Posted on November 25, 2020
Authored by Manika Dayal*
Standard Essential Patents (“SEP’s”) and FRAND (fair, reasonable, and non-discriminatory) terms under licencing agreements in recent times have exponentially risen to prominence, especially in the Information and Computer Technology ( “ICT”) sectors as well as the telecommunications industry. The myriad of issues that have been springing up at an national and international level has inevitably served as a trigger to all the stakeholders involved. SEPs have been discussed by us earlier here and here. The subject matter emerges out to be of utmost importance, predominantly because of three reasons. First, it’s evident overlap between securing intellectual property rights and encouraging free competition. Secondly, the impact of rising monopolies in the market. Lastly, with a stagnant increase of patent-related disputes in the automotive industry such as the dispute between Nokia and Daimler, coupled with the ongoing pandemic, the likelihood of the disputes being restricted to the ICT and the telecommunications sector keeps decreasing.
In furtherance of our analysis of SEPs here and here, the present author writes this article to analyse the decision of the United States Court of Appeals for the Ninth Circuit in Federal Trade Commission v. Qualcomm Incorporated and its impact on the discourse concerning SEPs, FRAND licensing and antitrust claims. As the realm of SEPs grows increasingly volatile with fresh disputes and new issues, FTC v. Qualcomm serves as an exceptional subject for an analysis with regard to the ongoing evolution of SEPs and FRAND licensing.
Qualcomm essentially is a corporation that is deemed to be the largest chipmaker in the telecommunications industry that provides communication ability to mobile phones. Qualcomm holds various patent portfolios, in fact, some of Qualcomm’s SEPs and other patents relate to CDMA and premium LTE technologies which is the way cellular devices communicate with the 3G and 4G cellular networks. While there are others that relate to cellular and non- cellular applications and technologies, such as multimedia, cameras, location detecting etc, Qualcomm’s licensing and modem chip business which comprises of two thirds of the company’s value, functions out of separate divisions. The first being, Qualcomm Technology Licensing, which is solely responsible for granting licenses to Qualcomm’s patent portfolios and calculating what royalty rates that are to be charged for those licenses. The second division is, Qualcomm CDMA Technologies, which is responsible for manufacturing, pricing, and selling Qualcomm’s CDMA and premium LTE modem chips.
Qualcomm commits to two standard setting organizations ( “SSOs”) – the first is the Alliance for Telecommunications Industry Solutions ( “ATIS”) and the second is the Telecommunications Industry Association ( “TIA”). They require Qualcomm to license Qualcomm’s patents, which are essential to practicing the ATIS and TIA standards, to other modem chip suppliers on FRAND terms. Further, another key point of consideration is that Qualcomm licenses its patent portfolios exclusively at the original equipment manufacturer ( “OEM”) level. An OEM licensing agreement entails licensing of software to an OEM for bundling with one or more other OEM components and distributing it to end users as part of an integrated product. Hence, as part of its “no license, no chips” policy, under which it prohibits selling its chips to OEMs that do not entail licenses to practice its SEPs, Qualcomm determines the royalty rates on its CDMA and LTE patent portfolios as a percentage of the end-product sales price.
In 2017, the Federal Trade Commission ( “FTC”) bought an action against Qualcomm at the United States District Court for the Northern District of California. FTC argued that Qualcomm is in violation of Section 1 and 2 of the Sherman Act ( “the Act”). Further, it argued that Qualcomm being a baseband supplier of two kinds of wireless chips used its monopolistic position to promote anticompetitive supply and consciously compelled the handset makers to pay exorbitant amount of fees for the use of its patents. Subsequent to a 10 day hearing in 2019, the District Court ruled in favour of FTC stating that Qualcomm was indeed in violation of various federal antitrust laws as it was engaging in anticompetitive behaviour. Primarily, through its practice of refusing to sell chips to phone manufacturers unless they license its patents, this practice was ordered to be entirely forsaken. Secondly, Qualcomm was liable for charging rival chip makers unfairly through licensing of its patent. Lastly, it was prohibited from entering into exclusive agreements.
The subject case, FTC v. Qualcomm, arose out of the appeal that was filed by Qualcomm at Ninth Circuit Court of Appeals.
