United States: Ninth Circuit Affirms Qualcomm's Standard Essential Patent Licensing Practices And Declines To Find Obligation To Help Competitors

On August 11, 2020, the US Court of Appeals for the Ninth Circuit issued an opinion in FTC v. Qualcomm Inc. reversing the district court's ruling against Qualcomm in a closely watched case brought by the Federal Trade Commission ("FTC") targeting Qualcomm's (1) practice of licensing its patent portfolios exclusively at the original equipment manufacturer ("OEM") level and refusing to license rival chipmakers, (2) high licensing royalty rates, (3) "no license, no chips" policy and (4) alleged "exclusive dealing" agreements with Apple. The Ninth Circuit's decision reinforces that "hypercompetitive" behavior is not by itself anticompetitive, and only in rare circumstances do companies have a duty to deal with competitors.

Background

Qualcomm is a leading cellular technology company that has made significant contributions to the technological innovations underlying modern cellular systems. Qualcomm's patent portfolio includes cellular standard essential patents ("SEPs"), non-cellular SEPs and patents that are not standard essential. Qualcomm's cellular SEPs are essential because international standard-setting organizations ("SSOs") include the technologies disclosed in those SEPs in technical standards practiced by each new generation of cellular technology. Since cellular SEPs are necessary to practice a particular cellular standard, SSOs require that patent holders such as Qualcomm commit to license their SEPs on fair, reasonable and nondiscriminatory ("FRAND") terms.

Qualcomm also manufactures and sells cellular chips that enable cellphones to practice third generation ("3G") code division multiple access ("CDMA") and fourth generation ("4G") premium long-term evolution ("LTE") technologies. Qualcomm has historically been the dominant player in the CDMA and LTE chip markets. Prior to 2016, Qualcomm possessed a 90 percent market share in the CDMA chip market and over 70 percent in the premium LTE chip market. Beginning around 2015, Qualcomm's dominant position in the chip markets receded with the entry of new competitors such as Intel and MediaTek.

Qualcomm's business model is to license its patent portfolios exclusively to OEM customers (i.e., manufacturers of cellphones and other products with cellular applications, such as smart cars) but not to its direct competitors. However, because rival chip manufacturers must practice many of Qualcomm's SEPs in order to comply with CDMA and LTE technological standards, Qualcomm instead offers its competitors "CDMA ASIC Agreements," whereby Qualcomm promises not to assert its patents in exchange for the rival chip manufacturer promising not to sell its chips to unlicensed OEMs.

Qualcomm reinforces these practices with a "no license, no chips" policy, under which Qualcomm refuses to sell chips to OEMs that do not take a license to practice Qualcomm's SEPs. Taken together, Qualcomm argued (and the Ninth Circuit ultimately agreed) that its practices are "chip supplier neutral," meaning that OEMs must pay a per-unit licensing royalty to Qualcomm for Qualcomm's patent portfolios regardless of which company they source their chips from.

Lastly, in 2011 and 2013, Qualcomm signed agreements with Apple under which Qualcomm offered Apple billions of dollars in incentive payments contingent on Apple sourcing its iPhone chips exclusively from Qualcomm and committing to purchase certain quantities of chips each year.

The District Court Ruling

On January 17, 2017, the FTC challenged several of Qualcomm's licensing practices by filing a complaint in the US District Court for the Northern District of California.¹

After nearly two years of litigation, the case proceeded to a 10-day bench trial before Judge Lucy Koh on January 4, 2019. Qualcomm's licensing practices were assessed under the "rule of reason" whereby the FTC had the burden to show that Qualcomm has sufficient market power to cause an adverse effect on competition and that Qualcomm imposed restraints that had an actual adverse effect on competition.² If the FTC met this initial burden, then the burden would shift to Qualcomm to show a procompetitive justification for the practice.³

After trial, Judge Koh found that: (1) Qualcomm's refusal to license rival chipmakers violates both its FRAND commitments and an antitrust duty to deal under § 2 of the Sherman Act; (2) Qualcomm's "no license, no chips" policy amounts to "anticompetitive conduct against OEMs" and an "anticompetitive practice[] in patent license negotiations"; (3) Qualcomm's "exclusive deals" with Apple "foreclosed a 'substantial share' of the modem chip market" in violation of §§ 1 and 2 of the Sherman Act; (4) Qualcomm's royalty rates are "unreasonably high" because they are improperly based on its market share and handset price instead of the value of its patents; and (5) Qualcomm's royalties, in conjunction with its "no license, no chips" policy, "impose an artificial and anticompetitive surcharge on its rivals' sales," "increas[ing] the effective price of rivals' modem chips" and resulting in anticompetitive exclusivity.

