MPEG LA seeks dismissal of ETRI, SK Telecom complaint threatening 'the utility, benefit, and public trust underlying [patent] pool licenses': Supreme Court of the State of New York

If litigants try a long shot, it may every once in a while contribute to the evolution of the caselaw. At times, the term "long shot" is a euphemism, especially when a complaint goes against a crystal clear contract. Deutsche Telekom's "antitrust" action against patent licensing firm IPCom was thrown out by the Mannheim Regional Court six months ago as I had predicted. At least Deutsche Telekom didn't deny that the contract said what it said (they waived their right to bring antitrust claims over how other implementers would be treated later): Deutsche Telekom "only" argued that an unambiguous written commitment, made when no injunction was in force or imminent, should be held unenforceable anyway.

Worse than that, the Electronics and Telecommunications Research Institute (ETRI) and SK Telecom brought a suit in September that comes down to claiming that the relevant contract--an agreement among patent pool contributors--doesn't say what it says. The two are suing MPEG LA--a patent pool administrator in good standing that has been around for more than a quarter century (Wikipedia article)--in the Supreme Court of the State of New York (County of New York, case no. 653232/2022, Electronics and Telecommunications Research Institute (ETRI) and SK Telecom Co., Ltd. v. MPEG LA, LLC (PDF)). ETRI and SK Telecom accuse MPEG LA of "falsely claiming to license to others hundreds of valuable patents owned by ETRI and [SK Telecom] when MPEG LA has no right or authority to do so"--but as I'll show further below, that's preposterous. If they won against all odds and common sense, a large number of MPEG LA licensees--from numerous small companies to the likes of Xiaomi--would subsequently face duplicative royalty demands and potentially infringement litigation over patents they are lawfully using (and paying for) under an existing pool license.

It's an attack on a bedrock principle of the patent pool system: that licensees can rely on being licensed to all patents that are essential to the relevant standard and belong to any of the licensors of a pool from which they take a license. I don't understand why two companies who contribute to various pools (with SK Telecom presumably also having taken many pool licenses) decided to bring that complaint, apart from being virtually certain to waste money on legal fees. They are making themselves ridiculous because of the absurdity of their theory and at the same time untrusthworthy:

• How can other pool managers trust ETRI and SK Telecom that they won't challenge unambiguous clauses in other patent pool agreements?

• How can licensees trust that if they license ETRI and SK Telecom patents from a pool, they won't later be sued over those patents (unless they pay again, and possibly a lot more than they paid the first time)?

Case overview

Patent licensing is a complex business, so there could be a legitimate question of contract interpretation here, right? Actually...no. One does have to read the Agreement Among Licensors Regarding the HEVC Standard that ETRI and SK Telecom attached to their complaint as Exhibit 3 (PDF). Then it's pretty clear that the issue the complaint attempts to make up simply doesn't exist.

ETRI and SK Telecom left the MPEG LA HEVC pool about three years ago (and instead joined Access Advance's HEVC Advance Pool, as did some other Korean companies, most notably Samsung). The complaint says: "For ETRI, termination became effective on January 2, 2020. For [SK Telecom], termination became effective on January 27, 2020."

What does such termination mean for licensees? One distinction is really key:

• timely licensees (those who signed up before termination taking effect)

  vs.

• tardy licensees (those who signed up after termination became effective)

"Timely licensees" and "tardy licensees" is just how I call them here.

The problem is that ETRI and SK Telecom emphasize another distinction, which one can make for academic purposes but which ultimately changes nothing about the contractual situation:

• pre-termination patents (HEVC-essential patents of which ETRI and SK Telecom became owners before termination taking effect)

  vs.

• post-termination patents (HEVC-essential patents of which ETRI and SK Telecom became owners after termination became effective)

A two-by-two matrix shows what the dispute is about, i.e., whether a given MPEG LA licensee is licensed to certain ETRI and SK Telecom patents:

	Timely Licensees	Tardy Licensees
Pre-Termination Patents	licensed (undisputed)	not licensed (undisputed)
Post-Termination Patents	MPEG LA says: licensed ETRI/SK say: not licensed	not licensed (undisputed)

In other words, tardy licensees get no benefit with respect to any of ETRI's and SK Telecom's patents; timely licensees remain licensed under pre-termination patents; and the question is now whether a timely licensee remains licensed to ETRI's and SK Telecom's HEVC portfolios including post-termination patents.

On November 7, MPEG LA brought a motion to dismiss (PDF). Contract interpretation is a matter of law, and if the contract is clear, the case must go away, based on documentary evidence alone.

The first contract clause to look at here is § 2.3 of the Agreement Among Licensors:

"Non-Exclusive Licenses or Sublicenses. Each [Licensor] shall hereby grant to [MPEG LA and any successor] a worldwide, nonexclusive, non-transferable license or sbulicense under all HEVC Essential Patents, which the [Licensor] and its Affiliates presently or in the future [emphasis added] has the right to license or sublicense (without payment to any third party which is not an Affiliate), with a right of [MPEG LA] to grant sublicenses which are identical in form to the sublicense in Attachment 1 hereto [i.e., the pool license agreement]. ..."

What does the termination clause (§ 7.2) say?

"Voluntary Termination. At any time after January 1, 2020 each [Licensor] shall have the right, effective upon thirty (30 days' written notice [...], to terminate with respect to itself all but not less than all of the following: (1) this Agreement [Among Licensors]; (2) the right of [MPEG LA] to grant additional sublicenses [i.e., pool licenses] (excluding renewals of sublicenses existing at such time) under its license or sublicense granted by such terminating [Licensor] pursuant to Section 2.3 herein; and (3) the Licensing Administrator Agreement entered into pursuant to Section 2.2 herein. [...] For the avoidance of doubt, such termination shall not affect the grant of the license, including renewals, or sublicenses contemplated pursuant to Section 2.3."

MPEG LA's motion to dismiss notes that ETRI and SK Telecom's complaint doesn't even quote the key passages, such as the "For the avoidance of doubt" part ("shall not affect the grant of the license, including renewals. Instead, the complaint makes it sound like "additional sublicenses"--which just means that MPEG LA can't give subsequent licensees any license to patents owned by licensors who have left--also included cases in which a timely licensee becomes licensed to post-termination patents.

Xiaomi is a great example here. Their license agreement with MPEG LA was announced (PDF) on January 9, 2020. Let's assume that the announcement wasn't delayed too much after the signing of the agreement, then they presumably became an MPEG LA HEVC licensee after ETRI's effective termination date, but undoubtedly prior to SK Telecom's. If Xiaomi or MPEG LA claimed that Xiaomi was licensed by MPEG LA to SK Telecom's HEVC patents, that would presumably be wrong, and I could see a case for declaratory judgment. But Xiaomi clearly got a license to all of SK Telecom's HEVC patents, including the ones SK Telecom obtained after termination ("in the future" as Section 2.3 as said). If SK Telecom was granted an HEVC-essential patent in, say, February 2020, Xiaomi is licensed, and the "For the avoidance of doubt" part applies--including that Xiaomi can perpetually renew its MPEG LA license agreement without losing those benefits.

Policy considerations

Implementers understandably expect legal certainty--peace of mind--with respect to the standard-essential patent (SEP) portfolios of the licensors they see on the list when they take a license. Why take a pool license at all if you may still face royalty demands and infringement litigation over patents from a party with which you thought you already had a deal in place?

Pools provide transactional efficiencies, but they can only do so with reasonable legal certainty.

ETRI and SK Telecom have a problem: anyone who negotiates an HEVC Advance license (a pool they joined because they thought they'd get a better deal than from MPEG LA) but already has a (timely) MPEG LA license will argue that certain parts of the Advance pool must not be paid for again. Access Advance--through its licensors that were asserting patents against Vestel--lost a case in Dusseldorf about a year ago because of the duplicative-royalties issues.

They're now trying a Hail Mary in a New York state court.

Another South Korean company, Samsung, also filed a lawsuit against MPEG LA there: a complaint (PDF) over royalty redistribution. Various cases by MPEG LA licensors against Samsung are pending in Dusseldorf. I don't want to disgree into the Samsung situation here. The cases aren't identical, but the root cause is the same and the issues are at least adjacent--and the complaints similarly meritless, though ETRI and SK Telecom's complaint has set a new absurdity record.

