Antitrust class action against Qualcomm (originally related to FTC action) thrown out on summary judgment; same judge previously denied discovery of my communications with Microsoft

In January, I reported on the partial dismissal of an antitrust class action against Qualcomm in the Northern District of California (a case that was brought in the wake of the FTC's ultimately unsuccessful enforcement action against the chipmaker), and at the time I already wrote that the ruins of that complaint "[would] hardly survive summary judgment." In February I agreed with Qualcomm's arguments for not reopening discovery, as did the court. After the SJ motion was filed in April, I "I guess[ed] Qualcomm's motion [would] succeed." And that is what has just happened.

On Tuesday, "[a]fter carefully considering the briefing and conducting oral argument on August 3, 2023," Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California granted Qualcomm's motion for summary judgment in its entirety:

In Re: Qualcomm Antitrust Litigation (case no. 17-md-02773-JSC, N.D. Cal.): Order re: Motion for Summary Judgment (Public Redacted Version)

This here is a legal victory that should put all of that U.S. antitrust litigation from the late 2010s to rest (short of a successful appeal, but chances are so slim that I guess an appeal will not even be brought). In economic terms it is, however, pretty unimportant compared to the fact that Apple, due to its failure to make its own iPhone-grade baseband processor, had to extend the chipset purchasing agreement with Qualcomm by another three years (2024-2026), which presumably means that Apple exercised an option to extend its standard-essential patent royalty payments as well. In the alternative (if Apple had been able to replace Qualcomm's chips), Apple might have tried to renegotiate those SEP licensing terms.

Things are going well for Qualcomm, and ultimately I believe the company will be able to deal with whatever impact the proposed EU SEP Regulation--in whatever form it may or may not be passed into law--will have.

As for Judge Corley's reasoning, the key elements are that there was really not even the slightest substance to claims that an agreement with Samsung had any market foreclosure impact. And even with respect to Apple, there was no credible pass-through theory (of elevated costs). The final part ("Conclusion") of the order granting the motion to dismiss essentially says that the class-action lawyers made their strategic choices. The initial choices (very much about "No License, No Chips" and allegedly supra-FRAND SEP royalties) didn't work out when the Ninth Circuit reversed the FTC's trial win. Later on, they still tried to get something out of this by suing Qualcomm over exclusive dealing. They presented a new expert report "though the Court had expressly declined to reopen expert discovery." Judge Corley declined to "open the flood gates to prolonged do-over litigation" as opposed to the speedy, efficient, and just resolution that the Federal Rules of Civil Procedure seek to ensure.

This outcome makes sense to me. As I noted further above, I predicted that the shifting-sands case wouldn't make it to trial.

Class actions can serve useful purposes. They can raise issues and promote justice. However, the vast majority of class actions I see in the technology industry are just opportunistic attempts by lawyers to extract settlements from large corporations. Qualcomm probably could have "settled" that class action at a far lower cost than that of its world-class defense. But once you do that, others will come and sue you as well. Qualcomm made the right choice and has now (again, absent an unlikely reversal on appeal) defeated this class action (or, more precisely, consolidated set of class actions).

The order to dismiss the Qualcomm class action(s) came one day after Judge Corley also made a decision (in a class-action matter that does not involve Qualcomm but also followed an FTC action) relating in part to yours truly's communications with Microsoft:

DeMartini et al. v. Microsoft (case no. 22-cv-08991-JSC, N.D. Cal.): Order Re: Discovery Dispute Joint Letter

Let me just refer you to an article about this odd sideshow of the Microsoft-ActivisionBlizzard merger case by Stephen Totilo of Axios Gaming.

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Draft SEP regulation threatens EU Commission's credibility at WTO level, may backfire big-time: issues outlined by former U.S. government officials and senior Qualcomm lawyer

More and more issues are identified concerning the European Commission's draft regulation on standard-essential patents (SEPs) that may or may not be formally put on the table next Wednesday (April 26) by EC Executive Vice President Margrethe Vestager. While the Commission is briefing reporters today (with critics of the proposal apparently planning the same for Monday and Tuesday), Mrs. Vestager told MLex (after speaking at a conference) that the 26th remained the target date, but delays could not be ruled out due to the EC's busy agenda. I first shared the information on LinkedIn (after reaching out to MLex about it).

For my previous reporting and commentary on the subject, see the link list toward the end of this post.

Yesterday (Thursday, April 20), an important letter was sent to key members of the EU Commission and an insightful write-up was published on LinkedIn. I'll discuss both below.

1. Letter from former senior officials of U.S. government agencies to EC leaders

2. While attacking Chinese antisuit injunctions at WTO level, the EC intends to create its own antisuit regime to interfere with foreign legal proceedings

Former leaders of U.S. government agencies under POTUS #42-#46 (Clinton, G.W. Bush, Obama, Trump, Biden) sent the following letter yesterday to EC President Ursula von der Leyen, EVPs Margrethe Vestager and Valdas Dombrovskis, and Commissioner Thierry Breton:

1. Letter from former senior officials of U.S. government agencies to EC leaders

Comments on European Commission's Draft "Proposal for Regulation of the European Parliament and of the Council Establishing a Framework for Transparent Licensing of Standard[-]Essential Patents" (April 20, 2023 letter by Christine Varney, David Kappos, Walter Copan, Makan Delrahim, Andrei Iancu, and Noah Phillips)

Most of them work in private practice now. Notably, three of them (former Antitrust AAG Christine Varney, former USPTO Director David Kappos, and former FTC commissioner Noah Phillips) are Cravath partners. Makan Delrahim (Trump's Antitrust AAG) is a Latham & Watkins partner, and Apple (which holds rather different positions) is major Latham client.

The letter expresses "shared concerns regarding an apparent pivot in the European Commission’s longstanding intellectual property (IP) policy that threatens European and American innovation leadership, and by extension, European and American economic success and security." (emphases added)

In diplomatic terms, that is a much stronger statement that it may appear to be at first sight. If we were talking about a statement by the signatories' successors, EU-U.S. relations would almost be on the brink of a trade war. The EC's leaders should ask themselves whether the objective of bringing down patent royalties paid by Apple and some automotive companies is really worth such complications. The answer should be clear, and what's also clear is that some people in the lower echelons of the Commission have acted irresponsibly in drafting a bill that raises such concerns without engaging in proper stakeholder consultation. Asking general questions about SEP-related grievances is not a substitute for discussing the implications of specific ideas.

The signatories of that letter know from their vantage point as former high-ranking government officials about "the critical yet fragile balance that must be struck when regulating [SEP] licensing" and warn that "even seemingly small policy changes can have outsized impacts." So does, by the way, a counterpart of theirs in London, UKIPO CEO Adam Williams, who told IAM in a recent interview (paywalled) that "massive intervention" in that area is rarely the right thing, and one needs to find a middle ground.

That's consistent with what I've observed as a cross-jurisdictional litigation watcher.

Near the top of page 2, the letter says SEP policies "should be data-driven and should consider the practical impact on industry and relevant geopolitical realities" (emphases added). Neither the draft regulation nor the draft impact assessment suggest a data-driven approach. Much to the contrary, I've already identified passages that are shockingly out of touch with reality and based on some people's opinion rather than any evidence, such as in connection with certain patent pools operated by Avanci and Sisvel. I also highlighted "geopolitical" in that quote because the Commission--especially at the most senior level--should be more sensitive to diplomatic and trade considerations.

The former U.S. government officials' letter warns that if the Commission proposed a regulation like the draft they've seen--even if it was not ultimately adopted in a similar way, shape, or form--"would also pave the way for Europe’s implementer-dependent international competitors to set binding aggregate royalty rates that severely devalue European innovation." Elsewhere (Section III), the letter describes those other jurisdictions as "[u]ndemocratic."

The EU would shoot itself in the foot. Given that even just making an ill-conceived proposal (regardless of what will subsequently happen in the legislative process) harms EU interests, the Commission should step back and think it all over again, with help from stakeholders on both sides of the debate.

Section II of the letter points out another credibility issue for the EU. As the letter recalls, it's been less than a year since the executive director of the EUIPO, Christian Archambeau, said “[o]f course, we will never have the competency in patents. But national offices do have competency in patents. So through the network, we can leverage their capabilities for common projects." And now the Commission wants to task the EUIPO with overseeing one of the most complex tasks in patent law (some would even argue it's the single most difficult one): portfolio valuation.

