restitution orders according to which gatekeepers must reimburse the profits gained from DMA violations to the damaged market participants – potentially on a lump-sum basis. In addition, the introduction of a fine or criminal liability of the responsible management should be examined." (emphases in original)

Para. 22 of that section of the report elaborates on the idea of criminal liability:

"The German legislature could furthermore also provide for criminal provisions, as also exist in some instances in the law on regulated network industries (cf. sections 95a and 95b of the Energy Industry Act), and when it comes to dealing with data that are secured against unauthorised access (cf. sections 202a-202d of the Criminal Code [StGB]). The problem that arises for instance in cartel prosecution, namely that punitive fines undermine existing leniency programmes, does not apply to violations of the behavioural provisions of the DMA."

Para. 77 discussed the same idea:

"The German legislature should furthermore examine introducing a fine or criminal liability of the responsible management for violations of the behavioural obligations and transparency provisions of the DMA. As to the details, it could take as an orientation for instance section 228 subsection (2) of the Telecommunications Act and/or sections 81 et seqq. of the Competition Act (also in conjunction with sections 9 and 130 of the Act on Regulatory Offences), and where appropriate also sections 95a and 95b of the Energy Industry Act and sections 202a et seqq. of the Criminal Code."

It's worth noting that under German law, patent infringement can also give rise to criminal liability, though all the patent cases I've seen were civil lawsuits. Just the possibility--even if only a remote one--of misconduct having consequences under criminal law can serve as a strong deterrent.

With or without that proposal getting traction, German I would expect the EU's largest member state to also become the most important jurisdiction for DMA enforcement through private litigation (just like most European patent infringement actions are brought in Germany). Among German courts, Munich may again play a key role. I warmly recommend filing cases with the Munich I Regional Court, where Presiding Judge Tobias Pichlmaier of the antitrust-specialized 37th Civil Chamber (the division to which I would expect DMA complaints to be assigned) has demonstrated in his years on the bench of the court's patent-specialized division his analytical skills in a technological context. He's not going to be gaslighted by the Apples and Googles of the world with "security" and other pretexts. It means nothing with a view to DMA enforcement that Judge Pichlmaier often took antitrust-minimalist positions on the enforcement of standard-essential patents, a complicated topic at the intersection of patent and antitrust law that is not representative of other areas of competition law. Just this year his understanding of EU law was validated by a European Court of Justice ruling that agreed with his take on preliminary patent injunctions.

I will follow the implementation and enforcement of the DMA with great interest. The Commission and the EU's legislative institutions have done an amazing job on that piece of legislation. But a lot of hard work is still ahead of the Commission--and the courts of law.

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Continental bothers Fifth Circuit again with petition for rehearing en banc and makes false representation of practical effects of Avanci patent pool agreement

The United States Court of Appeals for the Fifth Circuit has done everything it possibly could to make automotive supplier Continental realize that its "antitrust" complaint against the Avanci patent pool and some of its licensors (Nokia, Sharp, Optis) is not going to be revived. The court didn't even formally deny Conti's motion for an extension of time to file another petition for rehearing en banc. The deadline was yesterday. Conti's counsel--instead of giving up a strategically lost position--worked over a long weekend (Monday was Independence Day) and filed its second petition for rehearing in the same case, even at risk of being sanctioned for abuse of procedure.

So here's the new petition, on which I'll share a couple of observations further below:

https://www.documentcloud.org/documents/22080066-22-07-05-continentals-renewed-petition-for-rehearing-en-banc

The fundamental problem is still the same: Conti is wasting the judges' time as it won't win regardless of the "issues" the tireless, tiresome tire company purports to raise. While the panel didn't explicitly affirm the district court's holding that Conti lacked antitrust standing, it didn't reverse that part either. A lack of standing could also have been the basis--or part of the reason--for concluding that Conti had failed to state claims. All that the revised panel opinion said that was that "Continental failed to state claims under Sections 1 and 2 of the Sherman Act"--as opposed to saying there's no Article III standing (which is not specific to antitrust but broader) like in the first version. It's not definitively clear whether the district court was affirmed all the way or only with respect to the final part of its analysis. Therefore, Conti's interpretation is not necessarily right, and Conti would have to show in a hypothetical continuation of the process that it had antitrust standing.

Even the lack of Article III standing (the panel's original holding) could come up again, though it's less likely, given that the panel itself withdrew its original decision. At least antitrust standing continues to be a serious issue not addressed by Conti's petition. With a view to antitrust standing it's also important to keep in mind that Conti is simply not the right plaintiff.

The panel opinion 2.0 merely affirms the district court without further analysis, so the district court's decision (almost two years old by now) is all that Conti can attack. Just like after the first panel opinion, what Conti does is to take particular statements out of context--so they look really broad--and to suggest that if those statements were reversed or narrowed, Conti would all of a sudden have a case. Not so. For instance, Conti's petition ignores footnote 15 of the district court's judgment. The context is that Conti says the relevant patent holders defrauded the standard-setting process by making FRAND promises they never intended to keep in the first place, thereby excluding other technologies belonging to right holders who would have complied with FRAND. The district court found that a Section 2 monopolization claim requires an allegation of harm to the competitive process itself, not just to competitors. The district court indeed held that even if some other companies' technologies had not been included in the standard, that would not be anticompetitive unless the competitive process itself was harmed (which is simply settled antitrust law). But it also expressed doubts in a footnote about whether Conti--even if one applied a different legal standard or assumed that Conti had shown harm to the competitive process--had even made a sufficient pleading as to the exclusion of competitors:

"The Court is also skeptical that such exclusion has been properly alleged. Plaintiff only includes conclusory allegations that alternatives were presented and rejected by the SSOs for the 3G and 4G standards and that if there were no alternatives to a given technology, the SSOs would have been obligated to abandon those parts of the standard. [...]. There is no indication of what these potential alternatives were, that they were alternatives to any of Defendants’ SEPs, or that they were excluded because of Defendants’ allegedly fraudulent FRAND declarations. Even if the SSOs had known that the Licensor Defendants did not intend to comply with their FRAND obligations, the SSOs may nevertheless have adopted the Licensor Defendants’ SEPs and chosen to insure compliance based on the Licensor Defendants’ contractually binding FRAND commitments, which are enforceable regardless of any alleged deception by the Licensor Defendants."

