The Extraordinary Qualcomm Case. The defining antitrust issues of our time are at stake in the landmark case of Fed Trade Comm’n v. Qualcomm Inc., (N.D. Cal. 2017, Case No. 17-CV-00220-LH) (“Qualcomm”). Qualcomm specifically concerns standard-essential patents and their misuse to restrain and monopolize commerce, but it gives rise to larger questions, whose final adjudication might foretell what kind of economy and society we will have as we march into the third decade of the Twenty-First Century.
Qualcomm has long been a leading provider of highly specialized modem chips and related technologies for use in smartphones and other smart devices. After emerging as an industry leader, it applied for and obtained standard-essential patents (“SEPs”) for various chips and technologies that must be used to make the most popular and sophisticated smartphones and other smart devices.
It obtained these SEPs only by expressly agreeing in advance to license them and sell products covered by them to all comers on fair, reasonable, non-discriminatory terms (“FRAND” terms). That obligation is a standard condition that accompanies all SEPs. It exists because the grant of a SEP is akin to a grant of market power.
By definition, the holder of a SEP holds a patent that must be practiced by all market participants in a given industry. That is the whole point of granting a SEP in the first place — to ensure that market participants in an interdependent industry use the same standards so that their products will work with one another. To obtain a SEP, its holder must agree not to abuse it. To this end, the holder of a SEP must agree to make it available to all market participants on FRAND terms.
Qualcomm thus obtained its SEPs by agreeing to make them available to all comers on FRAND terms in binding contracts between it and industry regulators (standard-setting organizations).The contracts specifically stipulated that affected market participants would be express third-party beneficiaries of Qualcomm’s obligation to provide its SEPs on FRAND terms to all comers. Qualcomm never would have obtained the SEPs if it had not agreed to this provision. Otherwise, Qualcomm would have gained not only a monopoly grant for a legitimate purpose (ensuring the interoperability of cellphone products), but also an unfettered license to misuse its narrow monopoly to gain an insuperable competitive advantage and to extort monopoly rents.
But Qualcomm no sooner obtained its SEPs on this basis, than it breached its promise by refusing to license these SEPs or sell products covered by them to any competitor (with one minor exception), and it thereafter obliged its customers (makers of smartphone handsets and other devices) to pay exorbitant royalties that were not only very costly, but also calculated to dissuade them from purchasing components made by any of its competitors.
To this end, Qualcomm’s standard licensing agreement obliged each customer to pay royalties to Qualcomm according to the number of smartphones or other devices that the customer sold, regardless of whether Qualcomm’s own chips or patented technologies were used in them. The customer must therefore pay a royalty to Qualcomm every time it sold a smartphone or other device that contained a rival’s chips. That amounted to a tax on rival chips that must be paid to Qualcomm. Qualcomm’s royalties were otherwise exorbitant.
Customers nonetheless accepted these abusive terms because they required Qualcomm’s chips to remain in business: the chips were protected by SEPs and were required for most smartphones and various other smart devices, and Qualcomm refused to license its SEPs or sell products covered by them to any customer that declined to accept its standard license, which incorporated these terms. That was Qualcomm’s “no-license, no chips” policy. It worked.
By refusing to make its SEPs available to rivals on any terms, and by obliging its customers to pay exorbitant royalties that also operated as a tax on all rival offerings, Qualcomm gained, preserved, and abused monopoly and near-monopoly positions in its markets. According to hornbook law from the Third Circuit, that conduct was obviously and egregiously anticompetitive conduct in violation of Section 2 of the Sherman Act. See Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 314 (3d Cir. 2007) (“We hold that (1) in a consensus-oriented private standard-setting environment, (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with an SDO’s reliance on that promise when including the technology in a standard, and (4) the patent holder’s subsequent breach of that promise, is actionable anticompetitive conduct.”).
The Federal Trade Commission challenged these practices by filing suit against Qualcomm in the United States District Court for the Northern District of California, where it rightly prevailed. The District Court’s ensuing decision in favor of the FTC was thorough, sensible, and seemingly incontestable.
Remarkably, this decision was overturned on appeal by the Ninth Circuit. I will chronicle that decision in a forthcoming article. This article instead addresses the District Court’s tour de force, its brilliant jurisprudence, which in my estimation established an unanswerable case against Qualcomm for egregious violations of federal antitrust law. The case was even a no-brainer, and the District Court’s decision should have been resoundingly affirmed on appeal.
Essential Background Facts: SEPs, SSO’s and FRAND Grants. Here are the essential background facts necessary to understanding this extraordinary case. In many industries, all industry participants agree to observe uniform standards when making their different products that serve the industry, so that their respective products can be readily used with one another. For example, such essential standards are observed in the cellphone industry by (1) firms that manufacture cellphones, cellphone components, cell towers, specialized servers for cellphone communications, etc.; (2) operators of cellphone networks, such as AT&T, Verizon, and Sprint; and (3) numerous other firms that in some capacity make or use the above products or otherwise serve the cellphone industry.
These essential standards are typically established by one or more industry participants, which invariably use patents to protect their standardized products or technologies: these patents thus protect products and technologies that have been adopted as industry-wide standards. Such patents are therefore called standard-essential patents (“SEPs”). The standards and patents that protect them are typically approved and adopted by private standard-setting organizations (“SSOs”), which are voluntary associations composed of various industry participants (manufacturers, distributors, commercial customers, and others that serve a particular industry or use its products or services).
SSOs are supposed to adopt uniform standards that improve the quality of all participants’ products and services. Standards adopted by SSOs are ordinarily observed by all industry participants and often are adopted by public authorities and codified into law as legally-binding, enforceable standards, which thereafter must be followed. If an industry participant’s product or technology does not respect a mandatory standard adopted by the relevant SSO, others in the industry will usually decline to buy its products or use its technology. If, as is usually the case, a SSO’s standards are codified by public authorities and thus acquire the force of the law, non-conforming products and technologies become illegal.
When a SSO in a given industry confers a SEP on an industry participant, its patented product or technology becomes a required industry standard. Thereafter, all industry participants must either use the patented product or technology or obtain permission from the SEP-holder to use a conforming substitute. That permission is typically given in the form of a license, which is a legally binding contract between the SEP-holder and its licensee.
If, say, Acme Widget Corporation obtains a SEP for its industrial-grade widgets, all rival widget makers must obtain a license from Acme to offer their own conforming industrial-grade widgets. Likewise, all downstream companies that use industrial-grade widgets as components in their own products must either (1) purchase the widgets from Acme, (2) purchase the widgets from a rival that holds a licence from Acme, or (3) obtain a license from Acme to use a conforming substitute. A SSO’s granting of an SEP to Acme is therefore a big deal. It confers enormous power on Acme, or, more specifically, the grant presumptively confers market power on Acme, affording it power to control, regulate, and exclude competition in the market for industrial-grade widgets or in any product market in which industrial-grade widgets are necessary components of the products in question.
That is why SSOs generally require a firm to agree to licence a SEP to all comers on fair, reasonable, and non-discriminatory terms (“FRAND” terms, which is a term of art). Otherwise, a firm that holds a SEP can too easily restrain or monopolize commerce in violation of our federal antitrust laws. At least, that is the general concept.
How Qualcomm Abused its SEPs and FRAND Obligations. Qualcomm, which makes modem chips used in cellphones, has openly tested and defied the above ground rules for SEPs and FRAND obligations, as have various other firms in different industries during our brave new era of lawless monopolistic conduct.