What Samsung has in common with ETRI and SK Telecom is the root cause of their grievances: they thought it was a smart move to join the Access Advance pool and leave the MPEG M;LA pool, and it's not going well. There are potential signs of piecemeal resolution by licensees such as Xiaomi, taking bilateral licenses rather than a pool license.

Those companies wish they could have left MPEG LA without existing licensees retaining any kind of license. But that's not what the contract says, nor would it be good policy. MPEG LA notes that what is at stake here is "'the utility, benefit, and public trust underlying [patent] pool licenses'."

The issues even go slightly beyond patent pools. Capture clauses in bilateral license agreements frequently include patents to be granted or acquired after certain key dates. Many bilateral license agreements resulting from individual negotiations as opposed to a standard agreement being signed by many parties. That is an important difference, but it is always unacceptable when licensors try to get out of their commitments in hopes of being able to charge more.

Federal courts deal with patent license agreements all the time because of license-based defenses to patent infringement complaints. State courts do have jurisdiction over contract law, including patent-related agreements, but don't see the practical implications in infringement cases. I suspect that ETRI and SK Telecom just hope that a state court can be fooled by them, but the contract language appears too clear--and the Supreme Court of the State of New York (County of New York) does adjudicate interesting commercial disputes on a daily basis. So my prediction is that the complaint will be dismissed.

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Court throws out tort-based part of Apple's counterclaims against Epic Games

Epic Games just reduced the potential risk it incurs from its antitrust dispute with Apple over its App Store business terms: Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California granted an Epic motion for judgment on the pleadings on some of Apple's counterclaims. As a result, Apple's counterclaims (unless an appeals court revives the ones the judge just threw out) are limited to breach of contract, which Epic already acknowledged in October it would be liable for should it lose its antitrust case against Apple. Punitive damages, which Apple was seeking, are not available on this basis, so they won't have to be discussed at next year's trial.

The court viewed the tort-based ones of Apple's counterclaims skeptically from the beginning. Nevertheless, Apple defended them, presumably in an effort to preserve them for an appeal.

What Judge Gonzalez Rogers told Apple today was that the iPhone maker had not shown any independently wrongful act on Epic's part beyond a breach of contract. Apple had stressed that "independently wrongful" doesn't mean it's an independent act, but that it would be wrongful even if it happened without a contractual framework being present. And in this regard, Apple pointed out that Epic's generation of in-app purchasing revenue on iOS continues even though the related contract was terminated in the summer. But that didn't persuade the judge. At the end of the Zoom hearing (Tuesday afternoon by Pacific Time) she announced her decision to grant the motion.

This decision is unrelated to the heart of the dispute, which is that Epic disputes the legality and enforceability of Apple's App Store terms under the antitrust laws. Judge Gonzalez Rogers said in August that the case could go either way, and the order on Epic's motion for judgment on the pleadings doesn't increase the likelihood of any particular outcome on the core issues in the case.

[Update]

A couple of hours after the hearing, Apple provided the following public statement:

"We respectfully disagree with the Court’s decision and believe Epic's conduct should be actionable under California tort law. It is clear, however, that Epic breached its contract with Apple. For twelve years, the App Store has helped developers turn their brightest ideas into apps that change the world. Our priorities have always been to provide customers with a safe and trusted place to download software and to apply the rules equally to all developers. In ways the Court described as deceptive and clandestine, Epic enabled a feature in its app which was not reviewed or approved by Apple, and they did so with the express intent of violating the App Store guidelines that apply equally to every developer who sells digital goods and services. Their reckless behavior made pawns of customers, and we look forward to making it right for them in court next May.

"Apple also thanks the Court for providing next generation attorneys the opportunity to argue a motion. We fully support this important policy that gives newer lawyers and those from underrepresented groups meaningful experience in court."

The young attorneys who delivered oral argument were Cravath's John I. Karin and Gibson Dunn's Anna Casey. Given the court's preconceived notion on this subject, I don't think oral argument made a difference. What was very clever on Mr. Karin's part was that at some point he preferred not to add anything to the court's preliminary opinion, which was already favorable to his client's position. So instead of trying to get the most out of this opportunity to practice, he opted for the safest and smartest path.

Apple's statement suggests to me between the lines that they will appeal yesterday's judgment on the pleadings after next year's trial.

[/Update]

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The FTC's most (and potentially only) important achievement in its Qualcomm litigation may be a contract interpretation, not an antitrust ruling

This is the first of three posts today on FTC v. Qualcomm, which the United States Court of Appeals for the Ninth Circuit heard last month. The second post will discuss the "No License-No Chips" part of the case, and the third one will have a proedural and political focus.

Since it was founded almost 106 years ago, the Federal Trade Commission's task has been a mix of antitrust enforcement and consumer protection. It would be an oddity--but not an improbable outcome as things stand now--if FTC v. Qualcomm ended up making an impact only by means of providing clarification of a matter of contract law.

I'd actually have liked a compulsory-licensing type of ruling to come out of this case. I do see the point in enforcing FRAND licensing commitments under contract law, but an additional avenue would have been desirable--and in cases where a patent is standard-essential but no FRAND plecge was made, there must be a way to compell a patentee to grant licenses on FRAND terms. It turned out, however, that I'd have to keep waiting for some other case to have that effect:

• Judge Lucy H. Koh of the United States District Court for the Northern District of California held Qualcomm in violation of antitrust law for refusing to license rival chipset makers, but did so under Aspen Skiing, which requires a party, among other things, to abandon a prior profitable course of dealing in hopes of making more money further down the road after having eliminated or fundamentally weakened a rival. That's a very fact-specific, historic, behavioral inquiry and could never be the U.S. equivalent of the Court of Justice of the EU's Huawei v. ZTE ruling, which clarified that SEP holders, under EU competition law, must grant licenses on FRAND terms to all comers.

• The Federal Trade Commission didn't even want to make an attempt to defend Judge Koh's Aspen-based holding. Instead, the FTC presented to the Ninth Circuit an alternative theory with an allegedly lower standard to meet: by not honoring contractual commitments to grant licenses, Qualcomm allegedly committed an antitrust violation (in addition to a breach of contract). While antitrust liability could serve as an additional deterrent against a refusal to grant licenses, this theory--even if it succeeded--wouldn't entitle anyone to a license who isn't already entitled under contract law anyway.

At last month's hearing, the Ninth Circuit didn't discuss the merits of the first question it has to decide in this context: whether or not to vacate the 2018 summary judgment according to which Qualcomm had an obligation under its FRAND licensing pledges to two U.S. standard development organizations (ATIS and TIA) to license rival chipset makers. The judges were merely interested in the procedural aspects, and didn't even spend much time on that one as they focused on "No License-No Chips" (the topic of my next post).

The court's procedural focus may--but need not--mean that the panel believes there were triable issues (especially the technical question of whether the cellular SEPs at issue are actually practiced by a baseband chip). If a trial is deemed necessary to discuss technical and potentially other facts (such as industry practice), that part of the case goes back to the district court. There was no summary judgment motion by Qualcomm asking the district court to hold that Qualcomm did not have such an obligation. So the appeals court couldn't resolve this question of contract law in Qualcomm's favor. It could resolve it in the FTC's favor by affirming the summary judgment, but the only alternative is a remand.

The FTC's right-for-the-wrong-reasons theory falls if a retrial--actually, the first trial on contract interpretation in this case--results in a finding (supposing it isn't overturned on appeal) that Qualcomm had no such obligation. Then Qualcomm's refusal to grant licenses wouldn't constitute an antitrust violation under the FTC's theory.

Assuming the Ninth Circuit decides to remand the contract interpretation question, it can just wait whether that part of the case ever comes back, and determine the derivative matter of an antitrust violation (based on a breach of contract) later. But the appeals court could also make it clear at the time of a remand that the contract interpretation question won't result in a holding of an antitrust violation in any event.

Given that this is a huge case, I guess the appeals court won't resolve more than is necessary at a particular stage of proceeding. That's just a guess, though.

If the appeals court sent the contract interpretation back to the district court but already made it clear that there won't be an antitrust violation in the chipset-licensing context no matter what, the FTC would have to spend tax dollars litigating a question that would be outside the scope of its mission. However, the FTC could theoretically appeal such a Ninth Circuit ruling to the Supreme Court, and on that basis could justify the further pursuit of this contract law issue.

