Antitrust Law Daily FTC, Qualcomm present arguments in ‘no license, no chip’ dispute
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Thursday, February 13, 2020

FTC, Qualcomm present arguments in ‘no license, no chip’ dispute

By Jody Coultas, J.D.

The oral arguments presented a unique split between U.S. antitrust enforcers, with the Department of Justice Antitrust Division arguing in support of vacating the lower court’s decision.

A panel of the U.S. Court of Appeals in San Francisco heard arguments today in the highly anticipated antitrust case concerning whether the FTC’s win in a dispute with Qualcomm, Inc. over whether it abused its modem-chip monopoly to force handset manufacturers to pay high royalty prices should be affirmed. The case not only presents unique issues of antitrust and patent law, but has also created a rift between the FTC and Justice Department. The Justice Department has sided with Qualcomm, arguing today that the district court’s decision should be vacated because the judge failed to consider the effects the ruling with have on national security (FTC v. Qualcomm, Inc., Case No. 19-16122).

The FTC brought an action against Qualcomm, alleging that it violated antitrust laws by leveraging its power in the modem chips market to impose unfair licensing terms and hurt competition. Handset manufacturers (known as "OEMs") depend on Qualcomm for modem-chip supply. Qualcomm also holds patents that it has declared essential to widely adopted cellular standards. In exchange for having its patented technologies included in these cellular standards, Qualcomm committed to telecommunications industry standard setting organizations (SSOs) that it would grant licenses to the company’s standard essential patents (SEPs) on fair, reasonable, and non-discriminatory (FRAND) terms to applicants that wish to implement cellular standards.

The FTC asserted that in breach of contractual commitments to the SSOs, Qualcomm rejected requests from modem-chip competitors to license patents essential to practicing these standards. The FTC sought a ruling that Qualcomm’s voluntary FRAND licensing commitments under the plain meaning of these SSOs’ IPR policies, require Qualcomm to make licenses available to competing modem-chip sellers.

Procedural history. The district court found that Qualcomm abused its chip monopoly power to distort negotiation with OEMs, secure higher royalties than it could obtain based solely on the value of its patents, and weaken competitors. In support of its conclusion, the court noted that Qualcomm refuses to sell modem chips to OEMs unless they first agree to a separate patent license (termed as Qualcomm’s "no license, no chips" policy). Because OEMs cannot obtain Qualcomm’s chips without signing the patent license agreement, the court concluded that the "no license, no chips" policy enables Qualcomm to secure "unreasonably high rates" that "are set by its monopoly chip market share rather than the value of its patents." The court also found that Qualcomm supported its elevated royalties by refusing to license its SEPs to competing chipmakers. Accordingly, the court entered an injunction aimed at Qualcomm’s anticompetitive practices.

The Ninth Circuit stayed the portions of the district court’s injunction requiring that (1) "Qualcomm must make exhaustive SEP licenses available to modem-chip suppliers," and (2) "Qualcomm must not condition the supply of modem chips on a customer’s patent license status" and "must negotiate or renegotiate license terms" with its customers in that respect. The appellate court now must rule on whether Qualcomm’s "no license, no chips" policy violated U.S. antitrust law.

More than a dozen amicus briefs have now been filed in the closely watched case, including by the Department of Justice Antitrust Division. The Antitrust Division’s brief argues that the district court’s decision threatened to disserve the purposes of antitrust law and, in imposing an overly broad remedy, to harm national security. The FTC argues that district court’s decision is "firmly grounded in the trial record and consistent with settled principles of antitrust law."

Oral arguments. Arguing on behalf of Qualcomm before Judges Rawlinson and Callahan, as well as Judge Murphy from the Eastern District of Michigan, Tom Goldstein noted that there is no basis in antitrust law to uphold the district court’s decision and that the decision runs contrary to the principles of antitrust law. Even assuming that Qualcomm engaged in the behavior at issue, Goldstein argued, there was no harm to the competitive process. The law encourages patent licensing, high patent rates, and offering chip discounts, yet the district court’s ruling essentially says these practices are illegal and anticompetitive. Goldstein also asserted that the patent royalties Qualcomm charged were not excessive, and that Qualcomm gets the same rates outside monopolized markets and inside monopolized markets where it does not sell chips. Qualcomm did not interfere with the competitive process, nor was the structure of its business anticompetitive, Goldstein argued.

