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Qualcomm Loses Bid to Dismiss FTC’s Chip Monopoly Suit

Last Monday, the court denied Qualcomm, Inc.’s motion to dismiss the Federal Trade Commission’s suit against it for allegedly using anticompetitive tactics to maintain a monopoly in baseband modem chips for cell phones.  The FTC contends that Qualcomm is using its standard-essential patents (SEPs) to extract monopoly prices from cell phone and other cellular device manufacturers in violation of its commitment to license its patents on a “fair, reasonable, and non-discriminatory” (FRAND) basis.

The court first discussed Qualcomm’s “no license-no chips” policy, whereby it refuses to sell its chips to cellular device manufacturers (referred to as original-equipment manufacturers or OEMs) unless they accept a patent license on terms favorable to Qualcomm.  It also refuses to license its patents to competing modem chip manufacturers who could supply an alternate source of chips to OEMs unless they also commit to collecting an additional patent license fee for Qualcomm from the any OEM to which they sell.  The court held that the FTC adequately alleged that Qualcomm’s licensing fees are “above-FRAND,” noting that Qualcomm has been able to collect a 5% royalty from that total value of every handset sold from 2006 through today, even though “Qualcomm’s SEPs contribute far less to the value of a 2017 phone [than] they contributed to the value of a 2006 phone.”  Op. at 28.  The court discounted Qualcomm’s defense that it offers some OEMs “incentive funds” which provide a rebate of some of its royalties.  The court found the fact that Qualcomm has the power to offer “carrots” on some occasions does not contradict FTC’s central allegation, which is that Qualcomm primarily uses the “stick” of threatened modem chips supply disruption to induce OEMs to agree to Qualcomm’s above-FRAND licensing terms.

The court went on to find that the no license-no chips policy, as alleged, harms the competitive process in the market for modem chips.  Qualcomm first argued that because its policy raises the prices of all modem chips equally, it cannot harm competition for modem chip sales.  The court found that the practice of refusing to license its patents to other chip makers prevented them from undercutting its prices, thus harming the competitive process.  Moreover, the incentive fund rebates affect different OEMs differently, making the effective cost of the licenses different across OEMs and undercutting other chip manufacturers who cannot offer such a rebate. 

The court also distinguished the Supreme Court’s decisions holding that competitors generally have no antitrust duty to deal with other competitors by pointing to Qualcomm’s participation in a standard-setting process.  Qualcomm voluntarily participated in the standard-setting process and agreed to license its SEPs on FRAND terms to induce the standard-setting bodies to include its technology in the cell phone standards.  Qualcomm then allegedly altered this voluntary (and profitable) course of dealing by refusing to license the patents to its rivals, in violation of its commitments.  Thus, the court held that “Qualcomm’s voluntary participation in the standards setting process, and Qualcomm’s voluntary commitment to license its SEPs on FRAND terms pursuant to the standards setting process, are the type of voluntary actions that can support an antitrust duty to deal.” Op. at 43.

Finally, the court discussed Qualcomm’s exclusive dealing arrangement with Apple in the market for premium LTE chips. (Apple has since filed its own suit against Qualcomm based on these agreements.)  In 2007, Qualcomm agreed to rebate some royalties to Apple on the condition that Apple refuse to sell or license a handset implementing a standard that Qualcomm opposed.  In 2011 and 2013, Qualcomm again entered into agreements with Apple to rebate royalties in return for Apple using Qualcomm chips exclusively.  The 2013 agreement was also contingent on Apple refraining from initiating or inducing others to initiate litigation claiming that Qualcomm had failed to offer licenses on FRAND terms.  The FTC alleged, and the court agreed, that this conduct was sufficient to state a claim that Qualcomm foreclosed other nascent competitors from competing for Apple’s business, a significant share of the market for modem chips.  The court rejected Qualcomm’s argument that the FTC was required in its complaint to identify a specific share of the market that was foreclosed by the conduct or specific competitors that were excluded. 

We will continue to monitor this case as it goes forward.  Of particular note, Maureen K. Ohlhausen, now the Acting Chair of the FTC, dissented from the filing of the complaint in this case, and the FTC’s opposition to Qualcomm’s motion to dismiss noted that “she has not changed her views.”  Several FTC seats remain unfilled and, if Commissioners sympathetic to Ohlhausen’s position are appointed, the FTC may reconsider its pursuit of this claim. For now, however, this case may provide some instructive guidance for industry participants who are considering participating in (or have participated in) a standard-setting process.