Specifically, Qualcomm obtained SEPs from SSOs that regulate the cellphone industry. Those SEPs were for technologies used in modem chips that in turn are required components in cellphones and other electronic equipment that use cellphone networks. Qualcomm did so by expressly agreeing with the SSOs to license these SEPs on FRAND terms to all comers, including rival chipmakers. All industry participants were designated as express third-party beneficiaries of this agreement. Qualcomm thereafter breached the agreement by refusing to license its SEPs to rivals, but Qualcomm sometimes afforded narrow covenants not to sue certain rivals, so that these rivals could narrowly offer competing, inferior modem chips without being sued by Qualcomm for infringing its SEPs. Qualcomm also obliged its downstream customers, which make cellphones, to purchase its standard SEP license as a condition of their purchase of its modem chips, which they required to make certain kinds of cellphones.
Among other things, Qualcomm’s standard SEP license obliged these customers to pay exorbitant royalties to Qualcomm on all cellphones that they shipped, including cellphones that contained modem chips made by Qualcomm’s rivals, so that Qualcomm used its SEP licenses to impose a standard “tax” on all sales made by its rivals, thus rendering their products too expensive.
By these practices and its adroit use of exclusivity arrangements and episodic, short-lived pricing concessions, Qualcomm was able to preserve monopoly positions in two worldwide markets for modem chips and impose supracompetitive prices and restricted output in these markets. That is what the evidence showed, and much else along the same lines.
On the basis of these facts, the District Court found that Qualcomm had unlawfully restrained and monopolized trade in violation of Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1-2), had thereby violated Section 5 of the FTC Act (15 U.S.C. § 45) (“Section 5”), and should therefore be enjoined under Section 5 from using the above practices to continue monopolizing and restraining trade unlawfully. These matters, which should be uncontroversial, are fully explained below.
The Issues at Stake in Qualcomm. Qualcomm thus raises key issues of modern antitrust jurisprudence — both specific questions and larger concerns.
The narrow issues concern the proper use of SEPs. If a firm obtains a SEP for its technology by expressly agreeing with all industry participants to license the SEP to all comers on FRAND terms, does the firm thereafter owe a duty under antitrust law to license its SEP to direct competitors on FRAND terms? If so, does the firm commit a violation of antitrust law if it refuses to license its SEP to rivals and thereby acquires or maintains a monopoly position in a properly defined relevant market? Does it commit an antitrust violation if it uses its SEP to oblige downstream customers to accept onerous contracts that cumulatively result in demonstrable harm to competition, such as supracompetitive prices (marketwide), lower output (marketwide), the removal of alternative offerings from the relevant market, or the curtailing of marketwide competition by foreclosing most possible sales in the market for a substantial duration?
In Qualcomm, the District Court answered each of the above queries with a resounding “yes,” reaffirming the meaning, reach, and importance of our federal antitrust law during this troubled era of impaired competition in the United States. Indeed, I argue below that the District Court reached the right result, but that its decision was nevertheless too cautious and gave too much credit to Qualcomm’s implausible efforts to justify open anticompetitive outrages of a kind that have become too commonplace during the past twenty years or so in our new Gilded Age Economy.
In particular, the District Court found that Qualcomm owed a duty to deal with its rivals because it had previously dealt with them and could not disrupt profitable, pro-competitive dealings in order to give effect to an anticompetitive scheme. That ruling reconciles Qualcomm to the narrow refusal-to-deal doctrine announced in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605-11 (1985) (“Aspen Skiing“), but the holding in Qualcomm shouldn’t be so difficult to reach. If a firm agrees to honor FRAND obligations to all comers in exchange for obtaining a SEP, and if it thereafter flouts that duty in order to maintain a monopoly position or coerce its customers to accept supracompetitive prices, the firm should be held in violation of antitrust law whether or not it has discontinued previously profitable dealings with rivals.
The obtaining of a SEP in exchange for an agreement to license it on FRAND terms to all comers should presumptively give rise to an antitrust duty-to-deal. It should not be necessary also to show a prior course of dealing that existed before the SEP was granted. The grant of a SEP should be treated as a presumptive grant of market power, with the burden of rebuttal upon the patentee. Any such grant should therefore be circumscribed by (1) broad, easily enforced FRAND obligations; and (2) presumptive antitrust liability for their breach.
But Qualcomm is more important than a mere dispute over SEPs and FRAND obligations. That is because of the arguments urged in the case by Qualcomm and now favored by the current Administration’s antitrust enforcers. Qualcomm thus concerns nothing less than the defining antitrust issues of the times, which I would state as follows. Will we use our antitrust laws to deter firms from obtaining and enlarging market power by preventing others from competing? Will we afford monopolists and oligopolies impunity by indulging a thousand post-facto rationalizations, each more absurd than the last, and thereby render federal antitrust law a meaningless relic from an earlier era that no longer applies to our general commerce? Do we in fact favor oligopoly and monopoly and their attendant benefits and disadvantages, or do we generally prefer to have competitive, open markets? If we generally prefer to have competitive markets, then oligopolies and monopolies should be narrowly tolerated only when they are acquired or maintained by procompetitive business practices. That … Continue reading
The Qualcomm Case. In Qualcomm, the Federal Trade Commission (“FTC”) successfully sued Qualcomm Inc. and its affiliates (“Qualcomm”) in federal district court under Section 5.Only the FTC can invoke Section 5, which prohibits commercial practices that constitute inter alia (1) an antitrust offense; (2) an incipient antitrust offense; or (3) a violation of the “spirit” … Continue readingAccording to the FTC, Qualcomm misused its SEPs and employed other anticompetitive practices in order to monopolize and restrain trade in worldwide markets for two kinds of modem chips used in smart cellphones. The District Court (the Hon. Lucy Koh) agreed and granted a sweeping injunction against Qualcomm that obliged it to curtail or reform its challenged business practices. Qualcomm has appealed to the Ninth Circuit Court of Appeals, which after receiving briefing and oral argument has taken the matter under submission.
Qualcomm specifically concerns the law of patentee hold-ups — which occur when a company obtains SEPs and thereafter misuses them to monopolize or restrain trade unlawfully. As explained above, a SEP is a patent for a technology or product that has been adopted as an industry-wide standard that all market participants must use in a given industry. The patentee of a SEP typically must agree to license it to all comers on FRAND terms in exchange for the benefit of having its technology or product adopted as an industry-wide standard.As explained above, in many industries industry-wide technical standards are often established by SSOs composed of various industry participants. A SSO’s published standards are typically … Continue readingA patentee hold-up occurs when the holder of an SEP breaches its FRAND obligations and instead misuses its SEP to restrain or monopolize trade unlawfully.
Qualcomm’s essential antitrust offense has been that it obtained SEPs on technologies for two distinct kinds of modem chips used in cellphones, then largely refused to license these SEPs to rival chipmakers while obliging its downstream customers (makers of cellphones) to accept onerous, anticompetitive conditions if they wished to receive its modem chips at all, which they required in order to make certain kinds of cellphones — “premium cellphones” (high-end smartphones) and “CDMA cellphones” (cellphones for use on CDMA networks). That conduct is the epitome of misusing a SEP to restrain and monopolize trade. Its only surprising aspect is that Qualcomm somehow believed it could conduct its business in this manner without being punished and fined as an antitrust offender.
