France seeks to drag rest of Europe into senseless trade war with U.S. over ideologically-motivated digital services tax

Yesterday, the United States Trade Representative (USTR)--which is the title of a presidential appointee at the rank of an ambassador (presently Robert Lighthizer), who has an entire agency, the Office of the USTR, working under him--published the findings (PDF) from the first segment of its Section 301 (Trade Act of 1974) investigation into France's Digital Services Tax. In July I reported and commented on the initiation of the investigation.

The USTR's proposed action "includes additional duties of up to 100 percent on certain French products," such as French wine. The approximate annual trade volume of those goods is $2.4 billion. Today, the French government threatened retaliation, seeking to leverage the collective economic power of the EU (which leverage is the whole reason why French politicians pretend to be pro-European) against the U.S., but President Trump remains optimistic that he'll "be able to work it out."

There are some European countries whose existing or envisioned digital tax regimes may come under pressure, so France will have some allies. But there are also many European countries that simply cannot have an interest in an escalating trade war with the U.S. only to defend of one of failing Macron's pet projects.

I've read the USTR's report in detail. The comments submitted by various stakeholder representatives to the USTR during the course of the investigation are also worth reading (you can find them on the public docket).

The U.S. government has reason and logic on its side, as well as longstanding principles of international tax and trade policy. By contrast, France has almost nothing to offer but envy and ideology.

I wrote "almost" because there is a problem that does need to be addressed, and the U.S. doesn't deny it as it's affected by it as well: it's called "base erosion and profit shifting" (BEPS). The OECD is working on that one, and it's a difficult one to tackle. Donald Trump has had some success in that regard: he basically struck a deal with large U.S. corporations under which he gave them a tax rate that made it make business sense for them to repatriate some of the profits they had parked abroad, particularly in Ireland. That kind of deal, however, is only an option if you have a truly strong economy, as the U.S. does and France doesn't to nearly the same extent. It also presupposes a political leader who, like Donald Trump, takes a pragmatic, results-oriented, non-ideological perspective.

President Trump is standing on higher ground here. He's a frequent and sometimes fervent critic of social media giants like Facebook and Twitter, who also in my observation tend to suppress conservative voices by applying dual standards. But as a matter of principle, those compüanies have to be taxed primarily in the U.S., not in France.

The primary obstacle France faces in the BEPS context is simply the European Union. Just like its monetary union is an abysmal failure (as the dysbalance of the European Central Bank's TARGET2 system and ever more negative interest rates and their devastating effects on many low-income earner's retirement savings prove) because it came too early, the "Single Market"--though it does give the EU a lot of political power (500 million reasonably affluent consumers)--is flawed because it has no safeguards in place against abusively low tax rates by small member states: neither can the EU force them to impose higher taxes (though in Ireland's case there would have been a window of opportunity when the country needed a bailout) nor is there even a way of excluding a country from the Single Market if it doesn't meet certain demands (probably the only club in the world that can't get rid of antisocially-behaving members).

There's a parallel between France's Digital Services Tax (DST) and the ill-conceived "state aid" case against Ireland--in reality, against Apple: both measures were taken just because the EU couldn't agree on bloc-wide minimum corporate tax rates. Commissioner Vestager (who's great in many other ways, but misguided in this context) and French president Macron wanted to "do something" at any rate, so the Danish commissioner made up a "state aid" case out of thin air--the Court of Justice of the EU may very well overturn it entirely or for the most part--and the French president had his parliament put that DST in place.

Even that controversial Article 13 (now 17) of this year's EU copyright reform falls in that category. Advocated most aggressively by France, it basically seeks to impose a copyright-based levy on digital content platforms, knowing that Europe's market share in content consumed by European users is greater than its share in platforms. It's a DST by any other name, though not as obviously discriminatory as France's DST.

The biggest mistake those unqualified French politicians made in this context is that they made their intent to discriminate against U.S. companies very clear. The USTR's report refers to ample evidence. At all stages of the political process, and at all levels, French politicians left no doubt that they wanted to target major U.S. digital economy players while defining all thresholds and categories to the effect of not affecting any other companies with very limited exceptions (such as Spotify's advertising-based free music service).

With respect to the discrimination, the following quote from an aide to French finance minister Bruno Le Maire is also telling--it was his response to someone expressing concern over the possibility of Amazon passing on the DST to third parties selling products via its platform:

"“[T]his response makes Amazon less competitive, and so much the better, because its monopoly worries us. [...] This may allow other platforms to recover some of their customers."

It's highly unusual--and equally objectionable--for a government to state publicly that a tax regime is designed to redistribute not only money, but market share.

The French DST is also structurally more discriminatory than the EU's proposed DST (which failed to receive unanimous support) would have been.

The USTR's report makes a very good point: for low-margin businesses, a tax based on revenues (not on sales like a value-added tax, which would affect everyone, and not on profits, which only affects profitable companies) disadvantages low-margin businesses and may even force some of them to exit the French market.

The practical implications of France's DST are also insane. Companies like Amazon or Google would have to put new accounting systems in place so they can track, for the purpose of French DST, whether a transaction came from a user who was on French soil at the given time (even though that may sometimes be the only connection to France--the user may be foreign, and the seller of a good may be foreign). What's worse is that, contrary to longstanding principles of taxation, the French DST is put in place retroactively, and if some companies didn't have the related user-location-based revenue tracking in place before July, then some rough and potentially unfair estimates of the portion of their first-half-of-2019 revenues subject to French DST will have to be performed.

As for who will be affected and how much, the largest volume is presumably digital advertising. Here, the affected players (according to the USTR's report) are Alphabet (Google, YouTube), Amazon, eBay, Facebook (also including Instragram), Microsoft, Snapchat, TWitter, and Verizon (Yahoo)--and only one French company, Criteo.

Where margins are a greater problem, and volumes lower than in digital advertising, is the "marketplace" category. The French law defines marketplace services in such a way that even huge French retailers who sell products directly won't be affected--it's about those who perform eBay-like intermediary services. Here, most are from the U.S., and a few from Japan and other European countries than France. The affected U.S. companies in this context are AirBnB, Google with respect to the Android Play Store (app store), Amazon's retail involving third parties selling via its platform, Apple's App Store, Booking Holdings (booking.com, OpenTable etc.), eBay, Expedia, Groupon, Match Group (Match, Meetic, Tinder), Sabre, Uber, and ContextLogic (Wish). There will be some impact on China's Alibaba, Spain's Amadeus (business-to-business travel services), Germany's Axel Springer media conglomerate (which owns a French real estate site named Seloger) and the Zalando retail site, Japan's Rakuten and Recruit, the Netherlands' Randstad (recruiting), Norway's Schibsted (Leboncoin), and the UK's Travelport.

All in all, 17 of the 27 company groups expected to be covered by the DST will be U.S.-based, and only one French-based.

I wish all of the companies for whose rights President Trump is standing up here were grateful. Some of them are run by ultraliberals who will likely just take this for granted. Some others are more constructive. But should the Democratic Party nominate "Fauxcahontas," one of whose stated goals is to break up various Big Tech players, it will be interesting to see whom Silicon Valley PACs will ultimately donate to...

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ITC starts first FRAND-related public interest consultation since Presidential veto of iPhone ban

In early August, the Obama Administration vetoed an ITC exclusion order relating to older iPhones and iPads on public interest grounds and indicated that it expects the U.S. trade agency to carefully consider the public interest before ordering import bans over FRAND-pledged standard-essential patents (SEPs). But there are still various SEP cases pending before the ITC, and patent holders have already made different suggestions as to how the U.S. trade agency could justify SEP-based exclusion orders in a post-veto world.

Two SEP investigations have reached the stage of a Commission review (the Commission being the six-member decision-making body at the top of the ITC) since the Presidential veto. On September 4, the Commission decided to conduct a full review of a preliminary ruling clearing Nokia, Huawei and ZTE of violation of various InterDigital patents. But in its review notice it stated that it "is not interested in receiving written submissions that address the form of remedy and bonding, if any, or the public interest at this time". This means that if InterDigital obtains a reversal of any non-liability finding, a second round of submissions will have to be requested to address FRAND-related public interest issues.

The fact that the ITC does not request FRAND-related submissions right away on a "just in case" basis could mean that the probability of a liability finding in InterDigital's favor is not too high. But it could also be due to the fact that there are so many liability-related questions to be analyzed in that investigation that the trade agency would need more time anyway if any FRAND questions later became outcome-determinative.

With a view to ITC complaints by the likes of InterDigital I'd like to highlight an opinion piece recently published by the Wall Street Journal, authored by a former ITC commissioner who says the agency "has drifted from its original mission" and has become the "International Trolling Commission". The debate over the ITC's role is part of a wider patent reform discussion in the U.S., and the ITC's jurisdiction over complaints by patent troll as well as its jurisdiction over SEP cases will remain controversial until abolished.

Yesterday the ITC decided to conduct another full review of an investigation involving FRAND issues. That investigation of an LSI/Agere complaint against Funai and Realtek was of interest to a very few people in the world until a federal judge in the Northern District of California ordered a preliminary injunction barring complainants from enforcing an exclusion over over a SEP should they win one against Realtek.

In the LSI/Agere case, the Administrative Law Judge did not find (in a preliminary ruling) Realtek to infringe a SEP, but the ITC's review notice does raise FRAND-relate public interest questions right away. All of the Commission's public interest questions are about FRAND, with a particular focus on negotiations between the parties:

1. Please discuss and cite any record evidence of the allegedly [F]RAND-encumbered nature of the declared standard essential '663, '958, and '867 patents. With regard to the '958 patent and the '867 patent, what specific contract rights and/or obligations exist between the patentee and the applicable standard-setting organization, i.e., the Institute of Electrical and Electronic Engineers, Inc. (IEEE)? With regard to the '663 patent, what specific contract rights and/or obligations exist between the patentee and the applicable standard-setting organization, i.e., the International Telecommunication Union (ITU)?

2. Please summarize the history to date of negotiations between LSI and Funai and between LSI and Realtek concerning any potential license to the '663, the '958, and the '867 patents, either alone, in conjunction with each other and/or the '087 patent, and/or in conjunction with non-asserted patents. Please provide copies of, or cite to their location in the record evidence, all offers and communications related to the negotiations including any offer or counteroffer made by Funai and Realtek.

3. Please summarize all licenses to the '663, the '958, and the '867 patents granted by LSI to any entity including evidence of the value of each patent if such patent was licensed as part of a patent portfolio. Please provide copies of, or cite to their location in the record evidence, all agreements wherein LSI grants any entity a license to these patents. Please also provide a comparison of the offers made to Funai and/or Realtek with offers made to these other entities.

4. If applicable, please discuss the industry practice for licensing patents involving technologies similar to the technologies in the '663, the '958, and the '867 patents individually or as part of a patent portfolio.

