By Nicole Daniel
The proceedings between Apple and Qualcomm began in January 2017 in the U.S. District Court in San Diego when Apple filed suit against Qualcomm over its allegedly abusive licensing practices with its wireless patents. Qualcomm then filed unfair competition law counterclaims. This case is being overseen by U.S. District Judge Gonzalo Curiel.
Apple then sued Qualcomm for similar violations in the UK, China, Japan, and Taiwan.
In July 2017 Qualcomm filed patent claims against Apple also in the U.S. District Court in San Diego. This case is being overseen by U.S. District Judge Dana M. Sabraw. At the same time Qualcomm filed a complaint with the U.S. International Trade Commission accusing the Apple iPhone of infringing five Qualcomm patents.
District Court Case I
In November 2017, Judge Curiel issued a split decision in the first patent and antitrust case between Apple and Qualcomm.
Apple has been seeking a declarative judgment that it had not infringed the nine Qualcomm patents at issue and asked the court to decide on a fair and reasonable licensing rate. Judge Curiel denied those claims, holding instead that no detailed infringement analysis as to the Additional Patents-in-Suit had been conducted.
Judge Curiel further held that Qualcomm had not adequately pleaded claims against Apple based on California’s Unfair Competition Law. These allegations stemmed from Apple’s decision to use both Qualcomm and Intel chips in its iPhone. Before, Apple exclusively used Qualcomm’s chips in earlier versions of the iPhone.
In a hearing in October 2017 the lawyers for Qualcomm claimed that Apple executives threatened to end their business relationship if Qualcomm publicly claimed that its own chipsets were superior to Intel’s. In his order judge Curiel held that Qualcomm had not adequately pleaded the specific facts indicating its own reliance on an alleged omission or misrepresentation by Apple. Accordingly, Qualcomm lacked standing under Unfair Competition Law.
District Court Case II
In the district court patent case, Apple filed counterclaims arguing that Qualcomm infringed patents relating to enabling extended battery life in a smartphone or other mobiles devises by supplying power only when needed. This technology serves to maximize battery life.
Apple further argued that it created the smartphone as its own product category in 2007 when it introduced the iPhone. Qualcomm merely developed basic telephone technology which is now dated.
Qualcomm, on the other hand, argued that the success of the iPhone is due to its technology as Qualcomm has developed high-speed wireless connectivity over decades.
The discussion of who essentially invented the smartphone is of importance since under U.S. President Trump the term “innovator” has become very significant. On 10 November 2017 Makan Delrahim, the new chief of the Department of Justice’s antitrust division, made a policy speech and stated that the government aims to rebalance the scales in antitrust enforcement away from implementers who incorporate the inventions of others into their own products. There will be more emphasis on the innovators’ rights so as to protect their patent-holder rights in cases concerning patents essential to technology standards.
Further Cases filed and the Case at the US International Trade Commission
In November 2017, Qualcomm filed three new district court patent cases against Apple as well as one new complaint for the case pending before the U.S. International Trade Commission. In sum, Qualcomm accuses Apple of infringing 16 non-standard essential patents for technology implemented outside the wireless modern chip.
Despite this litigation, Qualcomm has so far remained a key supplier of chips to Apple.
By Marie-Andrée Weiss
A 5-page copyright infringement complaint filed last April in the Southern District of New York (SDNY) is being closely watched by copyright practitioners, as it may lead the court to rule on whether a Twitter post incorporating a copyrighted photograph, without permission of the author, is copyright infringement. The case is Goldman v. Breitbart News Network LLC et al., 1:17-cv-03144.
In the summer of 2016, Justin Goldman took a picture of the Boston Patriots quarterback, Tom Brady, walking in the streets in the Hamptons, in New York, with members of the basketball team the Boston Celtics. The picture was of interest as it could be implied from it that Tom Brady was helping the Celtics to acquire star player Kevin Durant.
The picture was published by several Twitter users on the microblogging site, and these tweets were then embedded in the body of articles about Tom Brady’s trip to the Hamptons published by Defendants including Yahoo!, Time, the New England Sports Network, Breitbart and others.