In Qualcomm, the FTC partially won its suit on summary judgment in 2018, and it prevailed on the remainder of its case after a bench trial in January 2019. The District Court (the Hon. Lucy Koh) issued a 138-page decision that carefully explained its findings, conclusions, and injunction against Qualcomm. To spare my readers the burden of reading this long decision, I have summarized it below, but it is superb, careful antitrust jurisprudence that is well worth reading if you have the time. Qualcomm appealed from this decision to the Ninth Circuit Court of Appeals, where oral argument was conducted in January 2020.
In a singular development, the Antitrust Division of the United States Department of Justice (the “Division”) intervened during the trial and then on appeal in order to support Qualcomm and oppose the FTC. To my knowledge, the Division and the FTC have never before publicly opposed one another in a pending litigation, whatever private disagreements they might have had since the FTC was established in 1914.
The Division, now run by a former attorney for Qualcomm, has taken the surprising view that the chief antitrust concern with SEPs is not patentee hold-ups, but rather implementer hold-outs, which occur when an implementer of a SEP (typically, a manufacturer of equipment) tries to take unfair advantage of the patentee’s FRAND obligations in order to strike an unfair bargain with the patentee and deprive it of the expected benefits of its useful, patented invention.The current head of the Division, Makan Delrahim, recused himself from the case, but the Division’s arguments in the case are the identical arguments that Mr. Delrahim has made on behalf of … Continue reading
The Division has also argued on appeal that Qualcomm implicates the “national security” of the United States, and that the injunction against Qualcomm must be revoked on this additional ground.
My own review of the case indicates that the District Court ruled correctly on all points by applying undisputed principles of antitrust law to a singularly egregious set of facts. This case should not even be a close call, but it has become controversial and noteworthy for several reasons. First, Qualcomm exposes egregious anticompetitive abuses that are emblematic of our times. Second, in this case one federal antitrust enforcer, the Division, has publicly opposed the other major federal antitrust enforcer, the FTC, doing so in a pending, consequential antitrust litigation brought by the FTC. That is unprecedented and a very worrisome development. Third, by its intervention the Division has urged novel, doubtful arguments about implementer holdouts and “national security” that resemble special pleading on behalf of Qualcomm, which the Division’s current leader used to represent (he has recused himself from the case, but the Division’s arguments echo arguments that he has made throughout his career as a spokesperson for patentees). Indeed, Qualcomm presents yet another instance when the Division has championed the cause of dominant market firms and openly sought to weaken antitrust enforcement (while paying lip-service to its enforcement). Indeed, the Division under its current leadership has at least once misused its public powers for partisan political purposes.
All of these developments are noteworthy and very troubling: our economy, society and polity have all been demonstrably and durably harmed by a dearth of competition, but now a public antitrust enforcer, the Division, has again intervened to try to weaken our antitrust laws even though it is charged with their vigorous enforcement.
The District Court’s Findings and Conclusions. The District Court made the following findings of fact and conclusions of law after receiving voluminous evidence at summary judgment and then at the bench trial of the case. See Federal Trade Commission v. Qualcomm Incorporated, 411 F.Supp.3d 658 (2019) (the “Decision”).
- Qualcomm, Inc. and its affiliated companies (collectively, “Qualcomm”) make various kinds of modem chips for use in cellphones and other electronic equipment. It also operates a highly profitable licensing business, by which it authorizes other companies to use its patented products and technologies. Qualcomm is the world’s leading manufacturer of CDMA modem chips, which are required components of cellphones that rely on CDMA cellphone networks, such as those operated in the United States by Verizon and Sprint. Qualcomm is also the world’s leading manufacturer of LTE modem chips, which are required components of “premium” cellphones that offer the best service and most advanced features.See Decision at 17-20, 29-37.
- There exists a relevant worldwide market for the sale of CDMA modem chips, which are necessary components in cellphones that use CDMA networks. In the United States, Verizon and Sprint operate only CDMA networks, and every cellphone that uses these networks must be equipped with CDMA modem chips. No other kind of modem chip nor any other product can serve as a substitute product.See Decision at 29-33.
- There also exists a relevant worldwide submarket for LTE modem chips, which are necessary components in “premium” cellphones that offer the most advanced features and best service on 4G networks. No other kind of modem chip nor any other product can serve as a substitute product.See Decision at 33-37.
- Qualcomm holds a strong monopoly position in the worldwide market for CDMA modem chips. In this market, its market shares were above 90% from 2010 to 2016 and since then have remained above 75% even though two substantial companies have entered this market — Intel and MediaTek. Neither of these recent entrants is able to deprive Qualcomm of a substantial volume of business, but they have imposed limited competitive discipline on Qualcomm. Otherwise, there are significant structural barriers to entry and expansion (very high capital costs) that largely prevent any rival from imposing competitive discipline on Qualcomm. Qualcomm’s challenged business practices constitute further significant barriers to entry and expansion: Intel and Mediatek have been unable to obtain licensing rights to Qualcomm’s necessary SEPs, but they have developed alternative technologies and elicited Qualcomm’s narrow agreement not to sue them for infringing its SEPs, but at best their alternative offerings are problematic and costly to bring to market. Because Qualcomm has strong market power in this market, it can and does charge prices (royalties) for its CDMA modem chips that are significantly higher than prices that it charges for comparable non-CDMA chips. Its internal documents disclose that it does so because it generally lacks viable competition in the market for CDMA modem chips.See Decision at 29-33.
- Qualcomm also holds a strong monopoly position in the worldwide submarket for LTE modem chips. In this submarket, its market share was nearly 90% in 2014 and since then has trended down to approximately 65%. But the other manufacturers in this market compete weakly only because they have obtained Qualcomm’s narrow covenant not to sue them for infringing its SEPs, but they offer inferior products rather than those that integrate Qualcomm’s SEPs, and some of them are vertically integrated with their only customer (e.g., Samsung makes LTE modem chips only for Samsung cellphones). In this market, there are significant structural barriers to entry and expansion (very high capital costs) that largely prevent any rival from imposing competitive discipline on Qualcomm, and Qualcomm’s challenged business practices constitute further significant barriers to entry and expansion. Because of its strong market power in this market, Qualcomm earns higher margins on its sale of LTE modem chips than it does on other kinds of modem chips that it sells in competitive markets. Its internal documents disclose that it charges the higher prices because it lacks viable competition in the market for LTE modem chips.See Decision at 33-37.
- Qualcomm principally derives its strong market power in the above two markets from its standard-essential patents (“SEPs”): the company holds patents on modem-chip technologies that must be used in (1) cellphones that use a CDMA network and (2) premium cellphones. Qualcomm’s patented technologies for those kinds of cellphones have been adopted as industry-wide standards by two SSOs — the Telecommunications Industry Association and the Alliance for Telecommunications Industry Solutions. Qualcomm’s patented technologies became SEPs in accordance with a contract between Qualcomm and the two SSOs. By this contract, Qualcomm agreed to license its SEPs to all comers on “fair, reasonable, and non-discriminatory terms” (“FRAND”). See Decision at 75-90.Qualcomm’s FRAND obligations were standard obligations: the primary role of an SSO is to establish industry-wide technical standards in a given industry. To this end, the SSO usually adopts … Continue reading
- After Qualcomm obtained its SEPs, it breached its FRAND obligations by refusing to license the SEPs to rival chipmakers that seek to make CDMA modem chips and LTE modem chips, but it has narrowly agreed not to sue some rivals that use substitute technologies that arguably infringe upon its SEPs.See Decision at 75-90.
