No FRANDS in Antitrust? Qualcomm’s Rejection of FRAND Violations as a Predicate to an Antitrust Violation

In the world of technology, Standard Setting Organizations (“SSOs”) play a crucial role in helping to facilitate innovation. They do so by creating industry standards that ensure quality and promote and enable the development of new, compatible technologies. To be included in such a standard, SSOs typically require participants to both disclose patents owned that would become essential to the standard and to license such essential patents to all other participants on fair, reasonable, and non-discriminatory (“FRAND”) terms. But what happens when such participants are alleged to have violated such SSO and FRAND commitments? Can such violations constitute an antitrust violation? The 9th Circuit’s recent decision in FTC v. Qualcomm Inc. instructs that such violations are properly viewed as contractual and rarely rise to the level of an antitrust violation.

SSOs generally require participating patent holders to provide timely disclosure of their patents and agree in advance to license their patents thought to be essential to the standard on FRAND terms (i.e., standard essential patents or “SEPs”).¹ FRAND obligations require the patentee to license freely to all qualified participants, whether or not they are competitors. Further, royalties to the owners of these SEPs are generally measured by the value that the contributed patent makes to the standard, which is generally measured “ex ante,” or prior to the patent’s adoption into a standard, though that premise has been a topic of dispute.² Thus, the goal of FRAND is to make patents available to participants at a price equivalent to what the patent would have been worth in the market prior to the time it was declared essential.

This SEP process has produced controversy and disputes. For example, patentees may attempt to evade a general FRAND requirement that an SEP owner must license unconditionally to all users of the standard and on non-discriminatory terms. Some SEP owners that manufacture products using that standard (and the SEPs) may prefer not to license a particular SEP to anyone. Or they may impose exclusive dealing or minimum market share requirements on licensees. Alternatively, the SEP owner may refuse to license the SEP for competing devices that practice the SEP, in violation of FRAND obligations to license to all qualified users on non-discriminatory terms. While these various attempts to evade FRAND obligations may very well breach a patentee’s contractual obligations to an SSO and its participants, they may also disrupt or prevent competition. Accordingly, parties, commentators, and policy makers have also advocated and argued that such abuses may constitute violations of federal and international competition laws.

In the U.S., whether a patentee’s breach of its FRAND commitment also violates the federal antitrust laws depends on whether the conduct in question causes competitive harm of a sort that the antitrust laws recognize. For Section 1 of the Sherman Act, this requires a relevant agreement that is reasonably calculated to reduce market output. If the conduct is in accord with other arguably procompetitive justification, a court must also assess market power and anticompetitive effects. For Section 2 of the Sherman Act or Section 3 of the Clayton Act, a party must demonstrate conduct that is unreasonably exclusionary and has an anticompetitive effect.

The U.S. Court of Appeals for the Ninth Circuit recently opined on whether such FRAND violations may properly be brought as antitrust violations. In deciding FTC v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020), the Ninth Circuit held that such violations are best addressed as a matter of contract or patent law, not antitrust law.

A. District Court Opinion

In 2017, the U.S. Federal Trade Commission (“FTC”) filed a complaint in the Federal District Court for the Northern District of California, seeking to enjoin Qualcomm’s SEP licensing practices related to certain wireless communications and semiconductor microchip patents. The FTC alleged that Qualcomm’s practices constituted unlawful maintenance of monopoly power and that its licensing and supply agreements constituted unlawful agreements in restraint of trade. The FTC brought claims under Section 5 of the FTC Act for alleged violations of Sections 1 and 2 of the Sherman Act.

Qualcomm has made significant contributions to the technological innovations underlying modern cellular systems, including third-generation (“3G”) CDMA and fourth-generation (“4G”) LTE cellular standards—the standards practiced in most modern cellphones. Qualcomm protects and profits from its technological innovations through the licensing of its patents. Qualcomm’s patents include cellular SEPs, non-cellular SEPs, and non-SEPs. In addition to its licensing business, Qualcomm also manufactures and sells cellular modem chips—the hardware that enables cellular devices to practice CDMA and premium LTE technologies. For this reason, Qualcomm does not to license its SEPs directly to its competitor, the manufactures that make similar modem chips. Instead, Qualcomm licenses its SEPs to original equipment manufacturers (“OEMs”) of cell phones and other devices—i.e., the customers who purchase the chips—and did so regardless of whether an OEM purchased Qualcomm’s chips or its competitors’ chips, while also promising its competitors that it would not assert its patents against them as long as they did not sell chips to unlicensed OEMs. Qualcomm also agreed not to sell its own chips to an OEM that had not taken a license for the SEPs. This was referred to as Qualcomm’s “no license, no chips” policy. Qualcomm structured the royalty in its licenses as a percentage of the OEM’s device price. The FTC alleged that this practice harmed competition by forcing OEMs to pay “inflated royalties” and a higher “all-in” cost for using non-Qualcomm chips.

In May of 2019, after a 10-day bench trial, the district court found in favor of the FTC. FTC v. Qualcomm Inc., 411 F. Supp. 3d 658 (N.D. Cal. 2019). Among other things, the district court found Qualcomm’s “no license, no chips” policy to be anticompetitive, concluding that its refusal to license to rival chipmakers violated both its FRAND commitments and an antitrust “duty to deal.” Specifically, it found Qualcomm’s refusal to license its competitors to be an unlawful exercise of monopoly power designed to avoid patent exhaustion and charge an “unreasonably high” royalty relative to what it would be able to charge competitors under the SSO’s FRAND standards. The district court issued a permanent, worldwide injunction, ordering Qualcomm to make its patents available to rival chipmakers and prohibiting Qualcomm from conditioning the supply of modem chips on whether a customer has purchased a license.

