There's a huge new patent licensing dispute in town, and it's hard to see how Apple could realistically win it unless Ericsson made an unlikely mistake in structuring its recent settlement with Samsung. What Ericsson is asking for is FRAND, not only in my opinion but simply in light of a recent decision by the Fifth Circuit in HTC v. Ericsson.
In 2015, it took about a year of litigation between Ericsson and Apple before a new license agreement was signed. That one is going to expire soon--presumably by yearend--but litigation has already commenced. We are not yet talking about any patent infringement assertions (which are barred while a license is in effect), but a declaratory judgment complaint that Ericsson brought against Apple in the Eastern District of Texas on Monday, effectively asking the court to declare that Ericsson's royalty rate of $5 per device is FRAND and that Ericsson's overall conduct is FRAND-compliant (this post continues below the document):
21-10-04 Ericsson v. Apple ... by Florian Mueller
Timing: At first sight, it may seem premature that Ericsson should run to the Marshall, TX courthouse three months prior to the presumed expiration of an existing license agreement. But Apple can't complain. According to Ericsson's new complaint, what happened during the negotiations before the previous agreement expired was that "while Ericsson’s license with Apple was still in force, Apple filed a surprise suit against Ericsson attacking seven Ericsson U.S. patents as not essential and also seeking, in the alternative, a patent-by-patent FRAND adjudication."
Interestingly, Ericsson already reached out to Apple in December 2020 to start discussions of the terms of a renewal. Ericsson knew there was going to be a high risk of a major disagreement. Not only is Apple generally known to play hardball with SEP licensors just like any other suppliers, but Ericsson also took note of Apple's public statements on SEP licensing terms after Ericsson's own 2017 ex ante disclosure of its 5G royalty rates.
U.S. venue: In an international dispute, the race to the courthouse always has something to do with venue choices. Apple dreads Ericsson's choice--the Eastern District of Texas--so much that it doesn't even operate any Apple Store there anymore as any permanent business presence weighs against a motion to transfer a case out of a district. Ericsson, by contrast, has major operations in the Eastern District of Texas and frequently litigates there, recently with a spectacular success against HTC that was upheld by the regional appeals court, the United States Court of Appeals for the Fifth Circuit, which is great for the Swedish wireless innovator and terrible for the smartphone luxury brand from California.
In the venue and jurisdiction part, Ericsson's complaint discusses Apple's "Texas ties" and growing Austin campus. However, Austin is in the Western District of Texas. While Ericsson also argues that Apple sells products to customers in the Eastern District and that it negotiated with Ericsson executives based there, I doubt that Apple would even want to go to the Western District, which has been so good to patent holders in recent years--and where Ericsson's Fifth Circuit victory over HTC would be controlling law, too. If Apple wants to go west, it will want to go much further west, i.e., to the Northern District of California, its home district. But I can't see how Judge Gilstrap would grant such a motion, and the predictable denial would hardly be overturned by the Federal Circuit if Apple brought a mandamus petition.
China: Apple is a major investor in China compared to other foreign companies. In August, the Supreme People's Court (SPC) of the People's Republic of China affirmed a jurisdictional decision in an OPPO v. Sharp case. Apple could try to seek a global royalty determination in China, but other than manufacturing it wouldn't really have a strong argument--and even though some (especially in the EU) misapprehend those Chinese decisions, it's not like the Chinese courts always agree that they should set global licensing terms: their decisions are highly case-specific. Should Apple try anything in China, Ericsson would likely be able to obtain an antisuit injunction in Texas, or at a minimum an anti-antisuit injunction against an actual or potential Chinese antisuit injunction.
UK and Germany: Those two European countries--one of them in the EU, the other not anymore--will become key venues once the existing license agreement has formally expired without a new deal being in place. In those jurisdictions, Ericsson's strategy would predictably be to obtain SEP injunctions unless Apple takes a global portfolio license. In the UK, the court will set terms that Apple will have to accept lest it be enjoined on a UK-wide basis. Apple is losing big-time against Optis, a group of non-practicing entities that also assert former Ericsson patents by the way. A Form of Order hearing will be held in London next Monday after Optis obtained a favorable judgment, and Apple will come under serious pressure in Mr. Justice Meade's courtroom. In Germany, the courts would not engage in rate-setting at the infringement stage. The big question would be whether Apple could avoid a sales ban by means of a § 315 licensing offer (i.e., taking a license but leaving the royalty determination to a subsequent court proceeding if the parties fail to agree). In the meantime, there would already be a decision from Texas on the FRAND compliance of Ericsson's royalty demands.
