TR Daily Ninth Circuit Rules for Qualcomm in FTC Antitrust Case
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Tuesday, August 11, 2020

Ninth Circuit Rules for Qualcomm in FTC Antitrust Case

The U.S. Court of Appeals for the Ninth Circuit (San Francisco) today overturned a lower court’s injunction prohibiting certain business practices of chip manufacturer Qualcomm, Inc., arguing, among other things, that the district court inappropriately considered effects in the broader cellular services market.

The Federal Trade Commission had brought a lawsuit against Qualcomm in the U.S. District Court for the Northern District of California (San Jose) alleging the company violated the Sherman Antitrust Act “by unreasonably restraining trade in, and unlawfully monopolizing, the code division multiple access (‘CDMA’) and premium long-term evolution (‘LTE’) cellular modern chip markets,” the appeals court noted in it opinion in “FTC v. Qualcomm, Inc.” (case 19-16122).

The district court ruled in the FTC’s favor last year, finding that the company had engaged in anticompetitive practices in its use of standards-essential patents (SEPs) to maintain its monopoly in the market for baseband processors (TR Daily, May 22, 2019). Qualcomm then sought review by the Ninth Circuit (TR Daily, July 10, 2019).

Circuit Judge Consuelo Callahan, writing for the court and joined by Circuit Judge Johnnie Rawlinson and District Judge Stephen Murphy III of the Eastern District of Michigan, sitting by designation, said, “This case asks us to draw the line between anticompetitive behavior, which is illegal under federal antitrust law, and hypercompetitive behavior, which is not. The Federal Trade Commission (‘FTC’) contends that Qualcomm Incorporated (‘Qualcomm’) violated the Sherman Act, 15 U.S.C. [sections] 1, 2, by unreasonably restraining trade in, and unlawfully monopolizing, the code division multiple access (‘CDMA’) and premium long-term evolution (‘LTE’) cellular modem chip markets. After a ten-day bench trial, the district court agreed and ordered a permanent, worldwide injunction prohibiting several of Qualcomm’s core business practices. We granted Qualcomm’s request for a stay of the district court’s injunction pending appeal. FTC v. Qualcomm Inc., 935 F.3d 752 (9th Cir. 2019). At that time, we characterized the district court’s order and injunction as either ‘a trailblazing application of the antitrust laws’ or ‘an improper excursion beyond the outer limits of the Sherman Act.’ Id. at 757. We now hold that the district court went beyond the scope of the Sherman Act, and we reverse.”

Judge Callahan noted that Qualcomm both licenses patents and manufactures and sells CDMA and premium LTE modem chips to device manufacturers, whereas its competitors in the chip manufacturing and patent-licensing markets compete in one market or the other, not both.

She also noted that like Nokia and Ericsson, Qualcomm “licenses its patent portfolio exclusively at the [device] OEM [original equipment manufacturer] level.” It also “refuses to sell modem chips to OEMs that do not take licenses to practice Qualcomm’s SEPs. Otherwise, because of patent exhaustion, OEMs could decline to take licenses, arguing instead that their purchase of chips from Qualcomm extinguished Qualcomm’s patent rights with respect to any CDMA or premium LTE technologies embodied in the chips,” Judge Callahan wrote.

“The district court’s decision consists of essentially five mixed findings of fact and law: (1) Qualcomm’s ‘no license, no chips’ policy amounts to ‘anticompetitive conduct against OEMs’ and an [‘anticompetitive practice[] in patent license negotiations’; (2) Qualcomm’s refusal to license rival chipmakers violates both its FRAND [fair, reasonable, and nondiscriminatory] commitments and an antitrust duty to deal under [section] 2 of the Sherman Act; (3) Qualcomm’s ‘exclusive deals’ with Apple ‘foreclosed a “substantial share” of the modem chip market’ in violation of both Sherman Act provisions; (4) Qualcomm’s royalty rates are ‘unreasonably high’ because they are improperly based on its market share and handset price instead of the value of its patents; and (5) Qualcomm’s royalties, in conjunction with its ‘no license, no chips’ policy, ‘impose an artificial and anticompetitive surcharge’ on its rivals’ sales, ‘increas[ing] the effective price of rivals’ modem chips’ and resulting in anticompetitive exclusivity,” Judge Callahan wrote.

