Tuesday, January 8, 2019

Day 2 of FTC v. Qualcomm: patent exhaustion; leveraging of chips in licensing negotiations; rival chipset makers

Friday, the first day of the FTC v. Qualcomm antitrust trial in the Northern District of California (San Jose, to be precise), couldn't have gone much better for the Federal Trade Commission. Today, Monday, the FTC made further headway, but to the extent that Qualcomm's lawyers had the chance to ask witnesses questions, they made the most out of that opportunity. If this weren't a bench trial in front of a judge who understands this industry and the issues involved so very well, but a jury trial, then Qualcomm would already have created enough confusion that anything could happen.

Let me explain this in connection with a particularly important issue: the licensing of rival chipset makers (and Qualcomm's refusal to do so). Qualcomm's counsel presented MediaTek-internal documents and elicited testimony from MediaTek's Finbarr Moynihan that it was, at a certain time, standard industry practice that patent holders would not extend standard-essential patent (SEP) licenses at the chipset level (only at the device level). With a jury of laypeople, that could be all that Qualcomm would need to have a chance of defending its practice. However, Judge Lucy H. Koh will consider that confirmation of one of Qualcomm's claims along with all other factors that will inform her future ruling on whether or not Qualcomm has an antitrust duty to extend SEP licenses on FRAND terms to rival chipset makers such as Intel and MediaTek. Those other factors are partly already known to her as her contract-based (not antitrust-based) summary judgment ruling indicated. She's well aware of Qualcomm itself having secured many chipset-level licenses (which, combined with Qualcomm's own patents, positioned Qualcomm as a SEP clearing house). She also heard today from former Qualcomm president Derek "Duct Tape" Aberle that Intel, Broadcom, MediaTek, Samsung, and Huawei had asked for exhaustive chipset-level SEP licenses from Qualcomm. And I'm unaware of a case where multiple actors (here, multiple SEP holders) could shirk an antitrust duty to deal by pointing to the fact that "everyone" behaved in a certain way. Uniform behavior doesn't move the fairness goal posts in antitrust law.

At the summary judgment stage, Qualcomm already made this kind of argument. Judge Koh was not interested in parol evidence or anything similar to it because she found the two FRAND pledges at issue to be clear enough in their own right. In connection with an antitrust duty to deal, the concept of parol evidence doesn't even exist in the first place. The reason why competition authorities require standard-setting organizations (SSOs) to ensure that companies participating in standard-setting enter into FRAND pledges is simply because standardization, which by definition has an exclusionary effect (concerning all alternative technical approaches), would otherwise be an illegal cartel from the start. So the FRAND licensing obligation is meant to protect all comers from what would otherwise be harm caused by an illegal cartel, and there's no reason why chipset makers should suffer from exclusionary practices while device makers should not.

In the morning, the FTC continued with Huawei's senior legal counsel Nanfen (Nancy) Yu's videotaped testimony. The most shocking thing she testified was that, at least at a certain point, Qualcomm's patent royalties accounted for 80% to 90% of Huawei's total patent licensing costs for a mobile device. Huawei also has a chipset division, HiSilicon, and Mrs. Yu explained that Huawei was interested in an exhaustive (i.e., downstream customers would be protected) license to Qualcomm's cellular SEPs, but instead was offered a covenant not to sue that fell far short of the kind of clear-cut exhaustive license Huawei would have liked to obtain. Instead, it went too far in terms of reporting requirements.

Patent exhaustion is a concept that Qualcomm is allergic to because it's incompatible with Qualcomm's often-criticized "double-dipping" and maximum-leverage strategies. Qualcomm dreads patent exhaustion in connection with its own chipset sales, but it would be one of Qualcomm's worst nightmares if it had to extend SEP licenses to other chipset makers on a basis that would protect the downstream (the chipset makers' direct and indirect customers).

Mr. Aberle was asked questions about Samsung's interest in a chipset-level license and attributed the failure to reach an agreement on such a kind of license to evolving case law in the United States and elsewhere regarding patent exhaustion, which required new approaches and ultimately nothing was agreed upon. In my words, Qualcomm wanted to again avoid patent exhaustion, but it was worried that its end-run around it wouldn't hold water in the courts.

Since it's become clear that Qualcomm tried to avoid exhaustion by entering into only limited covenants not to sue with respect to chipsets, I'm quite sure Mr. Aberle was referring to cases in which courts of law held that even a covenant not to sue resulted in exhaustion because it was a license by any other name.

The most significant one of those rulings was the Federal Circuit's 2009 decision in TransCore v. Electronic Transaction Consultants (ETC). As PatentlyO explained at the time, a patent license isn't really more than a guarantee not to be sued by a patent holder given that the right to sue infringers is what a patent is all about.

