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Antitrust UCL and Privacy

Northern District of California Says Qualcomm Must License SEPs to Competitors

Lee Brand
Rebecca Friedemann
Pillsbury Winthrop Shaw Pittman LLP

On November 6, 2018, Judge Lucy H. Koh of the Northern District of California granted the FTC’s motion for partial summary judgment in its ongoing litigation against Qualcomm. FTC v. Qualcomm Inc., No. 17-CV-00220-LHK, 2018 WL 5848999, at *1 (N.D. Cal. Nov. 6, 2018). While the FTC’s suit alleges that Qualcomm has harmed competition in the modem chip market in violation of § 5 of the Federal Trade Commission Act (“FTCA”), the government successfully sought summary judgment on only the relatively narrow question of whether certain telecommunications industry agreements governing the use of standard essential patents (“SEPs”) require Qualcomm to license such patents to competing modem chip suppliers. Id. Still, the ruling is a significant win for the FTC in the overall litigation as the wrongful refusal to license its SEPs to competitors is a key component of Qualcomm’s alleged scheme to unfairly dominate the modem chip market. See id. Moreover, the FTC’s motion inspired amicus briefs on both sides, underscoring the fact that Judge Koh’s decision is likely to have implications on SEP licensing practices far broader than the instant case. See id. at *4.

Background

Modem chips, also known as baseband processors, are key components of complete wireless devices like cell phones. Communications over such devices depend on widely distributed networks that implement cellular communications standards, like the 4G LTE family of standards. Industry groups known as standard-setting organizations (“SSOs”) develop and manage those cellular standards and commonly adopt standards that incorporate patented technology. To prevent the holders of those patents from blocking implementation of a given standard, SSOs also adopt intellectual property rights (“IPR”) policies, which require an SSO’s members to license their SEPs on terms that are fair, reasonable, and non-discriminatory (“FRAND”). Id. at *2. Qualcomm holds SEPs related to cellular standards and has relevant FRAND obligations under the IPR policies of two SSOs—the Telecommunications Industry Association (“TIA”) and the Alliance for Telecommunications Industry Solutions (“ATIS”). Id. at *3.

According to the FTC’s motion for partial summary judgment, Qualcomm’s FRAND obligations under the TIA and ATIS IPR policies require it to license its SEPs to all applicants, including competing suppliers of modem chips and other cell phone components. Id. at *7. Qualcomm’s opposition does not dispute that the IPR policies constitute binding contracts, but instead argues that these policies only require it to license its SEPs to suppliers of complete devices, like cell phones themselves, because only such complete devices actually “practice” the relevant cellular standards. Id. at *7, *14. Trade organizations representing app makers and other companies in the computer and communications industries filed an amicus brief in support of the FTC’s motion while Nokia filed an amicus brief in support of Qualcomm. Id. at *4.

The FTC’s motion did not seek to prove the government’s ultimate claim that Qualcomm has violated § 5 of the FTCA. Id. at *7. However, Qualcomm’s failure to abide by its FRAND obligations under these IPR policies is one of the three interrelated practices that the FTC does contend in its complaint collectively constitute such a violation. The other key practices, not addressed on summary judgement, are that Qualcomm (1) will not sell its modem chips unless a customer accepts a license to its SEPs for “elevated royalties,” and (2) entered into “exclusive dealing arrangements” with Apple, a particularly important manufacturer of finished cellular devices. Id. at *1.

The District Court’s Analysis

In addressing Qualcomm’s contractual obligations under the TIA and ATIS IPR policies, the District Court relied heavily on Ninth Circuit precedent addressing the scope of “a SSO IPR policy with almost identical language” and identifying “sweeping” FRAND commitments.Id. at *10–11. In those cases, the Ninth Circuit had initially recognized that SSOs ensure “not just interoperability but also lower product costs and increased price competition” and, accordingly, that “SSOs requir[e] members who hold IP rights in standard-essential patents to agree to license those patents to all comers” and that their IPR policy language “admits of no limitations as to who or how many applicants could receive a license.” Id. (quoting Microsoft Corp. v. Motorola, Inc., 696 F.3d 872, 876, 884 (9th Cir. 2012)) (emphasis added by Judge Koh). When the Microsoft case returned to the Ninth Circuit a few years later, the court reiterated that a “SEP holder cannot refuse a license to a manufacturer who commits to paying the [F]RAND rate.” Id. at *11 (quoting Microsoft Corp. v. Motorola Inc., 795 F.3d 1024, 1031 (9th Cir. 2015)) (emphasis added by Judge Koh). Seeing no room after these cases to draw the distinction between component and finished product licensing proposed by Qualcomm, the District Court instead simply concluded that the “binding precedents are clear: a SEP holder that commits to license its SEPs on FRAND terms must license those SEPs to all applicants.”Id.

Judge Koh found further support for this result in the procompetitive principles espoused by the guidelines and statements of purpose associated with the IPR policies at issue. The guidelines to the TIA IPR policy “specifically identify ‘a willingness to license all applicants except for competitors of the licensor’ as an example of discriminatory conduct” that is prohibited by the policy. Id. at *12. In addition, the “TIA IPR policy is designed to . . . ‘enable competing implementations that benefit manufacturers and ultimately consumers’” and its “FRAND commitment ‘prevents the inclusion of patented technology [in a standard] from resulting in a patent holder securing a monopoly in any market as a result of the standardization process.’” Id. (emphasis added by Judge Koh). The District Court reasoned that absent an obligation to license its SEPs to competing component suppliers, an SEP holder like Qualcomm could effectively monopolize the modem chip market by embedding its technology into a cellular standard and then refusing to license others to sell modem chips. Id.

The court also found that Qualcomm’s proposed distinction between components and finished products was belied by its own words and deeds. While Qualcomm argued that the general “industry practice” is to license SEPs only to handset manufacturers, Qualcomm itself had received “extensive” SEP licenses to produce components such as modem chips. Id. at *12–13. Further, in prior litigation where Ericsson had alleged that Qualcomm’s modem chips infringed Ericsson’s SEPs, Qualcomm argued that the very same TIA IPR policy at issue here required Ericsson to license its SEPs to Qualcomm. Id.at *13. Similarly, although amicus Nokia argued that “the FTC’s interpretations of Qualcomm’s commitments under the TIA and ATIS IPR policies are ‘novel and very surprising,’” Nokia itself had previously alleged in a European Commission filing that Qualcomm’s termination of a modem chip license agreement breached its “unequivocal” FRAND duties pursuant to multiple IPR policies. Id.

Finally, the court found that Qualcomm’s basic premise that only finished devices “practice” or “implement” standards made little sense. Judge Koh explained that any “SEP is by definition necessary to practice or for the purpose of implementing a standard . . . . Thus, if a modem chip infringes a SEP, practice or implementation of the relevant standard would require a license to that SEP.” Id. at *14.

Conclusion

While the District Court’s grant of partial summary judgment is generally limited to a contractual analysis of the relevant IPR policies, it puts the FTC one step closer to proving its overall theory of a § 5 violation and provides significant momentum for the government leading up to the start of trial on January 4, 2019. Further, beyond the bounds of this case, Judge Koh’s ruling may inspire component manufacturers in various standard-dependent industries to begin demanding SEP licenses from their competitors.

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