Justin Goldman registered his work with the Copyright Office and filed a copyright infringement suit against the platforms which had reproduced his photograph. Defendants moved to dismiss, claiming that the use was not infringing because it was merely embedding, and also because it was fair use. Judge Katherine B. Forrest denied the motion to dismiss on August 17, 2017, because whether embedding a tweet is equivalent to in-line linking could not be determined at this stage of the procedure.
Defendants, minus Breitbart, then filed a motion for partial summary judgment on 5 October 2017. Plaintiff moved to oppose it on 6 November 2017.
The Exclusive Right to Display a Work
Section 106(5) of the Copyright Act gives the copyright owner the exclusive right “to display the copyrighted work publicly.” Section 101 of the Copyright Act defines displaying a work as “to show a copy of it, either directly or by means of a film, slide, television image, or any other device or process or, in the case of a motion picture or other audiovisual work, to show individual images nonsequentially.” Plaintiff argues that “embedding” is one of the processes mentioned in Section 106(5).
Is Embedding a Tweet Just Like In-Line Linking?
Defendants claimed that incorporating an image in a tweet is not different from ‘in-line linking,’ which the Ninth Circuit found to be non-infringing in Perfect 10, Inc., v. Amazon.com, Inc.. In this case, the issue was whether the thumbnail versions of copyrighted images featured by Google on its image search result pages were infringing.
The Ninth Circuit had defined “in-line linking” in Perfect 10 as the “process by which the webpage directs a user’s browser to incorporate content from different computers into a single window”. In this case, Google had provided HTML instructions directing a user’s browser to access a third-party website, but did not store the images on its servers. This was found not to be infringing, as Google did not store the images as it not have a have a copy of the protected photographs, and thus did not display then, since to “display” a work under Section 101 of the Copyright Act requires to show a copy of it. This reasoning is known as the “Server Test”.
Plaintiff distinguished the facts in our case from Perfect 10, claiming that his photograph was shown in full size, that it was not “framed” and that it was featured prominently on Defendant’s websites. He argued that the thumbnails in Perfect 10 were low-resolution pictures which users had to click in order to access the full photos, whereas an embedded tweet allows the user to see the full high-resolution image without further maneuvers.
Defendants argued instead that, similarly to the Perfect 10 facts, tweets were embedded using code which directed user’s browsers to retrieve the Tom Brady picture from Twitter’s servers, and the picture was indeed framed, with a light gray box. They had, as publishers, merely provided an in-line link to the picture already published by the Twitter users, and this was not direct copyright infringement. They argued that the embedded tweets were not stored on, hosted by or transmitted from servers owned or controlled by them.
Meanwhile, in the European Union…
Defendants argued that an embedded tweet functions as a hyperlink, since clicking on it brings the user to the Twitter site. This case is somewhat similar to the European Court of Justice (ECJ) GS Media (see here for our comment) and Swensson cases. In Swensson, the ECJ had found that posting a hyperlink to protected works which had been made freely available to the public is not a communication to the public within the meaning of article 3(1) of the InfoSoc Directive, which gives authors the exclusive right of public communication of their works. Recital 23 of the Directive specifies that this right covers “any… transmission or retransmission of a work to the public by wire or wireless means, including broadcasting.” The ECJ reasoned that providing a hyperlink is not a communication to a new public and is thus not infringing.
In GS Media, the ECJ found that posting hyperlinks to protected works, which had been made available to the public, but without the consent of the right holder, is not a communication to the public within the meaning of article 3(1) of the InfoSoc Directive either. However, if the links were posted by a person who knew or could have reasonably known that the works had been illegally published online, or if they were posted for profit, then posting these hyperlinks are a new communication to the public and thus infringing.
Could ECJ case law on hyperlinks inspire U.S. courts to revisit Perfect 10?
By Nicole Daniel
In October and November 2017 significant developments occurred in the two Apple-Samsung patent cases.
The first concerns litigation between Apple and Samsung that started in 2011 and went to trial in 2012. In October 2017, a retrial was ordered.
