Standard-essential patents: more rationality and a shift to China, but where are tech's titans? (guest post)

Preliminary Note

How's that for a holiday special? Right below this introduction you'll find the first guest post ever on the FOSS Patents blog, authored by Richard Kramer, the main founder of Arete Research, and Brett Simpson, one of Arete's co-founders. Founded in early 2000 by experienced research professionals, Arete is the pioneer in independent equity research, and has the largest team of experienced analysts specializing in global technology, telecoms and alternative energy sectors. Arete is the trusted source of equity research to over 100 of the world's most sophisticated tech investors.

The FOSS Patents blog started as a one-man show but it will, over time, become a more inclusive platform. Guest authors' opinions are not necessarily my own. In fact, Richard and I have previously disagreed, which included his 2011 prediction that the "smartphone patent wars" weren't going to have devastating impact, a fact I also recognized about two years ago. Even in areas where we still disagree, I always find his insights interesting, and I hope so do you.

Happy Thanksgiving! And now:

Guest post by Richard Kramer and Brett Simpson, both of Arete Research

Standard-essential patents: more rationality and a shift to China, but where are tech's titans?

Despite a long campaign on the part of the smartphone players from outside of the traditional telecom industry to "de-value" standards-essential patents, a period of irrational inflation of patent assets (Rockstar Nortel patents for $4bn+, anyone?), and the largely Quixotic efforts of a range of patent "re-sellers" (often an indirect negotiating tactic of the large IPR holders), we have gradually seen a more sensible "clearing price" for SEPs get established in the deals of the past few years.

We said in 2011 that "this Cold War around IPR relating to mobile devices is not over, but we think it will reach a phase where settlements will be preferable to all-out warfare." The past few years have seen this view become mainstream. (Perhaps aggressive law firms, like investment bankers, simply are less successful in their business development efforts in egging clients on to undertake massive litigations.)

We seem to be entering a period of more tactical lawsuits, realise that pursuing litigations to the bitter end carries too many business risks to justify the rewards. One can see this with Apple, where for all its initial aggression around design patents, it has more recently adopted a pragmatic approach, coming to agreements with Ericsson (avoiding extensive and messy litigation in West Texas), Huawei, and even Kudelski (over OpenTV patents). Perhaps the business risks of extended litigation are now being weighed in the calculation over "defending" rather nebulous design patents, which often draw attention to, and sympathy for the sued party. Nokia also made it clear that it sees itself in a "new world" given that its prior major licensing deals were struck when it needed cross-licenses for its own smartphone business, with a critical renewal at Apple forthcoming.

Yet the new wrinkle in global SEPs has been the emergence of Huawei as the primus inter pares of the Chinese technology world. If we trace back the origins of the most relevant SEPs in wireless technology, they stem from a combination of infrastructure vendors and chipmakers (Siemens-Infineon; Motorola-Freescale, Ericsson-EMP, etc.), Huawei has not only established itself as top three wireless networks vendor (in a now largely consolidated market), but also continually invested in chip-level technology at the device level with its HiSilicon unit (now gradually seeking merchant silicon sales).

In the past two years Huawei has filed more patent applications than even Qualcomm, a key output of its $8.6bn R&D investment. By securing a licensing deal with Apple, and pursuing ZTE and others in China, Huawei is signalling that it must abide by the same rules in all markets. In Jan. '16, Huawei agreed a broad cross-license deal with Ericsson, in Sept. '16 it settled a long-standing dispute with InterDigital and is current engaged in counter-suits with Samsung. In this context, it will be interesting to watch how it resolves the Samsung situation, and handles cross-licensing with Nokia, as well as resolving a rather salacious lawsuit involving T-Mobile, where Huawei staff were caught breaking into a T-Mobile office, while Huawei responded by taking the unprecedented step of suing T-Mobile, a prominent infrastructure and smartphone customer.

The emergence of Huawei as a leading force in global IPR claims is good news for traditional IPR holders like Qualcomm and Nokia, where the quid pro quo for Huawei collecting royalties outside of China must surely be that leading Chinese smartphone brands must now pay royalties on domestic shipments, something that has been deftly avoided by previous (Xiaomi) and current (Oppo) market share leaders, from a combination of focus on the domestic market and exporting to equally IPR-unfriendly markets through "agents". Qualcomm is suing Meizu in China, Samsung and Huawei are suing each other in China, while Nokia sub-licensees WiLAN, Sisvel and Vringo all brought suits either in China or against Chinese vendors like ZTE, Haier, etc. Not only are the Chinese, most notably Huawei, becoming more assertive, but China is increasingly becoming a critical venue alongside the traditional US, UK, Dutch and German courts. The gravitational forces of IPR have now inexorably begun shifting Eastwards, both as a source and claimant of royalty income; one now has to rank Huawei alongside Qualcomm, Ericsson and Nokia as the stalwarts of an increasingly rational wireless SEP environment.

One of the big surprises to us is the lack of involvement in standards setting (and patent generation) from the most influential companies in global tech: Apple, for its $160bn smartphone business, has exerted zero influence on 5G development. Google, Microsoft, Intel, Amazon, Facebook have collectively doubled R&D in the last two years – reaching $30bn+ excl. stock comp - but choose to focus on emerging technologies such as machine learning, VR, AR, driverless cars, robotics, drones, where there are no standards, but instead a loose commitment to open source technology (often as a fig leaf for proprietary technology). It’s even more surprising when considering how much their businesses have profited the most from 4G, and how much more they stand to gain from 5G. Data is the new gold and 5G will enable data to be used in “near real time” that will be essential for applications like driverless cars, or even assisted driving.