For Qualcomm it's extremely important to get that summary judgment overturned. While it's a contract-specific holding, it would sooner or later result in some other chipset maker suing Qualcomm in California for a license (just like automotive supplier Continental is suing Nokia and other Avanci patent pool members--initially they brought the complaint in California, but it got transferred to Texas--on that basis).

This part of the case can't be settled in a way that solves the problem for Qualcomm. Even if the FTC dropped its case, other parties would still point to that summary judgment. Qualcomm could argue that it never took effect as a result of a settlement, but that would be a formalistic perspective. So Qualcomm needs to get--and to win--a trial on this issue.

In 2018, the FTC and Qualcomm asked Judge Koh to stay the case with respect to the then-pending summary judgment motion. Judge Koh declined what I called "litigation à la carte." At the time, the parties knew that if summary judgment would (as it then did) be entered, it would complicate any settlement efforts because Qualcomm would have no choice but to fight that particular decision.

As Qualcomm once told the IRS, it's "humongously more lucrative" to license only end-product makers, not chipset suppliers. At a minimum, Qualcomm would want to reach the point at which any chipset maker contemplating a contract lawsuit to get a license would face the uncertainty of a trial. If the Ninth Circuit vacated that summary judgment, Qualcomm might already be interested in settling this part of the case as well.

A trial always comes with considerable uncertainty, but Qualcomm would face major hurdles. Its own practice of obtaining exhaustive chipset-level licenses ("more equal than others") is at least a psychological problem. On the technical side, Qualcomm would have to present some cellular SEPs that are not implemented by a baseband chip but require additional hardware. The cellular SEPs-in-suit I've seen so far, including Nokia's ten patents-in-suit against Daimler, are baseband chip patents, as Qualcomm's German counsel--in that case, representing Daimler--noted last year.

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French court may hold ETSI FRAND declarations to be binding contracts to the benefit of third parties: cross-jurisdictional ramifications

Two weeks ago, the Tribunal judiciaire de Paris (TJP), which was known as the Tribunal de Grande Instance (TGI) until the turn of the year, handed down an order in TCL v. Philips & ETSI, a case that has the potential to affect cellular standard-essential patent (SEP) jurisprudence throughout and beyond the rest of Europe. That's because the European Telecommunications Standards Institute (ETSI) is based in Sophia Antipolis in the south of France, and the FRAND licensing pledges made by participants in cellular standard-setting to ETSI must be interpreted under French law wherever on this planet a party invokes an ETSI FRAND declaration by a patent holder.

I don't see a potential impact on how U.S. courts adjudicate cellular SEP licensing disputes as they have consistently recognized third-party beneficiary rights in connection with FRAND licensing pledges. However, on the other end of the spectrum there are those extremely biased German courts that have for many years stopped at pretty much nothing in their quest to favor patent holders over implementers, and as part of that have denied third-party beneficiary rights. Continuing to deny the existence of third-party beneficiary rights in connection with ETSI FRAND pledges will be quite problematic (to say the least) if and when the French court to which all French patent disputes are assigned has provided clarification with respect to a FRAND declaration that indisputably must be interpreted under French law. For implementers of standards it would definitely be a positive to be able to rely not only on antitrust law (abuse of dominant market position) but, additionally, on contract law (as defendants to U.S. SEP cases do all the time).

Once again, China's TCL, a company that expanded from TV sets into other segments of the consumer electronics market (though I can't remember ever having seen any of their products in a store, neither in the U.S. nor in Germany), is party to an important SEP case. A couple of months ago, the Federal Circuit vacated in part, reversed in part and remanded TCL v. Ericsson to the Central District of California. What the Federal Circuit took issue with is that Ericsson was denied a jury trial regarding a release payment (past infringement damages by any other name) for past unlicensed sales.

The dispute between Philips--an aggressive SEP enforcer that miserably failed in the mobile handset business just like Ericsson and Nokia--and TCL didn't originally appear to be remarkable in any way. TCL refused to bow to Philips's royalty demands (as had others before TCL), so Philips sued TCL in the UK for infringement of two select SEPs (in 2018). But then came the French connection: almost exactly a year ago, TCL brought a complaint under contract law against Philips and ETSI in France--ETSI's legal domicile.

The objective is to get Philips to make a FRAND licensing offer to TCL, which would be reviewed or, if Philips fails to make an offer, simply be determined by the French judiciary. ETSI itself does not hold patents, but TCL wants ETSI to make a contribution to the process. That sounds vague (as Philips's attorneys accurately note). It's easy to see why ETSI--or any other standard-setting organization--wouldn't want to be drawn into that kind of dispute.

The decision that came down in Paris earlier this month is basically the equivalent of a U.S. court order denying a motion to dismiss (this post continues below the document):

20-02-06 TJP Order in TCL v... by Florian Mueller on Scribd

Philips wanted to get rid of the French case and instead just have any FRAND licensing matters resolved, to the extent this would obviously be necessary before an injunction could come down, by the England & Wales High Court. But pointing to the fact that the UK case is the earlier-filed one wasn't enough.

What crystallized at this early stage of proceeding is that TCL and Philips have divergent views on the legal significance of the ETSI FRAND licensing pledge signed by the participants in its standards-development processes. Philips described it as merely a precontractual matter, while TCL insisted that it constitutes what is called a "stipulation pour autrui"--a covenant benefitting a third party, i.e., a contract that can be enforced by anyone implementing a standard such as 3G/UMTS or 4G/LTE (thus also by non-ETSI members).

TCL's related prayer for relief is "juger que les déclarations d’essentialité faites par les sociétés PHILIPS à l’ETSI constituent une promesse de concéder une licence à des conditions FRAND aux sociétés membres du groupe TCL, portant sur l’ensemble des brevets des sociétés PHILIPS déclarés essentiels pour les normes UMTS et LTE." My unofficial translation: "declare that the essentiality declarations made by the Philips entities to ETSI constitute a covenant to grant a license on FRAND terms to TCL entities, covering the entire portfolio of patents declared by the Philips entities to be essential to the UMTS and LTE standards"

At this stage, the court has not entered (declaratory) judgment yet. However, it has denied Philips's request for dismissal in its entirety and allowed the case to go forward (with a caveat I'll explain in a moment). It's slightly--but legitimately--speculative to say that the case would probably have been dismissed if Philips had succeeded in persuading the court that TCL didn't have a hard contract case.

I've seen at least one commentary, by a group of three French lawyers, who interpret the order as "the first time that a French court rules that the promise made by the owner of SEPs as per ETSI's IPR Policy governed by French law constitutes a 'stipulation pour autrui'." But my reading of the decision is more conservative. Outside the sections in which the court summarizes the parties' pleadings without stating its own opinion, it mentions the key term "stipulation por autrui" only once (the bottommost paragraph on page 10):

"Si les fondements juridiques des demandes dirigées contre l'ETSI et les sociétés PHILIPS sont différents (les premières sont fondées sur le contrat d’association qui régit les rapports entre l'ETSI et ses membres et les secondes sur la stipulation pour autrui par laquelle les sociétés PHILIPS se sont engagées à consentir des licences à des conditions FRAND issues des règles de fonctionnement de l'ETSI), il ne s'agit pas d'un obstacle à la reconnaissance d'une identité de situation de droit, ainsi que l'a jugé la Cour, ce d'autant moins qu'en l'occurrence les demandes sont toutes expressément soumises à la loi française ainsi que le prévoient les règles de procédure élaborées par l'ETSI." (emphasis added)

The highlighted part means "the covenant to the benefit of a third party by which the Philips Entities have promised to grant licenses on FRAND terms further to ETSI's by-laws." I can see why some would read this as a holding by the court that the relevant passage of the ETSI FRAND declaration (Article 6.1) indeed constitutes a contract to the benefit of a third party. There would be a grammatical argument here: the court could have used "seraient" instead of "sont" in order to distance itself, by means of indirect speech, from TCL's assertion. Imagine "seraient" as being the same as "sont," but with the equivalent of "allegedly" before it. I am sensitive to that grammatical difference because there was a time when I did a whole lot of work on EU policy matters, and when French, Belgian or Luxembourgian politicians gave speeches, the grammatical form indicated whether they stated a fact or merely restated someone else's account. But in this case I'm still hesitant to view this as a judicial conclusion. The reason for my conservative approach is the context. Not only is the wider context an order on a motion to dismiss, but the highlighted passage merely appears in parentheses in a conditional subclause ("Si" = "If").

