Ninth Circuit Reverses Trial Court’s Finding That Qualcomm Violated Antitrust Laws

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In a defeat for the Federal Trade Commission (FTC), the Ninth Circuit earlier this week reversed a district court ruling that Qualcomm violated Sections 1 and 2 of the Sherman Act through its technology licensing and microchip sales practices and vacated the injunction the district court granted prohibiting many of Qualcomm’s business practices.

In the closely watched case, FTC v. Qualcomm Inc., the FTC asserted antitrust claims to stop Qualcomm from engaging in what the Commission—and Qualcomm’s competitors—viewed as anticompetitive conduct based on Qualcomm’s standard essential patents (SEPs) in wireless technology and its dominant market position in the manufacture and sale of microchips incorporating wireless technology. 

In pursuing this case, the FTC seemed to be taking on a business with obvious antitrust concerns:  Qualcomm owns a large portfolio of patents relevant to wireless technology, including numerous SEPs, and, as recently as 2016, held over 90 percent of the market for supplying CDMA modem chips and 70 percent of the market for premium LTE modem chips, both relevant markets for purposes of Sections 1 and 2 of the Sherman Act. 

While the Commission’s case convinced the district court that Qualcomm’s practices of refusing to license its patents to competitor wireless technology chip manufacturers and of imposing a “no license, no chips” condition on product manufacturers that buy CDMA and LTE chips from Qualcomm and others were antitrust violations justifying the imposition of a prohibitive injunction, it did not stand up to appellate scrutiny.

Surrounding the litigation was disagreement between the two antitrust regulators, the FTC and the Department of Justice’s Antitrust Division, as to whether the FTC’s arguments, particularly those regarding SEPs and failure to license, were cognizable under antitrust law. Ultimately, the Ninth Circuit found Qualcomm and its business practices to be, as the court put it, “hypercompetitive” not “anticompetitive” and ruled that the district court erred in rendering judgement for the FTC and against Qualcomm.

Although the Ninth Circuit’s opinion addresses many important issues in analyzing potential antitrust liability for business owners and antitrust practitioners alike, the continuing trend of courts emphasizing the limited application of the Supreme Court’s holding in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) is especially interesting. 

Despite the FTC conceding the district court erred in concluding that Qualcomm refusing to license its SEPs to competitor chip manufacturers violated the Sherman Act under Aspen Skiing, the Ninth Circuit felt it necessary to explain, in detail, why the district court’s holding was incorrect. The general rule is that competitors have no duty to deal with one another, and that is true even when one party has a dominant market position. The Supreme Court held in Aspen Skiing that there is an exception to this general rule and that a refusal to do business with a competitor can be an antitrust violation, which the Ninth Circuit has interpreted to apply where three factors are present: (1) A defendant unilaterally terminates a “voluntary and profitable course of dealing. (2) The only “rationale or purpose” is to obtain “higher profits in the long run” by excluding competition through “sacrific[ing] short-term benefits.” (3) The “refusal to deal involves products that the defendant” provides to other “similarly situated customers” in the market.

The Ninth Circuit found Qualcomm met none of the factors. Unlike the district court, the Court of Appeals concluded that Qualcomm had not ended an earlier, profitable practice of licensing its patent portfolio, including Qualcomm’s SEPs, to competitor chip manufacturers and that, in any event, Qualcomm’s decision to license at the original equipment manufacturer (OEM) level of the supply chain, rather than at the chip manufacturer level, was justified given developments in the law of patent exhaustion, and was more profitable in the short- and the long-term.  The Court of Appeals also concluded that, because Qualcomm applied its licensing practices in a “chip neutral” fashion to all competing modem chip manufacturers, the FTC’s case against Qualcomm also did not satisfy the third element for Aspen Skiing to apply.

The FTC argued to the Ninth Circuit that, setting aside Aspen Skiing, Qualcomm’s breach of its commitments to license on fair, reasonable, and non-discriminatory (FRAND) terms as part of the process for standard-setting organizations (SSOs) to pick Qualcomm’s patents as “standard essential” was a violation of Section 2 of the Sherman Act. The Ninth Circuit rejected the FTC’s argument that, even if Qualcomm breached its contractual obligations under SSO commitments to license competitor chip manufacturers, this breach itself harmed competition. 

The Court of Appeals rejected the FTC’s arguments for a number of reasons, including distinguishing what it considered to be an inapposite earlier case involving Qualcomm, in which there was alleged deception of an SSO during the SEP selection process. The court also found that competition for the supply of modem chips was not harmed by Qualcomm charging royalties to all OEM customers because those licensing fees applied regardless of which chip manufacturer OEMs selected. In addition, the Ninth Circuit agreed with the policy arguments raised by a number of amici, including the Department of Justice, that disputes concerning SEP owners’ failure to license on FRAND terms (i.e., breaching their commitments to SSOs), are best left to contract and patent law, rather than antitrust law.

The Ninth Circuit also addressed Qualcomm’s pithy “no license, no chips” policy for licensing its patent portfolio and selling CDMA and LTE chips. The court started by saying it believed than any harm suffered due to this practice was suffered by the OEMs, not by Qualcomm’s competitors, and so the harm was not to competition within the relevant antitrust markets.

Nevertheless, the Court of Appeals recognized that “no license, no chips” is a novel, and perhaps unique business practice. However, much like the Supreme Court’s decision in Ohio v. Am. Express Co., regarding American Express’ “antisteering” term in its merchant agreements, a novel or unique business practice or contract provision does not automatically lead to antitrust liability. In fact, the Ninth Circuit said, while a practice initially may appear anticompetitive, the practice may in fact be merely innovative or disruptive and procompetitive, ultimately requiring competitors to innovate themselves in how they do business. The Ninth Circuit pointed out that, in contrast with a hypothetical “no chips, no license” practice that required OEMs to buy Qualcomm’s chips in order to be licensed to practice Qualcomm’s SEPs, Qualcomm’s actual “no license, no chips” policy does nothing more than validate Qualcomm’s patent rights and does not prevent OEMs from buying chips from Qualcomm’s competitors.

Ballard Spahr’s Antitrust and Competition Group offers strategic guidance on securing antitrust clearances and developing a cogent competition strategy that will hold up in court, at the negotiation table, or before an antitrust agency.

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