Background

The FTC filed suit against Qualcomm in January 2017, alleging Qualcomm had engaged in engaged in licensing practices for cellular communications SEPs that were “[u]nfair methods of competition” under § 5 of the FTC Act, because they violated the Sherman Act’s prohibitions on “unreasonable restraints of trade” and monopolization. According to the FTC’s complaint, Qualcomm is a dominant supplier of modem chips and owns many patents that it has declared essential to “widely adopted” cellular communication standards, including CDMA and LTE. Against this backdrop, the FTC alleged that Qualcomm refused to license its SEPs for those standards to other modem chip suppliers that compete with Qualcomm, and maintained “exclusive dealing arrangements” with a significant downstream handset company. In turn, Qualcomm purportedly instituted a “no-license, no-chip” policy, under which it refused to sell modem chips to any cellular device manufacturer unless that manufacturer accepted a license for Qualcomm’s SEPs. The FTC argued that Qualcomm’s licensing policies were designed to prevent other modem chip suppliers from entering the baseband processor market, which enabled the company to maintain its position as the leading supplier of modem chips and compel cellular device manufacturers and other customers to pay “excessive” royalties for its SEPs. The FTC sought injunctive relief to enjoin such anticompetitive conduct in the future.

In November 2018, the FTC obtained partial summary judgment that Qualcomm’s agreements required it to license its SEPs on the LTE and CDMA standards to competitor modem chip suppliers on FRAND terms, as our team discussed in our article on IP Watchdog here. The summary judgment ruling rejected Qualcomm’s practice of only licensing end-user cellphone manufacturers, and effectively held that a SEP-holder can no longer discriminate among entities at different stages of a supply chain.

Court Finds Anticompetitive Conduct Towards OEMs

The Court found that in its licensing program for cellular communications SEPs, Qualcomm had engaged in engaged in practices constituting “[u]nfair methods of competition” under § 5 of the FTC Act, “unreasonable restraint of trade” under § 1 of the Sherman Act and monopolization under § 2 of the Sherman Act.

Judge Koh found that Qualcomm had monopoly power in the CDMA modem chip market and was able to charge supracompetitive prices for its CDMA modem chips because competitors were unable to increase their output in the short term in order to discipline the higher pricing.

Judge Koh also found that Qualcomm exercised monopoly power over the premium LTE modem chip market and was able to charge monopoly prices on premium LTE chips over an extended period, demonstrating competitors’ inability to quickly increase output. Premium LTE competitors also could not easily enter the market because the development of LTE modem chips, which contain very advanced features, required immense investments in R&D.

The Court further found Qualcomm engaged in anticompetitive conduct in its dealings with fifteen multinational technology companies and sixteen smaller Chinese OEMs. Such conduct included sealing off or delaying chip supply, threatening to withdraw technical support, withholding sample chips, declining to share patent charts or patent lists, threatening to require the return of software, delaying the delivery of software, charging high patent royalty rates to punish the use of rival chips, giving out incentives and rebates, and refusals to deal.

Exclusive Dealing Regarding SEPs

Exclusive dealing is not always an antitrust violation, but courts review such agreements under the “rule of reason” to determine whether their anticompetitive effects (i.e., preventing smaller competitors from succeeding in the marketplace) outweigh their potential procompetitive benefits (e.g., encouraging marketing support for the manufacturer's brand). Here, the Court found that Qualcomm formed two agreements with a handset manufacturer that gave overwhelming incentives to purchase substantial volumes of Qualcomm modem chips. Further, the agreements required the manufacturer to pay back any earned incentives if it purchased any modem chips from a Qualcomm competitor. Finally, the agreement to purchase modem chips would terminate if the manufacturer sold a non-Qualcomm device commercially. These facts led the Court to conclude that Qualcomm’s exclusive deal foreclosed competitors from gaining viable market share.

Qualcomm has a Duty to License SEPs to Competitors

Judge Koh held in November, discussed here, Qualcomm has a duty pursuant to its FRAND commitments to license its modem chip SEPs to competing chip suppliers. Following the trial, the Court outlined testimony and documents illustrating that Qualcomm understood FRAND to require it to offer such licenses to competitors, that it had previously done so, and that other SEP-holders have granted and received modem chip licenses. She then explained, based on testimony and internal documents, that Qualcomm’s refusal to license rivals was driven by a belief it was more lucrative to license to cellphone manufacturers themselves, and that other SEP licensors recently began to follow suit, recognizing the opportunity to extract higher royalty rates. The Court dismissed Qualcomm’s justifications of reduced transaction costs as pretextual and not credible, given the testimony and evidence of Qualcomm’s recognition that charging royalty rates exceeding the price of a modem chipset would be difficult to justify.

Refusals to deal usually are not antitrust violations, and the Supreme Court has stated that not even a monopolist has a general duty to deal with competitors.[1] Here, however, the Court held that Qualcomm has an affirmative antitrust duty to license its SEPs to modem chip supplier competitors. The Court cited three factors that determine whether a refusal to deal violates the antitrust laws: (1) the defendant terminated a voluntary and profitable prior course of dealing, (2) the defendant’s actions were motivated by anticompetitive malice, and (3) there is an existing retail market for the relevant product. Even though Qualcomm never licensed its SEPs to competitors in the past, the Court found that Qualcomm’s previously profitable licenses to other third parties supported an antitrust duty to deal in this case. Judge Koh stated that the refusals to deal with competitors were motivated by anticompetitive malice, or “an intention to sacrifice short term benefits”—profitable licenses—“to obtain higher profits in the long term,” in order to maintain high royalty rates. Finally, the Court found there was already an existing market for licensing modem chips.

