Yesterday's final (though appealable) judgment by the Munich I Regional Court--granting Qualcomm a Germany-wide injunction against iPhones older than the 2018 models over a power-efficient enveloper tracker chip design--is not merely wallet paper to decorate Qualcomm's or Quinn Emanuel's offices. Qualcomm immediately announced that posting the bond or making deposit required by the court for the right to enforce the injunction during an appeal (something that Reuters initially got wrong) "will be completed within a few days." Apple, predictably, told the media that it was going to appeal. Otherwise the bond or deposit wouldn't be necessary, but no one could have doubts for even one second whether Apple would appeal.
There are technically two cases (one in which Apple Inc. is the defendant and another one where two European Apple entities, including the German company operating 15 local Apple Stores, are targeted). In the aggregate of the two cases, Qualcomm is now going to post a bond or make a deposit of more than $1.5 billion. As Judge Dr. Matthias Zigann explained yesterday, the amount is 60% less than what Apple's counsel had demanded, and the court felt the massive reduction was justified by the fact that the 2018 iPhone models aren't going to be affected (only iPhone 7, iPhone 7 Plus, iPhone 8, iPhone 8 Plus, and--but it wasn't on sale anymore anyway--the iPhone X). Qualcomm had disagreed with the amount, but failed to present facts that would have persuaded the court to slash it further.
The liquidity cost to Qualcomm will be significant, as an appeal could take about a year to be resolved: we're talking about tens of millions. Even though Qualcomm's present litigation costs are huge, as are PR expenditures that according to the New York Times even included a fake "Draft Tim Cook 2020" website, that's still a lot. But from the perspective of Qualcomm shareholders, anything that would significantly increase the chances of settling the dispute with Apple--plus, ideally, from Qualcomm's perspective, getting rid of baseband chipset competition from Intel--may seem worth a lot more than this. However, the court didn't require $1.5B only to cause a liquidity cost of maybe $30-$50 million. It's because there is, just like there would be in the same situation in a U.S. litigation, a clear and present danger of staggering wrongful-enforcement damages.
Let's look--from a Qualcomm shareholder value perspective--at the costs and benefits, risks and opportunities. After an itemized analysis, we'll get to whether it's worth it.
Please note that the appeals court can stay enforcement of the injunction for the duration of the appeal (and, at the end of the appeal, may overturn the injunction as a whole). The analysis here is, therefore, based on a pure hypothetical: on the assumption, for the sake of assessing risks and opportunities, that the appeals court would not stay enforcement, despite Apple presumably attacking the lower court's ruling from multiple angles now.
Potential benefit #1: immediate leverage over Apple
Apple has already announced that older iPhones would now be removed from the 15 German Apple Stores, though customers will still be able to buy them in other stores and from carriers (for the time being).
Based on what I've read on different websites, the prices of the newer iPhones have recently come down a bit. Without a carrier contract, the 4.7" iPhone 7 is listed on Apple's German website at a price starting at €519 (7 Plus: €649). The iPhone 8 starts at €679 (4.7" display) and €789 (5.5" Plus size). The 2018 iPhone XR, with a 6.1" display (a larger net screen size than the old "Plus" format though the device as a whole is smaller), starts at €849. Looking at those prices, I believe the iPhone 8 was just available for consistency's sake, but if anyone had told me they wanted to buy one now, I'd have urged them to get an XR because the incremental value far, far exceeds the incremental price, making a purchase of a new iPhone 8, at this point, an illogical decision. However, if someone had told me they wanted an iPhone, and it should be the cheapest one, but they wouldn't want a used one, then I'd still have recommended the iPhone 7. In fact, I'm still using a 7 Plus, and a couple of months ago I had its screen replaced at a cost of about €200, which I thought was a smart choice for potentially skipping one product generation.
Obviously, Apple can always reduce the entry point in Germany by just lowering the price of the smallest iPhone XR. But presumably some price-sensitive buyers who want a contract-free new phone for about €500 would have to go elsewhere, or wait.
