Key Lessons from the 14 Amicus Briefs Filed in Support of the FTC in the Ninth Circuit Court of Appeals
In a key court case poised to make or break the innovation cycle in America, Qualcomm and its allies are recycling the same tired arguments in their effort to overturn the district court ruling in the Federal Trade Commission’s antitrust case against the company’s anticompetitive patent licensing behavior. While Qualcomm justifies anticompetitive conduct on patent rights, as the 14 amicus briefs filed in support of the FTC’s case make clear, the fatal flaw in Qualcomm’s advocacy is that the case isn’t really about patents.
The FTC charged Qualcomm with a complex and wide-ranging anticompetitive scheme, a major component of which was Qualcomm’s manipulation of open connectivity standards, such as 3G and LTE, in order to abuse their granted monopoly power. By voluntarily agreeing to license certain patents under “fair, reasonable, and non-discriminatory” (or FRAND) terms for inclusion in these globally-adopted standards, Qualcomm agreed to license to anyone in return for a wider use base. Qualcomm and its allies like to dismiss the company’s FRAND commitments as irrelevant “20-year-old contracts,” but Qualcomm’s decision to renege on those commitments triggered significant antitrust scrutiny.
FRAND Commitments Protect Pro-Competitive Effects of Technical Standards Development
Numerous amici supporting the FTC explain how the FRAND commitment is a time-tested critical assurance that underlies industry collaboration in standard setting, and acts as relief valve for inherent competition issues that arise when competitors collaborate in standards-setting organizations.
- The origins of FRAND commitments can be found in World War II era “remedial orders intended to address anticompetitive arrangements involving patents.” According to professor Jorge L. Contreras in his brief, the history of FRAND licensing makes it clear “…that the FRAND commitment is intended to ensure broad access to patented technologies included in industry standards.”
- Absent compliance with FRAND, standard-essential patent (SEP) holders can exploit monopoly power from a standard. CCIA’s brief explained further that “Qualcomm’s duty to deal with competitors on FRAND terms arises because, absent compliance with such a duty, Qualcomm would be in a position to exploit the monopoly power conferred upon it through concerted action in which it participated, in violation of the very constraint—its FRAND obligations—that was necessary to make its concerted action lawful under the antitrust laws in the first place.”
Qualcomm’s Licensing Behavior and Legal Positions Today Represent a Radical Shift
Amici also describe how, since a number of Qualcomm’s primary lines of business collapsed in the late 1990s (e.g., mobile phones and telecom equipment), the company turned toward squeezing as much profit out of its patent portfolio as possible. Patent licensing went from a mere 32% of the company’s profits in 1999 to 82% by 2016. A core part of that strategy was a dramatic change — Qualcomm’s decision to begin reneging on its FRAND commitments.
- Qualcomm previously honored their FRAND commitment. Forty legal and economic scholars joined a brief that notes, Qualcomm “voluntarily promised two industry-wide SSOs that it would license its SEPs to ‘all applicants’ on FRAND terms. And for a time, Qualcomm did just that, licensing all comers no matter where they appeared in the distribution chain. Yet Qualcomm subsequently changed course and now refuses to license rival chipmakers.”
- Qualcomm even litigated against another SEP holder for refusing a license to Qualcomm. In the same brief above, the scholars explain that “as recently as 2009, [Qualcomm] sued a rival chipmaker in federal court, claiming that the rival chipmaker had breached its FRAND promise by refusing to grant Appellant a license to the rival’s SEPs for Appellant’s own chips.”
Qualcomm Has No Refuge in Patent or Antitrust Law for “Refusals to Deal”
The core of Qualcomm’s defense is that the courts have found that patent holders have no obligation to license their patented technology to competitors let alone under reasonable terms, and therefore its refusal to license does not violate the standards set out in Trinko or Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).
As numerous amici explain, the problem with their argument is that Qualcomm voluntarily committed to license the patents at issue—which are essential to key wireless standards—under FRAND terms. As discussed above, those FRAND commitments are critical to ensuring the standard setting process is legal under antitrust law. Moreover, if Qualcomm had refused to license its patents under FRAND terms at the outset, the standards-setting organizations would have simply used different technology.
The amicus from the 40 legal and economic scholars demonstrates “the policy concerns that drove the Supreme Court’s reluctance to hold refusals to deal unlawful do not apply here.” They argue requiring Qualcomm to honor its voluntary FRAND commitments does not trigger the previously identified policy concerns because:
- The “free-rider” problem is not an issue with SEPs. “Industry standards like those at issue here are intended to be available to all firms—competitors and non-competitors alike—to spur widespread adoption of, and facilitate competition in the development and sale of products implementing, the standards.”