5. Please identify the forums in which you have sought and/or obtained a determination of a [F]RAND rate for the '663, the '958, and the '867 patents. LSI, Funai and Realtek are each requested to submit specific licensing terms for the '663, the '958, and the '867 patents that each believes are reasoanble and non-discriminatory.

6. Please discuss and cite any record evidence of any party attempting to gain undue leverage, or constructively refusing to negotiate a license, with respect to the '663, the '958, and the '867 patents. Please specify how that evidence is relevant to whether section 337 remedies with respec to such patents would be detrimental to competitive conditions in the U.S. economy and other statutory public interest factor.

The fifth question is the most interesting one in this particular case because it relates to the proceedings in Judge Whyte's court in Northern California.

The ITC's questions are broad and general. All that can be said at this stage is that the ITC wants to look at these questions in detail, including reasonable royalty rates, an area in which it doesn't have much expertise (if any). I interpret this FRAND questionnaire as an attempt by the ITC to encourage SEP holders to pursue import bans despite the recent veto. Even though it's now going to be harder than before to win a SEP-based exclusion order from the ITC and to actually enforce it, the ITC portrays these FRAND issues as highly case-specific, which is a way of creating legal uncertainty that could result in settlements. And such uncertainty is, in and of itself, not in the public interest.

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Allegations of protectionism fail plausibility test in Samsung import ban context

I picked a perfect time for my week off. There was limited activity on the smartphone patents front (partly due to the U.S. government shutdown) and only one situation in which I had to resist the urge to chime in: when I saw baseless conspiracy theories in connection with a U.S. import ban against infringing Samsung devices that went into effect last week (Bloomberg, Reuters, IDG News Service).

In early August, two things had happened in short succession: the United States Trade Representative (USTR) vetoed a U.S. import ban Samsung had won over a standard-essential patent, and the ITC ordered one against Samsung over a couple of Apple patents. The latter decision was also subject to a Presidential review conducted by the USTR on behalf of the White House, and no veto came down, so the import ban is now in effect (and may give rise to an enforcement dispute).

Samsung's "smells like U.S. protectionism" propaganda (parroted by a Washington lobbyist whose organization is the most hypocritical industry group I've eve seen as far as "interoperability" is concerned and counts Google and Samsung among its members) succeeded in part -- but not entirely, because most reporters did realize that there's a difference between standard-essential patents (SEPs) such as the patent at issue in Samsung's offensive case and non-SEPs such as the ones underlying the import ban Apple won against Samsung.

This blog has talked so much about the difference between injunctive relief over SEPs and over non-SEPs that I don't need to repeat the basics here. But I do wish to look at those conspiracy theories from a different angle: plausibility.

It makes no sense to suggest that the U.S. government's stance on SEP injunctions is driven by protectionism rather than principle. Case in point: the American mobile phone company, Motorola, owned by an American Internet giant (Google), was investigated by the FTC. I'm not completely satisfied with the outcome of that investigation, but what the FTC did was at least enough to result in the withdrawal of a couple of remaining SEPs-in-suit from Motorola's ITC case against Microsoft.

By contrast, nothing has come out so far of the DoJ investigation of Samsung's use of SEPs against Apple.

Of course, if, for example, a U.S. company like InterDigital ultimately obtained an ITC exclusion order against Samsung (or Huawei, ZTE, or Nokia) over FRAND-pledged SEPs, then and only then there might be a basis for suspecting protectionism. But that hasn't happened yet and I don't believe it will ever happen.

Certain conspiracy theories, including this one, appear much less credible if one asks a simple question: if the theory were true, wouldn't there have been a much smarter way to implement the alleged agenda?

In this case, there would have been a number of much smarter ways to achieve the alleged objective. If the goal had been to tilt the scales in Apple's favor in this earth-spanning patent spat, it wouldn't have made sense to put the fate of Samsung's case against Apple in the hands of the USTR. The preliminary ITC ruling, by an Administrative Law Judge, had been a finding of no infringement. The Commission (the six-member decision-making body at the top of the U.S. trade agency) could simply have upheld that ruling. Only a very few people in the whole world would have understood the highly technical question that made the difference between infringement and non-infringement. In the end, this would have been just one more SEP Samsung would have asserted against Apple without success. This would not have been inconsistent with its worldwide track record. For example, in Germany, an undoubtedly neutral jurisdiction, Samsung had previously failed with four SEP assertions and not succeeded with a single one.

The ITC could also have handed Apple a more impactful win against Samsung. Compared to how other litigants performed at the ITC (and compared to Apple's case against HTC), Apple was rather successful with its two-patent victory, but the ITC could have given Apple a win over three or four patents, and/or over the same patents but based on really devastating claim constructions (particularly for the Steve Jobs patent). Instead, the ITC cleared various Samsung workarounds -- against Apple's procedural objections -- and the USTR has already said that enforcement disputes should be resolved in close cooperation between U.S. Customs and the ITC, a recommendation that will help Samsung avoid disruptions of its U.S. business.

Not only could the U.S. government have influenced these ITC processes in Apple's favor but it could also have used the investigative powers of one of its sister agencies, the DoJ, well ahead of the ITC ruling, let alone the USTR veto. In December 2012, the European Commission issued a Statement of Objections (SO), a preliminary antitrust ruling, against Samsung's pursuit of SEP-based sales bans of Apple products. In a last-ditch attempt to dissuade the EU from this step, Samsung unilaterally withdrew all of its European SEP-based injunction requests. It would have been quite easy for U.S. regulators, if there had been a protectionist agenda, to put antitrust pressure on Samsung and to obligate it to abandon its push for SEP-based bans in the U.S. as well, especially after Samsung argued that its withdrawal in Europe was good for consumers (without explaining why U.S. consumers should be treated differently than their European counterparts).

In light of these options, it's an insult to suggest that the U.S. government sought to give Apple unfair leverage over Samsung. There are clear signs that the U.S. government would have denied Apple a SEP-based U.S. import ban against Samsung as well (it's just that Apple hasn't asserted any SEPs in court against anyone), and that it wouldn't have vetoed a non-SEP-based import ban if Samsung had won one against Apple (its non-SEPs are too weak for that and have a 100% drop-out rate worldwide, however). I said it's an insult because it implies that an allegedly agenda-driven U.S. government was too stupid to see those readily identifiable alternative ways to give Apple leverage without any need for the USTR to veto the ban.

There's also some confusion out there concerning the scope of the ban. The scope of an ITC exclusion order is not limited to the exemplary infringing products identified in an investigation. Two months ago I published the letter the ITC sent to U.S. Customs, and you can see that it refers to product categories and their customs codes, and the patents underlying the ban, as opposed to product names. If newer products really don't infringe (due to technical changes, or -- not in this case -- licensing), then Samsung is fine, but only because they steer clear of infringement, not because the ITC didn't look at particular products during the course of the investigation.

If the scope of ITC import bans was limited to the exemplary accused products, HTC and Qualcomm wouldn't be trying to modify the HTC One so as to avoid infringement of a Nokia patent, and Google wouldn't have said that the new Moto X line of phones "will be assembled in the United States and are therefore not subject to the exclusion order" Microsoft won last year.

I'm going to do a round-up post tomorrow on various developments in the two California Apple-Samsung cases. Samsung appears to be in panic mode with respect to the scandal involving its lawyers' disclosure of the terms of the Apple-Nokia license agreement to its executives. It brought an emergency motion and request for a hearing last week, but Judge Koh won't hold a hearing and will presumably deny Samsung's motion soon. Meanwhile the parties are preparing for next month's damages retrial and next spring's trial over a new set of patents. With a view to the retrial, proposed jury selection questions (voir dire), jury instructions and verdict forms were published, and Apple clarified in which ways it will point the new jury to "copying". In the second case, both parties filed summary judgment motions and motions to exclude expert testimony. There's a mountain of documents and I found some interesting information in it, but none of this is urgent and this is likely going to be a slow week anyway, so I'll just write about it tomorrow.

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Samsung says Ericsson is "seeking billions more" than under previous patent license agreements

The Microsoft v. Motorola FRAND trial in the Western District of Washington has just started (parties' counsel are questioning potential jurors as I start to write this post), but FRAND disputes are going on in other venues, such as the United States International Trade Commission (USITC, or just ITC), where Ericsson and Samsung are seeking exclusion orders against each other over a mix of standard-essential and non-standard-essential patents. I recently reported and commented on Ericsson's proposal to have the ITC determine a FRAND license fee for its SEPs-in-suit, which is a sign of strength but not a procedural path that I believe in. Today Samsung has filed its response, and I tried to download that document from the ITC server, but the downloaded version could not be opened on my desktop computer or uploaded to Scribd. Since this is an interesting topic, I'll just paste the text further below (I can at least view the document in a browser and copy from it).

I don't want to jump to conclusions, but there are early signs of Samsung, now that its SEP-based strategy against Apple has failed in the U.S. and Europe (and is not too likely to work out in Japan and Australia), becoming a bit more FRAND-friendly and advocating positions that appear to be increasingly inconsistent with Google's (Motorola's) SEP strategy unlike in the past, where both parties, represented by the same firm (Quinn Emanuel) against Apple, were acting like divisions of the same army. Samsung now argues that the proper FRAND value of a SEP is its ex ante value ("As explained by the USTR, an analysis of the value of an SEP requires an analysis of the value of the patent ex ante before the standard was set.") Google is appealing the FRAND part of Judge Posner's ruling in no small part because of this holding (the related Federal Circuit hearing will take place on September 11, 2013). Also, Samsung is now arguing against SEP-based ITC exclusion orders even if a patent holder made an offer on truly FRAND terms and voices a preference for disputes like this one to "be resolved in other available forums", such as arbitration (not my preference) or district court (great idea, and different from Google's Motorola's stance in the Seattle case).

I like the evolution of Samsung's stance, and I think it's smart: Samsung is going to increasingly have to defend itself against SEP assertions and excessive royalty demands. It used to be a hunter, now it's being hunted, a target of hold-up. There's no point in being a captive of one's own former strategies. Samsung may have read the writing on the FRAND wall and drawn some very appropriate conclusions for its general litigation strategy. It may also be looking for an exit strategy from its FRAND antitrust troubles.

Regrettably, Samsung is still advocating the idea of a comprehensive cross-licensing proposal being a FRAND offer, a notion I reject because it constitutes tying.

As expected, Samsung says the ITC should not make FRAND royalty determinations, and I said that I would support Samsung on this one.

One particularly interesting fact this filing reveals provides a clue as to the economic magnitude of this dispute:

"At trial, Samsung is prepared to show Ericsson’s offers to license its SEPs after the expiration of the parties 2007 license agreement are unreasonably high--seeking billions more than the previous license agreements--and that these offers are inconsistent with FRAND."