I agree with the overarching concerns raised by that letter and disagree only with the signatories' support of the EU complaint over Chinese antisuit injunctions ("The European Union rightly argued that [...] violated China’s obligations"--in my opinion those Chinese antisuit injunctions are just a defensive response to extraterritorial overreach by foreign courts).

2. While attacking Chinese antisuit injunctions at WTO level, the EC intends to create its own antisuit regime to interfere with foreign legal proceedings

The letter shown and discussed above discusses geopolitical and international trade issues that would arise even from just putting a fundamentally flawed proposal on the table next week. In that regard, let's now look at the attempt to create de facto antisuit injunctions at the EU level that would interfere with the sovereignty of foreign jurisdictions and go against the concept of international comity.

In a LinkedIn article published yesterday, Qualcomm's chief licensing lawyer, Fabian Gonell, explains why the draft SEP regulation would do "exactly what [antisuit injunctions] do in China: penalize patent holders that bring an action in foreign courts." And Mr. Gonell is rightly wondering how the Commission, which will soon have to file its substantive brief in support of its WTO complaint over China's antisuit injunctions, will seek to distinguish the antisuit element of its proposed SEP regulation "from the [Chinese] conduct of which [the EC] is complaining."

That LinkedIn article makes all the right points, and actually discusses only one of the two antisuit mechanisms envisioned by the EU contrary to its position in the WTO proceedings that no instrument of that kind should restrict patent rights in the first place. So let me explain it here in my way--in even more basic terms with a view to those who may be less familiar with the topic--and discuss both antisuit elements of the draft SEP regulation in parallel.

First, let's clarify what amounts to an antisuit mechanism. Two years ago I participated as a speaker in an EC webinar (the blog post also shows my slide deck)--a webinar that has now been declared part of the consultation process for the draft regulation, which I deem a mischaracterization. I'm now going to take a position totally consistent with the effects-based approach of my May 2021 presentation:

An antisuit mechanism

• effectively precludes a party from enforcing its rights in another (almost always a foreign) jurisdiction (the enjoined jurisdiction)

• by means of (typically drastic) sanctions in the enjoining jurisdiction.

The EU complains that China (in that context, the enjoining jurisdiction) imposes antisuit injunctions on patent holders, effectively precluding them from enforcing their patent rights in the EU (through the enforcement of SEP injunctions) by imposing per diem contempt fines.

Back then I said that requiring defendants to EU SEP cases to take a global portfolio license to avoid the enforcement of an injunction ultimately also means that they can't seek a rate-setting decision in other jurisdictions (with respect to the patents valid in those countries) because they will either lose sales or be sanctioned for contempt of court (by disobeying the injunction). In yesterday's article, with a focus on the draft SEP regulation, Mr. Gonell now argues--and I agree--that one must just focused on whether a party is "penalize[d]" for "bring[ing] an action in foreign courts." That is the nature of the antisuit beast, and Mr. Gonell rightly calls it "a distinction without a difference" that Chinese antisuit injunctions result in fines on SEP holders while the EU's envisaged antisuit mechanism penalizes them with a "loss of rights to enforce EU patents."

The EC's draft SEP regulation would penalize SEP holders in one context and implementers in another. Oddly, the antisuit context is the only one in which the draft regulation is at least somewhat symmetrical, while in all other regards it just seeks to impose costs on SEP holders, and to delay and complicate enforcement, while doing nothing to combat hold-out by unwilling licensees.

How can parties set off the draft regulation's antisuit mechanism?

Art. 48 of the draft regulation defines the term "parallel proceeding" as

(a)

civil court proceeding, any other court procedure or procedure before a tribunal or administrative or state authority of a jurisdiction outside of the Union called upon by law to make legally binding and enforceable decisions;

(b)

concerning a licensing dispute concerning the same standard and its implementation, or including SEPs from the same patent family involving one or more of the parties to the FRAND determination as a party, and

(c)

[a duplicative "and"] concerns the same matter which serve as a basis for the FRAND determination.

This is extraterritorial overreach, plain and simple. It's about non-EU jurisdictions like the UK, U.S., China, India, or Brazil, to name but a few examples of jurisdictions in which SEP holders often enforce their rights. And it covers "licensing dispute[s]" as well as patent infringement actions that may result in injunctions putting an end to violations.

Whoever came up with that essentially wants the EU to take the position that all other jurisdictions in the world have to wait until the EU has made a FRAND determination--or if one doesn't wait, one will get penalized in the EU. It's a "my way or the highway" attitude. It has nothing to do with international comity. It's more like what one would expect from so-called "rogue states"...

Let's look at the two sides of the licensing negotiations:

• If SEP holders started "parallel proceedings", they'd seek a FRAND determinations and/or enforce their rights in foreign jurisdictions.

• If implementers started a "parallel proceeding", it would be a FRAND determination that would result in an obligation to enter into a license (the statute is limited to proceedings that result in "legally binding and enforceable decisions" as opposed to mere declarations).

The draft regulation doesn't even distinguish between foreign FRAND determinations that would cover patents valid in the EU or not. So, for instance, if an implementer asked a Chinese court to order the SEP holder to grant a license to only its Chinese SEPs on court-determined terms, it would run afoul of the EU's rules! That's insane.

The penalty is defined by paragraph 2 of that article in conjunction with two paragraphs of another article:

[Art. 48(2)]

In case of a parallel proceeding [as defined in para. 1] filed prior or during the FRAND determination by a party, the FRAND determination panel, or in case it has not been established, the competence centre, shall terminate the procedure upon the request of the other party. Article 47(3) and Article 47(4) shall apply.

We have to turn to Art. 47(3) and (4) to find out more specifically what is meant by "terminat[ing] the procedure upon the request of the other party." Art. 47 is the statute that defines what constitutes a "[f]ailure of a party to engage" in the EU's FRAND determination proceedings. So, even if a party that is enforcing its rights elsewhere contributed constructively to an EUIPO-led FRAND determination, the mere fact that it's also asserting non-EU patent rights in foreign jurisdictions would be penalized like a failure to engage.

Art. 47(3) addresses the scenario in which the implementer fails to engage (which as per Art. 48(2) includes a scenario in which a party avails itself of a foreign court for certain purposes, even if no EU patents are concerned):

3.

The competence centre shall issue a notice of termination of FRAND determination to the SEP owner, including for the use before the customs authorities of a Member State, if the FRAND determination was terminated under [t]his article, and the party referred to in paragraph (1) is the prospective implementer.

4.

The competence centre shall issue a notice of termination of FRAND determination to the implementer, if the FRAND determination was terminated under [t]his article, and the party referred to in[ ]paragraph (1) is the SEP owner.

So, if a party--licensor or licensee--avails itself of a foreign court, the other party will get a notice of termination--but the party that exercised its rights outside the EU will not get one. What does that mean in practice? It means that only one party--the one that didn't run to a foreign court--is free to do in the EU what it wants.

If the party that doesn't get such notice of termination is the patent holder, Art. 58(4) precludes it forever from enforcing its rights in the EU:

A court of a Member State or the Unified Patent Court, requested to decide on any issue related to a SEP in force in a Member State, shall not proceed with the examination of the admissibility of the request, unless it has been furnished with a notice of termination of the FRAND determination.

It's a total enforcement deadlock, a sanction that can--and in many cases will--be more drastic than a contempt fine.

For implementers, the penalty is that they lose the protection the draft regulation would afford them with a view to enforcement in national courts as well as USITC-style customs seizures. Implementers--unlike SEP holders--wouldn't be worse off than today if they asked a foreign court to enforce their rights under a foreign country's laws. But if that draft regulation had entered into force, availing themselves of foreign courts (even in my example of someone just seeking a Chinese FRAND ruling with respect to Chinese patents) would deprive them of a shield they'd otherwise have in the EU.

This is judicial imperialism. Should the EC actually put that kind of proposal on the table, I'd be left to wonder why the EU Commission doesn't have the checks and balances in place to prevent such a terrible mistake. It shouldn't be hard for the ultimate decision makers to figure out, with help from their advisers, that the draft regulation is a dumpster fire.