Ninth Circuit Court’s Decision
Issue 1: Whether Qualcomm’s practice of refusal to license to rival chip manufacturers was an antitrust violation ?
The Ninth Circuit Court (“the Court”) whilst adjudicating upon the issue cited the exception outlined in Aspen Skiing Co. v. Aspen Highlands Skiing Corp which the District Court had relied upon to substantiate its conclusion. The exception requires: (i) the unilateral termination of a “voluntary and profitable course of dealing”; (ii) the only rationale or purpose of which is to “sacrifice short-term benefits in order to obtain higher profits in the long run from the exclusion of competition”; and (iii) the refusal to deal pertains to products that the defendant already sells in the existing market to other similarly situated customers. The Court held that the facts of the present case weren’t in conformity with any of the elements of the Aspen Skiing exception. Consequently, District Court had erred in holding that Qualcomm was bound by any antitrust duty to license rival chip manufacturers. The Court, further, was of the view that Qualcomm’s OEM-level licensing policy, was an ‘industry standard’ and was not an antitrust violation of the Sherman Act.
Issue 2: Whether excessive royalty rates are anticompetitive?
The Court vehemently rejected FTC’s argument of Qualcomm’s imposition of an “anticompetitive surcharge”. Further, the Court disagreed with the allegation of anticompetitive harm which, according to FTC, was based on Qualcomm’s exorbitant high royalty rates, resulting in Qualcomm’s unlawful monopoly. The Court rationed it by stating any harm from the rates was to OEMs and not to Qualcomm’s direct competitors. Hence, the rates had no “direct impact on competition”. The Court also held that Qualcomm’s policy of “no license, no chips” is permissible and that it is excluded from the purview of an ‘antitrust injury’. The FTC argued that by determining “unreasonably high” royalty rates, Qualcomm was able to control its rival chip manufacturers’ prices by increasing the “all-in” price of its rivals’ chips to include the nominal chip price and Qualcomm’s royalty surcharge. According to the Court, the result of the policy might have raised the price and harmed the customer base however, it won’t have an effect on its rivals in the relevant market. The Court while referencing the Act also propounded that it did not place a bar on Qualcomm from either licensing SEPs separately from the chip sales and collecting royalties or restricting their chip customer base to licensed OEMs. The policy would be contrary to law, if it was the other way around i.e. if the policy would engage in exclusionary conduct in the form of “no chips, no license”, where Qualcomm refuses to license its SEPs to OEMs unless they agree to purchase Qualcomm’s chips prior.
Issue 3: Whether there was an antitrust violation for breach of SSO commitments?
The Court held that the FTC failed to establish that Qualcomm was in breach of contractual SSO obligations and hence in violation of the Act. SSOs often impose contractual restrictions on SEP holders’ freedom to seek injunctive relief. However, according to the Court, FTC has failed in adducing evidence that shows the breach impaired the potential opportunities of its rivals in the CDMA and LTE chip markets. The Court in conclusion stated that any alleged harm that may have arisen from Qualcomm’s contractual breach was borne by OEMs and not rival chip manufacturers. Substantiating this conclusion, the Court stated that, Qualcomm’s royalties were “chip-supplier neutral”. Consequently, the royalty rates are based on the portfolio chosen by the OEM customer regardless of where the OEM sources its chips. With regard to the CDMA and LTE chip markets, the Court pointedly noted that the FTC “identifies no such harm to competition,” as Qualcomm’s rival chip suppliers are permitted to practice Qualcomm’s SEPs royalty-free.
Issue 4: Whether exclusive dealing arrangements with Apple were Anticompetitive?
While recognizing the merit in the District Court’s conclusion that Qualcomm’s agreements with Apple in 2011 and 2013 were structured similar to exclusive dealing contracts rather than volume discount contracts, the Ninth Circuit held that the agreements did not have a practical effect of wholly foreclosing competition in the CDMA modem chip market. Further, the Court found affirmation in the fact that no specific competitor or even potential competitor was affected by either of the agreements, as there were no viable competitors to Qualcomm prior to 2014.
