Friday, 4 September 2020

Big Win for Qualcomm in the Ninth Circuit

 In a big win for Qualcomm, the Ninth Circuit Court of Appeals (Judge Callahan writing the opinion), in FTC v. Qualcomm, __ F.3d __ (9th Cir. August 11, 2020), found that Qualcomm had not violated competition law based on licensing practices, including refusal to deal and FRAND practices.  Notably, the Ninth Circuit overturned the District Court’s “permanent, worldwide injunction prohibiting Qualcomm’s core business practices.”  The District Court made five major findings:

1) Qualcomm's “no license, no chips” policy amounts to “anticompetitive conduct against OEMs” and an “anticompetitive practice[ ] in patent license negotiations”; (2) Qualcomm's refusal to license rival chipmakers violates both its FRAND commitments and an antitrust duty to deal under § 2 of the Sherman Act; (3) Qualcomm's “exclusive deals” with Apple “foreclosed a ‘substantial share’ of the modem chip market” in violation of both Sherman Act provisions; (4) Qualcomm's royalty rates are “unreasonably high” because they are improperly based on its market share and handset price instead of the value of its patents; and (5) Qualcomm's royalties, in conjunction with its “no license, no chips” policy, “impose an artificial and anticompetitive surcharge” on its rivals’ sales, “increas[ing] the effective price of rivals’ modem chips” and resulting in anticompetitive exclusivity.

One important problem with the District Court’s analysis, according to the Ninth Circuit, was the District Court’s failure “to distinguish between Qualcomm’s licensing practices (which primarily impacted OEMs) and its practices relating to modem chip sales (the relevant antitrust market).”  The Ninth Circuit rejected the District Court’s reliance on the Aspen exception to the general concept that refusals to deal are not antitrust violations and quoted a prior case: “’Competitors are not required to engage in a lovefest.’”  The Ninth Circuit also found that Qualcomm’s conduct in breaching its SSO agreements did not arise to an antitrust violation.  Notably, the Ninth Circuit stated:

Finally, we note the persuasive policy arguments of several academics and practitioners with significant experience in SSOs, FRAND, and antitrust enforcement, who have expressed caution about using the antitrust laws to remedy what are essentially contractual disputes between private parties engaged in the pursuit of technological innovation. The Honorable Paul R. Michel, retired Chief Judge of the Court of Appeals for the Federal Circuit, argues that it would be a mistake to use “the hammer of antitrust law ... to resolve FRAND disputes when more precise scalpels of contract and patent law are effective.” Amicus Curiae Br. of The Honorable Paul R. Michel (Ret.) at 23. Judge Michel notes that “[w]hile 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 FRAND agreements.” Id. at 24. Echoing this sentiment, a former FTC Commissioner, Joshua Wright, argues that “the antitrust laws are not well suited to govern contract disputes between private parties in light of remedies available under contract or patent law,” and that “imposing antitrust remedies in pure contract disputes can have harmful effects in terms of dampening incentives to participate in standard-setting bodies and to commercialize innovation.” Wright, supra note 1, at 808–09.

The Ninth Circuit rejected the District Court’s determination that Qualcomm engaged in anticompetitive conduct by charging “unreasonably high royalty rates” among other things.  The Ninth Circuit stated:

We hold that the district court's “anticompetitive surcharge” theory fails to state a cogent theory of anticompetitive harm. Instead, it is premised on a misunderstanding of Federal Circuit law pertaining to the calculation of patent damages, it incorrectly conflates antitrust liability and patent law liability, and it improperly considers “anticompetitive harms to OEMs” that fall outside the relevant antitrust markets. Furthermore, even if we were to accept the district court's conclusion that Qualcomm's royalty rates are unreasonable, we conclude that the district court's surcharging theory still fails as a matter of law and logic.

On the Federal Circuit’s damages law, the Ninth Circuit states:

Even if we accept that the modem chip in a cellphone is the cellphone's SSPPU, the district court's analysis is still fundamentally flawed. No court has held that the SSPPU concept is a per se rule for “reasonable royalty” calculations; instead, the concept is used as a tool in jury cases to minimize potential jury confusion when the jury is weighing complex expert testimony about patent damages. See Ericsson, 773 F.3d at 1226(explaining that the SSPPU concept is a flexible evidentiary tool, not an unyielding substantive element of patent damages law); VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1327–28 (Fed. Cir. 2014) (same); LaserDynamics, 694 F.3d at 68 (same). As this case involved a bench trial, the potential for jury confusion was absent.

