“By imposing antitrust law in a context involving fair, reasonable and non-discriminatory (FRAND) obligations, the FTC risks harming industries which require the adoption of standards.”
On July 15, retired Federal Circuit Chief Judge Paul Michel filed an amicus brief in Qualcomm’s appeal of the Federal Trade Commission’s (FTC) antitrust case to the U.S. Court of Appeals for the Ninth Circuit. The following day, the United States government filed a statement of interest with the appellate court as well. Both parties filed in support of Qualcomm’s request for a partial stay of an injunction handed down this May in the Northern District of California, which requires Qualcomm to license its standard essential patents (SEPs) to modem-chip suppliers after determining that the company’s “no license, no chips” policy violated U.S. antitrust law.
In addition to Judge Michel’s brief, the United States government also filed a brief in support of Qualcomm, with representatives of the Department of Justice, Department of Energy and even representatives of the Federal Trade Commission siding with Qualcomm over the FTC and against Judge Koh’s decision. Moreover, Ericsson similarly filed a brief support Qualcomm, saying that the public will not benefit from the injunction and will, in fact, be harmed because this is a critical moment for the deployment and future of 5G technology.
The issues presented by FTC v. Qualcomm, as well as the broader issues of the applicability of relying on antitrust laws to regulate patent owners — particularly patent owners of standard essential patents — will be the topic of the IPWatchdog hosted Standard Essential Patents: Striking a Balance Between Competition and Innovation, which will take place on September 10-11.
Judge Michel: Qualcomm Injunction is Not in the Public Interest
The former Chief Judge of the Federal Circuit argues that the public interest strongly favors granting Qualcomm’s motion for a partial stay. To start, Judge Michel argues that the public interest favors a strong patent system with reliable and exclusive rights for inventors. When respect for an inventor’s right to exclude others “are supplanted by novel and questionable theories of antitrust law,” private firms lose confidence in their licensing activities and the public suffers from reduced levels of innovation. By enjoining Qualcomm from pursuing licensing activities it had employed for many years, Judge Michel argues that this upsets licensing practices that are settled in the semiconductor industry. As Qualcomm’s motion notes, major licensors of cellular patents license to original equipment manufacturers (OEMs) and not competing chipmakers, which Qualcomm is required to do under the injunction. By licensing to OEMs, Qualcomm and other rational marketplace participants realize the true value of their patented technologies and address issues with the patent exhaustion doctrine which may reduce that value if patents are licensed upstream in the supply chain.
The injunction also requires Qualcomm to renegotiate the terms of licensing agreements made under its former “no license, no chips” policy, creating unpredictability in the patent marketplace that “is plainly against the public interest.” However, the FTC’s entire enforcement action is predicated on what Judge Michel argues is a controversial interpretation of antitrust law. While many scholars understand that antitrust and patent laws are largely complementary to each other, the FTC didn’t seek redress for obvious patent misuse but rather the renegotiation of private agreements between “extremely sophisticated, highly successful, cash-rich companies who understand the value of patented technology.” By imposing antitrust law in a context involving fair, reasonable and non-discriminatory (FRAND) obligations, the FTC risks harming industries which require the adoption of standards.
Economic Disruptions Caused by Fictional “Patent Holdups”
Judge Michel also writes against the notion that “patent holdups” have required the use of antitrust laws in cases such as this, citing to published legal research demonstrating that no real issue exists on that point. This renders as flawed the FTC’s argument that Qualcomm, the world’s leading modem chip innovator, has enabled an anticompetitive patent holdup.
The economic and legal disruptions that would likely be created by the injunction against Qualcomm further tilt the public interest towards a stay. While Qualcomm is a leading innovator in its field, it faces growing competition from Chinese entities such as Huawei which are being aided by the Chinese government’s Made in China 2025 industrial policy to attain international tech dominance.
“The concern with China rests not on xenophobia but on the rational objective of maintaining the United States’ important global leadership role in innovation, as well as protecting our national security.”
The FTC’s decision to pursue an enforcement action in this case was contentious from the start, as Judge Michel notes, supported by the rare written dissent from FTC Commissioner Maureen Ohlhausen. Further, the Trump Administration’s blocking of Broadcom’s attempted takeover of Qualcomm in March 2018 was based upon the need to maintain leadership in 5G development over China. Conflicting views on antitrust regulations in the patent context between the FTC and the U.S. Department of Justice also point to the need to exercise extreme caution before imposing a remedy that might harm licensing firms like Qualcomm.
U.S. Government: Diminishing Qualcomm Leadership Poses a National Security Threat
The United States’ brief also stresses the harms to competition and national security created by the district court’s ruling, although it focuses a bit more on contracts that Qualcomm has with federal government agencies. However, the U.S. agrees that even a short-term reduction in Qualcomm’s leadership could enable foreign firms to increase their influence, especially in the developing field of 5G networks, in a way that threatens national security.
