United States: ITC Alj McNamara In Apple-Qualcomm Investigation: Exclusion Orders Are Incentives To Design- Around

Last Updated: June 5 2019
Article by Aarti Shah

In her April 16, 2019 Public Interest Findings, Administrative Law Judge ("ALJ") McNamara decisively stated that antitrust issues disguised as competitive conditions arguments are not a factor in the International Trade Commission ("ITC") proceeding between Apple and Qualcomm. See Mobile Electronic Devices II, Inv. No. 337-TA-1093, Analysis and Findings with Respect to the Public Interest, and Recommendation on Remedy and Bond, at 4 (April 16, 2019). In her decision, she includes a detailed public interest analysis, ultimately rejecting Apple's contention that an order excluding certain iPhone 7s, 8, and X would be so harmful to the American public that it should not be allowed, and noting that an exclusion order against Apple is an incredible incentive to engineer a design-around.

By way of background, Qualcomm sued Apple in the ITC alleging patent infringement of certain patents related to a power saving technique. The allegedly infringing devices are certain iPhone 7s, 8, and X that contain Intel baseband processor chips. Qualcomm sought a permanent, limited exclusion order ("LEO") and cease and desist order ("CDO") to exclude those devices from importation.

Apple argued that Qualcomm's anti-competitive behavior precluded the ITC from awarding any remedy for a patent violation, regardless of infringement. Apple only has two suppliers of baseband processor chips: Intel and Qualcomm. According to Apple, if an exclusion order was entered, Intel would be forced out of "the chipset market and from 5G development 'with near certainty.'" Apple argued that even if it were found to infringe, Qualcomm should be satisfied with money damages from other court proceedings in lieu of an exclusion order.

Qualcomm countered by stating that Apple is a monopsonist, whom yields so much power as the "current major seller/supplier of smartphones" that whichever chipset company Apple selects, "has the largest share of global chipset sales for high-end smartphones." Qualcomm dispelled the notion that it targeted Intel to drive its primary competitor out of the baseband chip market. To Qualcomm, "'the exclusion order [was] about Apple's lack of respect for [its] intellectual property.'" (citations omitted).

Ultimately, ALJ McNamara found that three of the four public interest factors favored Qualcomm, citing ITC precedent that "has a history of protecting intellectual property even as it considers the balancing of interest, and even when that leaves only one dominant player in a given market." The four public interest factors are: (1) the public health and welfare, (2) competitive conditions in the United States economy, (3) the production of like or directly competitive articles in the United States, and (4) United States consumers. 19 U.S.C. § 1337(d)(1).

First, ALJ McNamara found that Apple's sole argument that an exclusion order would have an adverse effect on the public health and welfare was premised on pure speculation and assumption. Apple and Intel failed to produce any evidence that an exclusion order would force Intel out of the U.S. baseband chipset market, thereby hindering technological innovation and 5G development. Moreover, because no smartphones are manufactured in the United States, she found that an exclusion order would not harm the production of like or directly competitive articles in the United States.

While ALJ McNamara found that an exclusion order may impact competitive conditions for the mobile electronic device market, she noted that consumers have ample choices to replace the accused iPhones with non-infringing products, including earlier, non-infringing iPhones and phones from other smartphone providers. Moreover, the price of chipsets is a mere fraction of the total price downstream consumers pay for iPhones. Therefore, if Apple is forced to pay a slightly higher price for Qualcomm's chipsets, consumers should experience negligible effects, if any.

ALJ McNamara expressed concern for Intel's future and that of 5G development. However, she stated that 5G development does not depend on Intel—or Intel's sales of chipsets to Apple. ALJ McNamara also found that there is ample time—and incentive—for Apple and Intel to develop and test prototypes or design-arounds for the infringing iPhones.

In light of her concern for 5G development, ALJ McNamara recommended a modified version of Qualcomm's requested remedy: (1) a tailored CDO, that will allow Apple to service—repair and replace—its current infringing iPhones in the U.S. and (2) a tailored LEO, whereby Apple is permitted to import iPhones for testing purposes that contain Intel 3G and 4G chips—but only for four months—and only in an amount necessary to test and develop 5G.

Unfortunately, ALJ McNamara's decision will not be reviewed by the full ITC, for the parties entered into a settlement agreement—and jointly filed to terminate the investigation. However, ALJ McNamara's findings will likely impact future public interest arguments at the ITC. Parties will need to stick closer to the statutory factors, instead of relying on speculative economic arguments that resemble antitrust allegations. What's more, ample sales of infringing products and the length of 337 investigations may be viewed as enough time to incentivize infringing parties to engineer design-arounds. Just how much so remains to be seen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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