Alston & Bird again: The lead attorney and first signatory under the new Ericsson v. Apple complaint is Dallas-based Alston & Bird partner Theodore "Ted" Stevenson, III. He helped Ericsson defeat HTC, and that case is the one for Ericsson to build on in the new dispute with Apple. Apple's phones are way more expensive than HTC's, so if HTC owes Ericsson up to $4 per device and for 4G, there's no reason Apple shouldn't pay $5 and for 5G. The parties appear to be so far apart that Apple isn't even prepared to pay what the courts have already found Ericsson can reasonably demand from HTC.
As in most Ericsson patent cases in the U.S., such as the recently-settled dispute with Samsung, the firm of McKool Smith is also involved. Alston & Bird is frequently seen on Nokia's side, but by now it's apparently the go-to firm for both major Northern European wireless SEP holders.
ETSI IPR Policy: Just like in Ericsson's dispute with HTC, the applicable FRAND framework is the ETSI IPR Policy.
Past dispute with Qualcomm hurts Apple in two ways: From early 2017 to the spring of 2019, Apple was embroiled in SEP-related litigation with Qualcomm and supported (already during the investigations preceding litigation) the Federal Trade Commission against the San Diego chipmaker. Ultimately, Apple needed 5G chips--and caved. The FTC kept fighting, but was trounced in the Ninth Circuit, and then didn't even dare or couldn't build a majority (of the commissioners) to file a cert petition with the Supreme Court. While the Ninth Circuit's Qualcomm decision isn't formally binding in the Fifth Circuit and the Eastern District of Texas, it does help Ericsson psychologically. What's more important is that Qualcomm's lead counsel against Apple, Cravath's Evan Chesler, presented in open court (at a time when the parties had actually already signed a settlement, but opening arguments had not been halted) an Apple-internal document according to which the iPhone maker made it a strategic objective to devalue SEPs. Ericsson's new complaint contains six occurrences of the verb "to devalue" and four of the noun "devaluation." In paragraph 44, Ericsson says that "Apple's attacks [meaning public statements directed against Ericsson's 5G royalty rates as well as similar behavior against other major SEP holders] are part of a self-described strategy to devalue standard essential patents" (emphasis added).
Portfolio litigation: Ericsson says that according to a 2019 FRAND policy statement by Apple, Ericsson should have to prove that each and every SEP to be licensed is actually valid and infringed by Apple, which is obviously not doable and simply not the way the courts view it. The following passage makes a compelling case against patent-by-patent country-by-country litigation:
"Apple knows that it would take hundreds of millions, if not billions, of dollars and several human lifetimes to individually adjudicate infringement, essentiality, and validity of the thousands of essential patents owned by Ericsson, then individually value them, in dozens of courts worldwide. By publicly committing to this licensing methodology, Apple intentionally foists the threat of enormous transaction costs on patent owners as a tactic to make them acquiesce to sub-FRAND royalty rates offered by Apple."
Royalty base: Ericsson argues that the price of the end product (in this case, the insanely overpriced iPhone) needs to be considered in a FRAND determination. Apple, however, makes the smallest salable patent-practicing unit (SSPPU) argument, which Ericsson overcame in its dispute with HTC in Texas as well as the Fifth Circuit.
Ericsson-Samsung terms: The overall circumstances suggest to me that Ericsson is going to win this, and the only leverage Apple has is "hold-out." Ericsson needs patent licensing revenues. Apple can try to delay the inevitable. Ericsson will most likely get a favorable decision in the U.S., and it can obtain sales and import bans in multiple jurisdictions, some of which will expect Apple to take a global license on Ericsson's FRAND terms. If there is any risk here to Ericsson, it's purely hypothetical and most likely a non-issue: Ericsson and Samsung settled so quickly this year that I can't rule out Ericsson made major concessions to the Korean consumer electronics giant. However, Ericsson knew that it was anything but unlikely to run into another dispute with Apple, and Samsung won't have had any desire to help Apple. Therefore, I believe the Ericsson-Samsung license deal involves a somewhat lower royalty rate on those Samsung phones that cost a fraction of an iPhone, but that whenever the terms of the Ericsson-Samsung license come into play (comparable licenses, non-discrimination), Ericsson can argue that even Samsung accepted to pay a royalty rate that is consistent with demanding $5 per iPhone from Apple.
Implications for EU policy making: The European Commission's DG GROW is preparing a consultation on potential legislative and/or other policy action regarding SEP enforcement. With Ericsson now having such problems getting Apple to pay a royalty rate that is pretty reasonable, and with everyone out there knowing that Nokia will also have to talk renewal with Apple in the not too distant future, I frankly can't see that the executive branch of the EU government would make any proposal next year that would bring down SEP license fees. There simply wouldn't be any political support for that, much less after the AUKUS deal as a public statement by arguably the most powerful EU commissioner, Thierry Breton, on the need to "rebalance the EU-U.S. relationship" shows.
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