Goldstein also pointed out that there is no case law on point, as Qualcomm’s business is unique and does business differently than any other company. Relying heavily on the "clearly erroneous standard," Goldstein argued that the district court improperly relied on Caldera, Inc. v. Microsoft Corp., 87 F. Supp. 2d 1244 (D. Utah 1999), to support the ruling that Qualcomm’s royalty rates raised rivals’ chip costs and that this was in violation of Section 2.

FTC attorney Brian H. Fletcher defended the district court’s decision, facing a number of questions from the judges as to whether the conduct at issue was not merely good business and whether there was any actual harm to competition. The FTC, agreeing with Qualcomm, conceded that the behavior at issue was unique and there was little precedent dealing with the issues presented. However, the FTC argued that the district court properly applied long-settled antitrust law that companies must "compete on the merits." Also, the FTC argued that it is well-settled that it is illegal to raise rivals’ costs by requiring customers to pay a financial penalty to the monopolist when they deal with its rivals.

The judges questioned whether the district court’s ruling punished Qualcomm for its overly capitalistic and unique business model. To answer whether the decision conflated uniqueness with anticompetitiveness, the FTC argued that Qualcomm did not charge higher royalty rates in markets where it did not have a monopoly, and this was a red flag that the conduct was not efficient. Qualcomm disputed this point. The judges also questioned whether the indirect harm to competitors was merely business as usual, but the FTC argued that Qualcomm’s business model was anticompetitive because the "no license, no chip" policy made it hard for its customers to work with rivals.

There were also questions as to why OEMs did not simply file patent or contract claims against Qualcomm, rather than relying on antitrust law. Qualcomm also argued that this dispute was better suited for patent and contract claims. The FTC contended that the OEMs could not file patent claims based on Qualcomm’s threats to stop selling them chips.

The FTC and Qualcomm also disagreed as to whether Qualcomm’s patent royalties constituted a naked tax on chips made by its rivals. The FTC concluded by stating that the injunction did not harm the market or efficiencies, and should be upheld.

Antitrust Division attorney Michael F. Murray argued that the district court’s ruling was contrary to the purpose of antitrust law and constituted a threat to national security. In its brief, the Justice Department argued that the district court’s flawed reasoning obscured a simple explanation for Qualcomm’s conduct and that any effect of Qualcomm’s conduct on OEMs did not establish harm to the horizontal competition among Qualcomm and chip-supplier rivals. However, the oral arguments focused on potential harm the district court’s ruling with have on national security. Murray argued that the remedy was not narrowly tailored, and will thus impact the rollout of 5G wireless service in the U.S. and would result in the U.S. losing the "5G battle" to China.

The judges seemed skeptical of this position, questioning what actual evidence the Justice Department had to support the national security argument. The FTC noted that, early on in the case, Qualcomm dropped any discussion of national security. Also, the FTC argued that there could not have been an abuse of discretion on the part of the district court judge because the issue was not before the court and there was insufficient evidence to support the Justice Department’s position.

Finally, the FTC noted that the reason Qualcomm is the only U.S. company in the 5G market was because its allegedly anticompetitive conduct squelched any possible competition. The judges raised the issue that there have been changes to the 5G market outlook since the district court’s decision, and that Qualcomm may not have the monopoly power it once had. The FTC countered that, despite some market numbers provided by Qualcomm, it was likely that Qualcomm would have a monopoly position when the market goes to 5G, and that market share losses were misleading because its rivals were faltering and others were not selling chips based on Qualcomm’s conduct.

Attorneys: Brian H. Fletcher for the Federal Trade Commission. Tom Goldstein (Goldstein & Russell, P.C.) for Qualcomm Incorporated. Michael F. Murray for U.S. Department of Justice, Antitrust Division.

Companies: Qualcomm, Inc.

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