The order is not a declaratory judgment, but a denial of a motion to dismiss, so it would be a dictum at best. But for the reasons stated above, I believe the context calls into question that the grammatical form alone indicates a judicial holding regarding third-party beneficiary rights.

While Philips's motion to dismiss has failed for the time being, ETSI's still requires further analysis. The court will hold a hearing in June on the question of whether ETSI is properly named as a defendant. Further briefing will be provided by the parties in the meantime.

Now there's a tricky procedural aspect. In order for the French court to find that the French contract case can go forward despite the UK patent infringement case having been filed earlier, there had to be a close connection between the claims against Philips (which is neither a French nor a UK party) and ETSI (a French organization). The court found that ETSI's role in monitoring the implementation of its licensing rules would be sufficiently closely related to Philips's obligation (at least as alleged by TCL) to extend a FRAND license to TCL. Such a close relationship is sufficient to establish French jurisdiction as ETSI is a French defendant. But what if the further proceedings resulted in a holding that there are no justiciable claims here against ETSI?

I can't predict whether French procedures would result in a dismissal of the case against Philips, too, given that suing ETSI was key to TCL's theory for French jurisdiction. But, at a minimum, such a holding would raise the bar for other parties who may bring French contract cases in the future against holders of patents declared essential to ETSI standards.

At this stage, the court has merely found that ETSI may be properly named as a defendant. But the actual decision on whether ETSI remains in the case will be made later this year. And thereafter we may see a declaratory judgment on the ETSI declaration, a prospect that makes this a case worth watching as it has the potential to provide much-needed clarification (which in some less conservative people's eyes it already has!).

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Apple v. Qualcomm trial kicks off in San Diego: jury of nine selected, live tweets disallowed

Today was Day One of the Apple, Foxconn et al. v. Qualcomm trial in San Diego (Southern District of California). Formally, there are two cases, which the court combined under the official caption In re Qualcomm litigation. The reason for two cases existing technically is that a few months after Apple sued Qualcomm in January 2017, Qualcomm sued Apple's four contract manufacturers (Foxconn, Wistron, Pegatron, and Compal), who counterclaimed. The contract manufacturers' counterclaims became the economically biggest issue in the case, amounting to approximately $9 billion, which could be tripled (as a damages enhancement) to $27 billion. Qualcomm is seeking damages of up to $15 billion according to Reuters.

United States District Judge Gonzalo P. Curiel is presiding over the trial. In one of his most important pretrial decisions, Judge Curiel agreed with Apple and its contract manufacturers that this is indeed primarily an antitrust/FRAND case, which Qualcomm sought to portray as a contract dispute in the first place so it could argue that contracts must be complied with, period (a principle that is very important but just doesn't outweigh antitrust considerations as serious as here). Somewhat ironically one might say Qualcomm already faces too many antitrust cases in the U.S. and on a couple of other continents that it would rather reduce than inflate the number of pending antitrust matters. The following smartphone patents battlemap, which I created about six months ago, shows the pressure Qualcomm is facing from antitrust agencies in multiple jurisidctions as well as some other cases (click on the image to enlarge; this post continues below the image):

The cases most closely related to the one being tried in San Diego as we speak are the U.S. Federal Trade Commission's antitrust lawsuit against Qualcomm in the Northern District of California (where Judge Koh might rule anytime now, given that the trial took place in January) and a consumer lawsuit alleging that 250 million Americans who bought smartphone over the last roughly eight years overpaid to the tune of $5 billion (an average of $20 per consumer) because of Qualcomm's accused business practices. Qualcomm appealed Judge Koh's certification of the consumer class action, but let's stay focused on the San Diego case (the real San Diego case, i.e. the antitrust case, as opposed to a patent infringement case that is a sideshow).

In one of the strongest signs of there truly being one or more antitrust issues with Qualcomm's business practices, the company has for some time insisted that those entering into certain agreements with Qualcomm were not allowed to complain to antitrust regulators (theoretically, they had that option, but at a high cost due to an immediate termination of rebates and even a clawback of past kickback payments). Judge Curiel found no contract violation of that kind by Apple, a decision that is worth a few billion dollars to Apple.

Today a jury of nine was selected, which means that up to three jurors could drop out (the trial might take about a month, though there are only four trial days scheduled for this week and three for each of the following weeks until jury deliberations begin) and they could still reach a verdict under the district court's Local Rules.

There were some funny situations and remarks, but nothing specific happened today besides jury selection (and, which is unusual for a district court on the West Coast, a decision that no electronic devices with an active online connection could be used inside the courtroom, which is why live tweets didn't continue after the lunch break). Opening arguments will be delivered tomorrow, and that's when the trial really begins.

On the eve of opening arguments, it makes sense to reflect on what this dispute is--and what it is not--about in high-level, philosophical, moral terms. The questions the jury will have to answer are unrelated to Qualcomm's history of innovation in cellular communications. Not only would no one doubt that Qualcomm succeeded a few decades ago with a courageous and ambitious bet on a technique called code division multiple access (CDMA), but it's also clear that Qualcomm has continued to invest heavily in research and development. No one claims they stopped innovating altogether. The dispute is all about whether they went, and are going, too far in their rent-seeking (and governmental agencies--antitrust enforcers--around the globe have so far found that it's the case, imposing fines that in the aggregate amount to several billion dollars).

If all that Qualcomm had done since its initial success had been to keep innovating, and if there hadn't been any issues, then those competition watchdogs would have focused on other companies and this San Diego trial wouldn't have started because Apple would never have brought the underlying complaint.

Both Apple and Qualcomm are innovative in fundamentally different ways, respects, and fields of technology (though Apple is now also creating many jobs in San Diego for chipset engineers). Some will consider one of them more innovative than the other, but it's an apples-to-bananas comparison. There are two key differences, however:

• Qualcomm's patent royalty demands relate to entire mobile devices, including various components (such as more memory or larger screens) that are functionally unrelated to the layer of technology at which Qualcomm is innovative.

• As a consumer I can always use an Android device instead of an iOS gadget. But either way I'll pay the Qualcomm patent tax (ironically, the IRS described itself as Qualcomm's "silent partner," literally).

That patent tax is artifically inflated by means of such practices as royalties on repairs, royalties on royalties (meaning that the royalty base for a royalty includes among other components the royalty), and interest on interest). They charge royalties separately from the prices of the chipsets they sell, though the longstanding judicial doctrine of patent exhaustion says that after you've sold a product you can't assert your own patents against it later.

What's under attack (not only in this particular trial but in a host of cases as shown in the battlemap further above) is not Qualcomm's business model in its entirety, but certain problematic practices. Qualcomm will have a bright future either way. It will continue to create jobs. It will continue to rake in huge profits. It may, however, have to make some adjustments so as to ensure an allocation of resources that will work best for the economy and for society. This is a story à suivre.

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Final pretrial conference order in Apple, Foxconn et al. v. Qualcomm (Southern District of California)

There were two developments yesterday in connection with Qualcomm's antitrust issues.

First, the EU General Court (which used to be call the European Court of First Instance) handed down a judgment that upholds the entirety of the European Commission's March 31, 2017 decision that Qualcomm would incur a daily fine of 580,000 euros for non-compliance with two information requests after specified dates (May 12, 2017 for one of them, and May 26, 2017 for the other). The EU General Court already denied in July 2017 a Qualcomm motion to stay the order, as I mentioned in this post. Apparently Qualcomm then had to comply (though it still appealed the decision), and the investigation of Qualcomm's exclusivity arrangements and predatory pricing further to a complaint by Icera, a once-European semiconductor company acquired by Nvidia (and shut down later).

At first sight one may wonder why Qualcomm would be accused of overcharging in one context and of predatory pricing in another, but the two theories can be reconciled: Qualcomm's supra-FRAND royalties enable the company to impose a tax on everyone and to sell chipsets, especially in the low-end segment, at a lower cost than Qualcomm could if it contented itself with FRAND royalties. It's one of the ways Qualcomm benefits from a business model that flies in the face of all we know about the concept of patent exhaustion.