A second case between Apple and Samsung was filed in 2012 and went to trial in 2014. In November 2017, the Supreme Court declined to hear Samsung’s appeal—thereby effectively ending the case.
Judge Lucy Koh, a District Judge in the Northern District of California, oversaw both cases.
The first Apple and Samsung case
In an order issued on 22 October 2017, Judge Koh ordered a new trial. This will be the second retrial. A damages retrial took place in November 2013.
This order for retrial comes more than five years after a federal jury ordered Samsung to pay $1.05 billion to Apple for patent infringement regarding the design and software of the iPhone. This sum was reduced to $929.8 million in the damages retrial. In the new trial, the jury will have to reconsider approximately $399 million in damages for design patents. Accordingly, the new trial has the potential to reduce the original damages by nearly 40%.
The decision for the new trial was triggered by a December 2016 Supreme Court decision in this case which held that an “article of manufacture” need not just be the whole product, but could also refer to the specific patented elements of the final product. The damages however, were set considering the infringement of the product as a whole and not of certain parts only.
Judge Koh also set out a four-factor test for the jury to use to determine what the “article of manufacture” in the present case is:
- What is the “scope of design claimed in the plaintiff’s patent”
- What is the “relative prominence of the design within the product as a whole”
- Whether the patented design elements are “conceptually distinct” from the whole phone
- Whether the patented components could be sold separately from the whole iPhone itself
By setting out this test Judge Koh rejected the tests proposed by Apple and Samsung respectively. Judge Koh determined that Samsung’s proposed test was too restrictive whereas Apple’s proposed test was too broad. Judge Koh adopted the test as argued by the Solicitor General in Supreme Court in 2016.
This second retrial will be significant for the development of design patent law as the definition of “article of manufacture” will be central and this is only the second time a federal judge will weigh in on this definition since the 2016 Supreme Court decision.
The second retrial will start on 14 May 2018 and Judge Koh has said that she will adopt an aggressive schedule leading up to the retrial.
Judge Koh further granted Samsung’s request for time for limited new evidence discovery since the law is currently being developed and it would be more prejudicial for Samsung if it was denied discovery.
She also imposed strict time limits on Apple’s and Samsung’s demands and even though the parties proposed a six-day trial she decided that five days would have to suffice. Judge Koh further rejected Samsung’s request to vacate the partial judgment for $548 million she entered in 2015.
The second Apple and Samsung case
On 6 November 2017 the Supreme Court decided not to hear Samsung’s appeal against a $120 million decision in favor of Apple. The Court of Appeal for the Federal Circuit had preserved the original verdict by the jury.
The Supreme Court followed the US Solicitor General’s recommendation to deny the petition for certiorari.
Only some smaller items are left before the case is fully resolved; these regard ongoing royalties to be paid by Samsung and will be decided on by the trial court in San Jose, California.
The original decision for the $119.6 million verdict in favor of Apple was handed down in May 2014 by a federal jury. The Court of Appeal for the Federal Circuit in early 2016 overturned the jury’s verdict. However, then the Court of Appeal for the Federal Circuit met en banc and reversed the three-judge panel. The en banc panel affirmed the lower court decision in an 8-3 decision that denied Samsung’s request for a judgment as a matter of law. Samsung had argued that the three Apple patents that the jury found infringed by Samsung were either not infringed or invalid. This was a rather controversial decision.
Samsung then asked the Supreme Court to decide whether the Court of Appeal for the Federal Circuit had erred in interpreting the four-factor test set out by the Supreme Court in the 2006 decision in eBay v. MercExchange, which states the conditions for when a court may issue an injunction against an infringer of a patent. Samsung argued that there had to be proof that the patented features directly drove demand for the product in question. The Solicitor General argued that no such proof was necessary.
Samsung also argued that the decision Court of Appeal for the Federal Circuit harmed competition and innovation, and that it conflicted with other Supreme Court precedent on patent law. Furthermore, the obviousness of patent claims was treated by the Court of Appeal for the Federal Circuit entirely as a factual rather than a legal question.
