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Ninth Circuit Reverses Northern District of California Decision in FTC v. Qualcomm Inc., No. 19-16122

August 13, 2020

On Tuesday, August 11, 2020, the Ninth Circuit reversed and vacated Judge Lucy Koh’s controversial, post-bench trial decision in FTC v. Qualcomm Inc., 411 F. Supp. 3d 658 (N.D. Cal. 2019), regarding whether Qualcomm violated the antitrust laws through its licensing practices for standard-essential patents (“SEPs”) covering cellular technology. That district court decision had issued a worldwide injunction, which had been stayed with the support of the DOJ pending appeal, of Qualcomm’s licensing practices. In a unanimous, precedential opinion, Circuit Judge Consuelo M. Callahan writing for the Panel made the following key findings:

    1. Qualcomm’s practice of licensing its SEPs exclusively at the original equipment manufacturers (“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 fair, reasonable and non-discriminatory (“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.

Before delving into the key issues, the Panel critiqued the district court’s analysis of the antitrust harms beyond the relevant product markets. Specifically, the Panel noted that while “the district court correctly defined the relevant product markets as ‘the market for CDMA modem chips and the market for premium LTE modem chips’” its analysis nevertheless “looked beyond these markets to the much larger market of cellular services generally.” The Panel thus rejected “a substantial portion of the district court’s ruling” which “considered alleged economic harms to OEMs—who are Qualcomm’s customers, not its competitors,” as any harms flowing therefrom, “even if real, are not ‘anticompetitive’ in the antitrust sense . . . because they do not involve restraints on trade or exclusionary conduct in ‘the area of effective competition.’” The Panel thereafter reframed the analysis to consider only the applicable markets at issue as “actual or alleged harms to customers and consumers outside the relevant markets are beyond the scope of antitrust law.”

As to the key findings, the Panel first considered and rejected the district court’s holding that Qualcomm had a duty to license its SEPs to rival chipmakers under Aspen Skiing Co. v. Aspen Highlands Skiing Corp1. Aspen Skiing represents an exception which is only to be applied in rare circumstances where a company (1) unilaterally terminates a profitable course of dealing where (2) the only conceivable rationale is to sacrifice short-term benefits to obtain higher long-term gains from the exclusion of competition, and (3) the refusal to deal involves products that the company already sells in the existing market to other similarly situated customers. The Panel found that there was no evidence that Qualcomm ever provided exhaustive licenses to its rivals when it had market power and that Qualcomm’s rationale for switching its licensing scheme at all was due to changes in patent-exhaustion law with the aim of achieving profits in both the short term and the long term. Finally, there was no evidence that Qualcomm was singling out any of its rivals as Qualcomm equally allows other chipmakers to use its patents royalty-free as long as the OEMs purchase a license. “Thus, while Qualcomm’s policy toward OEMs is ‘no license, no chips, its policy toward rival chipmakers could be characterized as ‘no license, no problem,’” and is therefore, “however novel, [] not an anticompetitive violation of the Sherman Act.”

Second, the Panel rejected the FTC’s argument that Qualcomm’s refusal to license to rivals constitutes unlawful monopolization in that it represents a breach of Qualcomm’s commitments to provide licenses on FRAND terms. The Panel held that it need not determine whether Qualcomm is obligated to license to rival chipmakers under its agreement with the standard setting organizations because the FTC had not shown that a breach of such agreements would hurt its rivals. Qualcomm’s rivals are all able to use the patents for their chips and the OEMS are all charged the same royalty rates for the patents. “Qualcomm’s royalties are ‘chip-supplier neutral’ because Qualcomm collects them from all OEMs that license its patents, not just ‘rivals’ customers,’” the Panel wrote. The Panel also acknowledged several amicus briefs, including that from retired Federal Circuit Chief Judge Paul R. Michel, and Former FTC Commissioner Joshua Wright, whom both argued that the antitrust laws should not be used to address FRAND disputes, but that such disputes should be addressed under contract and patent law.

Third, the Panel rejected the district court’s theory of harm that Qualcomm’s royalty rates act as a surcharge for manufacturers that purchase chips from its rivals. The Panel found the district court “incorrectly conflates antitrust liability and patent law liability, and it improperly considers ‘anticompetitive harms to OEMs’ that fall outside the relevant antitrust markets.” For example, the Panel rejected the district court’s reliance on “the patent rule of apportionment” and the smallest salable patent-practicing unit (“SSPPU”) as “[n]o court has held that the SSPPU concept is a per se rule for ‘reasonable royalty’ calculations; instead, the concept is used as a tool in jury cases to minimize potential jury confusion when the jury is weighing complex expert testimony about patent damages.” Rather, the Federal Circuit expressly held that there is nothing inherently wrong with using the market value of the entire product in determining a royalty rate. The Panel also rejected the district court’s conclusion that royalties are “anticompetitive” unless they reflect a patent’s intrinsic value, declining to adopt a theory of liability that would “presume anticompetitive conduct any time a company could not prove that the ‘fair value’ of its SEP portfolios corresponds to the prices the market appears willing to pay for those SEPs in the form of licensing royalty rates.” Finally, the Panel noted that any harms identified were to the OEMs, Qualcomm’s customers, not competitors, who agreed to pay Qualcomm’s royalty rates and were thus beyond the scope of the relevant markets.

The Panel also rejected the FTC’s argument that Qualcomm uses its licensing royalties to charge ultralow prices on its own modem chips—pushing out rivals by squeezing their profit margins and preventing them from making necessary investments in research and development. The Panel noted that there was no evidence of predatory pricing, but rather, the district court relied on the proposition that Qualcomm charged monopoly pricing. The Panel thus described Qualcomm’s pricing as the type of “garden-variety price competition that the law encourages[.]”

Further, the Panel rejected the district court’s analysis of Qualcomm’s “no license, no chips” policy as it focused on alleged harms to OEMs, which fall outside the relevant antitrust market. The district court failed to identify how the policy directly impacted Qualcomm’s competitors or distorted “the area of effective competition.” The Panel also noted that OEMs had effectively negotiated such policy with Qualcomm “through arbitration claims, negotiations, threatening to move to different chip suppliers, and threatened or actual antitrust litigation. These maneuvers generally resulted in settlements and renegotiated licensing and chip-supply agreements with Qualcomm, even as OEMs continued to look elsewhere for cheaper modem chip options.”

Fourth, the Panel addressed the FTC’s claims over an exclusive arrangement Qualcomm had with Apple from 2011 to 2015, but found no evidence that there were any viable competitors in the modem chip market at the time and thus did not have the effect of foreclosing competition. Additionally, such past harm—to the extent it existed—would not suffice for an injunction since it is not ongoing, the Panel held.

In sum, the Panel found the case to involve novel business practices that may appear to be anticompetitive at first, but ultimately benefit consumers by increasing competition. The Panel therefore reversed and vacated the district court’s order as it “decline[d] to ascribe antitrust liability in these dynamic and rapidly changing technology markets without clearer proof of anticompetitive effect[.]”

1472 U.S. 585 (1985).