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How the ITC forced a veto in the Samsung-Apple patent case

August 5, 2013: 6:13 AM ET

Did the International Trade Commission blow it by ignoring Dean Pinkert's dissent?

Commissioner Pinkert

ITC Commissioner Pinkert

FORTUNE -- His dissent was heavily redacted and buried in a long official filing. But everything you need to know about how the U.S. International Trade Commission punted when it granted Samsung's request for an import ban on five Apple's (AAPL) devices -- forcing the first Presidential veto of one of its decisions in a quarter century -- is contained in the opinion filed by Dean Pinkert, one of the ITC's six commissioners.

Pinkert, a George W. Bush appointee (and a Democrat), laid out in careful detail why his fellow commissioners were wrong to order Apple to cease and desist selling those five products -- including a version of the iPhone 4 that is still one of the company's most popular -- on the strength of Samsung's complaint.

Among the reasons he cites:

  • The patent in question was part -- and only a tiny part -- of an international standard, and as such Samsung had agreed to make it available for licensing under terms that are fair, reasonable and nondiscriminatory (FRAND).
  • Samsung had made no effort to demonstrate that the licensing terms it offered Apple "satisfied an objective standard of reasonableness."
  • That the only time Samsung made such an offer -- in oral discussions in December 2012 -- it came with strings attached to which Apple could not agree.
  • What those strings were are blacked out in the document, but Pinkert adds in the next sentence: "it is neither fair nor non-discriminatory for the holder of the FRAND-encumbered patent to require licenses to non-FRAND-encumberd patents as a condition for licensing its patent" (emphasis his).

Reading between the lines, it sounds like Samsung had refused to license its standard-essential patents (SEPs) unless Apple offered its non-essential iPhone patents -- the company's crown jewels -- in return.

As usual, FOSS Patent's Florian Mueller was on top of the case. In early July he obtained a copy of Pinkert's dissent, painstakingly transcribed it into HTML, and published it in a post that began:

"I'm outraged. The underlying rationale of the ITC ruling is a serious threat to innovation and competition. Among other things, it represents a radical departure from well-established antitrust principles concerning the illegal practice of tying (in this case, a Samsung proposal that required Apple to license its non-standard-essential patents to Samsung in order to get an SEP license). This totally runs counter to the ITC's mission to protect the domestic industry."

The Obama Administration agreed. On Saturday it threw out the ITC's verdict and told Samsung that if it wanted to pursue the case, it could take Apple to court.

UPDATE: Reader Jim Neal points out that the other five members of the ITC are no dummies. He suggests that they may have secretly supported Pinkert's dissent, and that they deliberately kicked the case upstairs to the President, hoping that the import ban they reluctantly ordered would get vetoed.

"The Obama administration has made it clear in recent weeks," Neal writes, "that the system is in dire need of revision, that companies are unfairly using SEP to extort money, to obtain unfair patent licensing agreements from other companies, even to flat out kill competition.  Changes to the ITC mandate might well be in the offing, but for now the ITC majority did exactly what the administration wanted -- made the only decision that would allow a higher authority to send a stronger message than they ever could."

Below the fold: Pinkert's dissent, as transcribed by Mueller.



Although I concur with my colleagues on all issues related to claim construction, infringement, and affirmative defenses (except as noted in the majority opinion), I dissent on whether an exclusion order and a corresponding cease-and-desist order should issue for infringement of the '348 patent by Apple, meaning that I diverge from the majority on the proper application of the public interest factors set forth in Section 337 ("the effect of such [exclusion or order] upon 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. . .") 19 U.S.C. §§ 1337(d)(1), (f)(1). A key issue in that regard arises from the obligation undertaken by Samsung to license the '348 patent on a fair, reasonable, and nondiscriminatory ("FRAND") basis, an obligation undertaken because the patent was declared essential to an industry standard (the UMTS standard) for the baseband processors found within the accused devices. Samsung does not dispute the existence of such an obligation with respect to the '348 patent. Whether and to what extent it bears on the public interest, however, are highly contested matters of first impression for this agency. As explained below, I find that Samsung's FRAND obligation is relevant in determining whether elimination of the infringing articles from competition in the U.S. market is consistent with the public interest, and, after taking into account a range of public interest considerations, I determine that the relief in question is not consistent with the public interest and should not issue.