Finally, according to Samsung, the Court of Appeal for the Federal Circuit erred in stating that it only needed to consider one out of the three elements of a patent claim.
By Gabriel M. Lentner
As reported by IAReporter, the pharmaceutical company Pfizer served a notice of dispute under the US-Ecuador Bilateral Investment Treaty involving a patent dispute between Pfizer and Argentine generics producer Acromax.
Pfizer holds a patent, obtained in 1999 from the Institute of Intellectual Property of Ecuador, for “the preparation of sildenafil”. Sildenafil is a medication treating erectile dysfunction (better known under the brand name Viagra).
The dispute arises out of several court rulings involving the Argentine-owned pharmaceutical laboratory Acromax, which produced and marketed sildenafil, against which Pfizer pursued claims in defense of its intellectual property rights. Several court rulings dealt with this issue. In the latest ruling, the Ecuadorian Constitutional Court heard an appeal and issued a ruling upholding Acromax’s rights to seek damages against Pfizer.
What Pfizer is allegedly asking is an intervention similar to an international investment tribunal’s issuing of interim measures, such as in the case of Chevron v Ecuador II, which required Ecuador to stop domestic proceedings against the company in the cases related to the dispute.
Should the dispute be brought before an arbitral tribunal, it will be another interesting case dealing with IP-related issues in international investment law.
U.S. District Court Grants a Preliminary Injunction Allowing Data Harvesting on LinkedIn’s Public Profiles
By Valerio Cosimo Romano
On 14 August 2017, the U.S. District Court for the Northern District of California (“Court”) granted a motion for a preliminary injunction against the professional social networking site LinkedIn (“Defendant”), enjoining the company from preventing access, copying, and use of public profiles on LinkedIn’s website and from blocking access to such member public profiles.
HiQ Labs (“Plaintiff”) is a company which sells information to its clients about their workforces. This information is gathered by analyzing data collected on LinkedIn users’ publicly available profiles, which are automatically harvested by Plaintiff. HiQ is entirely dependent from LinkedIn’s data.
Plaintiff resorted to this legal action after Defendant attempted to terminate the Plaintiff’s ability to access the publicly available information on profiles of Linkedin users (after years of apparently tolerating hiQ’s access and use of its data). Plaintiff contends that Defendant’s actions constitute unfair business practices, common law tort and contractual liability, as well as a violation of free speech under the California Constitution.
Irreparable harm and the balance of hardships
First, the Court evaluated the existence of a potential irreparable harm for the parties. The Court concluded that, without temporary relief, hiQ would go out of business and that LinkedIn does not have a strong interest to keep the privacy of its users, who made their respective profiles publicly available on purpose. Therefore, the court recognized that the balance of hardships weighs in hiQ’s favor.
Likeliness to prevail on the merits
The Court went on to establish the parties’ respective likeness to prevail on the merits. It considered four claims.
Computer Fraud and Abuse Act (“CFAA”)
LinkedIn argued that all of hiQ’s claims failed because hiQ’s unauthorized access to LinkedIn violates the CFAA. The CFAA establishes civil and criminal liability for any person who intentionally accesses a computer without authorization or exceeds authorized access and thereby obtains information from any protected computer. Defendant explicitly revoked the Plaintiff’s permission to acquire data on its systems. According to Defendant, the CFAA is violated when permission has been explicitly revoked by the data’s provider. Plaintiff contended that applying the CFAA to the access of public websites would expand its scope well beyond what was intended by the Congress at the time it enacted the statute since, under Defendant’s interpretation, the CFAA would not leave any room for the consideration of either a website owner’s reasons for denying authorization or an individual’s possible justification for ignoring such a denial.
The Court sided with hiQ, asserting that the CFAA is not intended to police traffic to publicly available websites. According to the Court, a broad reading of the Act would set aside the legal evolution of the balance between open access to information and privacy. Given that the CFAA was enacted well before the advent of the internet, the Court refused to interpret the statute in that manner. The Court further clarified that this does not impair the possibility for a website to employ measures aimed at preventing harmful intrusions or attacks on its servers.