Why sit on the sidelines? Perhaps it is that 5G offers few “insertion points” in this global SEP licensing process, since it largely continues the use of the 4G air interfaces, making renewals more of a pro forma matter. This leaves wireless heavyweights – Qualcomm, Huawei, Ericsson, Nokia, et al – remaining firmly in control of the standards setting process in 5G and thereby controlling one of the most lucrative profit streams in tech, as seen in the $8bn revenue base at Qualcomm’s QTL unit, or the $1bn+ licensing streams of Nokia and Ericsson.

This is important since the hyper-scale data centre players have squeezed the OEM business model down to ever lower margins; this creates a rising incentive to seek royalties for SEPs, and also extract value from implementation patents which are largely unlicensed today.

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Automotive companies fighting for FRAND: Daimler, Hyundai join Fair Standards Alliance

About four to five years ago, there was a time when "FRAND Patents" would have been a more suitable name for this blog than "FOSS Patents": the pursuit of sales and important bans over standard-essential patents (iun violation of pledges to license them to all comers on fair, reasonable and non-discriminatory terms), royalty demands far out of the FRAND ballpark and exorbitant damages claims were the three most important symptoms of a huge underlying problem, and I did what I could to shed some light on what was going on and going wrong.

While I'm glad that some of the worst potential consequences were avoided at the time, I have realized that there is some unfinished business in that area. Antitrust settlements and court decisions were helpful. Some of them, such as Judge Posner's 2012 Apple v. Motorola ruling, were really great. But attempts to abuse FRAND-pledged SEPs are still rampant. Various SEP owners are still seeking injunctions (not in all jurisdictions but definitely in some). Royalty demands and damages claims still appear to be out of line in too many cases.

Why hasn't the problem been solved yet?

• For the most part, courts solved problems only in narrow contexts. Even Judge Robart's rate-setting decision in Microsoft v. Motorola (2013), which was wonderful in some ways, had a major shortcoming: it didn't require Motorola to base its royalty claims on the smallest saleable unit implementing a given standard, such as a WiFi chip for IEEE 802.11 patents or a baseband chip for patents on cellular network standards.

• Antitrust authorities stopped short of establishing clear, bright-line rules. Instead, they entered into settlements with major loopholes. I particularly criticized, at the time, the FTC's Google/Motorola consent decree.

That said, I do have hope that significant progress will be made over the next few years:

• Judges and competition enforcers can easily see that what was done a few years ago was generally good but simply not enough.

• Android companies (Google and certain device makers) weren't the "perfect" FRAND offenders to crack down on as they weren't repeat offenders or aggressors. What they did was just retaliation for attacks on Google's Android mobile operating system and the related ecosystem. They hadn't done this before (Motorola maybe, but not Google, which owned Motorola at the height of the smartphone patent wars). They haven't done it since. What they wanted then was not to cause damage to the concept of FRAND licensing: at the most they were prepared to accept collateral damage in order to end the smartphone patent wars on the basis of (more or less) zero-zero license deals.

  Google's antitrust lawyers stressed all the time that their client hadn't drawn first blood -- and they pointed to assertions of patents on de facto industry standards and to what they called "commercially essential" patents. Microsoft said something very accurate at the time: two wrongs don't make a right. Unfortunately, however, regulatory agencies are controlled by politicians, and they just didn't want to take sides in the ecosystem wars between Android rivals and the Android ecosystem. As a result, some of the world's worst SEP abusers benefited from what Google/Motorola, Samsung and others were doing (and from those companies' political weight). But times have changed. Earlier this year, Google joined the Fair Standards Alliance. It's now fighting the good fight for FRAND.

• The pro-FRAND coalition is now more broadbased and more powerful than ever. Case in point, I received a press release today from the Fair Standards Alliance announcing that Daimler and Hyundai have joined the Brussels-based organization, joining major IT companies such as Google, HP, Cisco, Intel, Dell, and Juniper Networks as well as rival car manufacturers Volkswagen, BMW, and Tesla.

  They are profoundly concerned about abusive assertions of patents on wireless and IoT (Internet of things) industry standards. That concern isn't new: automotive companies frequently have to defend themselves against patent assertions (in the Eastern District of Texas and elsewhere). I'm not allowed to disclose the name publicly but I also gave some advice a few years back to a major German automotive company, and I've talked to lawyers defending such companies in court. But if the problem wasn't huge, those organizations wouldn't have joined the Fair Standards Alliance.

Let's give meaning to FRAND. I'll make my little contribution again by blogging about FRAND developments, not only but also in a litigation context.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

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Three angles to look at Google's Pixel phone: design patents, antitrust, copyright

I'll start with the design patents angle. You can also go directly to the antitrust and copyright sections.

1. Design patents

When I read an article on Pixel, the Android smartphone made by Google, shortly after its official presentation, I saw a picture and (being an iPhone user myself) thought it was an iPhone shown only for the purpose of describing Google's aspirations and illustrating the competitive environment. But no. The image showed a couple of Pixels. It wasn't the following picture, but a somewhat similar one (this post continues below the image):

Then I read about the range of choices and the price points, and they were very iPhone-like, too. Another iPhone characteristic: hardware and software are made by the same company.

As I follow the Apple v. Samsung design patent case, I was obviously thinking to myself: is Apple going to sue them? And meanwhile at least one website, FastCo.Design, has raised the question in an article that quotes design patent expert Professor Sarah Burstein saying it wouldn't be impossible to imagine Apple at least sending Google a letter. Professor Burstein notes that "[t]he official test is it has to look the same to an ordinary observer" as opposed to a requirement for a "precise line-by-line copy to infringe."

