Knowledge@Wharton Segment on FTC v. Qualcomm

This morning at 10 a.m. Central Time, Knowledge@Wharton will be broadcasting a live, call-in radio segment on FTC v. Qualcomm.  They'll be interviewing Professor Herb Hovenkamp and me.  From Knowledge@Wharton's webpage:

Knowledge@Wharton is a daily, call-in business interview program, broadcasting live from The Wharton School’s historic Ivy League campus. Host Dan Loney goes behind the headlines with world-renowned Wharton professors, distinguished alumni and expert guests. Listen to Knowledge@Wharton Monday through Friday, 10AM-Noon Eastern on SiriusXM 132. We’d love to take your calls at 1-844-WHARTON (1-844-942-7866).

Thoughts on Judge Koh's Findings of Fact and Conclusions of Law in FTC v. Qualcomm

As noted yesterday, Judge Lucy Koh has now entered her 233-page Findings of Fact and Conclusions of Law in FTC v. Qualcomm, concluding that Qualcomm violated U.S. antitrust law.  Now that I've had a chance to read through the Findings of Fact and Conclusions of Law, here are my thoughts.  (For conciseness, from here on I'll call the Findings of Fact and Conclusions of Law an opinion.)

1.  Overall, I think the opinion is quite impressive.  Judge Koh's analysis of the evidence seems thorough, and she bases her legal conclusions on that evidence.  In several portions of the opinion, she indicates how contemporaneous documents contradicted what Qualcomm witnesses said at trial (e.g., about the firm not actually threatening to cut off OEMs' supply of chips).  I suspect that Judge Koh's detailed factual analysis will make it very hard for Qualcomm to prevail on appeal.  (As for the appeal, I wonder if the DOJ will weigh in again at the appellate level?  Very odd to have the two federal antitrust enforcers taking different views about the role of antitrust in policing FRAND breaches, as discussed here . . . .)

2.  Among the key factual conclusions are that Qualcomm had market power in the markets for CDMA and premium LTE modem chips; that Qualcomm imposed de facto exclusivity requirements on OEMs and on Apple (through, e.g., rebates,  threats of cutting off supply, and agreements that purchasers/licensees wouldn't challenge Qualcomm's patents or other licensing practices; see summary at pp. 113-14, 151); and that the royalties Qualcomm charged for its SEPs were above-FRAND (pp. 157 et seq.).  In reaching this last conclusion, Judge Koh finds, among other things, that Qualcomm earned $7.7 billion in licensing revenue in 2016, which "exceeded the combined 2016 licensing revenue of twelve other patent licensors, including Ericsson, Nokia, and Interdigital" (pp. 8-9)--even though other firms' patents contribute more value to the standards by which end devices operate (pp. 165-66).  Judge Koh also appears to be of the view that FRAND licenses generally must be based on the smallest saleable patent practicing unit (SSPPU), in order to conform to Federal Circuit precedent (pp. 172-73).

3.  The key legal conclusion, in my view, is that Qualcomm excluded competitors in the markets for CDMA and premium LTE chipsets by means of (1) its "no license, no chips" policy, and (2) its imposition of de facto exclusive dealing requirements on the OEMs and Apple.  In an article I published in Law360 a couple of months ago, I explained how the no license, no chips policy could lead to this result.  Since (in the short term, at least) all the OEMs care about is the "all-in" price--that is, the price Qualcomm charges for the combination of chips + license--Qualcomm can manipulate the price of the license to put its rivals at a competitive disadvantage.  E.g., if the all-in price Qualcomm charges an OEM, taking into account discounts, rebates, etc., is $20, consisting of $10 for a license and $10 for a chip, a rival could charge the OEM no more than $10 for a chip.  (These numbers I'm using are for illustrative purposes only.)  Suppose further that a FRAND royalty would be $5 and that the marginal cost of producing a comparable chip, not including the FRAND royalty, is $12.  On these hypothetical facts, however, the OEM could not charge more than $10 for its comparable chip, and thus Qualcomm's circumvention of its FRAND commitment would be a direct cause of the rival's inability to compete.  That would be the economic theory, at any rate, and I believe that is what Judge Koh has in mind at pages 153-54, 185 in her discussion of why the no license, no chips policy enables Qualcomm to maintain its chip monopolies.  Such a scheme might also involve rebating back some portion of the all-in price when the OEM buys chips from Qualcomm and not from a rival.

