The Line Between Anticompetitive And HyperCompetitive Practices: FTC V QUALCOMM

Shwetna Jain

Institute of law, Nirma University

Factual background
On August 11, 2020, a decision of Judge Koh sitting in the Northern District of California was overturned by the Ninth Circuit Court of Appeals that some of Qualcomm’s commercial practices violated the antitrust laws in relation to the Standard Essential Patents (SEPs). It was contented by Qualcomm that FTC (Federal Trade Commission) has violated Sherman Act by restraining trade and unlawfully monopolizing the CDMA and LTE cellular modem chip market. Qualcomm entered into a ‘CDMA ASIC Agreement’ with the rival chip makers according to which the chipmakers are allowed to use the cellular SEPs of Qualcomm on a royalty-free basis. In return, the chipmakers cannot sell these SEPs to unlicensed Original Equipment Manufacturers (OEMs). Qualcomm enforces a ‘No license, No chip’ policy under which it refuses to sell modem chips to those OEMs who does not acquire license to use Qualcomm’s SEPs. Qualcomm charges the royalty price from OEMs based on the percentage of the end-product sales price, irrespective of the source from where OEMs procured the chips. According to Qualcomm, they adopted the policy and CDMA ASIC Agreement to avoid the doctrine of patent exhaustion that was cemented in the case of Quanta Computers v LG Electronics Inc.
Issue:
• Whether it is Qualcomm antitrust duty to license SEPs in the modern chip market to its direct competitors?
• Whether Qualcomm is liable for anticompetitive behavior against OEM’s for the policy of ‘No license, No chips’?
• Whether the royalty prices charged by Qualcomm are unreasonable and improper?
Decision of the Ninth Circuit Federal Court
The first issue was answered by the federal court in negative and reversed the district court judgement. The court examined the conclusion drawn by the district court which held that Qualcomm had an antitrust duty to license its SEPs to the rival chip maker under the exception outlined in the case of Aspen Skiing Co. v Aspen Highlands Skiing Corp. . The federal court held that the district court was erroneous in holding Qualcomm had an antitrust duty to license direct competitors as the exceptions that were laid down in the Aspen Skiing case were absent in the present case. The court further acknowledged that the ‘no license, no chip’ policy was not anticompetitive in nature as asserted by both FTC and district court. It is rather a chip neutral policy as it makes no difference from the source of procurement of chip. Furthermore, the appeal court also dismissed the judgement of the District Court that Qualcomm’s royalties were high, stating that there is no principle under Competition Law requiring patent royalties to be based on the Smallest Saleable Patent Practicing Unit (SSPPU). The panel ruled that antitrust law does not mandate that royalties exactly constitute the actual and underlying value of a patent. The royalty can be in accordance with the current value of a patent and should be in line with the royalty rates charges by the other companies.
Critical Analysis
The determination of the relevant market in which anticompetitive behavior is to be tested is of prime importance including the effects of such anticompetitive behavior. The relevant market is the market in which a particular product is sold. In the present case the relevant market was ‘the market for CDMA modem chips and the market for premium LTE modem chips’. The district court although determined the market correctly erred in reviewing the Qualcomm’s commercial activities and took into consideration a broader market. The district court considered OEMs as the competitors of Qualcomm rather than their customers. Even if the harm was real, it cannot be considered as anticompetitive in antitrust sense as Qualcomm did not directly restrain the trade.
On the issue of denial to give license to the rival chip makers and switching to the use of CDMA ASIC Agreement, the court referred to the case of Colgate v U.S and held that no one is compelled under antitrust laws to negotiate with the rivals as the main objective of the Sherman Act is to protect the competition and not the competitors per se. The case of Aspen Skiing Co. laid down the exception under which the company has the duty to give license to the rival company if the three conditions were fulfilled, i) voluntary and profitable course of dealing, ii) refusal to deal further to sacrifice short-term benefits in order to obtain higher profits in the long run from the exclusion of competition, and iii) singling out specific competitor from obtaining license. In the present case none of the three conditions were fulfilled as under first condition, Qualcomm never had any pre-existing collaborative agreement with the competitors