I personally wouldn't dare to predict how a jury would decide. Firstly one would have to know exactly which design patent(s) Apple would pick from its portfolio to assert. A design patent on a large button below the screen wouldn't work at all (as you can see on the photo above); others, however, might very well stand a chance of passing the "ordinary observer" test.

Two and a half years ago, Apple and Google withdrew all patent infringement lawsuits pending against each other but didn't extend a license to each other (cross-licenses practically never include design patents anyway). Google even has kept on seeking the invalidation of certain Apple patents in different jurisdictions.

I guess the appetite between the two parties for comprehensive patent litigation each other is nil. I can't see why that would have changed since the spring 2014 second-class settlement. But they could duke it out over design rights without escalation of the throwing-in-the-kitchen-sink kind.

Apple could just wait and see how the Pixel is received. There are reports of demand already having exceeded Google's expectations, though some planned shortage may sometimes also be part of the marketing plan. Even if true, Google is probably still not going to move quantities that would have a huge impact on Apple's business. Design rights could still be asserted later, but obviously the story to present to the judge and the jury would be weaker if Apple elected to sit by idly for some time. Also, in my observation Apple really views design rights as a matter of principle. About five years ago it even shut down a small iPad lookalike in Spain. That was, by the way, the first time I fundamentally disagreed with Apple on something (I thought the criminal case that resulted from Apple's complaint to customs authorities was over the top, and it was fortunately dismissed later).

Talking about disagreements with Apple in the context of design patents, I wish to clarify something here. There is no question about Apple's leadership in design. Now it looks (to some people, at least) like Microsoft is making its own kind of iMac, though it is technically quite different. My position on Apple understandably seeking to defend the uniqueness of its products has not changed over the years. However, the focus changed on appeal. The higher up you go, the more it's really about general rules that must work for all comparable cases. Maybe 5,000 years ago, or maybe even today in some tribal communities somewhere on this giant planet, kings or elders or priests may adjudicate disputes without being bound in any way to statutory law and/or case law. Then one can decide and opine whatever. But I have three problems with Apple's design patent enforcement when considering the implications and ramifications for others:

1. Unfortunately, this issue is not before the Supreme Court, but as a former NoSoftwarePatents campaigner and as an app developer I have a huge problem with design patents covering software in the form of non-physical screen designs (and layouts and elements thereof). Such patents should not exist. I believe copyright and trademark law would provide just the right level of protection in that area.

2. As the Dusseldorf Regional Court noted more than five years ago (when explaining why a decision came down for Apple and against Samsung), Apple's strength is "minimalistic design." It should be obvious to everyone that minimalistic design must be harder to protect with design patents because otherwise such patents would become overbroad. A design patent on a carpet design with a huge number of design elements is narrow; a design patent on a round button below a rectangular screen is overbroad. Breadth also has to do with functional elements: the alternative to rounded corners is damage to people's pockets.

   Here, again, it's important to make a distinction between Apple's non-legal merits as a design trendsetter and the problematic legal implications of the level of (over)protection Apple has been seeking.

   Taste per se isn't patentable.

3. Finally, even if something falls within the scope of patent-eligible subject matter, is not too broad to be valid, and an infringement is proven, then remedies must still be reasonable, not draconian. There's the eBay standard for injunctions and there are various principles governing damages determinations, including in many contexts (such as some in which I have always supported Apple) the smallest saleable unit approach. Apple has benefited from those standards on numerous occasions. Fortunately, the position with which it went into the recent Supreme Court hearing was already much more moderate than what it had told the district court and the Federal Circuit.

In some ways, it would be harder for Apple to go after Google now than it was to sue Samsung in 2011:

• Even prior to the Apple v. Samsung Supreme Court opinion (which will probably come down in December or January), the position taken by the DoJ and some of what the justices said at the hearing have made it crystal clear that the appropriate "article of manufacture" will have to be determined in future design patent cases if someone seeks a disgorgement of otherwise-unapportioned profits.

• In a dispute with Google itself, as opposed to Samsung as a Google proxy, Apple would not be able to benefit from a certain statistically-proven bias of U.S. juries against foreign companies. It would be Silicon Valley Giant v. Silicon Valley Giant. Like a duel on the 101.

• A disgorgement of infringer's profits would be further complicated by Google, with most of its business not being in hardware, being able to present to the jury all sorts of overhead and development costs as being related to the Pixel project.

A key lesson from Apple v. Samsung is that Apple suing someone for allegedly making iPhone (or iPad) lookalikes can actually have a positive marketing effect on the defendant, at least in some places. Far be it from me to impute such cynicism to Google, but I wouldn't be surprised if maybe the decision-makers who approved the Pixel project in this form, in addition to seeking legal advice on how to have the most defensible position under the circumstances, thought that a design lawsuit by Apple would be the best thing that could happen to them because it would make even more people aware of certain parallels between the Pixel and the iPhone. That, however, would probably hurt other Android device makers more than Apple.

I have no idea what Apple is doing, but should Apple take legal action in the U.S. or elsewhere, I could understand it. Still I wouldn't support software design patents, overbroad design patents, or draconian and devastating remedies, ever.

