Ninth Circuit Overturns District Court Judge Lucy Koh's Decision That Qualcomm's Licensing and Chip Sales Practices Are Antitrust Violations
The Federal Trade Commission has a history of taking positions and aggressively pursuing them, despite getting reversed (sometimes continually) by Circuit Courts (see "Reverse Payments in Generic Drug Settlements"), although occasionally finding an ally in the Supreme Court (see "Federal Trade Commission v. Actavis, Inc. (2013)"). Most recently, the FTC has waged a campaign against chipmakers involved in the cell phone industry, and their most spectacular victory was in convincing U.S. District Court Judge Lucy Koh (Northern District of California) to impose a worldwide injunction against Qualcomm. That victory was short-lived, however, with the Ninth Circuit ruling on Tuesday that Qualcomm's business practices, while aggressive did not rise to antitrust violations. (The result may have been telegraphed by the Court in granting a stay on the injunction, where it said that the "district court's order and injunction [was] either 'a trailblazing application of the antitrust laws' or 'an improper excursion beyond the outer limits of the Sherman Act.'")
As set forth in the opinion, Qualcomm has been successful in making chips used in code division multiple access ("CDMA") and premium long-term evolution ("LTE") cellular modern technology, which it sells to original equipment manufacturers (OEMs). In addition, the company licenses its cellular standard essential patents ("SEPs"), non-cellular SEPS, and non-SEPs to OEMs as well as rival chipmakers. These chips and their licensed technologies that "enable[] cellular devices to practice CDMA and premium LTE technologies and thereby communicate with each other across cellular networks"; in a footnote, the Court explains that the company has two separate divisions, its Technology Licensing arm responsible for licensing its patent portfolios and establishing licensing rates, and its CMDA Technology division that cells modem chips. These divisions distinguish Qualcomm from other companies in this space (including Nokia and Ericsson, for example) who license their SEP portfolios but don't also sell modem chips, and other chip makers (such as Samsung) who don't have SEP portfolios to license. The opinion also acknowledged that Qualcomm had "monopoly power" (90% market share) over the CMDA modem chip market between 2006-2016 and 70% market share over the LTE chip market, and accordingly charged "monopoly prices" on its chips.
According to the opinion, Qualcomm deals exclusively with OEMs, charging "a percentage of the end-product sales price," which the Court says is a "practice not unique to Qualcomm." Interestingly (perhaps as an example of the law of unintended consequences), the practice arose in response to the Supreme Court's decision on patent exhaustion in Quanta Comput., Inc. v. LG Elecs., Inc., 553 U.S. 617, 625 (2008). The rationale is that sales to suppliers of OEMs would exhaust all patent rights in the chips, and because such suppliers do not need licenses to Qualcomm's SEP and other standard portfolios the company would not be able to collect them from their OEM customers.
Qualcomm had not refused to license rival chipmakers, according to the opinion, offering them what amounts to a covenant not to sue provided that they do not sell their chips to unlicensed OEMs. Qualcomm has a "no license, no chops" policy to enforce these arrangements, refusing to sell the OEMs who do not license their SEP portfolios.
The opinion also notes that because Qualcomm is not itself an OEM, it is not in competition with OEMs; as stated in the opinion, "these OEMs are Qualcomm's customers" (emphasis in opinion), which changes how the antitrust laws are applied to Qualcomm's behavior.
As might be expected, Qualcomm's rivals complained about its business practices and the Federal Trade Commission sued, alleging violation of § 5(a) of the FTC Act, 15 U.S.C. § 45(a), and §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. The FTC contended that Qualcomm's business practices "unreasonably restraining trade in, and unlawfully monopolizing, the code division multiple access ("CDMA") and premium long-term evolution ("LTE") cellular modern chip markets." The District Court found that "Qualcomm's licensing practices are an unreasonable restraint of trade under § 1 of the Sherman Act and exclusionary conduct under § 2 of the Sherman Act." The District Court based its decision on "five mixed findings of fact and law" according to the opinion:
(1) Qualcomm's "no license, no chips" policy amounts to "anticompetitive conduct against OEMs" and an "anticompetitive practice[] in patent license negotiations"; (2) Qualcomm's refusal to license rival chipmakers violates both its FRAND commitments and an antitrust duty to deal under § 2 of the Sherman Act;12 (3) Qualcomm's "exclusive deals" with Apple "foreclosed a 'substantial share' of the modem chip market" in violation of both Sherman Act provisions; (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...
