It Was Nice While It Lasted: 9th Circuit Rejects Lower Court Ruling On How Abuse Of Patent Monopolies Can Violate Antitrust

from the wait,-what dept

Last year we had a detailed post about judge Lucy Koh's district court ruling that outlined exactly how Qualcomm abused its patents in an anticompetitive way to shake down the entire mobile phone industry for decades. This was in a case that was brought by the FTC and it was a stunning ruling on multiple accounts. First, it's rare for a court to recognize how patents and copyrights grant monopoly rights that can be abused in violation of antitrust rules. Second, it exposed a stunning degree of anticompetitive behavior on the part of Qualcomm.

Unfortunately, this week, the 9th Circuit overturned that ruling, though did so in a somewhat confused manner. Indeed, this ruling may significantly limit any kind of antitrust activity (at least in the 9th Circuit).

There are a lot of details, but the key element at stake was Qualcomm's "no license, no chips" rules. No company could buy Qualcomm chips, which were necessary for mobile devices, without licensing Qualcomm's entire patent portfolio. This snippet from the lower court ruling gives you the basics:

These high royalties reflected an unusual negotiating tactic called "no license, no chips." No one could buy Qualcomm's cellular chips unless they first signed a license to Qualcomm's patent portfolio. And the terms of these patent deals were heavily tilted in Qualcomm's favor.

Once a phone maker had signed its first deal with Qualcomm, Qualcomm gained even more leverage. Qualcomm had the right to unilaterally terminate a smartphone maker's chip supply once the patent licensing deal expired.

"If we are unable to source the modem, we are unable to ship the handset," said Motorola executive Todd Madderom in a deposition. "It takes many months of engineering work to design a replacement solution, if there is even a viable one on the market that supports the need."

That made Qualcomm's customers extremely vulnerable as they neared the expiration of a patent licensing deal. If a customer tried to negotiate more favorable terms—to say nothing of formally challenging Qualcomm's patent claims in court—Qualcomm could abruptly cut off the company's chip supply.

But, it got worse. The licensing terms for the patents required that you paid based on every device sold even if your devices did not include Qualcomm chips. Basically, even if you chose not to use Qualcomm's chips, you still had to pay for them. That seemed obviously anticompetitive, because if someone is already paying for Qualcomm's technology, why then pay another company as well?

However, the 9th Circuit rejects all of that as anticompetitive. Why? Because it says it wasn't anticompetitive, it was just hypercompetitive.

This case asks us to draw the line between anticompetitive behavior, which is illegal under federal antitrust law, and hypercompetitive behavior, which is not.

The ruling opens with a weird hagiography of Qualcomm. I mean, parts of it read straight out of a puff piece advertorial:

Qualcomm’s patent licensing business is very profitable, representing around two-thirds of the company’s value. But Qualcomm is no one-trick pony. The company also manufactures and sells cellular modem chips, the hardware that enables cellular devices to practice CDMA and premium LTE technologies and thereby communicate with each other across cellular networks.

A key part of the ruling is arguing that Qualcomm's "no license, no chip" plan in selling to OEM's is sensible because of the concept of patent exhaustion. If you don't recall, back in 2008, in the LG v. Quanta case, the Supreme Court made the correct call that patent rights "exhaust" upon sale. That is, if I sell my patent-protected widget to Company A, and Company B buys it and includes it in its contraptions, I can't then sue Company B. This makes sense because it's the same chip that was already legally purchased.

Yet, the 9th Circuit panel seems to conclude that this kind of ruling forced Qualcomm into its "no license, no chip" business model. Indeed, the panel seems in awe of such a business model -- jacking up prices and limiting competition by using the Supreme Court's rule as leverage to cut out a key part of the market.

Qualcomm reinforces these practices with its so-called “no license, no chips” policy, under which Qualcomm refuses to sell modem chips to OEMs that do not take licenses to practice Qualcomm’s SEPs. Otherwise, because of patent exhaustion, OEMs could decline to take licenses, arguing instead that their purchase of chips from Qualcomm extinguished Qualcomm’s patent rights with respect to any CDMA or premium LTE technologies embodied in the chips. This would not only prevent Qualcomm from obtaining the maximum value for its patents, it would result in OEMs having to pay more money (in licensing royalties) to purchase and use a competitor’s chips, which are unlicensed. Instead, Qualcomm’s practices, taken together, are “chip supplier neutral”—that is, OEMs are required to pay a per-unit licensing royalty to Qualcomm for its patent portfolios regardless of which company they choose to source their chips from.