2. Antitrust

About six months ago, the European Commission sent a Statement of Objections (not a final decision but certainly something that puts recipients on the defensive) to Google over the way it controls the Android operating system and Android apps. While there are definitely some parts of the Commission's analysis that I agree with, such as market segmentation (very important in antitrust cases), there's a couple of things that make me (since I'll also release an Android app soon) a bit leary:

• The Commission mentions Google's "anti-fragmentation" efforts. If you talk to any Android app developer out there (and I've talked to a number as you might imagine), they'll tell you about how difficult fragmentation makes it to develop and test Android apps. Ever better tools become available all the time. But it remains a huge issue. On iOS (where I'll release my first app) some things are a lot easier just because there is no fragmentation (just a very limited range of different screen sizes and aspect ratios).

  What the Commission says in public about its concerns related to "anti-fragmentation" sounds more like a concern over anti-fragmentation serving as a pretext for curbing competition. To the extent that this really is the Commission's focus, I'm fine. But I need to know more about what the remedies (or Google's commitments to settle the case) would be and what impact they'd have on developers like me. I'd like the Commission to make it very clear that some anti-fragmentation efforts are very positive while others may be reasonably viewed as illegal restrictions on competition.

• I'd probably be a lot less concerned if the ones apparently funding the official complainants and sometimes acting as complainants themselves were Android device makers as opposed to certain enemies of Google (by the way, Apple does not seem to have any hand in this, at least to the best of my knowledge). At the same time, let's be realistic: it would really be hard for an officially-licensed Android device maker and Google partner to complain. I could imagine, however, that some of them may have told the Commission about certain problems they face when the Commission sent them questionnaires and interviewed them. In a different competition context in which I participated in a conference call with Commission officials and a software company, I noticed that a company was about ten times clearer and more accusatory than in public.

The EU Android case is about the search engine and about what others call an "essential facility" type of theory: device makers need Android, Google controls it and then imposes restrictions that protect its monopoly. It's not about Google competing with Android device makers. Not yet.

Psychologically, I don't believe the Pixel phone does anything to alleviate the Commission's concerns. It won't become an additional official concern anytime soon, but when the game master is a player himself, all sorts of issues come up. The big problem in sports-related competition law is that sports bodies set the rules (including the commercial rules) and usually also act as major commercial operators in the same field, competing with the clubs (and often unfairly). Google's Nexus phones didn't give rise to that concern; they were a showcase effort and Google partnered with a different manufacturer every year. But with the Pixel out there, the Android ecosystem looks more like a FIFA/UEFA type of setup than it used to (after Google divested Motorola Mobility's device business to Lenovo). I believe Google should, in light of the Pixel, give more flexibility to other Android device makers than before (while still ensuring that fragmentation won't make life even harder for developers like me).

3. Copyright

Finally, what might Oracle (which just filed an appeal against Judge Alsup's latest ruling) do?

The Pixel runs on Android Nougat. It integrates the Java APIs on an OpenJDK (i.e., GPL) basis. I'm not going to go into the merits and technical aspects of this now because this is already a long post. Suffice it to say that Oracle would have to overcome three hurdles when going after Google over the Pixel:

1. Copyrightability would have to be determined once again. My position on this one is well-known and I don't think it should be an issue, but there's no doubt Google would fight over it again and the findings from the other case wouldn't be law of the case in a new proceeding. Also, if the new case didn't involve patents, it would be appealable to the Ninth Circuit, which wouldn't be formally bound to however the Federal Circuit interpreted its law. Even another Supreme Court appeal over API copyrightability could happen (last time certiorari was denied, but that could also have been due to the stage of proceedings).

2. Fair use would come up again, too. Oracle knows by now that juries easily get confused about open source issues in this context, which favors alleged infringers.

3. Oracle would have to become a GPL enforcer and demand that Google release certain parts of Android on a GPL basis. The legal question would then be, for example, whether Google's key proprietary Android apps are derivative works of (even if only indirectly) OpenJDK. In order to get real leverage, Oracle would probably have to reach the level at which even Google's apps, or at least some other proprietary extensions of Android, would be demeed to fall under the copyleft rule.

I believe Oracle will do something sooner or later about Android Nougat, but my feeling is it will at least want to get the next Federal Circuit decision in the first Oracle v. Google case.

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Apple v. Samsung: stark contrast between Supreme Court and Federal Circuit

Within a few days of each other, the Supreme Court of the United States and the United States Court of Appeals for the Federal Circuit had Apple v. Samsung on their agenda. One week ago, the Federal Circuit issued a ruling that was more than surprising: a majority of the full court overruled the three panel judges, including the Chief Judge, with respect to the second California Apple v. Samsung case to reinstate a $119 million verdict for Apple. On Tuesday, the Supreme Court held its hearing on the question of design patent damages (transcript).

Was it just a coincidence that the Federal Circuit made a decision on an Apple petition for a rehearing about eight months after the original decision and just days before the design patents hearing in the top U.S. court? It may very well have been. But when there are already other oddities (such as the decision not to invite further briefing from the parties and hold a rehearing), it's not impossible that there is a hidden message or agenda.

The Federal Circuit decision certainly gives Apple leverage. Limited leverage, though: the relatively most valuable one of the three patents on which Apple had prevailed at the spring 2014 trial has expired and the most iconic one, slide-to-unlock, is about as valuable in the age of Touch ID and comparable technologies as an ISDN or floppy disk patent.

The Supreme Court hearing, by contrast, went fairly well for Samsung--to the extent that one can say at this procedural stage. While the Federal Circuit had said in May 2015 that Samsung was liable to the extent of its total profit on any phones deemed to infringe any Apple design patent(s) and that arguments against that holding would have to be directed to Congress, Apple itself softened its stance after the U.S. federal government had warned against absurd results: Apple told the Supreme Court that the "article of manufacture" with respect to which an unapportioned disgorgement of profits was warranted might be less than an entire smartphone.

