US Appeals Court Reverses Antitrust Ruling in FTC vs Qualcommby Andrei Frumusanu on August 11, 2020 6:00 PM EST
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It’s been over three years since the United States FTC had charged Qualcomm with antitrust violations over cellular modem patents and business practices. That suit ultimately received a ruling in May of 2019 against Qualcomm, resulting in an injunction for Qualcomm to renegotiate its licensing agreements with its customers. Qualcomm had subsequently appealed the ruling, putting the order on hold, and today, a bit over a year later, the Ninth Circuit Court of Appeals has finally issued an opinion, reversing and vacating the injunction, resulting in a win for Qualcomm at this moment in time.
The appeals court’s opinion centres around the FTC’s use of anti-trust law to hold Qualcomm accountable for some of its controversial business practices in how it handles licensing of its patent portfolio and its “no license, no chip” mode of operation. The opinion attacks the original judgment in that the arguments presented do not fall under the umbrella of anti-trust law violations, and instead it being a matter of contract and patent law.
The original charge revolved around Qualcomm’s supposed refusal to license cellular patents to competitor chip vendors, with the company countering this accusation that its patents only apply to OEM products, not the chips of components themselves:
“Qualcomm argues that it has no antitrust duty to deal with its rivals, and in any case OEM-level licensing is consistent with Qualcomm’s SSO commitments because only OEM products (i.e., cellphones, tablets, etc.) “practice” or “implement” the standards embodied in Qualcomm’s SEPs. Furthermore, Qualcomm argues that it substantially complies with the TIA and ATIS requirements by not asserting its patents against rival chipmakers.”
The appeals panel has upheld Qualcomm’s notion and point-of-view of the practice, stating that there is no antitrust law which prohibits the company from applying licensing arrangements in this way.
More precisely, the matter of Qualcomm collecting royalties from OEMs is said to be due a change in patent law, that forced the company to stop giving non-exhaustive licenses to other chip vendors:
“… Qualcomm claims that it never granted exhaustive licenses to rival chip suppliers. Instead, as the 1999 email suggests, it entered into “non-exhaustive, royalty-bearing agreements with chipmakers that explicitly did not grant rights to the chipmaker’s customers.” Appellant’s Opening Br. at 45. According to Qualcomm, it ceased this practice in response to developments in patent law’s exhaustion doctrine, see, e.g., Quanta Comput., 553 U.S. at 625 (noting that “the initial authorized sale of a patented item terminates all patent rights to that item”), which made it harder for Qualcomm to argue that it could provide “non-exhaustive” licenses in the form of royalty agreements.”
Because Qualcomm applies this practice equally between all OEMs, and there is no history of the company ever granting exhaustive licenses to a chip vendor, the appeals panel also failed to determine any anticompetitive behaviour on the part of the company, calling Qualcomm’s business model “chip-supplier neutral”, and does not undermine competition in the antitrust market.
“… 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.”
As Qualcomm is seen as not having performed any anticompetitive behaviour in terms of its willingness to license patents to OEMs, and the fact that it gives a “CDMA ASIC” waiver license to chip vendors for free in order for them to internally exercise the technology before they sell it onto their customers, its refusal to give chip vendors non-exhaustive patent licenses is not seen as a matter of antitrust law, and the original ruling to be void in this regard.
The appeal opinion also addresses the third matter of the alleged exclusivity deal that Qualcomm had entered with Apple in 2011 and 2013, that given the effect of this deals had not stifled the competition (And arguing with the fact that Intel had subsequently won Apple contracts in following years), that it also did not go against antitrust law.
Overall, the opinion of the appeals panel today represents a major blow to the FTC and its original legal tactic and usage of antitrust law. Whilst this is a major win for the company, it’s not completely out of the woods as the company’s practises could still be in violation of contract and patent law:
“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.”
While currently Qualcomm can continue its business practises licensing model, it’s likely to continue to receive future scrutiny in regards to the amount of the fees it charges.
- United States Rules Qualcomm In Violation of Antitrust Laws - Qualcomm To Appeal
- United States FTC Charges Qualcomm with Antitrust Violations over Cellular Modem Patents & Technology
- European Union Fines Qualcomm $1.23 Billion for Anti-Competitive Apple Deal
- European Commission Fines Qualcomm €242m For Anti-trust Violations
- Taiwan Fines Qualcomm $773 Million for Antitrust Violations
- South Korea Fines Qualcomm $865 Million for Anti-Trust Violations
- China Fines Qualcomm $975 Million for Anti-trust Violations
- European Union Opens Up Antitrust Investigation Into Qualcomm
Source: UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT No. 19-16122
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Raqia - Tuesday, August 11, 2020 - linkThe initial anti-competition ruling was based on a tortured narrative concocted by lawyers of much bigger _customers_ (not competitors) of Qualcomm characterizing royalties as an unfair surcharge in an effort to reduce their input costs for valuable IP which adds hundreds of dollars to the value of a device (just compare iPad and iPad LTE).
The court correctly observed that Qualcomm's general behavior among its actual competitors was hyper-competitive rather than anti-competitive. In no way did they block the entry to rival chip makers with their licensing and their royalties were in fact explicitly designed to be chip neutral.
