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On Monday, the U.S. Federal Trade Commission and Qualcomm reportedly requested a 30 day delay to a preliminary ruling in their ongoing dispute over the terms of Qualcomm’s licensing agreements–indicating that they may seek a settlement. The dispute raises important issues regarding the scope of so-called FRAND (“fair reasonable and non-discriminatory”) commitments in the context of standards setting bodies and whether these obligations extend to component level licensing in the absence of an express agreement to do so.

At issue is the FTC’s allegation that Qualcomm has been engaging in “exclusionary conduct” that harms its competitors. Underpinning this allegation is the FTC’s claim that Qualcomm’s voluntary contracts with two American standards bodies imply that Qualcomm is obliged to license on the same terms to rival chip makers. In this post, we examine the allegation and the claim upon which it rests.

The recently requested delay relates to a motion for partial summary judgment filed by the FTC on August 30, 2018–about which more below. But the dispute itself stretches back to January 17, 2017, when the FTC filed for a permanent injunction against Qualcomm Inc. for engaging in unfair methods of competition in violation of Section 5(a) of the FTC Act. FTC’s major claims against Qualcomm were as follows:

  • It has been engaging in “exclusionary conduct”  that taxes its competitors’ baseband processor sales, reduces competitors’ ability and incentives to innovate, and raises the prices to be paid by end consumers for cellphones and tablets.  
  • Qualcomm is causing considerable harm to competition and consumers through its “no license, no chips” policy; its refusal to license to its chipset-maker rivals; and its exclusive deals with Apple.
  • The above practices allow Qualcomm to abuse its dominant position in the supply of CDMA and premium LTE modem chips.
  • Given that Qualcomm has made a commitment to standard setting bodies to license these patents on FRAND terms, such behaviour qualifies as a breach of FRAND.

The complaint was filed on the eve of the new presidential administration, when only three of the five commissioners were in place. Moreover, the Commissioners were not unanimous. Commissioner Ohlhausen delivered a dissenting statement in which she argued:

[T]here is no robust economic evidence of exclusion and anticompetitive effects, either as to the complaint’s core “taxation” theory or to associated allegations like exclusive dealing. Instead the Commission speaks about a possibility that less than supports a vague standalone action under a Section 5 FTC claim.

Qualcomm filed a motion to dismiss on April 3, 2017. This was denied by the U.S. District Court for the Northern District of California. The court  found that the FTC has adequately alleged that Qualcomm’s conduct violates § 1 and § 2 of the Sherman Act and that it had entered into exclusive dealing arrangements with Apple. Thus, the court asserted, the FTC has adequately stated a claim under § 5 of the FTCA.

It is important to note that the core of the FTC’s arguments regarding Qualcomm’s abuse of dominant position rests on how it adopts the “no license, no chip” policy and thus breaches its FRAND obligations. However, it falls short of proving how the royalties charged by Qualcomm to OEMs exceeds the FRAND rates actually amounting to a breach, and qualifies as what FTC defines as a “tax” under the price squeeze theory that it puts forth.

(The Court did not go into whether there was a violation of § 5 of the FTC independent of a Sherman Act violation. Had it done so, this would have added more clarity to Section 5 claims, which are increasingly being invoked in antitrust cases even though its scope remains quite amorphous.)

On August 30, the FTC filed a partial summary judgement motion in relation to claims on the applicability of local California contract laws. This would leave antitrust issues to be decided in the subsequent hearing, which is set for January next year.

In a well-reasoned submission, the FTC asserts that Qualcomm is bound by voluntary agreements that it signed with two U.S. based standards development organisations (SDOs):

  1. The Telecommunications Industry Association (TIA) and
  2. The Alliance for Telecommunications Industry Solutions (ATIS).

These agreements extend to Qualcomm’s standard essential patents (SEPs) on CDMA, UMTS and LTE wireless technologies. Under these contracts, Qualcomm is obligated to license its SEPs to all applicants implementing these standards on FRAND terms.

The FTC asserts that this obligation should be interpreted to extend to Qualcomm’s rival modem chip manufacturers and sellers. It requests the Court to therefore grant a summary judgment since there are no disputed facts on such obligation. It submits that this should “streamline the trial by obviating the need for  extrinsic evidence regarding the meaning of Qualcomm’s commitments on the requirement to license to competitors, to ETSI, a third SDO.”

A review of a heavily redacted filing by FTC and a subsequent response by Qualcomm indicates that questions of fact and law continue to remain as regards Qualcomm’s licensing commitments and their scope. Thus, contrary to the FTC’s assertions, extrinsic evidence is still needed for resolution to some of the questions raised by the parties.

Indeed, the evidence produced by both parties points towards the need for resolution of ambiguities in the contractual agreements that Qualcomm has signed with ATIS and TIA. The scope and purpose of these licensing obligations lie at the core of the motion.

The IP licensing policies of the two SDOs provide for licensing of relevant patents to all applicants who implement these standards on FRAND terms. However, the key issues are whether components such as modem chips can be said to implement standards and whether component level licensing falls within this ambit. Yet, the resolution to these key issues, is unclear.

Qualcomm explains that commitments to ATIS and TIA do not require licenses to be made available for modem chips because modem chips do not implement or practice cellular standards and that standards do not define the operation of modem chips.

