Dispatches from the Patent Wars: The High-Stakes Battle Between Qualcomm and Apple

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Intellectual Property Practice Group, was recorded on Friday, January 11, 2019, during a live teleforum conference call held exclusively for Federalist Society members.        

 

Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is titled "Dispatches from the Patent Wars: The High Stakes Battle Between Qualcomm and Apple." My name is Micah Wallen, and I am the Assistant Director of Practice Groups at The Federalist Society.

 

As always, please note that all expressions of opinion are those of the experts on today's call.

 

Today, it is my pleasure to introduce our moderator, Professor Kristen Osenga, who is a Professor of Law at the University of Richmond School of Law. Professor Osenga will be introducing our panelists today. After our speakers give their remarks, we will then go to audience Q&A. Thank you for sharing with us today. Professor, the floor is yours.

 

Prof. Kristen J. Osenga:  Thank you, Micah. I'm Kristen Osenga, and today I'm joined by Jonathan Barnett, Professor and Director of the Media, Entertainment, and Technology Law Program at the University of Southern California Gould School of Law, and Thomas Cotter, the Briggs and Morgan Professor of Law at the University of Minnesota Law School. Today, we're here to talk about the current high-profile patent war occurring between Apple and Qualcomm. I'm going to provide a little bit of an overview about the various cases and issues in these cases, and then turn things over to Jonathan and Tom for discussion.

 

In a day where hyperbole is all the rage, to call this a high-profile patent war might actually be a bit of an understatement. Apple has sued Qualcomm, or Qualcomm has sued Apple, or they've sued each other via countersuit in multiple countries, including the United States, China, Germany, and the U.K. Generally, these suits boil down to two claims. Qualcomm claims that Apple is infringing Qualcomm's patents, breaching agreements to pay licenses for using the technology, and generally trying to use Qualcomm's inventions for free. On the other hand, Apple has argued that Qualcomm is being unfair in how it licenses those patents, extorting higher license fees than other companies, and refusing to bargain in good faith.

 

But like any two-sided story, the bottom line is the situation is a lot more complicated than it seems. In January 2017, the Federal Trade Commission, or FTC, charged Qualcomm with monopolistic behavior with respect to some of its technology; in simple terms, chips for cell phones. Three days later, Apple filed a $1 billion lawsuit against Qualcomm, basically piggy-backing off the FTC's allegations that Qualcomm was overcharging for use of its patented technology. In April 2017, Qualcomm filed a countersuit alleging patent infringement by Apple. And in June 2017, Qualcomm filed a suit in the International Trade Commission, or ITC, alleging that Apple was importing iPhones into the United States that infringed its patents.

 

So there's three main lawsuits in the United States. The FTC v. Qualcomm, Apple v. Qualcomm, and Qualcomm v. Apple at the ITC.

 

These lawsuits are starting to shake out as we move out of 2018 and into 2019. This past fall, the administrative law judge in the ITC case found Apple to be infringing Qualcomm's patent, but in what I've personally argued is an extraordinary move, declined to issue an exclusion order citing the public interest. This is kind of interesting because only a handful of cases of the ITC have not issued an exclusion order where patent infringement has been found, but that's a discussion for a different day. The case is presently awaiting review by the commission, and it will be interesting to see how it shakes out.

 

The FTC case is being heard right now, this month, before Judge Lucy Koh in the Northern District of California to determine if, as the FTC claims, Qualcomm engaged in anti-competitive licensing practices to monopolize the semiconductor market with respect to iPhones and iPads. And the third, the case between Apple and Qualcomm in the United States district court, is expected to go forward this spring.

 

While these cases have been winding their way through the United States court system, similar cases have been working their way through the courts of other countries. Qualcomm obtained judgement against Apple for patent infringement in China this fall, including an order prohibiting Apple from selling iPhone series 6, 7, and 8 phones in China. A similar outcome occurred in Germany. At least some versions of iPhones are not being sold in those two countries at this time. With two countries plus the ITC already finding that Apple has infringed Qualcomm's patents, it will be intriguing to see what the United States court that hears the Apple-Qualcomm case later this spring ends up doing with it.

 

And of course, the issues go well beyond patents. For example, Qualcomm alleged in September that Apple had stolen valuable trade secrets, sharing some elements of source code with Qualcomm's rival Intel in violation of a software agreement between the companies. Additionally, there are antitrust claims being litigated abroad, not just here in the United States. Qualcomm was recently fined by antitrust regulators in Europe for paying Apple to use its chips in shutting out competitors.