- Courts will not be in the role of “central planner.” “A court need only order licensing on FRAND terms, leaving Qualcomm and its competitors to negotiate rates in the shadow of the law.”
- There is no undue risk of collusion. “The parties need only discuss the royalty. Unlike Aspen Skiing . . . the resulting interactions here would not require joint marketing or sale of consumer-facing products…nor would they require coordination regarding the introduction of a new competitor-facing service…or any discussion of output levels or chipset design.”
- It will not compromise Qualcomm’s incentives to innovate. Qualcomm “will continue to earn royalties and chipset profits in return for its investments in developing patented technology…Condemning a refusal to deal in this context merely holds Qualcomm to a bargain that it willingly struck in exchange for SSOs’ adoption of its technology into industry standards, and in no way diminishes its right to obtain a reasonable royalty for others’ use of its SEPs.”
Other amici also addressed why Qualcomm’s defenses simply do not apply in this case:
- Chip manufacturer MediaTek argued, “this case is not a referendum on the ‘outer boundary’ of refusals to deal under the Sherman Act.” “Qualcomm and its amici point to no authority suggesting that Qualcomm’s refusal to honor a voluntarily assumed obligation to offer licenses — an obligation accepted in a standard-setting process designed to ensure competition — is entitled to immunity, with or without the compounding impact of Qualcomm’s supply threats, discriminatory royalties, exclusionary royalty rates and caps, exclusive dealing, and gag clauses.”
- The Open Markets Institute argues this is actually a form of “illegal monopolization.” “A monopoly’s repudiation of its commitment to license standard essential patents on FRAND terms following the adoption and commercialization of a technical standard is a species of deception. In addition to constituting an improper refusal to deal as the district court concluded, such conduct amounts to a bait and switch—inducing the standard setting body’s reliance by making a promise and later reneging on this promise.”
- The American Antitrust Institute and Public Knowledge characterize this as a “monopoly maintenance” case. Their brief challenges Qualcomm’s defense by noting that “[n]otwithstanding that an unreasonable, supra-FRAND royalty is part of the mechanism Qualcomm used to exclude competitors, this is a monopoly-maintenance case, not a rate-regulation case.”
Amici also illustrate that the anticompetitive effects of Qualcomm’s scheme go well beyond the smartphone market and are devastating for small businesses:
- SEP-holders’ refusal to license to auto suppliers is stifling innovation. SEP holders have already exported Qualcomm’s strategies to the auto industry. As Continental and Denso, two of the world’s largest auto suppliers, argue in their brief, “SEP-holders’ various refusals to license cellular technologies on FRAND terms to upstream manufacturers—who are responsible for actually producing most automotive components, and in particular those that actually practice the SEPs—carries harmful consequences for consumers, namely higher prices and a slower pace of innovation (particularly with emerging 5G technology) . . . As amici can attest firsthand, it is the SEP-holders’ refusal to license their technologies to upstream manufacturers on FRAND terms that is stifling innovation.”
- Automakers are the bellwether for the rest of the economy. The joint brief from the Global Automakers and Alliance of Automotive Manufacturers argues that, like cellphone OEMs, automakers are “particularly vulnerable to anticompetitive practices like the refusal to offer exhaustive FRAND licenses to industry suppliers . . . the auto industry is a bellwether for the rest of the economy. Within the next decade, billions of consumer items will connect to the ‘Internet of Things.’ They too will need standardized network components. And therefore, they too will be susceptible to the same type of abuse.”
- Qualcomm’s refusal to license to all adds inefficiency and harms small innovators. The High Tech Innovators Alliance (HTIA) argued that “HTIA member companies have direct experience with negotiating SEP licenses in the context of wireless standards like LTE and Wi-Fi, among numerous other standards. Even for our companies, each of which is large, sophisticated, and employs numerous lawyers with experience in intellectual property and licensing, it is far more efficient to rely on upstream suppliers of the components and subsystems we integrate to figure out what technical standards are implicated by the hardware and software, what SEP licenses are needed, and what the terms of those licenses should be.”
The Ninth Circuit will hear oral arguments in the appeals case on February 13. A decision on the appeal could take months, but as stated by the 14 amicus filers, whatever the ruling is it will have lasting effects on innovation beyond the smartphone market for years to come.