Ninth Circuit Reversal Of FTC's Qualcomm Win Highlights The Limits Of Antitrust Enforcement In Standard Essential Patent Licensing

• Published date: 19 August 2020
• Law Firm: Arnold & Porter
• Author: Mr Jonathan Gleklen and Justin P. Hedge

On August 11, 2020, the US Court of Appeals for the Ninth Circuit reversed the Federal Trade Commission's (FTC) district court victory in its suit challenging Qualcomm's licensing practices for its standard essential patents. After earlier expressing skepticism regarding the FTC's theories in its decision staying the district court's injunction pending appeal and an unprecedented amicus brief by the Department of Justice opposing the position of its sister antitrust enforcer, the Ninth Circuit firmly rejected the FTC's theory that Qualcomm's alleged breach of commitments to standard setting organizations could constitute an unlawful refusal to deal and that its Apple supply agreement constituted unlawful exclusive dealing. The case illustrates the continued narrow application by courts of an antitrust duty to deal under Aspen Skiing and addresses important questions regarding the interface between antitrust and standard setting.

Background

In January 2017, the FTC filed a complaint in federal court seeking to enjoin Qualcomm's standard essential patent (SEP) licensing practices for certain technology used in wireless communications semiconductor microchips.¹ The FTC alleged that Qualcomm's practices constituted an unlawful maintenance of monopoly power and that its licensing and supply agreements constituted unlawful agreements in restraint of trade. The FTC brought its case under Section 5 of the FTC Act for conduct alleged to violate Section 1 and 2 of the Sherman Act.

Qualcomm's SEPs at issue relate to code division multiple access (CDMA) and premium long-term evolution (LTE) wireless communications technology, which is used in cell phones to allow devices to communicate with the cellular network. According to the FTC's complaint, as part of the relevant standard setting organizations (SSOs) incorporating Qualcomm's technology into the CDMA and LTE standards, Qualcomm agreed to license its SEPs on fair, reasonable, and non-discriminatory (FRAND) terms.²

Qualcomm uses its SEPs to make CDMA and LTE chips, but also faces competition from other firms that supply CDMA and LTE chips. Qualcomm chose not to directly license its competitors under its SEP patents. Rather, Qualcomm licensed its SEPs to original equipment manufacturers (OEMs) of cell phones and other devices'i.e., the customers purchasing CDMA and LTE chips'and did so regardless of whether an OEM purchased Qualcomm's chips or those of a competitor, while promising its competitors that it would not assert its patents against them as long as they did not sell chips to unlicensed OEMs. Qualcomm, which had a leading position in CDMA and LTE chips, also would not sell its own chips to customers unless they had previously taken a license. This was referred to as Qualcomm's "no license, no chips" policy. Qualcomm structured the royalty in its licenses as a percentage of the OEM's device price.³

The FTC alleged that this practice harmed competition by forcing OEMs to pay "inflated royalties" and a higher "all-in" cost for using non-Qualcomm chips.⁴ The FTC also alleged that Qualcomm's 2011 and 2013 agreements to supply Apple were anticompetitive de facto exclusive deals because the large amount of total rebates given to Apple based on the volume of chips purchased from Qualcomm foreclosed competitors from entering or expanding.⁵

District Court Decision

In May 2019, after a 10-day bench trial, the District Court for the Northern District of California found in favor of the FTC.⁶ The court had previously granted partial summary judgment finding that Qualcomm's SSO licensing commitments required it to license competitors, not just OEMs.⁷ After trial, the court found that Qualcomm's refusal to license its competitors was an exercise of its monopoly power designed to avoid patent exhaustion and charge an "unreasonably high" royalty relative to what it would be able to charge competitors under the FRAND standard required by the SSOs.⁸ Under the patent exhaustion doctrine, "the initial authorized sale of a patented item terminates all patent rights to that item,"⁹ so a license to Qualcomm's competitors would have allowed the competitors to sell finished chips to OEM customers without the need for the OEM to pay a royalty to Qualcomm for the SEPs practiced in the chip. The court found that Qualcomm's royalty determined as a percentage of the cell phone's price would be above the FRAND rate because, among other things, its SEPs are not a major contributor to technology incorporated in phones and the modem chip is but one component driving the total handset value.¹⁰

Based on Qualcomm's failure to license competitors under the court's interpretation of the SSO commitments and its finding that the royalty was not reasonable under a FRAND standard, the court found an antitrust violation under the Supreme Court's decision in Aspen Skiing.¹¹ As clarified by the Supreme Court's later decision in Trinko,¹²Aspen Skiing permits a finding of antitrust liability for a refusal to deal with competitors in narrow circumstances -- only where there was a prior course of dealing between the...