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By Shridhar Jayanthi
The problem of patents being used in ways at odds with antitrust laws is very old. The conflict arises from the tension between the government-granted right to exclude competition provided by patents and the antitrust laws interests in preventing economic damages to society that are often a product of monopolies. This conflict is at the heart of the present dispute between the Federal Trade Commission (FTC) and Qualcomm (5:17-cv-00220, NDCA).
To understand the issues in this litigation, it is necessary to delve into how advanced technologies are commonly developed, and how that development impacts the licensing arrangements for intellectual property rights, such as patents.
Modern day technologies are usually developed by several market players that might have competitive or complementary interests. To facilitate the integration of the products and components produced by these different players, these parties may agree to abide by jointly developed standards. By adopting the standard, the parties can minimize risks associated with investing substantial resources in a technology that is not adopted. This type of risk was well illustrated by the optical medium wars between the HDDVD and Blueray formats in the early 2000s. Due to the lack of a common standard, different players were forced to choose one of the formats, and companies that chose the HD DVD, such as Microsoft and Toshiba, incurred in substantial losses.
The adoption of standards in an industry can bring intellectual property issues. Standards are usually governed by standard setting organizations (SSOs), such as the Third Generation Partnership Project (3GPP), responsible for setting the 3G, 4G, and 5G standards for mobile phone communications. The standard setting process is usually a collaborative process in which the member parties decide which technologies will be adopted. Some of these technologies adopted by the standard are protected by standard-essential patents (SEPs), which usually belongs to a member of the SSO. To prevent a hold-up issue from SEP owners, the SSOs will often bind their members to agreements wherein SEP owners agree to license their SEPs under fair, reasonable, and non-discriminatory (FRAND) licenses to the other members. Such agreements are considered sensible, since they provide security to members of the SSO that they will be able to access the intellectual property required by the decided standard. The SEP owner benefits from the adoption of the standard as it presumably increases the demand for licensing of its patents.
Qualcomm-owned patents essential to the 3G and 4G mobile phone standards are at the heart of the matter in FTC v. Qualcomm. Qualcomm is the owner of a patent portfolio that includes technology for modem chips, which are used to establish communications between cell phones and the cellular network infrastructure. Moreover, Qualcomm is also subject to FRAND terms established by the Telecommunications Industry Association (TIA) and the Alliance for Telecommunications Industry Solutions (ATIS), and presumably required to license its SEP portfolio under those terms.
In their complaint, the FTC focused on two general licensing practices of Qualcomm. First, Qualcomm only issued licenses of its SEP portfolio to the cell phone manufacturers that use the modem chips, such as Apple or Samsung, while refusing to provide licenses to competitors that manufacture modem chips themselves. Second, Qualcomm required the modem chip users to license its patent portfolio as a precondition for the sales of the modem chips. The FTC asked for injunctions against these two practices, which they believe were in violation of the FRAND terms of the SSO agreements and contrary to the patent exhaustion doctrine (detailed below). Moreover, the FTC also submitted that these were unfair practices designed to eliminate competitors and increase consumer prices, in violation of the Sherman Act.
The case was decided against Qualcomm in the Northern District of California by Judge Koh and is currently pending appeal in the 9th Circuit (No. 19-16122, 9th Circuit). The Federal Court judgment was issued in two decisions, the first in November of last year and the second in May of this year. In the first decision, Judge Koh ruled on the contractual issues that arise from the FRAND terms and decided against Qualcomm in a summary judgment. The second decision, also against Qualcomm, focused on whether Qualcomm practices constituted unfair methods of competition in violation of the Sherman Act.
The latter decision’s Sherman Act analysis focused both on Qualcomm’s substantial market dominance over the modem chip market and the question of whether their practices were anticompetitive. In the findings on market dominance, the Federal Court pointed to the fact that, indeed, Qualcomm is the major supplier of modem chips in the industry and that there are substantial entry level barriers in the field of modem chips. In the defense of its practices, Qualcomm appeared to allege that it is vulnerable to a hold-out problem, by claiming that it is entirely dependent on cell-phone manufacturers to profit from its patents. This argument was successful in a Southern District of Iowa case wherein a seller of high fructose corn syrup did not dominate the market due to the presence of powerful buyers capable of lowering syrup prices. This argument was not persuasive here, however, due to the facts of the case. Even if Qualcomm could theoretically be vulnerable to hold-outs from cell phone manufacturers, Judge Koh found that the data shows that this theoretical problem is not actually occurring.
In the findings on anticompetitive practices, the Federal Court looked at how Qualcomm used the ownership of SEPs to obtain high licensing fees. In this analysis, the court noted that Qualcomm’s dealings with cell phone manufacturers and modem chip competitors were designed to eliminate competition and increase consumer prices. The court noted that Qualcomm required cell phone manufacturers to license its patents as a precondition for sales of the modem chips – a practice called “no license-no chips.” Under the “patent exhaustion” doctrine, the first sales of a product that incorporates a patent exhausts the patent rights downstream. In other words, when Apple buys a modem chip from Qualcomm that includes patented technology, Apple is not ordinarily required to license those patents, since the patent right exhausted after the first sale.
The “no license-no chips” practice, however, goes around the doctrine by demanding the licensing. Regarding its dealings with competitors, the court pointed to the fact that Qualcomm has consistently refused to license its SEP portfolio to manufacturers of modem chips under pretextual excuses, thus preventing new entrants in the market. As a result of these practices, the court found that Qualcomm extracted unreasonably high licensing fees.
The decision is a massive defeat for Qualcomm, which appears to rely heavily on these practices as its main business model. It also appears that Qualcomm is willing to fight this case all the way. As mentioned above, an appeal is pending in the 9th Circuit, and that court has already granted a stay of the injunctions issued by the Northern District of California. The case appears to be getting even more interesting with the involvement of the Department of Justice in favor of Qualcomm. If the case rises to the Supreme Court, we might be getting some rulings that impact the way in which the use of patents for leverage go against the Sherman Act.
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