Links to prior FOSS Patents posts on the envisaged EU SEP regulation

In chronological order:

1. March 29: European Commission departs from best practices in hasty preparation of standard-essential patent policy proposal that is fundamentally flawed and unbalanced

2. March 31: Table of contents and synopsis of European Commission's draft proposal for standard-essential patent regulation

3. April 2: Proposed EU SEP regulation will also harm net licensees: implementers of standard-essential patents must be careful what they wish for

4. April 3: In draft EU SEP regulation, appeals are not even an afterthought: what if owners or implementers of standard-essential patents disagree with decisions?

5. April 5: EU Commission contradicts itself in attempted justification of SEP regulation in light of EU Charter of Fundamental Rights: 'uniform and predictable outcome' but 'not ultimately binding'?

6. April 11: Is the EU becoming hostile to standards-related innovation, standards development, and the enforcement of standard-essential patents?

7. April 12: Definitive issues: draft EU regulation on standard-essential patents fails to properly define 'SEP' and 'enforcement', and encourages antitrust violations

8. April 14: Stakeholder reactions to draft EU SEP regulation: both licensors and licensees identify issues that counsel against premature proposal

9. April 16: European Commission's take on patent pools has turned negative: draft impact assessment makes up and distorts facts, relies on conflicted "researcher"

10. April 17: ETSI asks European Commission to reconsider SEP regulation -- Apple protests as it stands to benefit from SEP enforcement complications more than any European company

11. April 19: Qualcomm outlines Reciprocal FRAND Agreement as superior alternative to European Commission's "fatally-flawed proposal" of non-binding standard-essential patent valuations

Only indirectly related, yet pretty relevant:

• April 18: Samsung joins Avanci's automotive standard-essential patent pools as licensor (in addition to previously announced participation in Avanci Broadcast)

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Qualcomm outlines Reciprocal FRAND Agreement as superior alternative to European Commission's "fatally-flawed proposal" of non-binding standard-essential patent valuations

The Policy and Regulatory Report (PaRR) has been told by the European Commission that a proposal for a regulation on standard-essential patents (SEPs) is still planned for next week. A draft proposal leaked late last month. On Friday, the European Telecommunications Standards Institute (ETSI) communicated its concerns to senior EC officials. Toward the end of the post I just linked to, you can find a list to my other writings about the topic.

Now the chief licensing lawyer of the world's largest SEP licensing program--Qualcomm's Fabian Gonell, whose live testimony in an FTC case I watched in San Jose four years ago--has published a thoughtful LinkedIn article to explain how "[t]he European Commission can achieve its goals without putting European participation in future standards at risk."

At the end of its first paragraph, Mr. Gonell's article predicts that the envisioned regulation would be unhelpful:

"Put simply, the leaked draft Regulation would upend patent rights in Europe and have a host of unintended consequences. Worst of all, it would be for nothing because the Regulation as written is not going to meet the Commission’s goals."

The Commission's original objective is described in the article as "increasing transparency about patents used in standards – specifically, which patents are actually essential." Qualcomm made a proposal "at the last meeting of the ETSI IPR Special Committee that would have directly addressed this issue for cellular standards." I have to protect my sources, but I can say that this was already known to me. I have to protect that source, but the source is not affiliated with Qualcomm in any way and says the proposal was good, but it takes time to reach an agreement on such initiatives.

Somehow the Commission staff that drafted the regulation became more ambitious and in a "dramatic turn" (as Mr. Gonell describes it) expanded the scope of the measure by also "establish[ing] radical new rules to set royalty rates and make FRAND determinations." Just like commentators (including yours truly), Mr. Gonell notes "[t]he incongruous language in the new provisions, and drafting errors." He makes an interesting comparison between the essentiality-check process ("well-thought out, detailed") and "the lack of structure, due process and procedural safeguards in the FRAND determination and aggregate royalty provisions to reach that conclusion."

In that context, Mr. Gonell's article raises an issue I haven't previously discussed: the draft regulation does not provide procedural safeguards along the lines of a "motion to quash or limit" in U.S. discovery. Parties could request information, but the FRAND conciliators could not act as gatekeepers who would make sure that overreaching requests are modified or thrown out.

Another new issue to add to what was already a rather long list is that the draft version of the regulation, apart from failing to determine essentiality claim by claim (as I had also noticed), does not explicitly relate "only to assertions against standards-compliant products." That is an issue because such patents could be used for purposes other than implementing the standard to which they were contributed. And Qualcomm would deem it helpful to make it clear that "the relevant FRAND commitment" will be referenced and applied in those FRAND determinations.

While the Commission says it wants to streamline the licensing process, the only thing certain is that enforcement against unwilling licensees would be delayed. As I've recently discussed, the meaning of the term "enforcement" is not even perfectly clear, so litigants might be able to seek declaratory judgment in parallel to a FRAND determination. But the real issue is that anything designed to delay enforcement encourages hold-out behavior.

The following sentence is not only--but also--about Apple (without naming it):

"Court case after court case has featured implementers refusing to be bound or arguing that they should be able to refuse to be bound by even court-decisions on FRAND terms."

A refusal to be bound was an issue in an Ericsson v. Apple FRAND case in the Eastern District of Texas last year, and in a dispute with Optis in the UK, Apple also said that even after a court determination of FRAND terms it might decline to take a license on such terms.

Apple is extremely active in lobbying for the current version of the draft regulation. Even Apple appears to be aware of the need to correct errors, but it wants the political signal that implementers should have even more time before they face the threat of an injunction.

Mr. Gonell notes that "[a]s courts have repeatedly recognized, delay facilitates hold-out and favors implementers." In my observation, delays--during which a licensee will not make any payments--are a key factor that forces SEP holders to settle for much less than they would actually be entitled to, especially if the implementer engaging in hold-out accounts for a very significant percentage of the SEP owner's licensing income.

The article goes on to explain that the process won't become less costly because after a non-binding FRAND determination, litigation would still be necessary, and points out that the Commission is accusing (at the WTO level) China of violating the TRIPS agreement while also seeking to deprive SEP holders of access to courts for the duration of a FRAND determination proceeding.

Then Qualcomm proposes a"better way – a way that actually does provide a faster and more cost efficient resolution, is fair, and is not inconsistent with the Commission’s WTO complaint":

"The Commission should replace the EUIPO-run FRAND determination scheme with a requirement that an SEP holder offer the implementer an agreement in which the patent holder agrees to forego patent infringement remedies and the implementer agrees to enter into a license on FRAND terms if one is offered. This agreement (a “Reciprocal FRAND Agreement”), modeled on the FRAND Injunction decisions of the courts of the United Kingdom and Wales, would give the implementer the power to be completely free of the threat of an injunction by agreeing to enter into a license on FRAND terms as confirmed by a court or agreed-to neutral third party. This fully addresses any concerns about the German courts’ application of the Huawei/ZTE framework resulting in injunctions against unwilling licensees without sufficient inquiry into whether the patent holder made a FRAND offer. With an obligation to offer a reciprocal FRAND Agreement, a failure to agree on licensing terms would be addressed in a contract action in a national court over FRAND terms, and not in a patent infringement proceeding."

No implementer would have to take such a license until actually having been held to infringe one of the licensor's SEPs. But when that happens, the window of opportunity to enter into the reciprocal FRAND agreement will close within 30 days. Just like in the UK, an implementer could decide to just let a sales ban enter into force instead of entering into that agreement. It would be optional for the implementer.

The article contains a colored table that shows what problems are solved or created by the two alternative approaches (FRAND determination under auspices of EUIPO vs. the Reciprocal FRAND Agreement proposed by Qualcomm):

I wish to comment particularly on two cells of that table:

• "Fair? No - enables hold-out":

  Unfortunately it appears that some people in the Commission's Directorate-General for the Internal Market (DG GROW) have been lobbied so hard by Apple and certain automotive industry stakeholders that they now believe hold-out equals fairness. The ultimate decision makers, however, hopefuly won't buy that. A solution is fair only if it tackles hold-out and hold-up at the same time.

• "Addresses German court issue? Only if courts respect non-binding judgment":

  It's clear to me that the Commission initiative was triggered by decisions made by German courts--not their French, Dutch, or other counterparts. And the Commission knows that some of the same judges will have greater powers as they serve on the UPC (full-time or part-time). Whether the conciliators will set the low royalty rates that companies like Apple would like to see is anything but certain. I actually think the conciliators will have an incentive to arrive at relatively high rates. But those who welcome the proposal simply want to slow the whole process down, increase its costs, and generally make it more onerous on SEP holders, hoping that this will give them leverage when they make lowball offers shortly before or after the expiration of license agreements.

