No Harm, No Case

US appeals court reverses Qualcomm antitrust ruling

Uncertainty is never a force for prosperity. It raises questions, doubts, challenges and often leads to inertia. After several years of challenges to its licensing model, Qualcomm can now operate with clarity and confidence. With more than 100 5G licensing agreements now in place and Huawei recently agreeing to terms, Qualcomm has a consensus on which it can build opportunities in 5G.

Crucially, one of the last remaining question marks for Qualcomm was the long-standing case brought by the US Federal Trade Commission (FTC) against the company. A district court decision held that Qualcomm’s patent licensing practices and “no licence, no chips” policy were anticompetitive and served to limit competition. Similarly, the ruling determined that Qualcomm’s 2011 and 2013 agreements with Apple restricted competition in the market for modem chips.

This ruling was reversed on 11 August 2020, when the US Court of Appeals for the Ninth Circuit upheld Qualcomm’s appeal against the judgment by the district court.

The importance of this overturn can’t be overstated. It’s a boon to Qualcomm and, more importantly, it’s hugely positive for the mobile industry at large, as well as consumers, and it has a broader significance for antitrust law and licensing of intellectual property. It will become a landmark case that defines the boundary between robust competition and anticompetitive behaviour, as well as the roles of patent and antitrust law. For this reason, it’s important to look into the determination.

Accurately Defining the Market

To successfully demonstrate anticompetitive behaviour, the market or “area of effective competition” must be defined. Although the district court defined “the market for CDMA modem chips and the market for premium LTE modem chips”, much of its analysis of Qualcomm’s business practices looked more broadly to different aspects of the cellular market. This meant that a large part of the ruling inaccurately considered alleged harm to manufacturers — Qualcomm’s customers — rather than rivals. This isn’t deemed anticompetitive because the conduct isn’t occurring within “the area of effective competition”. In much of its examination, the district court failed to draw a distinction between Qualcomm’s practices in licensing and those in sales of modem chips.

This is reflective of the complexity of Qualcomm’s two-sided business model, consisting of licensing and chip sales. However, as the Ninth Circuit stated, “novel business practices — especially in technology markets — should not be conclusively presumed to be unreasonable and therefore illegal”. Subsequently, the court of appeals had to reframe the case to focus on the impact of Qualcomm’s practices to the markets for CDMA and premium LTE modem chips.

No Antitrust Duty to License to Direct Rivals: “No Licence, No Problem”

There’s a long-held right in the US for a person or company to choose the parties with which it does business, as well as the associated prices, terms and conditions. This isn’t restricted by the Sherman Antitrust Act. To borrow the words of the ruling, “competitors are not required to engage in a lovefest”. Qualcomm’s approach is based on licensing at the original equipment manufacturer (OEM) level, meaning that the company holds licence agreements with product manufacturers directly, rather than multiple companies throughout the supply chain. Chip suppliers can operate royalty-free and Qualcomm’s agreements are “chip-supplier neutral”. This approach isn’t unique, with Nokia and Ericsson working in a similar fashion.

This is a cleaner approach to licensing as it limits the number of agreements required, and it’s also more profitable. But crucially, the Ninth Circuit determined that the pursuit of greater profit in the short and long term was not anticompetitive. This is an important decision for the mobile industry. If device-level licensing were deemed anticompetitive, the process of licensing intellectual property would become horrendously complicated and would likely prove counterproductive, with more claims of anticompetitive behaviour and patent infringement.

The Ninth Circuit stated that it found no evidence suggesting that Qualcomm singles out any specific chip supplier for anticompetitive treatment in licensing of standard essential patents. In a succinct summary, it indicated that Qualcomm’s chip policy toward rival chipmakers is more like “no licence, no problem”.

“The Type of Garden-Variety Price Competition the Law Encourages”

A crux of the district court’s judgement was that Qualcomm caused anticompetitive harm with unreasonably high royalty rates. The Ninth Circuit held that there’s nothing wrong with Qualcomm’s approach of basing royalty rates on the market value of a product, given that this is a common approach in other industries.

When a manufacturer sells a device, it needs to use Qualcomm’s standard essential patents to make the product work. This is true whether the chips are made by Qualcomm or another rival. Most importantly, the manufacturer only pays once. This is where the district court was most heavily criticized, as it (bizarrely) faulted Qualcomm for lowering its prices when other companies introduced rival chips. This points to the existence of healthy competition rather than the opposite, anticompetitive behaviour.

Policy of “No Licence, No Chips” Did Not Limit Competition

Anyone who has followed Qualcomm in recent years knows that its licensees have been anything but quiet. The company has renegotiated numerous licence agreements including recent high-profile contracts with Apple and Huawei. As the Ninth Circuit stated, “it appears that OEMs have been somewhat successful in ‘disciplining’ Qualcomm’s pricing through arbitration claims, negotiations, threatening to move to different chip suppliers, and threatened or actual antitrust litigation”.

Qualcomm’s policy of not supplying chips to manufacturers that hadn’t licensed its patents applied regardless of whether the manufacturer acquired chips from Qualcomm or a rival. Had Qualcomm pursued the reverse policy of refusing to license standard essential patents unless manufacturers first agreed to buy its chips — “no chips, no licence” — this would be quite different. Qualcomm has been clear that its policy is motivated by profit as technology licensing is its biggest source of profitability. However, the Ninth Circuit was clear in declaring that “profit-seeking behavior alone is insufficient to establish antitrust liability”.

Those Exclusive Deals with Apple

The final part of the district court’s judgement was that Qualcomm’s agreements with Apple foreclosed a “substantial share” of the market for CDMA modem chips. This was also dismissed by the Ninth Circuit because competition continued to exist during the relevant period, with Apple considering Intel as a supplier before committing to modem supply from the company in 2014.

Conclusion

The Ninth Circuit’s conclusion perfectly sums up the case. It stated that Qualcomm “asserted its economic muscle with vigor, imagination, devotion and ingenuity… It has also acted with sharp elbows as businesses often do”. Crucially, however, “anticompetitive behavior is illegal under federal antitrust law. Hypercompetitive behavior is not”.

It’s paramount that a balance is maintained that protects the intellectual property rights of innovators whilst ensuring fair and healthy competition. The court of appeals made the same observation, stating that “innovation is essential to economic growth and social welfare” and that “an erroneous decision will deny large consumer benefits”.

The decision also provides a platform for the mobile industry to grow at an important time when 5G networks are being switched on. Qualcomm’s business model is about offering a springboard for others to innovate and compete. The irony in the FTC’s case has long been that Qualcomm has played a leading role enabling competition from a long line of Android licensees, not restricting it.