Richard Lloyd

After an investigation lasting more than two years, the Federal Trade Commission filed a complaint against Qualcomm on Tuesday over what it alleges are the chipmaker’s anti-competitive practices in the supply of its baseband processors and the licensing of its patent portfolio. The lawsuit, which was filed in the Northern District of California, is the latest example of Qualcomm’s licensing practices being placed under the microscope by regulators around the world.

The FTC’s case is framed around three main points: first, that Qualcomm adopted a ‘no licence, no chips’ policy, whereby it refused to sell its chips to those companies that declined to take a licence to its patent portfolio; second, that the tech giant refused to license its competitors; and, finally, that Qualcomm put in place a deal with Apple in which the iPhone maker was precluded from sourcing baseband processors from competitors from 2011 to 2016.

Together they amount to a damning set of allegations, but the FTC’s announcement also revealed that the Commission was split on whether to bring a case. The three commissioners (two seats remain vacant following departures last year) voted 2-1 to initiate the suit, with Commissioner Ohlhausen, the lone Republican in the triumvirate, dissenting and issuing an unusual and strongly worded statement.

In it she criticised the enforcement action for being: “Based on a flawed legal theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine US intellectual property rights in Asia and worldwide.”

In a statement Qualcomm also came out fighting with general counsel Don Rosenberg commenting: “This is an extremely disappointing decision to rush to file a complaint on the eve of Chairwoman Ramirez’s departure and the transition to a new Administration, which reflects a sharp break from FTC practice.”    

The cases against Qualcomm are perhaps the highest profile spats in a much broader debate in the licensing industry: just exactly what constitutes a reasonable royalty,  particularly where standard essential patents (SEPs) are concerned? That issue has become more complicated as the licensing industry has grown, the returns have got bigger and new entrants have moved into what had been relatively cosy markets.

To that end, the wider patent community may welcome a court case that will closely analyse Qualcomm’s FRAND policies and might answer some of the big questions that licensors and licensees routinely disagree about. It was telling, however, that the FTC did not use the term ‘unreasonable’ in its case, preferring instead ‘elevated’ when referring to Qualcomm’s rates. Of course there’s nothing in FRAND to say that a licensor can’t charge at the top of the market for its IP, it just asks that the set rate is ‘fair and reasonable’.

Commissioner Ohlhausen highlighted this point in her dissent, claiming that the FTC’s complaint “dances around that essential element”. Its failure to address it head on, Ohlhausen insisted, reflected the lack of evidence in the Commission’s case. “What I have been presented with is simply a possibility theorem,” she asserted in a comment that would sound familiar to all those who rage against claims of widespread patent hold-up and royalty stacking in the licensing world.   

Just what is unreasonable about Qualcomm’s rates may become clear in the course of a courtroom battle, but it should be assumed that the company’s very well-paid lawyers are going to be picking holes in this from day one - and it looks like they have plenty of scope to do so.

Rosenberg’s concluding comments in Qualcomm’s statement also point to a possible point of attack by the company’s lawyers. “The intellectual property rights policies of the cellular standards organisations do not require licensing at the component level, and the FTC does not have the authority to rewrite industry policy,” he asserted.

ETSI, which is the relevant standards body, requires that companies license at the device level so the likes of Qualcomm demand royalties from handset manufacturers (in the case of the mobile market) rather than pursue royalties from competitors like Intel. Perhaps the FTC has a smoking gun which shows that Qualcomm has refused to grant rival chipmakers a licence to its portfolio but, as Rosenberg suggests, the Commission’s case doesn’t appear to completely tally with licensing practices.

Of course, there’s an element of timing in all of this. The FTC is an independent body but it’s hard not to think that the Obama administration would agree with most if not all of the complaint. After all it was comments by the Department of Justice’s Renata Hesse that effectively prompted the IEEE to revise its patent policy and which was met by fierce opposition from, among others, Qualcomm.

And with two spots on the commission vacant and a third due to open up when the Chairwoman, Edith Ramirez steps down in February, the FTC is about to undergo a significant overhaul. No party can hold more than three of the commissioner seats but with President Trump claiming the White House, the FTC should soon have a Republican majority. According to several FTC observers, there’s also a good chance that Commissioner Ohlhausen will take over as chairwoman and we already know how she feels about the case.

“The history of deathbed antitrust lawsuits is grim at best,” said David Balto, a former policy director at the FTC’s Bureau of Competition, now in private practice, adding that he saw the case as “tremendous over-reaching by the FTC”.

How much support the incoming administration shows to this case remains to be seen, but there are indications that it may be lukewarm (at best) to some of the arguments the FTC has made. For one thing, an early appointee to the Trump transition team overseeing the handover at the FTC was Professor Joshua Wright, a former FTC commissioner who returned to academia at George Mason University in 2015 after a two and a half year stint at the commission. 

It is not clear what Wright thinks – he declined to comment for this story – but it’s not beyond the realms of possibility that his sympathies lie more with his former colleague Ohlhausen. Some of Wright’s research has cast doubt on the use of antitrust remedies to regulate FRAND licensing.    

This case may also not fit with the emphasis the Trump administration has placed on creating jobs and protecting American enterprise. Although the FTC would no doubt like it to be construed as an effort to ensure that consumers don’t ultimately pay too much for their smartphones and that Qualcomm’s rivals – particularly Intel – are competing on a level playing field.

But even those arguments could run into difficulty. Consumer harm may be hard to prove during a period of declining smartphone prices, while the optics of pursuing a genuine American innovator that has been harangued by regulators around the world doesn’t exactly fit with much of Trump’s rhetoric.

No other company’s licensing practices have been as heavily analysed and penalised as Qualcomm’s in recent years. In early 2015 the company was fined $975 million by China’s National Development and Reform Commission (NDRC) and agreed to modify some of its business practices in the country. Then, at the end of last year, it was fined more than 1.03 trillion won ($853 million) by the Korea Fair Trade Commission (KFTC) for practices that violated Korean competition law. 

Qualcomm can at least take solace from the fact that even though it has been slammed by the FTC, it now has a long judicial process in which to make its case. The last major patent licensing case that the FTC brought was against Rambus in 2002. That was initially heard by one of the FTC’s own Administrative Law Judges before it went back and forth in the courts and was ultimately scrapped in 2009. The case against Qualcomm is at an even greater scale, but as Rambus showed, making something stick can be tricky.