According to Plaintiff, LinkedIn also violated California’s constitutional provisions on free speech, which confer broader rights than those provided by the First Amendment. In Pruneyard Shopping Center v. Robbins, the California Supreme Court held that the state free speech right prohibited private owners from excluding people from their property when their property is an arena where constitutionally valuable actions take place, like engaging in political speech or sharing fundamental parts of a community’s life. The internet, hiQ contends, can be therefore interpreted as a “public space”, and thus be subject to such doctrine.
However, The Court found that no court had expressly extended Pruneyard to the internet. Thus, it concluded that no serious question had actually been raised with regard to constitutional rights under the California Constitution.
Unfair competition law
HiQ also argued that Defendant’s actions had the anticompetitive purpose of monetizing the data with LinkedIn’s competing product and that this conduct amounted to unfair competition under California’s unfair competition law, which broadly prohibits “unlawful, unfair or fraudulent” practices, including those practices that do not explicitly violate antitrust laws, but threaten the spirit of such laws.
According to Plaintiff, Linkedin is violating the spirit of antitrust laws in two ways: first, it is leveraging its power in the professional networking market to secure advantage in the data analytics market. Secondly, it is violating the essential facilities doctrine, which precludes a monopolist or attempted monopolist from denying access to a facility it controls that is essential to its competitors, by precluding them to enter the market.
The Court concluded that Plaintiff had presented some evidence supporting its assertions, but also remarked that during the proceedings LinkedIn may well be able to prove that its actions were not motivated by anticompetitive purposes.
The Court did not recognize any basis for a further common law promissory estoppel claim based on an alleged promise made by Defendant to make the data as public as possible and even available to third parties.
According to the court, there was no proof of such a promise and Plaintiff did not cite any authority applying promissory estoppel made to someone other than the party asserting that claim.
Lastly, the Court considered the public interest. Plaintiff argued that a private party should not have the unilateral authority to restrict other private parties from accessing information that is otherwise available freely to all. Defendant, in contrast, argued that if the users knew that this data was freely available to unrestricted collection and analysis by third parties for any purposes, they would be far less likely to make the information available online.
The Court concluded that granting blanket authority to platform owners to block access to information publicly available on their websites may pose a serious threat to the free and fair flow of information on the Internet and that the questions related to antitrust enforcement leaned further in favor of granting the motion for the preliminary injunction.
U.S. Appeals Court for the Ninth Circuit Finds Per Se Treatment Inapplicable to Tying Arrangement in the Premium Cable Services Market
By Valerio Cosimo Romano
On 19 September 2017, the U.S. Court of Appeals for the Tenth Circuit (“Appeals Court”) affirmed with a split decision the tossing by the U.S. District Court For the Western District of Oklahoma of a jury verdict in a suit alleging that a telecommunications company had illegally tied the rental of set-top boxes to its premium interactive cable services.
Parties and procedural history of the case
Cox Communications, Inc. (“Defendant”) operates as a broadband communications and entertainment company for residences and businesses in the United States. Its subscribers cannot access premium cable services unless they also rent a set-top box from Cox. A class of subscribers in Oklahoma City (“Plaintiffs”) sued Defendant under antitrust law, alleging that Defendant had illegally tied cable services to set-top-box rentals in violation of § 1 of the Sherman Act, which prohibits illegal restraints of trade.
The jury found that Plaintiffs had proven the necessary elements to establish a tying arrangement. However, the District Court disagreed, and determined that Plaintiffs had offered insufficient evidence for a jury to find that Cox’s tying arrangement had foreclosed a substantial volume of commerce in Oklahoma City to other sellers or potential sellers of set-top boxes in the market for set- top boxes. The District Court also concluded that Plaintiffs had failed to show anticompetitive injury.
A tie exists when a seller exploits its control in one product market to force buyers in a second market into purchasing a tied product that the buyer either didn’t want or wanted to purchase elsewhere. Usually, courts apply a per se rule to tying claims, under which plaintiffs can prevail just by proving that a tie exists. In this case, there is no need for further market analysis.
