By Jody Coultas, J.D.
The Ninth Circuit determined that Qualcomm has shown there are questions on the merits of the district court’s determination that Qualcomm has an antitrust duty to license its standard essential patents to rival chip suppliers.
Pending the resolution of an appeal filed by Qualcomm, Inc., of a California district court order granting the FTC two partial injunctions in its suit against the modem chip maker, the U.S. Court of Appeals in San Francisco has 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. "Whether the district court’s order and injunction represent a trailblazing application of the antitrust laws, or instead an improper excursion beyond the outer limits of the Sherman Act, is a matter for another day," the court said (FTC v. Qualcomm, Inc., August 23, 2019, per curiam).
Initial FTC action. 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.
District court remedy. 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.
Motion to stay. Qualcomm moved to stay two provisions of the court’s injunction: (1) the requirement that it refrain from implementing its "no license, no chips" policy and negotiate or renegotiate license terms with customers; and (2) a requirement that Qualcomm make exhaustive SEP licenses available to modem-chip suppliers on FRAND terms. The FTC argued that Qualcomm has failed to show the required elements justifying its requested partial stay: (1) that it will likely succeed on the merits on appeal; (2) that it will be irreparably injured absent a stay; and (3) that the public interest favors a stay. The Justice Department, however, expressed its stark disagreement that Qualcomm has any antitrust duty to deal with rival chip suppliers.
To determine whether to issue a stay pending appeal, the appellate court considered "(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies."
The Sherman Act does not restrict a manufacturer engaged in an entirely private business from freely exercising its own independent discretion as to parties with whom he will deal. There is a limited exception when a monopolist terminated a voluntary and profitable course of dealing with a competitor and sacrificed short-term benefits to exclude competition in the long run. However, as has been revealed by this case, the FTC and Department of Justice Antitrust Division disagree as to whether Qualcomm’s conduct implicates the duty to deal.
Qualcomm has shown there are questions as to the merits of the district court’s determination that Qualcomm has an antitrust duty to license its SEPs to rival chip suppliers, the appellate court concluded. Qualcomm also provided evidence that its practice of charging OEMs royalties for its patents on a per-handset basis does not violate the antitrust laws. There was also sufficient evidence of irreparable harm. The injunction requires Qualcomm to enter new contractual relationships and renegotiate existing ones on a large scale. The fundamental business changes that the injunction imposes cannot be easily undone should Qualcomm prevail on appeal. Finally, the court found that the balance of equites weighed in favor of a stay. Although the hardship to the party opposing the stay and the public interest usually merge when the government is the opposing party, this case is unique, as the government itself is divided about the propriety of the judgment and its impact on the public interest.
Reaction. In response to the ruling, Senator Mike Lee (R-UT) stated that the decision "highlights yet again the oddity of us having two federal agencies responsible for civil antitrust enforcement." "Here, we have the FTC prosecuting the case while her sister agency, the Department of Justice Antitrust Division, has told the Court of Appeals that the district court ruling will harm rather than benefit competition," Lee continued. "This kind of dysfunction and confusion illustrates why having two agencies at loggerheads does not make for effective antitrust enforcement."
The case is No. 19-16122.
Attorneys: Jennifer Milici for the FTC. Gary Bornstein (Cravath, Swaine & Moore LLP) for Qualcomm, Inc.
Companies: Qualcomm, Inc.
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