- Qualcomm also refused to sell modem chips to cellphone manufacturers (“OEMs”), unless they also accepted its standard SEP license, which imposed onerous, anticompetitive restraints of trade. OEMs submitted to this arrangement because Qualcomm refused to license its SEPs to rival chipmakers, so that its rivals could not make CDMA or LTE modem chips that met best-in-class industry standards without infringing on Qualcomm’s patents. Qualcomm otherwise offered a wide array of modem chips for different kinds of cellphones that OEMs purchased because they required Qualcomm’s CDMA modem chips and LTE modem chips. For many kinds of cellphones, OEMs found themselves obliged to procure modem chips from Qualcomm, and Qualcomm agreed to furnish them only if the OEMs accepted its standard SEP licenses. That was Qualcomm’s policy of “no license, no chips.”See Decision at 38-75.
- Qualcomm’s SEP licenses for OEMs were breathtakingly anticompetitive. They required each OEM to pay supracompetitive royalties to Qualcomm — namely, royalties according to the number and value of cellphones that the OEM shipped, not according to the number and value of Qualcomm modems that the OEM included in its shipped cellphones, which would have been a standard royalty on such transactions.See Decision at 38-75.
- Qualcomm’s SEP licenses for OEMs further obliged each OEM to pay Qualcomm’s supracompetitive royalties on all cellphones that the OEM shipped, including those that used modem chips made rival chipmakers. That formula directly raised rival chipmakers’ costs: if an OEM subject to Qualcomm’s SEP license wished to purchase modem chips made by a rival, it must pay (1) the rival’s prices for the modem chips; plus (2) royalties to Qualcomm for every shipped cellphone that included the rival’s chips. In practice, that meant that rival chipmakers must either offer discounts equal in amount to Qualcomm’s royalties or charge prices significantly higher than Qualcomm’s prices for similar products that performed the same function.See Decision at 38-75, 116-125.
- Qualcomm thus used its SEPs to deprive rivals of the ability to sell competitive products: the rivals could not offer CDMA or LTE modem chips without infringing on Qualcomm’s patents, and their sales to OEMs bound by Qualcomm’s SEP license were subject to Qualcomm’s “tax,” so that for these sales the rivals’ modems were either uncompetitively priced or sold at a loss (if the rival gave discounts to offset Qualcomm’s tax).See Decision at 38-75, 116-118.
- It thus became prohibitively difficult for rival chipmakers to compete against Qualcomm in two worldwide markets – the markets for CDMA modem chips and LTE modem chips: Qualcomm held the SEPs for technologies that must be used in these kinds of chips, and it refused to license these SEPs on any terms to rival chipmakers.See Decision at 38-90.
- Further exploiting its market power as the only seller of usable modem chips for CDMA cellphones and premium cellphones, Qualcomm prevailed on OEMs to accept exclusivity arrangements and de facto exclusivity arrangements that largely prevented them from purchasing modem chips from rival chip makers. Qualcomm also threatened to cut off supplies of modem chips to OEMs that balked at accepting its SEP licenses and other contractual terms. Qualcomm also used short-term financial inducements to lock-in OEMs to its anticompetitive SEP licenses.See Decision at 38-75.
- All of the above practices were anticompetitive: they did not improve Qualcomm’s offerings, but served only to hinder rivals’ ability to compete against Qualcomm. Moreover, these practices resulted in anticompetitive outcomes in the above two markets: supracompetitive prices, restricted output, a dearth of competition, and the anticompetitive exclusion of rival chipmakers that might otherwise have exerted competitive discipline in these markets.See Decision at 38-90.
- Qualcomm’s stated justifications for these practices were mere “pretexts” and not bona fide justifications.See Decision at 81, 85-86, 98, 103, 116, 125.
- By its anticompetitive practices, Qualcomm preserved its monopoly positions in the above two markets — i.e., the worldwide markets for CDMA modem chips and LTE modem chips. Qualcomm’s conduct therefore constituted unlawful monopolization under Section 2 of the Sherman Act (15 U.S.C. § 2).See Decision at 129.
- As noted above, Qualcomm’s anticompetitive practices included its use of trade restraints (restrictive covenants) in its SEP licenses and sales contracts. Those trade restraints were unlawful under the rule-of-reason standard because they significantly impaired competition in the above two relevant markets, but lacked redeeming procompetitive justifications (i.e., the trade restraints largely prevented OEMs from purchasing CDMA and LTE modem chips from rival chipmakers, and Qualcomm was unable to identify legitimate purposes for these restraints that could justify their use). Qualcomm thus violated Section 1 of the Sherman Act (15 U.S.C. ¶ 1) by using unlawful trade restraints in its standard licensing and sales agreements with customers (OEMs).See Decision at 129.
- Because Qualcomm’s conduct violated both Section 1 and Section 2 of the Sherman Act, it also violated Section 5 of the FTC Act. The FTC therefore prevailed on its claim and was entitled to appropriate injunctive relief.See Decision at 129.
- To redress Qualcomm’s wrongs, the District Court issued an injunction that required Qualcomm to license its SEPs to rival chipmakers on FRAND terms and to sell its modem chips to OEMs without obliging them to accept its SEP license. Qualcomm was further ordered to cease charging supracompetitive royalties and to cease requiring OEMs to accept exclusivity arrangements. Qualcomm was also ordered to submit periodic reports to the District Court to confirm its ongoing compliance with the injunction.See Decision at 134.
Those were the findings of fact and conclusions of law established by the District Court. To support these findings and conclusions, the District Court provided a extensive discussion of the evidence that it considered. Its discussion is far more detailed and has many more nuances than my summary, and it shows how Qualcomm slightly varied its tactics with each OEM. The foregoing summary provides the gist of its conduct and the effect of its conduct in the markets at issue.See Decision at 17-129.
The District Court’s Rulings Were Sound. I believe that the District Court’s rulings are sound and should be affirmed on appeal. Indeed, this case is not even a close call if standard antitrust analysis is applied to the unusually compelling facts of the case.
The District Court’s findings carefully document how Qualcomm has maintained monopoly positions in two worldwide markets for modem chips by employing the following anticompetitive practices: (1) refusing to license its SEPs to rival chipmakers in violation of its FRAND obligations; (2) raising of rivals’ costs by refusing to sell them SEP licenses on FRAND terms and also by imposing a “tax” on such modem chips as any rival can sell to OEMs subject to Qualcomm’s SEP license — which are most OEMs in the cellphone industry and all of the major ones; (3) obliging OEMs to purchase Qualcomm’s SEP license in order to purchase its modem chips, and thereby saddling OEMs with supracompetitive royalties for all cellphones that they ship, including those that contain rival modem chips; (4) prevailing on OEMs to accept exclusivity arrangements (express and de facto) that largely shut out rivals from these markets; and (5) related practices.See Decision 38-129.
