Ninth Circuit Delivers A Defeat To The FTC And Holds That Technology Company’s Licensing Practices Are Not Illegal
On August 11, 2020, the United States Court of Appeals for the Ninth Circuit overturned a decision by the United States District Court for the Northern District of California finding that the Federal Trade Commission had proven that the technology company’s (the “Company”) patent licensing practices violated the antitrust laws. FTC v. Qualcomm Corp., __ F.3d __, Case No. 19-16122, 2020 WL 4591476 (9th Cir. Aug. 11, 2020). The panel included Judges Rawlinson and Callahan of the Ninth Circuit, and Judge Murphy of the Eastern District of Michigan, sitting by designation. While the Ninth Circuit’s opinion involves some complex issues involving technology markets and patent law, at a higher level, this opinion’s critical antitrust findings reaffirm that businesses are free to independently choose with whom to deal, the terms upon which they will do so and that mere profit-seeking conduct is not illegal. The opinion further makes plain that to establish the element of harm to competition, plaintiff’s theory of harm, its market definition, and its proof of alleged anticompetitive effects must be consistent. Where the alleged anticompetitive effects are not established to have occurred within the properly defined, relevant market, a plaintiff’s claim should be rejected.
The Company is a wireless technology company that holds a broad patent portfolio that is critical to producing cellular technology, including the manufacture of modem chips. The Company also manufactures modem chips that it sells to original equipment manufacturers (“OEMs”), such as cellular telephone and smart car manufacturers. In the sale of modem chips, the Company has a high market share—ranging between 65% and 90%, depending on the type of chip and time period. The FTC’s lawsuit primarily concerned two of the Company’s licensing practices. First, the Company refused to license its patent portfolio to its modem chip manufacturer competitors (i.e., it would only license its patents at the OEM level). However, it agreed not to sue these rivals for patent infringement on the condition that the chip manufacturers would not sell chips containing the Company’s technology to any OEM that did not license the Company’s patents. Second, the Company maintained a “no license, no chips” policy toward OEMs under which the Company would not sell chips to an OEM if it did not have a license to the Company’s patent portfolio.
According to the Company, the purpose of these two policies was to maximize the value of the Company’s patents by avoiding patent exhaustion. The Company set its royalty rate at a percentage of the finished OEM product. If the Company licensed its patent portfolio to upstream chip manufacturers it would be unable to recoup royalties on the downstream product produced by the OEM because the Company’s patent rights would be exhausted when competing manufacturers sold their chips to OEMs, creating little incentive for OEMs to pay licenses for the Company’s patents. The FTC saw it differently. Because the Company’s licensing practices together required OEMs to pay the Company a royalty regardless of whether it purchased the Company’s chips, the FTC asserted that these practices imposed an anticompetitive surcharge on its rivals’ chips and impeded their ability to compete in the market to sell two types of chips.
In a strongly worded opinion for a unanimous panel, the Ninth Circuit overturned the district court’s decision in favor of the FTC, holding that (1) the Company’s OEM-level licensing policy was not anticompetitive, but a common licensing practice designed to maximize the value of a patent portfolio; (2) that the Company’s “no license, no chips” policy did not impose an anticompetitive surcharge because it was “chip-supplier neutral”; and (3) the Company was not subject to an antitrust duty to license to its rivals under Aspen Skiing and did not engage in related anticompetitive conduct in violation of § 2 of the Sherman Act.
At the outset of its analysis, the Court held that the district court and FTC had properly defined the market(s) as “the market for CDMA modem chips and the market for premium LTE modem chips.” Having defined the markets as competition between chipmakers, a recurring theme throughout the Ninth Circuit’s opinion is that the district court erred by failing to require the FTC to provide proof of harms to the competitive process in those markets and instead focusing on supposed harms to OEMs. In other words, the Ninth Circuit’s opinion criticized the mismatch between the market allegedly harmed and the attempt to use claimed effects in another, albeit related market.
First, the FTC’s primary theory of harm was that the Company’s licensing practices resulted in an anticompetitive surcharge that OEMs had to pay when purchasing chips from the Company’s competitors. While the Ninth Circuit rejected the district court’s conclusion that these prices were “unreasonable” on patent law grounds, from an antitrust perspective, the Ninth Circuit held that these practices were not directed toward competitors participating in the FTC’s defined markets, but instead related to OEMs. Harms to OEMs, even if proven, “were [ ] located outside the ‘areas of effective competition’—the markets for CDMA and premium LTE modem chips—and had no direct impact on competition in those markets.” Because the FTC’s claimed harm to OEMs did not directly relate to the FTC’s defined market, the Ninth Circuit held that the district court erred by finding that the FTC had met its burden to establish harm to competition in the alleged markets. Likewise, with respect to the Company’s “no license, no chips” policy, the Ninth Circuit held that any harms, if they existed, were to OEMs and did not impact competition in the FTC’s defined markets. Separately, the Ninth Circuit found that this policy did not prevent rival chipmakers from competing because it was “chip-supplier neutral” and it pointed to the fact that Intel was able to take a large customer from the Company while this policy was in effect as evidence that it did not harm competition in the defined markets.
Second, the FTC continually asserted that the Company’s licensing practices were anticompetitive because the Company was able to extract a royalty even when OEMs purchased chips from manufacturers other than the Company. The Ninth Circuit was not troubled by this because any chip that an OEM purchased, regardless of the manufacturer, still incorporated the Company’s patented technology. That fact distinguished the Company’s licensing practices from licensing practices that other courts had found to be unlawful (i.e., defendant received a royalty even on products that did not incorporate its patents or other intellectual property).
Third, the district court had held that the antitrust laws required the Company to license its patents to its chipmaker rivals. The FTC conceded this holding was in error and the Ninth Circuit agreed. The FTC nevertheless asserted that the Company was required to deal with these competitors because of its licensing commitments to various standard-setting organizations, and its failure to abide by those obligations violated the antitrust laws. The Ninth Circuit declined to decide whether the Company was contractually obligated to license its patents to rivals in its agreements, but even if it was, the Ninth Circuit held that such issue is better resolved using the “scalpel” of contract and patent law instead of the “hammer” of antitrust law.
The Ninth Circuit framed the district court’s ruling as either a “trailblazing application of the antitrust laws” or an “improper excursion beyond the outer limits of the Sherman Act.” In the end, the Ninth Circuit held it was the latter. This decision teaches that courts must critically analyze the connection between a plaintiff’s market definition and its theory of harm and attempted proof of anticompetitive effects. If there is not a tight connection, it can result in the rejection of plaintiff’s claim.