4.  Further, Qualcomm's imposition of de facto exclusivity requirements on OEMs and on Apple puts competitors at an obvious disadvantage, particularly given the high costs of entry into the chipset market (and thus the need for some prospect of a significant customer base to make that investment worthwhile).  Judge Koh appears to provide a substantial evidentiary basis for her conclusion that Qualcomm's conduct contributed to the inability of Intel and other potential rivals to gain a foothold in the chipset market during the time period in question.

Judge Koh also concludes that, in view of her summary judgment ruling from last fall, Qualcomm's FRAND commitment required it to license its competitors, and thus amounted to an antitrust duty to deal.  Under Judge Koh's analysis of the Aspen Skiing case, Qualcomm's breach of this antitrust duty itself amounted to a violation of Sherman Act section 2 (see pp. 134-31).   

5.  By these means, Judge Koh concludes, Qualcomm was able to foreclose potential rivals and maintain its monopolies in the CDMA and premium LTE modem chip markets.  This diminished competition resulted in the OEMs (and, ultimately, consumers) paying higher prices and having fewer alternatives from which to choose.

Some portions of the opinion, in isolation, might be read as resting on the premise that Qualcomm's breaches of its FRAND commitments (e.g., charging above-FRAND royalties), standing alone, caused competitive harm and thus violated the antitrust laws (see, e.g., p.183).  In my view, this would be a more tenuous claim under U.S. antitrust law, which generally doesn't make it illegal for a monopolist merely to charge a monopoly price.  Nevertheless, I think there is enough in the opinion to support the conclusion that Qualcomm's circumvention of its FRAND commitments enabled it to distort competition in the chip markets and thus to maintain its monopoly power (which is a standard sort of antitrust offense under U.S. law).  The harm is then measured by the higher prices consumers pay and, possibly, by the loss of whatever the foreclosed rivals would have contributed to longer-term innovation in the chip markets.  On the latter harm, see, e.g., pp. 124, 196-98; Judge Koh would appear implicitly to reject arguments that penalizing Qualcomm will have a negative impact on innovation.

6.  As for remedy, Judge Koh asserts that "Qualcomm’s anticompetitive conduct is ongoing," in that it "continues to refuse to provide patent exhaustion, refuse to sell modem chips to an OEM until the OEM signs a license, and engage in chip supply threats and cutoffs" (p.218).  The resulting injunction has five provisions (pp. 227-33):

 (1) Qualcomm must not condition the supply of modem chips on a customer’s patent license status and Qualcomm must negotiate or renegotiate license terms with customers in good faith under conditions free from the threat of lack of access to or discriminatory provision of modem chip supply or associated technical support or access to software.
(2) Qualcomm must make exhaustive SEP licenses available to modem-chip suppliers on fair, reasonable, and non-discriminatory (“FRAND”) terms and to submit, as necessary, to arbitral or judicial dispute resolution to determine such terms.
(3) Qualcomm may not enter express or de facto exclusive dealing agreements for the supply of modem chips.
(4) Qualcomm may not interfere with the ability of any customer to communicate with a government agency about a potential law enforcement or regulatory matter.
(5) In order to ensure Qualcomm’s compliance with the above remedies, the Court orders Qualcomm to submit to compliance and monitoring procedures for a period of seven  (7) years. Specifically, Qualcomm shall report to the FTC on an annual basis Qualcomm’s compliance with the above remedies ordered by the Court.

Judge Koh thus rejects the DOJ's suggestion from a few weeks back that there should be some further briefing or hearing on remedies (pp. 226-27).  

Judge Koh Rules for FTC, Against Qualcomm

I will be reading the opinion this morning, and hope to post something later today or tomorrow.  Here's the story in Bloomberg, FOSS Patents, Law360, the WSJ.

Here's a copy of Judge Koh's Findings of Fact and Conclusions of Law.