But it's not just about what the 15 German Apple Stores do immediately. The analysis must be more comprehensive.
The court ordered, besides an injunction against new sales, a recall from resellers (carriers, retailers) and the destruction of all products returned by resellers. With the Holiday Season and everything, it may take a couple of weeks before a letter from Apple to resellers goes out and urges them to return those products. Small resellers may be impressionable; the likes of T-Mobile are themselves exposed to patent infringement litigation all the time, so I wouldn't be surprised should their participation in the recall effort be, well, characterized by a lack of enthusiasm and speed, or even an outright lack of cooperation. At least that's what other patent holders (such as IPCom) alleged in the past. The injunction binds three Apple entities, but no third parties. Theoretically, those third parties must and do know that a willful patent infringement in Germany can even be deemed a criminal offense, but again, those are deep-pocketed, sophisticated organizations and not that easily scared.
In fact, those larger resellers are so deep-pocketed and sophisticated that, if they needed any new supply of iPhone 7 or iPhone 8 units, they could just buy the thing from Austria (not sure whether this works for carrier-specific phones, but certainly for unlocked ones). The German injunction doesn't apply to Austria (a bordering EU member state with the same official language, German), nor does it involve customs seizures (which Qualcomm would have to seek separately).
If Qualcomm sought to accelerate the recall at all costs, it would have to seek injunctions against the resellers. That would position Qualcomm as a patent troll, and would make Qualcomm some additional enemies. And in the case of that envelope tracker patent, Qualcomm would face a high risk of losing any subsequent case, given that the technical win over Apple was not based on conclusive evidence of infringement but on the sequence of pleadings (we'll get to that again in the public relations context).
This is now totally speculative (I can guarantee that no direct or indirect source of any kind said or even hinted at anything like it), but what if Apple actually had the option, at some point or maybe at any time of its choosing, to put all the technical facts on a court's table, and if those facts would then be more or less certain to result in a finding of non-infringement just like at the ITC? Maybe it's just that as long as the damage is minor, Qorvo's secrets will be protected, but at some point, the damage might exceed the value of those secrets? The problem for Qualcomm is that until all appeals are exhausted, those facts can still be put on the table and result in a wrongful-enforcement damages claim against Qualcomm. If Apple's calculus was (again, note what I just said about how totally speculative it is!) that they're going to win this sooner or later anyway, then there wouldn't be that much leverage: while lost sales are always a bit hard to prove (especially in a case where you still have multiple iPhone models on sale and where third parties may still offer them for quite some time), the costs of a recall and of the destruction of such devices can be accounted for, and that could cost Qualcomm dearly in the end.
So the leverage Qualcomm gets from the Munich injunction isn't huge (new iPhones are in most demand and are most profitable). At best, it's "significant but limited," but if Apple can simply play a joker anytime by presenting Qorvo's technical secrets, then it's extremely limited, with the possibility of this ultimately even becoming a net negative for Qualcomm due to wrongful-enforcement damages.
The possibility of Apple actually having a joker up its sleeve is just due to the fact that yesterday's decision doesn't have the kind of technical basis--a definitive identification of the presence of each and every claim limitation in the accused embodiment(s)--that a solid patent infringement finding would need, and even "solid" ones are often overturned. If Qualcomm had asked me whether it's a good idea to enforce, I'd have said: guys, if you had a real infringement finding here instead of an agnostic ruling (where the court itself said they don't know whether there really is an infringement), then, yes, I'd probably understand why you'd take your chances and enforce. But be realistic: the appeals court may simply consider the lower court's agnosticism reversible error (for instance, because of Qualcomm's German lawyers simply not having been cooperative regarding the chipset schematics the same law firm had obtained in the U.S. for the explicit purpose of presenting them in Germany), or Apple may have a joker and it may do away with agnosticism--and then your case here will go up in flames, as will a fair amount of money. And by the way, the deposit is not an upper limit: it's just what the court thought might be at stake, but ultimately you'll be liable for actual damages, which can be more (or, obviously, also less).
