September 25, 2020

Volume X, Number 269

September 25, 2020

Subscribe to Latest Legal News and Analysis

September 24, 2020

Subscribe to Latest Legal News and Analysis

September 23, 2020

Subscribe to Latest Legal News and Analysis

Ninth Circuit Reverses FTC Win in FTC v. Qualcomm, Finding No Antitrust Violations from Qualcomm’s Licensing of its Standard-Essential Patents

In a reversal that came as no surprise to many observers, on Tuesday, August 11, 2020, a unanimous panel of the U.S. Court of Appeals for the Ninth Circuit reversed the decision by the U.S. District Court for the Northern District of California in FTC v. Qualcomm and vacated the district court’s worldwide, permanent injunction prohibiting several of Qualcomm Incorporated’s (“Qualcomm”) licensing practices with respect to standard-essential patents (“SEPs”) covering cellular technology.  In reversing the district court’s decision, the Ninth Circuit held that Qualcomm had no antitrust duty to license its SEPs to rival chip suppliers and that the FTC failed to establish anticompetitive effects to the cellular chip market arising from Qualcomm’s patent licensing practices.

This was a controversial and closely watched case by both antitrust and intellectual property practitioners, academics and enforcement agencies.  The FTC brought the suit in 2017 on a 2-1 partisan vote over the strong and unusual objection of Commissioner Ohlhausen.  As described below, Qualcomm used its monopoly power in aggressive and strategic ways, but as the Ninth Circuit concluded, within its rights as the owner of valuable intellectual property.

Background

Qualcomm’s Business Model: “No License, No Chips”

Qualcomm is a cellular technology company that holds patents to technological innovations relating to modern cellular technology, including third-generation (“3G”) CDMA and fourth-generation (“4G”) LTE cellular standards practiced in most modern smartphone devices. 

Qualcomm licenses these patents to original equipment manufacturers (“OEMs”), such as mobile phone manufacturers/suppliers, whose devices practice CDMA and premium LTE technologies.  In addition to its patent licensing business, Qualcomm also manufactures and sells cellular modem chips, the hardware that enables devices to communicate using these technology standards, to OEMs.

Qualcomm’s patent portfolio includes standard-essential patents (“SEPs”) for CDMA and premium LTE technologies found in all modern smartphone devices.  SEPs are patents on technologies that international standard-setting organizations (“SSOs”) choose to adopt as the technological standards practiced by each new generation of cellular technology; SEPs are therefore necessary to practice a particular standard.  In order to ensure that SEPs are available to all industry participants, SSOs require SEP holders who participate in the standards setting process to commit to license their SEPs on fair, reasonable, and nondiscriminatory (“FRAND”) terms.  This commitment is generally set forth in agreements between the SSO and its members.

Qualcomm licenses its patents exclusively to OEMs; it does not license its patents to rival chip suppliers.  These patents can include SEPs, non-cellular SEPs, and non-SEPs.  Qualcomm enforces a “no license, no chips” policy, under which it refuses to sell its chips to OEMs that do not also take the licenses to practice its SEPs.  Qualcomm sets the royalty rates for its CDMA and LTE patent portfolios as a percentage of the end-product sales price. 

The reason Qualcomm does not license its SEPs to competing chip suppliers is to avoid “patent exhaustion,” whereby OEMs could purchase chips from Qualcomm’s rival chip manufacturers without paying for the licenses themselves.  However, because those competing chip suppliers must practice Qualcomm’s SEPs in their own chips by necessity, Qualcomm grants these competing chip suppliers a covenant not to sue, effectively allowing these chip suppliers a royalty-free license enabling them to practice the SEPs.  In exchange, these competing chip suppliers must report their supply agreements with OEMs to Qualcomm.  Qualcomm then charges OEMs a per-unit licensing royalty for the use of chips manufactured by Qualcomm’s rivals that utilize Qualcomm’s SEPs.  As a result, OEMs pay royalties to Qualcomm for the SEPs regardless of which company they choose to source their chips from. 

District Court Opinion

In January 2017, the FTC sued Qualcomm for equitable relief in the Northern District of California, alleging that Qualcomm’s patent licensing practices excluded competitors and harmed competition in the modem chip markets in violation of the Federal Trade Commission Act and Sections 1 and 2 of the Sherman Act.  In May 2019, the district court issued its opinion finding that Qualcomm violated federal antitrust laws by (1) refusing to license its SEPs to its direct competitors in the modern chips markets; (2) imposing an anticompetitive surcharge on rival chip manufacturers’ chip sales through its patent licensing and “no license, no chips” policies to OEMs; and (3) entering into exclusive dealing arrangements with Apple in 2011 and 2013. 