  The "if" in "[o]nly if courts respect non-binding judgment" is a big IF. I've previously discussed that courts, including but not limited to the ones in Germany, won't necessarily give much weight to advisory opinions. They could still identify Sisvel v. Haier reasons to enjoin; they could still require implementers to take global portfolio licenses to huge patent pools even if they are held to infringe only one patent. Damages awards could get costly. Patentees might prioritize non-SEPs in EU-based courts. There would likely be more assignments to licensing firms. But even if German courts including Germany-based UPC Local Divisions became unattractive venues for enforcement, SEP holders could sue elsewhere (the regulation would not result in a global license or a global portfolio valuation--only the EU parts would be affected).

An interesting if not intriguing effect of the Reciprocal FRAND Agreement proposed by Qualcomm would be that FRAND would become a matter of contract rather than antitrust law.

Whether or not one agrees with the particular approach outlined by Mr. Gonell on LinkedIn (in my opinion, it is clearly more balanced and effective than the FRAND determinations--including those for entire standards--envisioned by the Commission), at minimum it shows that the Commission should have engaged in consultation not only on potential and actual problems, but also on alternative solutions.

The last sentence of Mr. Gonell's article says the Commission would "put[] European participation in standardization at risk by sending the Parliament and Council a fatally-flawed proposal." That is not just Qualcomm's opinion. It's what ETSI itself has told the Commission. Does the Commission really want to take a legislative initiative with shortcomings (some of them structural) that the experts in the Council and in the Parliament--the two institutions that will be the co-legislators--will easily identify? An original proposal that requires numerous amendments even if one merely wanted to fix errors (regardless of one's objective) is not necessarily the fast track to new legislation. Qualcomm's idea of a Reciprocal FRAND Agreement wouldn't need the 24-month ramp-up period that the Commission's draft proposal needs just to get the EUIPO--a trademark (not patent) office--up to speed, so it could bring about change even more rapidly.

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Qualcomm moves for summary judgment against ruins of class action that piggybacked on FTC lawsuit -- Judge Corley mentioned possibility of new class action over exclusive dealing

Class-action lawyers tend to be persistent even when they're losing. They hope until the end that they may get paid. But some large companies--and Qualcomm appears to be one of them--are unwilling to settle for nuisance value. They just defeat them.

Coincidentally, Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California presently has two ultra-flimsy class actions piggybacking on FTC lawsuits before her: the one against Qualcomm I'm discussing here, and one over Microsoft-ActivisionBlizzard, which I tweeted about this morning.

In January, Judge Corley further narrowed the scope of the Qualcomm action. It's now down to an exclusive-dealing claim (the Qualcomm-Apple agreement that allegedly kept Intel out of the high-end baseband chipset market), and even that one can only be pursued under California state law, not federal law. The class-action lawyers hoped to get access now to Qualcomm's 2019 settlement agreement with Apple--which they haven't seen because discovery closed in 2018--but that's after the class period. Judge Corley held a hearing on February 23, 2023, where she said she was "not inclined to reopen discovery."

In my commentary on the last order to dismiss certain claims, I already said that the remainder of the case "will hardly survive summary judgment." Actually, if it was up to Qualcomm's lawyers, it wouldn't even have reached the point of a summary judgment: they'd have preferred to defeat the remainder of the case through a motion for judgment on the pleadings. But Judge Corley didn't like that notion, given that the usual purpose of judgment on the pleadings is to obviate the need for discovery--and here, discovery closed years ago ("the record is full"). It's more efficient for the court this way, given that if a judgment on the pleadings was successfully appealed as premature (for failure to consider anything in the record), the case would be remanded and she'd then have to adjudicate a motion for summary judgment.

Yesterday (Friday), Qualcomm filed its motion for summary judgment:

In Re Qualcomm Antitrust Litigation (case no. 3:17-md-2773-JSC, N.D. Cal.): Defendant Qualcomm Incorporated's Motion for Summary Judgment (Redacted)

Talking about different types of pretrial motions, large parts of that motion look at first sight like a Daubert motion for taking aim at law professor Elhauge's expert testimony--and quite extensively so. But the argument is not about his testimony being unreliable. It's about relevance to the questions to be decided. The expert testimony was optimized for the original theory, which was that Qualcomm abusively raised standard-essential patent (SEP) royalties to supra-FRAND levels, while the class-action lawyers are now trying to keep the case alive by arguing that Qualcomm's exclusive deal with Apple shut Intel out of the market and thereby made chipsets more expensive. As Qualcomm describes it, the class-action lawyers have "flipp[ed] from arguing that Qualcomm was undercutting competitors on chip prices to arguing that Qualcomm was overcharging OEMs." Here's my favorite sentence from that document:

"In short, there are gaping voids where one would expect evidence of causation to be."

The problem is even more fundamental than shifting from "undercutting" to "overcharging": until the case got destroyed for the largest part, the class-action lawyers insisted on a holistic perspective and the alleged interdependencies and mutually reinforcing effects of Qualcomm's various practices--all of that for the ultimate goal of arguing that the combination of multiple intertwined aspects of Qualcomm's conduct made SEP licenses more expensive. Qualcomm says in its motion for summary judgment that they can't pursue exclusive dealing as a standalone claim now that it's all that's left in the case (and again, for the avoidance of doubt: even that one is already dead under federal law).

At the February 23 hearing, Judge Corley already discussed this problem with the class-action lawyers:

"Well, why not file a new lawsuit? I mean, you had a theory, as I understand it. It was all intertwined. It was all intertwined and it was based, in part, on the FRAND theory, which the Ninth Circuit rejected. Okay. I mean, that’s just what happened. But that -- you could have pursued -- and maybe you’ll tell me and you’re going to say that the evidence is there to support the claim, so maybe you did. You could have pursued a separate exclusive dealing theory that was not dependent upon the FRAND, but maybe you chose not to. Okay. That was just a strategic choice."

There are four named smartphone customers in the current class. The class-action lawyers could just find some others (on whom the decisions in the present case will not be binding) and bring a new complaint, as Judge Corley also explained at the hearing.

In that case they would also get to look at more recent documents, potentially including the 2019 Qualcomm-Apple contracts.

For now, the class-action lawyers don't want to give up on whatever little is left of their original case. But I guess Qualcomm's motion will succeed. Will they choose to file a new lawsuit to pursue a standalone exclusive-dealing claim? I doubt it. They know that the FTC--despite support from Apple (the two had a mutual interest agreement in place)--failed to prove that Intel was ready to compete with Qualcomm at the relevant time (and in 2019 Intel even left that market, sold the chipset business to Apple, and Apple still can't make its own baseband processors for the iPhone). A follow-on class action with a standalone exclusive-dealing claim would be doomed to fail as well.

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Patent exhaustion can be triggered by covenant to sue last: Germany's Federal Court of Justice creates legal uncertainty for wireless patent holders such as Qualcomm

The global ramifications for the patent licensing industry are huge:

Patent holders who enter(ed) into agreements with chipset makers and other suppliers while hoping to reserve the enforcement of their rights against downstream customers--particularly for the purpose of collecting royalties from end-product makers--can no longer rely on a covenant to sue last (sometimes also called covenant to exhaust remedies) as a means of sidestepping patent exhaustion.

I'm grateful to German IP litigator Oliver Loeffel ("Löffel" in German) for flagging the following decision to me:

The Bundesgerichtshof (Federal Court of Justice of Germany) today published (PDF) a judgment (dated January 24, 2023) according to which

• a covenant not to sue is, as a matter of law, not capable of circumventing patent exhaustion; and

• a covenant to sue last (which the court refers to as a "covenant to be sued last", a term that I can't find elsewhere and which doesn't make sense to me linguistically) is not, as a matter of law, certain to avoid exhaustion. Instead of focusing on what might theoretically happen (i.e., that there are hypothetical scenarios in which the beneficiary of the covenant to sue last might find itself on the receiving end of an infringement action), it depends on the answer to the following question of fact: whether the beneficiary of the covenant must realistically expect--in the ordinary course of events--to be held liable for infringement.