That conduct easily qualifies as predicate conduct for the offense of unlawful monopolization in violation of Section 2 of the Sherman Act. That offense occurs when, as here, the following circumstances are present: (1) the defendant possesses monopoly power in a properly defined relevant market; and (2) the defendant has acquired or maintained its monopoly power by using anticompetitive practices, which are practices that unreasonably limit rivals’ opportunities to compete for sales (i.e., practices that do not improve the seller’s offerings but only hinder its rivals, or practices that improve the seller’s offerings but also hinder its rivals unnecessarily). See, e.g., Hunt-Wesson Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919, 924 (9th Cir. 1980) (listing elements of claim for unlawful monopolization); Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1206 (“Courts generally require a 65% market share” protected by market barriers to show that defendant has monopoly power.).
The Exclusionary Practices Test. In such cases, the leading test used to distinguish procompetitive from anticompetitive conduct is sometimes called the “exclusionary practices test.” See Cascade Health Sols. v. PeaceHealth, 515 F.3d 883, 894 (9th Cir. 2008) (“Anticompetitive conduct [sufficient to serve as a predicate for unlawful monopolization]… tends to impair the opportunities of rivals and either does not further competition on the merits or does so in an unnecessarily restrictive way.”).
Qualcomm’s above-described conduct easily qualifies as anticompetitive conduct under the exclusionary practices test, and Qualcomm used this conduct to maintain monopoly positions. It therefore committed unlawful monopolization in violation of Section 2 of the Sherman Act. The District Court’s conclusion on this point is hardly controversial, and its findings and exposition of the law in support of this conclusion are thorough, soundly reasoned, and even cautious.
Unlawful Exclusive Dealing and Raising Rivals’ Costs. In addition, the District Court held that Qualcomm had used contracts — its SEP licenses and related sales contracts with OEMs — to restrain trade in violation of Section 1 of the Sherman Act. Specifically, the District Court found that Qualcomm had used these contracts to foreclose competition, raise rivals’ costs, and thereby facilitate anticompetitive pricing. Its contracts thus ran afoul of two two antitrust doctrines: unlawful exclusive-dealing and raising rivals’ costs.
One kind of unlawful trade restraint occurs when a defendant uses contracts with its customers to tie down a preponderant share of overall sales in a given market. Under narrow circumstances, that conduct can be condemned as unlawful exclusive dealing. When such contracts are challenged, the plaintiff must typically show that the challenged contracts, considered cumulatively, foreclose a substantial part of overall sales in the relevant market for an extended duration, thereby depriving rival sellers of an opportunity to evolve into efficient competitors, and thus permitting the defendant to charge supracompetitive prices or quash an incipient threat from a disruptive rival. Only when those circumstances are all present does exclusive dealing raise antitrust concerns. See ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 271 (3d Cir. 2012) (antitrust law condemns a defendant’s use of contracts with customers to foreclose rivals’ opportunities, but only when the market foreclosure is substantial, for a long duration, and done to facilitate anticompetitive outcomes); United States v. Dentsply Int’l, Inc., 399 F.3d 181, 187 (3d Cir. 2005) (same); LePage’s Inc. v. 3M, 324 F.3d 141, 157 (3d Cir. 2003) (exclusive-dealing contracts can be condemned as unlawful restraints of trade under Section 1 of the Sherman Act or as predicate anticompetitive conduct under Section 2 of the Sherman Act).
If the plaintiff makes this showing, the defendant must show how its exclusive-dealing contracts help it or its customers to accomplish legitimate business purposes. If the defendant makes this showing, the plaintiff can rebut it by showing that the defendant’s proffered business purposes are either pretexts or could be reasonably accomplished by less restrictive measures. After these showings are made, the trier of fact must decide whether on balance the defendant’s contracts are predominantly procompetitive and therefore lawful or predominantly anticompetitive and therefore unlawful. See Bhan v. NME Hospitals, Inc., 929 F.2d 1404, 1413 (9th Cir. 1991) (explaining the structured rule-of-reason and the shifting burdens of proof entailed by it); United States v. Brown Univ. in Providence in State of R.I., 5 F.3d 658, 669 (3d Cir. 1993) (ditto).
The District Court found that Qualcomm’s contracts constituted express or de facto exclusive dealing arrangments with many of the principal OEMs that make cellphones, that it used them to foreclose a substantial part of overall sales in the worldwide markets for CDMA cellphones and LTE cellphones, that it did so specifically to discourage and prevent competition, and that these contracts along with Qualcomm’s other challenged practices preserved its monopoly positions and thereby permitted it to charge supracompetitive prices for an extended duration while stifling alternative offerings, product innovation, and competition on price and quality.
In addition, Qualcomm required its customers (most OEMs) to accept its standard SEP licenses, which obliged them to (1) pay supracompetitive royalties; and (2) pay these royalties on all cellphones that they shipped, including those that contained modem chips made by other chipmakers. Those contracts thus raised rivals’ costs by imposing a “tax” on their sales: when an OEM shipped a cellphone that contained a rival’s modem chips, it must still pay a supracompetitive royalty to Qualcomm. If a rival wished to match or beat Qualcomm’s prices, it must discount this royalty from its prices; otherwise, its customers (the OEMs) must pay both the rival its prices and Qualcomm its royalties on every cellphone that used the rival’s chips. That is one of the most brazen instances of raising rivals’ costs of which I am aware, and the very fact that Qualcomm could profitably impose such a tax on its customers is itself strong evidence that it held market power over them and abused it in ways that harmed competitive processes in the affected markets. See McWane, Inc. v. Fed Trade Comm, 783 F.3d 814, 832 (11th Cir. 2015) (a contractual restraint “can be harmful when it allows a monopolist to maintain its monopoly power by raising its rivals’ costs sufficiently to prevent them from growing into effective competitors.”).
Unsurprisingly, the District Court found that by engaging in these practices Qualcomm had unlawfully monopolized and restrained trade in the worldwide markets for CDMA and LTE modem chips. On this basis, the District Court held that Qualcomm had violated Section 5. That holding gave the District Court authority under Section 5 to impose an injunction against Qualcomm. See Decision at 129. A private plaintiff must always show its own antitrust injury (i.e., that it was harmed by an anticompetitive aspect or effect of the defendant’s monopolizing conduct or restraint of trade), but … Continue reading Qualcomm has appealed from this decision.
Aspen Skiing Should Have Been Unnecessary to the District Court’s Analysis. If anything, the District Court showed excessive caution and gave too much credit to Qualcomm’s various arguments and post-hoc justifications for flouting its FRAND obligations and using its SEPs to foreclose competition, monopolize markets, and force its customers to pay supracompetive prices as well as a tax on rivals’ modem chips.
The District Court thus took great care to show that Qualcomm’s refusal to license its SEPs to rivals was unlawful under the narrow duty-to-deal established in Aspen Skiing, which states that a monopolist owes a duty to deal with rivals only when the following circumstances are present: (1) the monopolist previously had an established, profitable relationship with one or more rivals; but (2) the monopolist ended these dealings in order to harm its rivals and thereby acquire or maintain a monopoly in a properly defined market; and (3) in so doing, the monopolist lessened the quality of its own products or services. See Aspen Skiing, 472 U.S. at 605-11. To determine whether Qualcomm’s refusal to license its SEPs to rivals could be condemned under this doctrine, the Court conducted a three-prong test that courts sometimes use to decide whether the defendant owes duty-to-deal under Aspen Skiing (i.e., whether the defendant owes such a duty under antitrust law, and whether it has committed unlawful monopolization by breaching the duty.) The District Court applied the three-prong test with great care, finding that each prong was satisfied, and that Qualcomm therefore owed an antitrust duty to license its SEPs to rivals on FRAND terms, per Aspen Skiing. See Decision at 86-90.
