On August 11, 2020, the Ninth Circuit Court of Appeals reversed a decision of Judge Koh sitting in the Northern District of California that certain of Qualcomm’s business practices relating to its standards essential patents (SEPs) breached the antitrust laws. The case had already attained some notoriety for the fact that although the lawsuit had been brought by the United States Federal Trade Commission (FTC), the United States Department of Justice had participated in the appeal as an amicus curiae supporting Qualcomm.
The main thrust of the Appeals Court’s decision was that the FTC had failed to show damage to competition in the relevant market as is required to establish “antitrust injury” of the type that antitrust laws are designed to prevent.
The court noted:
Anticompetitive behavior is illegal under federal antitrust law. Hypercompetitive behavior is not. Qualcomm has exercised market dominance in the 3G and 4G cellular modem chip markets for many years, and its business practices have played a powerful and disruptive role in those markets, as well as in the broader cellular services and technology markets. The company has asserted its economic muscle “with vigor,
imagination, devotion, and ingenuity.” It has also “acted with sharp elbows as businesses often do.” Our job is not to condone or punish Qualcomm for its success, but rather to assess whether the FTC has met its burden under the rule of reason to show that Qualcomm’s practices have crossed the line to “conduct which unfairly tends to destroy competition itself.” We conclude that the FTC has not met its burden. (Citations for the quotes omitted).
The practices that had been found to violate the antitrust laws by the district court:
- Qualcomm licenses its patent portfolios exclusively at the original equipment manufacturer (OEM) level, setting the royalty rates on its code division multiple access (“CDMA”) and premium long-term evolution (“LTE”) patent portfolios in cellular modern chip markets as a percentage of the end-product sales price. Such OEMs products (usually cellphones, but also smart cars and other products with cellular applications) practice one or more of Qualcomm’s patented technologies.
- Because rival chip manufacturers practice many of Qualcomm’s SEPs by necessity, Qualcomm offers these companies what it terms “CDMA ASIC Agreements,” wherein Qualcomm promises not to assert its patents in exchange for the company promising not to sell its chips to unlicensed OEMs.
- Qualcomm reinforces these practices with its 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.
The district court had found that: (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 commitments to the standard-setting body to license SEPs on Fair, Reasonable and Non-discriminatory (FRAND) terms and an antitrust duty to deal under anti-monopolization provisions of § 2 of the Sherman Act; (3) 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 (4) Qualcomm’s royalties, in conjunction with its “no license, no chips” policy, “impose an artificial and anticompetitive surcharge” on its rivals’ sales, “increasing the effective price of rivals’ modem chips” and resulting in anticompetitive exclusivity.
The Decision of the Court of Appeals
As noted above, one of the Court of Appeals main concerns was whether any injury that had been caused by Qualcomm’s practices was an injury of the type that antitrust laws were intended to prevent. In this context, the Appeals Court noted:
Qualcomm does not manufacture and sell cellphones and other end use products (like smart cars) that consumers purchase and use. Thus, it does not “compete” in the antitrust sense against OEMs like Apple and Samsung in these product markets. Instead, these OEMs are Qualcomm’s customers.
Having noted this, the court went on to note that a key issue in antitrust analysis was to define the relevant market in which conduct was to be evaluated for its anticompetitive effects. Here it was “the market for CDMA modem chips and the market for premium LTE modem chips.” The district court had, however, erred when its analysis of Qualcomm’s business practices and their anticompetitive impact looked beyond these markets to the much larger market of cellular services generally. The Court of Appeals noted:
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.”
Against this background, and the fact that the propriety of the challenged conduct had to be assessed on a rule of reason basis allowing for consideration of procompetitive effects of the conduct being considered as well as anticompetitive effects, the Court of Appeals addressed each of the practices noted above.
Refusal to License Chipmakers
On the question of refusal to license other chip manufacturers and use of CDMA ASIC Agreements instead, the Court of Appeals noted that the Supreme Court had in cases such as Verizon v. Trinko and Colgate v. U.S. made it clear that no one was compelled by the antitrust laws to deal with their competitors. The one exception to this found in Aspen Skiing v. Aspen Highlands, where a party to a pre-existing collaborative agreement between competitors (relating to providing a common lift ticket for use on adjacent ski areas) sought to terminate that agreement to obtain a competitive advantage, did not apply here. Qualcomm had at one time licensed to chip makers but had never granted them the right to license their customers. This had changed in response to developments in patent law’s exhaustion doctrine. These developments held that the initial authorized sale of a patented item terminates all patent rights to that item irrespective of any conditions imposed on the purchaser at the time of the first sale, meaning that if Qualcomm had continued to grant licenses of the type it had done previously, it would have been stripped of its right to sue OEMs for infringement in making an unauthorized use of chips that had been bought from a licensed chip maker. Use of CDMA ASIC agreements, where Qualcomm promised not to sue other chip-makers in return for promises not to sell the chips in question to unlicensed users as described above, avoided this problem, improved profitability and had been copied by other chip manufacturers. The policy did not therefore fit within the Aspen exception.
As to the question of whether Qualcomm’s policy of not licensing chip manufacturers was an antitrust violation because it breached Qualcomm’s obligation to license SEPs, the court noted that the only case where this had been found, Broadcom Corp v. Qualcomm Inc., was one where it had been found that there had been an intentional deception of the Standards Setting Organization, which was not the case here. Furthermore, the court noted that many scholars and practitioners had “expressed caution about using the antitrust laws to remedy what are essentially contractual disputes between private parties engaged in the pursuit of technological innovation.”
The Royalty Rate
The question of whether Qualcomm caused antitrust injury because of its allegedly high royalty rates was dealt with succinctly by pointing out that 1) in condemning Qualcomm’s royalty rates because they were based on the cost of a handset and not the value of the patents, the district court had misread Federal Circuit case law which allowed parties to agree to base royalty rates on sales prices of products including a patented feature when this was convenient; 2) there was no basis in case law for finding a royalty rate to be anticompetitive unless they precisely reflect a patent’s current, intrinsic value and are in line with the rates other companies charge and 3) even if there was any harm, this was being done to Qualcomm’s customers, not to its competitors and so did not harm competition.
‘No License, No Chips’
Similarly, any injury caused by Qualcomm’s “no license, no chips” policy fell largely on its potential customers, the OEMs, not on competitive chip makers and so did not constitute an “antitrust injury”. Indeed, the evidence showed that competitors had entered the market and Qualcomm’s share of it was decreasing. The court noted that this policy was the converse of a traditional tie-in situation where grant of a license was tied to purchase of a product that could in some cases be an antitrust violation. In this case, the court noted:
“no license, no chips” is chip neutral: it makes no difference whether an OEM buys Qualcomm’s chip or a rival’s chips. The policy only insists that, whatever chip source an OEM chooses, the OEM pay Qualcomm for the right to practice the patented technologies.
The decision is clearly a victory for holders of standards essential patents and consistent with US case law on the purpose of the antitrust laws, which unlike parallel legislation in Europe do not provide general remedies for what can be viewed as abuse of a dominant position. The idea that SEP issues can be dealt with by contract law rather than antitrust or competition law, may however, be overly optimistic. Whereas the contract laws of most states of the United States recognize concepts such as promissory estoppel and third-party beneficiary rights, both of which are likely to be relevant to contract disputes relating to SEPs. Recognition of such concepts is not universal and many contracts relating to FRAND and SEPs are governed by laws where such concepts may not apply. This could create problems for a contract law-based approach to the question of how best to enforce both patent owners and users rights and obligations relating to SEPs.