In contrast, the complaint by FTC raises the question of whether FRAND commitments extend to licensing at all levels. Different components needed for a device come together to facilitate the adoption and implementation of a standard. However, it does not logically follow that each individual component of the device separately practices or implements that standard even though it contributes to the implementation. While a single component may fully implement a standard, this need not always be the case.

These distinctions are significant from the point of interpreting the scope of the FRAND promise, which is commonly understood to extend to licensing of technologies incorporated in a standard to potential users of the standard. Understanding the meaning of a “user” becomes critical here and Qualcomm’s submission draws attention to this.

An important factor in the determination of a “user” of a particular standard is the extent to which the standard is practiced or implemented therein. Some standards development organisations (SDOs) have addressed this in their policies by clarifying that FRAND obligations extend to those “wholly compliant” or “fully conforming” to the specific standards. Clause 6.1 of the ETSI IPR Policy, clarifies that a patent holder’s obligation to make licenses available is limited to “methods” and “equipments”. It defines an equipment as “a system or device fully conforming to a standard.” And methods as “any method or operation fully conforming to a standard.”

It is noteworthy that the American National Standards Institute’s (ANSI) Executive Standards Council Appeals Panel in a decision has said that there is no agreement on the definition of the phrase “wholly compliant implementation.”  

Device level licensing is the prevailing industry wide practice by companies like Ericsson, InterDigital, Nokia and others. In November 2017, the European Commission issued guidelines on licensing of SEPs and took a balanced approach on this issue by not prescribing component level licensing in its guidelines.

The former director general of ETSI, Karl Rosenbrock, adopts a contrary view, explaining ETSI’s policy, “allows every company that requests a license to obtain one, regardless of where the prospective licensee is in the chain of production and regardless of whether the prospective licensee is active upstream or downstream.”

Dr. Bertram Huber, a legal expert who personally participated in the drafting of the IPR policy of ETSI, wrote a response to Rosenbrock, in which he explains that ETSI’s IPR policies required licensing obligations for systems “fully conforming” to the standard:

[O]nce a commitment is given to license on FRAND terms, it does not necessarily extend to chipsets and other electronic components of standards-compliant end-devices. He highlights how, in adopting its IPR Policy, ETSI intended to safeguard access to the cellular standards without changing the prevailing industry practice of manufacturers of complete end-devices concluding licenses to the standard essential patents practiced in those end-devices.

Both ATIS and TIA are organizational partners of a collaboration called 3rd Generation Partnership Project along with ETSI and four other SDOs who work on development of cellular technologies. TIA and ATIS are both accredited by ANSI. Therefore, these SDOs are likely to impact one another with the policies each one adopts. In the absence of definitive guidance on interpretation of the IPR policy and contractual terms within the institutional mechanism of ATIS and TIA, at the very least, clarity is needed on the ambit of these policies with respect to component level licensing.

The non-discrimination obligation, which as per FTC, mandates Qualcomm to license to its competitors who manufacture and sell chips, would be limited by the scope of the IPR policy and contractual agreements that bind Qualcomm and depends upon the specific SDO’s policy.  As discussed, the policies of ATIS and TIA are unclear on this.

In conclusion, FTC’s filing does not obviate the need to hear extrinsic evidence on what Qualcomm’s commitments to the ETSI mean. Given the ambiguities in the policies and agreements of ATIS and TIA on whether they include component level licensing or whether the modem chips in their entirety can be said to practice the standard, it would be incorrect to say that there is no genuine dispute of fact (and law) in this instance.

An important new paper was recently posted to SSRN by Commissioner Joshua Wright and Joanna Tsai.  It addresses a very hot topic in the innovation industries: the role of patented innovation in standard setting organizations (SSO), what are known as standard essential patents (SEP), and whether the nature of the contractual commitment that adheres to a SEP — specifically, a licensing commitment known by another acronym, FRAND (Fair, Reasonable and Non-Discriminatory) — represents a breakdown in private ordering in the efficient commercialization of new technology.  This is an important contribution to the growing literature on patented innovation and SSOs, if only due to the heightened interest in these issues by the FTC and the Antitrust Division at the DOJ.

http://ssrn.com/abstract=2467939.

“Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts”

JOANNA TSAI, Government of the United States of America – Federal Trade Commission
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JOSHUA D. WRIGHT, Federal Trade Commission, George Mason University School of Law
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A large and growing number of regulators and academics, while recognizing the benefits of standardization, view skeptically the role standard setting organizations (SSOs) play in facilitating standardization and commercialization of intellectual property rights (IPRs). Competition agencies and commentators suggest specific changes to current SSO IPR policies to reduce incompleteness and favor an expanded role for antitrust law in deterring patent holdup. These criticisms and policy proposals are based upon the premise that the incompleteness of SSO contracts is inefficient and the result of market failure rather than an efficient outcome reflecting the costs and benefits of adding greater specificity to SSO contracts and emerging from a competitive contracting environment. We explore conceptually and empirically that presumption. We also document and analyze changes to eleven SSO IPR policies over time. We find that SSOs and their IPR policies appear to be responsive to changes in perceived patent holdup risks and other factors. We find the SSOs’ responses to these changes are varied across SSOs, and that contractual incompleteness and ambiguity for certain terms persist both across SSOs and over time, despite many revisions and improvements to IPR policies. We interpret this evidence as consistent with a competitive contracting process. We conclude by exploring the implications of these findings for identifying the appropriate role of antitrust law in governing ex post opportunism in the SSO setting.