The Supreme Court determined that tying two products together disrupted the natural functioning of the markets and violated antitrust law per se. However, the Supreme Court has declared that the per se rule for tying arrangements demands a showing that the tie creates a substantial potential for impact on competition.
On the basis of Supreme Court’s precedents, lower courts have defined the elements needed to prove per se tying claims. In particular, in the Tenth Circuit, a plaintiff must show that (1) two separate products are involved; (2) the sale or agreement to sell one product is conditioned on the purchase of the other; (3) the seller has sufficient economic power in the tying product market to enable it to restrain trade in the tied product market; and (4) a ‘not insubstantial’ amount of interstate commerce in the tied product is affected. If a plaintiff fails to prove an element, the court will not apply the per se rule to the tie, but then may choose to analyze the merits of the claim under the rule of reason.
According to the Appeals Court, legal precedents (Eastman Kodak, Microsoft) show that in some industries a per se treatment might be inappropriate.
In this regard, the Court cited a recent case from Second Circuit (Kaufman), concerning the same kind of tie by a different cable company. In Kaufman, the court thoroughly explained the reasons why the tying arrangement at issue didn’t trigger the application of the per se rule.
To start, the court explained that cable providers sell their subscribers the right to view certain contents. The contents’ producers, however, require the cable companies to prevent viewers from stealing their content. This problem is solved by set-top boxes, which enable cable providers to code their signals. However, providers do not share their codes with cable box manufacturers. Therefore, to be useful to a consumer, a cable box must be cable-provider specific.
After explaining the function of set-top boxes, the Second Circuit turned to the regulatory environment and the history of the cable industry’s use of set-top boxes. The court described the Federal Communication Commission’s (“FCC”) attempts to disaggregate set-top boxes from the delivery of premium cable, and stated that the FCC’s failure is at least partly attributable to shortcomings in the new technologies designed to make premium cable available without set-top boxes. The court also pointed out that one FCC regulation actually caps the price that cable providers can charge customers who rent set-top boxes. Under the regulation, cable companies must calculate the cost of making such set-top boxes functional and available for consumers, and must charge customers according to those costs, including only a reasonable profit in their leasing rates.
On this basis, the Second Circuit concluded that the plaintiffs’ factual allegations because they didn’t trigger the application of the per se tying rule.
In our case, the discussion relates to the fourth element (affection of a ‘not insubstantial’ amount of interstate commerce in the tied product). Plaintiffs claim that this element only requires consideration of the gross volume of commerce affected by the tie, and that they met this requirement presenting undisputed evidence that Cox obtained over $200 million in revenues from renting set-top boxes during the class period. On the other side, Defendant maintains that this element requires a showing that the tie actually foreclosed some amount of commerce, or some current or potential competitor, in the market for set-top boxes.
According to the Appeals Court, recent developments in tying law validate the district court’s order and support Cox’s interpretation of tying law’s foreclosure element. Based on the Supreme Court’s tying cases and other precedents, the Appeals Court therefore concluded that Plaintiffs had failed to show that the tie has a substantial potential to foreclose competition.
The Appeals Court’s reasoning is based on four points. First, Cox does not manufacture the set-top boxes that it rents to customers. Rather, it acts as an intermediary between the set-top-box manufacturers and the consumers that use them. This means that what it does with the boxes has little or no effect on competition between set-top-box manufacturers in the set-top-box market, as they must continue to innovate and compete with each other to maintain their status as the preferred manufacturer for as many cable companies as possible. Second, because set-top-box manufacturers choose not to sell set-top boxes at retail or directly to consumers, no rival in the tied market could be foreclosed by Cox’s tie, and therefore the alleged tie does not fall within the realm of contracts in restraint of trade or commerce proscribed by § 1 of the Sherman Act. Third, all cable companies rent set-top boxes to consumers. This suggests that tying set-top-box rentals to premium cable is simply more efficient than offering them separately. Fourth, the regulatory environment of the cable industry precludes the possibility that Cox could harm competition with its tie, as the regulatory price control on the tied product makes the plaintiffs’ tying claim implausible as a whole.