The FTC, led by the nose by Apple had been barking up the wrong tree this whole time as the style of licensing that Qualcomm (the owners of most of the seminal patents for the LTE air interface) actually allowed for vibrant competition in implementations of cellular solutions. Compare this to Intel which jealously guarded its IP from open licensing and collected fat margins while suppressing competition for years for chips that were arguably much less sophisticated than the SoCs pervasive in smart phones today. Qualcomm by comparison collects much lower total margins, licensing included in selling much more sophisticated SoCs, and its capped percentage royalty schedule is generally a fair discount for many lower end phones which make less intensive use of very robust standards that just work than some unfair take of the value of the most premium tier, highest priced handsets.
close - Wednesday, August 12, 2020 - link"In no way did they block the entry to rival chip makers with their licensing and their royalties were in fact explicitly designed to be chip neutral"
Except the present ruling did not center on this and it's implied this is still true. Just that the breach lies in contract and patent law rather than antitrust law. The law is made in such a way to allow multiple interpretations specifically to give some freedom to judge either way should the need arise.
Unfortunately these days US courts have about the same spine as an ice cream in the sun. They are not allowed to touch big-tech in any way, shape, or form as this would weaken the US's position relative to China. It's the same principle that made the US take protectionist measures with TikTok after shouting for decades that protectionism is baaaad.
So these days more than ever, a US court decision in such a case is about as trustworthy as a Chinese court decision. You can almost see the band playing behind the judges, and the judges dancing to the tune as expected.
Raqia - Wednesday, August 12, 2020 - link"Except the present ruling did not center on this and it's implied this is still true."
The ruling if you read the entirety of it by and large does not imply this is true, finding some merit in only one small claim by Koh who grossly over-stepped in her decision. The conclusion summarizes it nicely:
"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. It has also 'acted with sharp
elbows—as businesses often do.'
The decision itself cites multiple instances of aggressive and unique business practices which while on the face of it seemingly anticompetitive ended up procompetitive, forcing other players to innovate while benefitting the consumer. Qualcomm's model falls short of many of those examples in even seeming anticompetitive given its open licensing and carve out for other chip makers in particular when compared to the prevailing practices of industry behemoths like Intel.
This ruling has taken the bludgeon out of the hands of the government and left it w/ a scalpel. The initial decision by Koh sacrifices the legitimate benefits of IP rights on the altar of a narrative based theory of fairness (spun by the likes of Apple for god sakes) which simply wasn't supported by the actual developments of the past decade. If anything, competition was vibrant, consumers enjoyed better products as well as prices, and judge Koh was the one who danced to the tune of her handlers, necessitating a slapdown by a higher court.
There are plenty of other businesses who don't like Qualcomm, but it is because they had to compete against Qualcomm, not because Qualcomm extinguished the possibility of competition in anyway. They've had to continually reinvest royalties and innovate to retain their position in cellular standards bodies and implementations, but their patents are the seminal standards and their chips are in a unique spot in terms of PPA.
Mr Perfect - Thursday, August 13, 2020 - linkRaqia, if you don't mind me asking, why do you take articles about Qualcomm so personally? One rolls around every couple months, and you're always so angry about it.
Raqia - Thursday, August 13, 2020 - linkI know some people who work there who were laid off in this saga and also respect the company's immense technical achievements. It had been a real shame for them that Apple could get so far with a few incorrect and deconstructive analogies, thereby threatening a very important R&D work underpinning a lot of important infrastructure. Apple's only goal in doing this was to reduce legitimate input costs to pad their already massive margins built on top of Qualcomm's work. By far, Qualcomm does more difficult and important technical work even though shiny Geekbench scores for the latest AX on run of the mill review sites dominates people's impressions of Apple.
s.yu - Thursday, August 13, 2020 - linkBytedance as a company would be one of the more spineless ones under Xi's tyranny, they take a shoe-licking attitude towards the Party similar to Tencent. I said a few months ago that if some sort of ban expands beyond Huawei, Tencent should be on the chopping block instead of the likes of Sina and Alibaba, who maintain careful distance with the Party. Bytedance was entirely off my radar at the time though, but in hindsight they're politically similar to Tencent. The motive may be partially protectionist but Tiktok's tittytainment algorithms are currently the world's most effective way of non-discriminate brainwash, Bytedance built their entire fortune pushing tasteless clips between users who for some reason have forgone thinking for themselves, bad enough, you don't want to risk that being manipulated by the influence of Xi.
Spunjji - Wednesday, August 12, 2020 - linkYour comments here have been really helpful for me in understanding this - particularly WRT to the Intel comparison. Thanks for the solid posts 👍
voiceofunreason - Tuesday, August 11, 2020 - linkSelection bias: things are more likely to get appealed when there's a question of law that's not settled. Plenty (ie the vast majority) don't go anywhere because they know the lower court judgement will stand on appeal (esp since appeals generally only cover questions of law, not factual findings).
Here you have Qualcomm doing something that patent holders haven't tried before, and the FTC trying a new legal argument to stop it. It's not surprising that lawyers and judges would disagree on how the law applies in a totally novel situation. Again, selection bias: if it was really clear what the law was then they would have settled before going to court.
Spunjji - Wednesday, August 12, 2020 - linkAnother useful bit of input. Cheers 👍
ksec - Wednesday, August 12, 2020 - linkPossibly yes, possibly no. It is hard to tell, but if you read the ruling on the original case by Lucy koh, it was pretty clear this will be appealed given how many holes and questions were left in it.