Saturday, December 8, 2018

Qualcomm fears being required to renegotiate patent license agreements with Samsung, many others

This is the first post, and probably not the last, in which I'll discuss some interesting information I found in the Federal Trade Commission's and Qualcomm's proposed findings of facts and conclusions of law with a view to next month's San Jose trial. Qualcomm's filing is more than twice as long (157 pages) as the FTC's submission (71 pages), but Judge Lucy H. Koh will decide strictly based on the law and the facts, so this antitrust case is not going to turn into a battle of matériel. The litigation departments of government agencies are outnumbered by private-sector litigants' armies of lawyers all the time, but quite often they prevail nevertheless.

Here are the two filings (this post continues below the documents):

18-12-06 FTC's Proposed Findings and Conclusions by Florian Mueller on Scribd

18-12-06 Qualcomm's Pro... by on Scribd

Those proposed findings and conclusions serve as a roadmap for the upcoming trial. There may still be some surprises, but by and large the points the parties seek to drive home are clear now, except for those heavy redactions, which I wish someone could fight the way Reuters, MLex, the First Amend Coalition and others attacked excessive sealings in Apple v. Samsung years ago (and I had to do the same at the Federal Patent Court of Germany; by the way, I'm presently involved in a new access-to-documents dispute there, with a notorious privateer).

Section III.I of Qualcomm's filing is one of the most outrageous examples of overredaction. That section is meant to justify Qualcomm's "no license-no chips" policy, which is central to the case. Under the headline "Qualcomm's Practice of Not Selling Chips to Unlicensed Companies Has Valid Business Justifications," paragraph 245 says:

"Qualcomm's practice of not selling chips to unlicensed OEMs is based on the following considerations:"

And then every single one of those business considerations is blackened out. 100%. It's hard to imagine that those redactions are reasonable, and maybe the court won't approve them. Or we'll find out at trial.

Fortunately, the paragraph that is most interesting in commercial terms is public:

"765. Moreover, the FTC seeks an order requiring Qualcomm to 'renegotiate . . . license terms' with all OEM licensees. (Joint Pretrial Statement at 2; FTC Interrogatory Response at 6.) Not only would such an injunction require renegotiation in markets where Qualcomm is not even alleged to have market power, such as WCDMA or non-'premium' LTE, but it is also overbroad insofar as it requires renegotiation of agreements no matter what the terms and no matter whether any anticompetitive harms caused or resulted from those agreements. Such an injunction would be tailored neither to the markets nor harms at issue, including because it would apply to agreements entered into outside the 2011-2016 timeframe for which the FTC has presented evidence."

The passage on the requested relief that Qualcomm's filing refers to says this:

"Require Qualcomm to negotiate or renegotiate, as applicable, 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, software, or other support;"

It's obvious why Qualcomm doesn't like this, but it's inevitable: if someone violates antitrust law and as a result of such behavior (including, but not limited to, the "no license-no chips" policy) imposes supra-FRAND royalties on others, renegotiation is the only way to redress the balance and fix the problem.

As the final sentence of paragraph 765 of Qualcomm's proposed findings and conclusions shows, they complain, among other things, about the requested injunction not being limited to the 2011-2016 period. The most significant agreement that is still in force and effect and that Qualcomm concluded outside that timeframe is presumably its early 2018 new deal with Samsung. Even if the FTC didn't present evidence that is specific to that timeframe, there can be no doubt that the 2018 Qualcomm-Samsung agreement came into being under the same problematic circumstances--simply because things will only get better if and when the FTC prevails (or if and when private parties prevail, with the Apple v. Qualcomm trial being scheduled for mid-April).

Qualcomm's proposed findings and conclusions do indicate some changes to their business policies after that timeframe, and they seek to leverage those changes so as to argue that the prospective remedy of injunctive relief wouldn't be warranted only on the basis of past behavior. The risk of recurrence is obviously key. But what Qualcomm changed (such as capping its 5% patent royalty demand at a device price of $400) is either unrelated to, or at least falls far short of, what the FTC is tackling here and seeking to redress and to prevent from happening again.

Actually, to the extent Qualcomm's refusal to extend SEP licenses on FRAND terms to rival chipset makers like Intel was a breach of contract (as Judge Koh has determined on summary judgment), that fact alone means that the economics of certain deals, such as the one with Samsung, would have been different if Qualcomm had behaved the way the court thinks it should have, and if a licensee like Samsung could also have decided to simply purchase baseband chips from Intel, or to license Qualcomm's SEPs at the chipset level (Samsung's Exynos division) instead of at the device level.

The requirement to renegotiate license terms would affect Qualcomm in two ways. Besides the direct implications of having to modify existing agreements in favor of implementers, a judge or jury tasked with determining whether or not Qualcomm complied with its FRAND licensing obligations will also look at (among other things) Qualcomm's other license agreements. It's a safe assumption that Qualcomm's recent deals, such as the one with Samsung, were optimized for the purposes of the forthcoming Apple trial. However, should those agreements be null and void in the sense that they must be renegotiated as per a court order, then they don't serve as useful points of reference for any FRAND-compliance analysis in any jurisdiction.

Again, there's a lot more in the 220+ pages Qualcomm (two thirds) and the FTC (one third) filed on Thursday, such as an interesting passage that could backfire against Qualcomm in connection with promissory estoppel (and possibly have novel implications for exhaustion), but it's simply too much for a single blog post.

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