Archive | Topic RSS for this section

Apple and Qualcomm Proceeding

By Nicole Daniel

In January 2017 Apple filed suit against Qualcomm over its allegedly abusive licensing practices regarding wireless patents.

Apple filed patent, antitrust and breach of contract claims against Qualcomm; this could result in damages of billions of dollars. Apple’s suit comes after recent legal challenges against Qualcomm filed by the U.S. Federal Trade Commission in federal court and a class action by smartphone buyers. Furthermore, Korean authorities levied their own $854 million penalty and China’s National Development and Reform Commission extracted a penalty amounting to nearly $1 billion in 2015. Also in 2015 the European Commission sent statements of objections to Qualcomm.

Apple alleges that Qualcomm abused its monopoly in baseband processors that power both the iPad and the iPhone and broke its promise to license its standard essential patents at FRAND, i.e. fair, reasonable and non-discriminatory, rates. Qualcomm breached its FRAND obligations by selling chipsets powering smartphones and tablets and separately licensing standard-essential patents. Apple further alleges that Qualcomm refused to sell chipsets to customers unless they first licensed their standard-essential patents. This allegation is central to the Federal Trade Commission’s case too as well as Apple’s allegation that Qualcomm does not licence its standard-essential patents to competing chipset manufacturers. Tying the chipsets and licenses to cellular technology illegally strengthened Qualcomm’s monopoly and eliminated competition. Another allegation by Apple is that Qualcomm threatened customers who purchased chipsets from competitors with less favorable license and royaltyi terms.

Not only did Qualcomm charge inflated royalties for its patents but it also engaged in allegedly intimidating business practices. For example, Qualcomm allegedly tried to force Apple to lie to the South Korean antitrust enforcer in exchange for $1 billion which Qualcomm was obliged to pay anyway. Apple further states that because it provided evidence in antitrust investigations against Qualcomm in the U.S. and Korea, Qualcomm, as retribution, withheld $1 billion that it owed to Apple. Apple now wants damages for having been overcharged billions of dollars, enjoin Qualcomm from engaging in further violations of the law and declaratory relief holding that Apple does not infringe on a number of patents owned by Qualcomm. Apple also asks the court to determine the proper FRAND rates.

Qualcomm countered by calling Apple’s allegations “baseless” and accusing its opponent of encouraging the regulatory “attacks” on Qualcomm. Also the antitrust claims are driven by commercial disputes and Qualcomm will continue to defend its business model.

Furthermore, Qualcomm learned in January 2017 that an Apple subsidiary filed two complaints against Qualcomm in the Chinese intellectual property court. The first complaint regards inter alia violations of Chinese anti-monopoly law by offering excessive royalty terms on patents and chipsets whereas the second complaint regards a refusal to provide to Apple a royalty offer for cellular standard essential patents consistent with FRAND terms.

In April 2017 Qualcomm filed an answer and counterclaims in California federal court. In its filing Qualcomm detailed the value of the technologies it has invented and alleged that Apple failed to engage in good faith negotiations for licensing 3G and 4G essential patents on FRAND terms. The filing further outlines that Apple allegedly breached and mischaracterized both agreements and negotiations. Apple further encouraged regulatory attacks in various jurisdictions and did not utilize the full performance of Qualcomm’s modern chips in the iPhone 7. Apple allegedly also misrepresented the disparity in performance between iPhones using competitor-supplied modems and Qualcomm modems. Qualcomm was even threatened by Apple to prevent it from making any public comparisons about the superior performance of iPhones powered by Qualcomm.

Also in April 2017 Apple published a written statement stating that it has chosen to withhold patent royalties owed to Qualcomm by its contract manufacturers because over the course of the last five years Qualcomm has refused to negotiate fair terms.

It remains to be seen how the proceedings in this case continue.

