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FTC Says “No License, No Chips” Policy Is No Good: FTC v. Qualcomm Inc.

V&E Antitrust Update E-communication, February 6, 2017

By Jason A. Levine and Ryan B. Will

On January 17, 2017, the Federal Trade Commission filed a complaint in federal district court against Qualcomm Inc., charging the company with maintaining a monopoly over baseband processors essential to communications in premium smart phones. In particular, the complaint alleges that Qualcomm had a practice of withholding the sale of baseband processors unless customers paid a royalty based on the use of competing baseband processors (“no license-no chips” policy); refused to license competitors, in contradiction to its commitment to standard-setting organizations that it would license its standard-essential patents on fair, reasonable, and non-discriminatory terms (“FRAND”); and entered into an exclusive license with Apple for baseband processors. The Commission alleges that Qualcomm had a monopoly over baseband processors used in CDMA-compatible and premium LTE-compatible devices and that the exclusionary conduct from accessing court to challenge the payment of higher royalties increased rivals’ costs by imposing a “tax” on customers using competing baseband processors, deterred new entry, and ultimately resulted in improperly high royalty rates.

Commissioner Ohlhausen dissented, and criticized the complaint as based on a “flawed legal theory” that lacks evidence. Ohlhausen pointed out that the complaint contained no suggestion that Qualcomm charges higher royalties to device manufacturers that buy non-Qualcomm processors and that the royalties charged violated Qualcomm’s FRAND commitment, and challenged the complaint’s view of royalties as a “tax.” She cited a lack of economic evidence of exclusion and anticompetitive conduct in concluding that the Commission’s allegations were no more than unsupported theory.

The Commission’s action here is a mix of prior U.S. enforcement agency positions applied in the intellectual property antitrust sphere. First, the Commission has previously challenged a requirement by an alleged monopolist to impose a fee on customers for using competing technology.1 The Commission has also been aggressive as to exclusive dealing contracts by dominant firms.2 And the Commission has long required companies to abide by their commitments to standard-setting bodies. The ramifications for the ultimate decision regarding Qualcomm are potentially significant because the court will evaluate the FTC’s view that a patent holder surrenders its right to exclude if it agrees to contribute its technology to a standard, and if Section 5 of the FTC Act (preventing unfair methods of competition) reaches such conduct. The case may also be a test of the approach of the new Trump Administration when it selects three new FTC Commissioners.

Discussion

Qualcomm is the industry’s leading supplier of baseband processors – semiconductor devices that communicate with cellular networks in mobile devices such as cell phones and tablets – to device manufacturers such as Apple and Samsung, particularly in the high-end cell phone market. The following describes the allegations in the Commission’s complaint.

Qualcomm, along with several other industry participants, also owns patents essential to operating on the 4G LTE network. In cases where the patented technology is selected as the industry standard, these patents (known as standard-essential patents or “SEPs”) are required by standard-setting organizations (“SSOs”) to be licensed to industry competitors on FRAND terms. However, despite the fact that Qualcomm’s share of these patents is roughly equivalent to other industry participants, device manufacturers pay Qualcomm far more in royalties than they pay other patent licensors.

According to the Commission, Qualcomm uses its dominant position as a baseband processor supplier to preclude device manufacturers from challenging its SEP licensing terms in what the agency has coined a “no license-no chips” policy. The Commission alleges that the licensing terms are non-FRAND, and device manufacturers have no choice but to comply or else risk disruptions to their supply of baseband processors for which they have no reasonable alternative besides Qualcomm. Ordinarily, a licensor can challenge the terms of the agreement in court, but Qualcomm’s no license-no chips policy removes any incentive to do so.

The increased royalty that device manufacturers pay to Qualcomm operates as a “tax,” according to the Commission, which raises the costs of using baseband processors supplied by Qualcomm, reduces demand for competing processors, reduces the ability and incentive of competitors to invest and innovate, and thereby entrenches Qualcomm’s monopoly power over the processors and raises prices paid by consumers.

