Court Agrees With the FTC That Qualcomm’s “No License, No Chips” Policy Is No Good, Deeming It Impermissible Anticompetitive Conduct
By Lincoln Wesley
In January 2017, the Federal Trade Commission sued Qualcomm in the Northern District of California, alleging that the company was violating U.S. antitrust laws by using its dominant market share in two cellular chip markets to extract unreasonably high royalty rates and anticompetitive licensing terms from device manufacturers. On May 21, 2019, following a ten-day bench trial, the district court ruled in the FTC’s favor and enjoined Qualcomm from continuing the practices found to be impermissible. See FTC v. Qualcomm Inc., No. 17-cv-00220 (N.D. Cal. May 21, 2019). The decision is an important case study on what types of conduct by companies, particularly in the high tech sector, may attract the attention of antitrust regulators.
The FTC’s case against Qualcomm has been controversial from the start, even within the agency. The Complaint was approved by a 2-1 vote of a shorthanded Commission in the waning days of the Obama administration, with then-Commissioner Maureen Ohlhausen issuing a rare written dissent, describing the case as “based on a flawed legal theory … that lacks economic and evidentiary support.” The Department of Justice Antitrust Division took the unusual step of filing a Statement of Interest seeking to provide input on appropriate remedies should the Judge find a violation, although that request was not granted. And after the Judge’s Decision, sitting FTC Commissioner Christine Wilson authored an op-ed condemning the ruling as “both bad law and bad policy” and “encourag[ing] higher courts to reconsider the wisdom of the judge’s conclusions.” The FTC’s case also followed antitrust cases or investigations against Qualcomm in Europe, China, Japan, Taiwan, and South Korea (though many of these cases were based on theories that differed from the FTC’s). This controversy reflects that the Qualcomm case presents thorny issues at the intersection of antitrust and patent law, and the difficulty regulators face in balancing what may appear to be short-run costs to consumers against the need to protect and promote long-run innovation incentives.
The FTC alleged that Qualcomm violated §§ 1 and 2 of the Sherman Act, and thereby violated § 5 of the FTC Act which prohibits unfair methods of competition. While § 1 requires the existence of an agreement, and § 2 requires the existence of monopoly power, the court held that the analysis of whether a defendant’s conduct is an “unreasonable restraint of trade” under § 1, or “exclusionary” under § 2, is substantially identical. Id. slip op. at 18-22. Therefore, the court first analyzed whether Qualcomm possessed monopoly power, and then analyzed whether the FTC had shown that Qualcomm’s conduct was an unreasonable restraint of trade under § 1 or exclusionary conduct under § 2.
The court defined two relevant chip markets, including CDMA and “premium” LTE modem chips, which are generally used to enable cellular communications in handheld devices. Id. at 22-41. Limiting the market to so-called “premium” chips was critical to the court’s analysis as Qualcomm’s share of all LTE modem chips is relatively small and declining. The court found that Qualcomm possessed monopoly power in both markets because of its dominant market share, the significant barriers to entry, and the inability of competitors to increase output or discipline Qualcomm’s prices in those markets. Id.
Having determined that Qualcomm possessed monopoly power, the court then examined a wide variety of anticompetitive conduct that it held constituted unreasonable restraints of trade under § 1 of the Sherman Act and exclusionary conduct under § 2. For example, Qualcomm implemented a “no license-no chips” policy under which it refused to sell its chips, or threatened to cut off supply, to device manufacturers unless they signed separate patent license agreements allowing Qualcomm to collect unreasonably high royalty rates on any handset sale, even if that handset contained a rival’s chip. Id. at 44. The court found that because a loss of chip supply would have been devastating to manufacturers, they had no choice but to sign the license agreements. Id. Of course, a device manufacturer using one of Qualcomm’s chips without a patent license would be infringing many of Qualcomm’s patents, and the court did not address the fact that its decision arguably requires Qualcomm to facilitate the infringement of its own patents, or what effect such a rule would have on Qualcomm’s and others innovation incentives.
Qualcomm also incentivized device manufacturers to purchase its chips through the use of “chip incentive funds” which would reduce the price of Qualcomm’s chips, induce manufacturers to agree to Qualcomm’s licensing terms, and also would prevent manufacturers from purchasing chips from Qualcomm’s rivals. Id. In particular, the court highlighted the fact that Qualcomm got Apple to enter into an exclusive deal by offering hundreds of millions of dollars in incentives if Apple purchased substantial volumes of Qualcomm’s chips, and imposing substantial penalties if Apple purchased any chips from a Qualcomm rival. Id. at 141-43. This exclusive deal substantially foreclosed Qualcomm’s rivals from Apple’s business and all of the other network benefits of doing business with Apple. Id. at 146-47. Significantly, the Court did not conduct any sort of economic analysis of the effects of the Apple agreement, including whether an equally efficient competitor could have made the same deal with Apple, or whether Apple’s share of any market was in fact large enough to foreclose chip competitors. Instead, the court believed it could divine foreclosure from certain Qualcomm and Apple business documents alone.
Qualcomm also refused to license its cellular standard essential patents (“SEPs”) to rival modem chip suppliers despite the fact that, according to the court’s decision, its commitments to standard setting organizations (“SSOs”) required it to do so under fair reasonable and non-discriminatory (“FRAND”) terms. Whether the breach of a contractual commitment to an SSO is sufficient grounds on which to find an antitrust violation remains controversial. The court found that without such licenses, rivals could not sell modem chips with any assurance that Qualcomm would not bring suit for patent infringement, and further excluded rivals from the market. Id. at 114, 124. The Court also found that Qualcomm had an antitrust duty to deal with its chip rivals under the “voluntary course of conduct” framework that the Supreme Court identified in Aspen Skiing, as earlier in its business Qualcomm had licensed some of its patents to other chip manufacturers, though it had long ago abandoned that policy.
In total, the court found that Qualcomm’s monopoly power, no license-no chips policy, and exclusivity with device manufacturers created an “insurmountable barrier for rivals,” which ultimately also harmed consumers. Id. at 193-94. It held that Qualcomm’s conduct constituted an unreasonable restraint of trade under § 1 of the Sherman Act, and was exclusionary under § 2. Id. at 215. Therefore, the court enjoined Qualcomm from continuing these practices. For example, Qualcomm may no longer condition the supply of modem chips on a customer’s patent license status, must make its SEP licenses available to rival chip manufacturers on FRAND terms, and may not enter into express or de facto exclusive dealing agreements for the supply of modem chips — apparently regardless of whether that exclusive deal is likely to have any anticompetitive effect. Id. at 227-32. To ensure compliance, Qualcomm must also submit to monitoring for seven years and provide an annual report on its compliance efforts to the FTC. Id.
Although the court’s ruling is an obvious victory for the FTC, the case is likely far from over as Qualcomm has already signaled its intent to appeal the decision. Further, Qualcomm has faced an onslaught of civil litigation ranging from mobile phone owner class actions to securities suits based on the conduct alleged by the FTC, and the outcome of these matters may hang in the balance of the FTC litigation. Regardless, the decision serves as a reminder that regulators are paying particular attention to the high tech industry, where intellectual property and competition law can often come into conflict. It is important for companies in this space to be in close contact with counsel, to help guard against the risk of adverse enforcement actions.
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.