Thursday, January 5, 2012

Thanks to Apple's flawed litigation strategy, HTC has nothing to fear until March 2013 (in the US)

Litigation is full of imponderabilities and surprises, especially in the United States, where the ITC increasingly appears to be a very difficult forum for smartphone patent holders and district court cases involve layperson juries as triers of deeply technical issues.

But even if litigants can never control their destiny, there are important ways in which smart tactics, combined with the first-mover advantage, can significantly influence the probabilities of different outcomes. And in this respect, Apple made a number of poor choices over the last two years that increasingly produce undesirable effects. In general, it appears that Apple got better. It probably learned from mistakes, and it hired more and better lawyers, both internally and externally. However, some of what went wrong in the past has effects that are irreversible at least in the near term.

When Apple started its patent assertions against Android device makers, there was undoubtedly a lot of emotion involved, at least on Steve Jobs's part. But fending off the fundamental commoditization threat that Android represents is not just a matter of revenge for presumed betrayal and theft: it's an absolute strategic necessity for Apple, which without meaningful product differentiation will be marginalized by Android in all respects. Therefore, it's inexplicable, with the benefit of 20/20 hindsight, how Apple could make major mistakes that would have been avoidable. A company known for its uncompromising attention to detail in all technical and design-related matters simply blundered when it decided when, where and how to sue. As a result, even HTC, the company with the weakest patent portfolio among major Android device makers, has nothing to fear from Apple's patents this year, at least in the United States (other jurisdictions are different, and some of them are much faster). Apple is ceding ground to Android on a daily basis, and its legal efforts take more years to bear fruit than they would have taken with better advice.

I've been watching Apple's lawsuits for quite a while now, and there's a lot I could tell you here about what they should have done differently -- and this is not just the kind of wiser-after-the-fact kind of stuff but things they could and should have researched and understood.

With the ITC import ban Apple won before Christmas, it has scored a first victory against HTC. Forcing Android device makers to modify their products feature by feature is a perfectly valid strategy. But it must be implemented efficiently, in ways that yield results sooner rather than later -- and that's where Apple made its worst mistakes.

In this post I will focus on the HTC situation. 22 months have passed since Apple sued HTC, and major results (in the U.S.) are at least another 14 months off. Instead of getting a series of quick results against HTC that could then be extended to other Android device makers, Apple's disputes with Motorola and Samsung, which started seven months and, respectively, 13 months later, may very well be resolved before there's any major breakthrough against HTC in sight.

Tactical mistakes in disputes with Motorola and Samsung

Apple also made mistakes against Motorola and Samsung. I may talk about those in more detail some other time. Just a few remarks here:

Apple indicated to Motorola that it was going to sue them but lost the race to the courthouse. As a result, Apple had to modify its litigation strategy, which may be part of the reason why its own ITC complaint against Motorola was based on only three patents. More importantly, Apple lost the chance to have all lawsuits consolidated in a venue of its choice. It now has to deal with Motorola in MMI's home court (the Northern District of Illinois), MMI's preferred rocket docket (the Southern District of Florida, where an Apple motion to transfer was flatly denied), and possibly in the Western District of Wisconsin, unless that court also sends its other Apple-Motorola cases to Chicago. Admittedly, Apple was a bit out of luck as far as Illinois is concerned: Motorola's lawsuits were transferred from there to Wisconsin, and then the biggest one of them was sent back to Chicago as a result of a work-sharing agreement between two federal judges. This is rather unusual and beyond control, but if the dispute had had a clear center of gravity in a venue of Apple's choice, it wouldn't have happened.

With respect to Samsung, I've previously criticized Apple's excessive reliance on "soft" design-related rights and its (as well as Samsung's) push for preliminary injunctions in multiple jurisdictions (though I do believe Apple has good reasons to appeal the denial of a preliminary injunction by a US district court to the Federal Circuit). In Germany and Australia, it's increasingly likely that Apple will owe Samsung damages due to improperly-granted preliminary injunctions. While Apple can afford this, it's an embarrassment and courts will be more hesitant than ever to grant Apple preliminary injunctions, at least in those jurisdictions.

Why no companion complaint in March 2010?

When Apple brought its first two complaints against HTC in March 2010, it asserted 10 patents in an ITC complaint and a different set of 10 patents in the District of Delaware. At the time, Apple couldn't know that the ITC is extremely reluctant to hand smartphone patent holders decisive victories -- nor could it anticipate to what astonishing degree the ITC would be swayed by non-legal political arguments.