At the Tuesday hearing, there really was no indication that the Supreme Court would agree with the lower courts. The focus was completely on what the right test for the relevant article of manufacture should be--a test that the Federal Circuit (and Judge Koh before it) hadn't even considered necessary. Despite the parties' agreement at this stage and the U.S. goverment's position, the Supreme Court could have said the same as the Federal Circuit: talk to Congress. It didn't. The justices appear convinced that a solution can be worked out without changing the statute, just by interpreting it reasonably. A couple of examples:

Chief Justice Roberts: "It seems to me that the design is applied to the exterior case of the phone. It's not applied to the --all the chips and wires, so why [...] So there should - there shouldn't be profits awarded based on the entire price of the phone."

Justice Breyer (sympathetically paraphrasing an Internet Association brief): "you know, wallpaper, you get the whole thing. A Rolls Royce thing on the hood? No, no, no. You don't get all the profit from the car."

In light of those statements, I would not advise patent trolls to acquire broad and trivial design patents at high prices right now. The Federal Circuit opinion on disgorgement may have encouraged some organizations to do that, but the Supreme Court decision will almost certainly be a lot more balanced.

The big question mark at the hearing was how to solve the problem (of totally unreasonable design patent damages due to the application of the law of the spoon to modern-day smartphones or entire cars or airplanes). What rule would work?

Justice Kennedy, whose concurring opinion in the eBay case on patent injunctions has been cited over and over, said something I agree with and that even the parties to this case here might agree with philosophically:

"My preference, if --if I were just making another sensible rule, is we'd have market studies to see how the --the extent to which the design affected the consumer, and then the jury would have something to do that. But that's apportionment, which runs headlong into the statute."

In the case of a design patent-infringing cupholder in a car, the impact on purchase decisions would be zero, or at least negligible. In the case of a rug or a wallpaper, design would be a huge part of the value. And when it comes to a smartphone, it's somewhere in between (not in the middle, but somewhere in between).

That kind of standard, however, would either require new legislation or an interpretation of § 289 under which the phrase "profit made from the infringement" would result in a causal-nexus requirement, which in effect would lead to apportionment despite the statute containing the world "total."

Samsung's counsel proposed focusing on "article of manufacture," which is also what certain amici had advocated in their briefs, and the patent specifications ("the article of manufacture to which a design has been applied is the part or portion of the product as sold that incorporates or embodies the subject matter of the patent"). Justice Kennedy said that as juror he wouldn't know what to do with an instruction like that, but there's lots of things that are hard for juries to resolve, such as highly technical infringement questions.

It's hard to make a prediction here but I think it's a relatively likely outcome that the Supreme Court will ultimately support Samsung's proposed approach of looking at the cost of the different components. It would be the lesser one of two "evils" the statute could lead to. The position of the courts below, which was an "entire product" or "largest saleable unit" kind of rule, could drive companies into bankruptcy. The net effect of basing damages for a design of the casing of a smartphone on the cost of the exterior parts covered by the design patent could be that design patent holders feel they are undercompensated. The result could be substantially below what Justice Breyer would like to be the test if he could make new law; but the Supreme Court has to interpret the existing statute.

Unless someone comes up with a creative new idea or the Supreme Court somewhat surprisingly goes down the "causal nexus" avenue, it will be a situation of "tertium non datur." It will be a choice between the devastating and absurd "entire product" approach or Samsung's (and also Google's, Facebook's etc.) "smallest saleable unit" rule. The latter would not drive companies out of business, which is a strong argument in its favor, and not the only one.

The reason why I would be less concerned about some potential undercompensation than about totally outrageous and absurd overcompensation is that design patent law is not the only kind of legal protection for design-oriented companies like Apple. Certain designs are protected by copyright. And designs that drive demand are protectable under trademark law including "trade dress," a type of intellectual property right Apple also asserted in this case (but on that one the Federal Circuit disagreed with it).

Apple still hopes--though probably much less now than it did before the Supreme Court hearing--to get the original verdict(s) affirmed because, according to Apple's lawyers, Samsung failed to present enough evidence that the smartphone as a whole was not the correct article of manufacture for determining design patent damages in this case. Based on how the hearing went, it's highly unlikely that the Supreme Court (except maybe one or two dissenters) would affirm the Federal Circuit decision on that basis. Apple's counsel was repeatedly told to focus on what the correct rule should be rather than stress the record:

Chief Justice Roberts: "Mr. Waxman, we're spending an awful lot of time on an issue about what was raised below, what wasn't raised below, what was raised below, what wasn't raised. Maybe it's a good time to turn to Justice Breyer's question."

Justice Sotomayor: "Please don't go to the --to the record."

It's impossible to form an opinion from the outside on whether the record contains enough evidence to support Samsung's position, but in this case the evidentiary body as a whole must amount to (literally) truckloads of material and Samsung's reply brief gives some examples on its pages 20-22. It's good news that the Supreme Court is inclined to focus on the rule rather than on the record. Further below, the record will play a greater role.

In the very short term, the Tuesday hearing could clearly have gone better for Apple. Over time, however, even Apple will benefit from case law that makes overcompensation less likely. Otherwise Apple itself could find itself exposed to various attempts to siphon off its profits.