Obviously, Samsung's mobile phone business has grown a lot in recent years, and that may explain at least part of a higher absolute royalty demand. But the way Samsung complains suggests to me that it also disagrees with Ericsson on a per-unit basis. For example, Samsung represents that its latest offers "reflect a vast and principled increase in licensing revenue from Samsung to Ericsson over the prior two licenses combined".

Full text of Samsung's response (public redacted version)

SAMSUNG RESPONDENTS’ RESPONSE TO ERICSSON’S NOTICE OF NEW AUTHORITY

Ericsson’s “Notice of New Authority” misinterprets the USTR’s August 3, 2013 Letter (“USTR Letter”), which disapproved an exclusion order issued in the 794 Investigation on public interest grounds. To be sure, the USTR Letter is important, new authority that affects the 862 Investigation and other current and future investigations in which complainants assert declared essential patents. The USTR Letter does not and could not, however, provide supplemental jurisdiction to the ITC to set unilateral FRAND royalty rates for patent portfolios. Rather, the USTR Letter adopts the view of the Department of Justice and other regulators that ITC exclusion orders are not an appropriate remedy for violations of standard essential patents (SEPs) except under limited circumstances. Where, as here, the parties’ only real dispute is one over how much a licensee should pay as a FRAND royalty—not whether it will pay—and other remedies exist, the USTR Letter recognizes the licensor’s proper recourse is in the courts (or private adjudication, such as arbitration, as Samsung repeatedly has offered to Ericsson). As a result, the impact of the USTR Letter on this Investigation is that Ericsson cannot show Samsung is an unwilling licensee where Samsung has negotiated in good faith, made reasonable FRAND offers, proposed arbitration, and never stayed the co-pending district court case containing the same patents-in-suit as an alternative forum for resolution.

Ericsson’s suggestion that the ITC could and should enter the business of setting unilateral FRAND royalty rates, on a portfolio-wide basis, for patent licensing companies like Ericsson—thus encouraging unwarranted SEP litigation in the ITC—is wrong and inconsistent with the USTR’s letter and purpose. Moreover, even if it were proper, Ericsson’s post-discovery request that the ITC now set a royalty between the private parties as part of the Investigation comes far too late and would requi re significantly different evid ence and trial presentation. Thus, Ericsson’s request should be seen for what it truly is: an attempt to co-opt the ITC into forcing Samsung into paying unreasonable royalties for a license to Ericsson’s SEPs. This is precisely the kind of holdup to which the USTR letter is addressed, and that Samsung, through its expert witness Professor Joseph Farrell, has demonstrated to be harmful to the long-term interest of consumers and innovation in the United States.

I. The USTR Letter Limits Availability of Exclusion Orders for SEPs to Cases Involving Clearly Unwilling Licensees

The USTR Letter disapproved the June 4, 2013 exclusion order issued in the 794 Investigation based on an SEP violation. The USTR’s disapproval was not based on challenging the ITC’s “legal analysis or its findings based on its record.” USTR Letter at 3. Rather, the USTR’s decision was based solely on “policy considerations” as “they relate to the effect on competitive conditions in the U.S. economy and the effect on U.S. consumers.” USTR Letter at 3. In particular, the USTR pointed to the concerns expressed in the joint policy statement issued by the Department of Justice and the United States Patent and Trademark Office titled “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary FRAND Commitments” (the “Policy Statement”). USTR Letter at 1–2. The USTR indicated that it “strongly share[s]” the “substantial concerns” expressed in this Policy Statement “about the potential harms that can result from owners of standards-essential patents (‘SEPs’) who have made a voluntary commitment to offer to license SEPs on terms that are fair, reasonable, and non-discriminatory (‘FRAND’), gaining undue leverage and engaging in ‘patent hold-up’, i.e., asserting the patent to exclude the implementer of the standard from a market to obtain a higher price for use of the patent than would have been possible when the standard was set, when alternative technologies could have been chosen.” USTR Letter at 2.

The USTR did not categorically rule out the availability of exclusion orders for cases involving SEPs, but noted the narrow circumstances where “[a]n exclusion order may still be an appropriate remedy,” explaining that “exclusionary relief from the Commission based on FRAND-encumbered SEPs should be available based only on the relevant factors described in the Policy Statement.” USTR Letter at 2. Such circumstances may exist where, for example, “a putative licensee refuses to pay what has been determined to be a FRAND royalty, or refuses to engage in a negotiation to determine F/RAND terms.” USTR Letter at 2, n.3.

Importantly, the USTR was clear that, notwithstanding the limited availability of exclusion orders for violations based on SEPs, the SEP owner would still have a remedy. USTR Letter at 4 (“My decision to disapprove this determination does not mean that the patent owner in this case is not entitled to a remedy.”). That remedy, however, was not an exclusion order in the ITC but rather that “the patent owner may continue to pursue its rights through the courts.” USTR Letter at 4.

In sum, the USTR Letter advocates the limited availability of exclusion orders for SEP-based violations to only those circumstances involving clearly unwilling potential licensees or where there may be no other remedy, and otherwise recognizes that the proper remedy for FRAND-encumbered SEPs should be decided be in the courts (or private adjudication by a neutral third party).

II. Ericsson’s Arguments Misconstrue the USTR Letter, Are Inconsistent with the Law, and Are Unworkable in Practice

In its Notice of New Authority, Ericsson misconstrues the USTR Letter in multiple ways.

A. Ericsson is Incorrect That The USTR Letter Provides That An Exclusion Order Should Issue If Ericsson Has Made A FRAND Offer

Ericsson first incorrectly argues that the USTR Letter provides that an exclusion order may issue for a violation of SEPs if the ALJ finds that Ericsson’s offer complies with FRAND:

First, whether the licensing offers extended by Ericsson to Samsung during their negotiations comply with FRAND--if so, any exclusion order in this Investigation should be conditioned on Samsung’s refusal to accept the terms that have been adjudicated FRAND.

Ericsson Notice at 4.

Contrary to Ericsson’s argument, the USTR Letter does not provide that an exclusion order may issue if Ericsson made an offer that “complies with FRAND,” but rather the USTR Letter instructs that anexclusion order should not issue on public interest grounds unless it is shown that Samsung was unwilling to negotiate for a FRAND license. USTR Letter at 2, n.3. To be sure, whether Ericsson has made a FRAND offer is before the Commission as part of Samsung’s affirmative defenses. If, however, the Commission finds that Samsung failed to prove Ericsson did not make a FRAND offer, that provides no basis for an exclusion order on SEPs to issue. Rather, the USTR Letter is clear that the public interest focus is on whether the potential licensee, here Samsung, refused to negotiate or refused to pay a neutrally-adjudicated FRAND royalty. See USTR Letter at 2, n.3 (“An exclusion order may still be an appropriate remedy in some circumstance, such as where the putative licensee is unable or refuses to take a FRAND license . . . .”). Significantly, these same circumstances arose in the 794 Investigation where the Commission found the respondent (Apple) failed to prove its affirmative defenses based on a failure to make a FRAND offer but the USTR nonetheless disapproved the exclusion order. Thus, the USTR directly rejects Ericsson’s argument that an exclusion order may issue upon a finding that a FRAND offer was made.

Ericsson’s argument that making a “FRAND offer” is the legal threshold for issuing an exclusion order incorrectly forecloses that both parties can make good faith offers consistent with their FRAND obligations but nonetheless be unable to reach agreement. As explained in the 794 Investigation, a “FRAND license could encompass a range of reasonable terms” and may be in the form of a cross license or involve a balancing payment. 794 Comm’n Op. at 60-61 (July 5, 2013) (public version). There is much room for dispute as to the license terms. Nothing in the USTR Letter suggests or implies that an ex clusion order could issue if both parties are acting in good faith and there is a bona fide dispute about the FRAND royalty. Instead, the USTR Letter provides that no exclusion order should issue in that situation because there is no “unwilling” party to the negotiation. USTR Letter at 2.

B. Ericsson Incorrectly Argues That The USTR Letter Provides That the ITC Should Set Unilateral FRAND Patent Portfolio Royalties

Ericsson’s second proposed reading of the USTR Letter is equally problematic. Ericsson wrongly argues that if the ALJ finds no FRAND offer was made, the ALJ should make his own finding of the proper royalties that Samsung should pay for Ericsson’s four different SEP patent portfolios:

[T]he ALJ should go on to determine what royalty rate (and any other terms) would comply with FRAND—then condition any exclusion order on Ericsson offering those terms to Samsung and Samsung refusing to accept them.

Ericsson Notice at 4.

This proposal is without basis in the law, unworkable, and inconsistent with the USTR Letter.

First, the USTR did not purport to (and could not) confer supplemental jurisdiction on the ITC to determine and set a royalty for SEP portfolios for private parties that cannot agree on terms. The ITC is, of course, “a creature of statute, and must find authority for its actions in its enabling statute.” See Kyocera Wireless Corp. v. Int’l Trade Comm’n, 545 F.3d 1340, 1355 (Fed. Cir. 2008). As relevant here, this Investigation was instituted under the ITC’s Section 337 jurisdiction. To determine a violation of Section 337, the ITC may have to determine whether a licensor violated its FRAND obligations to a standard setting organization as part of the respondent’s affirmative defenses. That inquiry does not, however, require determination of what the proper FRAND royalty would be between two parties, particularly where, as here, the license dispute includes patents not before the Commission including those as part of a cross-license. Similarly, the USTR’s public interest inquiry does not require the ITC to make a finding as to the proper royalty between two parties. Rather, it requires a finding as to whether the potential licensee negotiated in good faith, incl uding whether the SEP holder made offers that were reasonable on their face, or so extreme that no counterparty could accept them, and bad faith cannot be inferred merely from the fact that the parties have failed to reach agreement as Ericsson implies. In sum, no defense and no public policy concerns identified by the USTR require or authorize resolution of the price term in the private cross-licensing dispute between Ericsson and Samsung as part of the Commission’s Section 337 Investigation.

Second, Ericsson’s proposal that the ITC engage in the business of setting license royalties is unworkable. Ericsson asks the ALJ to decide the license royalty terms for its worldwide SEP portfolios covering four different standards. Ericsson Notice at 7 (The ALJ “should make an in-depth evaluation of whether Ericsson has offered FRAND terms to Samsung and if not, what would constitute FRAND terms for Ericsson’s standard essential patents.”). Most of these patents are not before the ALJ—Ericsson claims to hold hundreds more patents than those at issue in the 862 Investigation. As explained by the USTR, an analysis of the value of an SEP requires an analysis of the value of the patent ex ante before the standard was set. USTR Letter at 2 (patentees improperly seeking “a higher price for use of the patent than would have been possible before the standard was set”). As a result, the majority of the patents for which the ITC will be setting a specific royalty would then be for patents for which it lacks evidence and argument. Thus, Ericsson seeks a binding determination on the value of patents (including foreign patents) not before the Commission.