Qualcomm's December 3, 2012, comments ("Qualcomm Submission") provide a useful starting point for the analysis of these issues. Qualcomm observes that a FRAND undertaking is a contractual obligation between a patent holder and a standards setting organization. Hence, in order for a respondent to establish an affirmative defense based on FRAND, ordinary principles of contract interpretation must be invoked, looking first to the plain meaning of the agreement, and then, where not clearly addressed by the agreement, to the intent of the parties who entered into the contract. Qualcomm Submission at 4. Qualcomm goes on to claim that the public interest requires consideration of the facts and circumstances of each case and that a blanket rule against exclusion orders in relation to declared-essential patents subject to a FRAND undertaking would strip the Commission of the ability to enforce patents that are often the most valuable and fundamental to a given technology or industry. Qualcomm Submission at 8-9. Qualcomm then characterizes the public interest inquiry that remains once it is determined that an affirmative defense based on FRAND has not been established. Qualcomm maintains that the remaining inquiry centers on whether "a standardized product truly faces no meaningful competitive alternatives. . . ," which should be balanced against other considerations such as the "importance of protecting patent rights and incentives to take licenses voluntarily." Qualcomm Submission at 9. In other words, Qualcomm appears to maintain that, once the ITC concludes that the affirmative defense has not been proved, no further consideration should be given to the FRAND undertaking.

In the present investigation, however, although Apple failed in the proceedings before the Administrative Law Judge to meet the burden of proof in establishing an affirmative defense based on FRAND, the weight of the evidence before the Commission in this remedial phase indicates that Samsung has thus far been unable or unwilling to make a FRAND licensing offer to Apple in relation to the '348 patent. The absence of a FRAND licensing offer from the course of dealings between the parties clearly has a bearing on whether relief under Section 337 is in the public interest.

I note in this regard that Samsung has made no effort to demonstrate that the license terms it has offered Apple specifically with respect to the '348 patent, or specifically with respect to a portfolio of declared-essential patents that includes it, satisfy an objective standard of reasonableness, has not identified a methodology for determining whether they satisfy such a standard, and nowhere suggests an intention to make them more attractive to Apple. Rather, Samsung's claim that it has made FRAND terms available to Apple in relation to the '348 patent is based largely on an oral offer it made during discussions with Apple in December 2012, and that offer included [REDACTED]. Samsung April 3, 2013, Submission at 24; Apple April 3, 2013, Submission at 28-29; Watrous April 3, 2013, Decl. Paras. 11, 14; Watrous April 10, 2013, Decl. Para. 7. Samsung referenced the December discussions in a letter to Apple dated March 22, 20l3, but [REDACTED]. Samsung April 3, 2013, Submission at Exhibit C44. Although licenses to non-FRAND-encumbered patents may certainly be included in a consensual resolution of a dispute over a FRAND-encumbered patent, it is neither fair nor non-discriminatory for the holder of the FRAND-encumbered patent to require licenses to non-FRAND-encumbercd patents as a condition for licensing its patent. Cf.Lemley and Shapiro, A Simple Approach to Setting Reasonable Royalties for Standard-Essential Patents, Stanford Public Law Working Paper No. 2243026, at 18 (March 30, 2013) ("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). For this reason, I do not find Samsung's arguments on this issue to be persuasive.

Apple, on the other hand, points out [REDACTED], despite the fact that Samsung is just one of many companies holding patents that have been declared essential to the standard for that processor. Apple April 3, 2013, Submission at 27-31, 35-36; Samsung April 3, 2013, Submission at Exhibit C42 (setting forth [REDACTED] specific to Samsung's declared-essential patents).

These circumstances raise the specter of significant costs being imposed on the economy as a consequence of relief under Section 337, and the statute gives the ITC a broad remit in considering such costs. Not only is the relevant statutory language very general -- "public health and welfare, competitive conditions in the United States economy . . . and United States consumers," 19 U.S.C. §§ 1337(d)(1), (f)(1) - but the legislative history indicates that "the public heaith and welfare and the assurance of competitive conditions in the United States economy must be the overriding considerations in the administration of this statute" and that "any evidence" of price gouging or monopolistic practices on the part of the domestic industry would be a proper basis for denying exclusion. Senate Rep. No. 93-1298 at 197 (1974).

As the U.S. Federal Trade Commission has observed regarding commitments to license on a reasonable and non-discriminatory (RAND) basis:

RAND commitments mitigate the risk of patent hold-up, and encourage investment in the standard. [Citation omitted.] After a RAND commitment is made, the patentee and the implementer will typically negotiate a royalty or, in the event they are unable to agree, may seek a judicial determination of a reasonable rate. However, a royalty negotiation that occurs under the threat of an exclusion order may be weighted heavily in favor of the patentee in a way that is in tension with the RAND commitment. High switching costs combined with the threat of an exclusion order could allow a patentee to obtain unreasonable licensing terms despite its RAND commitment, not because its invention is valuable, but because implementers are locked in to practicing the standard. The resulting imbalance between the value of patented technology and the rewards for innovation may be especially acute where the exclusion order is based on a patent covering a small component of a complex multicomponent product. In these ways, the threat of an exclusion order may allow the holder of a RAND-encumbered SEP [standards-essential patent] to realize royalty rates that reflect patent hold-up, rather than the value of the patent relative to alternatives, which could raise prices to consumers while undermining the standard setting process.