This case proved to be a turning point and a major win for SEP owners who are in constant tussle with the implementers. One can’t help but notice the stark difference in this case law and its European counterparts. Historically, if one traces the trajectory of cases in the EU it’s evident that there has been lack of clarity as to what constitutes as abuse of a dominant position. Yes, there are cases such as Huawei V ZTE that provide a set of compliances that need to fulfilled in order to file for injunction against the licensee or theMotorola EC case which essentially states that it would not amount to abuse of dominance if the licensee is unwilling to negotiate on FRAND terms or the Ericsson cases in India which, relying primarily on the EU approach, find that threats of infringement suit by the SEP holder may amount to abuse of dominance if it is done to compel the implementer to accept the license on non-FRAND terms. However, a devil’s advocate argument would be that all these statements can be deemed to be vague and ambiguous. The Qualcomm case clarifies what would be abuse of dominance in certain unforeseen situations owing to Qualcomm’s unique policy. However, this case was settled based on contract law (being the terms of the SSO) and not patent or competition law specifically (being the Act solely). The author opines that due to the difference in interpretation of certain concepts, differentiation in nature and content of pieces of legislations all over the world, the assumption that SEP issues can be effectively dealt with by contract law rather than antitrust or competition laws, may be ineffective. Therefore, the author opines that a contract law based approach for balancing and enforcing both patent owners and users’ rights and obligations relating to SEPs would not prove to be the most efficient.
The Ninth Circuit’s reversal of the District Court’s decision reinforces the principle of law that plaintiffs seeking to allege antitrust violations entail the onus of showing anticompetitive harm to the relevant market. However, in this case, that does not seem like the best outcome. FTC failed to provide evidence pertaining to Qualcomm’s practice of licensing exclusively to OEMs which would result in a violation of the Sherman Act, as Qualcomm has no antitrust duty to license its rival chip manufacturers. Further, the Court leniently noted that Qualcomm, by charging non-FRAND royalty rates, comes under the purview of contract and patent law, not antitrust. Lastly, Qualcomm’s “no license, no chips” policy was novel, to the say the least and not an antitrust violation as no harm was afflicted in the relevant markets. In the author’s opinion, it is evident from the facts of the case that, due to Qualcomm’s unusual policy and ability to take advantage of loopholes, it is able to exercise monopoly over the relevant market. Qualcomm had a huge role to play in the evolution of smartphones. Its’ patents are part of the standard for modern wireless broadband systems, and the company is now the world’s largest producer of baseband processors which is solely the modem chip that allows phones connect to data networks. With the onset of 5G-enabled products, Qualcomm and other modem providers will be eyeing that new market as well. Unsurprisingly, Qualcomm is all set to dominate it with this judgement in its corner. If Qualcomm is indeed operating a monopoly, they could drive up the price of any 5G devices. Concluding, FTC in October has requested for an en banc from theNinth Circuit Court of Appeals. It is also notable that Qualcomm is involved in various suits all over the world for anti-competitive practices including being fined to pay $975 million to China in 2015, $854 million to South Korea in 2016, and $1.2 billion to the EU in 2018 for a specific deal with Apple. Qualcomm settled a $774 million fine from Taiwan in mid-2018 as well. Hence, it is safe to say Qualcomm presents itself to be a driving force in the relevant market and the stakeholders involved should be mindful of its evolution.
*Manika Dayal, Senior Editor and Board Member at IntellecTech Law, graduated with B.A LL.B (Hons) from Jindal Global Law School with a specialization in Intellectual Property, Data Privacy and Media law
 FTC v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020).
 Id. at 11-12
 Joshua D. Wright, SSOs, FRAND, and Antitrust: Lessons from the Economics of Incomplete Contracts, 21 GEO. MASON L. REV. 791 (2014)
 Id. at 75-669
 FTC v. Qualcomm Inc., No. 17-CV-00220-LHK, 2018 U.S. Dist. LEXIS 190051
 Id. at 13-14
 Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985)
 Id. at LEXIS 190051, 33-34
 Id. at LEXIS 190051, 30-31
 Id. at LEXIS 190051, 37-38
 Id. at LEXIS 190051, 49-53