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Majority of Federal Circuit sides with Apple against Samsung: impact assessment, next steps

Only a few days prior to the long-awaited Supreme Court hearing on design patent damages (Tuesday, October 11), there's some surprise #appsung news. For the second time this year, Apple's world-class legal team achieved a turnaround that any litigator would be proud of for the rest of his life. In January, the Federal Circuit finally granted Apple an injunction against certain Samsung devices. While useless in practical terms, Apple managed to shift the goalposts in its favor even thought he hearing hadn't gone well for it. Then, a month later, a three-judge Federal Circuit panel threw out Apple's second California case against Samsung, but now the full court (11 judges) overturned the panel with an 8-3 majority decision (PDF), thereby reinstating Apple's $119 million (roughly 5% of what it originally sought) spring 2014 verdict.

Two surprise turnarounds within nine months of each other are stunning. But this is a dispute between companies, not the legal equivalent of the Olympic Games. So what is this good for?

Enforcement of patents-in-suit won't affect Samsung's U.S. sales

The three patents are the "quick links" patent (which expired earlier this year), the slide-to-unlock patent (which even several Samsung devices at issue in this case weren't accused of infringing and which has lost relevance in the age of Touch ID), and the autocomplete patent, which never appeared to be a high-priority patent-in-suit in this case.

At this stage (who knows what new information will surface over time) there's no reason to assume that any Samsung device will have to be modified (beyond what has already been done) as a result of Apple's two Federal Circuit wins.

Implications for damages

This litigation is now about money (and reputation). The Federal Circuit has remanded the case to California for a determination on willfulness. This could result in willfulness enhancements (triple damages). It's possible that this means more money for Apple but I doubt there will be much impact, if any. Willfulness has an objective and a subjective dimension. The objective dimension appears hard to establish, given that a Federal Circuit panel (even though overruled later) found Apple had no case.

However, Apple might seek supplemental damages for the roughly two years between the cutoff date for the spring 2014 trial and the expiration of the "quick links" patent (which amounted for the bulk of the damages award, so it's the only one worth thinking about in this context). There would likely be an argument over whether or not Samsung continued to "infringe."

I must admit that I haven't been able to figure out from the en banc opinion what actually happened to the damages-related parts of Samsung's appeal. Samsung had argued, especially with a focus on the "quick links" patent, that the district court prevented it from presenting important evidence about real-world deals such as Apple's license deals with Nokia and HTC. The Federal Circuit panel never reached those parts of Samsung's appeal because it threw out the case on the merits ("In light of these holdings, we need not address the other issues on this appeal."). I tried to find a reference to those evidentiary issues in the en banc opinion but couldn't find any. If you've been more successful in this regard, please let me know via my contact form...

Maybe I overlooked something. Or maybe someone else did.

Unusual procedural events

Apple's rehearing petition had been pending for more than half a year and I had already started wondering why there was silence on the docket, and then the Federal Circuit rendered an en banc opinion instead of first granting the petition, then getting some more briefing, holding a rehearing, and finally deciding.

As at least one of the dissents notes, this is unusual.

What's also unusual is that the eight judges who were not on the panel (the three on the panel stayed firm and wrote their dissenting opinions) had to actually disagree with the panel on several issues in order to arrive at this complete reversal of fortunes with respect to Apple's offensive case.

The primary reason I had been initially (before things started taking unusually long) skeptical about Apple's petition for rehearing was that I thought a unanimous panel decision by a panel that was not an outlier -- in fact, it was pretty representative of the composition of the court as a whole, with frequently defendant-friendly Chief Judge Prost on one side of the spectrum and previously Apple-friendy Circuit Judge Reyna on the other end -- was less likely to be overruled than an outlier position or a 2-1 majority ruling.

While there are differences between the approaches of Federal Circuit judges, I wouldn't have thought that eight non-panel judges would totally agree that the three panel judges got everything (except the part about Samsung's offensive counterclaims) wrong. This is just a highly unusual discrepancy.

The combination of all of this is strange, but there really isn't anything there that would give rise to conspiracy theories like Bill Clinton's tarmac meeting with the Attorney General.

What one could imagine (and I'm not saying this is something I necessarily believe to be the case, but it would be plausible) is that somehow the eight non-panel judges' agreement was made easier by some circuit judges wanting to settle accounts with, or weaken, the Chief Judge. Previously, Chief Judge Rader was somewhere between the Federal Circuit mainstream and the "radical" pro-right-holder wing. Chief Judge Prost isn't always defendant-friendly but certainly in a completely different part of the spectrum of positions. It could be that various Federal Circuit judges feel she doesn't really represent them. She's not their boss in a strict sense anyway, but chief judges often get to speak for their court and it could be that there is a disconnect between her and some old-school patent radicals.

Prospects for a second Apple-Samsung Supreme court case

I haven't been able to find a Samsung statement on this yet. I guess Samsung's lawyers are now completely focused on the design patents case. So is Apple. But I'm not going to wait for the parties before I me share my thoughts as to the prospects for a Supreme Court appeal in this context here:

• It's clear that the three panel judges phrased their dissents (which I like very much) with the objective to encourage, and provide ammunition for, a further appeal. Dissenting opinions always contain statements that can be viewed as invitations for an appeal but in this case the indications are unusually clear.

• I would be disappointed if Samsung gave up, but I also want to be realistic: a further appeal here would be harder than last time. Psychologically, the Supreme Court might just not have an appetite for yet another #appsung case. But what makes this here a significant challenge for Samsung's lawyers (which are at the same level as their colleagues representing Apple) is that it won't be easy to set the right priorities. It's not just about where the en banc might be demeed to have made mistakes. Before the Supreme Court looks at the merits, it evaluates whether the issues presented warrant certiorari. And to achieve that, Samsung will also want to get broadbased support from amici curiae, as it did in the design patent case.