The Ninth Circuit’s Opinion

In a unanimous opinion, the three-judge panel reversed the district court’s decision and held that the FTC failed to satisfy its initial burden under the rule of reason framework to prove that the challenged restraint had a substantial effect that harmed consumers in the relevant market for CDMA and premium LTE chips.  Accordingly, the Court vacated the worldwide permanent injunction relating to Qualcomm’s patent licensing practices.

Refusal to License to Rival Chip Manufacturers Is Not an Antitrust Violation

The Ninth Circuit held that the exception provided by Aspen Skiing creating an antitrust duty to deal with competitors did not apply because Qualcomm’s switch to licensing exclusively to OEMs did not meet any of the three required elements of the exception.  The Aspen Skiing exception requires (i) the unilateral termination of a “voluntary and profitable course of dealing,” (ii) the only conceivable 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 involves products that the defendant already sells in the existing market to other similarly situated customers.  In contrast, the Court noted that Qualcomm ceased its prior practice following developments in patent laws that made it more difficult to provide “non-exhaustive licenses,” that licensing exclusively to OEMs was profitable in both the short and long run, and that unlike in Aspen Skiing, the district court found no evidence that Qualcomm singles out any specific chip manufacturer for anticompetitive treatment in its SEP-licensing. The Court also found the district court’s application of the Aspen Skiing exception in this case ignored the Supreme Court’s subsequent warning in Trinko that the Aspen Skiing exception should be applied only in rare circumstances.  Indeed, the FTC itself conceded the district court’s error in that regard.

No Antitrust Violation for Breach of SSO Commitments

The Ninth Circuit held that the FTC failed to establish a Sherman Act violation arising from Qualcomm’s breach of its contractual SSO obligations absent evidence that the breach impaired the opportunities of its rivals in the CDMA and LTE chip markets.  The Court concluded that any alleged harm from Qualcomm’s breach of SSO commitments was borne by OEMs, not rival chip manufacturers.  Because Qualcomm’s royalties were “chip-supplier neutral,” 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.  The Court also found unpersuasive the FTC’s reliance on Broadcom v. Qualcomm given the lack of allegations relating to Qualcomm’s deception during the standards setting process and discriminatory charging for royalties dispositive to that decision.  Finally, the Court noted that “[a]bsent a showing of harm to competition, antitrust is not an appropriate regime for resolving contractual disputes.”

“No License, No Chips” Policy is Permissible

The FTC argued that by setting “unreasonably high” royalty rates, Qualcomm controlled 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.  The Ninth Circuit held that at worst, the “no license, no chips” policy might raise the price and harm Qualcomm’s customers, not its rivals in the relevant market.  Furthermore, the Court emphasized that the Sherman Act does not prohibit Qualcomm from either licensing SEPs independent from chip sales and collecting royalties or limiting their chip customer base to licensed OEMs; Qualcomm’s policy would only raise potential antitrust concerns if it were exclusionary conduct in the form of “no chips, no license” in which Qualcomm refused to license its SEPs to OEMs unless they first agreed to purchase Qualcomm’s chips. However, unlike that situation, under Qualcomm’s “no license, no chips” policy, it makes no difference to Qualcomm whether the OEM purchases the Qualcomm chip or a rival’s chip.  The Court likened “no license, no chips” to the novel business practice in American Express that “at first appeared to be anticompetitive, but in fact was disruptive in a manner that was beneficial to customers in the long run.” 

Exclusive Dealing Arrangements with Apple Were Not 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, the Court held that the agreements did not have the actual or practical effect of substantially foreclosing competition in the CDMA modem chip market.  Notably, the Court was persuaded by the record that no specific competitor or potential competitor was affected by either of the agreements, as there were no viable competitors to Qualcomm prior to 2014. 

