Tantra Analyst

FTC vs. Qualcomm – More than meets the eye in Ninth Circuit decision

The United States Court of Appeals for the Ninth Circuit (Ninth Circuit) gave a landmark decision in favor of Qualcomm, on Aug 11th 2020, in the long running antitrust case brought about by FTC. This was a highly anticipated outcome in the multi-year saga, which saw fortunes go back and forth between the parties. The detailed opinion written by Judge Callahan, representing the panel of three judges, is a tell-a-tale of how FTC mischaracterized Qualcomm’s business model, and how the United States District Court for the Northern District of California (lower court) misjudged the case. The ruling vacated all the decisions of the lower court, including the partial summary judgement. I spoke to Don Rosenberg, EVP, and General Counsel of Qualcomm, who of course was quite pleased with the outcome. He said, “we felt vindicated by the appeals court’s ruling and are looking forward to continue bringing path-breaking innovation like 5G to life.” 

Ninth Circuit’s decision was not just relevant for this case, but clarifies a whole slew of long-standing issues, and will set a defining precedent for IPR licensing in the future, especially from an antitrust point of view. 

Side note: If you would like to know the full background of the case, refer to my earlier articles in the FTC vs. Qualcomm article series.

Well expected outcome

The recent developments in the case had made me predict such ruling. The Ninth Circuit’s stay of the lower court’s decision, and the language used in that order, the tone of the in-person hearing, and the deep skepticism the panel showed in their questioning made it amply clear the direction the panel was tilting. 

The case indeed had a lot of unusual and rather interesting turn of events from beginning to end. It was filed in the last days of the last administration with only a few FTC commissioners in the office. One of those commissioners who was opposed to this move wrote a scathing opinion in The Wall Street Journal, publicly disparaging the case. The new incoming chair of FTC recused himself from the case, which left the case on autopilot with FTC staff taking charge. The instigators, major supporters and witnesses moved away from the case midway—Apple and Huawei settled their licensing disputes with Qualcomm, Intel exited the modem market. The US Department of Justice, which shares the antitrust responsibility with FTC, went strongly against FTC, it even became a party to the hearing and pleaded against the case. But the biggest surprise for me was the ferocity with which the Ninth Circuit tore down and reversed every decision of the lower court, including the summary judgement.

Highlights of the ruling

This indeed was a complex technical case, where the judges had to quickly develop full understanding of the industry. Rosenberg highlighted the challenges of appellate court judges “They have to work on the record that somebody else has created for them, including lots of documentary evidence, witness testimony, lower court’s assertions and more” he added “considering that, the judges did an amazing job, cutting through the noise and really getting to the core issues and opine on them.” The interesting thing I found reading through more than 50-page ruling is, how it summarized and reduced the case into five key questions: 

1. Whether Qualcomm’s “no license, no chips” policy amounts to “anticompetitive conduct against OEMs” and an “anticompetitive practice in patent license negotiations”

2. Whether Qualcomm’s refusal to license rival chipmakers violates both its FRAND commitments and an antitrust duty to deal under § 2 of the Sherman Act

3. Whether Qualcomm’s “exclusive deals” with Apple “foreclosed a ‘substantial share’ of the modem chip market” in violation of both Sherman Act provisions

4. Whether Qualcomm’s royalty rates are “unreasonably high” because they are improperly based on its market share and handset price instead of the value of its patents 

5. Whether Qualcomm’s royalties, in conjunction with its “no license, no chips” policy, “impose an artificial and anticompetitive surcharge” on its rivals’ sales, “increasing the effective price of rivals’ modem chips” and resulting in anticompetitive exclusivity

The panel decided that FTC and lower courts were wrong on all counts. Rosenberg said that the opinion gave very logical, persuasive and point to point arguments with obviously relevant citations to refute all those assertions. Here are some of the excerpts from the opinion:

“…OEM-level licensing policy,  .. was not an anticompetitive violation of the Sherman Act.”

“…to the extent Qualcomm breached any of its #FRAND commitments, the remedy for such a breach was in contract or tort law…” 

“…”no license, no chips” policy did not impose an anticompetitive surcharge on rivals…”=

“…We now hold that the district court went beyond the scope of the Sherman Act…”

” Thus, it [Qualcomm] does not “compete”—in the antitrust sense—against OEMs like Apple and Samsung in these product markets. Instead, these OEMs are @Qualcomm’s customers…” 

“…OEM level licensing was not “to sacrifice short-term benefits in order to obtain higher profits in the long run from the exclusion of competition,” 

“…while Qualcomm’s policy toward OEMs is “no license, no chips,” its policy toward rival chipmakers could be characterized as “no license, no problem…”

“…even if we were to accept the district court’s conclusion that Qualcomm royalty rates are unreasonable, we conclude that the district court’s surcharging theory still fails as a matter of law and logic.”

“…neither the Sherman Act nor any other law prohibits companies from (1) licensing their SEPs independently from their chip sales; (2) limiting their chip customer base to licensed OEMs…”

“…Our job is not to condone or punish Qualcomm for its success, but rather to assess whether the FTC has met its burden under the rule of reason … We conclude that the FTC has not met its burden…”

What this means for the industry

This indeed was a landmark decision with long ranging consequences. It surely clears the clouds of uncertainty that were hanging over Qualcomm’s licensing business for a long time. It will also be a welcome decision for many other patent holders and licensors. The precedent this case has set will be used for resolving patent related antitrust issues for a long time to come. Here are some of the specific things I think are relevant: 

• Device-level licensing is not anti-competitive 

• FRAND and patent violations are outside the purview of the antitrust law, and are better handled under the contract law

• Royalties of one company do not have to be in-line with the rates other companies charge

• Surcharge on competitors may have to be direct, at least the “effective surcharges” from complex inferencing do not work 

Rosenberg said “Qualcomm’s novel licensing model and its policies have now gone through intense global legal litigation and have successfully proven themselves. Now we are more confident and working hard to innovate and to expand the reach of 5G and bring its benefits to the world.”

What is next for the case?

The FTC has not made comments on its next steps. It does have a couple of options. It could ask for what is called an “en banc hearing” in which the whole Ninth Circuit bench (or a major part of it) is asked to hear the case. But for that to happen, a majority of the judges would have to vote to agree to the hearing. Even after the en banc hearing, either party could knock on the doors of the Supreme Court and ask whether it would be willing to hear the case.

But, keeping all the theoretical options aside, I think a unanimous verdict, ferocious opinion coupled with the fact that all of the lower court’s decisions were vacated, makes it very less likely for FTC to keep pushing the case further. Since the instigators and supporters have also moved on, there is no incentive for anybody to keep it going. The FTC might ask for an en banc hearing anyway as a face-saving step as that does not require significant effort from its side.  Since en banc is a large effort, and many other judges will have to spend a lot of time and energy to fully understand such a highly technical and complex case to give any verdict, I doubt they will grant it. Hence, I am confident that in many respects, this is the end of the road for the case.

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