In June, Judge Koh of the U.S. District Court for the Northern District of California denied Qualcomm’s motion to dismiss the Federal Trade Commission’s (FTC) enforcement suit asserting that Qualcomm violated competition law in its mobile phone chip licensing practices. ACT | The App Association believes that a ruling based on the merits of the case will allow the court to bring much-needed clarity to app developers, and businesses of all sizes, on what constitutes appropriate negotiating behavior in the context of standard essential patents (SEPs). SEPs refer to patents that are part of, and must be exercised to implement, a technical standard and include well-known technologies like wi-fi, Bluetooth, and Long-Term Evolution (LTE, commonly referred to as “4G”), among many others. In return for the potential of a wider user base of an SEP, SEP holders often volunteer to act in a fair, reasonable, and non-discriminatory (FRAND) manner when licensing access to their SEPs. Because these standards drive the uptake of new technology, the policies covering the licensing of SEPs (in other words, what FRAND means) are integral to competition in today’s tech sector, interoperability among current and future innovations, and the ability of the internet of things (IoT) to revolutionize everything from healthcare to agriculture in the United States and around the world.
Judge Koh’s decision is significant for those seeking clarity about what FRAND behavior is and is not. In competition enforcement cases generally, moving beyond the motion to dismiss phase indicates that the court believes that the allegations put forward by the FTC have validity and that the conduct at issue needs to be evaluated on its merits. In this particular case, mobile phone chip producer Qualcomm requested to dismiss the FTC’s suit, arguing that its allegations were so off-base that they should be thrown out on their face. Ultimately, the court rejected these arguments and held that the FTC’s allegations deserve full consideration in a trial setting.
The FTC’s complaint alleges that Qualcomm coerced cell phone manufacturers into accepting unfair SEP licensing terms in violation of its voluntary promise to act in a FRAND manner when dealing with licensees interested in their SEPs. The FTC alleged that Qualcomm’s behavior was due, in part, to its dominant position in the chip manufacturing market, as Qualcomm makes the lion’s share of Code Division Multiple Access (CDMA) and premium LTE chips, which are essential components to nearly every cell phone. According to the FTC, Qualcomm either refused licenses or threatened device manufacturers with the potential of withholding access to those necessary chips unless licensees agreed to pay exorbitant royalty fees. The FTC described this as an anticompetitive “no license-no chips” policy, which allowed Qualcomm to obtain royalties significantly higher than those suggested within their FRAND obligation.
The FTC also alleged that Qualcomm’s refusal to license their SEPs to competing chip manufacturers violates the Sherman Act. The FTC argues that by selectively licensing its SEPs, Qualcomm could force mobile phone manufacturers to accept supracompetitive royalty rates or face serious disruptions to their supply. In addition to impacting mobile phone companies, the FTC argued that Qualcomm’s actions pose serious threats of harm to consumers. The FTC claimed that Qualcomm’s licenses allowed an extension of royalties to include devices not containing a Qualcomm chip, described as a “tax” on mobile phones that hurts consumers by driving prices up.
This case is particularly important because clear rules regarding FRAND behavior are essential to American innovation. However, the meaning of the voluntary FRAND commitment continues to drive an intense debate across policy fora because of the nature of SEPs. Companies are often motivated to enter their SEPs into a technology standard because it allows them to reach a wider customer base than they would ordinarily be able to service. In return, these companies volunteer to license access to their patent in a “FRAND”-ly manner. Competition regulators around the globe, from the U.S. to the European Union to South Korea, have long held that abuse of the FRAND promise by SEP holders stifles innovation, raises prices, and reduces choice, ultimately hurting standard implementers and their consumers.
During a recent congressional briefing on SEPs and FRAND abuse hosted by the App Association, small business owner David Bain, president of TM Technologies, highlighted the serious impacts of FRAND abuse on small businesses. He noted that small businesses do not have the legal or financial resources to endure years of patent litigation with large companies, and thus greatly benefit from enhanced clarity as to what FRAND means. While these big companies dominate headlines regarding patent disputes, it is important to remember that America’s small businesses are often hurt the most by anticompetitive practices involving SEPs. For this reason, the App Association filed an amicus brief in FTC v. Qualcomm urging that the case to be heard on its merits to bring greater clarity to the definition and scope of the FRAND commitment, helpfully shaping the framework on which our members can rely.
Open standards are vital to support continued innovation by American tech companies. The App Association is hopeful that this case between the FTC and Qualcomm, and ongoing litigation regarding SEPs, will provide greater clarity to what constitutes a FRAND violation. This clarity will provide a level and clear playing field that will allow our members, and tech companies across the country, to innovate and grow.