Sunday, March 8, 2020

The FTC's most (and potentially only) important achievement in its Qualcomm litigation may be a contract interpretation, not an antitrust ruling

This is the first of three posts today on FTC v. Qualcomm, which the United States Court of Appeals for the Ninth Circuit heard last month. The second post will discuss the "No License-No Chips" part of the case, and the third one will have a proedural and political focus.

Since it was founded almost 106 years ago, the Federal Trade Commission's task has been a mix of antitrust enforcement and consumer protection. It would be an oddity--but not an improbable outcome as things stand now--if FTC v. Qualcomm ended up making an impact only by means of providing clarification of a matter of contract law.

I'd actually have liked a compulsory-licensing type of ruling to come out of this case. I do see the point in enforcing FRAND licensing commitments under contract law, but an additional avenue would have been desirable--and in cases where a patent is standard-essential but no FRAND plecge was made, there must be a way to compell a patentee to grant licenses on FRAND terms. It turned out, however, that I'd have to keep waiting for some other case to have that effect:

  • Judge Lucy H. Koh of the United States District Court for the Northern District of California held Qualcomm in violation of antitrust law for refusing to license rival chipset makers, but did so under Aspen Skiing, which requires a party, among other things, to abandon a prior profitable course of dealing in hopes of making more money further down the road after having eliminated or fundamentally weakened a rival. That's a very fact-specific, historic, behavioral inquiry and could never be the U.S. equivalent of the Court of Justice of the EU's Huawei v. ZTE ruling, which clarified that SEP holders, under EU competition law, must grant licenses on FRAND terms to all comers.

  • The Federal Trade Commission didn't even want to make an attempt to defend Judge Koh's Aspen-based holding. Instead, the FTC presented to the Ninth Circuit an alternative theory with an allegedly lower standard to meet: by not honoring contractual commitments to grant licenses, Qualcomm allegedly committed an antitrust violation (in addition to a breach of contract). While antitrust liability could serve as an additional deterrent against a refusal to grant licenses, this theory--even if it succeeded--wouldn't entitle anyone to a license who isn't already entitled under contract law anyway.

At last month's hearing, the Ninth Circuit didn't discuss the merits of the first question it has to decide in this context: whether or not to vacate the 2018 summary judgment according to which Qualcomm had an obligation under its FRAND licensing pledges to two U.S. standard development organizations (ATIS and TIA) to license rival chipset makers. The judges were merely interested in the procedural aspects, and didn't even spend much time on that one as they focused on "No License-No Chips" (the topic of my next post).

The court's procedural focus may--but need not--mean that the panel believes there were triable issues (especially the technical question of whether the cellular SEPs at issue are actually practiced by a baseband chip). If a trial is deemed necessary to discuss technical and potentially other facts (such as industry practice), that part of the case goes back to the district court. There was no summary judgment motion by Qualcomm asking the district court to hold that Qualcomm did not have such an obligation. So the appeals court couldn't resolve this question of contract law in Qualcomm's favor. It could resolve it in the FTC's favor by affirming the summary judgment, but the only alternative is a remand.

The FTC's right-for-the-wrong-reasons theory falls if a retrial--actually, the first trial on contract interpretation in this case--results in a finding (supposing it isn't overturned on appeal) that Qualcomm had no such obligation. Then Qualcomm's refusal to grant licenses wouldn't constitute an antitrust violation under the FTC's theory.

Assuming the Ninth Circuit decides to remand the contract interpretation question, it can just wait whether that part of the case ever comes back, and determine the derivative matter of an antitrust violation (based on a breach of contract) later. But the appeals court could also make it clear at the time of a remand that the contract interpretation question won't result in a holding of an antitrust violation in any event.

Given that this is a huge case, I guess the appeals court won't resolve more than is necessary at a particular stage of proceeding. That's just a guess, though.

If the appeals court sent the contract interpretation back to the district court but already made it clear that there won't be an antitrust violation in the chipset-licensing context no matter what, the FTC would have to spend tax dollars litigating a question that would be outside the scope of its mission. However, the FTC could theoretically appeal such a Ninth Circuit ruling to the Supreme Court, and on that basis could justify the further pursuit of this contract law issue.

For Qualcomm it's extremely important to get that summary judgment overturned. While it's a contract-specific holding, it would sooner or later result in some other chipset maker suing Qualcomm in California for a license (just like automotive supplier Continental is suing Nokia and other Avanci patent pool members--initially they brought the complaint in California, but it got transferred to Texas--on that basis).

This part of the case can't be settled in a way that solves the problem for Qualcomm. Even if the FTC dropped its case, other parties would still point to that summary judgment. Qualcomm could argue that it never took effect as a result of a settlement, but that would be a formalistic perspective. So Qualcomm needs to get--and to win--a trial on this issue.

In 2018, the FTC and Qualcomm asked Judge Koh to stay the case with respect to the then-pending summary judgment motion. Judge Koh declined what I called "litigation à la carte." At the time, the parties knew that if summary judgment would (as it then did) be entered, it would complicate any settlement efforts because Qualcomm would have no choice but to fight that particular decision.

As Qualcomm once told the IRS, it's "humongously more lucrative" to license only end-product makers, not chipset suppliers. At a minimum, Qualcomm would want to reach the point at which any chipset maker contemplating a contract lawsuit to get a license would face the uncertainty of a trial. If the Ninth Circuit vacated that summary judgment, Qualcomm might already be interested in settling this part of the case as well.

A trial always comes with considerable uncertainty, but Qualcomm would face major hurdles. Its own practice of obtaining exhaustive chipset-level licenses ("more equal than others") is at least a psychological problem. On the technical side, Qualcomm would have to present some cellular SEPs that are not implemented by a baseband chip but require additional hardware. The cellular SEPs-in-suit I've seen so far, including Nokia's ten patents-in-suit against Daimler, are baseband chip patents, as Qualcomm's German counsel--in that case, representing Daimler--noted last year.

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