Tenth Circuit holds IPRs defense available to rebut a refusal to deal antitrust claim

By Valerio Cosimo Romano

On 31 October 2016, the United States Court of Appeals for the Tenth Circuit (the “Court of Appeals”) held that the invocation of IPRs is a presumptively valid business justification sufficient to rebut a refusal to deal claim.

The case involved a dispute between a software company and the developer of aviation terminal charts (which provide pilots with the information necessary to navigate and land at a specific airport). The developer holds copyrights for portions of its charts, which use a proprietary format. The parties negotiated and executed a license and cooperation agreement under which the developer would waive its standard licensing fee and grant the software company access to proprietary products that facilitate the integration of the developer’s terminal charts into third-party systems. In exchange, the software company would create a data management reader that works in conjunction with an e-book viewer. After the execution of the agreement, the software company registered with Apple as a software application developer and requested the necessary toolkit from the developer to develop an app. The developer did not provide the toolkit. Rather, it announced it had created its own app, offered to its customers at no additional cost beyond their terminal chart subscription fee.

The software development company sued the developer. The district court granted summary judgment for developer on the antitrust claims but denied summary judgment on the remaining claims for loss of profits, awarding more than $43 million in damages. The developer appealed, challenging only the district court’s ruling related to the loss of profits. The software company cross-appealed, challenging the dismissal of its antitrust claims, alleging a single anticompetitive conduct consisting in a refusal to deal, in violation of § 2 of the Sherman Act.

To determine whether a refusal to deal violates § 2, the Court of Appeals first looked at market power in the relevant market, in which the court assumed that the developer enjoyed monopoly power. Second, the Court of Appeals looked at the use of the product, and concluded that the assertion of IPRs is a presumptively rational business justification for a unilateral refusal to deal. In its legal reasoning, the Court of Appeals relied on the approach taken by both the First and Federal Circuits in Data General and Xerox, respectively. In Data General, the First Circuit held that while exclusionary conduct can be pursued by refusing to license a copyright, an author’s desire to exclude others from use of its copyrighted work is a presumptively valid business justification for any immediate harm to consumers. In Xerox, a Federal Circuit declined to examine the defendant’s motivation in asserting its right to exclude under the copyright laws, absent any evidence that the copyrights were obtained by unlawful means or used to gain monopoly power beyond what provided for by the law. Quoting Novell and Trinko, the Court of Appeals also recognized the existence of a limited exception, available only where the plaintiff can establish the parties had a preexisting, voluntary, and presumably profitable business relationship, and its discontinuation suggests a willingness to forsake short-term profits to achieve anti-competitive ends. On this last point, the Court of Appeals held that the software developer did not present any evidence.

Therefore, it concluded that the developer did not have an independent antitrust duty to share its intellectual property with the software company. Consequently, it reversed and vacated the jury’s award of lost profits, but affirmed the partial summary judgment on software company’s antitrust claims.

Partial victory for BMI: Federal judge rules against full-work licensing requirement

By Martin Miernicki

On 16 September 2016, Judge Stanton issued an opinion interpreting the BMI Consent Decree. He concluded that the decree does not require BMI to issue “full-work” licenses.

 

Background

On 4 August 2016, the U.S. Department of Justice (DOJ) published a closing statement concluding its review of the ASCAP and BMI Consent Decrees. It stated that said decrees prohibited ASCAP and BMI from issuing fractional licenses and required them to offer full-work licenses.[1]  Both ASCAP and BMI immediately announced to fight the opinion, the latter seeking a declaratory judgement, asking the “rate court” for its opinion.[2]

 

The court’s opinion

In its declaratory judgement, the court rejected the DOJ’s interpretation of the BMI Consent Decrees, ruling that “nothing in the Consent Decree gives support to the [Antitrust] Division’s view.” It held that the issue of full-work licensing remained unregulated by the Consent Decree; rather, this question should be analyzed under other applicable laws, like copyright or contract law. In conclusion, the court explained that the decree “neither bars fractional licensing nor requires full-work licensing.” The court furthermore distinguished the question at hand from its decision in BMI v. Pandora,[3] where it struck down attempts by major publishers to partially withdraw rights from BMI’s collective licensing regime.

