On 11 August 2020, a panel of the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”), in a unanimous opinion by Judge Callahan, reversed the U.S. Federal Trade Commission’s (“FTC’s”) win in the district court against Qualcomm Inc. (“Qualcomm”) and upheld Qualcomm’s licensing practices, including (1) its policy of licensing only to original equipment manufacturers (“OEMs”) and not to direct competitors, and (2) its “no license, no chips” policy of selling chips to customers only if they also agree to pay a per phone royalty fee. The Ninth Circuit vacated District Judge Lucy Koh’s opinion and held that Qualcomm’s conduct did not violate the Sherman Act. If the panel decision stands, it could have far reaching consequences.

Qualcomm, which maintains one of the world’s largest patent portfolios, has a vast array of cellular standard-essential patents (“SEPs”). The FTC contended, and Judge Koh had found, that Qualcomm’s licensing practices in the Code Division Multiple Access (“CDMA”) and Long-Term Evolution (“LTE”) cellular modern chip markets amounted to unreasonable restraints of trade and unlawful monopolization in violation of Sections 1 and 2 of the Sherman Act. The Ninth Circuit vacated District Judge Lucy Koh’s opinion and held that Qualcomm’s conduct did not violate the Sherman Act.

Below are some key takeaways from the Ninth Circuit’s decision.

As long a company’s practices are supplier-neutral, it will have no duty to deal with rivals

The Ninth Circuit held that Qualcomm’s practice of licensing its SEPs exclusively at the OEM level did not amount to anticompetitive conduct because Qualcomm is under no antitrust duty to deal with rival chip suppliers. The court found that Qualcomm did not fall under the narrow exception to the general rule that companies have no duty to deal with competitors that the Supreme Court articulated in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) because Qualcomm did not sacrifice short-term profits by licensing only to manufacturers and not its competitors.

The court found Qualcomm’s patent-licensing royalties and “no license, no chips” policy to be “chip-supplier neutral” because “Qualcomm collects them from all OEMs that license its patents, not just ‘rivals.’” Thus, Qualcomm’s “no license, no chips” policy was not deemed by the court to impose an anticompetitive surcharge on the sale of chips by rivals. In light of this ruling, SEP holders should ensure that their customers’ choice in suppliers does not influence the SEP holders’ royalty charges for related licenses.

Breaches of FRAND commitments are contract and patent law issues, not antitrust concerns

The Ninth Circuit held that, even if Qualcomm breached its commitment to license on fair, reasonable, and non-discriminatory (“FRAND”) terms through its licensing practices, the remedy for such a breach lies in contract and patent law, not antitrust law. In so holding, the Ninth Circuit sided with Qualcomm and others that take the position that antitrust law should play a limited, if any, role in the enforcement of FRAND commitments.

Standards in the information technology sector are typically set by standards development organizations (“SDOs”), whose members include parties with a commercial stake in how the standard is written. While incorporating patented technologies into a standard greatly benefits consumers, it also creates competitive risks. In particular, when industry standards include patented technologies, the standard-setting process can create the risk of opportunistic conduct. Patents that cover technology adopted into a standard can empower their owners to demand higher royalty rates and other more favorable licensing terms than they could have demanded before the standard was adopted. This conduct is known as “patent hold-up.” To address this risk, SDOs often seek voluntary commitments from patent holders to license their standard-essential patents on FRAND terms.

The role of antitrust in the context of standard setting has been at the heart of a recent dispute between the two U.S. antitrust enforcement agencies, the FTC and Department of Justice Antitrust Division (“DOJ”). Under the leadership of Makan Delrahim, the DOJ has taken the position that “an antitrust cause of action premised on a failure to abide by FRAND commitments would be inconsistent with Section 2 of the Sherman Act.” Accordingly, the DOJ withdrew from a 2013 joint policy statement with the Patent and Trademark Office, stating that the policy had not “accurately conveyed [the DOJ’s] position about when and how patent holders should be able to exclude competitors from practicing their technologies.” The DOJ replaced the 2013 statement with a new statement in 2019. In addition to this policy reversal, the DOJ has also weighed in as a third party in various private antitrust cases to state that antitrust is not an appropriate model for solving licensing disputes. In a rare public display of disagreement between agencies, the DOJ filed an amicus brief in opposition to the FTC in the Qualcomm case.

Next steps

The Ninth Circuit stressed that “[a]nticompetitive behavior is illegal under federal antitrust law. Hypercompetitive behavior is not.” According to the court, Qualcomm’s licensing policy permissibly toed that line.

FTC Bureau of Competition Director Ian Conner acknowledged that the court’s ruling is “disappointing” and stated that the FTC is “considering [its] options.” The FTC could seek en banc review in the Ninth Circuit or alternatively appeal to the Supreme Court. The FTC has had prior success before the full court in the Ninth Circuit. In 2018, the Ninth Circuit, in an en banc review, reversed a panel decision against the FTC in a consumer protection case involving AT&T.

What the FTC does next will be decided by FTC Chairman Simons, who until recently has been recused from the Qualcomm case. The rest of the Commission has been deadlocked, with the two Democratic Commissioners supporting the case and the two Republican Commissioners opposing it.

The practical effects of the Ninth Circuit’s decision are already emerging: other holders of significant wireless SEP portfolios such as Nokia and Ericsson have already begun to use more aggressive patent strategies related to 5G devices. The decision could also have repercussions beyond the technology sector. Companies litigating against the FTC, including in the pharmaceutical sector, have quickly availed themselves of the ruling to defend themselves. The ruling may also have a cooling effect on innovation if companies are less inclined to participate in standard-setting processes due to limited repercussions for companies that maneuver around their FRAND obligations. If the panel decision stands, it could have far reaching consequences.

*During her tenure as Chairwoman of the U.S. Federal Trade Commission, Edith Ramirez voted to file the FTC complaint against Qualcomm Inc.

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