FTC v. Qualcomm, Antitrust, and Intellectual Property

Mobile devices, such as smartphones and tablets, rely heavily on technical standards, which are created by private standard-setting organizations to provide a blueprint for complex technologies that require interoperability between many distinct components produced by many different companies. But the attending commercial arrangements—particularly those surrounding intellectual property (IP) licensing—occasionally provoke competition policy concerns. The latest chapter in this saga involves an antitrust suit brought by the Federal Trade Commission (FTC) against chip manufacturer Qualcomm, which the Commission recently won in district court. The case involves a novel confluence of standard-setting and IP issues with some bedrock antitrust subjects, namely tying (conditioning one sale on another) and exclusive dealing (restraining customers from dealing with competing providers). In many cases, the selection of a standard leads some patent owners—namely, those whose patented technologies are essential to the standard—to acquire substantial bargaining power. Many companies that use a standard must secure licensing rights for these “standard essential patents” (SEPs). These same patents might otherwise have become worthless if a different standard had been chosen, but since practicing the standard requires using its essential technologies these patents become highly valuable. A major concern is that SEP owners will exploit this to demand exorbitant royalties after the standard has been cemented into place—a practice known as “patent holdup.” To prevent the holdup problem, standard-setting organizations often require that SEP owners agree to sell licenses on “fair, reasonable, and nondiscriminatory” (FRAND) terms. FRAND is usually interpreted to preclude the SEP owner from exploiting patent holdup to charge unreasonably high royalties or refusing to license its competitors. Qualcomm is a major licensor of SEPs relating to cellular communications. It also sells modem chipsets used in mobile devices that rely broadly on the same standards. In fact, Qualcomm is dominant in this chipset market, providing an additional source of power over price. But unlike the SEPs, the chips are not the subject of any FRAND agreements. Consequently, Qualcomm is presumptively entitled to demand high prices—or other concessions—for its chips. It is not inherently problematic for a firm to supply both SEP licenses and a physical product to the same customers. But Qualcomm intertwines its chip sales and SEP licensing, instituting what the FTC has called a “no license–no chips” policy. Qualcomm effectively ties its chips to its licenses, threatening to cut off the chip supply to any manufacturer who rejects its preferred licensing terms. Furthermore, the company’s terms are accompanied by provisions designed to ensure that manufacturers continue to buy chipsets exclusively from Qualcomm. It charges an unusually high royalty rate by default but offers licensees large “rebates” or “incentives,” essentially partial reimbursements, that reduce the effective royalty rate. Such rebates, however, are available only if the manufacturer buys chips exclusively, or nearly so, from Qualcomm. On final judgment, U.S. District Court Judge Lucy Koh found that this arrangement constituted anticompetitive exclusive dealing. This portion of the opinion argues quite effectively that Qualcomm’s conduct likely acted to maintain higher-than-competitive prices by forestalling competition in the chipset market. In a nutshell, the court’s theory of harm was that manufacturers are largely compelled to accept Qualcomm’s restrictive licensing terms due to its near-monopoly in the chipset market. And these agreements further secured the exclusivity Qualcomm needed to maintain its dominance. The case is a good example of the potential problems that can arise when an SEP owner ties its licenses to a complementary input such as a chipset. As I have argued elsewhere, tying may provide a backdoor means of violating a FRAND agreement even in cases where the SEP owner does not hold a monopoly over the complementary good. Although FRAND acts to cap the royalty rate at a “reasonable” level, the SEP owner may attempt to get around this by applying its desired markup to a complementary good instead, which it then ties to its SEP licenses. Similarly, public utilities have occasionally sought to circumvent regulatory price controls by tying the regulated service to an unregulated complement, such as tying telephone service to a lease for telephone equipment. A second component of the Qualcomm decision is more precarious. Judge Koh held that Qualcomm’s refusal to license rival chip makers such as Intel was an anticompetitive “refusal to deal.” Separately, she concluded that Qualcomm’s FRAND agreements created a contractual duty to license rivals, although that ruling has limited bearing on the FTC’s antitrust claim. There is some precedent for finding antitrust liability where a firm’s refusal to deal with a rival is motivated solely by the prospect of excluding the rival, although this doctrine is very narrow in scope. Nevertheless, Judge Koh concluded that Qualcomm’s refusals satisfied the relevant criteria for antitrust liability. What the court and the parties neglected to mention is that the Patent Act explicitly states that a refusal to license does not constitute patent “misuse or illegal extension of the patent.” This language arguably creates antitrust immunity for refusals to license. Although the antitrust agencies have previously disputed this interpretation, it remains an unresolved question. Moreover, Judge Koh’s opinion does not discuss any connection between FRAND and a potential antitrust duty to license. In principle, the court might have concluded that a FRAND commitment impliedly waives the statutory immunity for refusals to license. But even then, it is not obvious that the waiver would clear a path for antitrust enforcement, as opposed to an action under contract law. In the end, the district court’s recent decision sidesteps these thorny issues. Nevertheless, it represents a significant development in the antitrust–IP interface and will surely influence future cases and commentaries in the field