By Joshua Sisco. Originally published on FTC:Watch on May 5, 2017.
San Diego, California-based chipmaker Qualcomm is challenging the Federal Trade Commission's ability to oversee patents, and the largely legal monopolies they confer on their owners.
That Qualcomm's technologies are deemed "essential" to some of the worlds' most ubiquitous electronic devices has given global antitrust enforcers an opening to act. So far, they have been largely successful.
Antitrust regulators in China and South Korea have secured nearly $2 billion in fines, while the Chinese government has helped its domestic smartphone makers get more favorable licensing deals.
The FTC is the latest agency to enter the fray. In January, it sued Qualcomm in California federal court for consistently refusing to license its cellular patents essential to industry standards to competitors on fair, reasonable and non-discriminatory, or FRAND, terms.
Currently, Qualcomm only licenses its patents to device-makers such as Apple. It doesn't offer licenses to competing chipmakers. Apple, one of Qualcomm's largest customers, filed its own antitrust case.
Qualcomm is also facing potentially billions of dollars in damages from smartphone purchasers who say they overpaid for their devices as a result of unfair patent licenses.
A dominant supplier of baseband processors for wireless connectivity, Qualcomm also engaged in a "no license, no chips" policy, withholding its processors unless customers agreed to patent licensing terms favorable to Qualcomm, the agency alleged.
The FTC is gearing up for its first offensive in June, when the two sides meet in the courtroom of US District Judge Lucy Koh in San Jose, to argue Qualcomm's motion to dismiss. It will be the first time a US antitrust enforcer will litigate SEPs in a federal court.
A commission divided
In addition to testing the FTC's legal theories and ability to curb potentially abusive licensing practices, the Qualcomm case is also exposing fissures in the commissioners' ability to work together.
Filed days before President Donald Trump's inauguration, the lawsuit split the agency's Democratic and Republican commissioners. FTC Chairwoman Edith Ramirez and Commissioner Terrell McSweeny, both Democrats, voted in favor of the complaint, while the FTC's sole Republican Commissioner Maureen Ohlhausen dissented.
In written remarks, Ohlhausen said the case is "based on a flawed legal theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide."
The complaint doesn't allege that Qualcomm charges more than a reasonable royalty, Ohlhausen said, or that it charges more for manufacturers that buy non-Qualcomm chips.
The timing of Ohlhausen's dissent is unusual as commissioners rarely speak out against ongoing litigation. But the substance is not surprising.
Shortly after joining the commission in 2012, the long-time FTC staffer dissented from two SEP-related consent decrees. One case involved the merger of Robert Bosch Gmbh and SPX Service Solutions, while the other case focused on Google, targeting the licensing of standard-essential patents by its subsidiary Motorola.
In both instances the FTC limited the ability of SEP holders to seek injunctions, and in both cases Ohlhausen questioned the agency's authority to enact such limits, expressing concern that intellectual property protections would be weakened.
The facts in Qualcomm are different, but Ohlhausen's concerns are the same. This time though, the current acting chairman may be able to do more than issue a written dissent.
Ohlhausen told FTC:WATCH's sister publication MLex that she may press the incoming Republican majority to drop the case.
There is little Ohlhausen can do until at least one more Republican commissioner is in place. With Ramirez gone, Ohlhausen and McSweeny are the only two sitting commissioners, and there are no immediate plans for replacements. Still, Ohlhausen has some time. Last month Koh scheduled a trial to start in January 2019.
A strong showing in court in June would strengthen the arguments of the agency's Democratic contingent to leave the lawsuit in place and let it stand or fall on the merits. Given the time needed to nominate and confirm a Republican commissioner, that is all but assured.
If the FTC does drop the case, it would be a major public relations victory for Qualcomm, though better still, would be a win in court.
The bulk of Qualcomm's revenues come from selling chips, but the main profit center is its patent licensing business. And with the FTC and Korea Fair Trade Commission cases, it believes that to be under siege.
Chinese antitrust regulators secured an eye-popping $975 million fine, along with changes to Qualcomm's licensing practices. Those remedies however, only apply within China, and enabled the company to renegotiate agreements with Chinese smartphone makers.
Qualcomm elected not to appeal the Chinese action, instead focusing its efforts on cases with more global significance.
The US and Korean authorities are taking a much broader approach, seeking changes to Qualcomm's licensing practices around the world. For that reason, settlements are unlikely and the company is aggressively fighting back. It is currently engaging the Korean regulator in what could be a years-long appeal over an $867 million fine and drastic licensing changes.
In the US, Qualcomm plans to fight the FTC as long as there is a case to fight.
"The failure on their part to have a good basis for their legal and economic theory is in part due to the fact there are no facts that support it. Their theories are off," Don Rosenberg, Qualcomm's general counsel, said of the case in an interview with MLex. "In terms of, for example, competitive harm, there's not one example of how a competitor, a competing chipmaker for example, was limited in its ability to compete with us."
Few things rouse the antitrust and patent bars more than applying antitrust law to patents. The FTC has much at stake. Neither the FTC nor the Department of Justice has litigated an antitrust case involving SEPs, and a win would greatly boost its clout in a hotly contested area of the law.