Last month, a Ninth Circuit panel unanimously reversed the US Federal Trade Commission’s (FTC) win in district court, finding that Qualcomm’s licensing practices for its cellular technology standard-essential patents (SEPs) do not violate US antitrust law, and removing the permanent, court-imposed worldwide injunction against several of Qualcomm’s core business practices – the latest round in a high-profile heavy-weight boxing match between the FTC and Qualcomm, with the US Department of Justice Antitrust Division (DOJ) ultimately placing itself inside the ropes as well.
This decision not only validates Qualcomm’s global business practices under US antitrust law, but also provides some clarity to SEP holders concerned about antitrust challenges to innovative patent licensing practices. As a result, other SEP holders are likely to continue adopting licensing programs similar to those used by Qualcomm, however they could continue to face increased fair, reasonable, and non-discriminatory terms (FRAND) challenges based in contract or patent law; as well as related antitrust claims despite the favorable Ninth Circuit ruling.
Round one: FTC
In addition to holding cellular technology SEPs, Qualcomm is a key manufacturer of cellular modem chips. Qualcomm is required to license its SEPs on FRAND terms but opts only to license the SEPs to original equipment manufacturers (OEMs) such as Apple, LG, and Samsung and not to rival chipmakers. While Qualcomm does not license its SEPs to rival chipmakers, its competitors can develop technology that reads on the SEPs as long as they sell only to customers who have licensed the SEPs from Qualcomm, denoted as Qualcomm’s “no license, no chips” policy. Qualcomm also sells its chips only to customers with a license.
In January 2017, the FTC sued Qualcomm alleging its licensing practices excluded competitors and harmed competition in the cellular modem chip market. At that time, the FTC had only three sitting Commissioners, and the vote to charge Qualcomm with monopolization was two in favor with one dissent. In May 2019, US District Judge Lucy Koh agreed with the FTC and ordered Qualcomm to permanently cease its in-scope global licensing practices and to renegotiate agreements with customers in good faith and without threatening to cut off access to its products.
DOJ: In Qualcomm’s corner
In an unprecedented split between the two US antitrust agencies in an active litigation, the DOJ aligned itself with Qualcomm when it filed with the district court a Statement of Interest disagreeing with the FTC’s position. The DOJ remained in Qualcomm’s corner throughout the appeal, filings its own brief supporting Qualcomm’s request to stay the injunction, and took off its gloves to back Qualcomm at oral arguments.
Round two: Qualcomm
The Ninth Circuit immediately issued a partial stay of the district court ruling until it could hear the case. Ultimately, the panel unanimously overturned Judge Koh’s decision, highlighting that under federal antitrust law while “anticompetitive behavior is illegal … [h]ypercompetitive behavior is not” and that the FTC failed to show Qualcomm’s behavior in the modem chip market was anticompetitive.
The Ninth Circuit found that Qualcomm’s practice of licensing its SEPs exclusively at the OEM level does not amount to anticompetitive conduct because Qualcomm has no “duty to deal” with its competitors. Additionally, Qualcomm’s patent-licensing royalties and “no license, no chip” policy do not impose an anticompetitive surcharge on rivals’ modem chip sales. The panel noted that they did not need to determine whether Qualcomm violated its SEP licensing FRAND commitments because if Qualcomm had breached such commitments, the appropriate remedy was in contract or tort law, not antitrust law. Notably, the opinion closely tracked the current DOJ’s position on antitrust enforcement and IP.
FTC: Down for the count?
The FTC is weighing its options, which could involve an application for a rehearing by the full Ninth Circuit or a petition to the Supreme Court. Will the three Republican majority favor “throwing in the towel” or will the Commission “step back into the ring” for another round by voting to proceed with an appeal.
Implications for those in the ringside seats
The Ninth Circuit is typically viewed as pro-enforcement but following the opinion’s repeated acknowledgment of Qualcomm’s contributions to the “dynamic and rapidly changing” tech industry, SEP holders may now see some deference from the courts when assessing their business practices. Further, the opinion invoked the Supreme Court’s recent decision in Ohio v. American Express Co. and found Qualcomm’s practices akin to the “novel” business practices in that case which were ultimately deemed beneficial to consumers, despite appearing anticompetitive at first.
Under this opinion, SEP holders who could be alleged to enjoy market power have no “duty to deal” with competitors. Although Judge Koh relied upon the Supreme Court’s decision in Aspen Skiing v. Aspen Highlands Skiing Corp., which established certain circumstances where there is a “duty to deal,” even the FTC conceded it should be narrowly construed.
Notably, the Ninth Circuit was not persuaded by the district court’s ruling that higher prices to consumers is necessarily a type of anticompetitive harm. If an OEM, or any SEP licensee, is looking to pursue an antitrust claim, they should be prepared to effectively demonstrate a restraint on trade or exclusionary conduct beyond higher pricing. Further, the opinion clarified that royalties that do not reflect the “fair value” of a patent are not automatically anticompetitive, and such a dispute is instead a patent issue, particularly in the case of a supplier neutral licensing policy. As previously noted, the panel’s view that antitrust enforcement should be cautious in addressing FRAND disputes will be informative to SEP licensees considering using antitrust laws to resolve such disputes.
Keep your gloves up
With a divided DOJ and FTC, it is unclear whether the FTC will step back between the ropes for another round. A slew of big-name companies, from tech to automotive, recently penned an open letter urging the FTC to seek an en banc hearing to avoid a precedent they assert would weaken the FTC and compromise domestic competitiveness. Regardless of the FTC’s next steps, the Ninth Circuit’s opinion will inform the agencies’ approach to considering monopolization claims against companies perceived to be exercising market power via SEPs. Moving forward, technology companies should continue to stay on top of US and global SEP and FRAND developments, as further interpretation of this opinion and other on-going litigations around the world will be forthcoming soon – the antitrust pugilism is far from over.