Monday, Judge Koh issued an order denying Qualcomm’s motion to dismiss in the FTC v. Qualcomm lawsuit. This is just the first step in the lawsuit, but there are some pretty important signals buried in this order.
Motions To Dismiss
A motion to dismiss is a request, filed by one side or the other and typically filed fairly early in a case, to dismiss the case for any of a variety of reasons. In Qualcomm’s motion to dismiss, they said the Federal Trade Commission (FTC) had “failed to state a claim.” Failure to state a claim doesn’t mean that the FTC didn’t allege Qualcomm had violated antitrust laws. Instead, it means that Qualcomm thought the FTC’s version of the facts didn’t meet the threshold of facts required to fit a legal claim under the existing antitrust laws.
Judge Koh disagreed. Now, this doesn’t mean that she thinks that the FTC will or should ultimately succeed—like in an inter partes review, this is an initial decision that the FTC has met the required threshold. But it does mean Judge Koh thinks that, if the FTC’s version of the facts is accurate, then the FTC stated a viable case.
X-Ray Vision For Judge Koh’s Decision
The short version? Judge Koh’s order shows she understands the FTC’s theory of the case and, at least preliminarily, seems inclined towards the FTC’s view of the relevant legal issues.
“No License-No Chips”
As a reminder, Qualcomm operates under a no license-no chips policy. This means that Qualcomm won’t just sell their modem chips on their own—if you want their chips, you have to buy a license to their patents. This policy is the core of the FTC’s case, and no one disputes that it’s Qualcomm’s policy. The only question is its effect on the relevant markets, and how antitrust law applies to it.
Because of no license-no chips, Qualcomm’s customers are forced to take a license. And because challenging that license might result in their supply of chips being cut off, the FTC alleges that Qualcomm’s customers are forced to accept royalties that are higher than a “fair, reasonable, and non-discriminatory” (FRAND) royalty.
Judge Koh found no fault with the FTC’s allegations.
It’s A Bird, It’s A Plane, It’s A Supra-FRAND (Royalty)
The FTC provides evidence for their belief that the existing royalties are too high. For example, even though Qualcomm has a roughly average share of patents declared essential to LTE, it collects royalties equivalent to the sum of some number of other companies. (Unfortunately, the number of companies is redacted.)
Qualcomm, in response, pointed to the fact that they have historically charged the same 5% of handset price royalty they currently charge, arguing that that shows that their royalties are reasonable. But Judge Koh disagreed that Qualcomm’s argument was meaningful. In fact, she said it supports the FTC’s allegations, because the baseband functionality Qualcomm’s patents cover is a less valuable portion of a modern phone than it was for dumb phones. For instance, a modern phone can serve as a primary camera for a user, store music, provide a web browser over Wi-Fi, etc. Charging the same percentage of sales price suggests that Qualcomm is charging more than their patents are actually worth.
In summary, according to Judge Koh:
Qualcomm collects the same 5% royalty on the total value of a 2017 smartphone as Qualcomm collected on the total value of a 2006 phone, despite the fact that both handset technology and Qualcomm’s SEP portfolio has changed dramatically over the past decade…
The result? The facts alleged support the allegation that Qualcomm’s royalty rates are higher than a FRAND rate.
Harm To The Market
In addition to establishing that Qualcomm’s royalties are higher than FRAND, the FTC also argued that Qualcomm’s policies harm the modem chip market. The FTC points to the impact of Qualcomm’s actions as a whole; Qualcomm focuses on their actions in isolation from one another. Judge Koh notes that antitrust requires viewing the actions as an integrated whole. The FTC identifies two ways in which Qualcomm harms the market.
First, Qualcomm uses the threat of disruption of modem chip supply to convince their customers to pay a higher-than-FRAND royalty, as discussed above.
Second, because Qualcomm’s customers take that license whether or not they use a Qualcomm chip, this higher-than-FRAND royalty raises the effective cost to the handset maker of competitors’ chips. It also allows Qualcomm to offer rebates to customers to prevent them from buying chipsets from competitors—the deal Qualcomm apparently had with Apple for several years. This prevents competitors from gaining a foothold in the market, a classic example of monopoly behavior.
So Qualcomm’s behavior with respect to handset makers is already questionable, according to Judge Koh. What about their behavior with respect to other chipset makers?
A Duty To Deal
One of the key issues for the chipset portion of the FTC’s antitrust case is whether Qualcomm had an “antitrust duty to deal.” In other words, is Qualcomm obligated under antitrust law to license out its patents to competitors (for example, rival baseband chip makers)? Without a duty to deal, Qualcomm might be able to escape liability for their anticompetitive conduct under a case called linkLine.
Judge Koh says the obligation exists; Qualcomm has to license their patents to competitors.
Qualcomm’s participation in the standard-setting process is in and of itself the kind of activity that creates a duty to deal. By agreeing to license their patents on a non-discriminatory basis, as part of the bargain to (allegedly) include their patents in the standard, Qualcomm created an obligation to make licensing deals for their patents with the industry at large. And because Qualcomm would be compensated fairly for licensing their patents (because it’s a FRAND royalty), the implication is that refusal to license is due to “anticompetitive malice.”
And that would mean that Qualcomm’s “no license-no chips” policy violates antitrust law.
Now, this is a motion to dismiss. That means that all of the facts have to be taken “in the light most favorable to the non-moving party.” In other words, Judge Koh was obligated to assume that anywhere there was a fact in dispute, the FTC was right and Qualcomm was wrong.
The problem, for Qualcomm, is that there really aren’t very many facts in dispute. Qualcomm doesn’t dispute that Qualcomm is a monopoly in the market for CDMA and premium LTE chips. They generally don’t dispute the amounts they charge, the structure of their business, and other key facts.
Instead, Qualcomm disputed that the royalties they charged were higher than a FRAND royalty. Qualcomm disputed that there was an antitrust duty to deal. And, as a result, Qualcomm disputed that there was competitive harm from their actions.
But if the facts aren’t in dispute, only the application of the law to those facts, then the motion to dismiss suggests that Judge Koh views the outcome of those legal disputes in a light favorable to the FTC.
That’s not good news, if you’re Qualcomm.