This post will discuss a summary judgment by a district court in California – the one responsible for most cases in Silicon Valley – on whether Qualcomm’s refusal to license its Standard Essential Patents (SEPs) to competitors infringed the non-discrimination limb of RAND commitments and, by extension, s. 5 of the FTC Act. The decision is available here.
Cellular communications depend on widely distributed networks that implement cellular communications standards. These standards promote availability and interoperability of standardized products regardless of geographic boundaries. Standard-setting organizations (“SSOs”) – such as the Telecommunications Industry Association (“TIA”) and the Alliance for Telecommunications Industry Solutions (“ATIS”) in the United States, and the European Telecommunications Standards Institute (“ETSI”) in Europe – have emerged to develop and manage the relevant cellular standards.
The cellular communications standards that SSOs develop and adopt may incorporate patented technology. In order to prevent the owner of a patent essential to complying with the standard—the “SEP holder”—from blocking implementation of a given standard, SSOs maintain intellectual property rights (“IPR”) policies. These IPR policies “requir[e] members who hold IP rights in [SEPs] to agree to license those patents to all comers on terms that are ‘reasonable and nondiscriminatory’ or ‘RAND.’
The FTC claimed that Qualcomm is a “dominant supplier” of modem chips and the holder of SEPs essential to “widely adopted cellular standards.” The FTC further alleged that Qualcomm harmed competition and violated s. 5 of the FTC Act via several interrelated policies and practices. First, Qualcomm does not sell its modem chips unless a customer accepts a licence to Qualcomm’s SEPs, which the FTC alleges Qualcomm offers for “elevated royalties.” Second, Qualcomm refuses to license its SEPs to competitors in the modem chip supplier market, in violation of industry agreements. Third, the FTC alleges that Qualcomm has entered “exclusive dealing arrangements” with Apple, an important mobile phone manufacturer.
The FTC alleges that, because of those practices, customers for Qualcomm’s modem chips must pay elevated royalties, while Qualcomm’s refusal to license its SEPs to competing modem chip suppliers ensures that Qualcomm’s customers must depend on Qualcomm for their modem chip supply. The FTC further alleges that Qualcomm’s exclusive arrangements with Apple preclude other modem chip suppliers from working with “a particularly important cell phone manufacturer,” which harms competition.
While all these matters are very interesting in and of themselves, this judgment concerns solely whether two industry agreements – namely, the policies of the Telecommunications Industry Association (“TIA”) and Alliance for Telecommunications Industry Solutions (“ATIS”) – require Qualcomm to license its SEPs to other modem chip suppliers. Since this is a summary judgment, there must be no genuine dispute as to any material fact – in this case, on whether Qualcomm is under an obligation to license its SEPs to some of its competitors.
The reasoning of the court focused on the construction of the relevant contracts – namely the SSOs’ policies at stake. Because it may be necessary to use patented technology to practice a given standard, standards threaten to endow holders of standard-essential patents with disproportionate market power. A single standard can implicate “perhaps hundreds, if not thousands” of patents. To avoid giving SEP holders the power to prevent other companies from practicing the standard, SSOs’ policies impose on SEP holders an obligation to license IP rights on reasonable and non-discriminatory (‘RAND’) terms to all comers.
The relevant policies condition the inclusion of a patent into a standard on the acceptance of an obligation to grant a licence to an unrestricted number of applicants on a worldwide, non-discriminatory basis, and on reasonable terms and conditions to use the patented material necessary in order to manufacture, use, and/or sell implementations of the relevant standard. Such policies admit of no limitations as to who or how many applicants could receive a licence or as to which country’s patents would be included. As a result, SEP holders cannot refuse to license any of its SEPs to any manufacturer that commits to paying the RAND rate.
In this case, if a SEP holder like Qualcomm could discriminate against modem chip suppliers, a SEP holder could embed its technology into a cellular standard and then prevent other modem chip suppliers from selling modem chips to cellular handset producers. A company with a SEP will effectively control the standard; its patent gives it the right to enjoin anyone else from using the standard. Such discrimination would enable the SEP holder to achieve a monopoly in the modem chip market and limit competing implementations of those components, which directly contradicts the policies’ stated purpose to “enable competing implementations that benefit manufacturers and ultimately consumers”.
Qualcomm argued that its FRAND obligations for SEPs extend only to device suppliers and not modem chip suppliers because only device suppliers “practice” or “implement” standards. However, the court held that this distinction not only violates the non-discrimination obligation, but also makes little sense. As Qualcomm’s founder conceded and Qualcomm’s own documents demonstrate, modem chips may be “compliant” with cellular standards.