So Conti's Section 2 claim is defective in more than one way. Conti makes it sound like the district court is fine with just any deception of an SSO, but in reality, the district court just explained that it takes more than Conti's pleadings to make it an antitrust issue. One major issue with the alleged "fraud" is that it's not about a violation of SSO rules (such as failing to disclose an essential patent): the accusation is that patent holders like Nokia never intended to comply with FRAND when they made a FRAND promise. That notion is absurd.

Conti points to three recent cases in which the Fifth Circuit granted rehearing en banc of unpublished decisions. Still, the fact that the decision was designated as unpublished and non-precedential makes it most likely that the petition will be rejected. Last time the court asked the defendants for a reply; that may not even happen this time around.

Conti's Section 1 argument is that despite the Avanci patent pool agreement explicitly allowing contributors to grant bilateral licenses (to car makers, suppliers, anybody), licenses at the component level were not "fully" and "realistically" available to Conti--and they blame Avanci for it. The petition misrepresents the situation: it's not just that the Avanci agreement doesn't preclude patent holders from engaging in bilateral licensing, but Avanci licensors have granted bilateral licenses on various occasions. Nokia granted one to Daimler last year, and shortly thereafter announced that a second (unnamed) car maker had taken a direct license, too. Sharp and Conversant granted component-level licenses to Huawei.

Those real-world bilateral licenses belie, inter alia, the following passage from Conti's renewed petition:

"Moreover, a provision in the Avanci agreement that merely pays lip service to the possibility of individual licenses cannot defeat a § 1 claim if the provision has no practical effect."

The fact that patent pools can increase efficiency in licensing doesn't make them or their contributors antitrust offenders. There may very well be patent holders who tell a licensee that they prefer to license their patents through the Avanci pool. But that doesn't amount to a conspiracy any more than some car makers' decision to conclude a pool license rather than negotiate with (and potentially face litigation from) approximately 50 different patent holders. Licensors and licensees alike just want to reduce transaction costs.

The most likely next step is that the Fifth Circuit will reject this petition (the worst-case scenario for Conti being that the court will additionally impose sanctions for abuse of procedure). It's pretty clear that Conti is hell-bent to exhaust all appeals, so we'll probably see them file a cert petition with the Supreme Court in a matter of months...

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Tuesday, July 5, 2022

Nokia wins second Mannheim patent case against OPPO (4G/5G standard-essential patent) two weeks after previous injunction

On May 3, the Mannheim Regional Court held a Nokia v. OPPO trial over a patent that was originally declared standard-essential to the 4G (LTE) standard and later to 5G: EP2981103 on an "allocation of preamble sequences". That same patent won Nokia an injunction against Daimler two years ago, but I believe OPPO developed a stronger non-infringement (non-essentiality, to be more precise) argument. Nevertheless, the Mannheim Regional Court's spokesman has just informed me that Nokia's complaint "has succeeded for the most part."

Two weeks ago, the same division of the same court granted Nokia a non-standard-essential patent injunction against OPPO.

OPPO is countersuing Nokia over 5G SEPs. The Munich I Regional Court conducted a first hearing in one of those cases in May, which went very well for OPPO. At least at the time of that hearing, OPPO wasn't pursuing injunctions, though its counsel kept that option on the table for the future.

What's next?

The Karlsruhe Higher Regional Court has the authority to stay the enforcement of patent injunctions during the appellate proceedings, provided that an appellant-defendant is more likely than not to prevail on appeal. OPPO is in a position to raise important questions, such as

  • the validity of the WiFi-related non-SEP (first injunction),

  • the essentiality of EP'103 (today's judgment), and

  • FRAND-related questions (today's judgment), which are particularly interesting here given that Nokia sued within days of expiration of a prior license agreement and it's a two-way dispute.

In a scenario in which the appeals court doesn't stay enforcement, the next question would be whether OPPO could work around those patents. Assuming that at least one of the patents can't just be worked around, its German resellers (telecommunications carriers, retail chains like MediaMarkt) could still buy OPPO's products before enforcement begins--and even after enforcement has begun, they could source those products in countries in which Nokia has not won an injunction, though Nokia could theoretically sue them (which in the case of mobile carriers would be a difficult decision as they are Nokia's network infrastructure customers).

Only a rather small part of OPPO's worldwide sales is generated in Germany. So even if OPPO's German sales were materially affected, the impact on a global scale may still be limited. Settlements can fall into place anytime, and patent infringement rulings are a driver of settlements. Here, however, it is not a given that Nokia already has enough leverage over OPPO, given that OPPO sells most of its devices in other markets, particularly in some rather price-sensitive geographies. It will be interesting to watch what happens next.

Other parties who have yet to renew their license agreements with Nokia, and who generate a larger portion of their global sales in Germany than OPPO does, will now have to think really hard about the prospect of litigation.

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Sunday, July 3, 2022

Seeking panelists for podcast on how to ensure security in open and closed app markets

It's been more than a year since the last FOSS Patents podcast, which was about developments relating to standard-essential patents. The next one will have a rather different focus: the security of open and closed app markets.

All around the globe, lawmakers, regulators, and courts are looking into, and in some cases are trying hard to open up, walled gardens like Apple's iOS App Store and Google Play (the dominant Android app store). From the app market-specific passages of South Korea's 2021 Telecommunication Business Act and the related Enforcement Decree to the Digital Markets Act (which is on the European Parliament's plenary agenda for tomorrow) to the Open App Markets Act proposal (U.S. Congress) to Epic Games v. Apple, change is coming. But Apple and Google--and various people on their payrolls--argue that "sideloading" and third-party app stores compromise security. Not just your security or mine, even national security.

These days (national) security arguments come up in different technology policy contexts. Without a doubt, security is important--but this doesn't mean every (national) security argument withstands scrutiny.

Let's take an analytical approach:

What is done--and what can still be done--to ensure that users can safely download and execute apps? What are the main threats? What role does (manual) app review play as compared to technology, especially the operating system? Would notarization of apps passing a security check be helpful? What security risks emanate from browsers? Does competition result in security improvements?

Those are just some of the questions I have in mind for a panel discussion in the form of a podcast. There won't be time to discuss all of them, at least not in a single podcast. Also, I'm open to other suggestions.