 

And then outside of the various courtrooms, the battle is also being fought in the media with various news streams reporting on statements made by both Apple's and Qualcomm's leadership to the press. At least one of the articles I read recently called the salvos the war of words between these two companies. All of these wars are taking place against a backdrop of poor sales and declining revenue for Apple, obviously not all related to these issues, as well as issues of technology standards in the development of 5G. Truly, this is a high-profile patent war between two technology titans.

 

And with that, I'm going to turn it over to two legal titans, Jonathan Barnett and Tom Cotter. Jonathan will go first and provide his opening remarks, and then Tom. I'll let them respond to each other, and then we'll open the floor to your questions. And now, I turn it over to Jonathan.

 

Prof. Jonathan Barnett:  Thank you very much, Kristen, for that excellent summary of the Apple-Qualcomm litigation and the related litigations between Qualcomm and various antitrust agencies around the world. What I'd like to do to start off with is to give our listeners a bit of background to the relatively unique industry structure that is at issue in this case. I think when we look back with the benefit of hindsight at this case and the related cases happening around the world, this will truly be one of the landmark set of litigations in patent, antitrust, and innovation policy in general. And it's very much about the industry structure under which innovation is conducted.

 

The smartphones that we all use every day and the phenomenal success of those smartphones can't be underestimated. I'd like to give our listeners just a few data points to get a sense of the magnitude of this market and the success of this market. Unit shipments on a worldwide basis in the smartphone industry grew from 123.9 million in 2007 to 1.47 billion, with a B, in 2017. The total value of those shipments grew from $52 billion in 2007 to $452 billion in 2015. If you were to open up an Econ 101 textbook, the smartphone market would be a real-world example of it. It's a market in which output is constantly expanding. Adjusted for quality, prices have actually declined. And if we look at the R&D expenditures at the firms that are most responsible for the innovations in this industry, it's an industry in which innovation is proceeding at an unrelenting pace.

 

Given that fact, it's somewhat curious that antitrust enforcement authorities around the world and intermediate users in the smartphone market, who are not the key innovators in the market, they are key implementers, and key assemblers, and key marketers. Those are all very important functions, but they are not the key innovators behind the fundamental technologies behind 2G, 3G, 4G, and now the 5G standard. It is curious that these governmental entities acting on behalf of the public interest and using taxpayer dollars in each of these countries and intermediate users advocating for these actions, or in Apple's case, undertaking these actions concurrently with government enforcement actions, have argued that this market is ineffective.  It is suffering from an alleged tax being put on the market by patent holders.

 

I think that narrative has it upside down. The market is a success, and it shows how the patent system can be useful not only in enabling innovators to accrue a return on the immense costs and risks that were invested by these companies in putting together and developing these technologies, but it also plays an enabling role. It plays a role in expanding access to technologies. How does it do that? It does that through the combination of property rights, in this case, patents, and contracts, in this case, licenses. What that does is two socially beneficial things. It enables information to be safely transmitted from entities that are responsible for producing it to entities that can then embed it into technologies that are then sold on the retail shelf, whether physical or virtual.

 

The second thing that it does is it allows every single firm on the supply chain to concentrate on what it does best. When Qualcomm started out, it made the whole system just to show that it worked in a prototype in San Diego. It quickly withdrew from that business and today concentrates primarily on R&D. It is able to adopt that specialized R&D focused business model showing R&D intensity levels, meaning R&D expenditures per dollar of sales, at a higher level than any other company in the smartphone industry. It is able to do that because of the patent and licensing infrastructure. Those two legal inputs have got to be there for that business model to work, and it's a business model that stands behind the success of the smartphone industry. It's a business model of secure patents and secure contracts that also stands behind the standard-setting organizations that are also part of the success of the smartphone industry.

 

This is a remarkable example of international private ordering that has succeeded in developing a standard. This is beneficial for new companies that want to enter the industry since it creates a common standard on which products can be built upon and deployed. It is also beneficial as a consequence for consumers because we get relatively robust turnover in the firms that are supplying the manufacturing and distribution functions. And if we look worldwide at the smartphone industry, while it may seem that today Apple and Samsung are dominant, it's a relatively recent phenomenon. And we see lots of entry, especially in overseas markets by firms from the People's Republic of China and other countries that have quickly secured substantial market share. They are able to do that, in part, because they can access the necessary technology through the licensing and patent infrastructure and the standard-setting organizations that I described.