Furthermore, the relevant policies do not limit a SEP holder’s RAND commitment to those applicants who themselves “practice” or “implement” whole standards. Any SEP is by definition necessary to practice or for the purpose of implementing a standard. Compliant devices necessarily infringe certain claims in patents that cover technology incorporated into the standard. Thus, if a modem chip infringes a SEP, it follows that the relevant standard requires that SEP to be licensed to its manufacturer on RAND terms.
The court agrees with the FTC that, “after considering the language of the contract and any admissible extrinsic evidence, the meaning of the contract is unambiguous.” As a matter of law, the TIA and ATIS IPR policies both require Qualcomm to license its SEPs to modem chip suppliers.
The reasoning of this case is in line with the prevailing US approach, according to which the licensing of SEPs is predominantly a matter of contractual law. However, a number of antitrust considerations nonetheless influence this approach.
First, the case was brought by the FTC under s. 5 of the FTC Act, which prohibits “[u]nfair methods of competition in or affecting commerce.” “Unfair methods of competition” under the FTCA includes “violations of the Sherman Act.” In addition, the FTC under Section 5 may “bar incipient violations of [the Sherman Act], and conduct which, although not a violation of the letter of the antitrust laws, is close to a violation or is contrary to their spirit.” It is well-established that: “the standard of ‘unfairness’ under the FTCA is, by necessity, an elusive one”, and the precise contours of the FTC’s authority under s. 5 are not clearly defined. However, the FTC’s authority to proscribe “unfair methods of competition” under s. 5 is not unbounded.
This power is important because in many systems, a SSO policy will not provide contractual rights to the licensee. As such, it may well be that licensees have to rely on mechanisms such as this, or on competition law grounds, to be entitled to a RAND undertaking.
This is not always the case. For example, in the Unwired Planet v Huawei decision reviewed here, and which appeal is reviewed below, the English High Court found that French law applied to the interpretation of the relevant telecommunications standard. This meant that a FRAND declaration was legally binding, and that enforceable claims for FRAND undertakings could be made by prospective licensees under the French legal doctrine of stipulation pour autrui (agreement for the benefit of third parties). In other words, the FRAND claim had contractual grounds.
The line taken by the German courts on this point is quite different. They reject the possibility of a choice of laws in view of the lex loci protectionis principle. For that reason, German law applies. The German courts are unanimous in holding that FRAND undertakings made vis-à-vis SSOs do not establish contractual obligations – and, in particular, do not amount to a binding agreement for the benefit of third parties. Instead, the statement of willingness to grant a FRAND licence gives specific declaratory form to the statutory obligation to conclude an agreement by virtue of competition law. The declaration must be interpreted as meaning that the patent owner intended to commit himself to the extent that such a commitment is mandatory under competition law. This means that a FRAND declaration is subject to the tacit proviso that the patent owner promising to grant a licence dominated the market (see, for this, Maximilien Haedicke ‘Lessons from the Huawei v. Unwired Planet decision for German patent law’ (2018) Journal of Intellectual Property Law & Practice (13) 7 581).
In short, competition law provide the basis for implementing a FRAND obligation – either by granting a competition agency a power to impose such undertakings, as in under US law, or by providing the basis for a legal duty to grant FRAND licenses.
A second way in which antitrust was relevant in this case was by guiding the interpretation of the relevant IPR policies. Such provisions should be interpreted in a way that is competition-enhancing, in line with the purpose of the relevant policies adopted by SSOs. As the judge noted, both policies which were relevant in this case include statements of purpose that emphasise the pro-competitive principles behind the non-discrimination. The TIA IPR policy is designed “to encourage holders of intellectual property to contribute their technology to TIA’s standardization efforts and enable competing implementations that benefit manufacturers and ultimately consumers.” Similarly, the ATIS policy aims “to benefit the public while respecting the legitimate rights of intellectual property owners.” The TIA Guidelines specifically explain that a SEP holder’s FRAND commitment “prevents the inclusion of patented technology [in a standard] from resulting in a patent holder securing a monopoly in any market as a result of the standardization process.’
Lastly, I would remark that this judgment deals with only one element of non-discrimination obligations under RAND commitments, and arguably the easier one to deal with: whether there is a duty to license a SEP in the first place. In practice, the harder challenge as regards non-discrimination concerns the assessment of the content of the licensing arrangement. This overlaps with reasonableness (and fairness) criteria included in FRAND terms. The difficulty this assessment poses is apparent in the case discussed below.