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FTC Sues Qualcomm for Using Anticompetitive Tactics to Maintain Chip Monopoly

Last week, the FTC filed a complaint against Qualcomm, a manufacturer of baseband processors, which are chips included in cell phones and other products with cellular connectivity that allow the devices to connect to cell networks.  Qualcomm holds patents to technologies incorporated in the standards that allow all cell phones to communicate with one another, referred to as standard-essential patents or SEPs.  Qualcomm’s patents mostly relate to older, 3G-CDMA cellular technologies, which are still necessary for modern cell phones to work as consumers expect.  As a condition of declaring its patents standard-essential, Qualcomm committed to the telecommunications industry’s standard-setting organizations that it would license its patents on a “fair, reasonable, and non-discriminatory” (FRAND) basis.

The FTC contends that Qualcomm has violated its FRAND licensing obligations and harmed competition through several interrelated policies.  First, it refuses to supply the chips it manufactures unless its customers agree to license its SEPs on allegedly onerous terms, including paying licensing royalties to Qualcomm on other products made by the customers that do not incorporate any Qualcomm chips.  The FTC refers to this as the “no license-no chips” policy.  It also accuses Qualcomm of refusing to license its patents to competitors on a FRAND basis.  Finally, the FTC alleges that Qualcomm made a series of anticompetitive agreements with Apple, one of the largest cell phone manufacturers, pursuant to which it rebated some of its licensing charges to Apple in exchange for Apple’s exclusive use of Qualcomm processors in new iPhone and iPad models and an agreement that Apple would not sue Qualcomm or induce others to sue for alleged violations of Qualcomm’s FRAND obligations. Apparently emboldened by the FTC’s action, in spite of its contract Apple filed suit three days later to recover the alleged supra-competitive payments described in the FTC’s complaint. 

The FTC alleges that Qualcomm has hurt competition by charging supra-competitive prices for its patents and weakening its competitors by collecting a “tax” on cell phone manufacturing using non-Qualcomm processors.  The FTC also accounts for why, if Qualcomm was indeed violating its FRAND commitments, other participants in the standard-setting organizations have not sued.  It avers that the “no license-no chips” policy eliminates the realistic possibility of bringing suit, as any challenger would be shut out of the market until the suit is resolved.       

Qualcomm has already been a defendant in a similar case, Broadcom Corp. v. Qualcomm, Inc., 501 F. 3d 297 (3d Cir. 2007), in which the Third Circuit held that “a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms” was actionable anticompetitive conduct.  However, a case decided in the D.C. Circuit a year later, Rambus v. FTC, 522 F.3d 456 (D.C. Cir. 2008), indicates that the FTC’s theory may be an uphill battle.  The Rambus court held that, to prove anticompetitive conduct, a plaintiff must show that but for the defendant’s misrepresentations the patent would not have been included in the standard. 

The suit may also indicate a renewed focus on the antitrust effect of intellectual property licensing.  On January 12, 2017, the Department of Justice and the FTC issued updated Antitrust Guidelines for the Licensing of Intellectual Property, the first update to its intellectual property licensing guidance since 1995.  Of course, the antitrust priorities of the new administration remain to be seen, but practitioners should be on the lookout for increased enforcement in the realm of patent licensing particularly in the SEP area.