 

Let me turn from that to what's at stake in these particular cases. I will focus on the antitrust litigation that has been brought by the FTC under Section 5 of the FTC Act. And there's a shadow litigation, which is actually primarily a breach of contract claim, not an antitrust claim, brought by Apple against Qualcomm. And in antitrust, there is the phrase that's become a cliché, but as with many clichés, it has a lot of truth to it and a lot of importance to it. And the cliché is that antitrusts must always be used for the benefit of promoting competition and not competitors. And when we look at the suit brought by the FTC against Qualcomm, we should ask the same question that we must ask with respect to the antitrust competition law actions that have been brought against Qualcomm by authorities in China, in Taiwan, in Korea, and other jurisdictions.

 

We must look carefully at the facts of the case and applicable law and ask, "Is that action seeking an outcome that will promote the welfare of consumers who are, of course, the key beneficiaries of the antitrust laws, or rather, is it erroneously using the antitrust laws to secure outcomes that merely promote the interests of a particular competitor?" If we look at antitrust actions that have been brought overseas prior to the FTC action, if we look at actions that were brought even earlier in the mid-2000s with respect to the 2G standard, they're consistently being advocated for by intermediate users, by manufacturers for whom the chip technology is an input. And they have a perfectly rational interest in their fiduciary duty to shareholder's demands that they pursue this interest to reduce their input costs as low as possible.

 

But the interests of the public in antitrust law is whether or not the claims that are being made under the rubric of antitrust law, are they in fact being made to promote outcomes that will promote consumer welfare, or rather, are they merely reducing the input costs of the suppliers? And in the innovation context, we want to be particularly sensitive to the importance of preserving the legal infrastructure that has enabled firms like Qualcomm, like Ericsson, and others to focus their efforts on R&D. If we unravel the property rights and the licensing arrangements that have supported that business model, we may be doing injury to consumers, at least in the medium to long term, in delivering the rapid flow of innovation that everyone has benefitted from.

 

And let me just close with one final point because I think I may be close to exhausting my time. The theme of the complaint that was filed originally, and both in its amended form by the FTC against Qualcomm, characterizes the Qualcomm licensing infrastructure. And if this is true, it would describe the licensing model that is used by other upstream innovator firms in the smartphone industry which are R&D intensive rely on licensing to monetize that innovation. They are -- unlike Apple, unlike Intel, they do not have significant manufacturing and distribution capacities that are the other ways to monetize innovation. The FTC characterizes this model as imposing a tax on the industry.

 

Again, I think that has it backwards. The patent and licensing infrastructure in the industry is not imposing a tax. It is the arrangement that is being used to transmit information from one party to another. It is simply the virtual equivalent of the physical supply and exchange relationships that we are familiar with in the pre-digital world. It is just the way that we transmit information in the virtual digital world. We do that through intellectual property rights and licensing. And if we look at the empirical evidence, the facts are simply not there to support the taxation narrative. Every empirical study that has looked at this market has found that the total estimated aggregate royalty burden that is being paid by smartphone manufacturers such as Apple, and Samsung, and so forth, are in the single digits, well below the double-digit royalty rates that have been floated around in popular commentary and some academic commentary.

 

So the taxation theory put forward by the FTC and put forward by Apple in its concurrent litigation may have a certain intuitive, rhetorical appeal. I think it's wrong conceptually in its understanding of how the patent system is working to make the smartphone market a success—and it is a success—and a success not just for innovators, but for consumers. And I think it's also been shown to be incorrect as a simple factual description of the market. Thank you very much.

 

Prof. Kristen J. Osenga:  Thank you, Jonathan. That was great. And now we turn it over to Tom.

 

Prof. Thomas F. Cotter:  All right. So I would like to begin by saying that I agree with much of what Jonathan says, at least up to a point. Patents certainly are an important part of the innovation landscape insofar as they provide an incentive to invent, to disclose. They can, as Jonathan pointed out, facilitate licensing and tech transfer better than other possible alternatives. I agree that all of that is true, but I think it's also important to recognize that it's true up to a point, that intellectual property, new technologies are both an input and an output of the creative process. Every new technology builds on that which went before. And so when intellectual property rights are stronger than is necessary to achieve these beneficial goals, they can make consumers worse off. They can, at some point, inhibit innovation.

