This article discusses the impact of a recent decision on by Judge Koh in the Northern District of California, on FTC v. Qualcomm Inc., No. 5:17-cv-00220 on the requirements for holders of standard-essential patents licensing under fair reasonable and non-discriminatory (FRAND) terms. The decision casts doubt on the practice by some holders of standard essential patents (“SEPs”) of refusing to provide patent licenses to their direct competitors and instead only offering licenses to downstream purchasers of their products.
In June 2017, the Federal Trade Commission sued Qualcomm alleging that Qualcomm’s licensing practices for SEPs it owned related to cellular communications standards violated Section 5 of the FTC Act and harmed competition in the provision of baseband processors and modem chips that enable cellular phones and other devices to communicate with a cellular network. According to the FTC’s complaint, Qualcomm is a dominant supplier of modem chips and owns multiple patents that it has declared essential to “widely adopted” cellular communication standards, including CDMA and LTE. Against this backdrop, the FTC alleged that Qualcomm refused to license its SEPs to other modem chip suppliers, which compete with Qualcomm, and maintained “exclusive dealing arrangements” with a downstream handset company, which the FTC considered an “important” cellular device manufacturer. In turn, Qualcomm purportedly instituted a “no-license, no-chip” policy under which it refused to sell modem chips to any cellular device manufacturer unless they accepted a license for Qualcomm’s SEPs. The FTC argued that Qualcomm’s licensing policies were designed to prevent other modem chip suppliers from entering the baseband processor market, which enabled the company to maintain its position as the leading supplier of modem chips and compel cellular device manufacturers and other customers to pay “excessive” royalties for its SEPs.
Qualcomm is a member of cellular standard-setting organizations (“SSOs”), including the Telecommunication Industry Association (“TIA”) and the Alliance for Telecommunication Industry Solutions (“ATIS”). For patents that a member declares to be essential to a standard endorsed by one of these SSOs, the member must disclose its SEPs and agree to license them on fair, reasonable, and non-discriminatory (“FRAND”) terms. The FTC views these commitments as necessary to address “patent holdup,” which describes a situation in which the SEP holder leverages the position it obtains through the standard setting process to demand royalty rates (or other non-FRAND terms) that the patent holder could not otherwise have obtained for its technology.
In August, the FTC moved for partial summary judgment on the issue of whether Qualcomm’s agreements with TIA and ATIS required it to license its LTE and CDMA SEPs to modem chip suppliers on FRAND terms. Qualcomm argued that no such requirement existed because modem chip suppliers do not “practice” the “whole” standard, which describes the operation of a complete mobile device in relation to the cellular network rather than the operation of a baseband processor standing alone. The FTC countered that by declaring its patents essential to LTE and CDMA standards, Qualcomm was required to license its SEPs to “all applicants” and that no language in the TIA or ATIS IPR policies limited this commitment to a particular type of product or partner occupying a particular level of the supply chain.
On November 6, 2018, the court granted the FTC’s motion and held that Qualcomm was required to license its SEPs to competing chip manufacturers on FRAND terms. The court emphasized that the Ninth Circuit had previously characterized FRAND promises as “sweeping” and established that patent holders “must license [their] SEPs to all applicants.” The court then found that the TIA and ATIS IPR policies, which were “mirrored” by Qualcomm’s own assurances to those SSOs, included non-discrimination provisions that prohibited Qualcomm from distinguishing between types of applicants—an interpretation that the court determined was further reinforced by the respective SSOs’ IPR guidelines.
In addition to reviewing the contractual language of Qualcomm’s agreements with the SSOs, the court highlighted that Qualcomm’s claim was contradicted by its own practices and the position the company had taken in prior litigation. Further, the court held that Qualcomm’s insistence that licensees must practice the “whole” standard to obtain FRAND terms “ma[de] little sense,” since the “practice or implementation of the standard is impossible without licenses to all incorporated SEP technology.” Finally, the court emphasized that TIA and ATIS IPR policies were drafted with the goal of encouraging competition and that non-discrimination serves to prevent the SEP holder from limiting competing implementations of the underlying components that are embedded into a given cellular communications standard (such as modem chips).
The Qualcomm decision follows the line of cases such as Microsoft v. Motorola, 696 F.3d 872 (9th Cir. 2012) and Ericsson v. D-Link Sys., Inc., 773 F.3d 1201 (Fed. Cir. 2014), holding that a SEP-holder’s FRAND commitments are binding and broad. But the Qualcomm decision is unique in that it appears to be the first decision to require a SEP holder to license its patented technology to its competitors, and not just its downstream customers, on FRAND terms. This decision casts doubt on the longstanding practice, common in industries such as the telecommunication and automotive industries, in which SEP holders seek to secure “FRAND” licenses with downstream companies that make finished products, while refusing to license (or licensing on non-FRAND terms) those same SEPs to their competitors or other companies further up the supply chain (such as component suppliers). The decision also emphasizes U.S. courts’ focus on the express language of SSOs’ IPR policies and the willingness to review the SSO guidelines in interpreting the agreements SEP holders enter into with SSOs. In this regard, the decision may bode well for SEP implementers, given the court’s broad understanding of what it means to “practice” a relevant standard and its view that SEP holders’ FRAND obligations extend to all potential licensees, irrespective of their position in the supply chain.
Going forward, the FTC will likely continue to scrutinize the licensing practices of SEP holders, especially in those situations where the standard has been adopted and the SEP holder has a dominant position in an adjacent market or is a supplier of a critical component necessary for other firms to compete in that market. Notably, Assistant Attorney General of the DOJ Antitrust Division Makan Delrahim has indicated that he believes “hold up” is not an antitrust problem, and the Division is planning to investigate competitive concerns that may arise when implementers interfere with the ability of patent holders to have their technology incorporated into a standard or to realize the full value of their innovation (which is often referred to “hold out”). FTC Chairman Joe Simons, on the other hand, has publicly stated that the FTC continues to recognize that “hold up” and “hold out” both can raise concerns and that the agency has no plans to focus on one set of issues at the expense of the other. The Qualcomm decision indicates the FTC will continue to examine patent “hold up” in the SSO context—particularly in light of the court’s extensive discussion about how promoting competing implementations, which is a stated purpose of many SSO IPR policies, informed its views of Qualcomm’s licensing obligations.