In 2017, the FTC sued Qualcomm for “unfair methods of competition” under Section 5 of the
FTC Act. Underlying the FTC’s lawsuit is the premise that Qualcomm was never forced into
negotiating a true “fair, reasonable and non-discriminatory” (FRAND) rate for its standard
essential patents (SEPs). According to this rationale, Qualcomm leveraged Original Equipment
Manufacturers’ (OEMs) need for its baseband chipsets and refused to license its SEPs to
baseband chipset competitors, who likely would have been best positioned to negotiate or litigate
a true FRAND rate. Thus, Qualcomm obtains “elevated” royalties from the OEMs who do pay
while simultaneously imposing an anticompetitive “tax” on OEMs that choose to use
FTC Commissioner (and current acting Chairman) Maureen Ohlhausen dissented from the
complaint in part because the FTC did not allege that the “elevated royalty rates” charged to
OEMs violate FRAND: “[t]he fundamental element of this theory is a royalty overcharge. If
Qualcomm charges reasonable royalties for its patents, then there is no anticompetitive ‘tax’ …
but only the procompetitive monetization of legitimate patent rights. … Hence, the complaint’s
taxation theory requires that Qualcomm charge OEMs unreasonably high royalties.”
On a motion to dismiss, District Court Judge Lucy Koh ruled that the complaint adequately pled
that Qualcomm charged above-FRAND rates by alleging that Qualcomm can charge a
“surcharge” on top of FRAND rates because OEMs fear losing supply while denying chipset
manufacturers the opportunity to negotiate FRAND rates entirely. In addition, Qualcomm patent
royalties are allegedly some of the highest in the cellular SEP space, and Qualcomm allegedly
charged a flat percentage of handset sales prices as royalty rates, even as handsets became much
more expensive due to the addition of non-cellular technologies.
Judge Koh further held that Qualcomm had a duty to deal with its competitors based upon its
FRAND commitments to standards setting organizations (“SSOs”). Qualcomm’s alleged refusal
to license modem chips to competitors also violated Section 2 of the Sherman Act because
Qualcomm engaged in a voluntary course of dealing with its competitors when it participated in
and committed to SSOs but failed to honor its FRAND commitments, and because Qualcomm
acted with anticompetitive malice.
Some key takeaways:
- A SEP-holder’s FRAND commitment constitutes an exception to the general antitrust
rule that there is no duty to deal with competitors.
- Adjudicating a breach of FRAND may not involve a complicated rate-setting exercise.
Judge Koh found Qualcomm’s royalty rate stayed constant over time despite (a) an
increasing royalty base due to the introduction of additional technology in high-end
smartphones apart from Qualcomm’s SEPs, and (b) the decreasing number of Qualcomm
SEPs relative to the total SEPs necessary to make a wireless device. This suggests that
the FTC may be able to prove a violation of FRAND without the need for complicated
technical valuation evidence.
- The FTC stated a claim under Sections 1 and 2 of the Sherman Act, even though the FTC
never expressly alleged such violations (or amended the complaint to do so).