She noted precedent establishing that “allegations that conduct ‘has the effect of reducing consumers’ choices or increasing prices to consumers do[] not sufficiently allege an injury to competition . . . [because] [b]oth effects are fully consistent with a free, competitive market,’” and that instead, “to prove a violation of the Sherman Act, the plaintiff must show that diminished consumer choices and increased prices are the result of a less competitive market due to either artificial restraints or predatory and exclusionary conduct.”

“Furthermore, novel business practices—especially in technology markets—should not be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use,’” Judge Callahan wrote.

She said that while the district court defined the relevant market as the market for CDMA modem chips and the market for premium LTE modem chips, “its analysis of Qualcomm’s business practices and their anticompetitive impact looked beyond these markets to the much larger market of cellular services generally. Thus, a substantial portion of the district court’s ruling considered alleged economic harms to OEMs—who are Qualcomm’s customers, not its competitors—resulting in higher prices to consumers. These harms, even if real, are not ‘anticompetitive’ in the antitrust sense—at least not directly—because they do not involve restraints on trade or exclusionary conduct in ‘the area of effective competition.’”

The appeals court reframed the analysis “to focus on the impact, if any, of Qualcomm’s practices in the area of effective competition: the markets for CDMA and premium LTE modem chips.”

It held that the district court erred in concluding that Qualcomm has an antitrust duty to license its SEPs to its direct competitors in the modem chip markets, noting that, among other things, the Qualcomm situation does not qualify for the exception laid out in the Supreme Court’s 1985 decision “Aspen Skiing Co. v. Aspen Highland Skiing Corp.” because Qualcomm did not single out a specific competitor that it withheld licenses from.

As for the district court’s “primary theory of anticompetitive harm”—that Qualcomm imposes “an ‘anticompetitive surcharge’ on rival chip suppliers via its licensing royalty rates”—the appeals court said that it “fails to state a cogent theory of anticompetitive harm. Instead, it is premised on a misunderstanding of Federal Circuit law pertaining to the calculation of patent damages, it incorrectly conflates antitrust liability and patent law liability, and it improperly considers ‘anticompetitive harms to OEMs’ that fall outside the relevant antitrust markets.”

Similarly, Judge Callahan wrote that “the district court’s analysis of Qualcomm’s ‘no license, no chips’ policy focuses almost exclusively on alleged ‘anticompetitive harms’ to OEMs—that is, impacts outside the relevant antitrust market.”

“Furthermore, it appears that OEMs have been somewhat successful in ‘disciplining’ Qualcomm’s pricing through arbitration claims, negotiations, threatening to move to different chip suppliers, and threatened or actual antitrust litigation,” she added.

Finally, the appeals court addressed “the district court’s more specific finding that from 2011 to 2015, 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.’”

“There is some merit in the district court’s conclusion that the Apple agreements were structured more like exclusive dealing contracts than volume discount contracts,” Judge Callahan wrote. “However, we do 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 is warranted.

“During the relevant time period (2011–2015), the record suggests that the only serious competition Qualcomm faced with respect to the Apple contracts was from Intel, a company from whom Apple had considered purchasing modem chips prior to signing the 2013 agreement with Qualcomm. The district court made no finding that any other specific competitor or potential competitor was affected by either of Qualcomm’s agreements with Apple, and it is undisputed that Intel won Apple’s business the very next year, in 2014, when Apple’s engineering team unanimously recommended that the company select Intel as an alternative supplier of modem chips,” she said.

Computer and Communications Industry Association Patent Counsel Joshua Landau said, “Judge [Lucy] Koh's opinion detailed how Qualcomm’s anticompetitive business practices have driven its competitors out of the modem business and raised prices in the cellular industry. The 9th Circuit ignored those factual findings and greenlit Qualcomm's anticompetitive business practices. CCIA is disappointed in the 9th Circuit's deeply flawed decision and hopes that the Federal Trade Commission will ask for review en banc to correct the numerous errors in the panel opinion.” —Lynn Stanton, [email protected]

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