and terminated the same to take an advantage in the competition. Even though Qualcomm once used to give license to the rival chip makers, it never granted them further rights to license their customers the same. The change in the policy was in response to the ‘Patent Exhaustion doctrine’ that was developed in the case of Quanta Computers. The exhaustion theory limits the control of the owner over the patents once the authorized sale is complete and all the patent rights get terminated. Qualcomm introduced these changes in order to protect the patents from the exhaustion doctrine because if they had continued to grant the licenses it used to grant earlier, the same would have taken away their right to sue OEMs pertaining to the exhaustion doctrine Thus, Qualcomm found an alternative in the form of CDMA ASIC Agreements which seemed more lucrative and profitable. Under these agreements Qualcomm promised to provide royalty-free chips to the rival chipmakers in exchange of the promise that they will not sell the chips to unlicensed OEMs. Further, Qualcomm didn’t single out a particular OEM from obtaining chip but was subjected to the condition of obtaining license for the Standard Essential Patents before procuring chip. Thus, the policy did not fit in the exception of Aspen Skiing . In another issue regarding the antitrust violation by Qualcomm for breaching the obligation to license SEPs to chip manufacturers was held to be non-violative as there was no intentional deception of Standards Setting Organization as was in the case of Broadcom Corp v. Qualcomm Inc .
The question of whether Qualcomm caused antitrust harm because of its allegedly high royalty rates was resolved by pointing out that the district court misread Federal Circuit case law in condemning Qualcomm’s royalty rates as ‘unreasonable’ because they were based on the cost of a handset and not the value of the patents, which required parties to agree to base royalty rates on market prices of the patents. Under antitrust law there is no hard and fast rule to determine the royalty rate of the patent. They are not considered anticompetitive unless the value reflects the present and intrinsic value of the patent and are consistent with the charges of other companies. In the present case, even though there was a deviation between royalty rates and ‘fair value’ of patent portfolio, the price was paid by the customer i.e, OEMs and not the competitors and thus there was no anticompetitive harm in antitrust sense. The harm was therefore outside the vicinity of CDMA and LTE modem chips that constituted the area of effective competition in the present case.
Lastly, the question of injury caused by Qualcomm’s ‘no license, no chip policy’ was held not be an antitrust injury as the policy was for the customers and not the competitors and was thus lies outside the purview antitrust laws. Indeed, the facts indicated that rivals had joined the industry and Qualcomm’s share of it was diminishing. The court observed that this approach was the reverse of a typical tie-in case where the issuance of a license was related to the procurement of a substance that could be an antitrust breach in certain circumstances. In the present case the ‘no license, no chip’ policy was neutral in nature and charges all-in price from the OEMs for the modem chips regardless of the source from which they procure the chips. Furthermore, the profit seeking behavior of the policy cannot be said to impose antitrust liability on Qualcomm as the opportunity to charge monopoly price is part of the free market system. Thus a new and innovative business practice cannot be considered as anticompetitive prima facie without analyzing the effect of the practice in the market place. Many companies like Nokia and Ericsson have now followed the steps of Qualcomm by adopting OEM level licensing practice and to compete with Qualcomm.
Conclusion
The judgment focuses on drawing the line between the anticompetitive and hypercompetitive business practices. The business practices that are new and innovative might prima facie appear to be anticompetitive in nature like the ‘No license, No chip’ policy adopted by Qualcomm but on careful analysis of the same it is became crystal clear that the policy was hypercompetitive in nature and was adopted to escape the Patent Exhaustion doctrine. Furthermore, the case also exhibits the relevance of determination of relevant market and area of effective competition as the wrongful determination can completely reverse the judgement as was in the case of district court that determined the broader area of effective competition and thus erred in giving the judgement. Thus, the present judgement is a victory for the holders of SEPs and is consistent with the Sherman Act.

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