But, what does Qualcomm "obtaining the maximum value for its patents" have to do with anything here? The only way to obtain maximum value for your patents is, by definition to be anticompetitive.

And here's where the ruling gets truly bizarre. It says that because the device manufacturers (the OEMs) don't compete with Qualcomm, then it's clearly not anticompetitive.

Although Qualcomm’s licensing and modem chip businesses have made it a major player in the broader cellular technology market, the company is not an OEM. That is, Qualcomm does not manufacture and sell cellphones and other end-use products (like smart cars) that consumers purchase and use. Thus, it does not “compete”—in the antitrust sense—against OEMs like Apple and Samsung in these product markets. Instead, these OEMs are Qualcomm’s customers.

Later it goes even further:

Thus, a substantial portion of the district court’s ruling considered alleged economic harms to OEMs—who are Qualcomm’s customers, not its competitors—resulting in higher prices to consumers. These harms, even if real, are not “anticompetitive” in the antitrust sense...

But... that gets almost everything backwards. First off, for years, antitrust experts have been saying the proper determination of whether or not something is anticompetitive is the impact on its customers. And here, it's clear that Qualcomm is using this bundling policy to jack up the prices (massively) for its customers. It seems like a quintessential example of anticompetitive behavior... and the court says no?

The ruling is worth reading in detail, as it bends over backwards to basically say that nothing that Qualcomm does violates antitrust law, it's all just good business to squeeze as much money as possible out of its patents. It even repeats again that since it doesn't see Qualcomm's actions hurting "competition itself" and merely just some competitors:

... the anticompetitive harm identified must be to competition itself, not merely to competitors.... The FTC identifies no such harm to competition.

Now, there is some reasonable logic to that line. Any kind of competition can harm competitors. If I market myself better than a competitor, that's harm to a competitor, but it's not an antitrust issue. But if that harm to the competitor is because of my monopoly power it's a different story. And here, that is absolutely the case.

Also, there are a few lines in here that, at the very least, might doom any attempts at bringing an antitrust case against companies like Amazon, Google, Apple or Facebook (at least in the 9th Circuit). For example, the court suggests that any new competitor entering the market proves there's no antitrust problem, no matter how well they did in that market, or whether or not they were hindered from obtaining market share through abuse of monopoly power:

The FTC’s conclusion that OEM-level licensing does not further competition on the merits is not only belied by MediaTek and Intel’s entries into the modem chip markets in the 2015–2016 timeframe, it also gives inadequate weight to Qualcomm’s reasonable, procompetitive justification that licensing at the OEM and chip-supplier levels simultaneously would require the company to engage in “multi-level licensing,” leading to inefficiencies and less profit. Qualcomm’s procompetitive justification is supported by at least two other companies—Nokia and Dolby—with similar SEP portfolios to Qualcomm’s.

In finally talking about the fact that Qualcomm is able to use its monopoly position to charge an anticompetitive surcharge, the panel basically says "nah..." because "patent monopolies are cool."

We hold that the district court’s “anticompetitive surcharge” theory fails to state a cogent theory of anticompetitive harm. Instead, it is premised on a misunderstanding of Federal Circuit law pertaining to the calculation of patent damages, it incorrectly conflates antitrust liability and patent law liability, and it improperly considers “anticompetitive harms to OEMs” that fall outside the relevant antitrust markets.

In short: because they have a government granted patent monopoly, it's okay for them to abuse that in anticompetitive ways, and we won't consider it anticompetitive. Or, another way of reading this: patent laws inherently create anticompetitive situations, and we're fine with it. And, tragically, that may be a correct reading of the law, as crazy as it is.

I guess this isn't that surprising. This has been the issue we've had with patents for ages -- that they are a monopoly. And that's why we were excited about the original ruling: finally recognizing that patent monopolies could be as abusive as any monopoly. But, here, the court is basically saying "abusing your patent monopoly is fine by us."

And, really, what this should mean is that we need to fix our patent laws, which are dangerous and harm competition. But... that seems unlikely.

Again, this kind of ruling almost certainly means phone prices will remain much higher than they would be in a competitive market for chips (which is why it's slightly frustrating that I've seen some supposedly "free market" supporters cheering on this ruling). But it might also mean that any antitrust fight against big tech just became significantly more difficult as well. As the court says:

Anticompetitive behavior is illegal under federal antitrust law. Hypercompetitive behavior is not.

Good luck figuring out which one is which.

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Filed Under: 9th circuit, abuse, antitrust, competition, customers, devices, monopoly, patents, phones
Companies: qualcomm