The Grant of a SEP With FRAND Obligations Should Establish a Rebuttable Presumption of Market Power and an Antitrust Duty-to-Deal. The District Court’s application of Aspen Skiing to the facts in Qualcomm was sound and thorough, but in my view wholly unnecessary to the District Court’s conclusions and holding.
Rather, the holder of a SEP should be presumed to have market power in the market in which its SEP must be practiced, and it should be held liable under Section 1 and/or Section 2 if it misuses this market power in order to acquire or maintain a monopoly position. See Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500-01 (1988) (“Typically, private standard-setting associations … include members having horizontal and vertical business relations…. [The members of such associations often have economic incentives to restrain competition and …  product standards set by such associations have a serious potential for anticompetitive harm. Agreement on a product standard is, after all, implicitly an agreement not to manufacture, distribute, or purchase certain types of products. Accordingly, private standard-setting associations have traditionally been objects of antitrust scrutiny.”).Any presumption of the SEP’s market power should be subject to the patentee’s right of rebuttal.
Qualcomm wished to have its distinctive technology adopted as an industry-wide standard protected by SEPs. It obtained those SEPs, but on condition that it license them to all comers on FRAND terms. It thereafter breached this obligation by refusing to license the SEPs to rivals on any terms at all, even at retail prices (although it afforded narrow covenants not to sue to a few rivals, thus permitting them to sell inferior modem chips). By this refusal to deal, Qualcomm maintained its monopoly position in two markets.
That conduct, by itself, should be sufficient to find that Qualcomm committed unlawful monopolization in violation of Section 2. It should not be necessary first to find that Qualcomm owed an antitrust duty-to-deal under the narrow criteria of Aspen Skiing. A leading case from the Third Circuit confirms this very point. See Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 314 (3d Cir. 2007) (“We hold that (1) in a consensus-oriented private standard-setting environment, (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with an SDO’s reliance on that promise when including the technology in a standard, and (4) the patent holder’s subsequent breach of that promise, is actionable anticompetitive conduct.”).
How far we have come from sound, vigorous antitrust enforcement when it is even necessary to provide such commentary. Even in the 1980s, when the courts dramatically whittled down the reach of antitrust law, practices of the kind at issue in Qualcomm almost certainly would have been condemned as obvious antitrust offenses. Cf. Allied Tube, 486 U.S. at 506-07 (“[P]rivate standard-setting by associations comprising firms with horizontal and vertical business relations is permitted at all under the antitrust laws only on the understanding that it will be conducted in a nonpartisan manner offering procompetitive benefits….”) (case decided by the Supreme Court in 1988 after a decade of decisions that limited the reach of antitrust laws).
The Division’s Unprecedented Intervention. While the District Court was considering what injunctive relief to give, the Division intervened to support Qualcomm and oppose the FTC. On appeal, it has maintained its support of Qualcomm and continued to oppose the FTC.
The Division’s involvement in this case is both unprecedented and a highly unwelcome development. The FTC and the Division are the principal federal agencies charged with interpreting and enforcing federal antitrust law. They typically do not work on the same cases, but instead agree to let one or the other conduct a particular antitrust investigation or litigation. Sometimes they might collaborate on important antitrust matters or informally confer to ensure that they are not working at cross purposes. Historically, each agency has usually assumed responsibility in some industries while the other has done so in other industries (e.g., the FTC has usually had responsibility for enforcing antitrust law in healthcare industries). The one significant exception is that only the Division can bring criminal charges under the Sherman Act.
As a general rule, the federal agency that assumes responsibility for a particular antitrust matter has sole authority to handle it. The other agency is expected to defer or at most to express its disagreements privately. When the two agencies publicly oppose one another in a pending antitrust litigation, they use their official imprimatur to urge contradictory interpretations of antitrust law in the same case. That undermines the authority of both agencies and imposes unreasonable burdens and expectations on the presiding court, the parties to the case, similarly situated parties observing the case, the antitrust bar, other government agencies, and the general public. That cannot be sound enforcement practice.
The DOJ’s National Security Arguments Should Fail. Qualcomm’s appeal to the Ninth Circuit has been fully briefed, heard, and submitted. The Division has argued that the injunction against Qualcomm should be lifted on grounds of “national security.” According to the Division, Chinese progress in 5G technology somehow poses an undefined risk to the “national security” of the United States, and this circumstance means that Qualcomm, which is an acknowledged leader in 5G technology, should be permitted to continue refusing to license its SEPs to rival chipmakers and to oblige OEMs to accept its SEP licenses, even if their effect is to impose supracompetitive pricing, an industry-wide “tax” on rival chips, and exclusivity arrangements that substantially foreclose competition in the above two markets.
But the Division has not explained how the injunction of these practices threatens our national security or how the lifting of this injunction is a remedy narrowly tailored to the threat supposedly posed by Chinese progress in 5G technology. Nor has the Division even shown how Chinese progress in this line of commerce exposes the United States to a national danger.
Many politicians in the United States have expressed concern that China’s emergence as a leading economic power constitutes a security threat to the United States. But that assertion seems to be a stretch. What their arguments usually boil down to is that China, using a different approach to industrial organization, might be outcompeting the United States in various markets, or that on current trends it threatens to do so.
Even if the Ninth Circuit were to accept as true that Chinese progress in 5G technology threatens our national security, and that in consequence Qualcomm should not be obliged to do anything that might facilitate China’s progress in this line of commerce, wouldn’t that merely mean that the injunction against Qualcomm should have a carve-out that relieves it of its FRAND obligations and duty-to-deal only when dealing with Chinese-controlled firms?
The Division is making these arguments at the very time the Trump Administration is pressuring European governments and companies to sell controlling stakes of European technology companies to private American firms. According to this pitch, which has had no takers, the European Union, the United Kingdom, Canada, and the United States should make common cause against the supposed menace of Chinese economic progress. But the Trump Administration has also placed tariffs on these countries’ products on the purported ground of “national security,” and none of them has shown any inclination to be drawn into a new Cold War between the United States and China, even if they have strong misgivings about certain business practices that are prevalent in China as well as increasing misgivings about the current Administration’s various trade wars, invocation of national security to justify punitive tariffs, and “America First” policies on international trade.
I find these arguments to be very worrisome and utterly misconceived. Shouldn’t we be looking for ways to trade with China and cooperate with it as fully as possible while treating objectionable business practices by Chinese firms or the Chinese government as matters to be addressed by trade treaties or our trade laws? Must we escalate misconceived trade disputes into a new Cold War? Regardless, none of these matters should serve as pretexts that excuse blatant antitrust abuses of the kind at issue in Qualcomm.
Here are some further comments in passing about the alleged security threat posed by China.
- China has an authoritarian government that routinely engages in practices that are considered to be despotic and anti-democratic by liberal-democratic standards (e.g., its censorship of free speech and extreme curtailment of other basic civil rights; its repression of democratic governance in Hong Kong; its persecution of minority groups; etc.).