 

Now, I would agree with Jonathan that the empirical evidence shows that innovation is proceeding, as he said, at an unrelenting pace, has been for a decade, two decades, particularly in the smartphone sector. But it's also important to recognize that that innovation proceeding at an unrelenting pace has occurred concurrently with what some critics would call a weakening of the U.S. patent system. Over the last decade or 15 years, U.S. patent rights have become, in some regards, weaker than they were before that, but it is actually rather hard to find any substantiated, any quantifiable evidence that that weakening has caused any impediment to innovation. So from and empirical standpoint, don't think that the sky is falling.

 

But focusing on the Qualcomm and Apple litigation itself, let me say a couple of things about the antitrust issues. I do agree that the antitrust claims, at least on their face, are a type of claim that's very difficult, usually, to sustain. It's important for listeners to recognize, for example, that excessive pricing is not a violation of antitrust law. Antitrust regulators and courts are not public utility regulators who try to determine the just price. Unilateral refusals to license one's intellectual property is almost never a violation of the antitrust laws in and of itself, neither is breach of contract. So to the extent that one perceives the antitrust litigation against Qualcomm as being grounded in Qualcomm's refusal to license its intellectual property to potential competitors such as Intel and MediaTek, or Intel violating its FRAND commitment, none of those things in isolation are violations of the antitrust laws.

 

Now, as I understand the FTC's theory, however, it is a monopolization or attempted monopolization theory that is to some degree a combination of all of these things. So the way I would explain the FTC's theory would be something like this, that Qualcomm is telling the contract manufacturers, the companies overseas that actually assemble the smartphones, that it won't sell them any of these chip sets unless the contract manufacturers agree that they will separately pay a royalty for the patents embodied in that technology. Secondly, Qualcomm will not license Intel or MediaTek, other potential competitors in this space. And third, the contract manufacturers, therefore, must pay a royalty, regardless of whether they buy the chip sets from Qualcomm or from somebody else. And fourth, Qualcomm, at least for a period of time, I think ending in 2016, had arrangements with both with the contract manufacturers and with Apple under which there would be a discount on the royalty rate if those entities purchased Qualcomm.

 

And so as I understand the FTC's theory, it is the combination of all of these features that potentially puts competitors such as Intel at a disadvantage and therefore has this potential anti-competitive effect. So in theory, that sort of claim is at least plausible. It is possible. There are certainly many hurdles that the FTC and private litigants in the concurrent class action would have to overcome in order to prevail on that theory. Notably, they would have to demonstrate that there actually has been, or is a substantial threat of being in the future, an anti-competitive threat, a harm to competition, not merely to individual competitors. And that's difficult to do. Often, these types of claims do not succeed because the risk of anti-competitive harm is simply too speculative. So I'm keeping an open mind on this. I don't know what the proof will show. It's a least plausible, though, that the antitrust claim might have some validity.

 

Focusing on, just very briefly, on the patent issues -- as Kristen pointed out, there is also patent litigation going on in the U.S. Apple's suing Qualcomm, Qualcomm's suing Apple in district court, in the International Trade Commission, and in a variety of foreign companies. A couple of things I would note about the patent litigation in the U.S. and elsewhere—and I don't have any special insight into the merits of the individual patent claims at issue, whether they are being infringed, whether the patents are valid—but I would like to focus a little bit on the remedies.

 

So in the United States since 2006, the Supreme Court's decision in eBay v. MercExchange, it is fairly difficult in some types of patent cases to obtain an injunction. Now, the prevailing party still gets an injunction in about 75 percent of cases, but in cases involving standard essential patents—and many of the patents ensued here are standard essential, not all of them are—in standard essential patent cases in the U.S. and also in other countries, it is increasingly difficult to obtain an injunction as long as the defendant, the implementer, is a willing licensee. In the United States as well, it can be difficult, even if the patent is not standard essential, to obtain an injunction if the patent merely one or a small number of patents embodied in a complex device. And reasonable minds may differ over whether that's good policy or not. I think Jonathan and I probably have different views on that particular issue. But one thing that I would point out is that in the United States, you can still obtain a damages remedy. Even if there is no injunction, the damages can be calculated going out into the future. And at least, I'm not aware of any evidence that courts systematically undercompensate patent owners in cases in which they deny injunctions.