If you'd like to participate or suggest someone I should invite, or provide other input, please send me an email. My address couldn't be easier to guess: it's first name dot last name at this blog's Internet domain. Thanks in advance!

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Saturday, July 2, 2022

UK consumer class action against Apple's app tax passes legal and factual plausibility test: Competition Appeal Tribunal gives guidance, lets case go forward

Just yesterday, I quoted Elon Musk on lawyers often being the real plaintiffs in class actions, but in commenting on a sham settlement between Google and a few U.S. developers also noted that sometimes class actions do bring about important results, particularly the Pepper v. Apple antitrust-based consumer class action that made it all the way up to the Supreme Court and--at least psychologically--paved the way for Epic Games v. Apple.

Hausfeld, a firm specializing in antitrust damages with offices in multiple countries, is one of the firms involved with the aforementioned Google cases, but they also do some much more significant work. In particular, their German office is playing a very important role in complaints with the European Commission as well as national competition authorities over various forms of misconduct by Apple and Google. And their UK consumer class action against Apple (for overcharging through the app tax), i.e., the British equivalent of the aformentioned Pepper case, looks ever more interesting.

The Competition Appeal Tribunal in London published a short summary as well as the entire 35-page decision (PDF).

The easier part for the court to resolve was the certification of the class, including that it's an opt-out rather than opt-in class: Apple wasn't challenging that part. Also, Apple wasn't trying to get the exclusive dealing and tying claims thrown out at this early procedural stage (at the earliest, the case will go to trial next year)--but Apple was trying to get the unfair pricing claim stricken. The key EU precedent for unfair pricing--which applies to British cases with respect to the period until Brexit, and still has some persuasive weight--is United Brands.

The standard for the class action lawsuit to survive Apple's early challenge was neither as low as Hausfeld merely having to establish that their representative client (economist Dr. Rachael Kent) had an actional antitrust claim nor as high as proving a likelihood of success on the merits. It was in between, basically a legal test that also involved a plausibility assessment of the factual allegations (U.S. readers will feel reminded of Twombly).

What's interesting here is that Apple's motion apparently backfired. It wasn't merely dismissed but the court effectively--whether intended or not--also gave guidance to Hausfeld and their economic expert witness with a view to future testimony.

Apple argued that the theories for what would have constituted fair pricing in a but-for scenario came down to a cost-plus theory (offsetting costs and generating some limited profits) without sufficient attention to demand-side effects, such as Apple creating features that enable app developers to make more money. The court, however, noted that the plaintiff's expert witness, Mr. Holt, actually compared Apple's return on capital employed (ROCE) to its weighted average cost of capital (WACC)--and will have to tread carefully in the further process so as not to lend credence to Apple's "it's just cost-plus" argument. The court "agree[s] with Apple that Mr Holt is somewhat abrupt in his explanation of his assessment of demand side factors--but that is exactly what will help the plaintiff side to optimize its case, while there is nothing in the decision that would better enable Apple to defend itself.

Hausfeld set up a website for the UK class action. Notwithstanding my general reservations concerning the actual impact of class actions on the (mis)conduct of large corporations, this one stands out as a particularly interesting one.

The UK decision mentions regulatory investigations and lawsuits around the globe. Apple and Google are facing ever more challenges to their app distribution terms and practices. For one example of many, I can't imagine the Korea Communications Commission would accept without a fight that Apple and Google charge a 26% fee (which Apple doesn't even adjust for cases where the regular app tax is 15%--small businesses, second-year subscriptions) even on payments processed by third parties.

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*Another* judge finds Apple's conduct in Ericsson dispute 'puzzling', denies addition to prior art list--and Ericsson opposes *another* questionable Apple motion to amend (FRAND defenses)

After a series of setbacks that Apple suffered against Ericsson, Administrative Law Judge (ALJ) Cameron Elliot handed the iPhone maker its first--partial and non-final, yet significant--win in that dispute: a claim construction order that greatly increases the likelihood of Apple avoiding an import ban over two of the three patents Ericsson is asserting in the last-filed and smallest one of this year's ITC complaints. So if there is any judge right now Apple can't possibly suspect of being biased in Ericsson's favor, that would be ALJ Elliot.

But just like Judge Rodney S. Gilstrap (the Chief Judge of the United States District Court for the Eastern District of Texas), who was "puzzled by the hot-then-cold positions taken by Apple" (emphasis added), ALJ Elliot now finds Apple's position on a procedural question "puzzling" and "implausible" (this post continues below the document):

https://www.documentcloud.org/documents/22077834-22-07-01-itc-1301-order-denying-apple-motion-to-amend-notice-of-prior-art

The favorable (from Apple's perspective) parts of the claim construction order in the same case don't render this denial of Apple's motion to amend the prior art list irrelevant: this is about a prior art reference Apple wanted to field against the '454 patent, with respect to which Ericsson fared much better at the Markman stage than in the case of the other two patents-in-suit. There is a factual dispute left to be resolved, but as ALJ Elliot noted in the claim construction order, "just the fact that the disclosed component is labelled a 'controller' rather than, say, a 'microprocessor' is sufficient to undermine confidence in Apple’s expert evidence." So Ericsson still seems to be in pretty good shape with respect to the '454 patent, unless Apple can prove it invalid.

ALJ Elliot's order denying Apple's motion to amend its notice of prior art by extension vindicates my criticism of Apple's motion (I noted that one rarely sees motions that are so obviously meritless as that one):

  • "[The point in time when Ericsson again stated its position] is both irrelevant, because the priority date is on the face of the patent, and implausible, because the priority date had been in dispute in the IPR for weeks, and because of the Complaint’s priority date allegation." (emphasis added)

  • What's worse, even at the point when Ericsson again (and even by Apple's own admission in the motion) stated its position on the priority date (May 12), Apple still had one day left to add that Pahlavan document to its notice of prior art. As ALJ Elliot notes, "although one day is admittedly not much time to revise the draft NOPA in light of Ericsson’s formal statement regarding priority date, it is puzzling that Apple did not simply just add the handful of prior art references from the IPR petition to that draft." (emphasis added)

  • The U.S. trade judge goes on to say:

    "Equally puzzling is why it took so long for Apple to do anything about the omission after it was discovered. According to Apple, it learned of the problem on June 1, 2022. See Memo. at 3. For no reason apparent from the record, it did not inform Ericsson of its intent to rely on Pahlavan until one week later, and waited to file the present Motion until June 14, 2022, almost two weeks later." (emphasis added)

  • If Apple had (as it did not) presented a good reason for having originally failed to list the Pahlavan document, ALJ Elliot actually would have granted the motion because he would have deemed it reasonable to let Ericsson take a position on the related invalidity theories within about six weeks. But "Apple’s lack of meaningful explanation for its error and lack of diligence in fixing it outweighs the balance of prejudices."

