Federal Trade Commission retreat is throwing the towel


The Federal Trade Commission’s decision not to petition the Supreme Court for review of the Qualcomm case, which was correctly decided at the district court level and unwisely reversed by the Ninth Circuit, it throwing the towel on a fight that is worth winning.

Qualcomm violated America’s antitrust laws by stifling the ability of an entire industry to grow and flourish because of market concessions that made its parts the industry standard, insuring massive profits.

Qualcomm is arguably the world’s most powerful telecom and mobile equipment manufacturer for its critical components that go into smartphones and mobile devices, but the Internet of Things, cloud SoC processing, Wi-Fi equipment, and carrier equipment.

The FTC alleged on January 17, 2017, that Qualcomm used its dominant position as a supplier to impose onerous and anticompetitive supply and licensing terms on cell phone manufacturers and to weaken competitors.

Qualcomm is the world’s dominant supplier of baseband processors – devices that manage cellular communications in mobile products – and the Federal Trade Commission should have asked the Supreme Court to overturn the U.S. Court of Appeals for the Ninth Circuit.

Recent merger activity, a changing political climate, and the company’s significant IP portfolio has created a virtual monopoly of mobile and telecommunications technology in Qualcomm.

Qualcomm’s unlawful abuse of a monopoly taxes its competitors’ baseband processor sales, reduces competitors’ ability to innovate, and raises prices paid by consumers for cell phones and tablets and other products that use baseband processors, semiconductor devices that Qualcomm has patented.

To explain this complex issue, I am relying heavily on material produced by the Electronic Frontier Foundation. EFF is the leading nonprofit organization defending civil liberties in the digital world and a source I trust for both its clarity and conviction.

I do not know if the EFF would agree with me, but I do believe the Federal Trade Commission should have petitioned the Supreme Court for review of the Qualcomm case, and to assert the validity of what is known as the “mandatory access remedy” or “essential facilities doctrine.”

Antitrust law empowers the government to break up monopolies when their conduct is so corrosive of competition that they can dictate market outcomes without worrying about their rivals.

In theory, patent and antitrust law serve the goals of promoting economic and technological development, but in practice when a competitor has power that is so great, it can use patents to stifle innovation.

On May 21, 2019, Judge Lucy H. Koh of the U.S. District Court for the Northern District of California ruled in favor of the FTC, finding that Qualcomm violated U.S. antitrust law.

On August 11, 2020, that decision was reversed by a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit. The agency’s request for en banc rehearing of the decision was denied. Subsequently, the Federal Trade Commission decided not to petition the Supreme Court for review of the Qualcomm case.

FTC Chairwoman Rebecca Slaughter cited “significant headwinds facing the Commission in this matter” in deciding to not to ask the top court to review the matter, but the fundamental fact remains that consumers are going to pay a steep price and our national interests will suffer in the global marketplace if American technology advancements are strangled by rules that let the powerful exploit everyone else.

Some technology standards become touchstones by achieving widespread adoption through market forces —the QWERTY keyboard layout as one example—while others are the result of extensive deliberation and cooperation among industry players (including competitors), like the MP3 audio compression and 3G wireless communication standards.

The relationship between antitrust and patent law is especially thorny when it comes to “standards-essential patents” or “SEPs.” These patents cover technologies considered “essential” for implementing agreed-upon rules and protocols that allow different manufacturers’ devices to communicate with each other using shared network infrastructure.

Such criterion can enhance competition and consumer choice, but they also inflate the value of patents deemed essential to the standard, and give their owners the power to sue companies that use them; either for money damages or for injunctions to block competitors from using their SEPs.

To minimize that risk, standard-setting organizations typically require companies that want their patented technology incorporated into a standard to promise in advance to license their SEPs to others on fair, reasonable, and non-discriminatory (FRAND) terms.

That promise strikes at a key tension between antitrust and patent law: patent owners have no obligation to let anyone use technology their patent covers, but to get those technologies incorporated into standards, patent owners usually have to promise that they will give permission to anyone who wants to implement the standard as long as they pay a reasonable license fee. 

Qualcomm is one of the most important and dominant companies in the history of wireless communication standards.

It is a multinational conglomerate that has owned patents on every major wireless communication standard since its first CDMA patent in 1985, and it participates in the standard-setting organizations that define those standards.

Qualcomm is somewhat unique in that it not only licenses SEPs, but also supplies the modem chips used by a wide range of devices. These include chips that implement wireless communication standards, which lie at the heart of every mobile computing device.