This may also have implications (in the sense of potentially persuasive authority) for other jurisdictions. With a view to the United States, the first part is merely consistent with TransCore, Quanta, and the spirit of Impression Products, but the second part touches on what would raise a question of first impression in the Supreme Court. So far, patent holders such as Qualcomm were pretty confident that a covenant to sue last would not entail patent exhaustion under U.S. patent law. While persuasive authority from a foreign jurisdiction is normally given limited weight, Germany's Federal Court of Justice actually has a reputation for being patentee-friendly, and its patent-specialized judges regularly meet with the judges of the United States Court of Appeals for the Federal Circuit.

The relevant case numbers are X ZR 123 (Federal Court of Justice), 6 U 104/18 (Karlsruhe Higher Regional Court, appellate opinion of November 25, 2020), and 7 O 165/16 (Mannheim Regional Court, judgment of September 28, 2018). The plaintiff (and appellee, at least in the Federal Court of Justice) is Japan's IP Bridge, the defendant is HTC, and the patent-in-suit is EP2294737 on "control channel signalling for triggering the independent transmission of a channel quality indicator", a patent that has been asserted against various defendants and over which IP Bridge won a famous German patent injunction against Ford last year.

The law firm of Kather Augenstein (which by the way represented Ericsson against Apple last year) published an English translastion of key passages of the Mannheim court's decision (PDF). I have not been able to find the appellate decision, though it has been referenced by IAM (as a key post-Sisvel v. Haier FRAND ruling) and even by this blog (because the Munich I Regional Court applied the Karlsruhe Higher Regional Court's claim construction in the Ford case, though it is not even in the Karlsruhe circuit).

Previously, no one paid much attention to the question of patent exhaustion. But the Federal Court of Justice--after siding with IP Bridge on the question of infringement--has now remanded the case to the Karlsruhe court (Presiding Judge: Andreas Voss ("Voß" in German)) because the patent-in-suit may have been exhausted by a covenant to sue last. As a result, it is now known that HTC--on top of technical defenses and a FRAND defense to injunctive relief--argued that the patent had been exhausted (maybe by IP Bridge, or maybe by Panasonic, which originally obtained this patent) through contracts with two chipset makers whose products were incorporated into the accused products (HTC smartphones).

This is a very special subject, so let me start with why such a thing as a covenant to sue last exists in the first place, and then discuss the holdings of the Federal Court of Justice in this case.

The instrument that is called covenant to sue last (or covenant to exhaust remedies) was borne out of necessity: Qualcomm and other patent holders (primarily wireless standard-essential patent (SEP) holders) have always preferred to license their patents to smartphone makers (and, more recently, automakers) over licensing them to upstream suppliers such as baseband chipset makers. But they'd also like to be able to enter into contractual arrangements with chipmakers so long as those dealings don't trigger patent exhaustion, which would make it impossible to enforce patent rights against the downstream, particularly the end-product maker.

They knew early on that a contractual provision would not be capable of preventing exhaustion when a straightforward license is granted. The concept of patent exhaustion is that patent rights are exhausted with the first sale (if the patent holder makes a product) or the first authorized (licensed) sale. The German decision published today also recalls that fact.

So the first "workaround" that lawyers came up with was to enter into a covenant not to sue instead of granting a license. For some time, there was widespread belief that this would do the trick. But over the years, the U.S. Supreme Court's patent exhaustion caselaw became more expansive. The 2008 decision in Quanta Computer v. LG Electronics clarified that patent exhaustion applies to method claims (as opposed to only product claims). In Impression Products v. Lexmark International, the top U.S. court held that post-sale restrictions may be enforceable under contract law but do nothing to avoid patent exhaustion. It also took an expansive view on whether a foreign first authorized sale will exhaust U.S. patent rights.

Between Quanta and Impression, the Federal Circuit equated, in its TransCore decision, a covenant not to sue to a license for exhaustion purposes, The instrument of a covenant to sue last became popular. This is how it works:

• The beneficiary neither gets a license nor a 100% reliable commitment not to be sued.

• But recovery will be sought from the beneficiary only if it cannot be obtained from the downstream.

Take automotive patent licensing, for example. If Nokia had (which I believe is not and was not the case) entered into a covenant to sue last vis-à-vis the chipmaker, it would only have been able to sue that company after seeking and failing to obtain recovery from Daimler (end-product maker), Continental (tier 1 supplier that makes telematics control units), and whatever tier 2 supplier supplied the Network Access Device (NAD) to Conti.

In the dispute between IP Bridge and HTC, the former succeeded in persuading the appeals court (Karlsruhe Higher Regional Court) that a covenant not to sue would already be sufficient to avoid patent exhaustion and, therefore, a covenant to sue last was even more certain to do the job.

HTC appealed, and the Federal Court of Justice (which is based in Karlsruhe like the court below) reversed and remanded with the following holdings and instructions:

• The Federal Court of Justice said it was not merely an obiter dictum that the Karlsruhe Higher Regional Court said a covenant not to sue would not trigger exhaustion. Instead, it was the bedrock of the lower court's conclusion that a covenant to sue last could not result in patent exhaustion either.

• The Federal Court of Justice says the focus must be on whether the patent holder has authorized the "release into commerce" ("Inverkehrbringen") of products that implement the patented invention. Typically, that will be the case if the patent holder entered into a covenant not to sue, and contractual provisions according to which the patentee reserves its rights against third parties are invalid.

• As a result, the Karlsruhe Higher Regional Court's conclusion that a covenant to sue last does not exhaust patent rights because even a covenant not to sue would not trigger exhaustion has been reversed.

• The Federal Court of Justice then turns to questions that the court below didn't have to reach:

• On remand, the Karlsruhe Higher Regional Court will have to determine whether the patent-in-suit falls under the capture clause of the patentee's relevant contracts with the two chipmakers.

• Patent exhaustion is not ruled out only because the chipmakers don't make phones and the patent claims-in-suit involve technical components that are not found in chips, but only in phones. The Federal Court of Justice acknowledges that patent exhaustion generally applies only to the particular product that was sold on an authorized basis. Exhaustion does not necessarily apply to downstream products that contain that product as one of multiple components. But that may be the net effect if the only meaningful way in which the chipsets in question can be used is to incorporate them into mobile end-user devices. In that case, the patentee's authorization of the sale of such chipsets may amount to tacit consent to the distribution of mobile devices that incorporate those chipsets. What could weigh against that conclusion, however, would be a disclaimer of liability in the agreements between the chipmakers and HTC.

• Even if the relevant agreements were to be interpreted to the effect that the patentee did not consent to the incorporation of those chipsets into mobile phones, the patent could still be exhausted if the technical effects of the patent-in-suit are materially achieved by those chipsets, with all other components of those mobile phones not playing a determinative role.

• Now comes the most important part:

  The Karlsruhe Higher Regional Court will have to determine whether the patentee gave its contractual partners (the chipmakers) an assurance that it would not assert the patent-in-suit against them--and such determination will have to focus on practical as opposed to exclusively theoretical considerations. The first and foremost question will be whether in the ordinarily expected course of events the chipmakers must fear to be sued over an infringement of the patent-in-suit.

In other words, the merely hypothetical possibility of the immediate beneficiary of the covenant to sue last being sued is not enough to avoid exhaustion. If it's rather unlikely that the immediate beneficiary of the covenant ever gets sued, then the covenant to sue last will be treated like a covenant not to sue, which in turn is treated like a license.

How can the chipmaker have a reasonable apprehension of being sued in the ordinary course of events? The normal course of events is that if you hold a patent and sue a device maker (and your infringement allegations have merit), you get paid--unless that device maker goes bankrupt along the way.

The short version is: the Federal Court of Justice does not want to let patent holders circumvent exhaustion through a covenant to sue last, but unless there are special circumstances that suggest otherwise, will treat it like a covenant not to sue, which is treated like a license.

Is this a desirable outcome? This post is already long enough without discussing the policy implications, but I do want to mention one: there may be cases in which chipmakers want peace of mind and where it would be in the public interest to allow patentees to give it to them, but in which patent holders may now tell them that after IP Bridge v. HTC it's too risky for them to enter into a covenant to sue last because they may exhaust their patent rights.