For the avoidance of doubt, ALJ Elliot is presiding over a non-SEP case.

There's also news from a standard-essential patent (SEP) case: the investigation of Ericsson's first 2022 ITC complaint. In that one (investigation no. 337-TA-1299), there's now a pattern of Apple trying to amend pleadings once the Office of Unfair Import Investigations (OUII, frequently referred to as the "(ITC) Staff") disagrees with it. It happened with respect to claim construction as well as Apple's FRAND defenses, all but one of which the Staff says are ripe for dismissal. So Apple brought a motion to amend those affirmative defenses, and yesterday Ericsson filed its opposition to that motion (this post continues below the document):

https://www.documentcloud.org/documents/22077835-22-07-01-itc-1299-ericsson-opposition-to-apple-motion-to-amend-answer-to-complaint

Sorry to say so, but Apple is once again playing tactical games to an excessive extent.

For example, Apple took an ITC precedent out of context by quoting it as follows:

"[T]he Commission generally favors allowing respondents to amend their answers to the complaint"

But this is what the decision (order no. 11 from inv. no. 337-TA-929, Beverage Brewing) really says:

"[T]he Commission generally favors allowing respondents to amend their answers to the complaint provided a showing of good cause as well as no prejudice to the public interest or to the other parties in the investigation." (emphasis added)

So there is no general presumption in favor of amendments to answers to ITC complaints: instead, there are clear criteria. Ericsson, of course, argues in its opposition brief that Apple has not shown good cause, and that an amemdment would be prejudicial as it would simply delay or, as the final part of Ericsson's brief says, "does not facilitate the efficient disposition of issues in this Investigation."

Ericsson says Apple has been pursuing a wait-and-see approach (because Apple brought its motion to amend only after Ericsson had brought a motion to strike those defenses) and is now basically just arguing that as a result of initial discovery, it can present improved versions of those defenses. But

  • legally defective defenses can't be cured by new facts (not only Ericsson but also the Staff--with the exception of one FRAND defense--considered those defenses legally defective), and

  • in cases where the ITC granted amendments in the form of new facts, the respondents clarified in their motions to amend what facts they were going to bring up (and Apple itself did so when it brought such motions in other investigations).

What Apple is doing in those Ericsson cases goes beyond leaving no stone unturned or trying the occasional long shot.

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Fifth Circuit treats Conti as nuisance, doesn't dignify motion for extension of time with prompt decision: Continental v. Avanci 'antitrust' case over automotive patent licensing is dead end

The reasonable and rational thing for automotive supplier Continental to do now would be to recognize that its meritless "antitrust" action against Avanci and some of its licensors (Nokia, Sharp, Optis) is--and always has been--an error. Conti has not convinced, and never will convince, a U.S. judge that it has standing and actionable claims under the Sherman Act. It's over (as the Fifth Circuit issued a revised panel opinion that throws out the case, just on a different, more case-specific basis). The sooner Conti comes to its senses, the better.

This here is a brief follow-up to a Thursday post, Continental and its counsel risk abuse-of-procedure sanctions from weary Fifth Circuit if they file another petition for rehearing. As I mentioned, the court gave flatly denied Conti's request for a 30-day extension to file another petition for rehearing en banc--and as I explained, the Fifth Circuit's published rules make it very clear that the number one problem of abuse of procedure faced by the court are all those en banc petitions, given that the fewest cases (less than 1%) are heard by the full court (and of the few that do make it there, a large percentage get there because of a judge, not a party, making the proposal). Conti and/or its counsel may get sanctioned, and in the present case there really would be a basis for that, as a decision designated as unpublished and non-precedential can hardly satisfy the criteria for a rehearing. Moreover, even if one disagreed with the district court and at least one of the panel judges (Circuit Judge Ho) on the question of antitrust standing for lack of injury, it is fair to say, at a minimum, that Conti cannot point to a pressing problem such as on the infringement litigation front.

The denial of Conti's motion for an extension of time was already a clear sign that the appeals court has had enough of this. Unfazed, Conti just brought another motion for an extension: as counsel for Avanci and its codefendants had told Conti's counsel they wouldn't oppose a 14-day extension, Conti thought the Fifth Circuit might grant a new motion.

But there's just radio silence from the court.

The judges left for a long weekend, right after which (as Monday is Independence Day) there is the statutory deadline for a rehearing petition. Unless there was just a logistical reason and the court informed Conti by telephone that the two-week extension would be granted (whic hI doubt), this leaves Conti and its lawyers with only two choices:

  1. Act like grown-ups, enjoy the weekend, and give up a strategically lost position. If all else fails, find a good psychotherapist to help you overcome the trauma.

    Or:

  2. Go into crunch mode and produce another rehearing petition, which won't have any effect other than, potentially, sanctions and the embarrassment that goes with them.

There are strong reasons in favor of the first option. One of them is that former Chief Judge Stewart, who denied the first motion for an extension, doesn't have reading-comprehension problems, unlike Conti, which didn't even observe the court's clear instructions when filing its first rehearing petition (they had to refile in order to add some missing--but mandatory--elements). Judge Stewart saw that Avanci and its co-defendants wouldn't have opposed a 14-day extension. He could have granted a 14-day extension right away had he been so inclined.

Conti must know when it is not wanted. This here is such a case. The court is already treating Conti as a nuisance. Can't blame the judges, really.

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Friday, July 1, 2022

Apple, Google testing limits of Korean law on in-app payment systems by charging 26% commission that renders use of alternative payment systems unprofitable

Ten months after South Korea's legislature enacted an amended Telecommunication Business Act with new rules governing in-app purchases as well as app reviews, and almost eight months after Google outlined how to adjust its in-app payment rules accordingly, Apple yesterday published rules for "distributing apps using a third-party payment provider in South Korea." What we're seeing there bears a strong resemblance to Apple's behavior in the Netherlands after the Autoriteit Consument & Markt (Authority for Consumers and Markets; ACM) determined that Apple's in-app payment rules were violating European and Dutch antitrust laws with respect to (in that specific case) dating apps:

  • Yes, app developers can now--in principle--use different payment systems without their apps necessarily being rejected on that basis.

