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Qualcomm Wins First Round in Apple Patent Fight at ITC – Part 2
by Olivier Blanchard | October 29, 2018
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1. Case Update

A few days ago, I shared an update about one of the Qualcomm cases against Apple currently before the ITC. The advantage went to Qualcomm, with Judge Thomas Pender (the administrative judge handling this case) advising the ITC that Apple had, in his opinion, infringed on one of Qualcomm’s patents. (Before going on, I recommend that you open a new tab and go read that piece to refresh your memory. It’s a short read.)

Judge Pender’s recommendation, which will inform the ITC’s full commission ahead of its ruling in January, essentially consists of two parts: The first is an opinion referencing Apple’s guilt or innocence in the matter of the patent infringement complaint, and the second is an opinion about what the ITC should do about it. Normally, if Company A is found to have infringed on a patent from Company B, and Company B requests a temporary or partial ban on products that use its stolen IP, the court tends to agree with Company B. As the ITC has no authority to force patent infringement offenders to pay royalties to the companies whose patents they infringed, partial and /or temporary bans of this kind are among the few effective mechanisms that the ITC can use as leverage against offenders.

This may be a good time to point out that Apple still owes Qualcomm billions of dollars in unpaid royalty payments. The short of it: Apple appears to be very comfortable enjoying the full use of Qualcomm’s patent portfolio without paying for it. This is why a case like this is so important: If the ITC rules Apple guilty of patent infringement but does not ultimately hold Apple accountable, then what recourse do patent holders have against bad actors? How will US companies protect their intellectual property from theft? Perhaps more importantly, why would investors risk continuing to fund innovation and tech companies if tech companies can no longer guarantee that they can protect and monetize their own IP? This case isn’t just about Qualcomm and Apple. It is about the future of innovation itself.

Which is why I was so surprised that Judge Pender recommended against the kind of remedy normally applied against companies found guilty of patent infringement, and even went so far as to cite “public interest” concerns as his justification. From where I stand, allowing Apple to skirt away without penalty or prejudice, should it be found guilty of patent infringement, seems counter to a “public interest” argument, as it clearly undermines the integrity of our already fragile system of IP protections.

I decided to do some digging to see if I could a) understand what his thinking was, and b) gauge whether or not the full commission would be likely to disagree with him on this specific point come January.

 

2. A simple question.

Before I get too deep in my search for answers, here is the most glaring question I keep running into: From the ITC’s perspective, given that its role is to protect Intellectual Property from theft and misuse, how is the public interest served by effectively not protecting US intellectual property and US patents from infringement and theft, and by not holding companies found guilty of patent infringement accountable?

What am I missing?

 

3. How “Public Interest” is defined by the ITC may not be how Judge Pender defines it.

I looked up how the ITC defines “public interest.” Here is what I found (in reference to Section 337: Building the Record on the Public Interest):

Under the statute, if the Commission finds a violation of section 337, it will issue an exclusion order to keep violating products out of the country (and may also issue cease and desist orders to violators), unless it finds an order should not be issued after considering the effects of a remedial order on:

  • the public health and welfare;
  • competitive conditions in the United States economy;
  • the production of like or directly competitive articles in the United States; and
  • United States consumers.

Obviously, being deprived of Intel-based iPhones would have no detrimental effect on public health and welfare. Enforcing healthy, law-abiding competitive conditions in the United States economy by enforcing IP protections would not be detrimental to said competitive conditions, because other smartphones could meet consumer needs. A partial ban on iPhones would also not negatively impact the production of like or directly competitive articles in the United States. And lastly, while United States consumers may find themselves temporarily inconvenienced, they would not be harmed by a partial ban on offending iPhones.

Note: I use the term “temporary” because Apple could settle with Qualcomm and become a licensee; I use the term “partial” because consumers could stick to Qualcomm-based iPhones.

Therefore, I find no reasonable justification for Judge Pender’s “public interest” argument with regard to Apple. iPhones are great the way that Canon cameras are great, and Specialized road bikes are great, and Rossignol skis are great: Consumers love them. They are well designed, high performance, popular products. But if tomorrow, any one of these companies were found by the ITC to have violated a competitor’s patents, or an industry partner’s patents, or a supplier’s patents, I doubt very much that the ITC would try to argue that a partial or temporary import ban (which typically the go-to remedy in a case like this) would represent a threat to the public interest.

