Tuesday, January 17, 2017

FTC Files Antitrust Complaint Against Qualcomm

. . . and while on the subject of SEPs and FRAND (see today's other post below), I should note in addition that the U.S. Federal Trade Commission (FTC) voted earlier today to file a complaint in federal district court, accusing Qualcomm of unfair methods of competition in violation of section 5 of the Federal Trade Commission Act.  Here is a link to the FTC's press release, here is a link to the complaint, and here is a link to a dissenting statement filed by Commission Maureen Ohlhausen.  The press release summarizes the allegations as follows:
. . . The complaint alleges that Qualcomm:
  • Maintains a “no license, no chips” policy under which it will supply its baseband processors only on the condition that cell phone manufacturers agree to Qualcomm’s preferred license terms. The FTC alleges that this tactic forces cell phone manufacturers to pay elevated royalties to Qualcomm on products that use a competitor’s baseband processors. According to the Commission’s complaint, this is an anticompetitive tax on the use of rivals’ processors. “No license, no chips” is a condition that other suppliers of semiconductor devices do not impose. The risk of losing access to Qualcomm baseband processors is too great for a cell phone manufacturer to bear because it would preclude the manufacturer from selling phones for use on important cellular networks.
  • Refuses to license standard-essential patents to competitors. Despite its commitment to license standard-essential patents on FRAND terms, Qualcomm has consistently refused to license those patents to competing suppliers of baseband processors.
  • Extracted exclusivity from Apple in exchange for reduced patent royalties. Qualcomm precluded Apple from sourcing baseband processors from Qualcomm’s competitors from 2011 to 2016. Qualcomm recognized that any competitor that won Apple’s business would become stronger, and used exclusivity to prevent Apple from working with and improving the effectiveness of Qualcomm’s competitors.
    I need to review the complaint more carefully and give the matter some more thought.  If I am understanding the first point above correctly, though, the gist is that Qualcomm uses its dominance in the market for baseband processors to extract a supra-FRAND royalty for its SEPs, which the OEMs must pay whether or not they use Qualcomm processors.  Since excessive pricing is not itself an offense under U.S. antitrust law, though, the theory must be that Qualcomm is expanding or maintaining its monopoly in the baseband processor markets by making it more difficult for competitors in those markets to compete.  For example, suppose that Qualcomm initially charged a profit-maximizing price of $5 for a processor and $1 for a license to use a particular FRAND.  (The numbers are arbitrary, and for illustrative purposes only.)  Then Qualcomm decides to charge $4 for the processor and $2 for the SEP (regardless of whether the implementer uses a Qualcomm processor or an imperfect-substitute processor produced a competitive-fringe firm).  Suppose further that the imperfect-substitute firm's processor markets for $3.  The implementer will be less likely to buy the imperfect substitute if it has to pay $2, as opposed to $1, for the SEP (see para. 87).  And if the competing firm lowers its price from, say, $3 to $2 to attract some business from implementers, maybe it can't make enough of a profit to remain in the market.  Whether such alleged conduct, if proven, amounts to an antitrust offense is not immediately clear to me; couldn't Qualcomm achieve much the same effect by temporarily charging a low (but non-predatory) price for its processors?  That would result in lower prices, to be sure, but would have much the same effect of putting those competitors at a disadvantage and thus preserving Qualcomm's dominance.  But it's late as I write this, and maybe I'm overlooking something.  I'll give it some more thought tomorrow.

    Meanwhile, here are links to write-ups in the Wall Street Journal and Reuters.
Update:  I'm still mulling this over.  To the extent the FTC is alleging that Qualcomm is inhibiting licensees from challenging the validity or infringement of its SEPs, I can see how in theory that could amount in some cases to an antitrust violation, because it might preserve a monopoly in either the SEP or processor markets or both.  But since you can challenge patent validity without terminating the license (see MedImmune v. Genentech), I'm not sure why a motivated licensee wouldn't be able to do so.  Maybe it depends on what the specific licenses say, or maybe licensees are afraid that if they do challenge validity Qualcomm will refuse to sell them processors (shades of the Intergraph v. Intel--in which the Federal Circuit, however, reversed a preliminary injunction against Intel based on the latter's refusing to sell chips to a firm that was suing it for patent infringement).  Some of the allegations in the public version of the complaint are redacted, however, and there is an allegation (para. 127) that Qualcomm obligated Apple not to induce litigation challenging the licenses as non-FRAND.

As for the monopolization theory I was thinking about last night, I'm still inclined to think that an antitrust judge isn't going to want to get into the business of determining whether the price Qualcomm charges for its SEPs is too high.  Moreover, if the royalty isn't consistent with Qualcomm's FRAND obligations, couldn't the implementers (other than Apple, apparently) file suit for breach of contract as in Microsoft v. Motorola?  Though in that event, the court hearing the breach of contract claim would have to determine what a FRAND royalty is.  Given that option, though, is an antitrust claim necessary?

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