A recent Ninth Circuit Court of Appeals’ decision to reverse and vacate a lower court decision in FTC v. Qualcomm was a clear win for Qualcomm in its ongoing antitrust troubles, but it came at the expense of America’s innovation ecosystem and the entrepreneurs that fuel it. In the decision, the court completely disregarded the role standards like LTE and Wi-Fi play in facilitating competition and innovation, as well as the impact of Qualcomm’s anticompetitive behavior on entrepreneurs and small businesses.
In summarizing what it considered to be “persuasive policy arguments” against applying antitrust law to the abuse of standard-essential patents (SEPs), the court turned to a quote from retired judge Paul Michel. The key quotes from Judge Michel’s amicus brief cited by the Court in its decision argued that “While antitrust policy has its place as a policy lever to enhance market competition, the rules of contract and patent law are better equipped to handle commercial disputes between the world’s most sophisticated companies about fair, reasonable, and non-discriminatory (FRAND) agreements.”
What Judge Michel and, in turn, the Court, doesn’t seem to grasp is that these are not just “commercial disputes” between firms. The vast majority of companies that rely on SEP holders to license their patents under FRAND terms are startups and small businesses, not “the world’s most sophisticated companies.” In fact, the Court never even considers, let alone addresses, the impact of Qualcomm’s so-called “hypercompetitive” SEP licensing scheme on the heart of America’s innovation ecosystem: small companies and entrepreneurs.
These disastrous misunderstandings stem from the Court trying to assess the antitrust implications of breaking FRAND agreements without taking into account their purpose in the standard-setting process or the role standards play in competition.
Cooperative standard setting is critical to interoperability, competition, and innovation in today’s information technology and telecommunications markets. Standards enable companies around the world to innovate and compete while maintaining compatibility with the same wireless infrastructure. International wireless communications standards, like LTE and Wi-Fi, turbocharge the development of a market by giving industry and consumers the confidence to invest in equipment that implements the standard and entrepreneurs confidence to invest in innovation that builds on top of the standard.
That’s why companies like Qualcomm both fight to get their patented technologies included in widely adopted international standards and voluntarily agree to license those patents under FRAND terms. Inclusion in the standard is a guarantee of a massive market for licensees and incredible opportunities for growth. From a business perspective, agreeing to FRAND terms is like agreeing to lower wholesale prices in order for Walmart to carry your product in every store. The volume makes it worth it.
Moreover, the FRAND agreement is a critical tool used by standard setting organizations to ensure the process enhances competition and does not run afoul of antitrust laws. Generally, a collaboration between competitors to choose market winners or set prices raises significant questions for competition regulators. Royalty free and FRAND licensing requirements were created by standards bodies to avoid potential antitrust scrutiny by limiting the market power and the potential for abuse by those involved in developing a standard. This is why the American National Standards Institute (ANSI) will not accredit any standards developing organization (SDO) that does not require standard-essential patent holders to provide licensing terms at least as favorable as FRAND.
The most important beneficiary of open interoperability standards and FRAND licensing requirements are the entrepreneurs and small businesses that have long fueled America’s innovation engine. They don’t have giant patent portfolios, market power, or the resources to hire legions of lawyers and spend years battling SEP abusers in civil court. Without some level of certainty about their ability to obtain licenses—let alone what they may cost—entrepreneurs will have trouble justifying the pursuit of any innovation that uses a standard and will certainly struggle to raise money from investors for such innovation. And Qualcomm’s vague and toothless promise simply “not to sue” smaller companies and component makers is no substitute for a license.
The adoption of 5G technology is expected to open unprecedented opportunities for innovation and economic growth as we move toward a world where everything from cars to tractors to buildings will connect to wireless networks. At every stage of the information technology revolution, America has been the undisputed leader because of the unparalleled entrepreneurial innovation ecosystem that we have built. If 5G SEP holders are able to arbitrarily refuse licenses to smaller firms, it would cripple America’s innovation ecosystem at the start of the next big wave of innovation. As economic tensions continue to rise with China, Chinese-based companies could use their 5G SEPs as international economic weapons to thwart U.S. competitors.
The 5G standard is supposed to be a platform for competition, innovation, and entrepreneurship, but if the Ninth Circuit decision is allowed to stand, it will become a chokepoint for snuffing out competitors and demanding monopoly rents. Open standards and FRAND licensing commitments are fundamental to competition in the modern economy, and the idea that they aren’t a subject for antitrust enforcement is patently absurd.