No License, No Chips, No Alternatives: Qualcomm Wins Against FTC’s Antitrust Allegation in the Ninth Circuit
The three-year litigation between the Federal Trade Commission (“FTC”) and Qualcomm Incorporated (“Qualcomm”) finally comes with a result from the Ninth Circuit.[1] On August 11, 2020, a unanimous panel of the U.S. Court of Appeals for the Ninth Circuit reversed the decision by the U.S. District Court for the Northern District of California in FTC v. Qualcomm[2] and vacated the district court’s permanent, worldwide injunction prohibiting several of Qualcomm’s core licensing practices[3] on cellular standard-essential patents (“SEPs”)[4] and sales of its code division multiple access (“CDMA”) and premium long-term evolution (“LTE”) modem chips.[5] In reversing the district court’s decision, the Ninth Circuit held that Qualcomm had no antitrust duty to license its SEPs to rival chip suppliers, and that the FTC failed to establish anticompetitive effects to the cellular chip market arising from Qualcomm’s patent licensing practices.[6]
Qualcomm is one of the world’s leading cellular technology companies.[7] Qualcomm focuses on developing semiconductor components, software, and services related to wireless technology, which are used in various mobile or other types of electronic devices.[8] During the past three decades, the company has made significant contributions to modern cellular systems and revolutionized methods of wireless communication through its breakthroughs in the third-generation (“3G”) of CDMA[9] and fourth-generation (“4G”) LTE cellular standards.[10] A major part of Qualcomm’s profits comes from licensing its patents, including SEPs, to original equipment manufacturers (“OEMs”), such as Apple and Samsung.[11] These OEMs do not directly compete with Qualcomm in the semiconductor or wireless standards development market, rather they are Qualcomm’s CDMA or LTE modem chips major customers.[12]
To prevent SEP holders from unreasonably excluding industry participants to implement a standard, the international standard-setting organization requires that patent holders agree to license their SEPs on fair, reasonable, and non-discriminatory (“FRAND”) terms.[13] Qualcomm, to secure its leading market and profits in modem chips, exclusively licenses its patent portfolios to OEMs and only enters into “CDMA ASIC Agreements”[14] with its rival chip manufacturers. In addition, Qualcomm refuses to sell modem chips to unlicensed OEMs, which is also called the “no license, no chips” policy.[15] In this way, Qualcomm reinforces that OEMs are always required to license the patents from Qualcomm regardless of whom they buy chips from, and can obtain maximum value for its SEP portfolios.
In January 2017, the FTC challenged that this “no license, no chips” policy was an anti-competitive act and violated § 5(a) of the FTC Act and §§ 1 and 2 of the Sherman Act.[16] After two years of litigation, the U.S. District Court for the Northern District of California decided to stand with the FTC and issued a world-wide and permanent injunction order barring Qualcomm from practicing such policy.[17]
After Qualcomm’s appeal and a subsequent hearing held in February 2020, the Ninth Circuit reversed the district court’s decision and held that Qualcomm’s “no license, no chips” policy did not constitute an antitrust violation.[18] In reaching this conclusion, the court mainly focused on two questions: (1) does Qualcomm have an antitrust duty to license its SEPs to its rival chipmakers in the modem chip markets?[19] (2) does Qualcomm’s policy constitute as anticompetitive behavior?[20]
To establish antitrust liability under § 1 of the Sherman Act, a plaintiff must show that a company (1) made an agreement, (2) which was in unreasonable restraint of trade.[21] For a Sherman Act § 2 violation, a plaintiff is required to show three elements: “(a) the possession of monopoly power in the relevant market; (b) the willful acquisition or maintenance of that power; and (c) causal antitrust injury.”[22] The mere possession of monopoly power in the relevant market itself is a part of the free-market system and not unlawful.[23]
In evaluating Qualcomm’s antitrust allegation, the Ninth Circuit first asked what the scope of “relevant market” is.[24] Agreeing with the district court’s opinion on this issue, the Ninth Circuit defined the “relevant market” as the market for CDMA and LTE modem chips.[25] Thus, subsequent discussions should be focused on Qualcomm’s policy impact on rival chip makers instead of downstream OEMs. Next, the Ninth Circuit relied on a previous Supreme Court case, Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,[26] to review whether Qualcomm has an antitrust duty to its competitors.[27] This is because the antitrust laws were enacted for the “protection of competition, not competitors.”[28] In Aspen, the Court held that a company engages in anticompetitive conduct when “(1) it unilaterally terminates a voluntary and profitable course of dealing, and (2) the only conceivable rationale or purpose is to sacrifice short-term benefits in order to obtain higher profits in the long run from the exclusion of competition.”[29]
However, the Ninth Circuit held that Aspen’s two-step analysis did not apply here because: (1) Qualcomm did not terminate a “voluntary and profitable course of dealing” and (2) Qualcomm did not sacrifice short-term benefits to gain long-term profits with respect to licensing to rival chip manufacturers.[30] Instead, Qualcomm’s “no license, no chips” policy is lucrative both in the short- and long-run.[31] Furthermore, since Qualcomm’s policy equally applies to all competing chip makers in the relevant market, the court held that Qualcomm’s behavior is not anticompetitive under the Sherman Act.[32] Although Qualcomm’s policy is novel and results in high royalty rates in the OEM licensing market, its practice still does not constitute an antitrust violation.[33]
The Ninth Circuit’s decision closed a chapter of the FTC and Qualcomm’s dispute on the antitrust violation. But immediately after, Intel, Honda, Tesla, and nineteen other automakers signed a letter to the FTC imploring it to seek an en banc rehearing on the Ninth Circuit’s recent ruling.[34] These companies are concerned that the Ninth Circuit decision would “endanger domestic competitiveness, as well as weaken the ability of the FTC to protect consumers through future enforcement actions.”[35] While it is still pending how the FTC will move forward, this case will have a significant impact on other similar pending cases in the U.S., particularly SEP licensing cases.
Footnotes