- The Chinese government oversees a vast, mixed economy, in which numerous and very large public, semi-public, and private firms variously compete and collaborate in domestic and global markets under the government’s close supervision and subject to its guidance and direction. The effort has been remarkably successful, and China has become the world’s second largest economy in absolute terms (measured by GNP). Among other things, China is now the epicenter of global manufacturing, global supply chains for electronic products and many other kinds of products, and global shipping of these goods. China increasingly produces high value-added products and cutting-edge technology products. It also has huge domestic markets. Our trade war against China has impeded this progress and harmed the world economy by disrupting supply chains and imposing lingering uncertainty about how the trade war will affect supply chains and global commerce.
- China is also implementing a vast, ambitious infrastructure and industrial development program called the “Belt and Roads Initiative.” Under this program, China is funding and managing major infrastructure and industrial projects in south and southeast Asia, the Eurasian regions, Europe, the Middle East, and Africa. China openly boasts that its Belt and Roads program will allow it to establish prosperous, long-term commercial ties with various regions of the world. But does any intelligence agency suspect that China has imperial designs and means to subdue other countries or prevent them from developing their own economies? Does China have any such designs on the United States? I have not seen any credible accusation of any such ambition. Current relations between the United States and China do not seem to be analogous to the historic rivalry between the United States and the USSR. Rather, the United States and China are major trading partners and indispensable actors in the global economy that have numberless commercial, educational, and family links to one another. Again, shouldn’t we look for ways to collaborate successfully with China? Regardless, we should not jettison our antitrust laws in order to place obstacles in the way of China’s economic progress, since doing so will make our economy that much less competitive, dynamic, and innovative over the long run, as countless studies have repeatedly demonstrated.
- China’s increasing economic prowess and approach to industrial organization have long been a source of conflict with the United States and other countries. Many countries and firms have often made the following credible allegations: (1) the Chinese government turns a blind eye to rampant product counterfeiting and software piracy in China and by Chinese exporters; and (2) to do business in China, a foreign firm must disclose its trade secrets and give minority ownership rights to a local Chinese firm (or enter into a joint venture with it).
- Many countries and firms have alleged that the Chinese government unfairly subsidizes various Chinese industries, and that these industries have built too much capacity, produce too many products, and often dump their products in foreign markets at below-cost prices (measured by average variable costs for each unit of production). To the extent the complaint turns on mere government subsidies, it is highly debatable as a proposition; but to the extent it concerns demonstrable below-cost dumping, existing trade laws afford viable strong remedies.
- The United States government has recently expressed concern that the Chinese government is using Chinese high-technology companies as “Trojan horses” to conduct industrial and military espionage in foreign countries, including the United States. So far as I know, the United States has not furnished any proof of these assertions in Qualcomm or in any other proceeding, and even the United Kingdom under Boris Johnson’s government has not been convinced by American entreaties to forgo using Chinese components in Britain’s emerging 5G networks.
- China has become a formidable competitor and collaborator in the global economy, but many object to its repressive governance and business practices that they deem to be unfair.
- The United States has various trade laws and trade treaties that afford full redress for China’s contested trade practices, and it previously negotiated a complex trade treaty with numerous Pacific and Asian nations other than China (called the “TPP”). The aim of the TPP was to establish a very large, prosperous common market in the hope that (1) China might wish to join this market and would reform its above practices in exchange for the privilege; and (2) even if the Chinese did not join, its commercial influence would be blunted by the TPP’s vast common market. But the Trump Administration withdrew the United States from TPP negotiations several years ago.
- Even if China has committed all of the above practices, the Division has not made any showing that the injunction against Qualcomm should be lifted in order to help us protect ourselves from an alleged threat to our national security posed by Chinese prowess in 5G technology.
- Nor has the Division otherwise shown how Chinese economic prowess, anti-democratic governance or unfair trade practices might be accurately characterized as a threat to the “national security” of the United States – one that should excuse select American firms from compliance with federal antitrust laws.
- That approach would quickly give rise to a very slippery and treacherous slope: if such a ruling were made in Qualcomm’s favor, how many other American firms would lobby for sweeping antitrust exemptions on the ground of national security? If the rationale for such a ruling is that only dominant firms that bestride their markets have the scale and scope needed to oppose Chinese firms, then the very purpose of antitrust law would be repealed in our most important markets on national security grounds, and the United States would find itself using state-managed industrial organization to favor monopolists and oligopolies and stifle competitive markets. That would be a bridge too far. Only Congress is vested with authority to enact these kinds of sweeping changes to our federal laws. Nor should it do so. The country urgently needs more competitive markets, not antitrust exemptions in furtherance of doubtful assertions about our national security.
But the Ninth Circuit need not address any of these points. It need only rule that these matters were not raised below, and that, absent exigent circumstances not present in this case, they cannot be raised for the first time on appeal.
Regardless, the Division has not made any specific showing of a threat to the national security of the United States occasioned by the injunction against Qualcomm, nor has the Division made a showing of exceptional circumstances that would justify presenting these issues for the first time on appeal. The Division’s untimely arguments on national security should therefore be rejected out of hand.
The Division’s Flawed Arguments on SEPs. Contradicting the FTC and the District Court, the Division has also argued that Qualcomm, as the patentee of the SEPs, is presumptively entitled to use them in order to generate the highest possible profits, and that its alleged violation of associated FRAND obligations do not implicate antitrust concerns, but only give rise to possible claims for breach of contract.Qualcomm agreed to the FRAND obligations in contracts that it made with two SSOs; under these contracts, other market participants are express third-party beneficiaries that have standing to sue for … Continue readingThe Division has also asserted it is far more bothered by implementer hold-outs than patentee hold-ups, and that the use of antitrust law to police alleged patentee hold-ups will inevitably discourage and limit innovation, since inventors and companies that might otherwise develop novel products or methods will be less likely to do so if they fear exposing themselves to antitrust litigation and the possibility of large antitrust damages.
Qualcomm urged the same arguments below, but the District Court rightly rejected them in its careful, easily defensible ruling. The Ninth Circuit should affirm this ruling on the basis of well-established antitrust principles.
Antitrust Law Condemns the Misuse of SEPs and Other Patents. Broadly speaking, an antitrust defendant commits unlawful monopolization if (1) it procures a patent by fraud and (2) thereafter enforces the patent in order to acquire or maintain monopoly power in a properly defined relevant market. See Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 174 (1965) (“T]he enforcement of a patent procured by fraud on the Patent Office may be violative of s 2 of the Sherman Act provided the other elements necessary to a s 2 case are present. In such event the treble damage provisions of s 4 of the Clayton Act would be available to an injured party.”).A patentee also commits unlawful monopolization if it acquires or maintains monopoly power by subjecting one or more rivals to baseless or fraudulent litigation for alleged patent infringement. See … Continue reading
That is essentially what Qualcomm did, except that it used fraud to obtain SEPs from SSOs rather than patents from the United States Patent and Trademark Office.
In the same vein, a patentee violates Section 1 or Section 2 if (1) its patent confers market power, and (2) it uses this market power to oblige its customers to accept licensing agreements that extend the duration or scope of its patent beyond the terms of the patent and in ways that restrain or monopolize trade within the meaning of antitrust law. That is hornbook law. See, e.g. In re Keurig Green Mountain Single-Serve Coffee Antitrust Litig., 383 F. Supp. 3d 187, 233–34 (S.D.N.Y. 2019), reconsideration denied, No. 14-MD-2542 (VSB), 2019 WL 2603187 (S.D.N.Y. June 25, 2019) (“Patent misuse relates primarily to a patentee’s actions that affect competition in unpatented goods or that otherwise extend the economic effect beyond the scope of the patent grant. (….) Misuse is closely intertwined with antitrust law, and most findings of misuse are conditioned on conduct that would also violate the antitrust laws.”).