Second, we're five days away from the start of the Apple & Contract Manufacturers v. Qualcomm antitrust and (secondarily) contract dispute in the Southern District of California. Judge Gonzalo P. Curiel (whom Judge James L. Robart, known for two groundbreaking SEP-related rulings, holds in the highest regard), has entered a final pretrial conference order (this post continues below the 262-page document):

19-04-09 Final Apple Foxcon... by on Scribd

This is a long document and I've mostly published it here as reference material for the upcoming trial. I haven't fully digested it yet, but it reflects the judge's prior categorization of the case as primarily an antitrust/FRAND and only secondarily a contract dispute.

The way the defenses to the parties' different claims are presented is consistent with what Apple had proposed: to list the defenses after each claim. Qualcomm had argued it would have been more efficient to discuss the defenses just once (and then apply them to multiple claims).

What both parties appear to be fine with is that the judge will interpret some disputed contract terms after the presentation of evidence, but before jury deliberations.

Don't be puzzled by the official date of the order. It came down on April 9, but with retroactive (ex tunc) effect.

There's probably something more in that long document that's worth talking about, and I'll take a closer look between now and the start of the trial on Monday.

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Qualcomm can't leverage Chinese bogeyman or allege misuse of its trade secrets by Apple in upcoming antitrust and contract trial: pretrial rulings

Judge Gonzalo P. Curiel just entered a minute order summarizing various rulings on Apple's, its contract manufacturers', and Qualcomm's motions in limine (pretrial motions to exclude testimony, evidence, or argument). The rulings came down orally at yesterday's motion hearing as the order indicates.

While those decisions can have major impact on what the parties to a dispute can say or show at trial time, rulings on motions in limine are typically much less important than summary judgment orders, and a very important summary judgment was published yesterday but dated March 12 (Tuesday): under that one, Qualcomm has lost the opportunity (barring a successful appeal) to claw back billions of dollars from Apple, and it's now apparently a foregone conclusion that Apple is entitled to an extra $1 billion in payments under a Business Cooperation and Patent Agreement (BCPA). And in other news today a jury verdict (in Qualcomm's favor) came down in a sideshow case involving a very small amount of money compared to what's really at stake between the parties.

But there are tens of billions of dollars at stake in the trial that will start on April 15 (with Apple placing the emphasis on antitrust and FRAND arguments, while Qualcomm puts certain contracts front and center), so even the decisions on various motions in limine are worth looking at (even if not in great detail because there's so many of them). Relatively speaking, even those "MILs" are strategically more important than today's verdict in a case that is not even about a tenth of a percent of the big antitrust/FRAND/contract case.

It's important to consider that even if a motion in limine is denied, counsel may still successfully object (at trial time) to some of the related testimony, evidence, or argument.

Qualcomm's five motions in limine

1. This Qualcomm motion has been denied, so Apple and the contract manufacturers remain free to present testimony and argument concerning "royalty stacking." This relates to the problem of numerous patent holders owning patents that have been declared to be essential to a given wireless industry standard, and if each and every one of those patent holders made Qualcomm-like demands on a per-patent basis, the aggregate royalty burden would be impossible for anyone to shoulder on a commercially viable basis.

2. This one was granted, so Qualcomm has managed to preclude Apple from presenting evidence of its PR strategy, such as discussions between Qualcomm and its PR agents. But the motion made it clear in its first footnote that it "[did] not seek to exclude statements that Qualcomm has made to the press."

3. The court deferred judgment on whether to exclude hearsay evidence from unretained experts. The related Qualcomm motion said: "Apple's exhibit list includes four expert papers by Karl Heinz Rosenbrock or Friedhelm Hillebrand regarding the Intellectual Property Rights Policy ('IPR Policy') of the European Telecommunication Standards Institute ('ETSI') (the 'Expert Papers')."

4. Qualcomm's motion to exclude evidence of certain standard-essential patent (SEP) disclosures has been denied. This is about Apple saying certain disclosures by Qualcomm (of essential patents) to two U.S. standard-setting organizations, ATIS and TIA, weren't timely. This blog first mentioned them in connection with the summary judgment the FTC requested and actually obtained in the Northern District of California regarding licenses to rival chipset makers.

5. Qualcomm's second successful motion in limine achieved the exclusion of certain transcripts of what companies that aren't parties to the Apple & Contract Manufacturers v. Qualcomm case in San Diego said at various investigative hearings held by the United States Federal Trade Commission (FTC). According to the motion, "[t]he witnesses who testified at these hearings included representatives from Samsung, Intel, Motorola, MediaTek and Huawei, among other companies." Qualcomm complained that using those transcripts would be unfair because "Qualcomm had no opportunity to attend the hearings and cross-examine the witnesses" (unlike at the later stages of the FTC v. Qualcomm proceedings).

Qualcomm's motions in limine had a pretty good hit rate (two out of five, and a third one may still succeed), but the impact is limited. Maybe there was something in the correspondence between Qualcomm and its PR companies that jurors might deem incriminating in some way, but I doubt it would have been absolutely damning. As for the investigative hearings, the fact that Qualcomm's lawyers weren't able to cross-examine those witnesses was a strong procedural argument for Qualcomm to make. However, the three SEP-specific motions in limine (#1, #3, #4) have been denied or deferred. And that's where the beef really is.

Apple and the contract manufacturers' 13 joint motions in limine

1. Judge Curiel granted the motion to exclude testimony and argument regarding Apple non-SEP litigation. This is about positions Apple took in its dispute with Samsung over non-standard-essential patents. No one bashed Apple harder for its damages claims in one Samsung case than I did, but that's an old story and really doesn't have a bearing on what a FRAND royalty rate should be.

2. Because of the denial of the related motion in limine, Qualcomm can still present certain fact witness testimony regarding the relative value of its portfolio. In their motion, Apple and the contract manufacturers had argued that "[t]hese and other Qualcomm fact witnesses have no basis to testify about the relative strength of Qualcomm's patents because these witnesses have no personal knowledge of other companies' patents." I'm sure they're going to raise this issue on cross-examination, just to minimize the weight any such testimony will be given.

3. Qualcomm also remains free to present evidence or argument that Apple and the contract manufacturers allegedly make, use, offer to sell, sell, or import Qualcomm's patented technology. The fact that Qualcomm may say so doesn't mean it can prove large-scale infringement.

4. The fourth motion in limine by Apple and its contract manufacturers has been granted in part and denied in part. The part that was granted appears very important: Qualcomm's allegations of Apple having misused Qualcomm's trade secrets or confidential information. There is a case pending under California state law, but so far nothing really appears to have come out of all those allegations, and they won't even be part of the big San Diego case. What Qualcomm will, however be allowed to say is that Apple has actually hired, or tried to hire, some Qualcomm employees. With Apple having set up shop in San Diego and recruiting wireless chipset engineers there, it's not really a secret--and not even 1% as incriminating as those--as of yet totally unproven--trade secret allegations.

5. Qualcomm will be allowed to prsent some evidence regarding Apple's financial strength. Also, Apple would have preferred to separate the question of punitive damages through a bifurcation of the trial, which won't happen.

6. Qualcomm can and likely will point to the fact that Apple has indemnification arrangements with its contract manufacturers (which is the normal course of business anyway).

7. Apple prevailed on a motion in limine related to a totally unspecified contract with someone as well as its revenue sharing model for App Store purchases (as an app developer I have direct experience with that part), and its "MFi" program, which according to the motion "gives developers rights to traemarks, trade secrets, technical specifications, licenses to NEPs, and access to design components from vendors."

8. A motion related to a 2015 Apple-Samsung meeting has been deemed moot.

9. The huge Chinese bogeyman that was part of Qualcomm's PR strategy around the January FTC trial won't resurface at next month's trial. Judge Curiel granted a motion by Apple and its contract manufacturers to exclude evidence or argument that competitors who will benefit from the remedies sought are in Asia (last time I checked, Intel was still in California...) or portraying Qualcomm as an asset to U.S. national security (no patent can ever be an asset to national security since patents are published).