The Appeals Court also argued that it does not have to apply the rule of reason unless Plaintiffs also argued that the tie was unlawful under a rule of reason analysis. However, as Plaintiffs had expressly argued that tying arrangements must be analyzed under the per se rule, the court did not address whether Defendant’s tie would be illegal under a rule of reason analysis.
The Appeals Court therefore agreed with the District Court that Plaintiffs had failed to show that Defendant’s tying arrangement foreclosed a substantial volume of commerce in the tied-product market, and therefore the tie did not merit per se condemnation. Thus, the Appeals Court affirmed the district court’s order.
By Valerio Cosimo Romano
On 13 September 2017, the President of the Unites States, Donald Trump, issued an executive order (“Order”) prohibiting the acquisition of Lattice Semiconductor Corporation (“Lattice”) by Canyon Bridge Capital Partners, Inc. (“Canyon”). This Order is in line with a recommendation previously issued by the Committee on Foreign Investment in the United States (“CFIUS”).
The parties and the proposed transaction
Canyon is a private equity fund headquartered in Silicon Valley, backed by the Chinese state-owned entities that manages industrial investments and venture capital. Lattice is an Oregon-based tech company which manufactures computer chips with both commercial and military applications. In November 2016 Canyon announced the entry into a definitive agreement to acquire Lattice for a deal value of $1.3 billion.
CFIUS is an interagency committee which assists the President in evaluating the national security implications of foreign direct investment in the American economy. Although CFIUS is not authorized to block deals, it can impose a wide range of mitigation measures where it determines such requirements can effectively address national security issues. Where CFIUS determines that national security concerns cannot be overcome with mitigation measures, it typically recommends that parties formally commit to abandoning the transaction. In the vast majority of cases, the parties agree to terminate the transaction (or to divest, if the transaction has already been completed).
CFIUS’s negative recommendation
That has not been the case for the acquisition of Lattice, where the parties went forward, hoping that the President would approve the transaction despite CFIUS’s objections. In early September 2017, CFIUS recommended that President Trump block the transaction because of potential risks to national security which could not have been addressed through mitigation. Indeed, in a statement released on September 13, 2017, CFIUS clarified that the national security risk linked to the acquisition related to the “potential transfer of intellectual property to the foreign acquirer, the Chinese government’s role in supporting this transaction, the importance of semiconductor supply chain integrity to the U.S. government, and use of Lattice products by the U.S. government.”
The strategic relevance of semiconductors’ industry
CFIUS’s statement builds on an earlier report (here and here) commissioned by the Department of Defense. Reportedly, the document concluded that China is engaging in a long-term strategy to transfer technological know-how from the U.S. to China by increasing its investments in prospectively key technologies (robotics, virtual reality, artificial intelligence), many of which require semiconductors. The Report identified the CFIUS as one of the key regulatory tools available to prevent such intellectual property transfers, and concluded that it should be given additional authority to prevent potentially harmful deals.
As we have just seen, notwithstanding the negative recommendation by CFIUS, Canyon and Lattice deferred the decision to the President, asserting that all the risks for national security could have been addressed by “comprehensive mitigation measures”. Despite this pleading, President Trump nixed the acquisition.
This is the fourth time in the American history that a President has blocked the acquisition of a US company, and the second time in a row that a deal has been blocked in the semi-conductor industry. Previously, President Obama halted the acquisition of a German semi-conductor equipment maker by a Chinese-backed company. President Obama also blocked a U.S.-based company owned by two Chinese nationals from acquiring four Oregon wind farm companies close to a naval base. Similarly, President George W. Bush prohibited a Chinese entity from buying an aerospace and aircraft parts manufacturer.
There is reason to believe that, during the current presidential mandate, the U.S. administration will increase the scrutiny of commercial transactions in areas which might prove strategic to national interests. Technology is certainly one of the chief areas of concern.