While big press outlets focus on major investigations into Google and Facebook, a more consequential and farther-reaching case is about to reach a critical stage. In a briefing hosted by ACT | The App Association last week, congressional staff heard from a variety of stakeholders who cautioned that a Qualcomm victory in the Federal Trade Commission v. Qualcomm case could significantly harm not just the market for handsets, but any industry vertical impacted by the rise of the internet of things (IoT); consumers; and national security. The Federal Trade Commission (FTC or Commission) brought an antitrust complaint against Qualcomm for anticompetitive behavior, including its licensing activities, which extracted exorbitant license fees for its standard-essential patents (SEPs). The Commission won its case in federal district court because the evidence it presented was overwhelming: Qualcomm had been illegally abusing its market dominance through, among other activities, refusing to license its SEPs to rival chipmakers and then leveraging its dominant position as a manufacturer of baseband chipsets to extract supracompetitive license fees from smartphone makers. The case is on appeal with the 9th Circuit, where the court has heard a diverse range of amicus brief filers in favor of affirming the FTC’s victory, including the panelists at our briefing. With oral arguments taking place next Thursday, the briefing offered a well-timed primer on what’s at stake should the court find in favor of Qualcomm’s appeal.
Morgan Reed, President, ACT | The App Association – Morgan moderated the panel and opened the discussion with a focus on standards. The case, he explained, involves licensing activity around not just regular patents, but SEPs. We don’t have Microsoft WiFi or Google WiFi, he explained, because WiFi is a standard comprised of technologies volunteered by several different companies and organizations. Similarly, 3G, 4G, and 5G are wireless open standards, which do not belong to a single company. The companies who volunteer their patented technologies to be included as essential to those standards agree to license them on terms that are fair, reasonable, and non-discriminatory (FRAND). Why? Because manufacturers relying on the standards have no choice but to take a license on any patents that are essential to them. As a corollary, although the SEP owner gives up some of its unalloyed right to exclude others from its technologies, it is guaranteed license fees from any innovator making products that read on the standard. In the FTC’s enforcement case, Morgan explained, Qualcomm was shown to have refused to license its SEPs to competitor chipmakers, a violation of its FRAND commitments. This was a key part of its playbook to eliminate competitors and charge supracompetitive license fees. Small IoT device makers in the App Association’s membership are rightfully worried that they will be hit with a SEP license demand from an aggressive SEP owner. See the App Association’s amicus brief here.
Jay Jurata, Antitrust and Competition Group leader, Orrick, and Counsel for Continental Automotive Systems, Inc. (Continental) – Jay filed a brief on behalf of two auto industry suppliers, Continental and Denso Corporation. What does the FTC v. Qualcomm case have to do with auto suppliers? Jay explained that SEP owners are starting to take a page from Qualcomm’s playbook in the auto industry, refusing to license to competitor component makers, while looking to license primarily to the downstream automakers at an elevated license fee. The practices, he warned, are not limited to the market for smartphones—they’re migrating to suppliers of auto manufacturers. If Qualcomm successfully convinces the 9th Circuit to overturn the decision against it for engaging in those anticompetitive practices, Jay said, it will incent other SEP owners to do the same thing to automakers. Jay concluded by noting that the most serious damage resulting from Qualcomm’s conduct will be to innovation itself, which is an unfortunately inexorable consequence of a lack of competition in tech-driven markets.
Norberto Salinas, Senior Counsel & Director of Government Relations, Intel Corporation – Norberto explained that Intel—which has over 50,000 employees in the United States—filed an amicus brief in favor of the FTC in part because it agrees with the U.S. District Court’s findings that Qualcomm’s conduct “unfairly tends to destroy competition itself.” Intel suffered the brunt of Qualcomm’s anticompetitive behavior, as it was denied opportunities in the modem market, prevented from making sales to customers, and forced to sell at prices artificially skewed by Qualcomm. Intel is also a SEP owner, Norberto said, but licenses to competitor chipmakers in accordance with the law. Due to the sum of Qualcomm’s efforts to ensure smartphone makers and suppliers only buy chipsets from Qualcomm, Intel exited the premium modem chip market, leaving only a single 5G chipmaker in that market: Qualcomm. However, Norberto said, Intel is still a 5G chip supplier in other IoT markets, emphasizing that those markets remain competitive. If the injunction against Qualcomm engaging in anticompetitive behavior is overturned, Norberto said, the competitiveness of all the other IoT markets could be is in jeopardy as Qualcomm or others might be encouraged to apply Qualcomm’s licensing practices more broadly. Fair competition in the wireless technology market is critical given its importance to the future of connected computing, including the revolutionary promise of 5G.
Charles Duan, Director, Technology & Innovation Policy, R Street Institute – Charles gave an overview of R Street Institute’s brief, which pushed back on Qualcomm’s recent lobbying offensive to undo the FTC victory on national security grounds. Despite its claims, Charles explained, a Qualcomm victory would seriously harm our national security. Just as former Department of Homeland Security (DHS) Secretary Michael Chertoff recently argued, suspending competition law to allow Qualcomm to dispose of competitors puts the nation at greater risk by forcing us to rely on a single supplier of critical communications components. Charles pointed out that if Qualcomm is the dominant seller of baseband chipsets and there is a failure in the supply chain, manufacturers have no viable alternative. Charles highlighted the risks to cybersecurity as well, noting that having multiple software competitors in a given market creates competitive pressures to address vulnerabilities. These pressures are not present with a monopoly. Charles concluded that the absence of competition creates national security risks, but also separate cybersecurity risks, both of which weigh against Qualcomm’s pleas for leniency in the name of national security.
Josh Laundau, Patent Counsel, Computer & Communications Industry Association (CCIA) – Josh explained that CCIA’s members are concerned with Qualcomm’s anticompetitive conduct. He underscored that when SEP owners decide to volunteer their patents to be included as essential to a standard, they are making a conscious decision to provide access to those patents to any innovator creating a device that reads on the standard. He also reminded the audience that the U.S. Supreme Court decision in the Lexmark case held that when a manufactured item is sold to a legitimate buyer, the buyer has licenses to the patented technologies that comprise the item. Qualcomm has been trying to get around the Lexmark decision, Josh noted, by withholding their baseband chipsets (of which they are now the only U.S. supplier to other companies) from smartphone makers unless they agreed to also license certain of Qualcomm’s patents related and unrelated to the components at issue—even if the components were manufactured by another company. In other words, even though Qualcomm’s patents are exhausted with the sale of components to smartphone makers, Qualcomm still sought licenses from it. The sum of Qualcomm’s activities, Josh noted, amount to abusive anticompetitive conduct that harms consumers and reduces competition.
Before wrapping up, panelists answered questions from the audience. One audience member asked whether contract remedies are adequate, and if not, why? The panelists unanimously agreed that the contract at issue—the letter of agreement a SEP owner signs with a standards-setting organization (SSO)—deals with harm to the SSO itself. But an antitrust remedy is necessary where the harm of a SEP owner’s conduct is to competition itself and consumers, which in this case spreads to virtually all industry verticals. It is those harms that the FTC case addresses and illustrates why a Commission victory is so critical.