10. Likewise, Judge Curiel agreed with Apple that some other antitrust cases involving either Apple or Qualcomm competitors like Intel over totally unrelated issues aren't relevant here.

11. The parties stipulated that Apple and the contract manufacturers' motion to exclude evidence of Qualcomm's corporate character (such as how nice, generous, benevolent or whatever Qualcomm would like to be considered) was moot.

12. Apple and the contract manufacturers didn't achieve a wholesale exclusion of "approximately, 92,438 pages of documents Qualcomm has produced since the cutoff [date in this case]" on top of "[m]ore than 18 million documents totaling over 08 million pages" already in the case. The denied motion argued that there was "a deliberate effort by Qualcomm to produce documents about events that have taken place after the fact discovery cutoff." This sounds like something that may give rise to various case-by-case objections later on.

13. Granted in part and denied in part. Apple won the exclusion of deposition testimony of French law professor Bénédicte Fauvarque-Cosson regarding the interpretation of the ETSI FRAND declaration under French law (also served as an expert witness for Qualcomm in the FTC case, but wasn't made use of in the end) and former Bosch IP executive Dr. Bertram Huber (who sat across me at a 2004 government roundtable on patent policy) won't be allowed to give "improper testimony about legal conclusion," but he will be free to talk about the history or intent of the ETSI intellectual property rights policy.

Contract manufacturers' (without Apple involved) two motions in limine

1. (No. 14) This was basically withdrawn and related to whether Qualcomm could tell the jury that the damage award might be enhanced by a factor of up to three.

2. (No. 15) The court denied a motion relating to evidence Qualcomm may present regarding a pass-on of damages (by the contract manufacturers to Apple).

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Apple obtains summary judgment against Qualcomm, can keep billions of dollars: no breach of contract by responding to antitrust regulators

In the Northern District of California, where the Federal Trade Commission is suing Qualcomm, an important summary judgment ruling came down in November, holding that Qualcomm owed rival chipset makers a cellular standard-essential patent (SEP) license on FRAND terms as per the FRAND declarations of two U.S. standard-setting organizations.

Qualcomm now has to digest a summary judgment order adverse to its interests in the Southern District of California, where Judge Gonzalo P. Curiel has determined that Qualcomm cannot claw back incentive payments made to Apple under a Business Cooperation and Patent Agreement (BCPA) based on allegations of Apple being responsible for some of Qualcomm's antitrust worries in the U.S., the EU, and South Korea, or based on Apple allegedly having induced its contract manufacturers to underreport royalties.

Considering that $1 billion out of the roughly $30 billion Apple and its contract manufacturers are seeking from Qualcomm in that San Diego action relates to Qualcomm having stopped such payments at some point, the amount at stake in this summary judgment context must be multiple billions of dollars as the BCPA took effect at the beginning of the 2013, so the period with respect to which Qualcomm was trying to claw back money must be a lot longer than the one during which Apple believes it should have received another billion dollars that Qualcomm withheld--simply because there were no signs of a dispute during most of that period. Apple's original 2017 complaint said in its § 160 that "Qualcomm conditioned billions of dollars on Apple's silence before courts and regulators about Qualcomm's business practices" (emphasis added).

Qualcomm can't get those billions of dollars back, apart from the hypothetical possibility of a successful appeal. And Apple is now virtually certain to get an extra $1 billion that Qualcomm withheld, though it may take another formal step, as I'll discuss further below.

Here's the order, followed by further analysis and commentary:

19-03-14 Apple v. Qualcomm ... by on Scribd

The final part ("CONCLUSION AND ORDER") grants summary judgment to the effect of dismissing, as requested by Apple, Counts VI-IX of Qualcomm's second amended counterclaims. The last one, Count IX, is one with which Qualcomm sought to get the court to decide that it didn't owe Apple the extra billion--and in the last passage before the final conclusion, Judge Curiel indeed finds that "Qualcomm has not shown a genuine dispute that, based on Apple filing a lawsuit, Qualcomm was relieved of its quarterly payment obligations for the second, third, and fourth quarters of 2016."

Does it mean that Qualcomm has to write a check now (in the event it can't obtain a stay)? In material terms I guess it does. In formal terms, the court still has to enter judgment on Apple's claim seeking the extra billion as the summary judgment order per se just declines to enter judgment on Qualcomm's related (declaratory judgment) counterclaim in Qualcomm's favor.

But what hurts Qualcomm even more is that it can't get back billions of dollars for the previous years.

The order is heavily redacted and I found it easier to understand after going back to a document I published a few weeks ago: the parties' trial brief on disputed contract terms, which addressed their positions on Sections 4 (based on which Qualcomm alleged interference by Apple with the contract manufacturers' relationships with its contract manufacturers) and Section 7 (based on which Qualcomm alleged a breach because of Apple's interactions with antitrust enforcement agencies). The related part of the pretrial brief on disputed contract terms (found in the older post I just linked to) begins on page 28 based on the numbering at the bottom of the page, or page 30 based on the page numbering of the PDF viewer. By the way, in that document Qualcomm, too, confirms that this issue here was about billions of dollars:

"In exchange for those commitments and other consideration, Qualcomm agreed to pay Apple billions of dollars in quarterly Business Cooperation and Patent Payments ('BCP payments')."

Note that those payments were made to Apple even though Apple wasn't making direct payments to Qualcomm itself: Apple's contract manufacturers bought the chips, paid the royalties, and charged eveything to Apple, and Apple then got an effective rebate in the form of Qualcomm paying Apple those kickbacks contingent upon some behavior (or on refraining from some behavior, to be precise).

Judge Curiel's reasoning is very balanced, but even though he agreed with Qualcomm on some subissues (such as that a safe harbor in the contract allowing Apple to respond to regulators wouldn't cover lies in the sense of things Apple would have said without reasonably believing they were true), Apple ultimately won and Qualcomm's BCPA-related clawback claims were found to have no merit--without any exception.

From a policy point of view, I'm profoundly concerned about any contract clause that prevents (by otherwise imposing a financial penalty) a party from antitrust complaints, be it with regulators or with courts. Let's look at it this way: a contract precluding a party from reporting crimes to the police would undoubtedly be unenforceable. Most antitrust violations aren't crimes--but they definitely are something that should also be reported to the appropriate authorities (competition enforcement agencies). There's a strong public interest in antitrust enforcement, and the freedom of parties to agree on certain term should end where that one is in jeopardy. However, Judge Curiel's ruling isn't that broad and general, though in one specific context he wrote:

"Under these circumstances, enforcing the BCPA so as punish Apple for responding to regulatory investigations would deter parties from responding to regulatory investigations and have the effect of concealing ongoing illegal conduct to the detriment of the public and perpetuating improper conduct."

The above sentence raises the question of why Qualcomm insists that its conduct was perfectly legal (as it did at the January FTC trial) while paying billions of dollars to ensure that no illegal conduct would be reported. The only conclusion a reasonable observer can reach is that Qualcomm has a lot of bad conduct to hide.

Judge Curiel reached his conclusion that Apple's summary judgment motion had merit by rejecting Qualcomm's theories one by one (except for some subissues that weren't sufficient for Qualcomm to get anything on the bottom line).

Qualcomm's allegations in the antitrust enforcement context come down to saying

• that Apple "lied," but Judge Curiel can't see any credible evidence of Apple not having said things it reasonably believed to be true;

• that Apple induced Samsung to influence the Korea Fair Trade Commission (KFTC) so it would broaden its investigation of Qualcomm's practices and impose worldwide remedies (as opposed to remedies specific to the Korean market);

• that Apple's responses to questions from regulators such as the FTC or European Commission aren't protected by the BCPA's safe harbor for responses to regulators since Apple had played a role in instigating those investigations prior to signing the BCPA (but Judge Curiel disagreed with this because of the public interest in companies responding to questions from regulators);

• that Apple attempted to expand the scope of the European Commission's investigation; and

• that Apple induced the FTC to bring its 2017 lawsuit against Qualcomm.

Judge Curiel found that Apple didn't "lie" and that its answers were within the sometimes rather broad scope of the questions asked by regulators. Even if Qualcomm didn't like what Apple said or what regulators did in the aftermath, Apple was allowed to say what it said; also, some of what Qualcomm said Apple induced some agencies to do didn't even happen anyway.

