Antitrust Law Daily FTC win in challenge to Qualcomm patent licensing practices overturned
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Tuesday, August 11, 2020

FTC win in challenge to Qualcomm patent licensing practices overturned

By Jeffrey May, J.D.

District court went beyond the scope of the Sherman Act, and its issuance of a worldwide injunction prohibiting some of Qualcomm’s core business practices was vacated.

The FTC failed to meet its burden of proving that Qualcomm, Incorporated’s various business practices caused anticompetitive harm in certain modem chip markets to support antitrust claims against "the world’s leading cellular technology company," the U.S. Court of Appeals in San Francisco has decided. The court also ruled that "exclusive deals" between Qualcomm and Apple Inc. did not warrant the issuance of an injunction. Noting that antitrust law, like patent law, is "aimed at encouraging innovation, industry and competition," the appellate court reversed the district court’s decision in favor of the FTC and vacated a worldwide injunction prohibiting some of Qualcomm’s core business practices (FTC v. Qualcomm, Inc., August 11, 2020, Callahan, C.).

Background. Qualcomm holds standard essential patents (SEPs) and other patents related to code division multiple access (CDMA) and premium long-term evolution (LTE) technologies. In addition to Qualcomm’s patent licensing business, the company also manufactures and sells cellular modem chips, the hardware that enables cellular devices to practice CDMA and premium LTE technologies and thereby communicate with each other across cellular networks.

Qualcomm licenses its patent portfolios exclusively to original equipment manufacturers (OEMs), such as Apple and Samsung, whose products (usually cellphones) practice one or more of Qualcomm’s patented technologies. In addition, Qualcomm follows a so-called "no license, no chips" policy, under which Qualcomm refuses to sell modem chips to OEMs that do not take licenses to practice Qualcomm’s SEPs.

OEM customers and rival chipmakers took issue Qualcomm’s practices of licensing exclusively at the OEM level and refusing to license rival chipmakers, its licensing royalty rates, its "no license, no chips" policy, and Qualcomm’s sometimes aggressive defense of these policies and practices.

FTC suit. In the final days of the Obama Administration, the FTC sued Qualcomm in the federal district court in San Jose, alleging that the company’s business practices excluded competitors and harmed competition in the modem chip markets in violation Section 5(a) of the FTC Act based on theories under Sections 1 and 2 of the Sherman Act. Following a 10-day bench trial, the district court in 2019 handed the FTC a victory. It concluded that Qualcomm’s patent licensing practices violated both Sections 1 and 2 of the Sherman Act. The district court ordered a permanent, worldwide injunction prohibiting Qualcomm’s core business practices.

Qualcomm appealed. Pending appeal, the appellate court stayed the portions of the district court’s injunction requiring that (1) "Qualcomm must make exhaustive [standard essential patent] 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.

Anticompetitive effects on relevant markets. Noting that rule of reason analysis applied to the conduct, the appellate court explained that the plaintiff had the initial burden to prove that the challenged restraint had a substantial anticompetitive effect that harmed consumers in the relevant market. The appellate court determined that the district court correctly defined the relevant markets as "the market for CDMA modem chips and the market for premium LTE modem chips." However, in reaching its findings, the district court considered anticompetitive impacts outside of the relevant markets. Although the lower court characterized Qualcomm’s various business practices as "interrelated" and mutually reinforcing, actual or alleged harms to customers and consumers outside the relevant markets were beyond the scope of antitrust law. Thus, the appellate court reframed the issues to focus on the impact to the relevant markets.

Antitrust duty to license SEPs to its direct competitors. The FTC conceded that Qualcomm’s refusal to provide exhaustive SEP licenses to rival chip suppliers did not fit within the Aspen Skiing exception to the general rule that there is no antitrust duty to deal with rivals. The appellate court agreed that the required elements for the Aspen Skiing exception were not met.

Separately, the appellate court rejected the FTC’s alternative theory attacking OEM-level licensing under Section 2 based on Qualcomm’s purported breach of contractual standard setting organization commitments to license SEPs to rival chipmakers on FRAND terms. The FTC did not meet its initial burden of proving anticompetitive harm under the rule of reason framework. The appellate court also noted that several academics and practitioners have expressed caution about using the antitrust laws to remedy what are essentially contractual disputes between private parties engaged in the pursuit of technological innovation. To the extent Qualcomm breached any of its FRAND commitments (a conclusion which the appellate court did not reach), the remedy for such a breach lies in contract and patent law, according to the appellate court.

Qualcomm’s royalty rates. The appellate court also rejected the district court’s primary theory of anticompetitive harm based on Qualcomm’s imposition of an "anticompetitive surcharge" on rival chip suppliers via its licensing royalty rates. According to the appellate court, the district court’s anticompetitive surcharge theory failed to state a cogent theory of anticompetitive harm. Even if there was an "unreasonable royalty rate" amounting to an "anticompetitive harm," the primary harms identified were to the OEMs who were outside the relevant markets.

Qualcomm’s "no license, no chips" policy. The alleged harm from Qualcomm’s "no license, no chips" policy also focused almost exclusively on harms to the OEMs and therefore harms outside the relevant markets. Citing the U.S. Supreme Court’s 2018 decision in Ohio v. Am. Express Co., the appellate court noted that this appeared to be another case where "a company’s novel business practice at first appeared to be anticompetitive, but in fact was disruptive in a manner that was beneficial to consumers in the long run because it forced rival credit card companies to adapt and innovate."

Qualcomm’s agreements with Apple. Lastly, the appellate court addressed the theory that Qualcomm violated both sections of the Sherman Act by signing "exclusive deals" with Apple that "foreclosed a ‘substantial share’ of the [CDMA] modem chip market." While the appellate court found some merit in the district court’s conclusion that the Apple agreements were structured like exclusive dealing contracts, it did not agree that these agreements had the actual or practical effect of substantially foreclosing competition in the CDMA modem chip market, or that injunctive relief was warranted. Apple itself had terminated the agreements two years before the FTC filed its action, and the agreements did not pose any current or future threat of anticompetitive harm.

The case is No. 19-16122.

Attorneys: Jennifer Milici for the FTC. Thomas C. Goldstein, Kevin K. Russell, and Eric F. Citron (Goldstein & Russell P.C.); Gary A. Bornstein, Antony L. Ryan, Yonatan Even, and M. Brent Byars (Cravath Swaine & Moore LLP); Robert A. Van Nest, Eugene M. Paige, Cody S. Harris, and Justina Sessions (Keker Van Nest & Peters LLP); Willard K. Tom, Geoffrey T. Holtz, Richard S. Taffet (Morgan Lewis & Bockius LLP); Michael W. McConnell (Wilson Sonsini Goodrich & Rosati) for Qualcomm Inc.

Companies: Qualcomm Inc.; Apple Inc.

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