That doctrine has been used to condemn the very practices at issue in Qualcomm. See Broadcom, 501 F.3d at 309-14. Specifically, an antitrust defendant violates Section 1 and/or Section 2 if it misuses a SEP to restrain or monopolize trade in a properly defined relevant market. See id. That is exactly what Qualcomm did, as was shown by the District Court’s careful, cautious findings on the basis of mountains of evidence.
Nor is this standard a radical departure from conventional antitrust analysis. On the contrary, it is merely the proper application of well-settled antitrust principles to a particular category of conduct — a patentee’s misuse of its SEPs.
The explanation is simple. Unlike an ordinary patent, a SEP presumptively confers market power on its holder precisely because it obliges all market participants in a given line of commerce to practice the SEP. See Broadcom, 501 F.3d at 314. (“A standard, by definition, eliminates alternative technologies. When a patented technology is incorporated in a standard, adoption of the standard eliminates alternatives to the patented technology…. Firms may become locked in to a standard requiring the use of a competitor’s patented technology. The patent holder’s IPRs, if unconstrained, may permit it to demand supracompetitive royalties. It is in such circumstances that measures such as FRAND commitments become important safeguards against monopoly power.”).In contrast, a mere patent does not constitute presumptive proof of the patentee’s market power. See Illinois Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, 31 (2006).
The misuse of such market power should be treated no differently from the misuse of any other kind of market power.See United States v. Microsoft Corp., 253 F.3d 34, 63 (D.C. Cir. 2001) (“[Defendant] claims an absolute and unfettered right to use its intellectual property as it wishes: ‘If … Continue reading
Properly understood, Qualcomm merely applies classical antitrust analysis to SEPs in a meticulous, cautiously reasoned decision. Its essential premise is that an antitrust defendant vested with market power commits an antitrust offense when it misuses its market power either to (1) acquire or maintain a monopoly position or (2) restrain trade by prevailing on others to accept agreements that result in anticompetitive outcomes, such as supracompetitive prices, restricted output, inferior offerings, or the removal of innovative offerings from the market. Its specific findings abundantly show that Qualcomm engaged in precisely such conduct by misusing its SEPs. That is standard antitrust analysis.
Such a decision should not be controversial, let alone cause for the Division to publicly oppose the FTC in order to urge novel, ill-conceived arguments that smack of special pleading on behalf of Qualcomm.
|↑1||If we generally prefer to have competitive markets, then oligopolies and monopolies should be narrowly tolerated only when they are acquired or maintained by procompetitive business practices. That outcome should persist only in markets whose economies of scale permit at most only a few firms to operate efficiently, and such markets must be monitored for anticompetitive abuses by public antitrust enforcers and/or industry-specific regulators.|
|↑2||Only the FTC can invoke Section 5, which prohibits commercial practices that constitute inter alia (1) an antitrust offense; (2) an incipient antitrust offense; or (3) a violation of the “spirit” of the antitrust laws. If a federal district court finds that the defendant has violated Section 5, it has broad discretion to issue an injunction that prohibits or reforms the challenged conduct. See 15 U.S.C. § 45(a); Fed. Trade Comm’n v. Cement Inst., 333 U.S. 683, 693–94 92 (1948); E.I. du Pont de Nemours & Co. v. Fed. Trade Comm’n, 729 F.2d 128, 136–37 (2d Cir. 1984); Fed. Trade Comm’n v. Brown Shoe Co., 384 U.S. 316, 321.|
|↑3||As explained above, in many industries industry-wide technical standards are often established by SSOs composed of various industry participants. A SSO’s published standards are typically treated as obligatory by all market participants in the industry and often are adopted by public regulatory authorities as legally binding regulations.|
|↑4||The current head of the Division, Makan Delrahim, recused himself from the case, but the Division’s arguments in the case are the identical arguments that Mr. Delrahim has made on behalf of patentees over the course of his career.|
|↑5||See Decision at 17-20, 29-37.|
|↑6||See Decision at 29-33.|
|↑7||See Decision at 33-37.|
|↑8||See Decision at 29-33.|
|↑9||See Decision at 33-37.|
|↑10||Qualcomm’s FRAND obligations were standard obligations: the primary role of an SSO is to establish industry-wide technical standards in a given industry. To this end, the SSO usually adopts patented technologies as its required standards. A patentee whose technologies have been adopted as mandatory standards usually must agree to license its patented technologies (i.e., its SEPs) on FRAND terms. The FRAND obligations are meant to ensure that the patentee does not misuse its SEP to monopolize or restrain trade unlawfully.|
|↑11||See Decision at 75-90.|
|↑12||See Decision at 38-75.|
|↑13||See Decision at 38-75.|
|↑14||See Decision at 38-75, 116-125.|
|↑15||See Decision at 38-75, 116-118.|
|↑16||See Decision at 38-90.|
|↑17||See Decision at 38-75.|
|↑18||See Decision at 38-90.|
|↑19||See Decision at 81, 85-86, 98, 103, 116, 125.|
|↑20||See Decision at 129.|
|↑21||See Decision at 129.|
|↑22||See Decision at 129.|
|↑23||See Decision at 134.|
|↑24||See Decision at 17-129.|
|↑25||See Decision 38-129.|
|↑26||A private plaintiff must always show its own antitrust injury (i.e., that it was harmed by an anticompetitive aspect or effect of the defendant’s monopolizing conduct or restraint of trade), but the FTC need only prove that the defendant has committed actionable violations of Section 5 without making a furthing showing of antitrust injury.|
|↑27||Any presumption of the SEP’s market power should be subject to the patentee’s right of rebuttal.|
|↑28||Qualcomm agreed to the FRAND obligations in contracts that it made with two SSOs; under these contracts, other market participants are express third-party beneficiaries that have standing to sue for breach of the FRAND obligations so long as certain conditions are met.|
|↑29||A patentee also commits unlawful monopolization if it acquires or maintains monopoly power by subjecting one or more rivals to baseless or fraudulent litigation for alleged patent infringement. See Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986, 992, 994 (9th Cir. 1979). Nor may a group of patentees agree to enforce one another’s patents against others so that each of them can restrain or monopolize trade in its own market. See United States v. Singer Mfg. Co., 374 U.S. 174, 194–95 (1963).|
|↑30||In contrast, a mere patent does not constitute presumptive proof of the patentee’s market power. See Illinois Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, 31 (2006).|
|↑31||See United States v. Microsoft Corp., 253 F.3d 34, 63 (D.C. Cir. 2001) (“[Defendant] claims an absolute and unfettered right to use its intellectual property as it wishes: ‘If intellectual property rights have been lawfully acquired,’ it says, then ‘their subsequent exercise cannot give rise to antitrust liability.’ That is no more correct than the proposition that use of one’s personal property, such as a baseball bat, cannot give rise to tort liability…. Intellectual property rights do not confer a privilege to violate the antitrust laws.”) (citing In re Indep. Serv. Orgs. Antitrust Litig., 203 F.3d 1322, 1325 (Fed.Cir.2000)).|