From Around the Blogs: Dutch FRAND Case, Fees 5 Years After Octane Fitness, and More

1.  On the IPKat Blog last week, Annsley Merelle Ward published a post by Léon Dijkman titled Dutch Court of Appeal injuncts unwilling licensee in first post-Huawei v ZTE FRAND decision.  The decision, Koninlijke Philips N.V. v. Asustech Computers Inc., was handed down on May 7, and Mr. Dijkman provides links to both the Dutch original and an English translation.  Mr. Dijkman notes, inter alia, that the defendant's "alleged willingness to enter into negotiations after the institution of the proceedings and a possible counteroffer in that regard cannot render the litigation abusive or trigger an obligation to stay the proceedings," and that the court "does not interpret Huawei/ZTE as obliging SEP holders to substantiate why their license offers are FRAND."    EPLaw also has a write-up, earlier noted on IPKat, here.

2.  Also on EPLaw (and earlier noted on IPKat) is a write-up, and link to an English language summary, in Graf v. Kaban & Daser, a decision of the Barcelona Commercial Court from last November, denying a request for an ex parte injunction against the exhibition of a device at a trade fair in Madrid.  The summary discusses the circumstances under which a patent owner should use a procedure known as a "preliminary verification of facts" to determine if a device infringes.

3.  Also on IPKat is a post by Peter Ling titled Does a “Launch At Risk” Automatically Exclude the Right to Appropriate Compensation for a Wrongfully-Issued Preliminary Injunction?  The post discusses a referral from the Metropolitan Court of Budapest to the CJEU, and AG Pitruzzella's opinion that the Enforcement Directive does not authorize member states to automatically deny compensation for a wrongly issued injunction if the defendant launched at risk (without having first sought to invalidate the patent in suit).

 

4.  As for the U.S., Ryan Davis published an article on Law360 last week titled 5 Things We've Learned in 5 Years Since Octane Fitness.  Citing data compiled by Nirav Desai, Mr. Davis presents descriptive statistics on the number of attorneys' fee motions filed and the grant rate post-Octane Fitness, and concludes that while fee awards have become more common, they are still unusual (as one would expect, given the statutory requirement that fees be awarded only if the case is exceptional).  Mr. Davis also discusses various factors that courts have considered in determining that a case is exceptional.

AAI Panel on Antitrust Enforcement and IP

The American Antitrust Institute (AAI) will be holding its 20th Annual Policy Conference, titled "Strengthening Antitrust Enforcement," on June 20, 2019 in Washington D.C. (link here).  Session III, titled "Intellectual Property and Competition:  Major Developments at the Agencies," should be quite interesting, in view of the recent squabble between the FTC and the Antitrust Division over the appropriate relationship between antitrust and IP law.  Speakers for this session, which will be moderated by Professor Jorge Contreras, will include former Acting Assistant Attorney General in charge of the Antitrust Division, Renata Hesse; former FTC Commissioner Terrell McSweeny; and the FTC's Chief Counsel for Intellectual Property, Suzanne Munck.

New Papers on SEP/FRAND Related Topics

1.  Jorge Contreras has posted a paper on ssrn titled Private Law, Conflict of Laws, and a Lex Mercatoria of Standards-Development Organizations.  Here is a link to the paper, and here is the abstract:

Technical standards created by industry standards-development organizations (SDOs) enable interoperability among products manufactured by different vendors. Over the years, SDOs have developed policies to reduce the risk that SDO participants holding patents covering the SDO’s standards will disrupt or hinder the development and deployment of these standards. These policies, including commitments to license standards-essential patents (SEPs) on terms that are fair, reasonable and non-discriminatory (FRAND), gain transnational application given the international character of SDO activities and are most effectively interpreted and applied on the basis of private law (contractual) principles. However, SDO policies are typically embodied in an SDO’s governing documents, which are in turn regulated by the law of the jurisdiction in which the SDO is based. This somewhat arbitrary linkage of SDO policies to national and state law has created inconsistencies in their interpretation and threatens to spark jurisdictional competition in an unproductive race to the bottom. This paper poses the question whether it would be possible to decouple SDO policy interpretation from the patchwork of national and state laws that purport to govern such policies in favor of a common lexicon of interpretive principles derived from the shared understanding of SDO participants: a “lex mercatoria” of standardization.