Moreover, this FRAND licensing dispute involves a cross-license to Samsung’s substantial patent portfolio. In the 794 Investigation, the ITC noted that cross-licenses are “typical in the industry,” may be “consistent with FRAND,” and require balancing payments between the parties. Here, the parties have two prior cross-licenses (covering many of the same patents) as benchmarks and this litigation arises from their unsuccessful attempts to conclude a third cross-license agreement. From Samsung’s perspective, any determination of a FRAND royalty between Samsung and Ericsson must take into account the value of a cross-license to Samsung’s SEPs as well as the parties’ previous agreements. That evidence, in substantial part, is not before the Commission in this Investigation. Simply put, even if determining a specific FRAND royalty on a portfolio basis were an appropriate exercise in a Section 337 Investigation, resolution of these issues would require a substantially different evidentiary and expert record than the one presented in the 862 Investigation.

Third, Ericsson’s proposal is inconsistent with the USTR Letter. The USTR Letter recognizes that injunctive relief, like exclusion orders, on SEPs raise hold-up concerns counter to the public interest and that an SEP holder’s primary remedy lies in the courts, which have a larger range of potential remedies, not in the ITC. These concerns include the undue bargaining leverage a licensor may gain through the threat of an exclusion order. USTR Letter at 2. As explained by Dr. Farrell, Samsung’s expert and former DOJ/FTC chief economist, a primary concern of regulators is the threat of an exclusion order distorting the private bargaining between parties on SEPs in a manner that harms U. S. consumers and long-term competition and innovation. Farrell Witness Statement at 2. Here, Ericsson’s proposal would further encourage, not discourage, SEP enforcement in circumstances where such an enforcement campaign is not warranted. Indeed, licensing companies, typically non-practicing entities that seek ever higher royalties with little or no concern for the valu e of the technology or cross-license (which could only be determined in a separate proceeding) would likely welcome the opportunity to have the ITC determine unilateral license rates under the shadow of a potential exclusion order—raising the identical concerns that the USTR cited in disapproving the exclusion order.

Similarly, deciding a specific rate only for Ericsson’s SEPs without regard to any cross-license is counter to the purpose of the USTR Letter of keeping the threat of exclusion orders from altering SEP license negotiations. If the ITC were to choose to set unilateral portfolio rates as part of its Investigations, it would improperly tilt the scales in SEP negotiations in favor of patent licensing entities (like Ericsson) and, against standards implementers (like Samsung) that follow industry cross-licensing practices. On this point, Ericsson’s motives in seeking to impose its unilateral FRAND rates through the threat of an exclusion order are clear: Ericsson’s primary request is an exclusion order because Samsung will not accept its terms; its request that the Commission set unilateral rates is only if the Commission finds that Ericsson failed to make a FRAND offer in the first place. Ericsson Notice at 4.

III. Ericsson Incorrectly Argues that the Parties Have Prepared Their Cases for the Commission to Decide the License Royalty Terms

Ericsson also incorrectly argues that the parties are prepared to argue the proper royalties for Ericsson’s patents essential to the 2G, 3G, 4G, and 802.11 standards. As explained above, the issue of the proper royalty for a cross-license has been a subject of negotiation, not litigation. At trial, Samsung is prepared to show Ericsson’s offers to license its SEPs after the expiration of the parties 2007 license agreement are unreasonably high--seeking billions more than the previous license agreements--and that these offers are inconsistent with FRAND. At trial, Samsung also is prepared to show that it, unlike Ericsson, has at all times acted in good faith and has been willing to negotiate, to arbitrate, and to litigate in the district courts if agreement cannot be reached. Samsung has not, however, prepared the specific analysis endorsed by the USTR, by industry experts, and by the courts for ascertaining the specific values for an Ericsson SEP-only portfolio license. It has not done so because those price terms are thus far not an issue in this investigation. And it is not otherwise required to do so as part of its FRAND obligations where, as here, Samsung has prepared and justified offers based on cross-licenses; an approach endorsed by the Commission and consistent with industry pr actice and these parties’ prior practices.

To the extent the Commission decides that it is appropriate to decide specific royalties for Ericsson’s SEPs substantially more discovery and time would be necessary, given the issues outlined above. In any case, as only a small subset of Ericsson’s alleged SEPs are before the Commission, even were it to take up the royalty term issue as to the patents in suit, it could not do so as to the entirety of Ericsson’s SEP portfolios.

IV. Under the USTR Letter, Ericsson Cannot Obtain an Exclusion Order

Although Samsung disagrees with Ericsson’s in terpretation of the USTR Letter, Samsung agrees with Ericsson that the USTR Letter is important new authority for the 862 Investigation. It is important because, under the standard USTR applied in disapproving the exclusion order in the 794 Investigation, Ericsson cannot obtain an exclusion order in the 862 Investigation.

Samsung has at all times been a willing licensee in its dispute with Ericsson. The record evidence on this fact is decisive. As Ericsson acknowledges, Samsung and Ericsson have had extensive license negotiations starting months before the 2007 patent license was set to expire. Ericsson Notice at 5. Those negotiations, which have occurred all over the world, are still on-going and reveal a bona fide dispute about the appropriate royalty for the parties’ respective 2G, 3G, 4G and 802.11 standard essential patent portfolios. Id.

In those negotiations, Samsung has made multiple offers to Ericsson. While those offers apparently do not include enough money for Ericsson, they do reflect a vast and principled increase in licensing revenue from Samsung to Ericsson over the prior two licenses combined. Under no objective standard could this substantially more favorable offer to Ericsson, which covers many of the same previously licensed patents, be characterized as a “refusal to negotiate.” Moreover, while Ericsson now prefers to exchange only unilateral, running royalty license offers, Samsung’s license offers have been identical to the types of offers that the parties exchanged in their prior two successful license nego tiations. Samsung has made cross license offers based on lump sum royalties and balancing payments. In fact, Ericsson’s legal officer responsible for this litigation concedes that the prior [REDACTED]

In addition to making reasonable offers to Ericsson, Samsung also has, on numerous occasions, offered to have the parties’ dispute resolved through binding, neutral arbitration. In particular, the parties actively are discussing the possibility of having the FRAND terms and conditions for a cross-license to their respective SEP portfolios set by an arbitration panel.

Ericsson’s request for an exclusion order is inconsistent with the DOJ/PTO Policy Statement approvingly cited in the USTR Letter because there are other available remedies for Samsung’s alleged infringement of Ericsson’s SEPs . Ericsson has admitted [REDACTED]

Samsung, however, has before and after the filing of Ericsson’s complaint been willing to arbitrate the license amounts in dispute. Samsung also did not stay the companion district court case that Ericsson filed, as was Samsung’s right, with the express expectation that if the parties could not reach agreement, they may need to litigate in the district court. Ericsson has raised the same FRAND arguments in the district court that it raises here. Thus, consistent with the USTR’s reasoning and with the public policy considerations set forth in 19 U.S.C. § 1337(d)(1), this dispute can be and should be resolved in other available forums.

It bears emphasis here that Ericsson's improper and untimely request that the ITC blessor otherwise determine its unilateral SEP license rates substantially ignores the USTR guidance on exclusion orders. Samsung is the only party that has addressed the proper public interest arguments that the USTR Letter raises. Samsung presented evidence and argument, including through its expert Dr. Farrell, on why no exclusion order should issue under the Policy Statement. That same Policy Statement was later endorsed by the USTR. By contrast, Ericsson substantially ignored Dr. Farrell’s analysis and dismissed the hold-up concerns reflected in the USTR Letter and Policy Statement as without basis.

* * *

Samsung agrees that the USTR Letter has an important impact on this case but not for the reasons Ericsson argues. Neither the 794 Investigation Commission Opinion nor the USTR letter determined a FRAND royalty between the litigants in the 794 Investigation and there is no reason the Commission should do so here. The USTR did, however, determine that an exclusion order for SEPs was inappropriate in the 794 Investigation as a matter of public policy. For the same reasons set forth in the USTR Letter, no exclusion order is appropriate for public policy reasons in this Investigation. Accordingly, Samsung submits that th e proper course of action for this investigation, following the USTR Letter, is for Ericsson promptly to seek to terminate its SEPs from the investigation.

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Microsoft, Nokia, Huawei oppose InterDigital's push for ITC import ban on public interest grounds

Last week I reported and commented on public interest statements filed by Ericsson and the Innovation Alliance in the ITC investigation of InterDigital's June 2011 complaint against Nokia, Huawei, and ZTE. The Administrative Law Judge identified no violation, but he also rejected all FRAND defenses. Should the Commission (the six-member decision-making body at the top of the U.S. trade agency) overrule him on one or more standard-essential patents (SEPs), then the decision on whether to issue an exclusion order will depend on public interest considerations -- and in light of the Presidential veto of a SEP-based import ban won by Samsung, I can't see how InterDigital would get its way.

It's not 100% impossible that the ITC will at some point issue an exclusion order over FRAND-pledged SEPs. But I interpret the vagueness of the United States Trade Representative's veto letter as a clear sign that SEP-based import bans are acceptable only under very rare circumstances. InterDigital doesn't pursue Samsung's strategic objective (which is a cross-license involving non-SEPs), but that fact alone, though it is an important difference from an antitrust point of view, doesn't entitle it to an import ban either.

Three more public interest submissions -- made by Microsoft, Nokia and Huawei -- have become publicly available since my last post on this case, and I've uploaded them to Scribd. I can see that ZTE and InterDigital have also filed statements, but no public redacted versions of those submissions were available at the time of publication of this post.

Microsoft's statement stresses the importance of the Windows Phone platform as "the primary remaining competition for the Apple/Google 'duopoly' in the United States smartphone market". This claim is certainly supported by BlackBerry's decision to put its company up for sale, which was announced after Microsoft's submission to the ITC, which was made on August 7.

Microsoft's concern relating to SEP-based exclusion orders is well-known, but there's a five-page limit for such submissions, so Microsoft decided to focus on platform-specific considerations. At the end of its submission, Microsoft requests "that the Commission, should it find a violation of Section 337, take steps to allow further briefing and the development of a much fuller evidentiary record on the public interest implications of remedial orders". I believe the Commission could deny InterDigital's request for an import ban on SEP-specific grounds without even needing any further briefing. But I agree that at the very least there would have to be some further briefing on FRAND issues if an import ban would otherwise be ordered.