 

Now, things are different, typically, in the International Trade Commission, as Professor Osenga pointed out, because that's a separate forum. It's sort of an unusual entity under U.S. law in that we have an agency that is entrusted with enforcing the Tariff Act. And so it can be a violation of the Tariff Act to import infringing merchandise into the United States. And so in some instances, there's about usually between 50 and 100 of these proceedings in any given year, a company that has a domestic industry, that's one of the requirements, sometimes will file a complaint and initiate an investigation, an ITC investigation, into whether merchandise being imported into the United States infringes a patent. And so you have, essentially, a patent trial before an administrative law judge. And that can result in what is called an exclusion order. So effectively, it's a type of injunction. Now, the ITC actually doesn't have authority to award damages like a district court does. However, in the vast majority of proceedings before the ITC, the patent holder also is engaged in parallel district court litigation over the same patents.

 

So in any event, it is fairly rare, it is quite rare, in fact, for the ITC to deny an exclusion order if a patent is found to be valid and infringed, but that is the recommendation of the administrative law judge in this one particular instance from a couple of months ago involving one of Qualcomm's patents asserted against Apple. There is some precedent for that. There was a case in 2013 in which, ultimately, the U.S. trade representative decided to veto an exclusion order that was entered also against Apple at the behest of Samsung on public policy grounds. This one is a little bit different, the Qualcomm-Apple case, in that the administrative law judge cited the need for competition on the part of Intel which produces the allegedly infringing chips.

 

So again, I don't know if that is going to succeed or not. The full commission may wind up overturning that or the federal circuit might wind up overturning that on appeal. It is a rare instance to deny an exclusion order, but there is some precedent for doing that. And again, it does not deny the patent holder a remedy altogether. I could talk a little bit more about the foreign litigation, but maybe I should stop there.

 

Prof. Kristen J. Osenga:  Great. Fantastic, Tom. Thank you. So I want to give Jonathan and Tom just a few seconds, I guess especially Jonathan, a chance to respond to Tom before we open it up to questions. Jonathan?

 

Prof. Jonathan Barnett:  Sure. Tom, thanks for those great remarks. And I'd like to, in a way, not so much respond but to build upon those remarks. Just two points -- one is just a more targeted thing. I think it may be useful for listeners to appreciate how much of an uphill battle the FTC faces in bringing this case. And as Tom mentioned, a very key distinguishing feature between U.S. antitrust law and antitrust law in other jurisdictions is that we do not have the equivalent of what in the E.U. antitrust law is called the abuse of dominance principle, which is used both in the E.U. and has been used in the East Asian jurisdictions that have brought actions against Qualcomm to essentially engage in what is tantamount to price regulation through the competition law. There is no equivalent of that in U.S. antitrust law.

 

To the contrary, as Tom mentioned, the strong presumption starting point principle is that the holder of a patent has no requirement to license to other parties, certainly not to competitors. And there's no particular price point at which they are required to charge if they do elect to license. And much of what all of this litigation is about is about these FRAND commitments, the commitment to fair, reasonable, and non-discriminatory licensing. And usually the language doesn't get any more specific than that. To what extent has the patent holder taken on some commitment that constrains this starting point principle of the refusal to deal? I think in a nutshell, that's really what much of these litigations are about.

 

The second, bigger point I just wanted to -- I thought would be useful to bring to listeners attention, and Tom brought this out, is that we are at -- the FTC case is, in a way, the culminating point of a roughly 10-year period of litigation taking place both in the U.S. and elsewhere on the antitrust front that's mostly been happening outside the U.S., and then also a concurrent stream of litigation which is focused on patent infringement and the calculation of damages for what are known as standard essential patents, which are patents that are subject to this FRAND commitment. And as Tom pointed out, that patent infringement litigation has essentially made it very difficult for the holder of the standard essential patent to have any reasonable expectation of injunctive relief either based on statements in certain countries that there is simply no injunctive relief for standard essential patents. That's the way they interpret the FRAND commitment. Or in more recent cases, that there's no injunctive relief as long as the alleged infringer's a willing licensee. That basically seems to come out to the same place as a practical matter because it's very hard for a patent holder to ever show that the defendant has been an unwilling licensee. In effect, the alleged infringer would have to go out of its way to be unwilling to engage in negotiation.

 

And it's true that there is a damages remedy there at the end of the day, but as a practical matter, I'm not sure it's fair to say that that puts the patent holder in the same position it would have been in under a more robust patent regime. And there's a couple of reasons for that. One, it's incredibly costly to litigate. Number two, many of the large intermediate users, the manufacturers that tend to be the accused infringers in these cases, have abundant cash resources in order to engage in protracted litigation. And in fact, in a regime in which there is no realistic possibility of injunctive relief, the rational strategy for the intermediate user, setting aside any reputation effects to future relationships with that innovator or other innovators, is actually not to pay the license fee, but rather to decline and to wait to be sued because even in the worst case scenario in which patent damages had to be paid, you would essentially be back in the same position financially.