But for a number of years it's been recommended that plaintiffs -- unless they are tight on cash -- file companion (mirror) complaints asserting in a federal lawsuit the same patents as in an ITC proceeding. This is usually done because the ITC can't order damages. It's also a potential second bite at the apple: even though district courts take note of the ITC discovery results and the ITC's rulings, there's always a possibility of prevailing on patents that one drops during an ITC investigation or on which a district court may decide more favorably even subsequently to a negative ITC decision (especially if ITC-specific issues such as waivers of arguments or the domestic industry requirement play a role).

So in addition to the two complaints it brought in March 2010, Apple should have filed a simultaneous federal lawsuit over the 10 patents from its original ITC complaint against HTC. Apple could still assert any of those patents in a federal lawsuit at this stage, but it could have saved time. This wouldn't have precluded Apple from additionally asserting 10 different patents in federal litigation as well. Companies do that all the time. A few months ago, HTC asserted nine patents it had obtained from Google, using five of them (alongside others) in an ITC complaint as well as a companion federal lawsuit and the other four of them only in a federal lawsuit.

Nokia litigation delayed Apple's ITC case against HTC, but Apple's Delaware lawsuits against HTC didn't slow down Nokia

Why did Apple sue HTC in Delaware at all? There's lots of litigation there because of many U.S. companies being Delaware corporations, but if you hold patents and want to stop someone's infringement soon, there are some more suitable districts. For example, MMI made a smart choice by bringing some litigation in the Southern District of Florida, but even Apple's home court, the United States District Court for the Northern District of California, is significantly faster. Apple started its litigation with Samsung in California, but it should already have done this against HTC. Again, we're not talking about 20/20 hindsight: the median times to trial for patent cases in the various district courts are no secret.

While I'm not 100% sure, I believe I have the answer: Nokia. By the time Apple sued HTC, it had already been embroiled in litigation with its Finnish rival for almost half a year. That litigation had its center of gravity in Delaware (which was Nokia's choice in that case). A short while after suing HTC there, Apple tried (unsucessfully) to have all of its HTC and Nokia lawsuits consolidated -- though Apple (equally unsuccessfully) opposed the partial consolidation of its ITC cases against Nokia and HTC. Why?

At the ITC, all disputes are one-way streets: counterclaims can only be brought as separate complaints. Therefore, Apple didn't want a delay of its ITC assertions against HTC and Nokia, while in Delaware it hoped to also slow down Nokia's lawsuits. Apple was afraid of Nokia and ultimately came down on the losing end of a settlement. In retrospect (and this is 20/20 hindsight in part, though not in full), Apple should have agreed to pay royalties to Nokia much earlier in order to focus on Android.

The tactical approach I just outlined failed. The ITC wanted to make things more efficient for itself and consolidated a part of the previously-launched investigation of Apple's complaint against Nokia into the investigation of its complaint against HTC. This resulted in a couple of months of delay as compared to an investigation in which HTC (including its U.S. subsidiaries) would have been the only defendant. Perhaps even more importantly, Nokia was at that time a much more powerful player than HTC, and it was and still is a greatly more sophisticated one as far as patents are concerned. By asserting partly the same patents against HTC and Nokia, and especially as a result of consolidation, Apple created a situation in which HTC, which at the time was pretty clueless about patents (it's certainly learned a lot as well since then, but it's still nowhere as competent in this area as Nokia), got the benefit of Nokia's prior art research and other help concerning those patents.

The Delaware court found a rather limited overlap between Apple's dispute with Nokia and the one with HTC. Unlike the ITC, it didn't see a major benefit in consolidation due to the fact that Apple asserted partly the same patents against both companies, given that Nokia's Symbian-based phones and HTC's Android-based handsets are different technologies. The overlap was relatively smaller since there was absolutely no overlap between the claims that Nokia and HTC brought, each of them separately, against Apple.

Delaware, Dela-y-ware: all Apple v. HTC litigation put on hold as of December 22, 2011

On December 22, 2011 -- three days after the final ITC decision on Apple's first complaint against HTC -- the United States District Court for the District of Delaware dealt Apple's aspirations against HTC a setback (in terms of timing, not substance) by granting an HTC motion to stay all three Apple v. HTC cases in that district pending the resolution of Apple's second ITC complaint against HTC.

HTC had brought the related motion in August 2011. When I saw it, I thought it was extremely ambitious and aggressive: HTC asked the Delaware court to stay three cases even though only one of those lawsuits involved the patents Apple is asserting at the ITC. There was no question that the federal court was going to stay the case that mirrored an ongoing ITC investigation, and Apple didn't object to that part of the motion to stay. But HTC argued that it would be much more efficient for the court to also stay those other two cases since they are somewhat related (from a technology point of view) to the companion lawsuit and all three of those lawsuits should go to trial at the same time, further down the road.

