9th Circuit Panel Questions Antitrust Application in FTC v. Qualcomm

SAN FRANCISCO -- A three-judge panel for the 9th U.S. Circuit Court of Appeals questioned during oral argument Thursday whether antitrust law, not patent law, is best to address Qualcomm’s potential violations related to chip licensing (see 2002120059). One judge appeared to dismiss DOJ’s argument that FTC antitrust enforcement against Qualcomm would threaten national security.

A Qualcomm attorney told the panel the company never disputed that it has a chip monopoly. As the district court affirmed, Qualcomm charges monopolistic prices, said attorney Tom Goldstein of Goldstein & Russell. That opens the door for competitors to move into the market and charge lower prices, he said. But FTC attorney Brian Fletcher argued Qualcomm indirectly disrupts access for rivals like Intel.

Reached after the hearing, Qualcomm officials declined to comment. The FTC also declined to comment.

DOJ argued in favor of Qualcomm. Deputy Attorney General Michael Murray focused arguments on the national security implications of harming a U.S. company competing with Chinese rivals for 5G.

There’s no market analysis or financial evidence that national security would be harmed, said Judge Stephen Murphy. There might be a broad policy concern, but there’s no hard evidence, he said.

The national security concerns are extremely abstract, Fletcher said. It’s ironic Qualcomm is asking for insulation from foreign competitors, when the purpose of antitrust law is to keep competition strong, he said.

Upholding the district court’s ruling would fundamentally alter Qualcomm’s operation and practices, Murray said. He conceded the district court proceedings didn’t focus on the 5G claims made by DOJ, which intervened late in the case.

The FTC claims Qualcomm uses its monopoly power to gain higher patent royalties, which causes rivals to make less money, Goldstein said: “If that’s correct, we win this case because that is what happens in business all the time.”

There’s no evidence Qualcomm interferes with competition through below-cost pricing, Goldstein said. He noted U.S. District Judge Lucy Koh’s finding that Qualcomm engages in monopolistic pricing. “We have accepted that rule,” he said. But the company denies violating antitrust law because there’s no evidence of competition disruption, Goldstein said: “There may be a contractual violation or something else.”

Murphy suggested possible patent violations. “Sure. Absolutely,” Goldstein said.

Fletcher agreed with Goldstein that when a monopolist charges high prices, a rival can usually enter and offer lower prices. The problem, Fletcher said, is that Qualcomm has taken part of the price for its chips and moved it to charging inflated patent royalties. Manufacturers like Apple testified they're paying inflated patent royalties, Fletcher said, not because they reflect the value of Qualcomm’s patents but because if the royalties aren’t paid Qualcomm won’t sell the chips. The surcharge reflects the value of the monopoly chips, he said.

Manufacturers only agree to pay for the inflated Qualcomm license price to get access to Qualcomm chips, Fletcher said. Qualcomm is telling manufacturers they have to pay an extra fee whether they buy Qualcomm chips or rival chips, he said.

That’s a good point, said Murphy. But he asked why manufacturers don’t exercise rights in patent law to file predatory pricing or monopoly abuse of patent claims. The federal circuit would be the venue to settle the dispute in those instances, he said.

Manufacturers testified they can’t do that because when trying to invoke ordinary patent law remedies, Qualcomm says to stop it, or it won’t sell the chips, Fletcher said. Manufacturers claim if they can’t get Qualcomm chips, they go out of business, Fletcher said.

Judge Consuelo Callahan questioned FTC claims Qualcomm employs a no license, no chip policy. It implies Qualcomm is saying buy the chips, or Qualcomm won’t award a standard-essential patent license, which is needed to sell the phones, Callahan said. The policy seems to make chip purchases from Qualcomm contingent on SEP license status, she told Fletcher: “I feel like you’re flipping it.” Why would manufacturers see this as unfair if they have to buy licenses anyway, she asked.

“No one else in the industry” has a no license, no chips policy, Fletcher said. It’s imposing a policy the district court found to be anticompetitive that's imposed only in monopoly markets, he said. It’s a “red flag that it’s not actually efficient. It’s a way of exploiting and entrenching your monopoly power,” he argued.

Judge Johnnie Rawlinson questioned Goldstein’s characterization of the FTC’s argument about blocking rivals from entering the market. She said the commission believes Qualcomm interferes with rivals’ ability to compete or enter the market, not make less money. There’s less ability to enter the market because competitors “make less money,” Goldstein said. They have less for R&D and make fewer competitive products, he said, and they’re getting outcompeted. The licensing fees don’t force a customer to purchase Qualcomm products, he said.

Rawlinson said the FTC believes Qualcomm’s “naked tax” forces customers' hands when choosing which chips to buy. “That isn’t what happens here,” Goldstein said. “We say to our customers, ‘You will take a patent royalty because everyone agrees we’re entitled to do that.’” If the customer uses a competitor chip, Qualcomm doesn’t charge more, he said.

Apple was in the best position to compete with Qualcomm, Fletcher said. Qualcomm recognized this and went out of its way to foreclose entry for competitors, he said. It delayed Intel from entering the market for about five years, he claimed. Apple was ready to work with Intel in 2014, but Qualcomm sacrificed its profits to buy exclusivity with Apple and enforced that exclusivity through dramatic clawback penalties, he said. Apple wasn’t able to work with Intel until those clawback penalties expired (see 1904160056).

Inside and outside monopoly markets, Qualcomm collects the same royalty rates, Goldstein claimed. The company is unique in that it has 140,000 patents and patent applications and an industry-leading chip sector, he said: The question is whether it’s charging too low prices for rivals to get in.