Nokia's filing starts with a reference to the Presidential veto in the Samsung-Apple case, in light of which "the Commission must decline, on public interest grounds, to issue an exclusion order" based upon patents declared essential to cellular standards (WCDMA and CDMA2000 in this case). I'm pleasantly surprised that Nokia takes such a clear "no exclusion order" position here, given that it supports Google's (Motorola's) appeal of the FRAND part of Judge Posner's ruling. In my observation Nokia's SEP-related actions have been far more reasonable than Motorola's, but its policy papers and public interest statements were closer to Google's position than that of, for example, Apple, Cisco and Microsoft.

Nokia mentions that it has asked the United States District Court for the District of Delaware to make a FRAND determination and says that "[t]he willingness to have a third party set a FRAND rate where parties cannot agree is tangible evidence that a licensee is willing, according to the US Federal Trade Commission".

Also, Nokia quotes Commissioner Pinkert's dissent from the majority ruling on Samsung's complaint against Apple.

The final part of Nokia's submission talks about Windows Phone, which it describes as "the only presently feasible alternative to iOS and Android". A footnote says that "[w]hen Nokia first announced its entry into the WP market in 2011 there were only 5,000 apps available for WP at that time; today, just 2 years later, there are 165,000 and counting".

Huawei's submission says that in the event of a reversal of the preliminary finding of no violation, "the Commission would be obligated [as a result of the veto letter in the Samsung-Apple case] to undertake further proceedings to develop a comprehensive record [particularly with a view to a DoJ/USPTO policy paper] and to permit the parties to set forth their views on how the principlesin the Policy Statement should be applied to that record". Huawei interprets the Samsung veto the way I do: there are only "narrow exceptions to the general rule against issuance of 337 injunctive remedies in aid of [SEPs]", which Huawei (again, just like me) believes InterDigital's complaint fails to meet.

Like Nokia, Huawei declares itself a willing licensee who has requested a FRAND determination, and refers to Commissioner Pinkert's dissent in the Samsung case, which "represents the efforts of one Commissioner to create [...] a framework" relating to FRAND/SEP-specific public interest factors.

In connection with the collective U.S. market share of the respondents in this investigation (which is relevant to the public interest from the perspective of consumer choice and healthy competition), Huawei also mentions Samsung, against which InterDigital brought an ITC complaint earlier this year (in that investigation, Nokia, Huawei and ZTE are Samsung's codefendants).

The debate continues, and it appears that InterDigital is desperately trying to achieve the impossible and win an import ban over FRAND-pledged SEPs.

[Update] Right after publication of this post I found the public version of InterDigital's statement. InterDigital argues that the circumstances are completely different here from the Samsung case and that exclusion orders must remain the norm. Also, InterDigital says that "one of the asserted patents (the '970) is not even arguably essential as to any standard practiced by the accused products, and therefore no FRAND considerations are applicable to the ‘970 patent in any event." (emphasis in original) [/Update]

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South Korean government fails to distinguish between standard-essential and other patents

I can understand a certain degree of disappointment in South Korea about the Obama Administration's "Presid-ess-ential" veto of an ITC import ban of older iPhones and iPads over a Samsung declared-essential patent. But I strongly disagree with South Korean media labeling this defense of nothing less than the standardization system as "protectionism". This is downright absurd.

The European Union is undoubtedly a neutral jurisdiction in the Apple v. Samsung dispute, though a major battleground. In December the European Commission issued a Statement of Objections (SO), a preliminary antitrust ruling against Samsung's pursuit of injunctive relief against Apple a willing licensee, over FRAND-pledged standard-essential patents (SEPs). A few days earlier, Samsung unilaterally withdrew all of its European SEP-based injunction requests against Apple and said it was doing so "in the interest of protecting consumer choice". It never explained why European consumers should be treated preferentially over U.S. consumers.

Let's go to another continent. Australia, too, is a neutral jurisdiction. Justice Annabelle Bennett called Samsung's assertions of 3G-essential patents "ridiculous" because this should only be about the terms of a FRAND license.

There is also significant concern over SEP abuse in Asia. For example, China's Ministry of Commerce took a very close look at Google's acquisition of Motorola Mobility, and SEPs were a major issue in the merger review.

It's not just that South Korean media attribute to protectionism what decision-makers in other parts of the world would have done in the same situation, correcting an outlier decision. There's also an official statement now by South Korea's trade ministry, quoted by AFP and other agencies. According to those reports, the South Korean government voiced "concern about negative impacts the decision by the [United States Trade Representative] will have on protecting patents held by Samsung". There's no reason for such concern, though.

There are simply two categories of patents: SEPs (subject to FRAND licensing commitments) and non-SEPs (traditional, exclusionary rights). Both have their distinct sets of advantages and limitations. It's easy to sign up lots of licensees for SEPs on FRAND terms; it's anticompetitive to make supra-FRAND demands or to engage in anticompetitive tying. By contrast, you're typically free to use non-SEPs in an exclusionary manner, but they can be worked around. So there's a market mechanism in place. SEPs can't be worked around, and where there are no alternatives in place, there's no functioning market. Therefore, antitrust rules and public-interest considerations are key.

To the extent that Samsung has non-SEPs, the USTR's veto changes nothing. Nothing at all. And it also changes nothing with respect to the ITC ruling scheduled for August 9 on Apple's complaint against Samsung, which is all about non-SEPs. According to the reports, South Korea will "closely watch" that USITC ruling, but this means comparing apples to oranges. The preliminary ruling already said that designaround products presented by Samsung (which Samsung actually sold in the U.S., though the exact quantities aren't known) are in the clear and don't infringe. An import ban wouldn't prevent Samsung from competing in the U.S. market. It would just have to steer clear of any infringements identified, and it already has everything in place for doing so. By contrast, the ban that Samsung was pursuing against Apple over a FRAND-pledged patent would have required changes to the nationwide infrastructure of the AT&T network and to the networks of some smaller carriers. That's just so different from the minor task of, for example, avoiding infringement of a patent on translucent images used for text highlighting, a problem that (I repeat myself) Samsung has already solved a long time ago, as the Administrative Law Judge found in his preliminary ruling.

South Korea doesn't have to be concerned about the enforceability of Samsung's SEPs either. It can (as it already has) seek monetary damages in district court. That's what Microsoft and Google's Motorola are sorting out in court now. That's what Samsung is also doing in Europe after the aforementioned withdrawal of its European SEP-based injunction request. Again, why is something that's fine in Europe not fine in the United States? Sometimes there may be reasons, but the South Korean government, South Korean media and Samsung don't provide any. That's a major deficiency in their criticism of the U.S. government's decision.

All sorts of entities and people are now, more than ever, going to try to conflate SEP and non-SEP issues. They're not going to confuse the readers of this blog, who know that it all comes down, at the end of the day, to the question of workarounds (or its synonym, designarounds).

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Bipartisan senators suggest Presidential veto of impending ITC import ban of older iPhones, iPads

In my first, quick reaction to yesterday's United States Senate hearing on "Standard Essential Patent [SEP] Disputes and Antitrust Law", I mentioned that profound concern was expressed at a high level while few references were made to the specific situation concerning the ITC import ban of older iPhones and iPads over a Samsung declared-essential patent, which will take effect in a very few days (August 5) unless it is vetoed by the Obama Administration. But I also wrote that "given the concern of certain senators about the problem of SEP abuse, it's certainly possible that lawmakers have talked to the White House about the Samsung-Apple case". I guessed right. After the hearing a press release was distributed that included, as an attachment, a letter that four United States Senators wrote to United States Trade Representative Michael Froman yesterday. Ambassador Froman is in charge of the Presidential review of the ITC order (the White House delegated this task to the USTR a long time ago). Here's the letter signed by Senators Klobuchar, Lee, Boxer, and Risch (this post continues below the document):

13-07-30 Senators to USTR Letter Samsung-Apple

The signatories are

• Senator Amy Klobuchar (D.-Minn.), Chairwoman of the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights (in which capacity she presided over yesterday's hearing);

• Senator Mike Lee (R.-Utah), Ranking Member of the same subcommittee and also a big-time defender of FRAND;

• Senator Barbara Boxer (D.-Calif.), who is very close to the high-tech industry; and

• Senator Jim Risch (R.-Idaho), who previously signed two other letters relating to injunctions over FRAND-pledged SEPs.

Three of the four senators were among the signatories of a May 2013 letter to the ITC in the build-up to the Samsung-Apple decision and also with a view to other cases.

The letter to the USTR notes that the senators "took no position on the merits of the cases then, and similarly we take no position on the merits of the case now", but it's a strong statement in and of itself that the senators go on to "urge the USTR to carefully consider" their public interest arguments. The fact that they write a letter to the USTR toward the end of the 60-day Presidential review period is an unmistakable expression of concern and, by extension, supports Apple, which is pushing for a Presidential veto.

Apple is not alone. A recent Wall Street Journal article mentioned AT&T's support (which I also blogged about) as well as that of BSA | The Software Alliance, a group that includes Microsoft, Intel, Oracle and other major tech companies. For the website of Fortune magazine (part of the CNN Money network), Senior Editor Roger Parloff wrote an opinion piece entitled "Obama should overturn an ITC import ban on Apple phones".

The Korea Times correctly summarized the position I took in a CNN.com op-ed almost two months ago, but in the meantime more information on the ITC ruling has become available and I'm now particularly concerned about the ITC's position that it's legitimate for a SEP holder to condition a licensing offer on a license to the other party's non-SEPs. One of the six chiefs of the ITC, Commissioner Dean Pinkert, also expressed concern over this one. For as much as I usually wouldn't want the ITC to be overruled, this case does raise unique and serious issues. The four bipartisan senators address some of the most important issues at a high level in their letter to Ambassador Froman.

There's a fundamental problem here that needs to be solved. And it would also be regrettable if Apple had to suffer under an outlier ruling by a government agency with quasi-judicial authority.

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AT&T asks USTR to veto ITC exclusion order against older iPhones, iPads over Samsung patent

On Friday it became discoverable that Apple has filed a motion with the United States International Trade Commission (USITC, or just ITC) for a stay of remedial orders (import ban, cease and desist) pending an appeal to the United States Court of Appeals for the Federal Circuit. The related Commission ruling was announced on June 5 published yesterday. Previously I had published Commissioner Pinkert's dissenting views and the majority's portrayal and analysis of Apple-Samsung negotiations. Today the public redacted version of the motion for a stay has entered the public record (this post continues below the document):

13-07-08 Apple Motion for Stay of ITC Remedial Orders by Florian_Muelle_439

Apple's motion (obviously) reiterates some of the previously-heard arguments (which I support) against exclusion orders over FRAND-pledged standard-essential patents (SEPs). But there's a new angle here: the standard for a stay of a U.S. government action is considerably closer to the eBay v. MercExchange factors applied by U.S. district courts when deciding on injunction motions than the ITC's general rule that any violation results in exclusion. These are the four factors for a stay, which Apple lists in its motion, citing to an ITC ruling that, in turn, cited to a Federal Circuit decision:

1. the appeal's likelihood of success on the merits;

2. whether the movant would suffer irreparable harm absent a stay;

3. whether issuance of a stay would substantially harm other parties; and

4. whether the public interest favors a stay

Given that harm plays such a role (factors 2 and 3), Apple's various references to rulings by Judges Posner and Robart (among others) aren't necessarily useless in this particular context even though the ITC declined to benefit from those judges' wisdom in its own ruling.