The U.S. argues that Qualcomm has a likelihood of succeeding in its appeal on the district court’s ruling regarding the company’s antitrust liability, mainly because central aspects of the lower court’s analysis contradict established antitrust principles. First, although U.S. District Judge Lucy Koh determined that Qualcomm’s licensing activities resulted in “unreasonably high royalty rates,” charging high prices is not itself anticompetitive. Second, the district court was wrong to impose a duty to deal upon Qualcomm, which contradicts the U.S. Supreme Court’s admonition in Verizon Communications v. Law Offices of Curtis V. Trinko against exceptions to the rule that antitrust law doesn’t impose such a duty. The lower court found that Qualcomm’s FRAND obligations with standard-setting organizations (SSOs) indicated that Qualcomm had volunteered to license rival chipmakers. However, “Qualcomm’s compliance with its legally binding FRAND obligations does not signify a voluntary course of dealing.” As well, the ruling also erroneously found that Qualcomm forsook short-term benefits seeking higher profits later through the exclusion of competition. Qualcomm’s practice of licensing to OEMs was a rational choice to realize greater profits, increasing short-term benefits for the company.
Anticompetitive Malice, or Just Business as Usual?
The Northern California district court ruling was also wrong to find that Qualcomm acted out of anticompetitive malice, says the U.S. Government’s brief:
“Antitrust law does not accept intent as a substitute for evidence of anticompetitive effects… That is for good reason: Mistaking legitimate business goals for anticompetitive ones risks chilling the very competition that antitrust law stands to protect.”
The district court failed to distinguish the difference between Qualcomm’s desire for profit and any anticompetitive intent that it may have had. The U.S. argues that other district courts have ruled that licensing directly to OEMs complied with FRAND commitments, citing to an Eastern District of Texas case involving Ericsson’s 4G network patent licensing activities decided this May.
Along with liability, the U.S. brief contends that the district court’s remedy against Qualcomm should be vacated because it is overly broad and not justified by antitrust law. The court converted a contractual agreement between Qualcomm and SSOs into a compulsory license, threatening the rewards that can be expected through FRAND licensing and undermining incentives for innovation in technologies that use standards. The district court also didn’t hold an evidentiary hearing to consider the consequences of imposing its injunction, which governs not only technologies involved in the trial but also innovations in other markets which weren’t considered in the liability trial. Imposing this injunction on Qualcomm can influence the licensing behaviors of many SEP owners who only license their technologies to OEMs.
In discussing the public interest in this case, the U.S. government notes that Qualcomm supplies mission-critical products to both the Department of Defense (DoD) and the Department of Energy (DoE). Depriving Qualcomm of substantial licensing revenue would negatively impact the company’s ability to fund research and development and deal direct harm to those DoD and DoE programs that rely on Qualcomm innovations.
Ericsson Amicus Supporting Qualcomm
If Qualcomm is not able to achieve a stay of Judge Koh’s injunction pending appeal, according to Ericsson licensees, customers and consumers will not be able to properly order their business activities and relationships. Ericsson is precisely correct. What are those doing business with Qualcomm to do when interpreting a draconian injunction that everyone other than a handful of people at the FTC and Judge Koh seem to understand is a substantial and troubling over-reach? Indeed, Judge Koh has inserted herself into the marketplace in a manner that should be quite troubling for all patent owners, which is precisely why the United States, Judge Michel and Ericsson have all taken the side of Qualcomm.
In summarizing their beliefs, Ericsson explained:
The district court’s order requiring Qualcomm to license the standard essential patents (SEPs) from its cellular modem chips to other modem-chip suppliers during the pendency of its appeal, and to re-negotiate terms for these licenses with existing customers, threatens to disrupt the stability and predictability necessary to permit 5G investments to go forward. Requiring Qualcomm to change its licensing practices in a fundamental way while the appeal is pending will create uncertainty at a time when the industry is already undergoing seismic changes as it shifts to new wireless standards… Because the district court’s order threatens to disrupt the cellular communications industry at a particularly sensitive time, it risks significant harm to the public interest and consumer welfare.
Ericsson did not say it quite as directly as they could have: Qualcomm is the major U.S. corporation engaged in the research and development of 5G technologies. With Qualcomm caught up dealing with this draconian injunction it threatens the deployment of 5G technologies that will benefit the entire United States and the entire world. The truth is the service providers that run commercials touting 5G and their deployment of 5G technologies are providing the last mile, not the first 999 miles. Of course, the last mile to the consumer is critical, but without those remaining actively engaged who are responsible for the first 999 miles relating to the innovations of 5G, things will not go smoothly, and will inevitably be postponed and take longer to achieve. Who does that help? Nobody.