 

The way forward

The court’s opinion is a clear success for BMI, but also for ASCAP, since it can be expected that Judge Stanton’s ruling will be influential in analogous questions regarding the ASCAP Consent Decree. However, this success is not final. BMI reported that the DOJ appealed the decision on 11 November 2016. It is hence up to the Court of Appeals for the Second Circuit to clarify the meaning of the decree.

[1] Under a full-work license, a user obtains the right to publicly perform the entire work, even if not all co-owners are members of the organization issuing the license. Conversely, a fractional license only covers the rights held by the licensing organization.

[2] For more information on the background of the decision see Transatlantic Antitrust and IPR Developments Issue No. 3-4/2016.

[3] BMI v. Pandora, Inc., No. 13 Civ. 4037 (LLS), 2018 WL 6697788 (S.D.N.Y. Dec. 19, 2013).

European Commission publishes a preliminary report on the e-commerce sector inquiry

By Nikolaos Theodorakis

On 6 May 2015, the European Commission launched a sector inquiry into e-commerce within the context of the Digital Single Market strategy, and in connection with Article 17 of Regulation 1/2003. In March 2016, the Commission published its initial findings on geo-blocking, which refers to business practices whereby retailers and service providers prevent the smooth access of consumers to the digital single market. In doing so, geo-blocking usually has three dimensions: (i) it prevents a consumer from accessing a website because of his IP address; (ii) it allows the consumer to add an item to his online shopping basket, but it cannot be shipped to his location and (iii) it redirects the consumer to another local website to complete his order.

As part of the sector inquiry, the Commission requested information from various actors in e-commerce throughout the EU, both related to online sales of consumer goods (e.g. electronics and clothing) as well as the online distribution of digital content. For that purpose, the Commission gathered evidence from nearly 1,800 companies operating in e-commerce and analyzed around 8,000 distribution contracts. The inquiry wished to look into the main market trends and gather evidence on potential barriers to competition linked to the growth of e-commerce.

E-commerce has been growing rapidly over the past years, and the EU is the largest e-commerce market in the world. As a result, any barrier in online trade may have severe consequences and distort healthy competition. In September 2016, the Commission published a preliminary report with certain findings. It identified issues arising from distribution agreements, which pertain to trade in goods, and licensing agreements, which pertain to trade in services.

 

Issues arising from distribution agreements

Distribution agreements may create geo-blocking restrictions, both from the manufacturers’ and the retailers’ side.

Manufacturers have adjusted to the increasing popularity of e-commerce by adopting a number of business practices that help them control the distribution of their products and the positioning in the market. These practices are not by default illegitimate, however under specific conditions, they can be.

For instance, manufacturers use selective distribution systems in which products can only be sold by pre-selected authorized sellers online. They also use contractual sales restrictions that may make cross-border shopping or online shopping more difficult and ultimately harm consumers since they prevent them from benefiting from greater choice of products and lower prices. The reasoning behind selective distribution systems is to control the quality of the product and safeguard brand consistency. This, nonetheless could classify as a vertical restraint and could be considered discordant with the principles of EU competition law.

Retailers use geo-blocking to restrict cross-border sales. Several retailers collect data on the location of their customers with a view to applying geo-blocking measures. This most commonly takes the form of refusal to deliver and refusal to accept payment from cards issued in other countries.

 

Issues arising from licensing agreements

With respect to digital content, the availability of licenses from the holders of copyrights in content is essential for digital content providers and a key determinant of competition in the market. The Preliminary Report finds that copyright licensing agreements can be complex and exclusive. The agreements provide for the territories, technologies and digital content that providers can use. As such, the Commission is expected to assess on a case-by-case basis whether certain licensing practices are unaccounted for and restrict competition.