Apple concedes in its motion that it "is not aware of any investigation in which the Commission has stayed enforcement of an exclusion order". Usually, if a judicial (in this case, quasi-judicial) body makes a decision, it makes it because it believes in it -- and if it believes in it, why would it grant an immediate stay? Usually not. But this case is special. Apple recalls that Commissioner Pinkert noted in his dissenting views that this case raises "highly contested matters of first impression for this agency".

Apple points out that the ITC doesn't have to backtrack from its ruling in order to grant a stay. The mere fact that this appeal raises novel questions would be a sufficient basis for a stay, says Apple.

The motion warns against the effect of enforcement of the relevant remedial orders:

• "[the] remedial orders [...] will create chaos in standard-dependent industries--both in the United States and throughout the world"

• "immediate enforcement of the Orders will frustrate consumer choice, increase prices, and decrease incentives for innovation"

By contrast, Samsung is only entitled to a FRAND royalty. It will get one. In addition to the ITC investigation it filed a companion lawsuit in the District of Delaware, which is currently stayed (pending resolution of the ITC investigation including appeals).

The ITC's decision to reject Apple's public-interest arguments included a mentioning of the absence of a submission by AT&T (one of a few networks that actually use the technique Samsung claims to be covered by its patent). Apple now points to a letter AT&T more recently sent to th United States Trade Representative, to whom the White House has delegated the Presidential veto right concerning ITC exclusion orders (for Apple and Samsung's submissions to the USTR, see this recent post):

"In its Final Determination, the Commission noted that AT&T did not submit comments to the Commission. Comm'n Op. at 2. AT&T, however, submitted written comments to the U.S. Trade Representative explaining the substantial harm to the public interest from exclusion orders on FRAND-committed patents, including harm to the competitive marketplace, service providers such as AT&T, and consumers. Letter from Thomas A. Restaino, Chief Intellectual Property Counsel, AT&T, to Ambassador Michael Froman Regarding USTR Review of the Commission's Final Determination in Inv. No. 337-TA-794 at 1-2 (June 21, 2013)."

Apple's motion for a stay also quotes this paragraph from AT&T's letter to the USTR:

"[E]xclusion orders of this type are entirely inconsistent with the President's goal of ubiquitous broadband deployment, especially for low income citizens. The model of the iPhone that is subject to the exclusion order in this case is available to consumers at very low cost. The exclusion order would eliminate a future supply of this popular mobile broadband option for existing and potential AT&T customers."

Apple also points to letters from U.S. politicians to the ITC warning against the implications of SEP-based exclusion orders, such as this letter sent by six Senators to the ITC about a year ago (in connection with Motorola Mobility's SEP assertions, but the same logic applies to Samsung's pursuit of an exclusion order as well).

If the ITC declines this motion and if the USTR doesn't veto, then the exclusion order will take effect on August 5, 2013. In that case, Apple will immediately appeal the decision to the Federal Circuit and request it to stay enforcement. While the ITC has to Apple's knowledge not stayed enforcement of any of its own exclusion orders, the Federal Circuit has done so. Apple cites the following cases:

• Broadcom Corp. v. Int'l Trade Comm'n, No. 2007-1164 (Fed. Cir. Sept. 12, 2007) (granting stay requested by wireless carriers and handset manufacturers);

• Dynatec Int'l, Inc. v. Int'l Trade Comm'n, No. 99-1504, 1999 U.S. App. LEXIS 38842 (Fed. Cir. Sept. 24, 1999); and

• Jazz Photo Corp. v. Int'l Trade Comm'n, No. 99-1431 (Fed. Cir. July 6, 1999)

Apple's motion indicates the broad lines of its appellate argument, though Apple reserves the right to appeal on other grounds as well:

• "The Commission {...] reversed the [Administrative Law Judge]’s non-infringement finding by erroneously altering the claim construction"

• "Even under the Commission's revised claim construction, Apple’s accused products do not infringe."

• "[N]one of Samsung's domestic industry products containing a Qualcomm baseband processor chip practices claim 75 or 82 of the ’348 patent. [...] Nor do any of the Qualcomm-based products practice claim 82 [...]"

• "There is no dispute that Samsung has licensed Intel to practice the ’348 patent and that the accused functionality in Apple's products is contained in a baseband processor chip that Apple purchases from Intel. The Commission’s rejection of Apple's exhaustion defense was based on its conclusion that sales of the baseband chips from Intel to Apple were not shown to take place in the United States. [...] That reasoning is at odds with the March 19, 2013, holding of the U.S. Supreme Court that, if authorized, extra-territorial sales of goods manufactured abroad exhaust intellectual property rights. See Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013)"

• "As construed, the asserted claims are not directed to patent-eligible subject matter under 35 U.S.C. § 101, because they merely claim an abstract mathematical relationship without any claim limitations that add anything inventive."; "also invalid [...] in view of the prior art"

• The previous items are all about liability. Apple will also challenge the remedies imposed by the Commission. This is where FRAND comes into play.

By the way, Apple strongly disagrees with the Commission majority's characterization of its conduct as constituting "reverse hold-up". Apple points to the fact that the description of Apple-Samsung negotiations contained in the Commission opinion spans seven pages and that it is willing to pay a FRAND royalty.

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USITC denies Apple the right to differentiate its products, grants Samsung a license to commoditize

In my previous post I published the dissenting views of Commissioner Pinkert, one of the six chiefs of the United States International Trade Commission (USITC, or just ITC), from the majority decision granting Samsung (unless vetoed by the United States Trade Representative or reversed by the United States Court of Appeals for the Federal Circuit) an exclusion order against older iPhones and iPads. Commissioner Pinkert's dissent is the only silver lining in a ruling of which I've obtained the final, public redacted version and which is actually much worse than even the worst German FRAND-related ruling I saw. I didn't expect this to happen, least in the U.S.

In certain parts of the world, antitrust professionals admire America as the "cradle of competition law" (for example, you can find those very words in this European Commission document). The ITC ruling on Samsung's complaint against Apple -- apart from the aforementioned dissenting views -- does not really contribute to that reputation. Nor does the unwillingness of U.S. antitrust authorities to intervene.

Price fixing may be the most basic antitrust concept, but tying is no less central to competition law. Tying means strings unfairly attached to a deal. Think of a city somewhere in the desert where only one company supplies water because it controls the only well in the area. And this monopolist now refuses to provide you any water unless you additionally agree to buy one smartphone per year. You may not want or need a smartphone; and even if you do, you would like to have a choice where to buy it. But what can you do without water? Short of relocating to another region, you're going to have to accept this condition. Hobson's choice.

Let's take this one step further. After everyone acceded to the smartphone/tablet clause, the water supplier comes up with the next scheme. Now it requires every customer to work for this company two days per month. It offers some compensation, which most residents consider unacceptably low. Some others wouldn't want to do that kind of work at all. As a result, many people complain and want a "cash-only option": they want a contract for their water that comes with no such requirements. They just want to pay, and nothing else. The water supplier offers such a deal. The only problem is that in this case the price is a huge multiple of what a fair market price would be.

The totally hypothetical water supplier would not get away with any of this. Wholly apart from whatever regulations the water supply business may be subject to, antitrust law would prohibit any of the above. No overcharging in a cash-only scenario. No requirement to buy unrelated goods. No requirement to work for the company if you don't choose to.

Regrettably, a majority of the current ITC has no problem with Samsung doing all of the above, and more, to Apple. Five of the six leaders of this U.S. government agency reconcile intellectual property and competition law in such a way that Apple's engineers and designers in Cupertino and elsewhere have to, practically speaking, work for their company's fiercest rival in the sense that the fruits of their creativity and hard work shall be available for Samsung to use in its own, competing, products. (This is even worse than the water supplier analogy, which just imposes requirements on citizens who don't compete with it.)

This ITC majority says Samsung may seek an exclusion order against Apple's products because (even if Apple had proven its FRAND defense to the Administrative Law Judge) Samsung met its FRAND licensing obligation by making a new offer in December 2012 conditioned on Apple granting Samsung, under the deal, a license to its non-SEPs. There is also a cash-only offer on the table: the infamous 2.4% demand, which didn't prevent the European Commission from issuing a Statement of Objections and was easily identified by a Dutch court as being far outside the FRAND ballpark.

In its ruling on Samsung's complaint against Apple, this ITC majority has taken the notion of intellectual property as an exclusionary right to such an extreme that the net effect is... the expropriation of innovators by extortionists. Anyone wielding standard-essential patents (SEPs) could abuse his gatekeeper role by requiring everyone else, at the threat of total exclusion from the market, to grant a license covering his non-SEPs as a condition for being allowed to operate at all. So a right to exclude could be abused in order to force others to give up their legitimate right to exclude. (A further net effect of this would be that no new entrant would ever have a chance to enter this market with a differentiated, innovative product at a competitive price, but let's focus on Apple and Samsung here.)

In an article published yesterday and entitled "Apple and Samsung: Some Phones Are Smarter Than Others", the Wall Street Journal's Heard on the Street column discusses how "[t]he specter of commoditization haunts smartphone makers". The article also discusses what happened to HTC, which is just one of many Android device makers. It notes toward the end that "Apple's unique operating system at least sets its mobile devices and computers apart". But the ITC does not allow Apple to make and keep iOS unique. Without a right to exclude from using its non-SEPs, there's no way Apple can enforce uniqueness against a copyist or plagiarist. The ITC denies this right to exclude by allowing Samsung to make exclusionary use of its SEPs unless Apple accedes to a cross-license.

Commentary on the passage of the ITC ruling concerning a reciprocal non-SEP license

Further below you can find the full text of the final, public redacted version of the ITC's portrayal and analysis of (SEP) licensing negotiations, which I converted to HTML format for easy reference and quoting (and because it proves that the European Commission accurately described Apple as a willing licensee). Before publishing that long passage I'm now going to quote the critical section on tying of non-SEP reciprocal licenses to SEP licenses upfront and will then discuss in further detail why it's dangerous and wrong and not supported by any major authority on antitrust.

"Apple also criticizes Samsung's attempt to negotiate a cross-license of both parties' mobile telephone patent portfolios. We cannot say that Samsung's offers in this regard are unreasonable. The record contains evidence of more than 30 Samsung licenses that cover the '348 and '644 patents. See RX-173C, RX-178C, RX-188, RX-189C, RX-191C, RX-193C to -209C, RX-42 IC, RX-423C. All of those licenses include a cross-license to the licensee's portfolio. That evidence supports a conclusion that a portfolio cross-license offer is typical in the industry and reasonable.