The Commission also alleges that Qualcomm is unique among industry suppliers in requiring device manufacturers to purchase a SEP license separate from the processor itself in order to use or resell the processors. In contrast, other component suppliers convey intellectual property rights directly via component sales rather than through separate licenses. Furthermore, Qualcomm has consistently refused to license its SEPs to competing suppliers of baseband processors including Intel and Samsung. As a result, these competitors cannot offer device manufacturers baseband processors that convey the rights to Qualcomm’s cellular SEPs.

Finally, the Commission also alleges that Qualcomm negotiated reduced royalty payment requirements from Apple in exchange for Apple’s exclusive use of Qualcomm baseband processors in new iPhones and iPads. These “conditional rebates” effectively penalized Apple’s use of any baseband processors supplied by Qualcomm’s (limited) competitors, and impeded the development of other baseband processors suppliers into effective competitors of Qualcomm.

The Commission has alleged that Qualcomm’s course of conduct, including: (1) conditioning the supply of baseband processors on licenses to FRAND-encumbered patents on Qualcomm’s preferred terms; (2) refusing to license FRAND-encumbered patents to baseband processor competitors; and (3) exclusive dealing with Apple, was anticompetitive in violation of Section 5(a) of the FTC Act.

Ramifications

The Qualcomm complaint has broad implications for the treatment of intellectual property, particularly SEP patents, under antitrust laws and the FTC Act. The crux of the issue is the view by the Commission that a patent holder surrenders its right to exclude if it agrees to contribute its technology to a standard, except under some limited circumstances. Notably, the recently updated Antitrust Guidelines for the Licensing of Intellectual Property released by the FTC and DOJ are silent on the issue of SEPs, despite concerns by many practitioners that this area of law requires discussion. The complaint also raises the issue of what constitutes a FRAND rate, and whether a company charging more than a FRAND rate is in violation of antitrust laws. Although the takeaway from the silence is that no special treatment will be given in these areas of law, how the Qualcomm case is resolved going forward will provide key guidance on treatment of these intellectual property rights under antitrust laws and Section 5 of the FTC Act.

The complaint also raises the controversial issue of the Commission’s power to police unfair methods of competition under Section 5 of the FTC Act. The Commission had not formally outlined how it would use this authority, which many agree extends to some extent beyond the Sherman Act’s ban on unreasonable restraint of trade and monopolization, until the Commission issued a short policy statement in 2015. The outcome of the Qualcomm case, assuming it is not summarily dismissed for the political reasons discussed below, should also give some guidance to the Commission’s approach to Section 5, including the extent to which the Commission’s powers reach.

Qualcomm may have caught a break with the new Trump administration, however. A few days after the complaint was filed, Maureen K. Ohlhausen – a Republican who voted against filing the complaint – was promoted to Acting Chairwoman of the FTC. As a result, observers say it seems increasingly likely that Qualcomm will be able to settle the complaint expeditiously and likely at minimal cost. Another theory among analysts is that the matter will eventually be withdrawn after a new slate of Commissioners are appointed by President Trump. Although this would be a very good outcome for Qualcomm, withdrawal of the complaint would delay the courts in further developing law at the intersection of antitrust and intellectual property. But in law, as in life, timing is everything.

Visit our website to learn more about V&E’s Antitrust practice. For more information, please contact Jason Levine.


1 In 1990, the Commission initiated an investigation into Microsoft Corp. for Microsoft’s use of contract terms requiring equipment manufacturers to pay Microsoft a royalty for each computer the manufacturer sells containing a particular microprocessor, whether or not the manufacturer included a Microsoft operating system with that computer. After several deadlock votes almost ended the FTC investigation, the DOJ filed a complaint and ultimately obtained a joint consent decree with the FTC and European Union’s Competition Directorate which effectively ended Microsoft's practice of “per processor” license agreements. See United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995).

2 For instance, in 2016 the Commission found that McWane Inc., a maker of pipe fittings and other industrial products, maintained monopoly power through a rebate policy designed to ensure distributors bought products exclusively from McWane. The Eleventh Circuit agreed with the Commission. See McWane, Inc. v. FTC, 783 F.3d 814 (11th Cir. 2015), cert. denied, 136 S. Ct. 1452 (2016). The Commission’s opinion is available at: https://www.ftc.gov/system/‌files/documents/‌cases/‌140206mcwaneopinion_0.pdf.

 

 


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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.