  The Holy Grail is an issue, or set of issues, that the Supreme Court will be willing to look at, that various stakeholders will encourage the Supreme Court to rule on, and where the Supreme Court will likely reverse the appellate opinion.

• The dissenting judges point out that a full-bench review is not meant to just overrule a panel because of merely another opinion on an issue. It takes more than that. And they believe the court would have benefited from a rehearing (instead of handing down a written decision right away).

  The standard for a full court overruling an appellate panel is a potential issue to be reviewed here. I just don't know how attractive an issue that is for the Supreme Court and for potential amici. The fact that a decision came down without another hearing appears to me (unless there's some very interesting precedent that I don't know) to be something that wouldn't likely get traction, but even if it did, it simply wouldn't help: Samsung's lawyers would just be banging their head against an eight-judge wall then, to no avail.

• On the substantive side, two of the patents (autocomplete, slide-to-unlock) raise questions about the weight to be given to secondary indicia of nonobviousness and the evidentiary standards for invalidation. Circuit Judge Dyk (one of the most experienced ones) explained in his dissent:

  "[T]he majority lowers the bar for nonobviousness by refusing to take account of the trivial nature of the two claimed inventions. With respect to the '721 patent, the slide to unlock feature was known in the prior art (Neonode) and the only innovation is an image associated with the sliding gesture from fixed starting to ending points. [...] With respect to the '172 patent, the autocorrect feature was known in the prior art (Robinson), and the only innovation is displaying contemporaneously the text to be autocorrected. [...] Such text displays have long been known in the prior art (though not specifically in connection with autocorrect display).

  Treating such minimal advances over the prior art as nonobvious is contrary to KSR, where the Supreme Court confirmed that the obviousness doctrine is designed to ensure that “the results of ordinary innovation are not the subject of exclusive rights under the patent laws."

  I could easily picture some great amici siding with Samsung on obviousness and it might be reasonably interesting to the Supreme Court. But it would not help Samsung with respect to where most of the money is in this case: the "quick links" patent. Samsung could, of course, raise any number of issues. But it would be an economically undesirable outcome for Samsung if the petition was granted with respect to obviousness and rejected with respect to the "quick links" patent.

• The focus must be on the "quick links" patent (I believe Samsung should even focus on it exclusively but that's their call), one issue raised by the dissenting opinions is that Apple and Samsung agreed, during this litigation, on a certain claim construction, and at least one dissenting opinion says the majority didn't really respect that agreement between the parties. What I find more interesting is that the majority argues an Android library for identifying phone numbers etc. in an email or other text document constitues a "separate" server because it runs in a different memory location. Chief Judge Prost explains very well why that doesn't make sense and actually vitiates an important claim limitation:

  "The majority asserts that, in light of the specification, a program that is 'structurally separate,' without more, satisfies the “‘separate’ requirement.' [...] We did not so cabin the word 'separate' in our Motorola construction. Because no two program routines may physically occupy the same memory at the same time (i.e., any two separate program routines are, by definition, separate in storage), the majority’s interpretation effectively and erroneously reads 'separate' out of our construction. Relatedly, the majority also fails to give effect to the requirement under our construction that the routine is a server routine, not any piece of code. That is significant because we relied in Motorola on the plain meaning of 'server,' which entailed a client-server relationship."

  If Samsung's attorneys found a way to raise this kind of issue in a general, certworthy form by presenting a question that the Supreme Court may very well decide to review, then that would seem the most promising approach to me based on what I know today, only about 24 hours after finding out about the Federal Circuit decision.

There should be a cert petition. I think it would have a very positive effect (not thinking specifically of this case but with a view to other patent litigation) if it was granted. And in that case, I think the panel decision should be reinstated. But now Samsung's lawyers have to design a strategy, which was much clearer to see in the design patents context than it is here.

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Samsung to Supreme Court: Apple has made a "remarkable about-face" on design patent damages

This tit-for-tat took almost four years. In December 2012, Apple informed the United States International Trade Commission of what it portrayed as a "remarkable about-face" by Samsung in the form of withdrawing injunction requests in Europe. Samsung's August 29, 2016 reply brief in support of its Supreme Court appeal concerning design patent damages--thankfully published by the SCOTUSblog (PDF)--says the following about Apple's opposition:

"In its brief, Apple makes a remarkable about-face. It now admits, agreeing with Samsung and the government, that the "article of manufacture" to which a patented design is "applied" may be only a component of a product. And it now admits, agreeing with Samsung and the government, that, where the patented design is applied only to a component of a product, the total profit under Section 289 is the profit attributable to the component, not the product."

On page 36 of Apple's July 29 brief, Apple indeed says that "article of manufacture" has a broad definition ("anything made by human labor"), specifically, "that it may include a complete final product or a component thereof." Apple, hgowever, argues that this broad definition works in its favor and doesn't limit application of the total-disgorgement rule to "decorative" articles. Apple continues to argue that even highly complex, multifunctional products may fall under that rule for infringing a single design patent.

Having re-read some older documents from this litigation, I can't help but feel that Apple has indeed adjusted--or one might just say "softened"--its position as a result of the amicus curiae brief filed by the Solicitor General on behalf of the U.S. federal government.

Very closely related to this is how some of the "friends of the court" supporting Apple argued in their filings. There's something rather atypical about it when you see certain amici raise very case-specific, partly just procedural reasons for or against a decision instead of focusing more or less exclusively on a fundamental, substantive legal question. To a non-party it normally shouldn't matter too much whether a certain party did or did not present a particular kind of evidence or raise a particular kind of objection somewhere in the process. If anything like that turned out outcome-determinative, the key substantive issue in the case might not (and often would not) be adjudicated.