The court, which probably suffers from case overload these days, somewhat surprisingly granted HTC's motion in full, pointing to the fact that courts enjoy quite some discretion with respect to case management issues. This decision slows down Apple's efforts against HTC in the U.S. to an extent that I believe is clearly prejudicial to Apple. I don't know if Apple will appeal this one to the Federal Circuit, but even if it did and succeeded, things would take time.

In a way it's unfortunate for Apple that the same court that denied Apple's own motion to consolidate the HTC and Nokia cases back in 2010 later granted a sweeping motion for consolidation by HTC. I don't think Apple's litigators could have foreseen this kind of treatment at the outset. But for the reasons I outlined above, going to Delaware was a bad idea in the first place, and when the decision was made, Apple could and should have chosen a more suitable venue, such as California. And like I said before, it was a bad idea (possibly also driven by emotions, such as pride) to fight a two-front war with Nokia and Android.

Apple could still try to sue HTC in a different district now. But with so much litigation between the two companies already having been brought in Delaware, the dispute has an undeniable center of gravity there, and other district courts might (though they need not) transfer any new lawsuits to Dela-y-ware...

Second round of ITC cases: only preliminary decisions in 2012, final ones in 2013

Apple and HTC (including its affiliates S3 Graphics and VIA Technologies) brought a second round of ITC complaints this summer. Here are the key target dates in those investigations:

  • Apple v. HTC (inv. no. 337-TA-797): trial in August 2012; ALJ's initial determination by November 7, 2012; final decision by March 7, 2013

  • HTC v. Apple (inv. no. 337-TA-808): trial in August/September 2012; ALJ's initial determination by November 30, 2012; final decision by April 1, 2013

  • S3 Graphics v. Apple (inv. no. 337-TA-813): trial in November/December 2012; ALJ's initial determination by February 20, 2013; final decision by June 20, 2013

  • VIA Technologies v. Apple (inv. no. 337-TA-812): trial in July 2012; ALJ's initial determination by November 9, 2012; final decision by March 14, 2013

What should Apple do?

While I have criticized the decisions Apple took back in 2010, I also acknowledged that they appear to have learned from mistakes. This year, Apple has some major new product relaunches coming up, and those new products are certainly the number one priority for the company. If its litigation tactics had been chosen more wisely, those products would benefit from more differentiation as compared to Android than they will under the current circumstances. But what can Apple do at this juncture?

So far, Apple hasn't brought counterclaims in the relatively new Delaware lawsuit in which HTC is asserting patents it acquired from Google. Apple answered HTC's complaint and brought defensive counterclaims (declaratory judgment requests) but it didn't bring infringement counterclaims. Maybe it can still amend its answer to HTC's complaint and bring counterclaims. Otherwise there's a risk for Apple that this Delaware case, though it was the last one to start, could be resolved ahead of Apple's older (but stayed) Delaware lawsuits. Also, by making the case bigger, Apple may create another incentive for the court to stay that one, too.

Like I said before, Apple could still try to bring litigation against HTC in another district than Delaware. If it comes to worst, the case will be transferred to Delaware -- but Apple has little to lose, and it can afford this financially. It could take some of its more recently-granted patents and start a lawsuit in California, for example.

Apple should also step up its efforts against HTC outside the United States. I know there are Apple lawsuits against HTC in two German courts (Mannheim and Munich) and something going on in the UK, and Apple might bring several more. It could also look at some other European jurisdictions (such as France and the Netherlands), and possibly Australia.

And even though Apple is plenty busy managing all the dockets in the three ongoing disputes, it might want to think about the possibility of bringing action against a fourth Android device maker. From a strategic point of view, Amazon would be a highly logical target. It's unlikely to own patents that Apple has to worry about, and the Kindle Fire is doing extremely well at the iPad's expense. Also, Amazon's business model is a fundamental threat to Google's Android monetization strategy, a fact that would certainly make it harder for Amazon and Google to trust each other (though they likely would work out ways to join forces against Apple).

By starting a whole new dispute over partly new and partly old patents, Apple could try to win decisions in a venue of its choice and subsequently assert its winning patents against other Android companies. Given that those Delaware cases against HTC may not be resolved for a long time to come, and considering how difficult it is to win ITC import bans of broad technial scope, a well-thought-out new lawsuit could be a major opportunity for Apple to make headway against Android, which is eating Apple's lunch.


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