Judge Lucy Koh of the U.S. District Court for the Northern District of California ruled for the Federal Trade Commission (FTC) last week in its antitrust enforcement action against Qualcomm, and issued an injunction that, if upheld on appeal, could seriously impair Qualcomm’s business model and enhance competition in the market for standards-compliant baseband modem computer chips used in cell phones and tablets. FTC v. Qualcomm Inc., No. 17-cv-00220-LHK, Dkt. 1490 (N.D. Cal. May 21, 2019) (“D. Ct. Op.”).
Background
Since the early 2000s, Qualcomm’s business model has depended on revenues from licensing standard-essential-patents (SEPs) and sales of standards-compliant baseband modem chips. Indeed, over the last 10 years, the vast majority of Qualcomm’s profits have come from licensing its SEPs, rather than selling chips.
In 2014, the FTC launched an investigation into allegedly anticompetitive practices that Qualcomm used to boost its SEP licensing revenues, including accusations that Qualcomm had used its dominance of the modem chip market to extract unreasonably high royalties on its SEPs. That investigation led the FTC to file suit against Qualcomm in January 2017, alleging that Qualcomm violated Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45(a). Section 5 of the FTC Act prohibits “[u]nfair methods of competition,” including practices that violate both the letter and the spirit of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2.
Judge Koh held a bench trial in January 2019 and issued her opinion and judgment on May 21, 2019.
The End Result—Judge Koh’s Injunction
As discussed below, Judge Koh found that Qualcomm’s conduct violated Sections 1 and 2 of the Sherman Act and thereby violated Section 5 of the FTC Act. Based on those findings, she issued the following injunction:
- Qualcomm must not condition its supply of modem chips on a customer’s patent license status. Qualcomm must also negotiate or renegotiate license terms with customers in good faith under conditions free from the threat of lack of access to or discriminatory provision of modem chips or associated technical support or access to software.
- Qualcomm must make exhaustive SEP licenses available to modem chip suppliers on fair, reasonable and non-discriminatory (FRAND) terms and submit, as necessary, to arbitration or judicial resolution to determine such terms.
- Qualcomm must not enter express or de facto exclusive dealing agreements for the supply of modem chips.
- Qualcomm must not interfere with any customer’s ability to communicate with a government agency about a law enforcement or regulatory matter.
- Qualcomm must submit to compliance and monitoring procedures for seven years, and it must report to the FTC on an annual basis regarding its compliance with the remedies above.
As a practical matter, the injunction dismantles three key components of Qualcomm’s business model:
- It forces Qualcomm to license its SEPs to other manufacturers of baseband modem chips in a way that results in exhaustion of Qualcomm’s patent rights downstream. Qualcomm had been unwilling to offer such licenses, and the FTC and others considered this practice a significant barrier to entry into the baseband modem chip market.
- It prohibits Qualcomm from entering into exclusive dealing arrangements for supply of modem chips. This may end up unwinding some or all of the recent Apple–Qualcomm settlement agreement, even though that agreement was negotiated in the shadow of the FTC v. Qualcomm
- It prevents Qualcomm from maintaining its “no license, no chips” policy, under which Qualcomm would...