Royalty Rates Found to be Unreasonably High

Judge Koh also found the rates charged by Qualcomm to license its SEPs unreasonably high, based on internal Qualcomm documents discussing the market, differences between Qualcomm’s SEP licensing program and those of other SEP-holders, Qualcomm’s choice of royalty base, and the lack of litigation to test Qualcomm’s rates. For example, certain internal Qualcomm documents identified the potential loss of licensing revenue if Qualcomm spun off its licensing business from its modem chip businesses and allowed the two segments to compete independently, from which Judge Koh concluded that Qualcomm would not be able to charge such rates if its share of the chip market were smaller. Internal Qualcomm documents also acknowledged that Qualcomm’s SEP share had declined even as its royalty rates have remained constant for 30 years, and that Qualcomm’s contributions to the standards did not justify its royalty rates exceeding those of other SEP-holders.

Additionally, unlike other SEP licensors, Qualcomm apparently declined to provide claim charts or patent lists to licensees, leading Judge Koh to believe Qualcomm was utilizing its dominant position in the modem chip market for leverage. Further, Judge Koh found Qualcomm’s practice of requiring a license prior to one purchasing its modem chips unique in the SEP licensing sector, distinct from other SEP-holders and Qualcomm’s own SEP licensing practices outside cellular telecommunication SEPs, such as with its Wi-Fi SEPs.

Moreover, the Court stated Qualcomm’s use of the entire value of a cellphone as a royalty base was improper under relevant Federal Circuit precedent, holding that a patentee is only entitled to a reasonable royalty attributable to the infringing features of a multi-feature device. Judge Koh noted that the Northern District of California had previously concluded that the “proper smallest salable patent-practicing unit” is the modem chip in a cellular handset, rather than the entirety of the handset. Additionally, she identified evidence, including multiple internal Qualcomm documents, to illustrate that the value of a cellular handset is not driven by modem chips, but by the remaining features and user experience.

Injunctions Ordered

After concluding that Qualcomm violated both its FRAND obligations and U.S. antitrust laws, Judge Koh issued an injunction, enjoining Qualcomm from actions that would constitute future antitrust violations and to take action to remedy its ongoing violations. The Court issued this injunction despite the filing of a statement of interest by the U.S. Department of Justice requesting additional briefing on injunctive relief. Judge Koh reasoned that the parties had thoroughly addressed the issue with testimony, evidence, and argument, so no further hearings or briefing were necessary.

Judge Koh further ordered Qualcomm to negotiate or renegotiate license terms with customers in good faith, without threatening to deny access to modem chips, technical support, or access to software. She also ordered Qualcomm to refrain from entering into express or de facto exclusive dealing agreements with modem chip customers. Judge Koh ordered Qualcomm to refrain from interfering with any customer’s ability to communicate with a government agency about a potential law enforcement or regulatory matter, expressly citing a settlement agreement between Qualcomm and Samsung where Samsung agreed to make certain statements to the Korean governmental competition agency. Qualcomm also must make exhaustive SEP licenses available to other modem-chip suppliers on FRAND terms and submit to arbitral or judicial determination of such terms. Finally, the Court ordered Qualcomm to submit to a seven-year compliance and monitoring period, where Qualcomm is obligated to provide annual reports to the FTC on its compliance with the Court’s injunctions.

Qualcomm has announced its intention to appeal the ruling, and has moved to stay the injunction pending the appeal.

Takeaways:

FRAND and Antitrust duty to license SEPs to competitors: Judge Koh determined that Qualcomm had a duty to license its SEPs to competitor chip-makers, which may require other patent licensors to re-evaluate current licensing practices in regards to competitors.

Internal Documents: The most harmful evidence against Qualcomm in this decision seemed a series of internal documents, from which Judge Koh gleaned an intent to monopolize. Companies that hold large shares of a given market or significant SEP portfolios should carefully consider the language used by employees to discuss pricing.

Reasonability of Royalty Rates: Although Judge Koh does not directly engage in a reasonable royalty rate analysis based on Georgia-Pacific factors, she outlines many facts that led to her conclusion that royalty rates offered by Qualcomm were unreasonable. Among other facts, she relied on Qualcomm’s declining share of SEPs over time and on a comparison between its contributions to the relevant standards and those of other cellular communication SEP-holders. She also relied on a previous decision in the Northern District of California that held the “proper smallest salable patent-practicing unit” is the modem chip in a cellular handset. In view of these considerations, licensees and licensors may focus on shares of SEPs and standards contributions and frame rates based on modem chip components rather than the cellular handset as a whole.

License Renegotiation as a Remedy for Antitrust Violation: Apart from the other aspects of the injunction ordered, Judge Koh’s order requiring renegotiation of SEP licenses is potentially very significant. It could lead to a rethinking of SEP license negotiation going forward. Licensees could have a basis to challenge existing licenses, and may have greater leverage to achieve more favorable licensing terms in the future.

Caution for Licensees: Although the decision strengthens a licensee’s position, licensees should be careful when applying the decision to a particular licensing context. Because the decision relies on a theory of many interrelated harms, clients should seek advice of counsel to evaluate the strength of their particular licensing claims.

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