Again, as I understand it, the ITC does not have the authority to force patent infringement offenders to pay royalties, fines, or damages to the companies whose patents they infringed, so taking import and/or sales bans off the table leaves the ITC more or less useless against companies that engage in IP theft.

A partial import ban of a certain make and model of skis, or road bikes, or consumer cameras, or toothbrushes, or sunglasses, or television sets, or smartphones, as a remedy against IP theft and/or patent infringement, does not represent a reasonable threat to the public interest.  A partial import ban on life-saving medication? Sure. A partial import ban on certain categories of materials and components indispensable to agriculture or the manufacturing sector? Obviously. But a partial import ban on interchangeable consumer goods? Not in my view, no.

As an avid cyclist who favors Specialized bikes, a lousy skier who favors Rossignol skis, and a passable photographer who favors Canon, even I have to admit that while an exclusionary order banning the importation of my favorite bikes, skis and cameras, while inconvenient, would not rise to the level of impugning “public interest.” Smart phones, by their very nature, are no different.

Change the brand names for a moment. Consider a hypothetical import ban on Huawei or ZTE or Samsung phones in the United States. Such a ban would not constitute a threat to the public interest because a) consumers would still be free to keep using their current Huawei, ZTE or Samsung phones, and b) they would still be free to buy any number of equivalent smart phones available on the market. And if a hypothetical ban of Huawei, ZTE, or Samsung phones is not detrimental to the public interest, then it stands to reason that a hypothetical ban on iPhones isn’t either.

Caveat: I will be the first to agree that having a smartphone in this day and age is a necessity, but nowhere does it say that your smartphone must be an iPhone (or a Samsung, or a Pixel, or an HTC, for that matter). There are simply too many phones to choose from to argue that a handful of Intel-specific smartphone models being temporarily banned, pending the resolution of a patent dispute, would be detrimental to the public interest. Therefore, it would be absurd to argue that, should Apple ultimately be found guilty of patent infringement by the ITC in January, an exclusionary order (or import ban) remedy focused on some iPhones would be detrimental to the public interest, especially if they happen to contain stolen technology.

 

4. Digging deeper: Is Judge Pender’s “public interest” argument about Apple, or is it really about Intel (and 5G)?

Qualcomm and Intel are both leading chipmakers. They supply a vast global ecosystem of technology clients. You can scarcely throw a USB stick in a Best Buy without hitting a laptop or a tablet or a phone or a smart speaker or wireless device that doesn’t have an Intel or a Qualcomm chip, let alone some kind of component that relies on Intel and/or Qualcomm patents to function. Samsung, HP, Pixel, Dell, Echo… If the device features wireless connectivity and smart power management, chances are that Qualcomm had something to do with it. If it has a little sticker that says “Intel” on it, you can gather the obvious. The same cannot be said of Apple: While Intel and Qualcomm serve an entire ecosystem of devices and companies, Apple prefers to keep to its own closed ecosystem – or “stack,” as many tech observers like to call it. Apple is a closed vertical business model. It has a technology stack. Qualcomm and Intel  have an open horizontal business model – the opposite of what Apple does. Apple has its own dedicated little corner all its own, physically and allegorically.

And so, if you want to gauge the value to the “public interest” of a technology company that invests in its own closed stack and doesn’t really participate in widespread and open innovation, against the value of technology companies that drive, fuel, and contribute to widespread innovation – innovation that advances every vertical and every industry, not just their own product portfolio – the calculus is simple: It is reasonable to infer that drivers of widespread innovation are far more important to the public interest than companies that mostly focus on their own limited stack of products and/or their own closed ecosystems. Ergo, as unfortunate as it would be to lose a company that has brought so much design coolness and UI brilliance to the consumer technology world, the tech sector would be fine without Apple. It would survive. It would not, however, be fine without Qualcomm and Intel.

And it is this realization that leads me to conclude that Judge Pender’s “public interest” concerns are not about Apple but rather about Apple’s preferred chip supplier: Intel.