Apple has offered no evidence to suggest that such portfolio cross-licenses are atypical in the industry. In fact, Apple's own witness on ETSI policies affirmed that ETSI anticipates cross-licensing may be part of the process of negotiating a FRAND license between two parties. See Tr. at 1443 (Walker). Additionally, the negotiating history recounted above shows that Apple has made cross-license offers to Samsung.

We also note that commentators have stated that an offer to cross-license both parties' patents may be consistent with a FRAND obligation, for example:

The obligation to make a FRAND offer does not prevent the standard-essential patent owner from entering into an alternative licensing arrangement, such as a portfolio cross license, with an implementer of the standard. It will often make sense for private parties to enter into a deal that reflects their specific circumstances.

***

[A] FRAND offer to a party that owns standard-essential patents can be made conditional on the would-be licensee itself making a reciprocal FRAND offer.

Lemley, Mark A. and Shapiro, Carl, A Simple Approach to Setting Reasonahle Royalties for Standard-Essential Patents Stanford Public Law Working Paper No. 2243026, 5-6, 17 (March 20,2013), available at http://ssrn.com/abstract=2243026. That approach appears consistent with the expectations of ETSI, as has been explained on the record in this investigation. See Tr. at 1443 (Walker). Moreover, the ETSI declarations Samsung executed specifically contemplate that a FRAND license will involve "terms and conditions," not just a royalty rate. See RX-723."

This passage of the ITC ruling fails to distinguish between what consenting parties may do voluntarily and what a litigant has to do to comply with a FRAND pledge before seeking/enforcing injunctive relief.

There's no question that total portfolio cross-licenses are more efficient than parties having a SEP deal on the one hand and a non-SEP deal on the other hand. That's why it's done most of the time. If parties agree in a situation in which neither one faces an anticompetitive threat of exclusion, let them agree. But when there's a dispute, a SEP-only license on cash-only terms must be offered.

The correct approach for the ITC would have been to limit its analysis of the negotiations between the parties (whether those should even play a role or whether a FRAND commitment is irreconcilable with injunctive relief is a separate question, so let's just assume for the sake of the argument that negotiations do play a role) to those "offers" -- a euphemism for "demands" in this context -- that Samsung made in full compliance with antitrust law. Any demand that came with a condition concerning non-SEPs would have to be ignored because, even though such a deal may very well be the outcome of negotiations, it constitutes anticompetitive tying.

In this case, that means the December 2012 offer doesn't matter. It didn't impress the European Commission. Now we know at least one reason why that offer didn't matter to the EU.

Unlike the ITC majority, dissenting Commissioner Pinkert points to the pertinent sentence from the same Lemley-Shapiro paper:

"While the issue is not free from doubt, we think that an offer made conditional on the would-be licensee licensing any patents other than standard-essential patents reading on the standard at issue is not a FRAND offer."

(emphasis in original)

The ITC majority takes the sentence about reciprocity completely out of context. The sentence Commissioner Pinkert quotes makes clear how narrowly reciprocity has to be defined: SEPs reading on the same standard. For example, the Mannheim Regional Court's Seventh Civil Chamber, which handles numerous smartphone patent cases but also adjudicates competition cases, expressed concern at a recent trial over Google requiring Apple to license other wireless SEPs than the ones of the particular standard at issue in that German dispute.

If read properly, the most mileage the ITC gets out of the Lemley-Shapiro statements on reciprocity is that they say "the issue is not free from doubt", without actually substantiating that doubt. Their paper is, however, overtly biased against Apple and very much promotes Google's interests (which in this context is the same as being pro-Samsung).

So let's focus on independent, unbiased authorities. I mentioned the Mannheim Regional Court. In fact, even the most extreme requirements imposed on implementers under the German Orange-Book-Standard framework (the most SEP-holder-friendly regime prior to this ITC proposal) never required anyone to license non-SEPs. How about the United States Federal Trade Commission? Its proposed Google (Motorola Mobility) consent decree clearly requires Google to make cash-only offers, at most requiring reciprocity with respect to the same standard. Anything else doesn't count under that deal.

The European Commission's announcement of its Statement of Objections speaks for itself.

I don't know any example of a case in which an antitrust authority or court of law considered anything other than a cash-only demand to be a FRAND demand. Again, a FRAND demand made at the threat of exclusion is something different than a voluntary FRAND agreement. The citizens of that desert town I mentioned further above are also free to buy smartphones from, or work for, their water supplier. If they so elect.

The ITC accurately notes that Apple made some licensing offers to Samsung that involved non-SEPs. But a deal that Apple is willing to do is not the same thing as a deal it would be forced to do at the threat of exclusion.

I don't mean to hold it against Samsung that it offered Apple a comprehensive cross-license. Not at all. This just isn't a way to comply with its FRAND licensing obligation (unless Apple voluntarily, without coercion, accepts it). If Samsung had made Apple a lower cash-only offer in December than the original 2.4% deal and proposed as an alternative a deal involving some or all of Apple's non-SEPs, then the second option doesn't matter -- but the first option is the one that the ITC would have had to look at.

History and analysis of Apple-Samsung licensing negotiations

I'm now going to publish a text-only (HTML) version of the passage(s) of the ITC ruling discussing and analyzing the history of Apple-Samsung patent licensing negotiations. As you might imagine, it's heavily redacted, but there's still some useful information in it.

Where the ITC talks about a memorandum of understanding (MOU) that Apple and Samsung's negotiators drafted and agreed to take back to their senior executives, I recommend caution. This was a draft, not an actual MOU. So far it hasn't led anywhere. And the context is discussions that were "focused" on something (that "something" is redacted out), so this could have been less than a comprehensive license deal involving SEPs and non-SEPs alike. This is not about antitrust issues now. It's about whether the parties were actually close to global peace earlier this year. Maybe they were. Maybe they weren't. I wouldn't jump to conclusions from the ITC ruling.

I strongly recommend reading Commissioner Pinkert's well-considered dissenting views before the majority opinion.

Now, finally, the excerpt from the ITC majority opinion:

The Factual History of Negotiations Between Samsung and Apple [12, 13]

The history of negotiations between Samsung and Apple relating to the '348 and '644 Patents is largely undisputed. Apple released its first UMTS phone, the iPhone 3G, on July 11, 2008. At that time Samsung and Apple had an ongoing business relationship in which Samsung supplied Apple with a number of components for its products, including the iPhone 3G. Samsung introduced its first Android-based smartphone in 2009. On August 4, 2010, Apple accused Samsung of infringing Apple's patents.

On October 5, 2010, Samsung and Apple met in Washington, D.C. At the meeting, Apple proposed that the parties enter into a cross-license under their respective patent portfolios with Samsung to make a recurring payment of a running royalty on its smartphone and tablet sales, and the royalty to depend on the type of device sold. Apple structured the proposed royalty as $30 per smartphone and $40 per tablet, with the following discounts: (1) a 20 percent discount for Apple's cross-license to Samsung's portfolio; (2) a 40 percent discount if the device used an operating system licensed by Apple (i.e., Windows Mobile); (3) a 20 percent discount for using Apple-licensed processors; and (4) a 20 percent discount for "Not Using Proprietary Features" that Apple defined as "distinctive industrial designs, software platforms or feature sets." Apple's offer was set forth in a presentation shown at the meeting, although the hard copy that Apple provided to Samsung after the meeting omitted the financial terms. CX-0394C.0015. At the conclusion of the meeting, Apple informed Samsung [REDACTED| at the party's next meeting, which was scheduled for November 4, 2010 in Seoul, Republic of Korea.

On November 4, 2010, the parties met in Seoul. At the meeting, Samsung provided [REDACTED]. Samsung proposed [REDACTED]. Based on Samsung's view that [REDACTED], Samsung proposed that [REDACTED] Samsung's offer would result in [REDACTED]. Apple did not accept this offer.

On April 15, 2011, Apple sued Samsung in the Northern District of California seeking, among other things, damages for alleged patent infringemcnt, as well as an injunction that would prevent Samsung from selling Android-based devices and other products in the United States. Samsung filed suit against Apple in the Northern District of California on April 27, 2011. In that action, Samsung asserted a number of patents, including several that Samsung had declared may be considered essential to the UMTS standard.

On April 29, 2011, Apple sent Samsung a letter requesting specific terms for a unilateral FRAND license for declared-essential UMTS patents (i.e., a license to Samsung's patents without a cross-license of Apple's patents). This was the first time since the parties' discussions had begun that Apple had expressed an intcrcst in obtaining tcrms for a license limited solely to Samsung's declared-essential UMTS patents. Until then, the discussions had focused exclusively on [REDACTED]. At the time of Apple's request, Samsung had never been asked for a unilateral license to its declared-essential UMTS patents.

On July 25, 2011, Samsung sent a letter that offered Apple a license under all Samsung patents "that are essential to comply with past/current UMTS/WCDMA Standards . . . at a royalty of 2.4 percent for each relevant end product." The offer included a license to the '348 and '644 patents assertcd in this investigation. The offer letter also indicated Samsung's preference for a negotiated cross-license agreement.

Meanwhile, the Commission instituted this investigation on July 27, 2011, based on a complaint filed by Samsung that alleges, inter alia, infringement of the '348 and '644 patents. Apple, in turn, filed a complaint with the Commission, asserting infringement of seven Apple patents. In response to Apple's complaint, the Commission instituted Investigation No. 337-TA-796 on August 2, 2011. That investigation remains pending.

Apple sent negotiation letters to Samsung on August 18, 2011; October 31, 2011; and December 24, 2011. Apple's letters [REDACTED] Samsung continued to engage Apple through letters dated January 31, 2012; April 9, 2012; April 25, 2012; and May 11, 2012.

On September 7, 2012, after the close of briefing in this investigation and the completion of the trial in the Northern District of California litigation, Apple offered [REDACTED]. Apple proposed [REDACTED].

In letters dated October 16 and November 14, 2012, Apple also proposed [REDACTED]. On November 22, 2012, Samsung proposed that the parties meet face-to-face in December to [REDACTED]. In the event such efforts failed, Samsung stated that it would be willing to [REDACTED]. Samsung proposed that [REDACTED].

On December 3, 2012, Samsung responded to [REDACTED] that Apple had proposed in its September 7, 2012, letter. Specifically, Samsung counter-proposed that [REDACTED] . The letter referred to [REDACTED].

The parties then held face-to-face meetings in Seoul on December 12, 2012, at which they agreed to discuss [REDACTED] at another meeting that month. On December 17, 2012, Apple proposed [REDACTED]. Apple also proposed [REDACTED] . The following day, December 18, 2012, Samsung made a new proposal, whereby [REDACTED]. Samsung's offer [REDACTED].[14] The parties also discussed [REDACTED]. The parties, however, were unable to reach agreement and opted to meet again in January 2013.

