Ten years after the European Commission opened an investigation into Qualcomm’s royalties for 3G essential patents, and 8 years after it closed that investigation without any finding of infringement, the US FTC last week week (January 2017) brought a new complaint against the chipset manufacturer’s patent licensing practices.
In the meantime, Qualcomm has not been long out of the competition authorities’ sights, withstatements of objections in the EU on exclusivity payments and predatory pricing, aninfringement decision and $853m fine by the Korean FTC (the second imposed on the company by that agency) just after Christmas last year, and a settlement worth over $900m with the Chinese antitrust authorities in 2015. It has also attracted private actions, as we reported here(Icera’s 2016 claim in the English courts) and as has been further reported in recent days (Apple’s new lawsuit in California, alleging overcharging for chips and failure to pay rebates due).
The FTC complaint focusses on three main areas*:
• Requiring customers for its baseband processors (in which Qualcomm is said to have a dominant position for both CDMA (3G) and LTE (4G)) to take a patent licence, thus achieving elevated royalties,
• Refusing to license its essential patents to competitors (such as Intel), contrary to Qualcomm’s FRAND commitments,
• Exclusive dealing, notably with Apple, to cement its position in the 4G smartphone market
In combination, this conduct is said to impose a “tax” on mobile phone manufacturers, even when using non-Qualcomm processors. The complaint also notes that licensees are passing up the opportunity to challenge whether Qualcomm’s rates are FRAND. The FTC lists a number of reasons why Qualcomm’s licences might not be FRAND, such as the maintenance of Qualcomm’s royalty rates at a significant level despite its reduced patent share, the charging of royalties on the selling price of the whole handset, even though this includes many features not subject to Qualcomm’s patent claims, and the extraction of onerous cross-licensing terms.
But why is this occurring? – why is it that licensees do not litigate Qualcomm’s royalty demands, as they do with other significant SEP holders? The answer lies – according to the FTC – in the cost to licensees of litigation with Qualcomm. It argues that rational licensees will be willing to litigate if the cost of doing so appears likely to be outweighed by the prospect of reduced royalties. In this instance, however, it is said that the cost of litigation for prospective Qualcomm licensees is usually too great: as Qualcomm’s licensees are also customers of Qualcomm’s chipsets (for which there are few – if any – substitutes), they not only have to bear the cost of the litigation itself, but also, potentially of significantly impeded market access, arising from difficulties in obtaining Qualcomm chips.
Patent licensing, once regarded as a largely benign or even pro-competitive business model, is now at the forefront of the antitrust authorities’ attention around the world. The fact that Qualcomm’s conduct is perceived to have effects on a market as valuable and crucial to the economy as the smartphone market have served to make it a particularly attractive target for the antitrust authorities. This is not without controversy, however: US DOJ officials have previously expressed concerns about investigations seeking to curb royalties would be liable to affect innovation, and – as Qualcomm has emphasised – the present FTC Complaint was launched on the basis of only 2-1 agreement by the FTC commissioners, in the face of opposition from Maureen Ohlhausen. Whatever the divergence of views, it appears inevitable that Qualcomm will continue to appear in the antitrust headlines for some time to come.
* One further area has been identified by the FTC, but is subject to protective order.