On Tuesday, the Ninth Circuit Court of Appeals ruled against the FTC in a much-anticipated decision concerning whether the telecommunications giant Qualcomm Incorporated violated Sections 1 and 2 of the Sherman Act. The company was accused of unreasonably restraining trade in and unlawfully monopolizing the code division multiple access (CDMA) and premium long-term evolution (LTE) cellular chip markets.
The panel vacated Judge Lucy Koh’s 2019 decision and reversed the “permanent, worldwide injunction prohibiting several of Qualcomm[’s] [] core business practices.”
From 2017, the FTC accused Qualcomm of leveraging its dominance as a cellular chip manufacturer to propound policies that harmed its competitors and entrenched its monopoly position. At the heart of the case was Qualcomm’s so-called “no license, no chips” policy, whereby it refused to sell chips to original equipment manufacturers (OEMs) unless they also agreed to pay for a separate patent license, usually a standard essential patent (SEP).
According to the FTC, Qualcomm also raked in unreasonably high royalties in violation of international standard-setting organizations’ requirement for patent holders to agree to license their SEPs on fair, reasonable, and nondiscriminatory (FRAND) terms. The FTC claimed this policy, coupled with others, edged out competition.
The appellate panel first examined the district court’s holding that Qualcomm had an antitrust duty to license its SEPs to direct competitors. The panel disputed the logic of the lower court’s finding and determined that Qualcomm had no antitrust duty to deal with competitors. The panel also declined to accept the FTC’s secondary argument “that even though Qualcomm was not subject to an antitrust duty to deal … Qualcomm nevertheless engaged in anticompetitive conduct in violation of § 2 of the Sherman Act.”
The appellate court then turned to the FTC’s contention that Qualcomm breached its contractual FRAND commitments, thereby harming the opportunities of its chip manufacturer competitors. The FTC failed to show anticompetitive harm under the rule of reason framework, citing no tangible examples of how Qualcomm’s behavior lessened competition itself.
In turn, the panel was less skeptical of Qualcomm’s procompetitive justifications for its licensing policy towards OEMs, which, the court wrote, “in any case, appear to be reasonable and consistent with current industry practice.” The panel articulated that if Qualcomm did indeed breach its FRAND commitments, “the remedy for such a breach was in contract or tort law.”
The panel then reviewed the core theory underpinning the district court’s holding, that Qualcomm’s imposition of an ‘anticompetitive surcharge’ on rival chip makers, via its licensing royalty rates, constituted Sherman Act violations. The Ninth Circuit attacked the lower court’s characterization of the issue, finding that its “theory fails to state a cogent theory of anticompetitive harm.” Instead, the panel held that Qualcomm’s patent-licensing royalties and “no license, no chips” policy were components of its business model that were “chip-supplier neutral,” and did not undercut competition in the relevant markets.
Finally, the panel addressed Qualcomm’s 2011 and 2013 agreements with Apple that the district court found to be exclusive deals that “foreclosed a ‘substantial share’ of the CDMA modem chip market.” These, the panel held, did not harm competition in that market.
In addition to exonerating Qualcomm, the disposition also vindicates the Department of Justice, which sharply disagreed with the FTC on the matter. Justice Department attorneys appeared at oral arguments earlier this year, backing Qualcomm’s appeal.
The FTC is represented by its lawyers. Qualcomm is represented by Cravath, Swaine & Moore, Kellogg, Hansen, Todd, Figel & Frederick, Goldstein & Russell, Keker & Van Nest, Morgan, Lewis & Bockius, and Wilson Sonsini Goodrich & Rosati.