On January 14, 2013, Samsung and Apple met for another face-to-face negotiation. At this meeting, Apple proposed [REDACTED]. Samsung rejected Apple's counter-offer because [REDACTED]. Although the parties were not able to reach agreement, they arranged to meet the following month.

Samsung and Apple met again in person on February 7, 2013. At this meeting, the parties focused on [REDACTED]. The parties drafted a memorandum of understanding that they agreed to take back to managcment reflecting this arrangement, [REDACTED].

After [REDACTED], Apple brought a counterproposal to a meeting with Samsung on February 20,2013.[15] Samsung declined the counterproposal. Apple's representatives called Apple management [REDACTED]. Apple's representatives informed Samsung that [REDACTED]. Samsung understood Apple's representatives [REDACTED].

On March 22, 2013, Samsung wrote to Apple and asked that it reopen negotiations. To our knowledge, Apple has not responded to that letter. Samsung asserts that its December 18, 2012, offer, as reflected in its March 22, 2013, letter, remains available to Apple.[16]

Apple submitted in its briefing to the Commission a report from its expert Mr. Donaldson. Mr. Donaldson calculated a FRAND royalty of, at most, $[REDACTED] per device for the '348 patent. Mr. Donaldson asserts that his caiculation uses the baseband processor chip, not the end device, as the royalty base because it is the baseband processor that incorporates the functionality ciaimcd in the '348 patent. Mr. Donaldson also states that his royalty rate reflects what the aggregate royalty bürden would be if all essential patent holders took the same approach (in order to avoid the so-called royalty stacking problem). Apple appears willing to pay this royalty (S[REDACTED] per device)[17] if Samsung obtains a section 337 violation determination from the Commission and prevails on an appeal of that determination to the Federal Circuit.

2. Analysis of the Parties' Negotiations

In light of the negotiations above, Apple has not proved a faiiure by Samsung to negotiate in good faith.[18] Apple does not dispute that on September 7, 2012, Apple proposed [REDACTED]. Apple indicated that [REDACTED]. On a unit by unit basis, such a valuation would result in [REDACTED]. Apple's December 17, 2012, offer also [REDACTED]. By December 18, 2012, Samsung was offering [REDACTED]. While we recognize that these offers have some ambiguity concerning the respective sales volumes of the two parties, we cannot say that Samsung's royalty offers have been unreasonable or lacking good faith. Moreover, the fact that representatives for both parties were able to reach a memorandum of understanding on February 7,2013, that [REDACTED] indicates that Samsung is ncgotiating in good faith and, to be colloquial, is playing in the same ballpark as Apple. In light of these fects, we cannot say that Apple has proven that Samsung is violating any assumed FRAND obligation.

Apple argues that Samsung was obligated to make an initial offer to Apple of a specific fair and reasonable royalty rate. The evidence on record does not support Apple's position. Apple's witness on ETSI policy and practice testified the ETSI IPR Policy document has "no precise definition of FRAND" and that it is expected that parties arrive at a FRAND license through negotiation. Tr. at 1442:17-1443:14 (Walker). Further, there is no legal authority for Apple's argument. Indeed, the limited precedent on the issue appears to indicate that an initial offer need not be the terms of a final FRAND license because the SSO intends the final license to be accomplished through negotiation. See Microsoft Corp. v. Motorola, Inc., 864 F.Supp.2d 1023, 1038 (W.D. Wash. 2012) (because SSOs contemplated that RAND terms be determined through negotiation, "it logically does not follow that initial offers must be on RAND terms").

Apple also criticizes Samsung's attempt to negotiate a cross-license of both parties' mobile telephone patent portfolios. We cannot say that Samsung's offers in this regard are unreasonable. The record contains evidence of more than 30 Samsung licenses that cover the '348 and '644 patents. See RX-173C, RX-178C, RX-188, RX-189C, RX-191C, RX-193C to -209C, RX-42 IC, RX-423C. All of those licenses include a cross-license to the licensee's portfolio. That evidence supports a conclusion that a portfolio cross-license offer is typical in the industry and reasonable.

Apple has offered no evidence to suggest that such portfolio cross-licenses are atypical in the industry.[19] In fact, Apple's own witness on ETSI policies affirmed that ETSI anticipates cross-licensing may be part of the process of negotiating a FRAND license between two parties. See Tr. at 1443 (Walker). Additionally, the negotiating history recounted above shows that Apple has made cross-license offers to Samsung.

We also note that commentators have stated that an offer to cross-license both parties' patents may be consistent with a FRAND obligation, for example:

The obligation to make a FRAND offer does not prevent the standard-essential patent owner from entering into an alternative licensing arrangement, such as a portfolio cross license, with an implementer of the standard. It will often make sense for private parties to enter into a deal that reflects their specific circumstances.

***

[A] FRAND offer to a party that owns standard-essential patents can be made conditional on the would-be licensee itself making a reciprocal FRAND offer.

Lemley, Mark A. and Shapiro, Carl, A Simple Approach to Setting Reasonahle Royalties for Standard-Essential Patents Stanford Public Law Working Paper No. 2243026, 5-6, 17 (March 20,2013), available at http://ssrn.com/abstract=2243026. That approach appears consistent with the expectations of ETSI, as has been explained on the record in this investigation. See Tr. at 1443 (Walker). Moreover, the ETSI declarations Samsung executed specifically contemplate that a FRAND license will involve "terms and conditions," not just a royalty rate. See RX-723.

Apple also complains that Samsung's offer is unreasonable because [REDACTED]. Apple's argument lacks merit for several reasons. First, as has been articulated in comments to the Commission from Qualcomm, Ericsson, and Samsung, a FRAND license could encompass a range of reasonable terms. A reasonable cross-license with one competitor may involve a balancing payment to Samsung while a reasonable cross-license with another competitor may involve Samsung making a balancing payment. Both types of agreements may be reasonable, depending on the two portfolios at issue and each party's respective volume of sales. For example, if one of Samsung's competitors has a less comprehensive patent portfolio than Samsung but a higher sales volume, that competitor could reasonably expect to make a balancing payment to Samsung in a portfolio cross-license. The dozens of patent licenses of record in this investigation reflect this industry practice. Compare, e.g., RX-191C ([REDACTED]) with RX-203C ([REDACTED]). In view of the record, we cannot say Samsung has been unreasonable in its negotiations with Apple.

We have already touched on a second problem with Apple's argument that it should not have to pay Samsung because [REDACTED]. Apple focuses on specific offers made by Samsung to Apple that [REDACTED]. But, as one court has recognized, satisfaction of the obligation flowing from a FRAND declaration is not measured by a specific offer, "be it an initial offer or an öffer during a back-and-forth negotiation." Microsoft Corp. v. Motorola, Inc., 864 F.Supp.2d 1023, 1038 (W.D. Wash. 2012). Thus, even if it were true that a FRAND agreement that requires Apple to pay Samsung ultimately is not reasonable (an issue on which we have no opinion), the offers that Apple criticizes do not necessarily demonstrate that Samsung has violated its FRAND obligations by failing to negotiate in good faith.

Apple also criticizes Samsung for tying some of its license offers to the settlement of litigation. We find Apple's argument to be somewhat hypocritical. The following sentence from Apple's Submission to the Commission on April 10, 2013, indicateis that Apple has no intention of paying Samsung any royalties until after the conclusion of litigation:

If the Commission were to determine that the '348 patent is valid, infringed, and enforceable--and it should not for all the reasons the ALJ found and Apple previously briefed--and if that judgment were affirmed on appeal, Apple would stand ready to pay FRAND royalties.

Resp. Apple Inc.'s Reply Submission at 20 (April 10, 2013) (public version April 12, 2013).

Apple's position illustrates the potential problem of so-called reverse patent hold-up, a concern identifed in many of the public comments received by the Commission. In reverse patent hold-up, an implementer utilizes declared-essential technology without compensation to the patent owner under the guise that the patent owner's offers to license were not fair or reasonable. The patent owner is therefore forced to defend its rights through expensive litigation. In the meantime, the patent owner is deprived of the exclusionary remedy that should normally flow when a party refuses to pay for the use of a patented invention.

[section continues]

Footnotes

Footnote 12: Many of the facts recited in this section were presented to the ALJ and relied upon by him in concluding that Apple had not proved that Samsung breached a FRAND obligation. Other facts in this section were provided by the parties in response to the Commission's notice issued on March 13, 2013. Because Apple faiild to prove what Samsung's FRAND obligations may or may not be, our determination herein would be the same even if we limited our review to the negotiation history presented to the ALJ. In any event, the facts recited here appear to be undisputed and are now of record.

Footnote 13: Commissioner Aranoff dissented from the Commission's March 13, 2013, decision to seek additional writtcn submissions, including supplemental briefing and evidence regarding the course of license negotiations between Samsung and Apple. See Dissenting Memorandum, EDIS Doc. ID 505695 (March 13, 2013). Given that Apple failed to prove a FRAND-based affirmative defense before the ALJ, she does not believe Apple should have received a second opportunity to present evidence or argument regarding its course of dealing with Samsung related to licensing. Accordingly, while she does not necessarily disagree with the following discussion, she does not view it as a required element of her analysis in this investigation.

Footnote 14: Samsung contends that Apple's 2012 sales of smartphones and tablets are approximately [REDACTED] units per year. [REDACTED], Samsung's offer would require Apple to [REDACTED].

Footnote 15: The Commission is not aware of the terms of Apple's counter-proposal.

Footnote 16: Samsung reiterated in March 2013 that its [REDACTED] offer [REDACTED] of December 2012 remains open, and that the offer [REDACTED]. See Samsung Reply Br. in Resp. to March 13, 2013, Notice at 18 (April 10, 2013) (citing Exs. C44, C64, G).

Footnote 17: By way of comparison to Samsung's [[ ]] offer made on December 18, 2012, we calculate that if Apple sold [REDACTED] Mr. Donaldson's caiculated royalty of $[REDACTED] per device, Apple [REDACTED].

Footnote 18: We emphasize that our analysis of these negotiations is predicated on assumptions about Samsung's obligations flowing from its FRAND declarations.

Footnote 19: The Commission notes that none of the licenses submitted in this investigation are to a single declared-essential patent, rather they are all portfolio cross-licenses, in some instances covering [REDACTED]. See RX-173C, RX-178C, RX-188, RX-189C, RX-191C, RX-193C to 209C, RX-421C, RX-423C. In addition, [REDACTED], the record supports a conclusion that a common industry practice is to use the end-user device as a royalty base. Id.

Footnote 20: Commissioner Aranoff does not join this paragraph.

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