If an amicus curiae just wants to do one of the parties a favor, that's a different story. But the likes of Calvin Klein aren't Apple vassals. They have an interest in design patents being as powerful as possible, and the power of design patents is a more generic question than the specifics of this litigation.

Amici should care about clarification in their favor, and somehow they appear to be afraid that the Supreme Court might agree with the U.S. government on the definition of "article of manufacture"--in fact, on the broad and inclusive definition that Apple now also, suddenly, accepts.

A simplistic way to put it is that Apple and some of its amici would now content themselves with Samsung being the last victim of Judge Koh's and the Federal Circuit's interpretation of § 289, knowing that any remotely savvy litigant in future cases would know how to avoid the same problem. For Apple, winning is the only thing. And its amici primarily just don't want to lose. Another plausible explanation is that some amici believe that even a finding by the Supreme Court that the district court was too narrowminded on "article of manufacture" wouldn't affect the value of design patents too much in the public perception because people would just see that Apple gets many hundreds of millions of dollars. That would, of course, benefit trolls asserting design patents, at a minimum by showing to prospective defendants that an unapportioned disgorgement can be the ultimate outcome. The worst-case scenario makes trolls money.

We're still about four weeks away from the Supreme Court hearing, and I'll write about this case again in the meantime. For the remainder of this post I just want to focus on what's very likely (not certain though) to be the outcome-determinative issue. A few months ago I would have assumed that the meaning of "article of manufacture" would be at the center of the hearing. It still might be if that's what the justices focus on. But if the top U.S. court agrees with both parties and the U.S. federal government that "article of manufacture" can also be a component, then the question would be whether the record of this case supports one party or the other. Unsurprisingly, either party argues that the other has the burden of proof and failed to shoulder it, so the respective party could win even without a remand. With respect to the burden of proof, Apple has the U.S. government on its side. It's the only key issue on which the DoJ agreed with Apple (the rest doesn't really matter). At the October 11 hearing, the most important indication of the outcome that the justices give could be what they say about who has the burden of proof on what the appropriate "article of manufacture" in this case was.

Samsung's argument concerning the burden of proof is that patent holders generally bear the burden of proof for their claims and that § 289 differs from other disgorgement statutes that "explicitly shift burdens to defendants." Samsung also quotes from the legislative record, and the following passage suggests rather strongly that Apple had the burden of proof:

"'the patentee recovers the profit actually made on the infringing article if he can prove that profit' H.R. Rep. No. 49-966, at 3 (emphasis added)"

If the Supreme Court (or Judge Koh on remand) finds that Apple failed to identify the relevant "article of manufacture," then there won't have to be another jury trial--and the clear message to the rest of the world would be that rationality has been restored with respect to design patent damages, period.

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Oracle files proposed notice of deposition of Google witnesses regarding discovery misconduct

On August 25, Oracle and Google filed sworn statements (and Oracle also filed an objection) regarding Oracle's motion for an Android-Java copyright re-retrial over alleged discovery misconduct and lies to the jury. Judge Alsup then ordered the parties to respond to each other's filings with new sworn declarations, which were due today.

To be of service to loyal readers following the case in detail, I have uploaded Google's declaration as well as Oracle's filing (a declaration as well as a proposed notice of deposition of Google witnesses) to Scribd.

Unfortunately, I don't have time, at least at the moment, to analyze these documents in detail and share any observations. However, I don't want this to be misunderstood as my positions on the issues in this case or my belief as to the most likely outcome having changed. So I'd like to explain, just quickly:

Due to my focus on two app development projects, my blogging has slowed down massively in recent years. For example, this is only my 36th post this year (with more than two thirds of the year already behind us), while I wrote a minimum of 40 posts in any given month of the year 2012. Some slowdown would obviously have resulted from the fact that many smartphone disputes have been settled, but not to this extent.

I'm working very hard right now to launch both games (one on iOS first, the other one on Android and iOS simultaneously) before Thanksgiving weekend. Both games are almost feature-complete, with a lot of the current efforts already relating to final touchup and testing. Both have taken much longer to develop than initially planned, but they've also become even better than I would have predicted at the outset--and those were ambitious projects from the beginning.

I have to focus as there still is some hard work on my part to be done, though I have recently stopped doing any coding myself. Now, after six years of "smartphone IP wars," there are only two really big cases pending: this copyright case here and the Apple v. Samsung design patent matter. As a right holder who has already invested a huge amount of money as well as "sweat equity" in software development, I care very much about Oracle v. Google, which is no longer really about APIs as much as it is about software copyright in general. As a potential future defendant against trolls, I'm deeply concerned about the prospect of an unapportioned disgorgement of profits over a design patent on a single icon or whatever other design.

The Supreme Court will hear Samsung's appeal in a month (one month and two days, to be precise). This is obviously not the time to reduce or discontinue my coverage of that matter. It will be over soon. I guess the decision will even come down before Christmas, or in January maybe.

By contrast, Oracle v. Google will take much longer. I honestly can't predict how much time I'll find to comment on it. It could be that I'll somehow manage to find the time to blog about it like in the past, especially because I disagree with 99% of everything else I read about that case, but it could also be that my next post on this case after this one will be my commentary on the final outcome after a settlement or after all appeals have been exhausted. Or anything in between those extremes. Whatever it may be, it has nothing to do with how important this matter is to software developers like me or with what I believe the legally and factually correct outcome should be.

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