In fact, one of the key determinants of competition in digital content markets is the scope of licensing agreements that determine online transmission. These agreements, between sellers of rights, use complicated definitions to define the reach of the service, creating differences in technological, temporal and territorial level. These contractual restrictions are practically the norm, whereas access to exclusive content increases the attractiveness of the offer of digital content providers.

A striking 70% of digital content providers restrict access to their digital content for users from other EU Member States. Further, the 60% of digital content providers are contractually required by rightsholders to geo-block. This practice is more prevalent in agreements for films, sports and TV series. Licensing agreements enable rightsholders to monitor that content providers comply with territorial restrictions, otherwise they ask for compensation. These agreements usually have a very long duration and they may make it more difficult for new online business services to emerge and try to win a stake in the market.

Additional questions arise when online rights are sold exclusively on a per Member State basis, or bundled with rights in other transmission technologies and then are not used. This might signal a semi perfect price discrimination policy depending on how much money each Member State is willing to pay, and a consequent further balkanization of the digital single market.

 

Next Steps

After publishing the preliminary report, the Commission is soliciting views and comments of interested stakeholders until 18 November 2016. The final report of the sector inquiry is expected in the first quarter of 2017. As a follow-up to the sector inquiry, the Commission may further explore if certain practices are compatibility with the EU competition rules and launch investigations against specific distributors and/or resellers on matters of both goods and digital content.

Finally, the results of the sector inquiry provide useful information for the debate on Commission initiatives relating to copyright and the proposed geo-blocking regulation.

The exhaustion rule does not authorize the resale of the back-up copy of a computer program

By Marie-Andrée Weiss

The Court of Justice of the European Union (CJEU) ruled on 12 October  2016 that while the original acquirer of a software can resell his used copy of the program because the exclusive rights of the copyright holder have been exhausted by the first sale, reselling a back-up copy of the program is subject to the authorization of the rightsholder. The case is Ranks and Vasiļevičs, C-166/15.

Mr. Ranks and Mr. Vasiļevičs (Defendants) sold online, from 28 December 2001 to 22 December 2004, more than 3,000 back-up copies of Microsoft computer programs protected by copyright, for an amount evaluated at  264,514 euros. Defendants claimed to have bought these copies from the original owners. However, some of these programs were copies, which Defendants claimed had been legally made by the original owners after the original programs had been damaged, destroyed or lost.

Defendants were charged by a Latvian court for selling unlawfully objects protected by copyright and found guilty. On appeal, the Criminal Law Division of the Riga Regional Court requested a preliminary ruling from the CJEU, asking the Court (1) if the acquirer of a copy of a computer program stored on a non-original medium can resell this copy, in such a case that the original medium of the program has been damaged and the original acquirer has erased his copy or  no longer uses it, because in such case the exclusive right of distribution of the right holder has been exhausted, and (2) if the person who bought the used copy in reliance of the exhaustion of the right to distribute can sell this program to a third person.

The Latvian court cited Directive 2009/24 in its request. However, as the facts took place before the Directive entered into force on 25 May 2009 and repealed Directive 91/250, the CJEU considered that these two questions had to be interpreted under the equivalent provisions of Directive 91/250, that is, its articles 4(c) about the first sale of computer program doctrine, and its articles 4(a), 5(1), and 5(2) about the exceptions to the exclusive right of reproduction of a computer program.

 

The exhaustion right protects the right of the original acquirer to resell his copy of the program

Article 4(a) of Directive 91/250 and Article 4.1(a) of Directive 2009/24 give the rightsholder the exclusive right to reproduce a computer program, by any means whatsoever, whether temporarily or permanently. That right is, however, exhausted, under Article 4(c) of Directive 91/250 and Article 4.2 of Directive 2009/24, if the copy of the program has been placed on the market in the European Union (EU) by the rightsholder or with her consent. The CJEU held in UsedSoft that the right of distributing a computer program is thus exhausted regardless of whether it is a tangible or an intangible copy of the program (UsedSoft paragraphs 55 and 61) and specified that “sale,” within the meaning of Article 4(2) of Directive 2009/24, includes purchasing the right to use a copy of a computer program for an unlimited period (UsedSoft, paragraph 49).