 

The only qualification to that would be a case in which damages were -- supercompensatory damages were awarded for willful infringement. But the data seems to suggest that that's a relatively infrequent case, and I'm only aware of one standard essential patent litigation in the U.S. in which those were awarded. And so as the patent system becomes weaker in terms of injunctive relief, in terms of expected damages, we may be creating a situation in which large intermediate users have no incentive to abide by licensing agreements. And while the smartphone market remains robust, over time that may either have disincentive effects on the incentives of upstream innovators to invest, or even if that did not occur, it would compel the upstream innovators to adopt business models that look like Intel in which they're vertically integrated, and they monetize innovation through production and distribution.

 

It might be thought that wouldn't matter because at the end of the day, there's another business model out there, but it does matter because those models are far more capital intensive than an R&D focused model. And we want the market in general, I think economically-minded commentators would agree, in general we want markets to be able to be able to choose their business models freely because we don't know the efficient business model at any particular time in any particular market. And that's ultimately, I think, the cost that could transpire if we were to continue down this road of weakening the patent licensing infrastructure. We may continue to see a good amount of innovation, but it's going to be occurring through business models that are perhaps not the most efficient way to do it.

 

Prof. Kristen J. Osenga:  Okay. And Tom, you have a couple minutes for the last word if want it.

 

Prof. Thomas F. Cotter:  I'll keep it brief. I agree that there is certainly a role for injunctions in patent law, but I think that the U.S. and other countries have mostly gotten it right in limiting the ability of standard essential patent holders to obtain injunctions as long as the implementer is a willing licensee. The typical smartphone or other complex device has tens of thousands, by one estimate 200,000 patented components. So if you could imagine somebody getting an injunction for the infringement of one single patent out of -- it's a little bit like saying if I have one infringing brick in my house, I have to tear the whole house down.

 

That remedy can be wildly disproportionate to the value of any particular inventive contribution, and I think that is the underlying economic rationale for limiting the availability of injunctive relief in these types of cases, again, as long as the implementer is a willing licensee. And there have been cases in the U.S., and certainly in Germany and China, where the court found that the implementer was not willing, that the implementer was engaging in a holdout strategy and refusing to bargain, and so in those cases, injunctions should be available, and indeed, they are. But I think I'll stop there so we have some time for questions.

 

Prof. Kristen J. Osenga:  Well, thanks, Tom, and thanks to you both. This was fantastic. Micah, I turn it back to you.

 

Micah Wallen:  I'm not seeing any questions jumping off right at the bat. Kristen, if you have further questions for the panelists, I'll just chime in as soon as a question comes through the system.

 

Prof. Kristen J. Osenga:  Oh, fantastic. Actually, I was going to turn things back to Tom. It sounded like you had a couple of things to say about what was happening in the foreign litigation, but you stopped yourself in the interest of time.

 

Prof. Thomas F. Cotter:  Okay, I can talk about that a little bit. So as you noted, Qualcomm is pursuing patent litigation in several other countries – Germany, China, the U.K., I think also Japan, possibly Taiwan. Many of these are patents that have their counterparts in the U.S. litigation. So just in the last few months in China, a court entered a preliminary injunction against the sale of certain makes of Apple iPhones. That's fairly unusual in China. The courts in China do not typically award preliminary injunctions. I've seen conflicting accounts of what particular impact that has had on Apple. I think Apple has claimed that it has some sort of work-around. The patents ensued there are not standard essential patents.

 

In the German litigation, there've been several lawsuits filed. Qualcomm did succeed in one lawsuit recently in Munich involving patents relating, if I remember correctly, to extending the battery life of phones. And so in Germany, when we are not dealing with standard essential patents, German courts do still typically award injunctions in every other instance in which the patent holder prevails. So in that case, the district court in Germany did enter an injunction against certain models of iPhones. From what I've read, that remedy has not been quite as effective as one might think because the injunction is directed against Apple alone and not against retailers, and so I'm told that you can still actually find a lot of these devices.

