The Federal Trade Commission filed suit last week in federal court against Qualcomm, Inc., following its investigation launched in September 2014. The FTC alleges that the semiconductor manufacturer illegally maintained a monopoly on baseband processors—the “chips” that enable cellular communications in phones and other products—through its licensing of its patents claimed to be essential for cellular communications standards, including Code Division Multiple Access (CDMA) and Long-Term Evolution (LTE). 

The next day, the first of two putative class action complaints was filed on behalf of retail purchasers of cellular telephones and other cellular devices, claiming that Qualcomm’s anticompetitive conduct allowed it to charge excessive royalties on devices incorporating the company’s products and patents, or even incorporating (or arguably incorporating) just its patents, resulting in inflated prices paid by purchasers of the devices. And on Friday, January 20, 2017, Apple Inc. filed a suit seeking to recover billions of dollars of alleged damages resulting from Qualcomm’s alleged illegal licensing practices and to obtain declaratory relief regarding the parties’ rights and obligations under applicable contracts and patents. 

These suits represent the latest challenges to Qualcomm’s patent licensing and pricing practices, which have been the subject of investigations and fines by competition authorities outside the United States. In this update, we consider the FTC’s complaint against Qualcomm, the follow-on private litigation and Qualcomm’s past run-ins with competition authorities.

FTC Action  

Qualcomm is the leading supplier of baseband processors and a licensor of patents that are claimed to be essential to widely adopted cellular standards. Cell phones and tablets sold by Qualcomm’s customers must comply with those standards, even when they incorporate baseband processors supplied by Qualcomm’s competitors. Qualcomm has allegedly committed to standard-setting organizations to license its standard-essential patents (SEPs) on fair, reasonable and non-discriminatory (FRAND) terms. 

The FTC accuses Qualcomm of violating Section 5 of the FTC Act, which prohibits unfair methods of competition, by excluding competitors and harming competition through several practices. These include: (1) employing a “no license-no chips” policy under which Qualcomm refuses to sell its baseband processors to device makers that won’t agree to the company’s patent licensing terms, including the required payment of “elevated royalties” when the customer uses a competitor’s processors; (2) refusing to license its patents to its baseband processor competitors, in violation of Qualcomm’s FRAND commitments; and (3) entering exclusive dealing arrangements with Apple in return for billions of dollars’ worth of reduced patent royalties.  

The complaint, filed in the U.S. District Court for the Northern District of California, alleges that these practices have harmed Qualcomm’s customers by requiring customers to pay elevated royalties and accept other potentially non-FRAND license terms, effectively preventing cell phone manufacturers from challenging the royalty demands while at the same time “taxing” them when they use non-Qualcomm processors. The complaint further alleges that the practices have harmed Qualcomm’s competitors by reducing demand for their processors—including via the exclusive supply arrangement between Qualcomm and Apple—and reduced the ability and incentive of competitors to invest and innovate. Together, the FTC claims, these practices help maintain Qualcomm’s monopoly power and raise the prices paid by consumers who purchase cellular devices. Despite these allegations, the FTC has not sought redress on behalf of past purchasers of the processors under Section 2 of the Sherman Act or otherwise, and has limited its demand for relief to a permanent injunction prohibiting Qualcomm’s allegedly anticompetitive conduct pursuant to Section 5 of the FTC Act, which cannot be enforced by private parties.

Follow-on Litigation  

The day after the FTC filed its complaint, private litigants followed suit with a complaint filed in the Northern District of California on behalf of a putative class of purchasers of cellular phones and other cellular devices. Highlighting the same alleged misconduct identified in the FTC complaint, the class action plaintiffs claim that Qualcomm’s abuse of its monopoly power has forced device manufacturers to pay excessively high royalties, resulting in higher consumer prices for cellular devices. 

Unlike the FTC, the private plaintiffs seek damages in addition to injunctive relief and assert claims for monopolization under Section 2 of the Sherman Act; violations of the California Cartwright Act and Unfair Competition Law; violations of several other states’ antitrust and consumer protection laws (many of which are similar to Section 5 of the FTC Act); and common law unjust enrichment. Two days later, a second complaint alleging nearly identical claims and putative class definitions was filed in the same court.  

Also on January 20, 2017, Apple filed suit against Qualcomm in the Southern District of California, alleging that Qualcomm’s abuse of its monopoly power has enabled it to overcharge Apple by billions of dollars in royalty payments, including nearly $1 billion that Qualcomm allegedly owes Apple under an agreement between the parties but refuses to pay due to Apple’s cooperation with an investigation of Qualcomm by Korean competition authorities. In addition to its contract claims, Apple alleges violations of Section 2 of the Sherman Act and the California Unfair Competition Law, and it also seeks declarations as to non-infringement and FRAND royalties for several Qualcomm patents. 

Qualcomm’s Past Run-Ins With Competition Authorities

Although the FTC lawsuit represents the first action by U.S. competition authorities directed at Qualcomm’s patent licensing practices, several regulators outside of the United States have taken action against Qualcomm in recent years, including:

• In September 2009, the Japan Fair Trade Commission issued a cease and desist order against Qualcomm based on the violation of its FRAND obligations.
• In February 2015, China’s National Development and Reform Commission found that Qualcomm had abused its monopoly power and restricted competition, fining Qualcomm $975 million.  
• In December 2015, the Taiwan Fair Trade Commission notified Qualcomm of its investigation into the company’s licensing behavior and royalty charges. 
• In December 2015, the European Commission filed formal complaints against Qualcomm alleging that Qualcomm illegally paid a major customer to exclusively use its baseband processors and that it sold its baseband processors below cost with the aim of forcing a competitor out of the market.
• In December 2016, the Korea Fair Trade Commission fined Qualcomm $854 million for abuse of market dominance and anticompetitive conduct with respect to its licensing practices. This followed a July 2009 fine imposed on Qualcomm by the KFTC. 

Implications

Like the earlier actions of foreign competition authorities, the FTC’s complaint and the follow-on litigation highlight the complicated interplay between patent licensing practices and antitrust and consumer protection laws. But in this action, the FTC pushes the envelope beyond its prior enforcement efforts directed towards the misuse of SEPs. In the FTC’s other recent actions, it focused on companies that threatened injunctions over SEPs. This new case wades into the complex territory of whether charging more than the FRAND rate or refusing to sell downstream products incorporating the SEPs violates antitrust laws. The suit necessarily raises the corollary question of what is an appropriate FRAND rate.

These actions serve as a reminder to companies that license their patents—particularly those companies that possess significant market power and/or SEPs—of the constantly evolving nature of relevant competition laws and the contours of the companies’ relevant rights and obligations. They also serve as a reminder to those potentially harmed by anticompetitive licensing practices, including the licensor’s competitors and consumers, that they may be entitled to redress under the competition laws. For more information on these subjects, including answers to questions about a company’s patent licensing practices or antitrust compliance measures, or potential claims based on the licensing practices of other industry participants, please contact experienced counsel.  

© 2017 Perkins Coie LLP