Conclusion

The Ninth Circuit’s reversal of the district court’s decision reinforces the long-standing principle that plaintiffs seeking to allege antitrust violations must meet their burden of showing anticompetitive harm to the relevant market.  Here, the FTC failed to show that Qualcomm’s practice of licensing exclusively to OEMs (and not rival chip manufacturers) amounted to a violation of the Sherman Act, as Qualcomm has no antitrust duty to license its rival chip manufacturers.  To the extent that Qualcomm breached any of its SSO commitments by charging non-FRAND royalty rates, the Court emphatically noted that the remedy for such a breach lies in contract and patent law, not antitrust.  Furthermore, the Court held that Qualcomm’s “no license, no chips” policy was not an antitrust violation absent any showing of harm in the relevant markets.  The Ninth Circuit’s reversal of the district court decision serves as a reminder that plaintiffs bringing antitrust claims still bear the initial burden under the rule of reason framework to show anticompetitive harm to the relevant market.  The last word on the “no license, no chips” approach may still be to come as this case is, of course, subject to appeal to the Supreme Court and a cert petition may well be filed. In any event, this is a big, if not unexpected win for Qualcomm.

©1994-2020 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume X, Number 226

TRENDING LEGAL ANALYSIS


About this Author

Richard G. Gervase Jr., Patent Attorney, Mintz Levin, Trade Secrets Lawyer, IP
Member

Richard Gervase heads Mintz’s Royalty Monetization practice and is a leader in the field.  Richard began his career in the late 1980s as a mergers and acquisitions and securities lawyer at Brown & Wood in New York City, where he focused on the biotechnology sector. He has extensive experience structuring and negotiating a wide variety of transactions in the life sciences industry, including royalty monetization transactions, pharmaceutical license and collaboration agreements, stock and asset acquisitions, strategic alliances, joint ventures, sponsored research agreements, research...

212-692-6755
Joseph M. Miller Antitrust Attorney Mintz, Levin, Cohn, Ferris, Glovsky & Popeo
Member/Co-Chair

Joe is a seasoned antitrust attorney and Co-chair of the firm’s Antitrust Practice. He has nearly 30 years of experience that spans roles in private practice, as a general counsel, and with federal antitrust enforcement agencies. He focuses his practice on providing strategic transactional advice and representing clients in government investigations and merger reviews. Joe primarily works with clients in the health care industry.

His work includes representing health care companies before the FTC and DOJ in merger reviews, counseling them on the antitrust aspects of transactions, and advising on risks associated with payer-provider contracting. He also advises pharmaceutical distributors, hospitals, health plans, and physician groups on a broad range of compliance issues, including information sharing, contractual arrangements, and interactions with competitors.

Prior to joining Mintz, Joe was a partner at a Washington, DC-based international law firm, where he was on the steering committee of the firm’s Antitrust Group as well as a member of the firm’s Health Care Group.

Before returning to private practice, Joe was the general counsel of a national trade association for the health insurance industry. Along with supervising a team of attorneys, he served as the association’s policy lead on health care competition issues, regularly testifying before Congress, advocating for positions at FTC policy roundtables, and participating in health care symposia.

Earlier in his career, Joe served as Assistant Chief of the Health Care and Consumer Products Section of the US Department of Justice’s Antitrust Division, a lead attorney on DOJ antitrust investigations in multiple industries, and a trial attorney in the Federal Trade Commission's Bureau of Competition.

Joe is a sought-after speaker at trade association events, including the American Health Lawyers Association (AHLA) and America’s Health Insurance Plans (AHIP), as well as at the American Conference Institute, American Bar Association Antitrust Law Section, government agencies, and private organizations. He is also frequently quoted in national legal and business publications, including Bloomberg periodicals, Corporate Counsel, Global Competition Review, and Law360.

202.434.7434
Michael Renaud IP Litgation Attorney Mintz Levin
Member / Chair, Intellectual Property Division

Michael is a highly regarded intellectual property litigator and patent strategist who helps clients protect and generate revenue from their patent holdings. Intellectual Asset Magazine has repeatedly recognized him in its select IAM Patent 1000 and IAM Patent Strategy 300 publications. Clients rely on his counsel regarding sensitive licensing agreement negotiations, acquisitions, and other technology transactions. He leads a team known for its ability to translate complex technology and its value to non-technical professionals — in court and business negotiations.

Michael is...

617-348-1870
Associate

Tinny assists clients with addressing antitrust and competition issues in connection with federal and state matters, including compliance, government investigations, Hart-Scott-Rodino (HSR) merger review, and review by the Committee on Foreign Investment in the United States (CFIUS). Tinny’s practice also involves private antitrust litigation, including class actions.

Prior to joining Mintz, Tinny was an associate in the antitrust practice of a law firm in New York, where he assisted clients in private antitrust litigation involving price-fixing, benchmark and commodities...

202.434.7415