The smartphone wars are ending, and nobody won (but the lawyers )

August 5, 2013

Over the weekend, the Obama administration made an extraordinary decision: The U.S. Trade Representative overturned a U.S. International Trade Commission injunction barring the import of Apple iPhones found to infringe Samsung standard-essential technology. It’s been almost 30 years since the ITC commissioners were previously overruled by the White House, but, as I told you last month, Apple argued that the ITC’s injunction was contrary to the emerging consensus among federal courts and executive-branch agencies that injunctions should not, except in rare instances, be based on standard-essential patents.

In a less dramatic but also consequential filing Friday, the Justice Department responded to a complaint Microsoft filed in federal district court in Washington on July 12, demanding that the U.S. Bureau of Customs and Border Protection enforce an ITC exclusion order barring the import of Motorola smartphones that infringe a Microsoft patent on Outlook calendar synchronization. Motorola, which is appealing the ITC’s determination that the patent is valid, evaded the ITC injunction by convincing Customs that it had removed the infringing feature from its phones. Microsoft argued that Customs made an improper ex parte determination and effectively undermined the ITC exclusion order. In the government’s response, the Justice Department cited a host of supposed procedural deficiencies in Microsoft’s suit, including the district court’s lack of jurisdiction to hear a case that should have been brought as an administrative proceeding.

But that’s not all. Justice said Microsoft’s suit is against public policy – and against Microsoft’s own arguments in other smartphone litigation. The U.S. Supreme Court’s test for injunctions requires a showing that the injured party would otherwise suffer irreparable harm. Here, the government brief said, damages based on a reasonable licensing fee from Motorola are a perfectly adequate redress for Microsoft. When the shoe has been on the other foot and Microsoft has been accused of infringing Motorola smart device IP, the Justice Department said, Microsoft itself has contended that relief should come through money damages. (I’m sure that Microsoft would argue that the situations are different in the two cases, since the Motorola technology at stake in the Microsoft case being litigated in federal district court in Seattle is standard-essential IP and the ITC exclusion order Microsoft is suing Customs to enforce concerns non-essential tech.)

Nevertheless, if you take a step back from the specifics of the Apple/Samsung and Microsoft/Motorola cases – and even from their common origin at the ITC – you can discern a message from the executive branch to smart device makers: Stop wasting your money on litigation that’s not going to result in a long-lasting, market-shaping bar on your competitor’s products. Negotiate fees like adults and let consumers, and not the courts, determine winners.

That’s a message device makers have already heard from federal district courts overseeing smartphone litigation. Regardless of whether allegedly infringed patents cover standard-essential technology or simply a few features of a multifaceted smart device, the Federal Circuit Court of Appeals and trial judges implementing its precedent have been reluctant to issue injunctions that would disrupt the smartphone market. Judge Richard Posner of the 7th Circuit, in his 2012 stint as a trial judge in litigation between Apple and Motorola, said Motorola wasn’t entitled to an injunction based on standard-essential patents – and, more broadly, that patent holders obligated to license essential technology on reasonable terms should not be able to enjoin competitors for infringing those patents. U.S. District Judge Lucy Koh of San Jose, who presided over the celebrated trial of Apple’s infringement claims against Samsung, similarly refused last December to permit Apple to torpedo Samsung products that infringed a limited number of Apple patents, denying Apple an injunction under Federal Circuit Court of Appeals precedent that holds injunctions must be based on a “causal nexus” between infringed patents and consumer demand. The Federal Circuit, by the way, established that standard in yet another dispute between Apple and Samsung that ended without an injunction on infringing products.

The ITC remained amenable to exclusion orders barring device makers from importing products that infringe even a single patent even after the Federal Circuit’s causal nexus standard put federal-court injunctions pretty much out of reach. The exclusion order in the Microsoft case against Motorola that’s now at issue in the federal court in Washington was issued in May 2012; the order barring Apple imports that was overruled by the Obama administration last weekend was issued this June. The ITC commissioners are scheduled to rule Friday on another crucial exclusion order in a case in which an ITC administrative law judge determined that Samsung infringed an Apple patent, though not a patent based on standard-essential technology.

But what we’ve seen in the most recent smartphone war developments is that ITC exclusion orders are not market changers, if they’re even available at all. The administration has said loud and clear in the Apple case that owners of standard-essential technology may not use the threat of an ITC exclusion order to abrogate their obligation to license patents on fair and reasonable terms. It has also said firmly in the Microsoft case that the Customs Bureau can evaluate workarounds, diminishing the impact of exclusion orders based on nonstandard-essential IP. You can be sure, for instance, that ever since Samsung lost a preliminary ruling at the ITC in the case the commissioners will decide Friday, Samsung engineers have been developing a way to produce devices that don’t incorporate the Apple patent at issue.

If injunctions aren’t available and exclusion orders have limited preclusive power, the smart device wars are really all over, at least as far as remaking the market through litigation. Never fear: There’s still going to be plenty of work for the law firms that have thrived on these case for the last several years. Appeals are under way at the Federal Circuit on the causal nexus test for injunctions as well as on Posner’s ruling that standard-essential patents shouldn’t be the basis of injunctions. The appeals court could reinstate the threat of injunctions and change the leverage calculations in licensing talks, though I’d be surprised if it did. The Judiciary Committee of the House of Representatives, meanwhile, is calling on the White House to reconsider the Custom’s Bureau’s implementation of ITC exclusion orders to give the injunctions more bite.

But, assuming the status quo remains more or less the law of the land, where does that leave smart device makers? With no ending other than global cross-licensing agreements. Ironically, Duane Morris partner Rodney Sweetland told my Reuters colleague Dan Levine that the U.S. Trade Representative’s veto of Samsung’s exclusion order may actually serve to delay global deals because it removes the urgency imposed by the threat of an injunction. Similarly, Sweetland said, if the ITC commissioners, as expected, issue an exclusion order Friday against Samsung but give it enough time to implement a workaround, Samsung won’t be inclined to meet Apple’s licensing demands. “You only get a settlement when one side or another gets traction,” Sweetland told Levine.

There’s also an argument that global deals are less likely because of the minimal value U.S. District Judge James Robart of Seattle placed on Motorola standard-essential patents employed in Microsoft devices. In April, you’ll recall, Robart ruled in Microsoft’s breach-of-contract case against Motorola that a fair licensing rate for Motorola patents encumbered by licensing obligations to standard-setting bodies would be a grand total of about 4 cents per device, or about $1.8 million in royalties. (A jury trial to determine whether Motorola breached its agreement to license the patents at a fair rate is coming later this summer.)

I’m sure Motorola and its parent company Google figure it’s worth it to keep paying its lawyers to litigate its standard-essential patents when the alternative is $1.8 million a year from potential licensees. Samsung probably feels the same way about its standard-essential portfolio. And Apple has shown little public willingness to settle with either of them (though it did reach a global deal with Nokia in June 2011).

That’s all good for the law firms that have spent untold thousands of hours billing for litigation that hasn’t turned out to be dispositive for any of the device makers. Is it good for the consumers who are indirectly paying the legal fees? Almost certainly not.

(Reporting by Alison Frankel)

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