In a different way, the Supreme Court strengthened the concept of patent exhaustion the year before last in its anti-end-run Lexmark decision.

Now I'm going to outline a concept that would be an exhaustion-related doomsday scenario for Qualcomm. In this FTC case, Qualcomm has declared (such as in its proposed findings of fact and conclusions of law) that it won't sue rival chipset makers except for retaliatory purposes. Here are two paragraphs from its proposed findings:

"420. Qualcomm does not seek to prevent others from practicing its cellular SEPs to manufacture or sell components of end-user devices; it neither asserts its SEPs against competing chip makers nor seeks to collect royalties from them."


"422. Competing modem chip manufacturers make and sell modem chips without any patent license agreement with, or royalties payable to, Qualcomm."

With Qualcomm now even having said this in a publicly-accessible court filing, a chipset maker who one day might get sued would have a potential promissory-estoppel argument. Under a narrow definition of patent exhaustion, only a conventional license (or an authorized sale of a component) would trigger exhaustion. However, the Federal Circuit's TransCore reasoning--that a patent is a right to sue and a covenant not to sue is therefore tantamount to a license--could theoretically also apply to a scenario in which rival chipset makers are not and cannot be sued by Qualcomm due to promissory estoppel. I'm not saying a court would necessarily decide this way. But patent exhaustion tends to be applied broadly rather than narrowly, and the same way in which one can argue that a covenant not to sue over a patent is the equivalent of a patent license, one could argue that promissory estoppel and a covenant not to sue are equivalents, too. In that case, all customers of Qualcomm's competitors could claim to be licensed. Again, I'm not saying this is the law--just that it could become case law in a hypothetical worst-case scenario for Qualcomm. Its promise not to sue rival chipset makers and not to seek license fees from them was motivated by what Qualcomm seeks to achieve in the FTC case. But with a view to patent enforcement, the passages I quoted above could have unintended consequences in future patent infringement disputes.

Qualcomm's fear of patent exhaustion was particularly visible today when a Qualcomm-internal document was shown and talked about how a certain agreement was designed "to maximize [Qualcomm's] ability to defend against exhaustion claims."

Finally, another key topic in San Jose today was how Qualcomm actually leveraged its "no patents-no chips" policy in order to get wireless device makers to agree to patent licensing terms that they'd normally reject as being supra-FRAND. Huawei's Mrs. Yu explained very convincingly that Huawei considered Qualcomm's royalty demands (again, accounting for 80%-90% of Huawei's total patent licensing costs) to be above FRAND, but ultimately accepted them so as not to be cut off from Qualcomm's high-end chipset supply. The FTC also showed documents according to which Qualcomm executives internally recommended, or even agreed, to put "no license-no chips" (that's the FTC's wording, not Qualcomm's) pressure on companies that disagreed with Qualcomm's licensing terms.

Qualcomm's lawyers tried to shift the focus to the fact that no example was provided of Qualcomm actually having stopped chip shipments to a customer. But since this merely means the threat always achieved the desired effect (of companies bowing to Qualcomm's license fee demands), I doubt that this will solve the problem for Qualcomm.

Interestingly, all the examples that Qualcomm provided of companies who received continued chipset shipments during licensing negotiations came down to cases where someone was still paying royalties under an old agreement or where Qualcomm and the given party already had a philosophical agreement in place, with only some details to be hammered out. Also, Qualcomm appears unable to point to a single case in which it actually sold chipsets to someone who wanted to buy chips but hadn't taken a license and wasn't going to do so immediately.

In order to argue that its patent royalties are FRAND in any event, Qualcomm seeks to give examples of companies having accepted those royalty rates in situations where Qualcomm didn't have any chipset leverage. For this purpose, Qualcomm goes back to a its very first few license agreements. The question that the FTC legitimately asked was whether any FRAND pledges were in place when Qualcomm made those deals. That's relevant because royalties tend to be fair higher when there's no FRAND licensing obligation, simply because patent holders can ask for anything when their patent is not subject to FRAND. The FTC asked the right question, but the former Qualcomm executive who has been described as the architect of its licensing program, Steven Altman, argued that even though the standards may not have been adopted at the time, the FRAND pledges may have been made already. That is a smokescreen since FRAND licensing pledges made by contributors to a standard-setting process don't have a binding effect on the patent holder until the standard is actually adopted (and the relevant patented inventions make it into the standard).

The trial will continue tomorrow with further testimony. For now (but remember that Qualcomm has yet to start with its case-in-chief) the FTC still appears to control the center of the chess board (i.e., appears to be in a strong position to prove at this trial that certain issues are real), with Qualcomm's lawyers focusing on a last line of defense for the most part: denying actual anticompetitive harm and pointing to legitimate business justifications for what Qualcomm did. But today Qualcomm showed that it can fight back in very smart and effective ways.

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