With the settlement of the Apple-Qualcomm litigation, the fate of the FTC’s litigation against Qualcomm has become the next topic of interest in the standard-essential patent (SEP) sphere. There are a host of reasons why the FTC shouldn’t settle that relate to concerns about Qualcomm’s behavior and its impact on competition and consumers. But beyond those existing reasons, there are forward-looking concerns that should drive anyone concerned with American interests and security to hope that the FTC continues its case.
Qualcomm As A Model
Some have speculated that an FTC-Qualcomm settlement might happen. As I wrote in the wake of the FTC’s summary judgment win on Qualcomm’s obligation to license competitors, any FTC settlement that would address Qualcomm’s existing anti-competitive tactics needs to address Qualcomm’s refusal to license competitors, its use of “no license, no chips” to get around the Lexmark case, and its use of exclusionary contracts (like the one it seems to have reached with Apple) to exclude competitors (in this case, with the result of forcing its sole competitor, Intel, out of the market.)
If the FTC settles and doesn’t address these issues, it effectively blesses Qualcomm’s business model as permissible. And once the FTC says it’s OK, other companies—who might have believed until now that Qualcomm’s practices were illegal—would almost certainly follow suit and impose their own, similar programs. Essentially, Qualcomm’s business model would become the model for other SEP owners to follow.
While there are a number of SEP owners who would likely go down this path, ranging from InterDigital (who has already been sued over its FRAND practices) to Nokia (who has a history of using privateering arrangements to try to enforce its SEPs), one of the most significant SEP owners, especially in 5G, is Huawei.
Huawei is a major SEP owner—in fact, by many estimates, Huawei’s 5G portfolio is of similar significance to Qualcomm’s 5G portfolio. And Huawei has been quite willing to enforce its SEPs, actively litigating them in jurisdictions across the world. In fact, one of the most significant EU SEP court decisions was in a Huawei case, Huawei v. ZTE.
If the FTC vindicates the Qualcomm model, Huawei would be one of the companies best suited to follow in Qualcomm’s footsteps. But there’s an additional wrinkle with respect to Huawei, one that Qualcomm can’t take advantage of: Huawei makes network-side equipment like the base stations that cellular towers use, not just handsets. (In fact, the ZTE case was about 4G base station patents.)
That raises a whole new set of concerns.
Huawei In The Middle
One of the key markets for Huawei is 5G network equipment. If Huawei can use its patents to effectively monopolize a market, as Qualcomm has done, that raises two sets of concerns.
The first set of concerns is identical to the concerns in Qualcomm’s case. By monopolizing the market, Huawei can raise prices for network providers (which are then passed on to consumers) and try to limit competition by refusing to license competitive network equipment vendors. And by leveraging its SEP patent portfolio to exclude competitors in violation of its FRAND obligation, removing competitors’ financial incentive to participate in development, Huawei also slows down technological development. Even Qualcomm admitted in the FTC case that having a competitor like Intel to push it forward helped Qualcomm develop better new technology, faster.
The second set of concerns is unique to Huawei. The national security concerns over Huawei’s base station equipment have been discussed at length, even to the point of senior U.S. officials warning the U.K. not to use Huawei’s equipment. There’s a reason behind that. As Lawfare put it in their analysis of the risks of Huawei network equipment, examining the potential risk of Huawei hardware, “[a]ll data sent and received from a mobile device, smart home or even a car will pass through a network built with Huawei devices.” By having its devices in the middle of the communication path, Huawei gains visibility into huge amounts of data and metadata.
You can choose not to buy a Huawei phone. You can’t choose not to use a Huawei base station—you won’t even know who makes the equipment your phone carrier uses.
Enforcing The Position
These types of security concerns have led various countries, including the U.S., to warn about the risks of Huawei hardware. Avoiding a particular product due to perceived national security risks is not a problem, but only provided that there’s an alternative base station that you can use. But if Huawei adopts Qualcomm’s business model, it can use its SEPs to force competitor 5G base station makers into unprofitable postures and ultimately to drop out of the market entirely.
Once the 5G base station market is “Huawei or nothing”, just like the 5G baseband chipset market for handsets is now “Qualcomm or nothing”, the ultimate choice is between having 5G or having a trustworthy cellular network. That’s why an FTC settlement with Qualcomm threatens U.S. national security.