  • No, it's not going to make sense for them to do so because Apple--which in Korea also applies to Google--charges a commission even on payments processed by other service providers that has the same effect--that of an "app tax"--as before.

  • Bottom line: Heads, Apple (or Google) wins. Tails, developers lose.

It was to be expected. Within a few days of the Korean legislature's decisive vote, Professor Damien Geradin (whose firm, Geradin Partners, is a leading antitrust boutique in Brussels and London) wrote on the Platform Law Blog:

"The lingering question is whether Apple and Google will do the right thing and voluntarily end the imposition of [Apple's In-App Purchasing] and [Google Play Billing] in the rest of the world or will try to delay the inevitable by fighting antitrust investigations and regulatory initiatives country-by-country. While I hope for the former, I fear the latter."

Those fears have been validated:

Last November, not long after Google announced its plans for how to "comply" with the new law, I described Google's intentions as "bad-faith compliance" and wrote that "South Korean lawmakers must go back to the drawing board if they respect themselves and want to be respected." More than seven months later, I still think that would be the most reliable way forward, but in a more optimistic scenario for app developers, the KCC's Enforcement Decree would be deemed to be within the scope of the 2021 version of the Telecommunication Business Act and to have scope for fining Apple and Google, though the 2% fine the law currently enables may not be enough of a deterrent anyway.

The enforcement guideline lists various types of conduct that constitute "unfair acts" under the 2021 law, the sixth and last item of which translates (unofficially) as follows:

"Conduct that forces [app developers to use] a particular payment system by imposing unreasonable, discriminatory conditions or restrictions in connection with fees [...] on Mobile Content Providers who use an alternative payment system."

The law itself focuses just on the need to open up the market for alternative payment systems. With a view to Android, this means apps shouldn't be required to use Google Play Billing; on iOS, it's called In-App Purchasing.

Is the 26% commission that Google announced in November and Apple published yesterday an unreasonable, discriminatory condition affecting revenues generated through alternative payment systems? And what about other restrictions, such as Apple requiring a separate app for South Korea? Does it all amount to an attempted end-run around a law meant to open up the market and give developers (not just consumers) choice of payment systems and a chance of avoiding the app tax?

A few observations:

  • While Google makes it clear that developers entitled to a reduced rate of normally 15% will be charged only 11% (15%-4%) in South Korea, Apple is being as unreasonable, uncooperative, and arrogant as it could be, and ignores its own Small Business Program by just demanding 26%--meaning that developers using a third-party payment processor in Korea would have a total cost that is about twice as high as if they used Apple's IAP.

    In the Netherlands, Apple started out with the same insult to human intelligence, which I believe does constitute discriminatory pricing, but later (after some contempt fines) said there would always be a 3% reduction (i.e., 12% under the Small Business Program).

  • Why the offset is 3% in the Netherlands and 4% in Korea is unclear. Maybe it's because Google came out first with the 4% figure, and Apple followed suit. It may also have to do with the fees charged by the very few payment service providers Apple currently accepts in Korea, one of which is Inicis, which has a standard fee of marginally more than 3%. It could also be that Apple has to err on the side of caution in Korea--where it's dealing with an actual law--while "only" facing an antitrust authority's decision in the Netherlands. The 3%/4% inconsistency does look odd whatever the reason(s) may be.

  • Just like (initially) in the Netherlands, Apple wants separate apps (also called SKUs, which means "shelf-keeping units" and was already the standard term in the days of "shrinkwrapped" software distribution) for the Korean market if an alternative payment processor is used. That requires app developers to get their users to switch from the app they already have to a new one. In the Netherlands, Apple backed down in that regard, though only temporarily so: Apple reserves the right to change its terms again should it prevail (in whole or in part) on appeal.

  • It would have been more cooperative for Apple to make the same concessions--applying the reduction to the Small Business Program and post-first-year in-app subscriptions, too--from Day One in Korea that the Dutch ACM got Apple to make. But as I said, Apple still takes the position it doesn't really have to do so in the Netherlands, and may just want to have some more bargaining chips for the further process in Korea. The problem is that Apple has so far gotten away with such arrogant and recalcitrant behavior without having been penalized in a way that really hurts. And a 2% fine by the KCC would not really matter to Apple.

  • It's foreseeable that Apple will argue the law itself doesn't require it to make third-party payment options more attractive than its own, and that the law says nothing about commissions (or royalties for intellectual property rights). From a common-sense point of view, the KCC can make a strong point here, but again, the statute could be stronger and clearer.

On the same day that Apple announced its new IAP rules for Korea, Google and class-action lawyers for certain developers filed a motion for preliminary approval of a proposed settlement of antitrust lawsuits over Apple's IAP commission, while new class-action complaints against both Apple and Google were filed in Australia (on behalf of end users, though). So far, no single case or legislation has been a total game-changer. The European Union, however, is soon going to enact its Digital Markets Act--it's on the European Parliament's plenary debate schedule for Monday (Independence Day in the U.S., but a regular workday in Europe). The DMA may be the most powerful measure, but even that one will ultimately have to be enforced, and Apple and Google are not going to interpret it the way many app developers (reasonably) would.

In the end, what may lead to change here is the combination of all those regulatory and legislative measures around the globe, plus litigation (by the way, in a couple of weeks Apple will file its final brief in the Epic Games v. Apple case before the Ninth Circuit holds a hearing). This blog will continue to comment on a variety of cases in numerous jurisdictions.

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Developer class action settlement with Google over Google Play tax on Android apps: same sham as in Apple App Store case, offers material benefits only to monopolists and lawyers--meanwhile, new consumer class actions filed in Australia

I don't mean to engage in media bashing, especially not in connection with mobile app stores where press coverage has really informed many people of the serious issues affecting my fellow developers and me. But Elon Musk does have a point about class-action law firms (often) being "the real plaintiffs, not the puppets they find to masquerade as such":

When class actions are brought against large corporations, they usually appear more formidable than they ultimately turn out to be. In-house lawyers often tell their colleagues in charge of running the business to keep calm because "it's just another class action." In other words, it's only going to be about money, particularly for the lawyers.