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Qualcomm opposes class-action lawyers' attempt to obtain its 2019 contracts with Apple

About a month ago, Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California further narrowed the class-action lawsuit against Qualcomm that sought to piggyback on FTC v. Qualcomm. By now, the case is down to exclusive-dealing claims under California state laws. There are no more Sherman Act claims, and no more claims that are specifically about the licensing of FRAND-pledged standard-essential patents (SEPs).

The question is where to go from here. Qualcomm would obviously like to get rid of the remnants of that litigation at the earliest opportunity, and I could easily picture a summary judgment motion succeeding. The class-action lawyers' last chance to extract any fees from Qualcomm is to make the continuation of this litigation costly for Qualcomm in different ways. A filing that was made about an hour ago shows that they are now primarily betting on Qualcomm's desire to keep the terms of its 2019 settlement with Apple under wraps. Here's the joint case management statement the parties just filed to state their divergent positions:

In Re: Qualcomm Antitrust Litigation (case no. 3:17-md-2773-JSC, N.D. Cal.): Joint Case Management Statement

The class-action lawyers have made an about-face in the sense that the case was originally about Qualcomm allegedly charging supra-FRAND SEP royalties, and now it's about Qualcomm's discounts to Apple (and potentially other device makers, but the plaintiffs can't name any) that were subject to certain exclusivity arrangements. The class-action lawyers say those discounts were actually just "loyalty penalties" (meaning that Qualcomm could claw them back in the event of disloyalty).

The following sentence shows how the focus has changed:

"Specifically, Plaintiffs’ experts are likely to focus on the chipset overcharge caused by Qualcomm’s exclusive dealing, instead of the overcharge caused by Qualcomm’s licensing practices, which heretofore had been the focus in both Plaintiffs’ and the FTC’s case."

After all these years, they now ask for "limited, additional discovery related to their exclusive dealing claim and to submit expert reports, which will focus entirely on Plaintiffs’ exclusive dealing claims and the antitrust impact those exclusive deals had on consumers." As Qualcomm puts it, "Plaintiffs request to re-open fact discovery for nine months, followed by several months of expert reports and expert discovery, and eventually briefing on the certification of some class, in an attempt to manufacture a claim where none currently exists."

This is how the class-action lawyers seek to justify that request:

"Qualcomm’s 2019 Agreement with Apple: Plaintiffs request that Qualcomm produce its 2019 agreements with Apple (including its settlement agreement, license agreement, and chipset supply agreement). Among other things, based on the public statements describing this agreement, it appears relevant to showing the extent to which Intel was truly foreclosed by Qualcomm’s prior exclusive dealing, thereby requiring Apple to return to Qualcomm for chipset supply even after initially awarding some of its chipset business to Intel."

To me that passage is a non sequitur. What I suspect is that they primarily hope Qualcomm doesn't want to take the risk of that agreement being discussed in public filings and potentially a trial. A secondary motive may be that they hope to find something in those 2019 Apple-Qualcomm contracts that would enable them to develop a new theory, such as in a whole new complaint. They are also talking about the possibility of a third amended complaint, though--as Qualcomm notes--Judge Corley already said last year that the Second Amended Complaint was going to be the last one.

I'd certainly be curious to find out more about the terms of the Apple-Qualcomm settlement, but I think Qualcomm has strong arguments against a reopening of discovery in this multi-year litigation, given that the contract was concluded AFTER the class period.

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Federal judge further shrinks antitrust class action against Qualcomm: 'No License, No Chips' policy is lawful, but plaintiffs can pursue exclusive-dealing claims under California state laws

The Federal Trade Commission's antitrust litigation against Qualcomm came to a definitive end almost two years ago when the FTC refrained from seeking Supreme Court review of the first-class acquittal the San Diego chipmaker had won in the United States Court of Appeals for the Ninth Circuit. It was a resounding victory for Qualcomm's counsel from multiple firms under the strategic leadership of Cravath Swaine & Moore's Gary Bornstein, whose work for Epic Games (against Apple and Google) I have mentioned many times.

Still, there is a class action pending in the Northern District of California: In Re: Qualcomm Antitrust litigation, but no longer before Judge Lucy H. Koh, who has meanwhile been promoted to the appeals court. Presiding over this case now is Judge Jaqueline Scott Corley, who is based in San Francisco. Yesterday (Friday, January 6), she granted in part and denied in part Qualcomm's motion to dismiss the class action:

In Re: Qualcomm Antitrust Litigation, Order Regarding Motion to Dismiss

In 2021, the Ninth Circuit remanded the certification of the consumer class to the district court, and without going into detail expressed the view that the failure, as a matter of law, of some of the FTC's claims would by extension also dispose of substantial parts of the class-action complaint. Also, the Ninth Circuit took issue with the application of California law to a nationwide class, especially when there are "repealer" and "non-repealer states" with respect to the Illinois Brick doctrine that bars indirect purchasers from seeking antitrust damages unless state laws open the door to such theories. Illinois Brick could have been overruled in Apple v. Pepper (App Store antitrust case), but it wasn't because a narrow Supreme Court majority determined that app downloaders directly purchase from Apple.

Upon remand, the class-action lawyers drastically narrowed their case: it's now only about California law (the Cartwright Act, which is sort of California's Sherman Act, and California Unfair Competition Law (UCL))--and the class is now limited to California consumers. Under the Cartwright Act as well as under California UCL, the class-action lawyers are suing Qualcomm over

1. its "No License, No Chips" policy (device makers must take a standard-essential patent (SEP) license from Qualcomm as a precondition for getting to buy Qualcomm's baseband chips);

2. an allegedly exclusive agreement with Apple (to be precise, there were certain rebates that Apple was eligible for as long as it largely relied on Qualcomm's baseband processors); and

3. allegedly having defrauded the standard-setting process by making FRAND promises without the intent to honor them (such as by granting exhaustive licenses to rival chipmakers).

The doctrine that requires the district court to take into consideration the Ninth Circuit's FTC v. Qualcomm decision in its adjudication of Qualcomm's motion to dismiss the consumer class action is stare decisis (consistency with applicable precedent). The consumers are not collaterally estopped because of the FTC's defeat, nor can any of the factual questions be demeed res judicata given that the class-action lawyers are entitled to their own day in court and could--in theory (though hardly in practice)--present stronger evidence than the federal government.

It is the last point I mentioned that keeps the "exclusive dealing" technically alive. It's a zombie claim as far as I can see: unless the class-action lawyers dig up some silver bullet somewhere, the conclusion is going to be that Intel and other companies wouldn't have been able to provide an adequate replacement for Qualcomm's chips anyway. But it's a dead claim walking for the reason I explained. It will hardly survive summary judgment, though.

The "fraud" prong has been dismissed directly because the consumer plaintiffs are not Qualcomm's competitors and, therefore, can't allege reliance on Qualcomm's FRAND promise.

The claim that "No License, No Chips" constitutes anticompetitive tying has also been dismissed directly (under either state law). Its fundamental deficiency is that the allegedly tied product--licenses to Qualcomm's SEPs--is not available from a rival seller: only Qualcomm licenses its SEPs to smartphone makers.

The class-action lawyers made a legalistic argument in that context: a 2015 decision by the California Supreme Court (Cipro) involving reverse payment settlements under the Hatch-Waxman Act, which is (broadly speaking) about creating incentive for the makers of generic versions of patented drugs to challenge the relevant patents: the first one to take down a patent gets a certain exclusivity period. As a result, some pharmaceutical companies entered into settlements with the first challenger at the expense of all of their joint competitors.

In the Qualcomm case, the class-action lawyers argued that Cipro shows a greater willingness by the California state judiciary to find antitrust violations in patent holders' dealing and practices. Judge Corley declined the invitation to "strike a new path in tying jurisprudence under the Cartwright Act, just as Cipro did in the realm of horizontal restraint." She said that there is no case law at the moment that supports the "novel tying theory" against Qualcomm, and the district court won't broaden the scope of Cipro by predicting potential changes in California case law based on a philosophical interpretation of Cipro.

The class-action lawyers could now try to appeal Judge Corley's decision to the extent their claims got dismissed, and hope that someone will make new law in order for their tying claim to be revived. They can also try to argue it doesn't matter that consumers themselves never relied on any FRAND licensing promise by Qualcomm. And they can try to win the factual debate over whether there were any anticompetitive effects from the Qualcomm-Apple agreement in question.

