Apple touted its ‘strong and growing’ UMTS patent portfolio in cross-licensing offer to Samsung
This week, a variety of unredacted Apple v. Samsung documents were filed after Judge Koh denied the parties’ requests to seal them. Many of them relate to the jury misconduct issue, which (as I’ll explain at the end of this post) is outside my focus. The part that’s really most interesting to me is the one about FRAND licensing issues. In this regard, the single most informative document that came to light this week is a letter dated April 30, 2012 from Apple’s IP licensing director Boris Teksler to his counterpart at Samsung, Seongwoo Kim. I have uploaded the letter to Scribd.
For the most part, the three-page letter criticizes Samsung’s royalty demand for its 3G/UMTS-essential patents: 2.4% of the average selling price of a licensed device. Apple points Samsung to its own statements about a reasonable royalty rate and base in a dispute it had with Ericsson a few years ago. Before I get to a couple of interesting tidbits found in that first part of the letter, I’ll go into more detail on the final part of the letter (roughly half of the last page), which is an Apple proposal of terms under which Samsung would be able to license Apple’s UMTS-essential patents if only it accepted that the royalty rate for its own UMTS-essential patents would be determined in accordance with the same principles underlying Apple’s offer.
I have not seen Apple assert any standard-essential patent in litigation, and I have countless Apple lawsuits on my watch list. For a long time I doubted they even had any meaningful number of SEPs. But times have changed, and Apple now does own a significant number of SEPs. In its April letter, Apple’s Mr. Teksler refers to “Apple’s own strong and growing UMTS-essential portfolio, including the large set of patents that Apple recently acquired from Nortel”. I don’t know about the details of the Nortel deal. Many Nortel patents still belong to a group named Rockstar Bidco, but Apple’s letter indicates that it also acquired some directly. At any rate, Apple is no longer a “have-not” with respect to cellular SEPs.
This is what Apple proposed to Samsung:
“Apple is willing to license its declared-essential UMTS patents to Samsung on license terms that rely on the price of baseband chips as the FRAND royalty base, and a rate that reflects Apple’s share of the total declared UMTS-essential patents (and all patents required for standards for which UMTS is backward-compatible, such as GSM)–provided that Samsung reciprocally agrees to this same, common royalty base, and same methodological approach to royalty rate, in licensing its declared-essential patents to Apple.
Apple estimates that this approach, which implements the true meaning of and requirements imposed by FRAND, results in a $.33 (thirty-three cents) per unit royalty for the Apple patents. Apple will today license its declared-essential UMTS patents to Samsung at that rate, provided Samsung reciprocally agrees to the FRAND principles that result in that rate. This rate would be applied to all Samsung units that Apple has not otherwise licensed. Samsung would likewise need to agree that it would only charge royalties on Apple units that Samsung has not otherwise licensed.”
The part about “not otherwise licensed” is meant to address patent exhaustion, which is also a bone of contention between these two companies.
Apple asked for a response by May 7, 2012, and whatever (if anything) Samsung replied, we know that no agreement was struck. Almost five months later, they still haven’t agreed.
I don’t doubt that Apple would have liked Samsung to accept its offer. And Apple’s proposed per-unit amount may seem low, but it doesn’t strike me as being ridiculously low. In those regards, it was a serious offer. But it’s important to look at the letter as a whole, and the offer in particular, against the backdrop of an ongoing EU antitrust investigation of Samsung’s use of SEPs against Apple and the trial that both parties were preparing for. When Apple wrote this letter, and whenever Samsung wrote its own letters in this context, either party knew that the ultimate audience would include not only the formal recipient but also the European Commission, Judge Koh, the jury, the ITC (Samsung also asserted a couple of UMTS declared-essential patents against Apple in an ITC complaint) and, potentially, the general public. Yes, they knew that even bloggers like me would get to read and write about that letter.
With such a broad audience in mind, the primary objective of either party is to demonstrate that it is constructive, and to put all the blame for a failure to agree on the other side. That is, by the way, what presumably happens every time that parties who aren’t ready to agree are formally or informally ordered by a court to hold high-level court-moderated settlement talks. They will sit down in front of a magistrate judge and play the same blame game. That’s why there usually aren’t any results in the end.
Apple’s letter twice references the fact that the Mannheim Regional Court cleared Apple of infringement of the first three UMTS SEPs Samsung asserted against it in Germany. The related decisions came down in January and March — not long before that letter. When I reported on the dismissals of those complaints (which Samsung appealed to the Karlsruhe Higher Regional Court, where I expect the related hearings to take place next year), I already assumed that non-infringement was the reason. Validity issues result in stays — not dismissals — of German patent infringement cases. There could also have been a patent exhaustion issue, but after Samsung claimed that the reasons for each of the three dismissals were patent-specific, non-infringement was by far and away the most likely reason. Now, thanks to Judge Koh’s denial of a sealing motion in California, this is an established fact.
Apple argues that Samsung has a “pattern of over-declaration” in terms of declaring too many patents essential to the standards in the development of which it participated. In other words, Apple says Samsung declared many patents essential even though they aren’t inevitably infringed if the standard is implemented. Apple cites a 2009 Fairfield Resources International study, and it also says that “the German court recently found none of them is truly essential”. Obviously, if the court had deemed them essential, Apple would have been held to infringe them — there was no dispute about whether Apple implements 3G/UMTS.