However, sometimes good things with a structural effect do come out of class action lawsuits. In the app store context, the Pepper v. Apple case is a great example: it went all the way up to the Supreme Court, which (unlike Judge Yvonne Gonzalez Rogers, and only by a narrow vote) determined that iPhone users are directly harmed by--should there be any--monopoly abuse by Apple in the form of excessive App Store commissions. In a way, Epic Games then jumped on the bandwagon and brought its own cases against Apple and Google, knowing that the class actions (from which Epic opted out as it had to) were not going to be the definitive answer.

Having said that, here's the latest development in mobile app store class actions--a motion for preliminary settlement approval in several cases targeting Google over its Google Play Store terms and practices in the Northern District of California:

https://www.documentcloud.org/documents/22077056-22-06-30-app-developer-class-action-v-google-motion-for-preliminary-settlement-approval

This motion didn't come as a total surprise: a May 25 filing had already announced that an agreement on the principal terms had been reached, and the original plan for last night's motion was to be submitted two weeks sooner.

Those class actions were consolidated with the far more serious cases brought in the same district by Epic and the attorneys-general of 36 U.S. states. There's now going to be some back and forth about whether the settlement should be approved, but it's unlikely that the court will say "no, you gotta keep litigating."

There was also a lot of outrage at a similar deal (involving partly the same people) with Apple, such as a statement by the Coalition for App Fairness, from which I'll quote now because this equally applies to the structurally very similar proposal for a class action settlement with Google:

"Apple’s sham settlement offer is nothing more than a desperate attempt to avoid the judgment of courts, regulators, and legislators worldwide. This offer does nothing to address the structural, foundational problems facing all developers, large and small, undermining innovation and competition in the app ecosystem. [...] We will not be appeased by empty gestures and will continue our fight for fair and open digital platforms."

Just like in the Apple case, it's about

  • roughly $100 million to be distributed to small developers,

  • meaningless promises (for instance, Google won't backtrack on its small business program for the next few years, which I'm sure it wouldn't have intended during that timeframe at any rate), and

  • above all, it's about this:

    "Plaintiffs will make a request for attorneys’ fees of up to $27 million, which represents 24% of the sum of the cash Settlement Fund ($90 million) and structural relief ($22 million) that can be reasonably quantified ($112 million total). This does not account for the other forms of structural relief that were likewise included in the Apple settlement and found, at final approval, to be 'valuable to the settlement class.'" (emphasis added)

What could be more befitting of a sham settlement than seeing Google--the company that says it manages the world's information--not even getting the date of its blog post on this deal right? Look at this screenshot (I'm pretty sure they'll fix it shortly, but I took this screenshot around midnight Pacific Time with Chrome for Windows):

The post was made on June 30, but Google (until they fix(ed) it) said July 30.

The real issue, however, is that this is simply a cheap way for Google to be let off the hook and to make it look like the issues that Epic and 36 state AGs are still suing them over have gone away--which they haven't.

The blog post says this about the lower commission rate for little guys:

"To continue to provide developers with a tiered pricing model, we’ll maintain Google’s 15% commission rate for the first $1 million in annual revenue earned from the Google Play Store for U.S. developers, which we implemented in 2021."

What Google omits there is that it's only a short-term commitment. The court filing itself says this:

"The Settlement requires that Google maintain this program for U.S. developers through at least May 25, 2025." (emphasis added)

Like in the Apple case, some out-of-app communication with users will be allowed. With respect to how little value that has, may I just refer you to the Coalition for App Fairness statement mentioned further above.

Google is also leveraging this settlement to make it sound like alternative app stores had a level playing field on Android:

"In new versions of Android, Google will maintain certain changes implemented in Android 12 that make it even easier for people to use other app stores on their devices, while being careful not to compromise the safety measures Android has in place." (emphasis added)

With that safety (security) pretext, Google can still strongly discourage users from using other app stores than Google Play, or "sideloading." Let's again take a look at what the actual court filing says:

"Competing Stores. Developer Plaintiffs have alleged that one impediment to distributing apps outside of Google Play is that apps downloaded from other Android app stores do not automatically update. [...] The Android 12 operating system, released by Google on October 4, 2021, facilitates auto updates by allowing 'installer apps to perform app updates without requiring the user to confirm the action.'" (emphasis in original)

So this is about a feature that is almost a year old. I'm not saying it's totally useless. But this falls far short of addressing the host of issues identified and tackled by Epic and the 36 states.

Google also promises to do something it hasn't done yet, but which I'm pretty sure it intended to do at any rate:

"One of the most significant challenges for small developers is getting their apps discovered. The Settlement improves discoverability by requiring Google to create an 'Indie Apps Corner' on the apps tab on the U.S. homepage of Google Play and maintain it for at least two years following final approval. [...] This feature will spotlight a revolving roster of apps created by independent and small startup developers. Developers within the Settlement Class will be able to submit their apps for inclusion in the Indie Apps Corner, and Google will select qualifying apps based on objective criteria."

This isn't bad at all, but again, the issues are so fundamental that they can't be cured with cosmetics. Also, in my experience, "objective criteria" for app review (whether for the purpose of approval or for the selection of apps to be showcased) don't really exist beyond whatever may be measurable, such as memory footprint.

There's also an item that Google doesn't even mention in its blog post:

"For at least three years from final approval, Google will publish an annual 'transparency report' that (at a minimum) will convey meaningful statistics such as apps removed from Google Play, account terminations, and objective information regarding how users interact with Google Play."

The bottom line is that class action lawyers and Google have agreed on a window-dressing package. The primary beneficiary are the lawyers; the secondary one is Google, which saves litigation costs, avoids the risk of potentially having to pay really large amount to developers (as most developers will likely not care to opt out of the settlement) should Epic and the 36 states prevail, and will way overstate the significance and usefulness of those promises.

Meanwhile, Apple and Google have been slapped with new class action lawsuits in Australia.

The Australian Financial Review was first to report (though largely behind a paywall) on "twin legal actions" against Apple and Google brought on behalf of Australian consumers, arguing that Apple and Google are charging excessive commissions on in-app purchases, which consumers end up paying for. That's the same kind of argument as in the Pepper v. Apple case I mentioned further above.

