No License, No Chips, No Problem: Ninth Circuit Delivers Qualcomm a Win in Antitrust Case Brought by the US Federal Trade Commission

Goodwin

In a much anticipated opinion, the U.S. Court of Appeals for the Ninth Circuit reversed a California district court decision holding that Qualcomm violated U.S. antitrust laws in its licensing of standard-essential patents in the 3G and 4G markets. Rejecting the district court’s conclusion that Qualcomm’s licensing of cellular SEPs had “strangled competition,” the Ninth Circuit found Qualcomm’s licensing practices — and its “sometimes aggressive defense” of those practices — to be “innovative” and “disruptive.” The Ninth Circuit noted that U.S. antitrust law draws a sharp line between conduct that is anticompetitive and illegal and conduct that is “hypercompetitive” and permissible, concluding that Qualcomm’s conduct fell into the latter category. The Ninth Circuit also repeatedly emphasized the distinction between issues that arise under patent or contract law, on the one hand, and antitrust law, on the other, ultimately concluding that most of the Federal Trade Commission’s allegations, even if accurate, do not implicate antitrust concerns. 

The Ninth Circuit decision effectively reversed all aspects of the district court’s trial decision. A few of the key issues decided by the court (and not decided by the court) are summarized below. 

Antitrust Harm to Competitors, Not Customers. A central component to the Ninth Circuit’s decision was that the district court improperly concluded that conduct by Qualcomm directed to so-called original equipment manufacturers like Apple and Samsung caused anticompetitive harm. According to the Ninth Circuit, this analysis was flawed because the OEMs were not competitors in the market for modem chips, but customers of modem chips, so any conduct by Qualcomm toward OEMs did not increase Qualcomm’s power in the relevant market, which was the market for certain generations of “modem chips.” As such, the court concluded, “actual or alleged harms to customers and consumers outside the relevant markets are beyond the scope of antitrust laws.” 

Qualcomm Had No Antitrust Duty to Deal With Competitors. Having rejected the district court’s reliance on the harms to OEMs, the Ninth Circuit “reframed” the issue to focus on the “impact, if any, of Qualcomm’s practices in the area of effective competition: the markets for CDMA and premium LTE modem chips.” First, the Ninth Circuit rejected the district court’s conclusion that Qualcomm had an antitrust duty to deal with its modem chip competitors, like MediaTek and Intel. This result was not surprising. During briefing and at oral argument, even the FTC conceded that the district court erred in holding that Qualcomm had an antitrust duty to deal with its competitors. Second, the Ninth Circuit rejected the FTC’s alternative argument that Qualcomm’s alleged breach of contractual commitments to standard setting organizations impairs competition or the opportunities for competition.

The Ninth Circuit expressly refused to address whether Qualcomm’s commitments to standard setting organizations required Qualcomm to license its patents to competitors under contract law, and it vacated the district court’s ruling that they did as moot in view of its other rulings. Rather, the Ninth Circuit assumed a breach of Qualcomm’s contractual commitments, but nevertheless found no evidence of antitrust harm. Interestingly, the court “note[d] the persuasive policy arguments of several academics and practitioners with significant experience in [standard-setting organizations], … who have expressed caution about using the antitrust laws to remedy what are essentially contractual disputes between private parties engaged in the pursuit of technological innovation.” 

Qualcomm Did Not Charge an Impermissible “Surcharge.” The “heart” of the FTC’s case on appeal was what it referred to as the “surcharge theory” — namely, that Qualcomm charged unreasonably high royalty rates for its patents that imposed a surcharge or tax on the use of rival chips because Qualcomm required OEMs to pay royalties even when they used competitors chips. The Ninth Circuit disagreed, faulting the FTC and the district court for “misunderstanding” Federal Circuit law on patent damages, “incorrectly conflating antitrust liability and patent law liability,” and “improperly consider[ing] ‘anticompetitive harms to OEMs’ that fall outside the relevant antitrust markets.” 

