On August 11, 2020, a Ninth Circuit panel reversed the District Court for the Northern District of California's judgment in FTC v. Qualcomm, Inc. The panel held that Qualcomm's conduct—(a) refusing to license its standards essential patents (SEPs) to rival chipset manufacturers; (b) refusing to supply chipsets to OEMs unless they first executed a license to its SEPs ("no license, no chips"); and (c) making exclusivity payments to Apple—was not anticompetitive. The panel did not disturb the District Court's conclusions that Qualcomm had monopoly power in the markets for code division multiple access (CDMA) and premium long-term evolution (LTE) cellular modern chipsets.
The panel's opinion had several key holdings:
- A duty to deal requires a short-term sacrifice of profits and a previous profitable course of dealing while the monopolist has monopoly power.
- Violating a commitment to license SEPs on fair, reasonable, and non-discriminatory (FRAND) terms is the exercise of lawful monopoly power and does not give rise to antitrust liability, at least absent intentional deception that led to the SEP holder's selection into the standard.
- Once the question of Qualcomm's royalties being FRAND is set aside, Qualcomm's licensing scheme was "supplier neutral," as the licensee must pay them no matter whether it uses Qualcomm's or rivals' chipsets.
- Qualcomm's "no license, no chips" policy—under which it refuses to sell its chips to any company that has not taken a license to its patents—was justified to avoid patent exhaustion.
The FTC may now seek a rehearing en banc with the Ninth Circuit. Given the messy history of the litigation, in which the District Court adopted an unusual theory different from the FTC's and the DOJ intervened to oppose the FTC, the FTC may not wish to do so. But with some tension between the panel opinion and several precedents, including some that impact broader antitrust law, the FTC may still feel compelled to appeal.
Background on the standard setting and antitrust law
Modern electronics are the result of contributions by many inventors creating ever-more complex devices that must be interoperable with products created by others. To enable this interoperability, standard-setting organizations (SSOs) seek convergence on a common technology. SSO members include companies that develop competing technologies and which lobby to have their methods incorporated into the standard, to the exclusion of other competing alternatives, in exchange for a pledge to license their technology on FRAND terms. This combination results in wider adoption of essential technology and enables interoperability among devices. In essence, standard setting involves trading competition between alternative technologies for competition between interoperable implementations of a single technology.
Courts have long grappled with the role of antitrust in policing abuses related to standard setting. Early cases, such as American Society of Mechanical Engineers, took a dim view of potential competitors agreeing to standards, noting that an SSO "can be rife with opportunities for anticompetitive activity." 1 As time passed, however, courts began to appreciate the benefits that standard setting could bring. For example, in Allied Tube, the Supreme Court noted that "[w]hen, however, private associations promulgate [] standards based on the merits of objective expert judgments and through procedures that prevent the standard-setting process from being biased by members with economic interests in stifling product competition...those private standards can have significant procompetitive advantages."2
The most recent and active debate, however, has been over the use of antitrust to police licensing of SEPs. On the one hand, the Third Circuit in Broadcom v. Qualcomm recognized that, absent enforcement of contributors' FRAND promises, the exclusion of alternative technologies could result in SEP holders exercising the market power that flows from being part of the standard, rather than only that which comes from the value of SEP holder's own invention. 3 The Third Circuit therefore viewed preventing the exercise of market power through violations of the FRAND commitment as a core concern of antitrust, at least when the SEP holder's commitment had been an important attribute in the selection of its technology into the standard. 4
The Federal Circuit, on the other hand, took a different view. In Rambus v. FTC, it observed that a core requirement of anticompetitive conduct is the exclusion of competition. 5 In that case, the FTC had made no findings about what technology the relevant SSO would have selected had Rambus's intent to violate its FRAND commitment been known, and so it could not say that the deception had excluded another competitive alternative. 6 The court emphasized that antitrust law is not meant to police high prices alone, absent evidence that those prices flowed from a reduction in competition, and is therefore not a proper mechanism for enforcing FRAND commitments. 7
The FTC's theory: shifting profits from chipsets to SEP royalties to hamper entry
The FTC accepted that Qualcomm was instrumental in the development of early mobile baseband technology. For the purposes of litigation, the FTC also accepted that Qualcomm had lawfully acquired monopoly power in the supply of CDMA chipsets and premium LTE chipsets and that Qualcomm's SEPs were valid.
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Footnotes
1 Am. Soc'y of Mech. Engs., Inc. v. Hydrolevel Corp., 456 U.S. 556, 571 (1982).
2 Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 501 (1988).
3 Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 314 (3rd Cir. 2007).
4 Id.
5 Rambus Inc. v. Fed. Trade Comm'n, 522 F. 3d 456, 464 (Fed. Cir. 2008).
6 Id. at 466. By contrast, the European Commission, which also investigated Rambus, expressly found that the conduct did exclude other alternatives.
7 Id.
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