News.com.au picked up the story as well.

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First good news for Apple in current patent dispute with Ericsson: U.S. trade judge deems two Ericsson patents (asserted in Ericsson's smallest ITC complaint) indefinite

About six months into the Ericsson v. Apple 5G patent dispute (if we count from the filing of the first infringement actions rather than Ericsson's pre-emptive FRAND complaint last fall), things have not gone well for Apple. As I wrote on Tuesday, the iPhone maker tried various tactical games--and failed. The Office of Unfair Import Investigations (OUII, commonly requerred to as the "(ITC) Staff") finds Ericsson's--not Apple's--proposed claim constructions in a standard-essential patent (SEP) case persuasive.

If one had wanted to find any good among the bad here before yesterday, the harvest would have been meager. Essentially, Apple avoided an anti-antisuit injunction in the Netherlands, but the fact that it was forced to state it didn't intend to seek an antisuit injunction is still a significant disincentive. Apple hasn't moved for an antisuit injunction so far. Then, Ericsson requested preliminary injunctions in two South American jurisdictions (Brazil and Colombia), and the judges there basically said "not so fast, please." That's obviously better than being enjoined, but merely means that judgment is deferred.

Realistically, with a dispute of this scale, spanning (at least) six countries, it's impossible for all the important decisions to go only one way. Relatively speaking, the first significant good news for Apple comes from the ITC and may result in the withdrawal of an Ericsson patent--and of at least a couple of claims from another patent--asserted in the third and smallest one of Ericsson's ITC complaints. However, Ericsson's third patent in that case is faring a lot better and continues to pose a threat to Apple, as do--potentially--the non-indefinite claims from another.

Yesterday, Administrative Law Judge Cameron entered the following claim construction (Markman) order, which I'll discuss further below:

https://www.documentcloud.org/documents/22077038-22-06-30-itc-1301-ericsson-v-apple-markman-order

Without digressing too much into comparative law, ALJ Elliot's order is one good example of many for the systematic approach to claim construction in the U.S. under the Markman doctrine--and a significant percentage of patent injunctions in other jurisdictions, including but not limited to Germany, would never issue if courts followed the same discipline.

The order addresses the three patents-in-suit (by comparison, there are four patents in Ericsson's aforementioned SEP case, and five in another non-SEP case) in the order of the complaint. The first one of those patents is still "hot" in the sense that Ericsson may very well win a U.S. import ban over it. The other two patents, however, have indefiniteness issues in ALJ Elliot's opinion that may now result in a voluntary narrowing of the case.

U.S. Patent No. 8,792,454 on "secure and seamless WAN-LAN [wide area network, local area network] roaming"

The parties disagree on the construction of four terms from the asserted claims of this patent. A couple of arguments made by Apple were flatly rejected by the judge as "beside the point" and "entirely unpersuasive." In particular, Apple tried to read a Make-Before-Break requirement (meaning you connect with an additional network and only then disconnect from a previous one) into the claim language that is clearly optional based on the specification, ALJ Elliot says.

Apple also couldn't convince the judge of the additional requirement of a Windows-based network interface card named "1x/rtt card 514" being required components.

With respect to a third claim construction dispute relating to this patent, "[a]dditional evidence is required" as "Ericsson has offered evidence that, in essence, merely articulating the function amounts to an algorithm, because programming a computer to perform the function requires 'at most, a two-line program in any high-level programming language.'"

The fourth part is trickier. It's a means-plus-function claim limitation ("means for transitioning communications from said first network to said second network") with a corresponding hardware structure that can be a controller or equivalents thereof. ALJ Elliot has described the part that is now likely going to be outcome-determinative as follows:

"[I]f the controller is found to qualify as a general-purpose computer, then the only disclosed programming algorithm is a high level description of Make-Before-Break; conversely, if the controller is found to not qualify as a general-purpose computer, then the claim element is not limited to the Make-Before-Break process."

So there still is a chance for Apple to successfully argue that the claim is limited to a Make-Before-Break sequence of actions. But based on yesterday's order, there still is quite a possibility that Ericsson may prevail on the '454 patent.

U.S. Patent No. 10,880,794 on "inter-band handover of the same physical frequency"

Ericsson is asserting claims 11-20. Claims 12-15 are dependent from claim 11, and claims 17-20 from claim 16.

ALJ Elliot takes issue with the quality of the specification:

"Why a certificate of correction never issued as to the 794 patent is mystifying, because it has more typographic and scrivener’s errors than either of the other two asserted patents. [...] In fact, its errors are so numerous and severe that it is impossible to ascertain the meaning of certain claim terms, including the 'first logical frequency' and the 'second logical frequency.'"

With respect to the terms just mentioned in the quote ("first/second logical frequency"), ALJ Elliot considered it an "inescapable conclusion [...] in light of the specification and prosecution history" that these terms are indefinite. As they appear in all 10 of the asserted claims from this patent, I guess Ericsson will drop it as it's unlikely to gain short-term leverage, though Ericsson could, of course, try to persuade the Commission (the ITC's top decision-making body) of its take. I don't claim to have analyzed this in full detail (I couldn't even if I wanted, as the evidence is sealed), but I recognize a pattern from similar situations and consider withdrawal the most likely next step. The ITC very much wants complainants to narrow their complaints.

U.S. Patent No. 8,472,999 on a "method and system for enabling dual standby state in a wireless communication system"

Ericsson is asserting claims 11-19. Claims 12-17 are dependent from claim 11, and claim 19 from claim 18.

There are lots of means-plus-function limitations to be construed here. With respect to most of them, Apple failed to persuade the judge that no structure was disclosed. In those cases, ALJ Elliot found that "the corresponding structure is a chipset and its equivalents." In another such case, it is "the main controller" with the questin of adequacy still being deferred.

With respect to one claim limitation ("the primary mode module to enable ..., the primary mode module configured to monitor ... provided primary mode monitoring frequency"), however, Apple has already gotten its way:

"[B]ecause there is no disclosed structure that performs the claimed function of 'monitoring,' the claim is indefinite."