On August 11, 2020, in a unanimous, precedential opinion, the Ninth Circuit reversed the district court’s post-trial ruling, making the following key findings:

1. Qualcomm’s practice of licensing its SEPs exclusively at the OEM level does not amount to anticompetitive conduct in violation of § 2 of the Sherman Act, as Qualcomm is under no antitrust duty to license rival chip suppliers as the district court had held.
2. To the extent Qualcomm has breached any commitments to license on FRAND terms, the remedy for such a breach lies in contract and patent law.
3. Qualcomm’s patent-licensing royalty rates and “no license, no chips” policy do not impose an anticompetitive surcharge on rivals’ modem chip sales. Instead, these aspects of Qualcomm’s business model are “chip-supplier neutral” and do not undermine competition in the relevant antitrust markets.
4. Qualcomm’s past agreements with Apple did not have the actual or practical effect of substantially foreclosing competition in the CDMA modem chip market. Further, because these agreements were terminated years ago by Apple itself, there is nothing to be enjoined.³

As relevant here, the Panel’s second and third findings rejected the FTC’s argument that Qualcomm’s refusal to license its SEPs to rivals constitutes unlawful monopolization in that it represents a breach of Qualcomm’s commitments to provide licenses on FRAND terms.

The U.S. antitrust laws only reach exclusionary conduct by monopolists; they do not extend to “exploitative” conduct in which a monopolist charges high prices or otherwise disadvantage customers, unless that conduct also excludes competition. With this is mind, the Ninth Circuit characterized the “no license, no chips” policy as “no license, no problem” policy as far as competitor-chipmakers were concerned. Even if Qualcomm’s policy allowed it to charge supra-competitive royalties to customers in breach of its SSO and FRAND commitments, the policy does not impair the opportunities of rivals because all OEMs paid the same royalty regardless of whether they purchased chips from Qualcomm or one of its competitors, the Ninth Circuit held.

In Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008), the leading appellate decision on such FRAND antitrust issues, the D.C. Circuit rejected a challenge by the FTC as to Rambus’s failure to disclose patents in breach of its SSO commitments. There, the FTC had failed to prove that Rambus unlawfully obtained monopoly power because there was no evidence that absent Rambus’s deception, the SSO would have chosen an alternative to Rambus’s patents. On the contrary, in Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3rd Cir. 2007), the Third Circuit found Qualcomm’s breach of SSO commitments to be an antitrust violation where Qualcomm deceptively induced the SSO to include its patents in the standard, which Qualcomm then licensed at “discriminatorily higher” royalty rates. Broadcom predates Rambus and further relied on the fact that Broadcom alleged that the SSO would not have standardized the Qualcomm technology absent Qualcomm’s deceptive conduct. The Ninth Circuit distinguished Broadcom as there was no such relevant conduct in the case at bar where Qualcomm’s competitors could practice the SEPs without paying any royalty at all. The Ninth Circuit thus chose not to wade into whether Qualcomm’s technology would have been standardized had the FTC established that Qualcomm engaged in deception.

Finally, the Ninth Circuit relied on “persuasive policy arguments” that SSO and FRAND disputes are contract disputes, not properly the province of the federal antitrust laws. Citing to several amicus briefs—including that from retired Federal Circuit Chief Judge Paul R. Michel, and Former FTC Commissioner Joshua Wright, both of whom argued that the antitrust laws should not be used to address FRAND disputes—the Ninth Circuit characterized Qualcomm as having engaged in “hypercompetitive behavior” designed to profit-maximize. While Qualcomm may have had “sharp elbows,” setting high prices or royalty rates alone—even at a monopoly price—cannot form the basis for an antitrust claim. The Ninth Circuit made clear that the federal antitrust laws do not prohibit Qualcomm from choosing where in the supply chain to license its SEPs. And even where SSOs clearly draft their patent policies to require patentees to license directly to competitors, a breach of that commitment does not raise antitrust concerns where such component makers pay no royalties and face no price-squeeze.

Under the Ninth Circuit’s analysis, breach of FRAND commitments do not constitute an antitrust violation unless there is also foreclosure of competition. Because Qualcomm’s licensing policies led to its competitors being licensed royalty-free and OEMs paying the same royalty regardless of where they bought their chips, even if Qualcomm breached its FRAND obligations, that breach did not foreclose completion and thus was not an antitrust violation. This conclusion is consistent with the general rule that the antitrust laws do not afford trebled damages as a panacea for any breach of contact or business tort issue that may arise, but only to those most pernicious actions that seek to quell competition. It is also consistent with the position of the DOJ of the current administration. See Brief of the United States of America as Amicus Curiae in Support of Appellant and Vacatur, FTC v. Qualcomm Inc., No. 19-16122 (9th Cir. Aug. 30, 2019). The counter position of implicating antitrust laws, pushed by the FTC in Qualcomm, is applied in numerous international jurisdictions and aggressively advocated for in the U.S. While Qualcomm is a major development, it is likely not the last word.