2.  Eli Greenbaum has posted a paper on ssrn titled No Forum to Rule Them All:  Comity and Conflict in Transnational FRAND Disputes.  Here is a link to the paper, and here is the abstract:

Recent years have seen an explosion in FRAND litigation, in which parties commit to license intellectual property under “fair, reasonable and non-discriminatory” (FRAND) terms, but cannot agree on the meaning of that commitment. Almost all of this litigation is multinational, and involves coordinating patent, antitrust and contract claims across several jurisdictions. A number of courts and commentators have aimed to centralize and thereby streamline these disputes, whether by consolidating all litigation in one judicial forum or through the creation of a comprehensive arbitral process. This Article argues that such efforts are misguided – FRAND disputes are particularly unamenable to centralization, and the costs of centralizing FRAND disputes are high. Rather, absent other agreement between the parties, FRAND disputes should be resolved through the ordinary territorial structures of patent law, and attempts to simplify these disputes should focus on procedural and substantive coordination between jurisdictions. 

Mr. Greenbaum raises some important challenges to arguments favoring some sort of global FRAND determination, many of which had not previously occurred to me.  I will need to reread this article and give it some deeper consideration.

3.  Yee Wah Chin has posted a paper on ssrn titled Standards and Patent Assertion Entities at the IP-Antitrust Interface:  Adhering to Basic Principles.  Here is a link, and here is the abstract:

The United States antitrust approach to intellectual property has evolved over time. The same antitrust analysis now applies to conduct involving IP as to conduct involving other forms of property, taking into account the specific characteristics of the particular property right.

However, there have been significant calls recently for presumptions that infringements suits and licensing conduct by patent assertion entities (PAEs) labeled “patent trolls” and holders of standard essential patents (SEPs) are monopolization or attempts to monopolize that violate Sherman Act §2, 15 U.S.C. §2. This paper argues that the basic principles of keeping in mind history and context, and general antitrust principles, apply equally to SEPs and PAEs as to other economic phenomena, and there is no need for any special presumptions.

4.  Peter Picht has published an article in the April 2019 issue of  Mitteilungen der deutschen Patentanwälten (pages 146-51) titled Neues SEP/FRAND-Recht vom englischen Court of Appeal:  Unwired Planet/Huawei und Convesant/Huawei & ZTE ("New SEP/FRAND Law from the English Court of Appeal:  Unwired Planet v. Huawei and Conversant v. Huawei & ZTE").  Here is the abstract (my translation):

Judicial disagreements over the licensing of standard essential patents on FRAND conditions have already generated an extensive case law from a wide range of jurisdictions.  The first instance decision of the High Court of England and Wales in the Unwired Planet/Huawei decision has already achieved special prominence, because (among other reasons) it takes on, in a level of detail not previously seen, the painstaking endeavor of establishing FRAND-conforming conditions.  This willingness, and its rather patent owner-favorable outcome, may have contributed to the decision of the patent licensor Conversant Wireless to file its complaint before the English court, although the background facts of the proceeding gave reason for the defendant firms Huawei and ZTE to challenge the jurisdiction of this court, initially at first instance and then by way of appeal to the Court of Appeal.  With its decisions the Court of Appeal has now largely affirmed the first instance court, and updated the English SEP/FRAND case law in a meaningful way. 

Report on 2018 Zurich Conference on Injunctions

For readers who have access to the German publication GRUR Int., the April 2019 issue (pages 352-56) contains a short article (in English) by Vital Lüthi titled Conference Report:  Zurich IP Retreat 2019--Injunctions at a junction?  Mr. Lüthi writes:

This year's topic of the Zurich IP Retreat, held on 2 and 3 November 2018 at Zunfthaus zur Waag, organized by INGRES and ETH Zurich was another fundamental question of intellectual property law:  Is there or should there be room for a balance of interest analysis before the issuance of an injunction, or are injunctions to be granted unless requirements for compulsory licensing are met?  What are the alternatives?

Among the discussants were Professors Stefan Bechtold, Rochelle Dreyfuss, and Christoph Rademacher, along with two (Franz Hofmann, Daniel Alexander) who were involved with the recent Erlangen conference on injunctions and proportionality.  Much of the discussion in Zurich also appears to have overlapped with the discussions in Erlangen and at the recent conference at LMU in Munich, e.g., does the Enforcement Directive require member states to take proportionality into consideration before issuing injunctions, are there other alternatives (such as Aufbrauchfristen, or grace periods) that might serve the same interest without conferring wider discretion on judges, etc.

Wherever the law ultimately comes to rest in Europe, I'm happy to see that these issues are at long last receiving the attention they deserve.  Further, if I get more information on the meeting the German Ministry for Justice and Consumer Protection will be holding on this topic on May 20, I will pass it along.