With respect to another claim limitation ("primary mode module"), ALJ Elliot makes an indefiniteness determination but isn't totally convinced, so he offers a fallback:

"[T]he 'primary mode module' element of claim 11 is construed as a means-plus-function element and is indefinite. Inasmuch as it is not indefinite, the claimed functions are 'enabling the primary mode of operation for the multimode wireless communication terminal' and 'monitoring paging information for the primary mode of operation at a communication network provided primary mode monitoring frequency,' the structure disclosed for performing the function of 'enabling the primary mode of operation for the multimode wireless communication terminal' is a chipset and its equivalents, and the claim is otherwise not construed." (emphasis added)

For practical purposes, this lack of confidence in the second indefiniteness determination makes things complicated. The claim element about the indefiniteness of which ALJ Elliot is sure appears in claim 11 and, therefore, in its dependent claims, but not in claim 18 and its dependent claim 19. However, the words "primary mode module" also appear in claim 18 and, therefore, claim 19.

So there's one term that the judge says is indefinite, period, but it's not found in all asserted claims; and another term is found in all asserted claims, but the judge doesn't rule out that it may not be indefinite.

Given the complexity of the situation, I can't offer a prediction as to whether Ericsson will continue to assert claims 18 and 19. A withdrawal of claims 11-17 is far more likely.

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Thursday, June 30, 2022

Continental and its counsel risk abuse-of-procedure sanctions from weary Fifth Circuit if they file another petition for rehearing: Continental v. Avanci et al.

Automotive supplier Continental's unreasonableness is getting worse by the day.

I started the headline of yesterday's Continental v. Avanci et al. post by describing Conti as impervious to reason. Meanwhile, Circuit Judge Stewart--a member of the panel that has already twice determined that Conti has no case--has denied Conti's motion for a 30-day extension for its second petition for rehearing. The court announced that the mandate would issue on July 13. So what did Conti do? They brought a new unopposed motion seeking a 14-day extension. The previous motion had already said that Avanci and its co-defendants (Nokia, Sharp, Optis) wouldn't oppose a two-week extension.

While Judge Stewart's order ("[Conti's] opposed motion for an extension of 30 days, or, to and including August 4, 2022, to file its petition for rehearing/petition for rehearing en banc is DENIED.") didn't specifically address the possibility of a 14-day extension, Conti should finally see the writing on the wall: the appeals court is tired of the tire maker.

It's worth recalling that Conti didn't even manage to file its original petition for rehearing in accordance with the Fifth Circuit's published rules. Some elements, such as a statement of facts, were missing, and Conti had to refile.

People at Conti have to pull the plug on this. While Conti apparently didn't care to read the Fifth Circuit Rules (PDF) before filing the first (and failed) petition, I have taken a look at those rules. What I found shows that Conti and its counsel are taking a risk. They should accept the panel decision 2.0 as the final resolution of the case by the Fifth Circuit. Otherwise they may be sanctioned for manifest abuse of procedure:

"35.1 Caution. Counsel are reminded that in every case the duty of counsel is fully discharged without filing a petition for rehearing en banc unless the case meets the rigid standards of FED. R. APP. P. 35(a). As is noted in FED. R. APP. P. 35, en banc hearing or rehearing is not favored. Among the reasons is that each request for en banc consideration must be studied by every active judge of the court and is a serious call on limited judicial resources. Counsel have a duty to the court commensurate with that owed their clients to read with attention and observe with restraint the standards of FED. R. APP. P. 35(b)(1). The court takes the view that, given the extraordinary nature of petitions for en banc consideration, it is fully justified in imposing sanctions on its own initiative under, inter alia, FED. R. APP. P. 38 and 28 U.S.C. § 1927, upon the person who signed the petitions, the represented party, or both, for manifest abuse of the procedure." (original in italics; emphases added)

Let's start with "the rigid standards" of Fed. R. App. P. 35(a), which envisions only two circumstances under which an en banc may be appropriate:

  1. en banc consideration is necessary to secure or maintain uniformity of the court's decisions; or

  2. the proceeding involves a question of exceptional importance.

If Conti and its counsel know that their petition doesn't meet at least one of those criteria, they have to refrain from bringing yet another rehearing petition lest they be potentially sanctioned.

The first criterion cannot possibly be fulfilled: an unpublished and non-precedential decision is inherently not capable of endangering the uniformity of the Fifth Circuit's decisions. Also, the panel opinion 2.0 is limited to only the Sherman Act Section 1 and 2 claims, i.e., couldn't be more narrowly case-specific at this stage.

Whatever Conti may say in its petition can't reasonably meet the second criterion either. Yes, to those Conti guys and their counsel the case may be of exceptional importance. But at this stage we're talking about an unpublished and non-precedential decision, which weighs against its importance--and a narrow decision on the specific defects of Conti's complaint. Furthermore, while the panel withdrew its holdings on Article III standing and didn't take a position on the district court's conclusion that Conti lacked antitrust standing, this here is still a case of no injury. Conti is not being sued over cellular standard-essential patents by any Avanci licensors (Avanci itself couldn't sue for lack of owning those patents). Conti is not being sued by a customer for indemnification. There is simply no harm that Conti has established, other than that it was denied a license it never really needed.

In light of all of that, this case falls far short of the exceptional and important case that warrants a rehearing en banc. Conti is not going to get that rehearing. There's no realistic upside, but a potential downside of being sanctioned.

If Conti and/or its lawyers signing the petition get sanctioned, they can't blame the Fifth Circuit for not having made it clear beforehand that this could happen. Here's another passage from the Fifth Circuit Rules:

"THE MOST ABUSED PREROGATIVE - PETITIONS FOR REHEARING EN BANC ARE THE MOST ABUSED PREROGATIVE OF APPELLATE ADVOCATES IN THE FIFTH CIRCUIT. FEWER THAN 1% OF THE CASES DECIDED BY THE COURT ON THE MERITS ARE REHEARD EN BANC; AND FREQUENTLY THOSE REHEARINGS GRANTED RESULT FROM A REQUEST FOR EN BANC RECONSIDERATION BY A JUDGE OF THE COURT RATHER THAN A PETITION BY THE PARTIES." (emphasis in original)

"The most abused prerogative"--for which we may now see one of the clearest cases ever of a manifest abuse of procedure. Conti and its counsel must finally understand that the Fifth Circuit also has other appeals, motions, and petitions to decide. It's utterly unreasonable and disrespectful for Conti to seek the attention of every active judge--all 26 of whom are listed on the appeals court's website--for a second time.

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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.

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