Moreover, the Federal Circuit rejected the premise of the district court's determination: that the SSPPU concept is required when calculating patent damages. See Commonwealth Sci. & Indus. Research Org. v. Cisco Sys., Inc., 809 F.3d 1295, 1303 (Fed. Cir. 2015) (“The rule Cisco advances—which would require all damages models to begin with the [SSPPU]—is untenable [and] conflicts with our prior approvals of a methodology that values the asserted patent based on comparable licenses.”) (citations omitted). The Federal Circuit has also observed that “ ‘[s]ophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products’ sales price,’ and thus ‘[t]here is nothing inherently wrong with using the market value of the entire product.’ ” Exmark Mfg. Co. Inc. v. Briggs & Stratton Power Prods. Grp., LLC, 879 F.3d 1332, 1349 (Fed. Cir. 2018) (some alterations in original) (quoting Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1339 (Fed. Cir. 2009)). These statements of law and current practice run counter to the district court's conclusion that patent royalties cannot be based on total handset price and that doing so exposes a firm to potential antitrust liability.

On Qualcomm’s “no license, no chips” policy, the Ninth Circuit stated:

This is not to say that Qualcomm's “no license, no chips” policy is not “unique in the industry” (it is), or that the policy is not designed to maximize Qualcomm's profits (Qualcomm has admitted as much). But profit-seeking behavior alone is insufficient to establish antitrust liability. As the Supreme Court stated in Trinko, the opportunity to charge monopoly prices “is an important element of the free-market system” and “is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth.” Trinko, 540 U.S. at 407, 124 S.Ct. 872. The record suggests that this case is more like Am. Express, where a company's novel business practice at first appeared to be anticompetitive, but in fact was disruptive in a manner that was beneficial to consumers in the long run because it forced rival credit card companies to adapt and innovate. 138 S. Ct. at 2290. Similarly here, companies like Nokia and Ericsson are now “[f]ollowing Qualcomm's lead” with respect to OEM-level licensing, and beginning in 2015 rival chipmakers began to successfully compete against Qualcomm in the modem chip markets. We decline to ascribe antitrust liability in these dynamic and rapidly changing technology markets without clearer proof of anticompetitive effect.

On the alleged anticompetitive nature of Qualcomm’s dealings with Apple, the Ninth Circuit stated:

Even if we were to agree with the district court that the Apple agreements were exclusive dealing contracts that substantially foreclosed competition in the relevant antitrust markets, it is undisputed that these agreements do not pose any current or future threat of anticompetitive harm. Despite the “clawback provisions,” Apple itself terminated the agreements in 2015—two years before the FTC filed its action. Thus, while we agree with the district court that these were structured more like exclusive dealing contracts than volume discount contracts, they do not warrant the issuance of an injunction.

Finally, the Ninth Circuit nicely sums up its reasoning and approach:

Anticompetitive behavior is illegal under federal antitrust law. Hypercompetitive behavior is not. Qualcomm has exercised market dominance in the 3G and 4G cellular modem chip markets for many years, and its business practices have played a powerful and disruptive role in those markets, as well as in the broader cellular services and technology markets. The company has asserted its economic muscle “with vigor, imagination, devotion, and ingenuity.” Topco Assocs., 405 U.S. at 610, 92 S.Ct. 1126. It has also “acted with sharp elbows—as businesses often do.” Tension Envelope Corp. v. JBM Envelope Co., 876 F.3d 1112, 1122 (8th Cir. 2017). Our job is not to condone or punish Qualcomm for its success, but rather to assess whether the FTC has met its burden under the rule of reason to show that Qualcomm's practices have crossed the line to “conduct which unfairly tends to destroy competition itself.” Spectrum Sports, 506 U.S. at 458, 113 S.Ct. 884. We conclude that the FTC has not met its burden.

First, Qualcomm's practice of licensing its SEPs exclusively at the OEM level does not amount to anticompetitive conduct in violation of § 2, as Qualcomm is under no antitrust duty to license rival chip suppliers. To the extent Qualcomm has breached any of its FRAND commitments, a conclusion we need not and do not reach, the remedy for such a breach lies in contract and patent law. Second, Qualcomm's patent-licensing royalties and “no license, no chips” policy do not impose an anticompetitive surcharge on rivals’ modem chip sales. Instead, these aspects of Qualcomm's business model are “chip-supplier neutral” and do not undermine competition in the relevant antitrust markets. Third, Qualcomm's 2011 and 2013 agreements with Apple have not had the actual or practical effect of substantially foreclosing competition in the CDMA modem chip market. Furthermore, because these agreements were terminated years ago by Apple itself, there is nothing to be enjoined.

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