The argument that Apple basically asked questions that were the effect of its pre-agreement efforts to get regulatory agencies interested didn't work because of the strong public interest in companies responding to those government agencies. Therefore, the judge disagrees with Qualcomm that Apple breached the implied covenant of good faith and fair dealing when negotiating and signing that BCPA with Qualcomm.

So before the related San Diego trial even begins (another one over "only" $31 million dollars is at the stage of jury deliberations, with no verdict reached yet), the first several billion dollars Qualcomm was seeking are already gone (again, absent a successful appeal by Qualcomm to the Ninth Circuit). Just like the FTC went into the January trial with tailwinds from summary judgment, Apple is going to go into its own Qualcomm trial next month on the basis of already having won something very significant.

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Contours of Apple-Qualcomm dispute: Apple emphasizes antitrust, FRAND, patent exhaustion -- Qualcomm says contracts are contracts

On April 15, the Apple & contract manufacturers v. Qualcomm trial will start in San Diego (Southern District of California), and the stakes are high.

This is a key month for pretrial filings. I've gleaned from the parties' joint pretrial brief on disputed contract terms that Qualcomm charges a 5% patent royalty on iPhone repairs performed by Foxconn and wants an extra $1.3 billion from three of Apple's four contract manufacturers as a late "processing and handling" charge. Beyond the joint pretrial brief, the parties have also filed literally dozens of motions, and yesterday (Saturday) they filed a total of more than 1,100 pages (!) relating to, and including, their proposed jury instructions and verdict forms.

It's obviously impossible to discuss everything in detail. The purpose of this post is to provide a bird's-eye view of the parties' priorities in the upcoming trial. Those priorities are reflected by what Apple writes about its plans for its case-in-chief, by what the parties would like to go into or be kept out of the jury instructions, and by their preferences for the order of items on the jury form as well as what should be put before a jury in the first place (as opposed to being decided by the judge).

I've uploaded some key documents and will share my observations below the list:

1. Apple and its contract manufacturers' position statement

2. Qualcomm's position statement

3. joint proposed jury instructions

4. Apple and its contract manufacturers' proposed verdict form

5. Qualcomm's proposed verdict form

The most fundamental difference is that Apple and its contract manufacturers place the emphasis on antitrust claims and FRAND licensing issues, while Qualcomm would like to focus the judge and the jury primarily on the contracts it has, or used to have, in place with the parties. In legal Latin, one could sum up Qualcomm's mantra as "pacta sunt servanda" (contracts must be fulfilled). I don't remember seeing that phrase in those documents, but that's the philosophy. While this sounds clear and logical, it's actually not that simple when antitrust issues come into play. Antitrust law always trumps contract law, provided that there is an antitrust violation.

The freedom of parties to define contract terms freely is important. Even very important. But it's not absolute. Contract terms can be unenforceable as a matter of contract law, or due to other laws, such as competition laws. That's why professionally-written contracts almost always come with a salving clause that states what to do if a court of law holds one or more clauses of a contract invalid or unenforceable. If "pacta sunt servanda" was a self-sufficient answer, a salving clause wouldn't be needed because everything would be valid and enforceable.

Not only can clauses be held invalid or unenforceable but there can also be restrictions based on, for instance, reasonableness principles.

Apple has now announced in its position statement that it will begin its case-in-chief (which will be the first case-in-chief since Apple brought the original complaint) with antitrust and FRAND matters. There's nothing Qualcomm can do about that. But Qualcomm would at least like to structure the jury instructions and proposed verdict form in a way that downplays the importance of antitrust and FRAND claims, and draws the jury's attention primarily to the contract terms Qualcomm imposed on the plaintiffs (and some of which Qualcomm says have been breached).

The importance of psychological considerations is underscored by Apple objecting to Qualcomm's proposals that always list Qualcomm first when the jury, on the verdict form, has to find whom it found for. Apple says as plaintiff it should come first. While such details can also make a difference, there are some more substantive disagreements.

Both parties assert affirmative defenses, but Apple and its contract manufacturers

• propose to let the jury indicate its decision on the various affirmative defenses right after finding on a claim, and

• lists affirmative defenses that Qualcomm believes should not be put before the jury.

Qualcomm generally seeks to minimize what the jury will be told. Affirmative defenses are a key part of that, but it goes beyond. Apple would even like the jury to take advisory positions on certain matters to be decided by the court, which Qualcomm opposes. Typically, such disagreements are always just about how a party believes the jury will view the parties' conduct (good guys vs. bad guys) if it hears about certain defenses and claims. In another California FRAND case, Huawei unsuccessfully sought to avoid that Samsung could present its FRAND breach case to a San Francisco jury next September. And one of the ways in which Judge Alsup (who's not involved with the Apple-Qualcomm dispute) disadvantaged Oracle against Google was that he allowed Google to raise open-source arguments that jurors apparently conflated with the actual "fair use" factors. Back to Apple-Qualcomm, it appears that Qualcomm simply wants the focus to be on what the contract say, and anything that calls the language of the contracts into question or limits its relevance is undesirable from Qualcomm's view, be it an antitrust issue, FRAND licensing obligations, or affirmative defenses.

In one of its numerous motions in limine, Qualcomm doesn't want Apple to refer to chipset-level licensing (smallest salable patent-practicing unit). That's the most interesting issue in FTC v. Qualcomm. It's also key to Apple & contract manufacturers v. Qualcomm because nothing has a greater potential impact on a FRAND determination than the identification of the royalty base.

Another question is almost as important as the parties' disagreement on whether the case is primarily about antitrust and FRAND or about contracts: the question of whether it's a patent case to some degree. It's not a patent infringement case in a strict sense as Qualcomm, in its efforts to avoid an exhaustion finding, waived its rights related to various patents and got some declaratory-judgment claims thrown out by the court. Qualcomm's "exhaustophobia" is quite extreme. Therefore, Qualcomm also brought a motion in limine regarding any references to patent exhaustion, and more generally, it just doesn't want Apple to dispute that Qualcomm's patents are valid and infringed.

In other words, Qualcomm wants to tell the San Diego jury in the Apple case, as it told Judge Koh last month in the FTC case, that it owns 130K patents and believes those are worth a 5% royalty (3.25% for standard-essential patents and 1.75% for non-SEPs).

But as I wrote ten days ago, Qualcomm's infringement lawsuits against Apple haven't really delivered results, after almost two years, that support Qualcomm's royalty demands. Many of those patent assertions have been unsuccessful (obviously, at this stage everything can still be appealed), and even the ones that have succeeded have just resulted in injunctions that could be worked around (one of which is based on an agnostic ruling that is contradicted by two facts-based U.S. decisions involving a patent from the same patent family).

By contrast, at this stage Nokia's assertions of SEPs and mostly non-SEPs against HTC (a huge number of patents in the end) resulted in a settlement under which HTC met Nokia's royalty demands; BlackBerry had caved even earlier. Last time, Apple settled with Nokia pretty quickly, presaumably to focus on the Qualcomm dispute. Ericsson typically achieves settlement before its assertions even go to trial. Nokia and Ericsson are two patent holders in this industry that are reasonably comparable to Qualcomm, with the most important difference apparently being that their royalty demands are substantially lower, thus licensees are more likely to accept them. (Otherwise Apple would probably not have done a deal with Nokia in order to focus on Qualcomm.)

Whether it's about Qualcomm's portfolio or anyone else's, it just doesn't make sense to assume that an entire portfolio consists of valid and infringed patents when discussing reasonable royalties. But Qualcomm argues it owns so many patents that it could just enter into a Super Sack non-assertion covenant with respect to some patents Apple sought to challenge in the San Diego case, just to get rid of the related declaratory-judgment claims.

Qualcomm is not the only one to seek royalties based on portfolio size rather than actual proof of an infringement of valid patents. However, so far no one has gone as far as Qualcomm has in its efforts to avoid any determination on the merits sought by the other party.

Just like in that Munich case in which an apparently non-infringing Qorvo chip was successfull accused by Qualcomm by preventing the court from analyzing the hard facts, Qualcomm favors agnosticism (in this case, with respect to whether the patents in its portfolio are valid, infringed, and not exhausted) over analysis.

