Northern District Of California Holds That Commitments Made In Industry Standard Setting Required Chipmaker To License Standard-Essential Patents To “All Comers,” Including Competitors
On November 6, 2018, Judge Lucy H. Koh of the U.S. District Court for the Northern District of California sided with the Federal Trade Commission (“FTC”) and granted a motion for partial summary judgment, holding that contractual commitments it agreed to in the standards-setting process required the defendant chipmaker to license certain essential patents to competing modem chip suppliers. Federal Trade Comm’n v. Qualcomm Inc., No. 17-CV-00220 (N.D. Cal. Nov. 6, 2018).
In moving for summary judgment, the FTC cited contractual commitments made by the chipmaker when its products were adopted as “standard essential patents” (“SEPs”) for 2G, 3G, and 4G cellular technology, and argued that the terms of these commitments obligated the chipmaker to provide licenses to any company that requests them, including to rival modem chip suppliers. The Court agreed, holding that the commitments “include an obligation to license to all comers, including competing modem chip suppliers.” The Court further held that those licenses must be offered on fair and reasonable terms. Although the Court’s partial summary judgment order resolves the Court’s interpretation of contractual commitments made in the standard setting process, it does not resolve the FTC’s underlying claim under Section 5 of the Federal Trade Commission Act (“FTC Act”), which is scheduled for trial in January 2019. To prevail at trial, the FTC still must prove that the chipmaker’s licensing practices amount to a violation of the FTC Act.
In its complaint, the FTC alleges that the chipmaker is a “dominant supplier” of modem chips and the holder of SEPs essential to “widely adopted cellular standards.” The FTC further alleges that the chipmaker harmed competition and violated § 5 of the FTC Act, which prohibits “unfair methods of competition in or affecting commerce,” by, among other things, (i) withholding its modem chips unless a customer accepts a license to Qualcomm’s SEPs, purportedly offered for “elevated royalties,” (ii) refusing to license its SEPs to competitors in the modem chip supplier market, and (iii) entering into “exclusive dealing arrangements” with Apple, an important cell phone manufacturer. The partial summary judgment motion did not seek to resolve the overall issue of whether the chipmaker violated FTC Act § 5; rather, the FTC’s motion addressed only whether the chipmaker was contractually required to license its SEPs to competing modem chip suppliers. The FTC argued that voluntary “fair, reasonable, and nondiscriminatory” (“FRAND”) licensing commitments made by the chipmaker to certain standard-setting organizations (the “SSOs”) for the cellular communications industry required the chipmaker to make its licenses available to competing modem-chip sellers. In response, the chipmaker argued (i) that such a holding “would radically reshape licensing in the cellular industry” and (ii) that the SEPs at issue only needed to be licensed to manufacturers of finished devices, not modem chips.
In finding for the FTC, the Court began with an analysis of the contractual commitments made by the chipmaker to the SSOs, which included assurances that it would comply with the SSOs’ stated policies to make licenses available “under terms and conditions that are reasonable and non-discriminatory” and “under reasonable terms and conditions that are demonstrably free of any unfair discrimination to applicants desiring to utilize the license for the purpose of implementing” the relevant standard. The Court found that this language was almost identical to language previously addressed by the Ninth Circuit. The Court held that the import of the Ninth Circuit’s prior decisions was clear: “a SEP holder that commits to license its SEPs on FRAND terms must license those SEPs to all applicants.”
The Court also considered extrinsic evidence in ruling for the FTC. First, the Court examined the guidelines and stated purposes of the SSO policies at issue. According to the Court, the guidelines behind the SSO policies made clear that the SSOs intended to make intellectual property rights “available on a reasonable and non-discriminatory basis for all that would use it to fashion products contemplated by the standard in question.” The Court also found it noteworthy that the guidelines specifically identified a licensor’s “willingness to license all applicants except for competitors of the licensor” as an example of impermissible, discriminatory conduct. Similarly, the Court observed that the stated purposes of the SSO policies emphasized the pro-competitive principles behind the non-discrimination requirement. The Court noted that the chipmaker failed to address the SSO policy guidelines or explain how discrimination against modem chip suppliers was consistent with the policies’ stated purposes.
Second, the Court found that the chipmaker’s own practices contradicted its current arguments that the SSO policies permit it to discriminate against component suppliers and that modem chip suppliers never receive SEP licenses. The Court noted that the chipmaker conceded that it had emphasized in prior litigation that a SEP holder may not discriminate in licensing its SEPs and had received SEP licenses to supply components such as modem chips.
Finally, the Court rejected the chipmaker’s argument that its FRAND obligations for SEPs extend only to device suppliers and not modem chip suppliers. The Court instead found that suppliers of both whole devices and component chips “practice” or “implement” standards and so fall under the protection of the SSOs’ policies. The Court therefore found that the chipmaker could not distinguish between finished devices and the components used to make them in licensing its SEPs.
Although, as noted, the underlying FTC Act claim will not be resolved until trial next year, the Court’s order setting out this clear and broad interpretation of the contractual commitments arising from the standard setting process is an important milestone not only in this litigation, but potentially in other litigation involving SEPS.