U.S. Federal Trade Commission Third Party Submission, Inv. No. 337-TA-745, at 3-4. I take this to imply that, where FRAND commitments have been undertaken and the weight of the evidence indicates that the complainant is not making FRAND terms available to the respondent, granting the complainant relief under Section 337 based on a patent covering a minor element of a complex multi-component product would in all likelihood impose substantial costs on consumers while undermining the standards setting process and public welfare and competitive conditions in the U.S. economy.

The U.S. Department of Justice and the U.S. Patent and Trademark Office have also offered guidance, maintaining that "it is important for innovators to continue to have incentives to participate in standards-setting activities and for technological breakthroughs in standardized technologies to be fairly rewarded." January 8, 2013, Policy Statement by the United States Department of Justice, Antitrust Division, and the United States Patent and Trademark Office, at 8. This emphasizes the need for balance in the adjudication of issues related to FRAND commitments and counsels us to be sensitive to the facts of each case in determining whether the public interest precludes relief under Section 337 based on the infringement of a FRAND-encumbered patent.

A central question in applying these principles to the facts of this case is whether the '348 patent covers a relatively minor element of a complex multi-component device. I find that it does, that the '348 patent represents nothing more than a "tweak" to the UMTS standard, which itself represents but a small portion of the value of the accused devices. As Apple points out, "while there is undoubtedly value in the UMTS standard as a whole because it provides cellular functionality to the accused devices, the devices also offer a great number of features that have nothing to do with UMTS, let alone the purported functionality of the '348 and '644 patents." Apple December 3, 2012, Submission at 24. Moreover, the baseband processors that contain the infringing functionality sell for less than $[REDACTED] -- while the accused devices are priced in the hundreds of dollars -- and the '348 patent covers only very specific and limited features of those processors. Id. at 16, 25. Because I therefore find that the patent in question covers a relatively minor element of a complex multi-component device and because, as discussed above, the weight of the evidence indicates that Samsung is not making FRAND licensing terms available to Apple, I determine that elimination of the infringing articles from competition in the U.S. market would in all likelihood impose substantial costs on consumers while undermining the standards setting process and thus public welfare and competitive conditions in the U.S. economy.

I now consider this determination in light of other information pertaining to the public interest. As background, I note that the only Apple articles alleged to infringe the asserted claims of the '348 patent are the iPhone 4, iPhone 3 GS, iPhone 3G, iPad 2 3G, and iPad 3G. Of those, only the iPhone 4 and iPad 2 3G are still being sold by Apple in the United States. Apple April 3, 2013, Submission at 12. In 2012, [REDACTED] of the smartphones sold in the United States were iPhone 4 products and [REDACTED] of the 3G-enabled tablets were iPad 2 3G products. Id. at 13. Also in 2012, approximately [REDACTED] of 3G-or 4G-enabled tablets were iPad 2 3G products. Id.

Elimination from competition of the iPhone 4 and iPad 2 3G would adversely affect U.S. consumers by denying entry-level devices to those who rely on the GSM network, which enable them to access the large and diverse library of popular software applications that are uniquely available on Apple platforms. Id. at 12. The iPhone and the iPad are rapidly evolving high technology platforms that are able to command from generation to generation a high level of consumcr recognition and loyalty as well as substantial consumer investment in related hardware, software, and services, and the iPhone features a degree of interoperability with other Apple devices that is simply not available with other manufacturers' smartphones. Id. at 15; OUII April 3, 2013, Submission at 8 (platform loyalty is a "significant factor" in the smartphone and tablet markets). It follows that, were the iPhone 4 and iPad 2 3G to be eliminated from competition, consumers would experience very significant switching costs.

It also follows from these circumstances that producers of related hardware and software would be severely harmed by the imposition of relief under the statute. In addition, the degree of interoperability across the universe of Apple products is a powerful indicator that remedial action would be injurious to competitive conditions in a wide range of markets, not merely those in which the accused devices are sold.

Accordingly, I determine that an exclusion order and a corresponding cease-and-desist order should not issue as a result of Apple's infringement of the '348 patent. I emphasize, however, that I have not adopted a blanket rule to the effect that relief under Section 337 is precluded under the public interest provisions whenever a FRAND obligation has been undertaken with respect to the patent(s) in question. Rather, I have considered whether Samsung is making FRAND licensing terms available to Apple, and I have found the weight of the evidence to indicate that Samsung is not. I have also considered whether a Section 337 remedy given such circumstances would impose significant costs on the U.S. economy, harming consumers while undermining the standards setting process and thus public welfare and competitive conditions, and I have taken into account other factors pertaining to the public interest as well. My determination rests on the totality of this analysis.


Link: One ITC chief found Samsung to fail to offer Apple FRAND licensing terms to its UMTS patents.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for

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