 

Anyway, Apple has appealed that judgement to the appellate court for the Munich region, and we'll see what happens. One of the interesting things in German litigation is that infringement and validity issues are decided in different forums. So in the United States, the defendant in an infringement lawsuit will typically argue that the patent is invalid, and roughly speaking, 40 percent of the time, the defendant succeeds in showing that one or more of the claims ensued are invalid. In Germany, those issues of infringement and invalidity are bifurcated, so the German court has only ruled on the infringement issue. I think Apple is separately challenging the validity in patent court.

 

Anyway, but the infringement matter is on appeal. In order to appeal, Qualcomm had to post a bond of over €1 billion, so we'll see what happens. On the one hand, the German courts are more favorable to patent holders and being more receptive to awarding injunctions, at least in cases not involving standard essential patents. But on the other hand, there also is a substantial risk for the patent holder if the judgement is overturned on appeal or, alternatively, if the patent is invalidated. Typically, the implementer has a claim against the patent holder which might be satisfied by the bond, or it might be in addition to that. So there are risks on both sides, and I guess, given those risks, I don't expect that either party is really going to want to concede the matter just yet.

 

Prof. Kristen J. Osenga:  Do we have any questions, Micah?

 

Micah Wallen:  Yes, we have a question lined up. So without further ado, we'll move to that caller.

 

Caller 1:  Thank you very much. I'd love to know what the speakers think about Judge Koh's partial summary judgement that Qualcomm is required by FRAND to license competitive chip makers.

 

Prof. Thomas F. Cotter:  Yeah, so that's a piece of the puzzle. It's not dispositive of any of the antitrust issues, but one of the things the Federal Trade Commission was trying to establish was that under the terms of these SSO IPR policies, Qualcomm is contractually obligated to license anyone who seeks a license to these standardized technologies. And so reviewing the terms of those, there were two IPR policies in particular that Judge Koh addressed because they would be governed by California law. And so essentially, reading the language, giving it more or less its plain meaning, it would appear from the face of those policies that, indeed, Qualcomm is obligated to license anyone. Now, Qualcomm's argument was that that was still not standard industry practice, that we shouldn't read the terms of those agreements quite so literally. So that would be an issue, I suppose, for an appellate court if the matter reaches the appellate level. But on its face, I think Judge Koh's conclusion seems to be the more logical reading of that language.

 

Now, again, that would mean, if anything, that Qualcomm has breached that agreement. Intel, presumably, could file a breach of contract suit. That's not dispositive of the antitrust litigation, but again, the antitrust litigation, as I understand it, is taking that and some of these other aspects and making the argument that in combination, Qualcomm has engaged in conduct that has put Intel and other potential manufacturers of these chip sets at a competitive disadvantage, and that ultimately, that harms the competitive process and will render consumers worse off. Not an easy claim to prevail on, but not a crazy claim, either, at least in my view.

 

Prof. Jonathan Barnett:  I'll just add two observations on that. I think it's worth appreciating the, I think what would be agreed, the aggressiveness of the claim being made by the FTC. And the aggressiveness is not in the contract interpretation question where I agree with Tom that seems like a certainly plausible reading of the language. I'm not sure it's correct, the best reading in the context of the industry. But what makes it aggressive is that the court is even exploring contract interpretation in the context of what is an antitrust cause of action. That's not typically the type of question that we see. And the only reason that the court is in a position to do this traces back to what may be a relatively -- seem like a relatively obscure event that occurred in 2015.

 

In 2015, the FTC, in a divided decision with two dissenting commissioners, redefined its understanding of its enforcement authorities under Section 5 of the FTC Act, which allows it to go pursue actions against what are called unfair methods of competition. It had historically been understood that actions brought by the FTC under Section 5 must meet the same probative requirements that would otherwise be required to be met under Section 1 and Section 2 of the Sherman Act as interpreted by the federal courts. The 2015 statement said that, but it also had language empowering the FTC to pursue actions that contravene the spirit of the Sherman Act, Section 1 and Section 2. And that's how we end up in this particular litigation where we are curiously looking at a contract interpretation question which would seem to be a question that should be brought by a private litigant, not by a competition law regulator. It also explains why you do not see in the FTC complaint an explicit theory of liability under what's known as tying or bundling, or an exclusionary refusal to deal claim. That's probably reflecting a strategic decision by the enforcers that they would not be able to withstand the case law requirements under the Sherman Act.