Although Qualcomm promised to license its SEPs (including patents essential to CDMA, 3G, 4G, and 5G) on FRAND terms, its conduct has to many looked unfair, unreasonable, and highly discriminatory.

In particular, Qualcomm has drawn scrutiny for bundling tens of thousands of patents together—including many that are not standard-essential—and offering portfolio-only licenses no matter what licensees actually want or need; refusing to sell modem chips to anyone without a SEP license and threatening to withhold chips from companies trying to negotiate different license terms; refusing to license anyone other than original-equipment manufacturers (OEMs); and insisting on royalties calculated as a percentage of the sale price of a handset sold to end users for hundreds of dollars, despite the minimal contribution of any particular patent to the retail value.

In 2017, the U.S. Federal Trade Commission sued Qualcomm for violating both sections of the Sherman Antitrust Act by engaging in a number of anticompetitive SEP licensing practices.

In May 2019, the U.S. District Court for the Northern District of California agreed with the FTC, identifying numerous instances of Qualcomm’s unlawful, anticompetitive conduct in a comprehensive 233-page opinion.

Consumer advocates were pleased to see the FTC take action and thrilled that the district court credited the overwhelming evidence that Qualcomm’s conduct is corrosive to market-based competition and threatens to cement that one company’s dominance for years to come.

Unfortunately, a panel of judges from the Court of Appeals for the Ninth Circuit unanimously overturned the district court’s decision, reasoning that Qualcomm’s conduct was “hypercompetitive” but not “anticompetitive,” and therefore not a violation of antitrust law.

To reach that result, the appellate court made the patent grant more powerful and antitrust law weaker than ever.

According to the Ninth Circuit, patent owners don’t have a duty to let anyone use what their patent covers, and therefore Qualcomm had no duty to license its SEPs to anyone. But that view ignores promises Qualcomm made to license its SEPs on reasonable and non-discriminatory terms—promises that have been consistently enforced.

It also means ignoring principles like the essential facilities doctrine, which limits the ability of a monopolist with hold-up power over an essential facility (like a port) to shut out rivals. Instead, the Ninth Circuit held rather simplistically that a duty to deal could arise only if the monopolist had provided access, and then reversed its policy.

But even when Qualcomm restricted its licensing policies in critical ways, the Ninth Circuit found reasons to approve those restrictions.

For example, Qualcomm stopped licensing its patents to chip manufacturers and started licensing them only to original equipment manufacturers (OEM). This let Qualcomm charge a much higher royalty rate based on the high retail price of the end user devices, like smartphones and tablets, that OEMs make and sell.

If Qualcomm had continued to license to chip suppliers, its patents would be “exhausted” once the chips were sold to OEMs, extinguishing Qualcomm’s right to assert its patents and control how the chips were used.

Patent exhaustion is a century-old doctrine that protects the rights of consumers to use things they buy without getting the patent owner’s permission again and again. Patent exhaustion is important because it prevents price-gouging, but also because it protects space for innovation by letting people use things they buy freely, including to build innovations of their own. The doctrine thus helps patent law serve its underlying goal—promoting economic growth and innovation. In other words, the doctrine of exhaustion is baked into the patent grant; it is not optional.

Nevertheless, the Ninth Circuit approved of Qualcomm’s efforts to avoid exhaustion—even when that meant cutting off access to previous licensees (chip-makers) in ways that let Qualcomm charge far more in licensing fees than its SEPs could possibly have contributed to the retail value of the final product.

It makes no sense that Qualcomm could contract around a fundamental principle like patent exhaustion, but at the same time did not assume any antitrust duty to deal under these circumstances. Worse, it’s harmful for the economy, innovation, and consumers.

Unfortunately, the kind of harm that antitrust law recognizes is limited to harm affecting “competition” or the “competitive process.”

Antitrust law, at least as the Ninth Circuit interprets it, doesn’t do nearly enough to address the harm downstream consumers experience when they pay inflated prices for high-tech devices, and miss out on innovation that might have developed from fair, reasonable, and non-discriminatory licensing practices.

The Federal Trade Commission’s decision not to petition the Supreme Court for review of the Qualcomm case, which was correctly decided at the district court level and unwisely reversed by the Ninth Circuit, it throwing the towel on a fight that is worth winning. Qualcomm’s unlawful abuse of a monopoly taxes its competitors’ baseband processor sales, reduces competitors’ ability to innovate, and raises prices paid by consumers for cell phones and tablets and other products that use baseband processors, semiconductor devices that Qualcomm has patented.

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