The CJEU noted that “the holder of the copyright in a computer program who has sold, in the European Union, a copy of that program on a material medium, such as a CD-ROM or a DVD-ROM, accompanied by an unlimited licence for the use of that program, can no longer oppose the resale of that copy by the initial acquirer or subsequent acquirers of that copy, notwithstanding the existence of contractual terms prohibiting any further transfer” (Ranks and Vasiļevič paragraph 30).

Reselling a back-up copy of a computer program is subject to the authorization of the rightsholder

However, the issue in our case was not about the right of the original acquirer to resell his used copy of a computer program, but instead whether the right of exhaustion gives a person who acquired, either from the original acquirer or from a subsequent acquirer, a used copy of a computer program stored on a non-original material medium, the right to resell that copy.

Microsoft argued that a non-original copy of a computer program can never benefit from exhaustion of the right of distribution and thus cannot be sold by the user without the rightsholder’s authorization. Defendants argued that even non-original copies benefit from the exhaustion right, if, as stated in UsedSoft, the right holder gave the acquirer of a program, in return for a fee corresponding to the economic value of the work, the right to use the copy for an unlimited period, and if the original acquirer had made every copy in his possession unusable at the time of the resale of the program.

Advocate General Saugmandsgaard wrote in his 1 June 2016 Opinion of the case that article 4(c) of Directive 91/250 must be interpreted as meaning that the right holder’s exclusive right of distribution is infringed if the user makes a copy of the computer program and then sells it without the right holder’s authorization, even if the original medium has been damaged and the seller makes all of his copies unusable (Opinion at 25 and 54). The CJEU followed the opinion of its AG.

While article 5(2) authorizes making a back-up copy of the computer program, it may only be done “to meet the sole needs of the person having the right to use that program” and, therefore, such copy cannot be made to resell the computer program to a third party, even if the original copy has been destroyed, damaged or lost (Ranks and Vasiļevič paragraph 43).

The CJEU had held in UsedSoft that the exclusive right of distribution of a computer program is exhausted after the first sale of the program in the EU. However, UsedSoft could be distinguished from this case as Mr. Ranks and Mr. Vasiļevič were not the original acquirer of the computer programs, and instead had been selling copies of computer programs “on non-original material media.” There was “nothing to suggest that they initially purchased and downloaded those copies from the rightholders website”( Ranks and Vasiļevič paragraph 51).

A back-up copy of a computer program cannot be transferred to a new acquirer without the authorization of the copyright holder, even if the original copy has been damaged, destroyed or lost (Ranks and Vasiļevič paragraph 44). For the CJEU, Mr. Ranks and Mr. Vasiļevič thus indeed possessed infringing copies of a computer program, which is forbidden by article 7.1(b) of Directive 91/250 and Directive 2009/24, and sold them, which is forbidden by article 7.1.(a) of Directive 91/250 and Directive 2009/24.

This case restricts the scope of the digital resale market.

ASCAP and BMI consent decrees: Review ends and struggles begin

By Martin Miernicki

On 4 August 2016, the U.S. Department of Justice (DOJ) announced the conclusion of its review of the consent decrees applicable to the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI). The authority decided not to propose any modifications to the decrees. Furthermore, it set forth its (controversial) opinion that said decrees require ASCAP and BMI to offer “full work” licenses.[1]

 

Background

ASCAP and BMI are the most important performance rights organizations (PROs) for the management of performance rights in musical works in the United States and have for several decades operated under consent decrees negotiated with the DOJ. The organizations entered into these decrees due to claims based on antitrust violations of the Sherman Act. The current versions of the consent decrees date from 2001 (ASCAP) and 1994 (BMI). In 2014, the DOJ’s Antitrust Division initiated a review in order to evaluate if these decrees needed to be updated. In the course of this review, numerous public comments were submitted to the DOJ.

