In FTC v. Qualcomm Inc.,1 the Ninth Circuit granted a significant victory to Qualcomm and highlighted challenges in using U.S. antitrust laws to address standard essential patent (SEP) licensing practices. Qualcomm is both one of the world's largest cellular chipmakers and one of the largest owners of cellular SEPs. Qualcomm committed to license its SEPs on a fair, reasonable, and non-discriminatory (FRAND) basis. Qualcomm refused, however, to license chipmaker competitors, instead licensing cell phone original equipment manufacturers (OEMs). Under its "no licence, no chips" policy, Qualcomm also required OEMs to license its SEPs before it would sell them chips. The FTC contended,2 and the district court agreed, that Qualcomm's licensing practices were anti-competitive. The Ninth Circuit reversed, focusing on two themes: lack of harm to chipmakers and neutrality of Qualcomm's licensing policies.
First, the Ninth Circuit determined Qualcomm had no duty to license its SEPs to rival chipmakers. The court found that the antitrust laws impose such a duty only in limited circumstances not present here. Because Qualcomm refused to license chipmakers due to the broadened scope of patent exhaustion, and not for an improper reason, and because Qualcomm treated rival chipmakers the same, its practices were not anti-competitive. 35.3
Secondly, the Ninth Circuit found Qualcomm's alleged breach of its FRAND commitments did not create antitrust liability. The FTC alleged that Qualcomm's refusal to license rival chipmakers breached its FRAND commitments and harmed competition. Not addressing whether Qualcomm breached its FRAND commitments, the Ninth Circuit focused on whether any breach harmed competition. It held that the district court improperly focused on harms to OEMs, without evidence of harm to the chip market. The court also found persuasive Qualcomm's argument that the antitrust laws should not be used to remedy FRAND contractual disputes.
Thirdly, the Ninth Circuit held that Qualcomm's allegedly unreasonable royalty rates did not cause anti-competitive harm. The court rejected the FTC's argument that royalties based on the price of a cell phone conflicted with patent law and that any deviation from the "fair value" of the patents could create antitrust liability. The court also noted again that the primary harm alleged by Qualcomm's unreasonable royalty rates were to the original equipment manufacturer (OEMs) paying Qualcomm's royalty rates, and not rival chip manufacturers.4 Moreover, even if unreasonable, Qualcomm's royalty rates were not an artificial surcharge on rival's chip sales. The FTC alleged Qualcomm used licensing royalties to charge ultra-low prices to squeeze rivals' profit margins and prevent research and development. Even if true, the Ninth Circuit noted that this theory could not create antitrust liability.5 Instead, absent predatory pricing, lower prices generally promote competition.
Finally, the court found that Qualcomm's "no licence, no chips" policy did not violate antitrust laws, reiterating there was no anticompetitive harm to rival chip manufacturers, and harm to OEMs was beyond the relevant market. Qualcomm's royalty rates, which OEMs must pay whether they purchase chips from Qualcomm or another chip manufacturer, did not harm rival chip manufacturers because they are "chip-neutral".
At its core, the Ninth Circuit's decision embraces the current views of the Department of Justice and others that SEP licensing disputes are matters of contract or patent law and not antitrust law.6
At the same time, by avoiding whether a refusal to license at a component level violates FRAND, the court left open a significant question on the nature of FRAND commitments. Thus, while significant, the Qualcomm decision does not signal an end to FRAND disputes.
1 No. 19-16122 (9th Cir. Aug. 11, 2020) ("Slip op.").
2The U.S. Department of Justice disagreed and filed a brief supporting Qualcomm.
3. Distinguishing Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).
4 See Rambus Inc. v. FTC, 522 F.3d 456, 464 (D.C. Cir. 2008), cert. denied, 555 U.S. 1171 (2009) (if a practice "raises the price secured by a seller" or otherwise harms customers, "but does so without harming competition, it is beyond the antitrust laws' reach").
5. Pac. Bell Tel. Co. v. linkLine Commc'ns, Inc., 555 U.S. 438, 451-52, 457 (2009) (holding no antitrust duty to deal with competitors).
6. July 28, 2020 Avanci Business Review Letter, at 20 ("Standards implementors can enforce the commitments in contract proceedings if there are disputes.)" https://www.justice.gov/atr/page/file/1298626/download)
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