Federal Trade Commission v. Qualcomm: California Court Finds Qualcomm Licensing Practices Violate Antitrust Laws
Why did Qualcom lose against the FTC after settling with Apple?
- Qualcomm has engaged in anticompetitive conduct.
- Never make admissions on patent exhaustion without first consulting a patent attorney with expertise on the subject.
- Avoid the many instances of conduct demonstrating bad faith in dealing with others when you have monopoly power as illustrated throughout this case.
On May 21, 2019, Judge Koh of the U.S. District Court for the Northern District of California decided Federal Trade Commission v. Qualcomm Incorporated, Case 5:17-cv-00220-LHK (N.D. Cal), a complaint brought by the FTC against Qualcomm for unlawful conduct under § 5(a) of the FTC Act, 15 U.S.C. §45(a). The FTC alleged that Qualcomm’s conduct violates § 5 of the FTCA because Qualcomm’s conduct violates both § 1 and § 2 of the Sherman Act. And even if Qualcomm’s conduct does not violate either § 1 or § 2 of the Sherman Act, Qualcomm’s conduct nonetheless “constitute[s] unfair methods of competition in violation of [§ 5] of the FTCA.”
Section 1 of the Sherman Act, 15 U.S.C. § 1, prohibits [e]very contract, combination … or conspiracy, in restraint of trade or commerce among the several States. To prevail, a plaintiff must prove (1) the existence of an agreement, and (2) that the agreement was an unreasonable restraint of trade.
Section 2 of the Sherman Act makes it unlawful for a firm to monopolize. To prevail, a plaintiff must prove (1) the possession of monopoly power in the relevant market, and (2) “the willful acquisition or maintenance of that power” through exclusionary conduct “as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”
The Court held that Qualcomm possessed monopoly power in relevant antitrust markets, and thus satisfied the first element of § 2 of the Sherman Act. The Court held also that Qualcomm’s conduct is an unreasonable restraint of trade under § 1 or exclusionary conduct under § 2 of the Sherman Act. The Court concluded that Qualcomm’s conduct violates the Sherman Act and thereby violates the FTC Act. The Court did not address the separate argument that Qualcomm’s conduct is a standalone violation of the FTC Act.
In short, in a strongly worded opinion, Judge Koh found Qualcomm licensing practices to have violated the antitrust laws. A remarkable development given that just a month earlier, on April 16, 2019, Apple settled its lawsuit against Qualcomm on the same and other grounds for about a reported $4.5 billion. Apple v. Qualcomm, Case 3:17-cv-00108-GPC-MDD (S.D. Cal.).
So what went so terribly wrong for Qualcomm that on the same question of law where Qualcomm brought Apple to its knees in one court, Qualcomm took a devastating defeat at the hands of the FTC in another court?
In a nutshell, bad facts. These bad facts include a senior manager at Qualcomm acknowledging that the sale of chips exhausted the Qualcomm patents and rampant instances of bad faith tactics on the part of Qualcomm in forcing its customers to license its patents at high royalty rates or risk having their supply of chips cut-off, among other things.
In our previous blog on both Apple and FTC cases, we said that:
“Even if the court allows Apple’s reading of the standard on the chipsets as proof of exhaustion, given the number of Qualcomm patents likely involved in the Qualcomm licenses under challenge, proving that every inventive aspect of every claim of every licensed patent reads on the standards is likely to be daunting. And any inventive aspect of any claim of any licensed patent falling outside the standards having a substantially non-standards infringing use may still support the Qualcomm license.
Unfortunately for Qualcomm, the question of patent exhaustion never got traction, probably on account of admissions by Qualcomm that the sale of the chips exhausts the Qualcomm patents. As Eric Reifschneider (QTL Senior Vice President and General Manager) told the IRS: “[T]he licensee’s sale of that chip will exhaust our rights and then we won’t be able to collect a royalty on a cell phone that’s based on the price of the cellphone.” (emphasis added). This, even though if the recited features of the patents were to be put under a microscope, they may go beyond the features of the standards or be features complementary to the standards and so not necessarily exhausted by the sale of the chip.
As we also pointed out in our previous blog, even if the sale of the chips exhausted the patents, Qualcomm’s conduct may still not amount to unfair conduct in the absence of bad faith on the part of Qualcomm in the conduct of its business:
And even if all the licensed patents are exhausted, given that patent exhaustion is unsettled law and but one factor bearing upon unfair competition, absent bad faith it is debatable whether Qualcomm’s conduct amounts to unfair competition.
Unfortunately for Qualcomm, if the trial record holds up on appeal, the trial record is replete with instances of conduct demonstrating bad faith in dealing with others given Qualcomm’s monopoly power. As to OEMs and resulting harm, the Court explained:
“In sum, Qualcomm has engaged in extensive anticompetitive conduct against OEMs. In practices that are unique within Qualcomm and unique in the industry, Qualcomm refuses to sell its modem chips exhaustively and to sell modem chips to an OEM until the OEM signs a separate patent license agreement. To enforce those licensing practices, Qualcomm has cut off OEMs’ chip supply, threatened OEMs’ chip supply, withheld sample chips, delayed software and threatened to require the return of software, withheld technical support, and refused to share patent claim charts or patent lists. In addition, Qualcomm has required OEMs to grant QCT cross-licenses (often royalty-free) to OEMs’ patent portfolios and charged OEMs higher royalty rates on rivals’ chips. All of these tactics ensure that OEMs will sign Qualcomm’s license agreements and generally result in exclusivity.