They can try any or all of the above--but it's highly unlikely to lead to any payout to California consumers. The biggest obstacle to a settlement here may be the fact that Qualcomm is on the winning track, even if it takes another year or two (or more).

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Huawei, Qualcomm, InterDigital agree that licensing level must not serve as pretext for driving down standard-essential patent royalties: IAM Connect 2022 panel

IAM just hosted the last one of its IAM Connect 2022 panels. It was chaired by Paul Lin, Xiaomi's long-time head of IP who founded Eagle Forest LLC, an IP-specialized consulting firm. The panelists were Huawei's Head of IP Alan Fan, Qualcomm's Senior VP and General Manager (for the licensing division named QTL) John Han, and InterDigital's chief licensing officer Eeva Hakoranta.

It was a great panel that easily met and arguably exceeded expectations, which were obviously high given the background of the panelists. I've seen webinars with several times more listeners that weren't even half as good.

The focus was on what were the key developments in IP licensing in the telecommunications sector this year, and what may be the key trends and issues in 2023. Huawei and Qualcomm agreed that renewing existing licenses in the smartphone market and upgrading them to 5G is less likely to require enforcement action than when some implementers took licenses for the first time.

To a greater extent than envisioned, the debate was about the licensing level, where the three companies agreed that

• one can license chipset and module makers (Huawei explicitly said so; Qualcomm said so with respect to IoT modules; and InterDigital did not appear to disagree), but

• an alleged obligation to extend component-level licenses (Qualcomm and InterDigital dispute that there is such a duty under the ETSI FRAND pledge, while Huawei doesn't rule it out) must not be a vehicle for bringing down standard-essential patent (SEP) royalties under a smallest salable patent-practicing unit (SSPPU) valuation approach.

Huawei's Chief IP Officer Alan Fan made an argument about consistent pricing across the supply chain that is not only in the interest of licensors but equally of licensees: the ND (non-discrimination) part of FRAND. It is true that a device maker A with a supplier X could be at a competitive disadvantage if its competitor B benefited from a lower royalty rate because of a deal between a given patent holder and its supplier Y.

It is a legitimate objective in its own right to oppose price erosion, but with the ND-part-of-FRAND argument, one simply stands on higher ground and takes a position that is in the public interest.

Qualcomm's John Han very much emphasized use-based pricing. Mr. Han rejected an SSPPU royalty base and stressed a key distinction:

Price differentiation isn't price discrimination.

More than three years ago I organized a Brussels conference on component-level licensing (I haven't organized a conference ever since and have no intentions of doing so, though that one was clearly a success as I'm sure any participant--including officials from four directorates-general of the European Commission--could confirm). At that conference, an economist with otherwise very implementer-friendly positions also acknowledged that use-based pricing is economically reasonable. There was, however, a little bit of a misunderstanding because he called "price discrimination" what Qualcomm's panelist today sought to distinguish from "price differentiation." Semantics matters here because one is a potential antitrust violation while the other is the very opposite: it is recognized, not only but especially in the EU, that applying the same price to different transactions may constitute discrimination.

The three companies from which today's panelists hailed have distinct business models. InterDigital is, as Mrs. Hakoranta acknowledges, a research firm that generates the entirety of its revenues from licensing; Qualcomm has a licensing arm (Mr. Han's division) as well as a chipset business; and when the moderator said that it would have been nice to hear the views of an implementer, Huawei's Mr. Fan was quick to point out in no uncertain terms that Huawei is a major implementer and large-scale licensee. Mr. Fan jokingly said that if Mr. Lin wanted him to talk about the topic from a licensee's perspective, he'd be happy to do so anytime.

Huawei's mix of licensor and licensee interests gives that company a very balanced perspective. They need licenses for their own products, but they also know what it feels like when a patent holder faces hold-out tactics by an unwilling licensee. Case in point, tomorrow morning the Munich I Regional Court's Seventh Civil Chamber--which until recently was chaired by Presiding Judge Dr. Matthias Zigann, who has since been promoted to the appeals court--will hold a Huawei v. AVM FRAND hearing. AVM is a German WiFi router maker and competes with Netgear, a U.S. company against which Huawei has already obtained a default judgment in Germany.

Shortly after Huawei's landmark patent cross-license agreement with OPPO was announced last week, it also became known that Huawei recently renewed its license agreement with Samsung, which is now a 5G license. A few years ago, Huawei and Samsung settled litigation and signed a 4G license agreement. This time around, no litigation proved necessary.

Interestingly, it has now been discovered that Samsung transferred certain U.S. patents to Huawei.

Mr. Fan's statements today were balanced and principled. InterDigital's positions are also very consistent, though their license deals are obviously one-way streets.

Qualcomm made a number of good points. However, one need not "buy" Qualcomm's distinction of smartphone patent licensing (where they license only at the end-product level) from other categories where Qualcomm is prepared to license module makers. What makes sense for Qualcomm to do--and I'm not taking a position here on whether it raises antitrust concerns--is unique to that company with its particular business model and competitive strategy. While Qualcomm does at this point prefer to license four major IoT module makers over dealing directly with myriad small device makers, Qualcomm stressed again today that licensing at the component level is a voluntary choice. What if Qualcomm decides to compete aggressively in the narrowband IoT chipset market? There is no guarantee that they will still license module makers.

For now, however, Qualcomm has those four IoT module makers under license, and Mr. Han specifically mentioned Quectel.

Mr. Fan explained from Huawei's perspective that apart from FRAND considerations, it is simply efficient for a patent holder to license a company that knocks at its doors requesting a license. At the same time he made it clear that a licensing offer that does not allow audits could not be considered FRAND because some control is needed to avoid double-dipping.

The overall growth of 5G (now more than half of all cellular gadgets) and component-level licensing were not the only topics of discussion. Another topic that the panelists touched on was whether there could be a smartphone patent pool. By coincidence, Sisvel had announced a 5G multimode pool for consumer electronics devices (smartphones etc.) earlier today. Qualcomm essentially argued that there are only a few major handset makers, and if a company already has a bilateral relationship with a handset maker (and given that they hold SEPs of their own and like to cross-license, plus they like to license implementation patents that I believe Mr. Han meant to imply aren't implemented at the chipset level anyway), it will now just negotiate a renewal that upgrades that license to 5G. In my opinion, that does not apply to those cellular SEP holders who do rely on pools in order to reduce transaction costs--such as the ones that have joined and may in the near future join Sisvel's 5G MM licensing program.

My takeaway is that in 2023 we're going to see a diversity of approaches to the licensing level (with Huawei being extremely flexible and Qualcomm making different choices depending on industry segment characteristics); and the kinds of companies who were represented on the panel will license bilaterally, while others will benefit from their participation in pools.

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Apple's biggest problem at next week's Ericsson FRAND trial in Texas: Qualcomm deal will be evaluated as comparable license agreement

I am still trying to find out what happened in Mannheim, where the court had originally scheduled the announcement of an Apple v. Ericsson ruling for yesterday (Tuesday, November 29). The response I received from a spokesman for the court (himself a judge, but not on this case) was that the court is not presently in a position to provide information on that case. The court's Second Civil Chamber was in session all day yesterday, so maybe I will hear something today.

There are no clear signs of the parties having settled. Therefore, it is still a possibility that next week's FRAND trial in the Eastern District of Texas (before Chief Judge Rodney Gilstrap) will go forward. Given the complexity of the case, it's difficult to describe it as an uphill battle for the iPhone maker, but it is fair to say that Judge Gilstrap's pretrial rulings have been significantly more positive for Ericsson. I already made that inference from the minutes of the pretrial hearing: there was no breach of the 2015 contract by Ericsson, and Ericsson is under zero legal obligation to license non-standard-essential patents (non-SEPs) to Apple. Apple can point to the fact that the 2015 agreement included non-SEPs, but that was simply a voluntary inclusion of additional IP and has nothing to do with what Ericsson "owes" Apple under its commitments to ETSI.