If that is indeed the case, it means that Judge Pender’s thinking must be that an exclusionary order (or partial ban) of iPhones containing Intel chips (instead of Qualcomm’s) would, in some way, harm Intel to such an extent that its ability to contribute to its “public interest” mission of driving technological innovation would be gravely diminished. The obvious question at this juncture is where in the world would he get such an idea?

Evidently, he may have gotten this notion from both Intel and Apple. Here is Apple lawyer William Lee (of the WilmerHale law firm), making his “public interest” argument (via Bloomberg):

“If Intel is barred from selling to Apple in the U.S. market, there is a good chance they’ll exit. It is in the best interest of consumers, it’s in the best interest of the economy, it’s in the best interest of the country and our national security to have two robust players.’’

There you have it. Mystery solved.

The plot, as they say, thickens.

5. How Apple’s house of cards begins to unravel.

Judge Pender may not have been the only victim of this bit of misdirection. This report from Bloomberg also cites ITC staff lawyer Lisa Murray, an advisor to the judge, echoing Apple and Intel’s argument. Per Bloomberg:

“If Intel is taken out of the 5G race, this would slow the pace of U.S. innovation,” Murray said. She recommended that future iPhones with 5G be exempt from any import ban, saying that “Apple and Intel would have continued incentive to invest in 5G.”

Several obvious problems should immediately jump out at you:

  1. There is absolutely zero reason why a temporary import ban of Intel-based iPhones would completely (or even partially) take Intel out of the 5G race. (More on that in a moment.)
  2. As future “iPhones with 5G” (5G modems, one can only presume?) do not yet exist, they have nothing to do with this case. (A product that doesn’t yet exist cannot infringe on patents it isn’t yet using.) Ms. Murray appears to be getting the this very real and present-tense case mixed up with a future, hypothetical one. For the sake of argument, even if her recommendation held some validity with regard to future Intel-based iPhones, it would not be relevant to any current Intel-based iPhones, which are neither “future” nor “5G.”
  3. Apple has already announced that it plans to drop Intel as an iPhone chip supplier in 2020. Ergo: If all of Intel’s 5G ambitions rest on its cellular modem contracts with Apple, a temporary import bans on Intel-based iPhones today will have very little impact on Intel’s 5G future, at least relative to what Apple appears to be signalling. Whatever discussions the ITC may want to have about Intel exiting the 5G race, especially as it relates to its relationship with Apple, should probably focus on 2020 rather than on a temporary 2019 ban on Intel-based iPhones.
  4. If Intel’s entire 5G strategy hinges on a continued, healthy relationship with Apple (and particularly iPhones), that is news to us. Intel certainly has not been communicating this bit of news with investors. This, in my opinion, is the most important point on this list, and one I want to dig into a little further.

You see how quickly this dubious house of cards falls apart.

 

6. PARADOX ALERT: Two contradictory paths to 5G cannot both be true.

Let’s quickly explore the notion that Intel will be forced to abandon its 5G aspirations if the ITC temporarily bans Intel-based iPhones, because it simply does not hold water:

On the one hand, Apple has been downplaying 5G for some time now, and doesn’t appear to have contributed a massive effort to the development of the standard, let alone to its integration into its technology stack. At least not yet. As far as I can tell, to say that Apple is not yet a player in the 5G space would be an understatement.

On the other hand, Intel has been working extra hard to try and catch up to Qualcomm in the cellular modem space, and appears to be signaling to investors that it is very serious about 5G, with or without Apple.

These two observations combined suggest to me that Intel’s 5G posture is not dependent on Apple (nor should it be).

Given the potential of 5G and its importance to national security, global competitiveness, and US technological hegemony, it stands to reason that any legitimate “public interest” argument relevant to the ITC in this case would hinge on Intel’s ability to become a major player in the 5G space rather than on Apple’s ability to sell iPhones. Apple and Intel attorneys certainly seem to be making that exact argument to Judge Pender.

Still with me?

The problem is that I haven’t found any literature from Intel outlining how its 5G investments are entirely, mostly, or even significantly predicated on its iPhone supplier business. Moreover, Intel certainly hasn’t been telling investors that its 5G play is entirely (or mostly, or even significantly) predicated on its relationship with Apple. Unless I’ve missed something in my research, the only place where this argument appears to have been made is with regard to this case.

Curious, isn’t it? If Intel’s 5G future is so dependent on Apple, and particularly Intel-based iPhones, isn’t that something that Intel investors should perhaps be made aware of?

