FTC v. Qualcomm: District Court Finds Qualcomm’s SEP Licensing Scheme is Anticompetitive

Elizabeth T. Castillo and Linda Szabados
Cotchett, Pitre & McCarthy, LLP

On May 21, 2019, District Judge Lucy H. Koh of the Northern District of California ruled that Qualcomm, Inc.’s standard essential patent licensing practices were anticompetitive.^[1] FTC v. Qualcomm, No. 5:17-cv-002200, 2019 U.S. Dist. WL 2206013 (N.D. Cal. May 21, 2019). Judge Koh found that Qualcomm possessed monopoly power in the markets for CDMA and premium-LTE modem chips. Qualcomm in turn used this monopoly power to (a) force SEP licensees into anticompetitive licensing agreements, (b) refuse to license its SEPs to rival modem chip manufacturers, (c) extract supra-competitive royalties from customers, (d) push competitors out of the market, and (e) secure exclusive deals. This anticompetitive behavior harmed original equipment manufacturers (“OEMs”) and Qualcomm’s rivals in the CDMA and premium-LTE modem chip markets. Indeed, Qualcomm had required OEMs to sign a patent license agreement before they could purchase their model chips (i.e., the no license/no chip policy), a practice which the court deemed anticompetitive.

Judge Koh’s decision followed a 10-day bench trial that ended on January 29, 2019. The Federal Trade Commission (“FTC”) sued Qualcomm in January 2017 for violating Section 5 of the FTC Act. The FTC’s complaint also included claims under the Sherman Act.

Decision Summary

Qualcomm’s Monopoly Power

Judge Koh first addressed the issue of Qualcomm’s alleged monopoly in the global CDMA modem chip market.^[2] Finding that the CDMA modem chip market was a distinct product market and properly defined by the FTC, Judge Koh determined that Qualcomm was able to charge up to a 30% premium on CDMA modem chips over comparable chips due to the company’s large market share, which ranged between 92-96 percent of the market between 2010 and 2017. The court noted that Qualcomm’s market power was further evidenced by its ability to charge premiums on the CDMA chips without price discipline from competitors. Moreover, Qualcomm’s competitors lacked the capacity to increase their output of CDMA chips. Judge Koh found that new market rivals have also been slow to enter the CDMA modem chip market due to the required investments. Even the largest OEMs had to give in to Qualcomm’s royalty demands or risk the inability to sell handsets.

Premium-LTE modem chips are LTE-compliant—meaning they are compatible with the 4G standard—handsets used in premium handsets. Judge Koh found that this was an appropriate antitrust submarket because the OEMs producing the premium handsets needed premium-LTE modem chips.

As with the CDMA modem chip market, Judge Koh found that Qualcomm held a significant share of the premium-LTE modem chip market. Not only was Qualcomm the first company to supply this type of chip, but it also did not face significant competition. Since Qualcomm was able to charge higher prices on premium-LTE modem chips for an extended period of time, Judge Koh reasoned that Qualcomm’s competitors could not quickly increase their output of a competing chip. Like the CDMA modem chip market, the premium LTE modem chip market also had high barriers to entry. However, the premium-LTE modem chip requires even more research and development investment than the CDMA chip, so Qualcomm’s competitors have simply been unable to create a competing chip due to the required expense.

Anticompetitive Harm Against OEMs

Judge Koh next turned to evaluating the alleged harm that Qualcomm caused in the CDMA and LTE modem chip markets. The court determined that Qualcomm’s refusal to sell modem chips to an OEM until the OEM signed a separate license agreement was anticompetitive because it violated the doctrine of patent exhaustion, which states that the “initial authorized sale of a patented item terminates all patent rights to that item.” 2019 WL 2206013, at *82 (citing Quanta Comp., Inc. v. LG Elecs., Inc., 553 U.S. 617, 625 (2008)). The court said Qualcomm was able to use its monopoly in the chip markets to coerce OEMs to sign patent license agreements, thereby avoiding exhaustion and enforcing its requirements for a separate patent license prior to selling modem chips.

Qualcomm also engaged in other “associated threats” to OEMs when it “refused to even provide samples of Qualcomm modem chips, withheld technical support, and delayed delivery of software or threatened to require the return of software until OEMs sign[ed] Qualcomm’s patent licensing agreements.” 2019 WL 2206013, at *83-84.

Judge Koh reasoned that Qualcomm’s licensing practice, combined with its threats to OEMs, allowed the chip company to charge “unreasonably high” royalty rates. Id. at *84. Since Qualcomm already receives royalties on any handset sale—including sales where the handset contains the chip of a competitor company—the company’s high royalty rates created an “artificial and anticompetitive surcharge” on the prices of modem chips made by Qualcomm’s competitors. Id. In fact, the court found that Qualcomm’s royalty rates for OEMs were sometimes even higher when the OEMs purchased chips from Qualcomm’s competitors, which only further hurt those competitors.

In the opinion, Judge Koh addressed Qualcomm’s specific actions towards each OEM separately, including Qualcomm’s anticompetitive behavior involving OEMs such as LGE, Samsung, Apple, Lenovo, Motorola, and ZTE.

For example, Judge Koh noted Qualcomm’s threat to reduce its supply of chips to Samsung and its offer to reduce the royalty rate if Samsung agreed to buy at least 85 percent of its chipsets from Qualcomm. This percentage was even higher in Qualcomm’s dealings with Motorola, where Qualcomm said it would greatly reduce its royalty rate if Motorola bought 100 percent of its chips from Qualcomm. With Apple, Qualcomm tried to require the iPhone maker to cross-license the entirely of its patent portfolio to Qualcomm. Qualcomm also entered into exclusive deals with Apple that prevented Apple from buying modem chips from Qualcomm’s competitors from 2011 to 2016. In 2018, Qualcomm also paid Samsung to silence it and to drop the antitrust claims it filed against Qualcomm.