That Apple can mention non-SEPs (while not being able to claim an entitlement to a non-SEP license when a new agreement is negotiated) is one of the things I learned from Judge Gilstrap's order on numerous pretrial motions:

Ericsson v. Apple, case no,. 2:21-CV-00376-JRG, Eastern District of Texas: Order on Pretrial Motions and Motions In Limine

Another thing that is clearer now is how Apple's Count IV will be adjudicated. Apple wants the court to set a FRAND rate. But as Judge Gilstrap explains, "[t]he jury need only concern themselves as to the prior conduct between the parties and whether that conduct comports with FRAND and good faith" and "the Court will tell the jury that it will set a rate that is fair, reasonable, and non-discriminatory between the parties as to these patents at a later date and that the jury need not be concerned about what an appropriate rate is."

So there won't be a jury verdict that states a specific FRAND rate. But, of course, what the jury says about Ericsson's FRAND compliance will matter in various ways.

Having read Judge Gilstrap's order, the one part that strikes me as the biggest problem for Apple is that its motion in limine number two was denied--unsurprisingly so, but that doesn't make the problem any smaller:

[Apple]'s MIL 2

Exclude Reference to Apple-Qualcomm Negotiations, Litigations, And Agreements Because the Apple-Qualcomm Agreements Are Not Comparable.

The MIL was DENIED. (Dkt. No. 290 at 29:11–34:4.) The Court found that the comparability of licenses is a question for the jury.

Apple pays Qualcomm more than all other patent holders combined. At least that was the case a few years ago during the FTC v. Qualcomm litigation, where the U.S. government was challenging Qualcomm's licensing practices (but the appeals court determined that Qualcomm was free to charge patent royalties separately from, and as a precondition for, its chip sales). At the time, Apple was paying Qualcomm $7.50 per iPhone. I don't know what the rate under the 2019 settlement is, but Apple needed Qualcomm's 5G chips as we all learned later (because we can see that what was then Intel's chipset division and acquired by Apple shortly thereafter, still doesn't have a 5G chip ready that Apple could use. So, chances are that Apple is paying Qualcomm the same or a similar license fee as it did at the time--and Ericsson will presumably argue to the jury that its 5G patents are stronger than Qualcomm's. Even if the jury felt that Qualcomm's patents were gradually more valuable than Ericsson's, it's still hard to see why Ericsson couldn't just ask for $5 per iPhone.

Apple will argue that the Qualcomm agreement isn't comparable. But jurors will learn about the terms, and Ericsson will get to explain why the jury shouldn't buy Apple's attempts to distinguish one license agreement from the other, but focus on the rate.

Ericsson v. Apple is in no small part about the discrepancy between what Apple pays to Qualcomm versus what Apple pays everyone else.

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Delays of Apple's own modem chip show prudence of 2019 Qualcomm settlement: chipset supply and patent license agreement until 2025, plus option for two-year extension of license

On April 16, 2019, I was in the overflow room of the San Diego courthouse of the United States District Court for the Southern District of California when Apple and Qualcomm--with opening arguments still ongoing--announced the settlement of their global antitrust and patent dispute. In the build-up to that Apple v. Qualcomm trial, the San Diego chipmaker publicly extended an invitation to Apple to help them bring a 5G iPhone to market, and rumors were flying that Apple had lost faith in Intel's ability to deliver a high-quality 5G baseband chip in time.

Delays with a 5G iPhone could have cost Apple some market share to Android. While the vast majority of Apple customers don't switch even when Apple is years behind in other respects (particularly with respect to screens: originally "phablets" and now foldable phones) because Apple manages to make them all believe that it's at the forefront of innovation, even they would have wondered whether buying a 4G iPhone is a good choice when the rest of the industry is already transitioning to 5G. The simple difference between the numbers "4" and "5" would have been too much even for many Apple customers. It would have been a serious threat even to Apple's luxury image. So Tim Cook--who a few months before the settlement had categorically ruled out a deal as he deemed Qualcomm's business model "illegal"--wasn't going to take any chances. With the benefit of 20/20 hindsight we can say, 3 1/2 years later, that it was in all likelihood the right decision: Qualcomm announced its numbers and offered a new forecast yesterday according to which it's still going to supply modem chips for the majority of 2023 iPhones (instead of only 20% of all iPhones sold that year, though the operating assumption for now is that Apple will use its own chips in fiscal year 2025.

I just said "in all likelihood" because, of course, we'll never know for sure what would have happened in a but-for world. If Apple had still relied on Intel, and if Intel had kept that cellular baseband chip division, it is theoretically conceivable that it wouldn't have taken that long to become independent of Qualcomm's chips. At least one analyst, Patrick Moorhead, blames Apple:

PSA: modems and RF are hard. @Apple acquired @intel’s #5G hardware, designs, IP in July 2019. That’s right, $AAPL can’t get its shit together after nearly 3.5 years. Now $QCOM gets the modem for another year. WTF is going on at Apple? https://t.co/DAKIizRiYG

— Patrick Moorhead #HCEConnect (@PatrickMoorhead) November 3, 2022

But another analyst, Roger Entner, emphasizes the magnitude of the task:

This shouldn't come as a surprise. 5G Modems are HARD. I wouldn't be surprised if Apple wouldn't need the entire contract period to get their modems ready. Look at how long it took Mediatek to be in the ballpark of what Qualcomm delivers https://t.co/wImau5Jncp

— Roger Entner (@RogerEntner) November 2, 2022

If the scenario described by Mr. Entner becomes reality, Apple is still more than two years away from making its own 5G modem chips.

Unrelated to modem chips, there is also an interesting development in the relationships that chip design company Arm Ltd. has with component makers like Qualcomm on the one hand and end-product makers like Apple on the other hand. Recent court filings suggest that Arm may increasingly prefer to deal directly with end-product makers rather than the likes of Qualcomm.

It's not easy to tell how innovative Apple is. Relative to its enormous profitability, it certainly isn't: it rakes in most of the profits of the smartphone industry, but it's not ahead of the crowd; instead, one can find interesting innovation (such as foldable phones) in Android devices, often many years before Apple adopts them, too. It's also noticeable that Apple increasingly engages in monopoly rent-seeking in app distribution and other aftermarkets (it isn't growing its advertising business through innovation, but through an abuse of power) and generally monetizes its huge and affluent customer base in ever more ways (last month, Apple started offering a savings account in collaboration with Goldman Sachs and is now even predicted to launch a health insurance offering in 2024. To be clear, a company can pick low-hanging fruit through a partnership with Goldman Sachs and simultaneously still be the industry's most innovative player--the former could help finance the latter. But at this stage I can't see anything in technological terms that Apple could offer me and the Android ecosystem couldn't.

If Apple's success was attributable to the "virtuous circle" of investment in innovation generating returns that are partly reinvested in ever greater innovation, the rest of the smartphone industry couldn't even see Apple's tail lights by now.

During Qualcomm's earnings call, analysts appeared concerned--and Qualcomm's leadership appeared to understand those concerns--that the smartphone device market is ever more concentrated and that Android keeps losing market share to iOS. Android devices are a much bigger revenue opportunity for Qualcomm with its Snapdragon chips--and the moment Apple can make its own modem chips, the only Apple-related revenue source for Qualcomm will be patent royalties. The patent license agreement has the same term as the chipset supply agreement (until 2025), but there is an option for a two-year extension, which is presumably a unilateral option that Apple can exercise--or Apple can say "we don't need your chips anymore and now let's just renegotiate those patent license terms, potentially entailing litigation." The parties are indeed preparing for a mid-term round of renewed patent litigation: Qualcomm openly criticizes Apple for its standard-essential patent (SEP) devaluation efforts, and Apple would have very much wanted to pursue the invalidation of a patent Qualcomm might assert again next time.

Android's weakness especially in the U.S. and some other high-income geographies is indeed alarming. I continue to believe that Google's strategic mistake is to antagonize app developers almost to the same extent that Apple does instead of leveraging the potential of the developer community in a way that would turn the trend around and could erode the iPhone's market share for a change. Google is fighting against app developers side by side with Apple instead of throwing Apple under the bus.

While it is obvious at any rate that Qualcomm has a greater opportunity in the Android ecosystem, it is also reflected by Qualcomm's CEO's tweet in support of Google's #GetTheMessage campaign--an initiative by Google that appears unlikely to move the needle.

Whether Android keeps bleeding market share is not a question of the quality of Qualcomm's products. Qualcomm's growth opportunity in smartphones depends on Google making the right choices. In the short term, Apple's delays certainly help.

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