 

The closing statement

In a closing statement, the DOJ explained its reasons for not modifying the decrees and prohibiting ASCAP and BMI from issueing “fractional licenses”. With regard to the update of the decrees, the DOJ stated that “the industry has developed in the context of, and in reliance on, these consent decrees and that they therefore should remain in place” (page 22). However, it also suggested the need for comprehensive legislative reform. As for “fractional” licenses, the Antitrust Division interprets the language of the decrees and the case law based thereon as requiring PROs to provide access to “all works” in their repertoire, meaning that a license issued by such entity must eliminate the risk of infringement liability for the user. Thus, ASCAP and BMI may only i) offer licenses to the entire works, even if they represent not all co-owners; ii) include in their repertoires only works which they are able to license on such a basis.[2] Similarly, an amendment to the decrees to allow fractional licensing was found to be not in the interest of the public.

 

What can be expected?

The closing statement is in conflict with long-standing practices of copyright licensing in the United States. If enforced, it is likely to have a major impact on the music industry. It has also triggered a heated debate. The concerns expressed include the rise of administrative costs, a reduced royalty flow to right holders, and obstacles to creative production. Both ASCAP and BMI have announced that they will challenge the authority’s reading of the consent decrees; ASCAP aims to induce a legislative reform while BMI plans to pursue litigation.

[1] Under a “full work“ license (or 100 percent license), a user obtains authorization to use a work without risk of infringement liability, whereas a “fractional” license covers only the rights which are controlled by the PRO issuing the license, implying the need for further licenses.

[2] Under U.S. copyright law co-owners of joint works are treated as tenants in common. Thus, each co-owner can issue a non-exclusive license to the entire work (unless an agreement stipulates otherwise), provided that she accounts for and pays to the other co-owners their pro-rata shares of the revenues.

Samsung alleges that Huawei used FRAND promises to monopolize smartphone technology

By Nicole Daniel

In an ongoing dispute, Samsung accused Huawei of breaching its patent licensing commitments in order to gain control over the market for commonly used cellular technologies.

In May 2016 Huawei sued Samsung in the U.S. and in China for infringing 11 standard essential patents for smartphones. The technology covered by these patents is allegedly used in almost all of Samsung’s cell phones. Huawei seeks damages in the U.S. proceeding; however merely seeks injunctions in the Chinese proceeding. In this regard, it must be noted that Chinese courts are becoming increasingly involved in patent disputes between big technology companies.

In July 2016 Samsung in turn sued Huawei in China for infringing six of its patents. In August 2016 Samsung responded to the U.S. lawsuit and filed antitrust counterclaims. Samsung accuses Huawei of breaching its promise to license the patents on FRAND terms thereby getting an unlawful monopoly over 3G and 4G wireless device technology. Furthermore, Samsung accused Huawei of patent infringement for 11 smartphone patents that may already be or may become essential to cellular technologies. Samsung also argued that two of Huawei’s patent infringement claims should be dismissed, since the underlying intellectual property are unpatentable math formulas.

Samsung further argued that Huawei merely sued for injunctions in China to gain leverage in licensing negotiations in other areas of the world.

Samsung is seeking damages as well as injunctions to block the injunctions sought by Huawei.

At a court hearing on 13 September 2016 in San Francisco, District Judge William Orrick said that he was not inclined to break up the patent and antitrust dispute between the companies to allow Huawei to seek a court-ordered global FRAND license rate for its patent portfolios prior to litigation over the alleged patent infringement and Samsung’s antitrust counterclaims. However, Judge Orrick allowed Huawei to argue for bifurcation by filing a five-page brief within the next week.

Judge Orrick then set a case schedule for a trial starting in two years on 17 September 2018. He also urged the opponents to settle the dispute sooner than that, noting that their plan to delay mediated settlement talks until deeper into the litigation proceedings was counterproductive. Furthermore, filing numerous lawsuits against each other to resolve their differences “is not the wisest way of dealing with the problem” that the companies have with each other.