 

And so while it is a straightforward reading of the FRAND requirement, it's indicative of the aggressiveness of the FTC's action in this case, and this particular point illustrates it. If this point -- if this ruling were to hold, and it would certainly be appealed, that FRAND means to requirement to license at every level of the supply chain, I think it has to be appreciated this runs counter to decades of industry practice and industry understanding. And if we see decades in which an industry has interpreted a particular term to mean licensing at the device level—not just the component level -- not at the component level, which is not unique to Qualcomm. It's run throughout the industry—we might want to ask as a starting question that perhaps that is an efficient practice. It's a practice in which the market has converged as the efficient way to license rather than as being an unlawful, anti-competitive licensing practice. I'll stop there.

 

Prof. Kristen J. Osenga:  Do we have other questions on the line, Micah?

 

Micah Wallen:  No questions as of now, so the floor is yours.

 

Prof. Thomas F. Cotter:  I was just going to say one possible point of disagreement here between me and Jonathan -- I think I would say that the FTC historically has reserved the right to interpret Section 5 a little bit more broadly than the Clayton Act and the Sherman Act. And so it may well be the case that none of the individual elements of its claim against Qualcomm in this litigation would be clearly actionable under the Sherman Act or the Clayton Act. Again, I don't think it's an implausible theory to say that the combination of activities at issue here might be deemed something that would put competitors at a substantial enough disadvantage that there would be a negative impact on the competitive process. Again, I'm not predicting one way or another who is going to win this or who should win it, but I don't think it's quite as implausible, at least not in my view, as Jonathan thinks.

 

Prof. Kristen J. Osenga:  So you're not making predictions one way or the other on this, but I was going to ask both of you as our time starts to wind down -- any predictions on the outcome of the ITC case and whether or not the statement of public interest as being a reason to decline exclusionary order is going to hold up?

 

Prof. Thomas F. Cotter:  It certainly is rare. If anything, I would say that Qualcomm might be able to convince a majority of the commissioners when the matter is appealed to the full commission that this goes against traditional practice insofar as it is invoking national security and competitive issues. I'm not very good at predicting the outcome of these things, but it certainly is rare. And as I think I mentioned in my comments, it's a little bit different from the case involving Apple and Samsung from a few years ago where the U.S. Trade Representative took into account the potential for the exclusion of the Apple devices at issue there as enabling Samsung to practice holdup to extract a royalty that would exceed the contribution of intellectual property. The rationale here is somewhat different. It's not the easiest thing to sustain on appeal, but maybe not impossible.

 

Prof. Kristen J. Osenga:  Any predictions, Jonathan?

 

Prof. Jonathan Barnett:  I'm not a betting person, so -- but I agree with Tom. If you had to bet that just given historical experience, it's obviously unconventional to decline the exclusion order once infringement has been found. So I think that would -- if you had to guess, you would guess that perhaps the administrative judge's decision would be reversed once the full commission hears the case. And I would hope they would take into account that the importance -- there's an importance to the U.S. and international technology markets. In having some reasonable expectation that the ITC would, in fact, once a patent has been -- the presumption of validity has been upheld and infringement has been found that the injunction order would -- the exclusionary order would typically issue. And the reason for that, which I'm not sure is so widely appreciated, is that our technology supply chains are international, and they're international because companies are constantly optimizing where they locate each level of the supply chain. So as is well known, production has just bid outside of the U.S. to jurisdictions that can provide those services at the lowest cost.

 

But in order for all that to work at the end of the day and for the IP innovator who stands at the apex of the supply chain to have confidence that it can extract revenue, it needs to have protection against unauthorized imitation. And one of those protections is the ITC, which is essentially an IP gatekeeper into the U.S. market. The U.S. market's obviously a lucrative market, an essential market for many firms. And so I think the property rights backstop that is supplied by the ITC and the track record of typically providing the exclusionary order for valid and infringed upon patents, I think that's an important part of the legal infrastructure that stands behind these technology supply chains. And all of that operates to the good of the consumer because if we can produce the iPhone or the Galaxy smartphone at the lowest possible cost and our retail markets are competitive, it's consumers at the end of the day who are enjoying the benefits from that international specialization of labor.

 

Prof. Kristen J. Osenga:  I would just like to thank both Jonathan and Tom. You guys did a fantastic job. This was really interesting. And thank the audience for joining us, and Micah, I turn it over to you to close.

 

Micah Wallen:  Thank you so much. Thank you to all of our speakers today for the benefit of their valuable time and expertise today. We welcome listener feedback by email at [email protected]. Thank you all for joining us. We are adjourned.

 

Operator:  Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federalist Society multimedia, please visit The Federalist Society's website at fedsoc.org/multimedia.