  • Smallest Salable Patent-Practicing Unit. It is a familiar concept in patent law that reasonable royalty damages are generally to be based on the smallest salable patent-practicing unit. The district court faulted Qualcomm for charging royalties based on the price of an entire cellular phone, not the much less expensive modem chips that provide the cellular connectivity. The Ninth Circuit, however, dismissed the concept of “smallest salable patent-practicing unit” as a “tool in jury cases to minimize potential jury confusion when the jury is weighing complex expert testimony about patent damages.” The Ninth Circuit also noted that, in private royalty negotiations outside the litigation context, parties often enter into licenses based on the sales price of a commercial product, and there is nothing inherently wrong in doing so.
  • An “Unreasonable” Royalty is Not Necessarily an “Anticompetitive” Royalty. The Ninth Circuit went on to conclude that even if Qualcomm charged “unreasonably” high royalties, when measured by patent law standards, there may not be an antitrust violation. Instead, the court expressly “decline[d] to adopt a theory of antitrust liability that would presume anticompetitive conduct any time a company could not provide that the ‘fair value’ of its SEP portfolios corresponds to the prices the market appears willing to pay for those SEPs in the form of licensing royalty rates.”Later in the opinion, the Ninth Circuit reaffirmed this principle:“[W]hether that all-in price [for the license and chips] is reasonable or unreasonable is an issue that sounds in patent law, not antitrust law.”
  • No Margin Squeeze. The Ninth Circuit also rejected the FTC’s argument that Qualcomm used its licensing royalties to charge anticompetitive, ultralow prices on its own modem chips, thereby pushing rivals out of the market by “squeezing” profit margins and preventing them from recouping investments in research and development.

No License, No Chips, No Antitrust Problem. The Ninth Circuit agreed with Qualcomm that its policy dubbed “no license, no chips” was not a violation of U.S. antitrust laws. Under the policy, Qualcomm (which conceded that it had monopoly power in the relevant chip markets for purposes of the appeal) would not sell its modem chips to OEMs that did not take a separate license to Qualcomm’s patents. The license required the OEMs to pay a royalty on all mobile phones sold, regardless of whether they contained Qualcomm chips. According to the FTC, Qualcomm’s chip monopoly gave Qualcomm leverage to demand excessive royalties.

The Ninth Circuit saw no antitrust violation. Once again, the Ninth Circuit found that the district failed to show how the policy directly impacted Qualcomm’s competitors. Instead, the court concluded that Qualcomm’s policy was applied neutrally in the relevant market — it did not discriminate between or among chip manufacturers. To the extent there was, “at worst,” any harm in the form of higher prices/costs, that harm was to the OEMs, who were not competitors. 

Exclusive Dealings May Have Been a Problem, But No More. The Ninth Circuit did agree with the district court that certain “rebate” or “incentive” deals that Qualcomm entered into with Apple “were structured more like exclusive contracts,” which are not permitted under antitrust law. But the Ninth Circuit concluded there was no ongoing harm from those contracts, and therefore nothing to enjoin. The agreements in question were entered into during the 2011–2015 time frame and were terminated by Apple in 2015, two years before the FTC filed its action. As the agreements are no longer in force, the Ninth Circuit concluded there was nothing to enjoin. 

CONCLUSION

The Ninth Circuit decision represents an important development for many companies that are looking to out-license or in-license standard essential patents, particularly as the country rolls out 5G cellular technology and the “Internet of Things” gains momentum. Many issues, however, remain unresolved, including the patent and contract implications the Ninth Circuit expressly declined to address. 

It is important to note what this decision does not mean. While the Ninth Circuit found no antitrust violation in Qualcomm’s practices, the court did not uphold Qualcomm’s actions under either FRAND or contract principles. Indeed, while the court vacated the district court’s decision that Qualcomm had a contractual obligation to license competing chip suppliers on FRAND terms, it did so only on mootness grounds; nowhere did the Ninth Circuit say the lower court’s analysis was wrong. Perhaps the main point of the Ninth Circuit’s decision is that contract and FRAND law are the right vehicles for assessing this type of conduct. Many lawsuits about FRAND obligations are still working their way through the federal courts based on patent and contract claims, and this decision may only serve to increase the importance of those disputes. Companies that own or license SEPs must understand FRAND obligations and be prepared to protect or assert their rights under patent and contract law.

Goodwin’s cross-disciplinary team of patent and antitrust specialists have been closely following the rapidly evolving legal landscape when it comes to the licensing of standard-essential patents. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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