A Rotten Apple Standard

Well it finally happened.  Notwithstanding the settlement with Apple, the district court overseeing the FTC’s case against Qualcomm issued a blistering, 233 page opinion against Qualcomm’s SEP licensing practices.  Some have argued that this ruling is just one more step in Apple’s long play attempts to kill SEP licensing – the technology that has put the “phone” into the iPhone.  To better understand this claim it is worth looking back at Apple’s history with respect to SEPs.

Apple is a very heavy user of cellular technology that contributes virtually nothing to its development.  Perhaps as a result, ever since Apple got involved in the Patent Wars in 2009, and 2010 it was clear that it was very keen, and keen for a very long time, to use every argument possible to pay less in SEP licensing fees.  This remained true in its fights with Samsung and Motorola that predate its litigations with Qualcomm.  Indeed, Apple since at least 2009 or 2010 had a plan  to use the antitrust laws and regulators as a cudgel to lower not only lower SEP royalties but to prohibiting owners from even selling or otherwise monetizing their SEPs – arguing that selling an SEP is a per se violation of antitrust.  (This is to saying nothing of their strong-arming of Apple’s suppliers to harm Qualcomm.)

Apple has never looked keenly on SEPs. Although a 2012 Fordham University study found Apple to be by far the most aggressive patent litigator (way more than PAEs – see table 7),  in 2012 Tim Cook argued that it was “fundamentally wrong” to sue people over SEPs.  Yet he pursued a highly questionable design patent litigation against Samsung to the US Supreme Court where a single patent ended up with an over a half a billion dollar judgment – which was a quarter of what Apple paid Nokia in 2017, or roughly three-quarters what Apple paid up-front to Nokia in 2011, for a license to all of Nokia’s 13,000+ SEPs.  This was doubly ironic, as it was recently revealed that Apple senior engineers believed that Nokia’s portfolio was “significantly weaker than Qualcomm’s.”

It is pretty clear that Apple doesn’t contribute to cellular standards, the paucity of SEPs in Apple’s portfolio – other than as a transferee it barely rates a mention in IPlytics 2016 study of SEPs  – is proof of that.   This fact lends credence to the strong rumors that Apple’s primary goal in SEP licensing and litigation has been to eviscerate the entire ecosystem.  As we have shown elsewhere, Apple since at least 2014, has engaged in a long term lobbying campaign in political capitals and academia to solidify the principle that FRAND royalties mean low prices.

The cognitive dissonance of Apple’s deep involvement with Rockstar aside, Apple’s ability to talk out of both sides of its mouth with respect to SEPs reached a new level in the more than 80 Qualcomm/Apple litigations.

During the opening arguments in the most recent trial between Apple and Qualcomm concerned global FRAND terms, Qualcomm presents Apple internal memos that state that Qualcomm’s engineering  – according to Apple’s vice president of hardware, Johny Srouji – was “the best” and that Qualcomm had a “unique share” of all SEPs and “significant holdings.  These documents belie Apple’s many attempts over the years to denigrate Qualcomm technology and SEP holdings.   Apparently too, Apple had to actually cripple iPhones with Qualcomm chipsets so that they would perform at the same (inferior) level as Intel chips.  Even more troubling was that Apple had been planning to sue Qualcomm as far back as 2014 but waiting until the end of 2016, by which time Qualcomm had paid billions of dollars in payments to Apple as part of a business cooperation agreement.  What was Apple’s long-term goal?  The documents make it plain: “Reduce Apple’s net royalty to Qualcomm” by “Hurt[ing] Qualcomm financially” and “Put[ing] Qualcomm’s licensing model at risk.”

One way that Apple tried to structure victory in its SEP claims was to point to alleged comparable SEP licenses which according to Apple – illustrate that Qualcomm leveraged its position to overcharge for its patent licenses.  This strategy was precisely designed to create the hazard astutely noted by Richard Vary in the context of the Ericsson v. TCL decision, that larger implementers like Apple:

will always insist on a better deal than their smaller competitors and will always have the bargaining power to obtain that. Courts then award the rates obtained by the large implementer to the smaller implementer. The next time, the large implementer will demand a yet better deal. And so it goes on.

This use of IP licensing to aid in its business disputes brings to mind Apple’s conspiracy with publishers to price-fix ebooks.

Beyond trying to create bad licensing comparables, to cause immediate pain to Qualcomm Apple instructed its contract manufacturers, which build its iPhones, computers and other products, to stop paying Qualcomm royalties for patent licensing agreements. According to Qualcomm’s counsel, Apple meticulously planned this move and was well aware that its actions could be found to be tortious interference with Qualcomm’s contractual relations and could put Apple and the manufacturers at risk for willful infringement.  Given Apple’s propensity to act with impunity towards vassals – for example removing without explanation at least 11 of the 17 most downloaded screen-time and parental-control apps to avoid competing with Apple’s own product or forcing Apple forced changes to third party apps that made them less useful than Apple’s tool – Apple’s behavior toward the contract manufacturers is not surprising.

What is very troubling about this entire exercise by Apple is how it also managed to capture the regulators and got the Federal Trade Commission to advance Apple’s cases again and again.  against Qualcomm over vigorous dissent and had one of its trial lawyers from its go-to firm for SEP litigation co-author a “working paper” that makes ridiculous claims about the total SEP royalty stack which somehow got picked up and swallowed whole-cloth by EC Commissioner Vestager – despite significant contrary evidence – and likely caused significant damage.

Perhaps Apple’s behavior should not surprise, as some have argued, that the entirety of Apple’s historic growth strategy from 1980s until today has been premised on capturing the conversation (for example by helping to fund a fabricated theory of antitrust and taking advantage of lax or misguided enforcement to acquire potential competitors before they are threat).

With the Apple/Qualcomm litigations settled, Intel out of the 5G market, and, frankly, the FTC’s claims against Qualcomm undermined by the evidence, the only party that stands to benefit from the FTC’s attempt to completely rewrite the rules and practices of decades of SEP telecom licensing  would be Chinese powerhouse, Huawei.  Such an outcome should make the FTC and other national regulators very, very wary of wading into private business disputes between large companies.  It is hard to justify – especially in this era of IP-focused trade disputes as preventing anticompetitive or monopoly behavior government actions that have the effect of eviscerating a domestic industry in favor a foreign national champion.  One can only hope that regulators are waking up to how they have been repeatedly played.  Unfortunately, as noted above the Department of Justice was unable to prevail upon the Judge overseeing the FTC case against Qualcomm from doing anything unfortunate and the FTC, however, still appears to be under Apple’s rotten spell.