In a ruling issued on August 11, 2020, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) reversed a decision of the U.S. District Court for the Northern District of California which found that Qualcomm had engaged in anticompetitive licensing practices, and vacated a worldwide injunction against several of Qualcomm’s business practices.
The District Court Ruling
On May 21, 2019, the U.S. District Court for the Northern District of California entered a decision in a Federal Trade Commission (“FTC”) action alleging that Qualcomm’s approach to wireless standard essential patent (“SEP”) licensing violated antitrust laws. FTC v. Qualcomm Inc., 935 F.3d 752 (9th Cir. 2019). The district court ruled that Qualcomm acted with “anticompetitive malice” in its licensing tactics, and entered an injunction requiring Qualcomm to renegotiate its current license agreements and prohibiting future anticompetitive licensing practices.
The district court ruled that Qualcomm violated the FTC Act by engaging in conduct that violated the Sherman Act. The district court found that Qualcomm had market power in the markets for CDMA modem chips and premium LTE modem chips. Among other things, Qualcomm sold its chips at prices that were much higher than comparable communications chips. In addition, the district court found that from 2014 to 2016, Qualcomm held at least a 96% share of the worldwide CDMA modem chip market. In the premium LTE chip market, Qualcomm held an 89% share in 2014 and an 85% share of the market in 2015.
The district court found that Qualcomm engaged in a number of anticompetitive licensing practices:
- First, it refused to sell modem chips, or even to provide sample chips, unless the purchaser signed a patent license agreement.
- Second, Qualcomm acted in a manner to create a monopoly by threatening to cut off OEM access to Qualcomm chips.
- Third, Qualcomm engaged in anticompetitive conduct by refusing to extend licenses to rival modem chip manufacturers, including Intel and Broadcom. The refusals delayed the introduction of competing modem chips and, in some cases, prevented the introduction of competing chips in the marketplace.
- Fourth, Qualcomm acted in an anticompetitive manner by entering into agreements that effectively created exclusive supply arrangements with OEMs. In some cases, this included substantial rebates, funded by high royalty rates, that were subject to clawbacks in the event that an OEM purchased modem chips from another source.
- Fifth, Qualcomm’s royalty rates, based on the value of the smartphone handset, rather than the modem chips, was unwarranted.
The district court found that, collectively, Qualcomm’s policies and practices “create insurmountable and artificial barriers for Qualcomm’s rivals, and thus do not further competition on the merits.” Qualcomm, 411 F. Supp. 3d at 797. Qualcomm appealed the decision to the Ninth Circuit.
The Ninth’s Circuit’s Ruling
The Ninth Circuit began its analysis by examining the district court’s conclusion that Qualcomm has an antitrust duty to license its SEPs to its direct competitors in the modem chip markets. It noted the general rule that a business is under no duty to do business under the terms and conditions preferred by its rivals.
The Ninth Circuit explained, however, that there is one limited exception to the general rule that there is no antitrust duty to deal, which was established under the U.S. Supreme Court’s decision in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).
The Ninth Circuit held that “none of the required elements for the Aspen Skiing exception were present, and the district court erred in holding that Qualcomm was under an antitrust duty to license rival chip manufacturers.”
The FTC made an alternative argument, which the Ninth Circuit also rejected, that even if Qualcomm is not subject to an antitrust duty to deal under Aspen Skiing, it nonetheless engaged in anticompetitive conduct in violation of Section 2 of the Sherman Act. Citing the FTC’s brief, the Ninth Circuit summarized the two primary components of the FTC’s argument as: “(1) Qualcomm entered into a voluntary contractual commitment to deal with its rivals as part of the SSO process, which is itself a derogation from normal market competition, and (2) Qualcomm’s breach of this contractual commitment satisfies traditional Section 2 standards in that it ‘tends to impair the opportunities of rivals and . . . does not further competition on the merits.’” (quoting Cascade Health Sols. v. PeaceHealth, 515 F.3d 883, 894 (9th Cir. 2008)).
