Last week, the United States Court of Appeals for the Ninth Circuit issued an opinion in FTC v. Qualcomm, Inc., No. 19-16122 (August 11, 2020), reversing a district court decision that Qualcomm’s licensing model was anticompetitive in violation of the Sherman Act, 15 U.S.C. §§ 1-2.
Qualcomm has long dominated the 3G and 4G LTE cellular modem chips markets. It owns the standard essential patents (“SEPs”) that international standard-setting organizations have adopted as the technical specifications used industry wide to ensure compatibility among competing products. In exchange, Qualcomm agreed to license its SEPs on fair, reasonable, and nondiscriminatory (“FRAND”) terms. Under its sophisticated business model, and to avoid the problem of patent exhaustion, Qualcomm licenses its SEPs only to original equipment manufacturers (“OEMs”) – not rival chip makers – and agrees not to assert its IP against its rivals so long as they promise not to sell their chips to OEMs that do not have Qualcomm licenses. Wielding its dominance “with sharp elbows,” its “no license, no chip” policy thus requires OEMs to take a license even if they purchase chips from another manufacturer.
In a lawsuit filed in the Northern District of California, the Federal Trade Commission challenged Qualcomm’s licensing practices as anticompetitive. The district court agreed, holding that the practices “are an unreasonable restraint of trade under § 1 of the Sherman Act and exclusionary conduct under § 2 of the … Act,” and issuing a permanent, worldwide injunction. Qualcomm appealed.
The Ninth Circuit struck down the district court’s decision as “an improper excursion beyond the outer limits of the Sherman Act.” Although “[a]nticompetitive behavior is illegal under federal antitrust law,” the Court held, “[h]ypercompetitive behavior is not.” Qualcomm was under no duty to license its SEPs to rival chip makers instead of covenanting not to sue them, so its practice of licensing only to OEMs was literally not anticompetitive. (Whether the practice breached Qualcomm’s FRAND obligations was a question for contract and patent law, not antitrust law.) Likewise, the Court explained, Qualcomm’s “no license, no chip” policy was “chip-supplier neutral” because it collected license fees from all OEMS, not just its competitors’ customers; therefore, it did not “impose an anticompetitive surcharge on rivals’ modem chip sales.”