FTC v. Qualcomm Inc.
[Citation forthcoming] (2020)
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Rule of Law:
The Sherman Act generally does not impose an antitrust duty to license standard-essential patents (SEPs) to rival chip manufacturers, nor does it typically deem OEM-level licensing or a 'no license, no chips' policy as anticompetitive conduct, even if such practices maximize profits or breach contractual FRAND commitments, unless they cause direct, substantial harm to competition in the relevant market.
Facts:
- Qualcomm Incorporated (Qualcomm) has made significant contributions to technological innovations underlying modern cellular systems, including CDMA and LTE cellular standards.
- Qualcomm protects and profits from its innovations through patents, including cellular standard-essential patents (SEPs), which it licenses to original equipment manufacturers (OEMs).
- International standard-setting organizations (SSOs) require patent holders to commit to license their SEPs on fair, reasonable, and nondiscriminatory (FRAND) terms before their patents are incorporated into standards.
- Qualcomm licenses its patent portfolios exclusively at the OEM level, setting royalty rates as a percentage of the end-product sales price, and offers 'CDMA ASIC Agreements' to rival chip manufacturers promising not to assert its patents if they do not sell chips to unlicensed OEMs.
- Qualcomm enforces a 'no license, no chips' policy, under which it refuses to sell modem chips to OEMs that do not take licenses to practice Qualcomm’s SEPs.
- From 2006 to 2016, Qualcomm possessed monopoly power in the CDMA modem chip market, and from 2011 to 2016, in the premium LTE modem chip market.
- 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 modem chips exclusively from Qualcomm and committing to purchase certain quantities.
- Apple decided to terminate these agreements in 2015 and source its modem chips from Intel for its 2016 model iPhone.
Procedural Posture:
- The Federal Trade Commission (FTC) sued Qualcomm Incorporated in the United States District Court for the Northern District of California for equitable relief, alleging violations of Section 5(a) of the FTC Act and Sections 1 and 2 of the Sherman Act.
- The district court granted the FTC's pretrial motion for partial summary judgment, ruling that Qualcomm's SSO FRAND commitments contractually obligated it to license its SEPs to competing modem chip suppliers.
- After a ten-day bench trial, the district court concluded that Qualcomm's licensing practices constituted an unreasonable restraint of trade under Section 1 and exclusionary conduct under Section 2 of the Sherman Act.
- The district court issued a permanent, worldwide injunction prohibiting several of Qualcomm’s core business practices.
- Qualcomm appealed the district court's judgment and injunction to the Ninth Circuit Court of Appeals, and the Ninth Circuit granted Qualcomm's request for a stay of the district court's injunction pending appeal.
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Issue:
Does a company's business model, involving the exclusive licensing of its standard-essential patents (SEPs) to original equipment manufacturers (OEMs) at the product level, refusal to license rival chip manufacturers, a 'no license, no chips' policy, and exclusive dealing agreements with a major customer, constitute anticompetitive conduct in violation of Sections 1 and 2 of the Sherman Act?
Opinions:
Majority - Judge Callahan
No, Qualcomm's business practices, including its refusal to license rival chip manufacturers, its OEM-level licensing policy, its 'no license, no chips' policy, and its agreements with Apple, did not constitute anticompetitive conduct in violation of Sections 1 and 2 of the Sherman Act. The court first held that Qualcomm was not under an antitrust duty to license rival chip manufacturers under the limited exception outlined in Aspen Skiing Co. v. Aspen Highlands Skiing Corp. because none of the required elements were present: Qualcomm did not unilaterally terminate a voluntary and profitable course of dealing with chipmakers during its monopoly period, its rationale for OEM-level licensing was to maximize profits (not to sacrifice short-term gains for long-term exclusion), and it did not single out rivals but applied its policy neutrally. Second, the court rejected the contention that an alleged breach of FRAND contractual commitments to SSOs (which the court did not reach the merits of) inherently constitutes an antitrust violation. The FTC failed to explain how such a breach, by itself, impaired rivals' opportunities given the 'chip-supplier neutral' nature of Qualcomm's royalty collections from OEMs and the de facto royalty-free licenses provided to rival chipmakers via 'CDMA ASIC Agreements'. Third, the court found the district court's 'anticompetitive surcharge' theory regarding Qualcomm's royalty rates to be flawed. It misinterpreted Federal Circuit patent damages law regarding the 'smallest salable patent-practicing unit' (SSPPU), which is an evidentiary tool, not a strict rule. The court emphasized that antitrust law does not govern the 'reasonableness' or 'fair value' of royalties, which is a patent law concept, and that alleged harms were primarily to OEMs (customers), not competitors, thus falling outside the relevant modem chip markets. The court also noted the absence of predatory pricing. Fourth, the 'no license, no chips' policy was deemed 'chip-supplier neutral' because it required OEMs to pay for patent licenses regardless of the chip source, thus not distorting competition in the modem chip markets or foreclosing rivals. Finally, while Qualcomm's agreements with Apple were structured like exclusive dealing contracts, they did not have the actual or practical effect of substantially foreclosing competition in the CDMA modem chip market, as Intel was able to successfully compete and secure Apple's business shortly after. Moreover, the agreements were terminated by Apple years prior to the injunction, making injunctive relief unwarranted for past wrongs.
Analysis:
This ruling significantly narrows the scope of antitrust liability for technology companies, particularly those holding standard-essential patents, by clarifying that profit-maximizing licensing strategies, even by monopolists, are generally permissible unless they involve specific types of exclusionary conduct with clear anticompetitive effects on competition itself. The decision reinforces the distinction between breaches of contractual commitments (like FRAND) and antitrust violations, asserting that the latter requires proof of harm to the competitive process, not merely to individual competitors or customers. This will likely make it more challenging for government regulators and private plaintiffs to use antitrust law to challenge patent licensing practices in dynamic, innovation-driven markets, directing such disputes towards contract or patent law instead.