In addition to these “sticks,” Qualcomm has offered OEMs the carrot of chip incentive funds to induce OEMs to sign patent license agreements. Those chip incentive funds result in exclusivity and near-exclusivity and, by preserving Qualcomm’s royalty rates, enable Qualcomm to continue to collect its unreasonably high royalty rates on rivals’ chips. Lastly, in 2018, Qualcomm paid to extinguish Samsung’s antitrust claims and to silence Samsung.”
As to SEPs (“standards-essential patents”) and resulting harm, the Court explained that:
“Qualcomm’s practice of refusing to license its cellular SEPs to rival modem chip suppliers  has promoted rivals’ exit from the market, prevented rivals’ entry, and delayed or hampered the entry and success of other rivals. Without a license to Qualcomm’s SEPs, a rival cannot sell modem chips with any assurance that Qualcomm will not sue the rival and its customers for patent infringement. Qualcomm’s refusal to license its SEPs to rivals also enables Qualcomm to demand unreasonably high royalty rates.”
On finding anticompetitive malice by Qualcomm, the Court found highly persuasive evidence like the following slide taken from a 2009 internal Qualcomm pricing presentation prepared within days of Qualcomm’s CDMA ASIC Agreement with MediaTek. Qualcomm’s refusal to license MediaTek predicated on a strategy of to “Destroy MTK’s 2G margin & profit” and “Take away the $$ that MTK can invest in 3G” was “designed to (and in fact did) limit MediaTek’s customer pool and reduce MediaTek’s revenue base to invest in future cellular generations,” the Court found.
On finding no justifications for Qualcomm’s refusal to license, the Court found Qualcomm’s own recorded statements to the Internal Revenue Service (“IRS”) show that Qualcomm previously licensed its SEPs to rivals, but stopped doing so because Qualcomm concluded that instead licensing its SEPs to only OEMs is “humongously more lucrative.”
Also hurting Qualcomm’s trial presentation were credibility issues. The Court observed that Qualcomm’s trial presentation relied almost exclusively on trial testimony and ignored Qualcomm’s own contemporaneous documents, which the Court found “more persuasive than Qualcomm’s trial testimony prepared specifically for this antitrust litigation.”
Other bad facts for Qualcomm included:
(a) Qualcomm’s sales of modem chips to Apple were profitable without exclusivity,
(b) Qualcomm’s royalty rates are unreasonably high since (i) they are set by its monopoly chip market share rather than the value of the patents, (ii) they are as high today even though Qualcomm’s share of SEPs is declining, (iii) they are not supported by patent lists or claim charts since Qualcomm refuses to give patent lists or patent claim charts during patent license negotiations, (iv) Qualcomm does these things only with its modem chip markets where Qualcomm has monopoly power and not with its Wi-Fi components business, (v) they are not supported by Qualcomm’s contributions to the standards, (vi) they are inconsistent with the Federal Circuit law that royalties be based not on the entire product, but instead on the smallest salable patent-practicing unit, (vi) there is an inability to test the unreasonably high royalty rates by litigation because of Qualcomm’s chip supply leverage,
(c) Qualcomm’s royalty charge on all OEM handset sales even those including a rival chip,
(d) Qualcomm’s incentive funds on Qualcomm chip purchases exaggerates surcharge on handsets using rival chips,
(e) Qualcomm’s unreasonably high royalty rates create barriers to entry,
(f) Qualcomm’s elimination of rivals and competing standards (“During MIA negotiations, Marv Blecker (QTL President) emailed Jeff Williams (Apple COO) to state that Qualcomm’s first priority was eliminating WiMax),
(g) Qualcomm licensing practices prevent rivals from investing in new technology through research and development and acquisitions (e.g., Qualcomm’s refusal to license MediaTek predicated on a strategy of “Destroy MTK’s 2G margin & profit” and “Take away the $$ that MTK can invest in 3G”),
(h) Qualcomm’s licensing practices also harm rivals’ standing with SSOs, network vendors, and operators (also referred to as carriers, like Verizon), which further suppresses rivals’ sales and further entrenches Qualcomm’s monopoly power, and
(i) Qualcomm’s own documents show that Qualcomm knew its licensing practices could lead to antitrust liability, knew its licensing practices violate FRAND, and knew its licensing practices harm competition, yet continued anyway—even in the face of government investigations in Japan, Korea, Taiwan, China, the European Union, and the United States.
In the Apple v. Qualcomm case, Qualcomm beat Apple because Apple needed Qualcomm chips to sell its products. In the FTC v. Qualcomm case, Qualcomm lost to the FTC because it had no leverage over the FTC.
The FTC v Qualcomm case stands as a precedent-setting case but not on the doctrine of patent exhaustion, as in our earlier blog we had hoped. Rather, FTC v. Qualcomm stands as a text book case on what not to do in your licensing practice when you have monopoly power in the relevant market of your product. Good litigation and licensing practice mandates (1) that there never be admissions on patent exhaustion without first consulting a patent attorney with expertise on the subject and (2) you avoid the many instances of conduct demonstrating bad faith in dealing with others when you have monopoly power as illustrated throughout this case.