Anticompetitive Harm Against Rivals

The court found that Qualcomm’s refusal to license its cellular SEPs to rival modem chip suppliers constituted anticompetitive conduct. According to the court, Qualcomm’s refusal to license its SEPs prevented its competitors from entering the market or forced them to exit it, and created a higher barrier to entry or success for other competitors. A competitor needs a license to Qualcomm’s SEPs to sell the chips without fear of Qualcomm suing the competitor and its customers for patent infringement.

The court looked at Qualcomm’s specific actions in refusing to license with rivals such as MediaTek, Samsung, Intel, Broadcom, Texas Instruments, and others. For example, Qualcomm’s refusal to license SEPs to Broadcom resulted in Broadcom’s exit from the modem chip market in 2014. Likewise, Qualcomm’s multiple refusals to license to Samsung put Samsung in a position where it is no longer a competitor in the sale of modem chips.

Qualcomm’s Refusal to License Rivals Violated FRAND Commitments

In a previous summary judgment decision in the case, Judge Koh relied on the Ninth Circuit’s decisions in Microsoft Corp. v. Motorola Inc., 696 F.3d 872, 876 (9th Cir. 2012) and Microsoft Corp. v. Motorola Inc., 795 F.3d 1024, 1031 (9th Cir. 2015), which repeatedly held that SEP holders must agree to license a manufacturer who commits to FRAND terms. 2019 WL 2206013, at *231-32.

Judge Koh determined that despite understanding FRAND terms, Qualcomm abandoned licensing its SEPs to rivals because licensing SEPs to only OEMs is “humongously more lucrative.” 2019 WL 2206013, at *231. Because licensing to only OEMs is so lucrative, other SEP licensors—such as Nokia and Ericsson—have imitated Qualcomm’s actions and now refuse to license modem chip suppliers.

Qualcomm Violated its Antitrust Duty to License its SEPs to Competitors

The court found that Qualcomm had an antitrust duty to license its SEPs to rivals under the liability factors in MetroNet Services Corp. v. Qwest Corp., 383 F.3d 1124, 1131 (9th Cir. 2004). These factors included: (1) “unilateral termination of a voluntary and profitable course of dealing, (2) a “refusal to deal even if compensated at retail price” which shows the conduct was anticompetitive, and (3) a refusal to “provide [a] competitor product that was ‘already sold in a retail market to other customers.’” 2019 WL 2206013, at *253-54.

Judge Koh found that Qualcomm’s actions met all of the MetroNet factors. Qualcomm previously provided licenses to its competitors but then voluntarily ceased doing so, even though it was profitable. Additionally, the company’s refusal to license its competitors was driven by “anticompetitive malice” because Qualcomm’s own statements from executives indicated it only refused licenses to avoid promoting competition and to continue charging high royalty rates. 2019 WL 2206013, at *257. Lastly, the court determined there is an existing market for SEP licenses of modem chips.

Exclusive Dealing with Apple

The court determined that the deals Qualcomm entered into with Apple were exclusive and that Qualcomm coerced Apple into purchasing a large portion of its needs from Qualcomm. Judge Koh cited Qualcomm’s own documents in which the company admitted its exclusive deals with Apple could extinguish competition since the residual sales to other OEMs would not support a competitor.

The deals included other anticompetitive indicia as well, such as the fact that Qualcomm only sought an exclusive deal with Apple after it found out Apple also wanted to buy modem chips from Intel, a Qualcomm competitor. Additionally, the court found that the five-year duration of the exclusive agreements between Qualcomm and Apple contributed to their anticompetitive nature.

The court further determined that Qualcomm’s modem chip sales to Apple would have been profitable even without the exclusive deals between the two companies.

Injunctive Relief: Implications on Qualcomm

After finding that Qualcomm was liable under the FTC Act for Sherman Act violations, the court also determined the injunctive relief available to the FTC.

Finding that Qualcomm’s anticompetitive practices were ongoing, Judge Koh granted injunctive relief and ordered:

• Qualcomm cannot condition the supply of modem chips on the status of a patent license; Qualcomm must therefore negotiate or renegotiate licenses in good faith, without the threat of cutting off supply or technical support;
• Qualcomm’s SEP licenses with modem chip suppliers must be exhaustive and made on FRAND terms. If necessary, Qualcomm must submit to arbitration or judicial dispute resolution to determine if the terms are FRAND;
• Qualcomm is barred from entering into exclusive dealing arrangements for modem chips;
• Qualcomm is prohibited from interfering with a customer’s ability to communicate with a government agency regarding law enforcement or regulatory issues; and
• Qualcomm must submit to compliance and monitoring for seven years to ensure it complies with the court’s remedies. Qualcomm is required to submit annual reports regarding its compliance with the remedies to the FTC.

Qualcomm’s appeal of this decision is currently pending in the Ninth Circuit.

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[1] Cellular standards, which are set by standard setting organizations (“SSOs”), may incorporate patented technology. When a patent is essential to the standard, it is called a standard essential patent (“SEP”). SSOs require that patent holders commit to licensing their SEPs on fair, reasonable, and nondiscriminatory (“FRAND”) terms before SSOs incorporate the patent into the standard. This is to ensure SEP holders do not prevent competitors from implementing a cellular standard. Back in text.

[2] A CDMA modem chip is a modem chip that supports CDMA cellular standards.Back in text.