Unless that argument is bunk, of course. Based on the information I have, I see no reason why a partial ban on (non-5G) Intel-based iPhones today would prevent Intel from developing 5G chips for future iPhones and other devices. (Note: The notion that a drop in revenue from an Intel-based iPhone ban would decimate Intel’s investment in 5G is complete nonsense. Intel is too big a company to predicate years of 5G investments mostly on revenue from Intel-based iPhone sales. No reasonable person would ever believe that.)

If the notion that Intel doesn’t have enough cash on hand to fund its 5G research unless Apple can keep selling old iPhones isn’t embarrassing and absurd enough, get ready for this next point:

Given the context of this case and what it alleges, aren’t Apple and Intel arguing that unless they are allowed to freely infringe on Qualcomm’s patents, Intel will not be able to be competitive in the 5G space? (Note that neither company has admitted to any wrongdoing.) How in the world can this possibly pass for a sound legal argument, let alone a sound PR strategy for either company? And more to the point, if Intel and Apple do indeed need some of Qualcomm’s patents to prop up their own technology ecosystems, what exactly is standing in the way of paying to use those patents like every other licensee?

How did such a relatively simple case of patent infringement manage to somehow degenerate into such a half-witted three ring circus? Simple: Because when you don’t have a sound defense, creating as much confusion and misdirection as possible is probably your next best bet if you don’t want to lose or settle.

And here, we come to what this case is and has always been ultimately about: Apple deciding that it shouldn’t have to pay for the use of Qualcomm’s patents – already to the tune of $7B and growing. Everything else about this is just noise. Smoke and mirrors. Distractions to keep everyone’s attention from what the Qualcomm vs Apple dispute has been about from the start: Money.

 

7. … But don’t just take my word for it.

As I was doing my research for this piece, I ran into pretty astute analysis in Marketwatch from Ryan Shrout, which follows a logical trajectory that more or less echoes my own:

“If Intel were truly at risk for losing the entirety of its wireless business due to a legal dispute that is months, if not years, old, then it would have been reported during quarterly earnings reports. These kinds of disclosures are required and Intel would be unlikely to risk the fallout of not doing so.”

Bingo. If Intel is arguing this in court but not disclosing it to investors, it may want to give some thought to how that decision could come back to haunt it.

It isn’t a stretch to surmise that either Intel and Apple lawyers are misrepresenting their case to the ITC or Intel isn’t sharing a pretty major strategic discussion with investors. Unless I am missing something, it is either one or the other. It cannot be both. As I doubt very much that Intel would abandon 5G because of one small Apple-specific hiccup (let alone because Apple has signaled a move away from Intel in 2020), I tend to lean towards the first option: Apple and Intel’s argument to the ITC that a partial iPhone ban may force Intel out of the 5G race is, at worst, a bluff, and at best, an exaggeration. Either way, in my view, the “public interest” argument appears to be based on little more than hot air.

 

8. In conclusion: I doubt very much that the ITC will make the same mistake Judge Pender made several weeks ago.

While both Lisa Murray and Judge Pender may have accidentally allowed themselves to be lured down a fairly preposterous rabbit hole by Apple and Intel’s attorneys, I doubt very much that the full Commission will fall into the same trap. Unless Intel begins to brief the Street about its intentions to abandon the 5G race if the ITC holds Apple accountable for its behavior, there is no reason for anyone at the ITC (or anywhere, really) to fall for that argument, and therefore to accept that holding Apple accountable for its patent infringement would somehow act against the public interest.

Why? Because if a temporary, partial ban on Intel-based iPhones will not force Intel to exit the 5G space, there is no reasonable “public interest” argument. And if there is no “public interest” argument, there is no reason for the ITC not to impose a ban on Intel-based iPhones until this matter is resolved.

If the ITC’s full commission spends even 1/10th of the amount of time analysts like Ryan and I just did researching this aspect of Judge Pender’s recommendation, I am confident that they will see Apple’s argument for the absurdity it is.

 

Disclosure: Futurum Research, like all research and analyst firms, provides or has provided research, analysis, advising, and/or consulting to many high-tech companies in the tech and digital industries. The firm does not hold any equity positions with  any other companies cited in this column.

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