There are obviously reasons why the parties had to file north of 1,000 pages on a Saturday just to tell Judge Gonzalo P. Curiel about their disagreements on jury instructions and the verdict form. However, they may still be able to narrow the issues the court must rule on. They explained that they made the filings yesterday to meet the deadline, but efforts are continuing to reach an agreement on at least some questions. That is another reason for which I believe this is not the time to go into too much detail on those filings. For now, what's key is to know the countours of the clash.

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Qualcomm demands an extra $1.3 billion from Foxconn, Pegatron, Wistron: exorbitant late "processing" charge

Qualcomm's collection of a 5% patent royalty on iPhone repairs performed by Foxconn is not the only absurdity that Apple, its contract manufacturers and Qualcomm's joint pretrial brief revealed last week. How about a potentially record-setting administrative charge of more than $1.3 billion for the "processing and handling" of late payments?

You can find the PDF in the previous post (which I just linked to). Here's a passage related to the late "processing" charge:

"Qualcomm agreed these late charges were 'administrative' to 'defray' 'costs in processing and handling.' Thus, the intent and scope of the provision expressly excludes compensating for any time-value of money and disclaims using fees to encourage (or coerce) timely performance.

"Yet Qualcomm has demanded that Foxconn, Pegatron, and Wistron pay $1.3 billion in late charges, a number disconnected from any 'processing and handling' expense Qualcomm could have incurred (much less foreseen) as a result of any possible late payment. Qualcomm's late 'processing' charge--1.5%/month of any disputed amount, compounding--increases dramatically with the amount of the tardy payment and with the passage of time." (emphasis in original)

On the same page, attorneys for Apple and its contract manufacturers argue that "[t]his is an illegal, unenforceable liquidated damages penalty barred by Cal. Civ. Code § 1671(b)." (again, emphasis in original)

What Qualcomm is charging here is colloquially called "interest on interest" related to the contract manufacturer's cessation of royalty payments on the products they make for Apple in the spring of 2017. We know Qualcomm recently claimed that $7 billion in royalties that Qualcomm wants have not been paid. Apple and its contract manufacturers claim that they actually overpaid in the past because Qualcomm extracted supra-FRAND royalties. But even if we assumed, just for the sake of the argument, that Qualcomm had indeed been owed another $7 billion since the spring of 2017, a $1.3 billion surcharge on a $7 billion amount is huge. It's almost 20% of the amount allegedly owed!

It's obviously not the kind of amount that Qualcomm could realistically claim it incurred in administrative costs. Processing a few royalty payments that come in late is not a lot of work. If that truly resulted in a billion-dollar cost, Qualcomm would be the most expensive bureaucracy in the world, and couldn't exist because, in that case, any employee's travel expense report would also cost a billion or so to process.

The effect of "interest on interest" is huge if new interest is added every month. And if this dispute, including appeals, took several more years, then the ultimate claim on that basis would dwarf the current demand of more than $1.3 billion.

Including the potential of treble damages, the Apple & contract manufacturers v. Qualcomm trial will roughly be about either side seeking approximately $30 billion from the other, the differential between the two extreme scenarios therefore being on the order of $60 billion. That's the proverbial high-stakes trial, and relative to that amount, the $1.3 billion late "processing and handling" charge is just a limited part of the overall dispute. However, just like those patent royalties charged on iPhone repairs (which probably represent a very small amount of the overall royalty demand), it's the utter unreasonableness of the underlying "logic" that is so striking here.

The biggest problem with that unreasonableness is not that Qualcomm wants this. The problem is that Qualcomm has been able to impose contract terms that it can interpret that way in the first place. Those terms are very unusual, and that's also what we heard last month at the FTC v. Qualcomm antitrust trial.

Of course, Qualcomm can and does pay expert witnesses who testify that such terms and conditions are simply a "market outcome" and claim that their "you can't argue with success" logic is stronger than what, for an example, Professor Carl Shapiro (Berkeley) told us about bargaining power and the normal splitting of gains from engaging in a transaction. But when some contract terms are so far out of the ordinary in business, something must have gone terribly wrong. Better late than never to fix the issue.

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Patently absurd: did you know Qualcomm charges a 5% wireless patent royalty on iPhone repairs?

The FTC v. Qualcomm trial in San Jose just ended about three weeks ago, and we're already approaching the Apple & contract manufacturers v. Qualcomm trial in San Diego. On Saturday, Apple, its four contract manufacturers (Foxconn, Pegatron, Wistron, Compal) and Qualcomm filed a joint pretrial brief on disputed contract provisions. The 76-page document serves as a preview of various issues. There are so many issues that I wouldn't even know where to begin if one of them didn't stand out because it's

• extraordinarily absurd and

• one of the best examples of hidden costs that we--the consumers--don't know about until they surface in litigation. But whether or not we know about them, we're the ones to foot the bill at the end of the day.

Qualcomm wants a 5% patent royalty (with a $400 cap for the royalty base) on smartphones. 3.25% of that relates to standard-essential patents, though I haven't seen Qualcomm successfully enforce even one of those SEPs in all those years. The related dollar amount will be illusory the moment its wireless SEPs must be licensed at the chipset level. Another 1.75% relates to non-standard-essential patents, and after almost two years of non-SEP infringement litigaton against Apple, Qualcomm has no real leverage. News cycles aren't leverage.

So there's a problem with what they charge, but until I read this pretrial brief, I was unaware of there being another problem with the wide net they cast when actually collecting their royalties.

Apple and its contract manufacturers complain that when Qualcomm performs audits, it insists on getting its 5% on whatever Apple pays to a company like Foxconn: not only the device, but also any services, including repairs. I'll use Foxconn as the example here because I've been able to find articles on its iPhone repair capacity. Quite often, devices are repaired right at an Apple Store (such as an iPhone 7 Plus I took there a few months ago to get a new screen and battery). In that case, Qualcomm probably can't charge patent royalties because it doesn't have a direct agreement with Apple. But some devices are sent to China to be repaired there at a lower cost. And in that case, Qualcomm collects 5% of whatever a company like Foxconn charges Apple (click on the image to enlarge; this post continues below the image with the related text passage and further commentary):

Here's the text again:

"For example, assume Apple paid a [contract manufacturer like Foxconn] an extra $20 per iPhone to repair it should it break, or an extra $10 per phone to disassemble it for recycling at the end of its life. While these would be collateral transactions 'related to' the phone sale, they would not constitute 'consideration … for each Subscriber Unit'—the extra charges would be consideration for repair or recycling services that are not royalty bearing under the [Subscriber User License Agreement] definition of 'Selling Price.' Yet, Qualcomm would charge a royalty on these transactions notwithstanding that they are unrelated to Qualcomm's patents." (emphases added)

The last point--"unrelated to Qualcomm's patents"--is the issue here:

If Qualcomm held one or more patents on a machine used by Foxconn when repairing iPhones, and if the agreement between them and Foxconn was about revenue-sharing instead of a per-machine license fee, then it would be OK. There might be an argument then about whether those patents are valid or actually infringed, but at least the patents would be logically connected to a repair service.

In this case, however, we're talking about wireless communications patents, general circuitry patents, and software patents. None of that justifies another patent license fee only because a broken device is repaired.

If you repaired iPhones and an average patent troll tried to shake you down, arguing that you owe him a royalty on your income from repair services even though his patents are entirely unrelated to the activity of repairing those devices, you would decline to pay. If the troll insisted, you'd ask him which part of "no" he doesn't understand or, if all else fails, some might even flip him the bird. But you definitely wouldn't pay up!

So how can Qualcomm get away with this (and some other things)? How can they impose such contract terms when they actually have a FRAND (fair, reasonable and non-discriminatory) licensing obligation with respect to their SEPs, meaning that all terms must be FRAND, not just one or two?

They've clearly been extremely effective at leveraging their patents and their chipset business. As the example of a $1 royalty on a $20 iPhone repair shows, "extremely effective" is a euphemism for the situation. Qualcomm's leverage has created an absurd situations, and both the FTC lawsuit in San Jose and the San Diego action by Apple and its contract manufacturers are key parts of what's needed to fix the problem. It will presumably take more than those two cases, but in the short term those lawsuits are most likely to help--not just in the sense of helping those companies, but the industry at large, and consumers.

Finally, here's the long document:

19-02-16 Apple-Qualcomm Joi... by on Scribd

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