FTC Sues Qualcomm Inc. for Anticompetitive Tactics in Supply and Licensing of Processors | Practical Law

FTC Sues Qualcomm Inc. for Anticompetitive Tactics in Supply and Licensing of Processors | Practical Law

On January 17, 2017, the Federal Trade Commission (FTC) filed a complaint in the US District Court for the Northern District of California against Qualcomm Inc. alleging anticompetitive tactics aimed at maintaining a monopoly in the licensing and supply of baseband processors (a type of semiconductor) used in cell phones. The complaint alleges that Qualcomm has used its dominant position to impose anticompetitive supply and licensing terms on cell phone manufacturers, weakening competition, and limiting innovation that would benefit consumers.

FTC Sues Qualcomm Inc. for Anticompetitive Tactics in Supply and Licensing of Processors

by Practical Law Antitrust
Published on 20 Jan 2017 • USA (National/Federal)
On January 17, 2017, the Federal Trade Commission (FTC) filed a complaint in the US District Court for the Northern District of California against Qualcomm Inc. alleging anticompetitive tactics aimed at maintaining a monopoly in the licensing and supply of baseband processors (a type of semiconductor) used in cell phones. The complaint alleges that Qualcomm has used its dominant position to impose anticompetitive supply and licensing terms on cell phone manufacturers, weakening competition, and limiting innovation that would benefit consumers.
On January 17, 2017, the FTC filed a complaint against Qualcomm Inc. alleging that it engaged in anticompetitive tactics under Section 5(a) of the FTC Act to exclude competition in the market for baseband processors (semiconductor devices that enable cellular communications in cell phones and other products). Qualcomm is the leading supplier of baseband processors worldwide. In addition, Qualcomm is a licensor of patents that have been declared essential to widely adopted cellular standards, known as standard-essential patents (SEPs).
The complaint alleges both traditional claims of monopolization and unreasonable restraints of trade and a more controversial application of the FTC Act known as a standalone Section 5 violation, based on alleged harm to the competitive process. The FTC seeks a court order to enjoin Qualcomm from using anticompetitive methods and requests that the court restore competitive conditions. For more information on Section 5, including standalone claims, see Practice Note, FTC Act Section 5: Overview.
The FTC's vote to initiate the complaint was 2-1, with Commissioner Ohlhausen dissenting in a strongly worded statement. Commissioner Ohlhausen noted that she was departing from her longstanding policy not to issue dissenting statements when the FTC authorizes litigation over her vote, due to "extreme circumstances," including that the complaint was issued on the eve of a new presidential administration. Commissioner Ohlhausen's view of the litigation is a preview of how antitrust policy may change under the Trump administration, with Commissioner Ohlhausen likely to be interim chairman of the FTC, and with three open Commissioner positions awaiting Trump's appointments (one of which must be a Democrat). It is possible that the FTC, once the new appointments are in place, will withdraw the Qualcomm complaint or seek a settlement.

The Complaint's Allegations

According to the FTC's complaint, manufacturers have limited practical alternatives to Qualcomm for baseband processors that comply with the required cellular standards. As a result, the complaint alleges that Qualcomm engaged in a course of conduct in which it used its dominant positions in baseband processor markets to obtain anticompetitive supply and licensing terms. Specifically, the complaint alleges Qualcomm's dominance in the markets for CDMA processors (which incorporate a third-generation, or 3G, cellular standard) and LTE processors (which incorporate a fourth-generation, or 4G, standard).
The FTC alleges that Qualcomm seeks to disrupt the supply of processors in order to obtain elevated royalties and other beneficial license terms for its SEPs by:
  • Maintaining a "no license, no chips" policy.
  • Refusing to license SEPs to competitors.
  • Extracting exclusivity from Apple in exchange for reduced patent royalties.
The complaint alleges that Qualcomm's actions are anticompetitive and constitute unfair methods of competition, in violation of Section 5(a) of the FTC Act (15 U.S.C. § 45(a)) because Qualcomm's activities support:
  • Maintenance of Qualcomm's monopoly in the two baseband processor markets.
  • Licensing and related agreements with manufacturers that result from Qualcomm's monopoly and market power and constitute unreasonable restraints of trade.
  • Harm to competition and the competitive process, which constitute unfair methods of competition in and are alleged to be standalone violations of Section 5(a) of the FTC Act.

Maintaining a "No License, No Chips" Policy

The complaint alleges that Qualcomm maintains a "no license, no chips" policy, meaning that it withholds access to its baseband processors unless the customer accepts a license for SEPs on Qualcomm's terms. Customers pay elevated royalties to Qualcomm if they use a competitor's baseband processors, essentially taxing the use of rival manufacturers' processors. The FTC alleges that Qualcomm's policy:
  • Is anomalous among component suppliers and licensors.
  • Denies manufacturers the opportunity to challenge the license terms in court or negotiate royalties, because manufacturers cannot risk losing access to Qualcomm's processors.
  • Requires manufacturers to accept Qualcomm's preferred license terms.
  • As a result of the above, harms competition.

Refusing to License Standard-Essential Patents to Competitors

Standard setting organizations (SSOs) establish standards for the cellular communications industry. The standards often incorporate patented technologies that are deemed essential to meet the standards (the SEPs). Generally, patent holders commit to the SSOs that create the standards to license SEPs on fair, reasonable, and non-discriminatory (FRAND) terms.
Qualcomm participates in SSOs and holds patents that have been incorporated into cellular communications standards and are subject to FRAND commitments. However, the FTC alleges that Qualcomm refuses to license its cellular SEPs to competing suppliers. According to the complaint, this has the effect of:
  • Limiting competitors' abilities to offer baseband processors that will work with key cellular systems.
  • Permitting Qualcomm to tax its competitors' sales through patent license terms with manufacturers in ways that it would not be able to if it licensed its patents to competitors.
For more on SSOs and SEPs, see Practice Note, Antitrust Risks in Standard-Setting Organizations.

Extracting Exclusivity from Apple in Exchange for Partial Royalty Relief

The complaint alleges that Qualcomm and Apple have entered into exclusive dealing agreements whereby:
  • Qualcomm provides Apple with large payments as partial relief from Qualcomm royalties.
  • Apple agrees to exclusively use Qualcomm baseband processors in new iPhone and iPad models.
  • Apple agrees not to initiate or induce others to initiate litigation against Qualcomm based on allegations that Qualcomm did not offer licenses on FRAND terms.
As a result of these agreements, the FTC argues that:
  • Apple prevented Qualcomm's competitors from attaining similar benefits during the exclusivity period.
  • Qualcomm's competitors were foreclosed from a substantial share of the market for baseband processors.

Commissioner Ohlhausen's Dissent

Commissioner Ohlhausen's dissent challenges the complaint based on her view that it:
  • Fails to allege that Qualcomm charges above-FRAND (or unreasonably high) royalties or that Qualcomm relied on below-cost pricing, without which the complaint cannot show anticompetitive harm. Instead, the dissenting statement argues that the complaint shows only that Qualcomm procompetitively monetized its patent rights.
  • Does not include sufficient economic evidence of exclusion and anticompetitive effects.
  • Includes an inappropriate standalone claim alleging a violation of Section 5(a) of the FTC Act based on harm to the competitive process. Commissioner Ohlhausen notes that the standalone claim vindicates her criticisms of the policy statement the FTC issued in 2015 regarding its standalone authority as too vague (see Legal Update, FTC Issues Policy Statement on Section 5).