Thursday, January 3, 2019

Qualcomm reiterates refusal to extend standard-essential patent licenses to rival chipset makers

This is a follow-up to the final pretrial briefs filed in FTC v. Qualcomm (with the bench trial set to begin tomorrow morning in Judge Lucy H. Koh's court).

Seeking to justify its practices, Qualcomm is trying hard to portray everything as positive in terms of being procompetitive. That's what it obviously has to do. To this effect, Qualcomm labels its "no license-no chips" policy as "benign" and, in a somewhat related context, asserts that rival chipset makers are doing just fine without a license from Qualcomm:

"Moreover, despite not licensing exhaustively at the component level, Qualcomm has never asserted its SEPs (except defensively) against competing modem chipmakers. Thus, other chipmakers—including Intel, MediaTek, Samsung, and others—have been free to make and sell modem chips, do so in increasing volumes, and pay no royalties to Qualcomm."

I doubt that whatever testimony Judge Koh will hear from Intel and MediaTek (Samsung is a special case because it makes chipsets for its own phones) is going to express much appreciation for Qualcomm's licensing policy. The FTC's trial brief is heavily redacted, but it does stress that rival chipset makers requested licenses from Qualcomm.

What's at issue in the FTC case is not whether others are "free to make and sell modem chips," or whether Qualcomm demands supra-FRAND royalties from them. It's about the interplay between Qualcomm's chipset business and Qualcomm's patent licensing practices, and the ultimate effects on competition.

I'm sure (even prior to hearing the testimony) that the likes of Intel and MediaTek would be more than happy to pay FRAND royalties to Qualcomm because this would enable them (Intel, MediaTek, etc.) to sell their components to such customers as Apple on a basis where the customer would then know there's no more need to negotiate with Qualcomm (unless one is interested in a license to some patents covering other types of functionality, such as the search-related patents Qualcomm is asserting against Apple in some of its cases pending in Munich).

By contrast, when such customers work with Qualcomm, they get the chips and a patent license, and Qualcomm has positioned itself as a clearing house for wireless SEPs, meaning that if you buy a Qualcomm chip, you're practically (thanks to patent exhaustion) also licensed to a number of other companies' cellular SEPs.

What Qualcomm says about its non-offensive approach to rival chipset makers comes down to saying: "We're not going to sue them, just their customers (if they don't pay our huge license fees)." One doesn't have to have much industry expertise to understand that the business implications of this are just as bad, if not worse.

Qualcomm describes its licensing practices as "more efficient for the licensors, licensees, and the industry in general." It made a similar efficiency argument against the FTC's summary judgment motion. To be clear, the stakes are higher now that the case goes to trial because the FTC is now asking the court to hold that Qualcomm's FRAND licensing obligations constitute an antitrust duty to deal, i.e., an obligation to grant licenses to rival chipset makers. At the summary judment stage, it was only about contract interpretation (and the FTC won). But some of the arguments are the same, and it's presumably a high priority for Qualcomm to preserve the record for an appeal because I cannot imagine Qualcomm wouldn't appeal, from a final judgment, the summary judgment decision it dislikes so much.

In one of the briefs leading to the summary judgment decision, the FTC countered Qualcomm's "efficiency" argument in the following way:

"Qualcomm has claimed that modem-chip-level licensing is efficient--at least when the licensee is Qualcomm itself. [...] If Qualcomm's efficiency claims are valid, similar efficiencies may arise from other modem-chip suppliers licensing Qualcomm's cellular SEPs on FRAND terms."

The contract-based summary judgment decision does not mean that Qualcomm is bound to lose the closely-related part (concerning an antitrust duty to extend SEP licenses to rival chipset makers) of the upcoming trial. The legal question is a different one, but some factual questions, such as efficiency or whether modem chips embody the inventions covered by cellular SEPs, will be the same, and with regard to those subissues Judge Koh is most likely going to reach the same conclusions again.

The following passage from Qualcomm's final pretrial brief is also reminiscent of something (disruption) it already warned against at the summary jugment stage:

"Imposing an antitrust duty to deal based on novel interpretations of the law would not only penalize Qualcomm for no reason, but would also disrupt the global cellular industry at large."

That statement is conclusory. There's nothing disruptive about more patent license agreements being concluded and about device makers having the choice between taking licenses directly from Qualcomm or getting the benefit of patent exhaustion when buying modem chips from licensed chipset makers. Incremental legal certainty may be undesirable from Qualcomm's perspective, but that doesn't make it "disruptive" for an entire industry.

The legal hurdle for an antitrust duty to deal is reasonably high. The FTC faces a significant challenge, but so far it doesn't appear insurmountable.

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