Companies looking to lower patent royalties on standard-essential technology have increasingly turned to antitrust law, arguing that patent owners have been using their power to make unreasonably high demands.
Patent owners have found an ally in the Justice Department’s head of antitrust, Makan Delrahim. His office submitted legal arguments in favor of Qualcomm against the FTC, its fellow antitrust enforcer. He’s also backed the dismissal of antitrust suits filed by
Delrahim’s “view is that the law really needs to protect the owners of standard essential patents,’' said Erik Hovenkamp, a professor at USC Gould School of Law. “The DOJ will be very happy with the outcome’’ of the case.
Model Under Scrutiny
Qualcomm’s business practices have come under scrutiny by regulators around the world, and it’s been the most high-profile case in the debate over how to value patents on standard-essential technology.
The issue is important because it will determine who profits most from the next generation of technology that promises to revolutionize developments such as autonomous cars, robotic surgery, and connected homes.
Companies that get together to develop industry standards have a leg up on ensuring their ideas are included in the standard. As a result, they pledge to license any relevant patents on “fair, reasonable and non-discriminatory’’ terms, a phrase that’s never been defined.
Qualcomm is the largest maker of chips that run the computer functions in smartphones and connect them to cellular networks. That business provides the San Diego-based company with the bulk of its revenue. The majority of profit comes from licensing patents that underpin how all modern phone systems work. It charges fees that are calculated as a percentage of the selling price of handsets and paid by the phone makers.
“For a long time now, the main proponent of these competition law attacks on us have been big companies who were basically seeking to get lower input costs, to pay less or nothing for the use of our intellectual property,’' Qualcomm General Counsel Don Rosenberg said. “Even before today, those companies for the most part, had already demonstrated that they were basically willing without further attempts like this to engage with us in license negotiations.’'
The U.S. Court of Appeals for the Ninth Circuit overturned Tuesday a lower court ruling that Qualcomm’s “novel” business practices were an antitrust violation. If there is a dispute, the court ruled, it’s better decided through breach-of-contract or patent law.
Qualcomm’s licensing practices aren’t anticompetitive because “Qualcomm is under no antitrust duty to license rival chip suppliers,” the court ruled.
The district court’s findings that Qualcomm’s royalties were “unreasonable” were based on a “misunderstanding” of how patent royalties are calculated, the panel wrote.
“Regardless of the ‘reasonableness’ of Qualcomm’s royalty rates, the district court erred in finding that these royalties constitute an ‘artificial surcharge’ on rivals’ chip sales,” the appeals court said.
The court is saying “antitrust law really isn’t the right avenue for this issue,’' said Brian Kacedon of Finnegan in Washington. “It will be interesting to see if different jurisdictions come out in different ways on this issue.’'
Issue of Innovation
Adam Mossoff, an intellectual property law professor at George Mason University, said the ruling was a win for innovators.
“FRAND has functioned very well, for standard development organizations, for many decades, and it was largely an academic theory not based in any actual real world market conditions that drove antitrust actions like the FTC’s case against Qualcomm,” Mossoff said.
“This opinion is really significant because it reestablishes the original foundations and functions of FRAND agreements in standard development organizations and the innovation economy, which has flourished and experienced explosive economic growth over the past several decades,’' he said.
Not everyone agreed.
“This decision runs counter to two decades of legal precedent that supports the fundamental role standards play in enabling competition and innovation,’' said Morgan Reed, president of ACT/The App Association, in an email.
The Ninth Circuit’s ruling could embolden some foreign tech giants that hold standard-essential patent holders, such as Huawei and ZTE, to discriminate against American companies, he said.
The question of how to value standard-essential patents isn’t going away any time soon, said Jorge Contreras, a law professor at the University of Utah.
The Ninth Circuit limited its opinion to antitrust issues and gives little guidance on the FRAND issues, he said.
The court’s interpretation is that “Qualcomm’s aggressive practices and desire to maximize profits were themselves not violations of the antitrust laws,’' he said in an email.
Still, it removes one big target off patent owners’ backs, Mossoff said.
“This novel antitrust theory that was invoked by the FTC and accepted wholesale by Judge Koh left innovators completely at sea with respect to knowing whether their rights would be respected in the marketplace,’' he said, referring to Judge Lucy Koh of the Northern District of California, who wrote the lower court ruling.
And that would be a big deal for patent owners, Rosenberg said.
“It certainly says that our practices, which we’ve said will continue in the 5G era, will continue unhindered by these allegations of anticompetitive conduct,’' he said.
The case is: Federal Trade Comm’n v. Qualcomm Inc., 9th Cir. App., No. 19-16122, Opinion filed 8/11/20
To contact the reporters on this story: Susan Decker in Washington at firstname.lastname@example.org (Bloomberg); Victoria Graham in Washington at email@example.com (Bloomberg Law);