Since that letter, there have been some other court decisions. Samsung did convince a court in the Netherlands that Apple infringes one of its asserted wireless SEPs. It won’t get an injunction, and it won’t get 2.4%, but it will get a FRAND rate to be determined by the court since the parties can’t agree. A couple of Samsung SEPs were also put before the California jury in August, which did not identify an infringement — so if the jury was right, those patents weren’t essential either. A preliminary ruling by an ITC judge cleared Apple of infringement of two other Samsung SEPs. In a Korean court, Samsung prevailed on two wireless SEPs. And it has brought a couple of new SEP cases in Germany. A trial was recently held on one of them, and there are some FRAND issues, but a finding of infringement is certainly possible. So it’s not like Samsung doesn’t have any truly UMTS-essential patents at all, but Apple argues that many of the ones Samsung claims to be essential aren’t, which has implications for what the reasonable royalty rate should be.
What shows the unacceptability of Samsung’s 2.4% demand is the following extrapolation:
“Even putting aside the over-declaration issue, and giving full effect to Samsung’s own declarations, Samsung’s demand would imply approximately a 44% aggregate royalty burden on UMTS products. This is far above the 5-7% range that Samsung argued (in its earlier litigation with Ericsson and InterDigital) was the appropriate range for aggregate royalties.”
Apple wants to know whether anyone ever paid Samsung a 2.4% royalty on those patents. By the way, in all of the court documents I’ve seen so far I also haven’t seen any indications that Motorola Mobility ever received the 2.25% royalty it demands — it appears to have received such a percentage in one or more cases, but not just for patents essential to a single standard like H.264 or IEEE 802.11. Here’s how Apple challenges Samsung to put evidence on the table that its 2.4% rate has any market acceptance:
“Can Samsung provide Apple with any evidence of any company paying Samsung a royalty similar to the 2.4% of ASP [Average Selling Price] terms that Samsung has requested from Apple? Can Samsung provide Apple with any evidence that Samsung has ever told a company other than Apple that Samsung’s declared-essential UMTS patents should be valued at 2.4% of ASP, for either a one-way license to those patents, or as part of a larger cross-license? You have previously suggested that you cannot share license-terms information because of confidentiality agreements. But Samsung’s own valuations of its own patents, as conveyed to other companies, constitute information that is within Samsung’s sole control. Again, can you provide any evidence that Samsung has ever negotiated a license based on a proposal that Samsung’s declared-essential UMTS patents be valued at 2.4% of ASP?”
There’s no question to me that Samsung’s 2.4% demand is driven by a desire to create a situation in which Apple will, in order to bring that royalty rate down to an acceptable level, make Samsung an offer of a comprehensive cross-license agreement. I don’t think Samsung even wants Apple to accept the 2.4% deal — and it knows that Apple can’t because otherwise it would face similar royalty demands from other UMTS SEP holders, which would over time result in the extrapolated 44% aggregate royalty burden Apple mentioned in a passage quoted further above. What Samsung wants is for Apple to say no so it can use this as an excuse to pursue injunctive relief — and so far no court outside of Korea has accepted this excuse. Even in Germany, Samsung has reached a point at which the courts may now defer to the European Commission’s Directorate-General for Competition on these FRAND licensing issues.
Since Apple needs to protect its intellectual property and ensure product differentiation, it has no choice but to defend itself vigorously against these claims. If Apple didn’t have any UMTS SEPs, it would still be entitled to a license on FRAND terms. But the fact that it has acquired a significant number of them puts it into a position in which it can make reciprocal licensing offers such as the one I discussed further above. And that helps Apple in the perception game that is taking place here.
FOSS Patents won’t cover the jury misconduct debate
I already noted above that the whole jury misconduct issue Samsung has raised after the August 24 verdict is nothing I want to focus on. I reported on Apple’s position that Samsung’s jury misconduct allegation is “frivolous on its face”. I’m not even going to try to do any further research on 20-year-old lawsuits involving Seagate, the husband of a lawyer working for Samsung’s law firm (but who didn’t appear to be involved with this case), and the jury foreman. My focus is on patent issues. From a patent point of view, the jury verdict made sense in many ways, especially considering the worldwide track record of Android’s proven infringement, though I said before that for statistical reasons I don’t believe all 12 patents-in-suit are really valid as granted and also identified some other issues, such as an item of the damages award that is pretty clearly contrary to law.
If there’s going to be a new trial, there will be a new trial, and the outcome could be better or worse for Samsung. It won’t be easy for Samsung to get a new trial, but I understand why it wants one. The allegations that I’ve seen are certainly not baseless, but I believe they are a bit far-fetched. That said, if I were in Samsung’s position, I would try the same thing. Samsung’s course of action is legit. So is Apple’s defense of a verdict that it more recently described as “an unshakeable testament to […] the importance of Apple’s claims against its Android competitors”.
There are great sources if you look for more information on this, such as Reuters (including ThomsonReuters News & Insight) and the San Jose Mercury News and some IT news networks. I’m going to leave the jury misconduct-related part of the reporting to them. They have better access to the relevant information, and to the individuals involved. Rather than trying to be all things to all people, I’ll focus on infringement, validity, injunctive relief, and, of course, FRAND. And I’ll continue to work hard to offer you the unique benefits of cross-jurisdictional monitoring and analysis.