Judge Koh also issued an injunction requiring Qualcomm to change its business practices, including by licensing its SEPs to rival chip suppliers and abandoning its "no license, no chips" policy toward OEMs. The injunction required Qualcomm to negotiate or renegotiate contracts with customers (OEMs) and competitors (chip manufacturers) worldwide. Qualcomm promptly appealed the decision to the Ninth Circuit, which issued a partial stay of Judge Koh's ruling in August 2019. Notably, the US Department of Justice supported Qualcomm, filing a statement of interest that departed from the FTC's views.

The Ninth Circuit's Opinion

On August 11, 2020, the Ninth Circuit reversed the district court's Sherman Act ruling and issuance of a worldwide injunction against Qualcomm, holding that the FTC did not meet its burden to show that Qualcomm's practices violated the antitrust laws.

• The court found that Qualcomm's practice of licensing its SEPs exclusively at the OEM level did not amount to anticompetitive conduct in violation of § 2 because Qualcomm had no antitrust duty to offer a license to rival chip suppliers.
• The FTC did not show that Qualcomm's alleged breach of its FRAND commitments itself impaired the opportunities of rival chipmakers, and because the FTC did not meet its initial burden under the rule of reason framework, the court did not do a deep dive into the validity of Qualcomm's allegedly procompetitive justifications for its conduct. To the extent that Qualcomm breached any of its FRAND commitments (an issue also not considered by the court), the court stated that the remedy for such breach lies in contract and patent law, not antitrust law.
• The court held that Qualcomm's patent-licensing royalties and "no license, no chips" policy did not impose an anticompetitive surcharge on rivals' chip sales. Instead, these aspects of Qualcomm's business model were "chip-supplier neutral" and thus did not undermine competition in the relevant CDMA and premium LTE chip markets.
• The court held that Qualcomm's 2011 and 2013 agreements with Apple did not substantially foreclose competition in the CDMA chip market. Moreover, because Apple terminated the agreements years ago, there was nothing to be enjoined.

Implications

The Ninth Circuit's opinion in Qualcomm drives home several key points. The opinion reinforces that the Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), exception to the general rule that there is no antitrust duty to deal is a limited exception to "be applied only in rare circumstances."⁴ The Ninth Circuit also noted "the persuasive policy arguments of several academics and practitioners with significant experience in SSOs, FRAND, and antitrust enforcement, 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."⁵

Moreover, the Ninth Circuit did not clear up all issues on appeal, as the court notably declined to decide whether Qualcomm's royalty rates were reasonable and whether Qualcomm's licensing practices violated any contract or patent law principles. As a result, SEP holders may increasingly face more traditional patent and contract law-based lawsuits in the future, as opposed to the antitrust claims asserted by the FTC.

Still to be determined is the impact of the Ninth Circuit's ruling on growing calls for antitrust enforcement against large technology companies. As has been well-publicized, tech companies were recently the subject of high-profile antitrust hearings in Congress, which at least some observers believe provided further support to calls for more aggressive antitrust oversight.⁶ The evidence revealed during these hearings will undoubtedly be leveraged by states that are in the middle of their own probes of tech companies. However, the Ninth Circuit—a historically antitrust-friendly court—expressly "decline[d] to ascribe antitrust liability in these dynamic and rapidly changing technology markets without clearer proof of anticompetitive effect."⁷ Tech companies will undoubtedly leverage this statement and the Ninth Circuit's overall finding to push back against government enforcement efforts and private antitrust lawsuits in the future. Time will tell how much support the Ninth Circuit's ruling in Qualcomm will offer to tech companies in combating the burgeoning anti-monopoly movement.

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