In rejecting this argument, the Ninth Circuit explained that the FTC failed to satisfactorily explain how Qualcomm’s alleged breach of its contractual commitment, in and of itself, impairs the opportunities of rivals. Therefore, the FTC failed to meet its initial burden under the rule of reason framework of proving anticompetitive harm. Because the FTC failed to meet its burden, the Ninth Circuit applied less scrutiny to Qualcomm’s procompetitive justifications for its OEM-level licensing policy which, the Ninth Circuit explained, “appear to be reasonable and consistent with current industry practice.”
The Ninth Circuit also cited “persuasive policy arguments” offered by experts cautioning against “using the antitrust laws to remedy what are essentially contractual disputes between private parties engaged in the pursuit of technological innovation.”
Finally, the Ninth Circuit turned to what it described as the district court’s “primary theory of anticompetitive harm,” which was Qualcomm’s imposition of an “anticompetitive surcharge” on rival chip suppliers through its licensing royalty rates. The district court’s central argument in this regard was premised on the district court’s findings that Qualcomm’s royalty rates are:
- Unreasonably high because they are improperly based on Qualcomm’s monopoly chip market share and handset price instead of the fair value of Qualcomm’s patents; and
- Anticompetitive because they raise costs to OEMs, who pass the extra costs along to consumers and are forced to invest less in other handset features.
With respect to the district court’s finding that Qualcomm’s royalty rates were unreasonably high due to the fact they were based on the entire handset price, the Ninth Circuit held that the lower court “misinterprets Federal Circuit law regarding ‘the patent rule of apportionment’ and the smallest salable patent-practicing unit (‘SSPPU’).” The district court had observed “that ‘it is generally required that royalties be based not on the entire product, but instead on the [SSPPU].’” The Ninth Circuit reversed, holding that analysis was “fundamentally flawed” because “[n]o court has held that the SSPPU concept is a per se rule for ‘reasonable royalty’ calculations.” Citing the Federal Circuit’s decision in Commonwealth Sci. & Indus. Research Org. v. Cisco Sys., Inc., 809 F.3d 1295, 1303 (Fed. Cir. 2015), the Ninth Circuit “rejected the premise of the district court’s determination: that the SSPPU concept is required when calculating patent damages.” (Italics in original.) Quoting other Federal Circuit decisions, the Ninth Circuit observed that “‘[s]ophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products’ sales price,’ and thus ‘[t]here is nothing inherently wrong with using the market value of the entire product.’”
The Ninth Circuit also addressed the district court’s finding that Qualcomm’s “no license, no chips” policy constituted “anticompetitive conduct against OEMs.” The Ninth Circuit held the district court failed to identify how the policy “directly impacted Qualcomm’s competitors” and that none of the OEMs “articulated a cogent theory of anticompetitive harm. Instead, they objected to Qualcomm’s licensing royalty rates.” Drawing a distinction between antitrust law and patent law, the Ninth Circuit held “whether that all-in price is reasonable or unreasonable is an issue that sounds in patent law, not antitrust law.”
Finally, the Ninth Circuit reversed the district court’s ruling that Qualcomm violated the Sherman Act by signing “exclusive deals” with Apple between 2011 and 2015 that “foreclosed a ‘substantial share’ of the [CDMA] modem chip market.” The Ninth Circuit reviewed the timing of the agreements and the entry of Qualcomm’s main competitor, Intel, holding that the agreements did “not have the actual or practical effect of substantially foreclosing competition in the CDMA modem chip market.” Because the last agreements were terminated in 2015, they “do not pose any current or future threat of anticompetitive harm” and thus “do not warrant the issuance of an injunction.”
Conclusion
In an unambiguous victory for Qualcomm, the Ninth Circuit clarified the distinction between what it deemed illegal anticompetitive behavior and lawful hypercompetitive behavior. The court also drew a distinction between claims sounding in antitrust law, and royalty disputes sounding in patent law, leaving the Federal Circuit to resolve the latter. If you have any questions about this ruling and its implications on your business, please contact John LeRoy.