Potential benefit #2: war psychology
Even if the questionable leverage (see the previous section) alone didn't justify this risk exposure and the liquidity costs, Qualcomm would likely be prepared--and, honestly, well-advised--to pay a certain premium for displaying a take-no-prisoners attitude to Apple and any other party (Huawei, for instance) because it could then get better results in any future negotiation.
For large corporations enforcing their IP, this is always a major consideration. And it conversely applies to Apple in this case: Apple can show that even if someone does what Qualcomm is doing, they still won't give up their antitrust, contract, patent exhaustion and other claims against Qualcomm.
Potential benefit #3: public relations (PR) and investor relations (IR)
It's been clear over these past two years that no party to patent and patent-related antitrust litigation has ever made a greater PR effort than Qualcomm; and some analysts also find some extreme discrepancies between what Qualcomm tells the courts and what it tells shareholders. PR and IR really drive some of what Qualcomm is doing here, including when they raise hopes of a near-term settlement (apparently Qualcomm's #1 IR objective).
If any of us got slapped with antitrust fines in different places and had to defend ourselves against competition enforcement authorities on three continents in parallel, we'd obviously also like to be able to distract from our own troubles and point fingers at the #1 adversary.
The following quote contained in yesterday's press release contains a false claim, however:
"Two respected courts in two different jurisdictions just in the past two weeks have now confirmed the value of Qualcomm's patents and declared Apple an infringer [emphasis added], ordering a ban on iPhones in the important markets of Germany and China," said Don Rosenberg, executive vice president and general counsel, Qualcomm Incorporated.
The emphasized passage--"declared Apple an infringer"--is the opposite of what the Munich court's own press release says. I'll copy some of the court's original wording below (in German, but I'll translate it immediately):
"Wie der Chip tatsächlich funktioniert, war zwischen den Parteien streitig, nach Auffassung der 7. Zivilkammer aus zivilprozessualen Gründen gleichwohl nicht aufzuklären. Die Kammer hatte ihrer Entscheidung vielmehr aus prozessualen Gründen zugrunde zu legen, dass der Chip so funktioniert, wie die Klägerin es behauptet [...]"
"Die Klägerin konnte in Ermangelung der ursprünglichen Schaltpläne des Chip-Herstellers zu der Funktionsweise des Chips nur anhand eines Teardown-Reports vortragen, den sie anhand eines reverse engineering-Prozesses hatte erstellen lassen. Ein Teardown-Report kann Ungenauigkeiten aufweisen. Die Kammer ging aber aus prozessualen Gründen davon aus, dass der Klägerin mehr nicht abverlangt werden konnte, weil die Schaltpläne des Zulieferers nicht öffentlich zugänglich sind. Die Beklagtenseite bestritt zwar, dass der Chip so funktioniere, wie es die Klägerin behauptete, sah sich aber wegen Geheimhaltungsinteressen ihres Zulieferers außerstande vorzutragen, wie der Chip denn stattdessen funktioniere. Das aber wäre nach Auffassung der Kammer für ein ausreichendes Bestreiten erforderlich gewesen. Weil es an diesem substantiierten Vortrag fehlte, musste die Kammer die Ausführungen der Klägerin zur Funktionsweise des Chips unterstellen und durfte diese nicht näher aufklären."
My translation:
"How the [accused] chip actually works was subject to a dispute between the parties, but [the panel of judges] found for procedural reasons that it did not have to obtain clarification. Under applicable procedural rules, the panel felt forced to base its decision on how [Qualcomm] alleged it worked [...]"
"Qualcomm, for lack of access to [Qorvo's] original chipset schematics, was limited to pleading its allegations based on a teardown report, which it had commissioned on the basis of a reverse-engineering effort. A teardown report can involve inaccuracies. However, the panel came from the assumption that [Qualcomm] could not be required to present more [than the teardown report], given that [Qorvo's] chipset schematics are not publicly accessible. [Apple] denied the accuracy of [Qualcomm's] allegations, but declared itself unable, due to confidentiality obligations, to explain how the chip actually does work. However, such explanation was deemed indispensable by the panel in order for [Apple's] denial to be sufficiently substantiated. In the absence of a substantiated denial, the panel had to take [Qualcomm's] word for it and did not have authority to investigate further."
