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Recent U.S. Decisions Affecting Licensing

Tuesday, February 7, 2017   (0 Comments)
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Federal Trade Commission Sues Qualcomm for Anticompetitive Licensing Practices in Cell Phone Semiconductor Market

By John Paul, Brian Kacedon, and Sonja Sahlsten

The Federal Trade Commission filed a complaint against Qualcomm in Federal district court, accusing it of using anticompetitive practices to maintain a monopoly of the supply of critical cell phone components. The FTC alleged that Qualcomm’s practices resulted in a tax on its competitors’ sales, reduced competitors’ ability and incentive to innovate, and raised prices for cell phone consumers. 

Background
Qualcomm leads the industry in supplying baseband processors to cellphone manufacturers. Baseband processors are semiconductor devices, or “chips,” that allow cellphones to communicate with the cellular networks. The telecommunications industry, like many other industries, uses standard-setting organizations to create technology standards, allowing industry participants that would otherwise compete with each other to instead collaborate in evaluating and selecting technologies for standardization. Qualcomm owns patents that have been deemed standard essential patents in the telecommunications industry.

In exchange for participating in the standard-setting, where their patented technology was selected as part of the standard, Qualcomm agreed to license its standard essential patents in the telecommunications industry on fair, reasonable, and non-discriminatory (“FRAND”) terms, but later engaged in licensing practices that prompted an FTC investigation. At the end of its investigation, the FTC voted 2-1 to pursue a complaint against Qualcomm, which it filed on January 17, 2017 in the U.S. District Court for the Northern District of California. 

The FTC v. Qualcomm Complaint
The complaint alleges that Qualcomm engaged in a number of anticompetitive practices to maintain its dominant industry position and to weaken its competitors. Specifically, the FTC alleged that Qualcomm’s “no license, no chips” policy forces its customers to agree to unfair licensing terms. Under Qualcomm’s “no license, no chips” policy, Qualcomm will not supply its chips unless the cellphone manufacturer accepts Qualcomm’s license terms, including royalties that the cellphone manufacturer must pay Qualcomm on the phones they make, even if they use a competitor’s chips instead of Qualcomm’s. 

The complaint further alleges that this policy amounts to a tax on the use of competitors’ processors—that cell phone manufacturers are forced to agree to these terms because if they lost their supply of Qualcomm chips, they would be unable to make phones that could connect to key cellular networks. According to the complaint, the “no license, no chips” policy and its resulting tax hurts competition, impedes innovation, and results in increased costs passed on to the consumer.

With respect to the royalty amount, the complaint notes that cell phone manufacturers would have several grounds for challenging the royalty as not complying with Qualcomm’s agreement to license on FRAND terms. For example, the complaint lists evidence that (1) Qualcomm’s royalties are disproportionately high compared to the value contributed by the patented features to cellular connectivity, (2) the royalty is based on a percentage of the price of the whole cell phone even though cell phones offer many features other than cellular connectivity, (3) Qualcomm’s standard royalty price has not fallen even though many of the patents have expired, and (4) Qualcomm has required cell phone manufactures to grant cross licenses, sometimes with pass-through rights. 

The complaint alleges that because of the “no license, no chips” policy explained above, cell phone manufacturers cannot challenge the royalty as non-FRAND because of the risk that Qualcomm would not supply them chips needed for commercial viability of their products in the marketplace. 

The complaint also alleges that despite agreeing to license its standard-essential patents on FRAND terms to everyone, Qualcomm has consistently refused to grant licenses to competing suppliers.  This prevents its competitors from making chips that use the technology covered by Qualcomm’s standard essential patents. If competitor suppliers could make the chips with the patented technology, Qualcomm would not be able to effectively tax its competitors’ sales via patent license terms with cell phone manufacturers. 

The complaint also alleges that Qualcomm entered into an agreement with Apple to be Apple’s sole supplier in exchange for a partial royalty reduction to Apple under the Qualcomm patents, resulting in billions of dollars in conditional rebates from Qualcomm to Apple between 2011 and 2016. The FTC alleges that these agreements effectively foreclosed Qualcomm’s competitors from developing a business to supply chips to Apple.     
The FTC seeks an injunction to prevent Qualcomm from continuing its allegedly anticompetitive actions and to take any steps necessary to restore competitive conditions.
 
Strategy and Conclusion
It will be interesting to see whether the positions taken by the FTC in the Qualcomm case will continue under the Trump administration, and whether the FTC will file more cases for anticompetitive licensing practices. 

Of note, less than 10 days after the FTC filed its complaint against Qualcomm, President Trump elevated Maureen K. Ohlhausen to be acting chair of the FCC.  Ms. Ohlhausen was the sole dissenting Commissioner in the Commission’s 2-1 decision to file the Qualcomm complaint. 

Furthermore, Commissioner Ohlhausen so strongly disagreed with the Commission’s decision that she broke her practice of not writing dissenting statements and described the action against Qualcomm as based on a “flawed legal theory . . . that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide.” 

Further Information
The FTC v. Qualcomm complaint can be found here.

Editors and Authors
The editors and authors are attorneys at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP.

John Paul - john.paul@finnegan.com
Brian Kacedon - brian.kacedon@finnegan.com
Robert Wells  robert.wells@finnegan.com
Robert MacKichan, III - Robert.MacKichan@finnegan.com 
Sonja W. Sahlsten - sonja.sahlsten@finnegan.com

This article is for informational purposes and does not constitute legal advice.
The views expressed do not necessarily reflect the views of LES or Finnegan.