Note that the court acknowledged it didn't actually clarify how the accused Qorvo chip works (because it concluded the pleadings didn't warrant it), and that Qualcomm's teardown report may have inaccuracies that are inherent to such reports.
So the Munich court stopped far short of declaring Apple an infringer--and even if it had (as it had not), the ITC would not have identified an infringement in a parallel case (with only subtle differences), suggesting that Apple at least had a good-faith basis for what it did.
In the PR/IR context, there's a potential upside for Qualcomm (distraction, display of strength etc.), but also a very significant downside if this goes wrong. In the disputes between Apple and Android device makers (and Microsoft and one Android device maker), no wrongful-enforcement damages were ever determined because the disputes were settled long before. But the Qualcomm situation is so extreme that this could become the first (or at least the first famous) smartphone case in which wrongful enforcement will actually be adjudicated in the end, and that might not end well for Qualcomm's credibility.
Potential benefit #4: Chinese psychology
Qualcomm may hope that the more noise it makes about the German injunction and its enforcement, the more comfortable China may feel that even the leading European patent jurisdiction allows Qualcomm to enforce some patent now. However, there's absolutely no technical overlap with the software patents at issue in China, so this effect should be very limited, if not negligible or zero.
Quick overview of the downside
I can keep this final section short because some of the downside was already discussed in connection with certain limits to the upside, and scenarios in which there might be no upside.
Qualcomm's antitrust worries are still going to be largely the same with respect to Apple, and potentially even worse with respect to the European Commission (which may be very concerned about how Qualcomm seeks to leverage Europe as a battleground, targeting specifically Intel-powered iPhones here), or the Federal Trade Commission (whose trial will begin on January 4), which can see the extreme lengths to which Qualcomm is prepared to go in its patent enforcement against Intel-powered iPhones.
The only way Qualcomm could avoid that everyone sees an anticompetitive intention (and an apparent fear of Apple's antitrust and contract claims) would be for Qualcomm to behave like your average IP enforcer concerned about protecting innovations against free-riding. But Qualcomm behaves precisely in the opposite way, and sophisticated agencies like the FTC and DG COMP will figure it out all too easily:
On December 8 I blogged about Qualcomm's proposed findings of fact and conclusions of law in the FTC case. I mentioned that there was a passage that almost raised some interesting estoppel questions. I meant paragraph 420:
Qualcomm does not seek to prevent others from practicing its cellular SEPs to manufacture or sell components of end-user devices; it neither asserts its SEPs against competing chip makers nor seeks to collect royalties from them.
The patent-in-suit in Munich is not an SEP, but here, too, Qualcomm simply doesn't seem to be truly interested in efficient IP enforcement: instead of suing the chipset maker (Qorvo), it sues Apple--over Intel-powered devices.
As the Munich court explained yesterday, Qualcomm could also just sit on the injunction without enforcing it immediately. In my opinion the most logical thing here for an IP enforcer would have been to do just that--and maybe to begin enforcement after collecting a couple more injunctions against the same devices. In that case Qualcomm could also try, with help from an appeals court, to avoid duplicative (additive) deposits.
The functionality at issue here, and the devices at issue (not the 2018 models), are factors that just make a $1.5 billion deposit and all the risks involved (such as having to pay later for the cost of destroying lots of iPhones returned by resellers) totally disproportionate for a minor invention. It's like nuking a kid that's stealing some candy.
Given all the ramifications, and the low likelihood of this bringing Apple back to the negotiating table (it might even make a settlement harder), I think this enforcement effort will ultimately prove to be an inefficient thing for Qualcomm to do at best, and a strategic mistake at worst.
Qualcomm's lawyers are happy about what is technically a win; its PR and IR departments and agencies may also find it useful in the short term; but all things considered, and apart from the fact that the appeals court may soon stay enforcement of the injunction anyway, it looks like it's going to be a Pyrrhic victory.
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