by: Tuong Pham
The Ninth Circuit has recently ruled in favor of Qualcomm in its long battle against the Federal Trade Commission (FTC). On August 11, 2020, the three-judge panel unanimously reversed the decision of the district court finding in favor of the FTC. The Ninth Circuit found that Qualcomm’s business policies did not violate anti-trust laws. FTC requested a rehearing en banc with the Ninth Circuit on September 25, 2020, but on October 28, 2020, the Ninth Circuit declined to rehear the case.
Qualcomm holds patent portfolios for many stand essential patents (SEPs) for cellular technology found in most smartphone devices including 4G standards. A large portion of Qualcomm’s business involves licensing the patents to original equipment manufacturers (OEMs) like cellphone manufacturers. To maximize revenue, Qualcomm only licenses to the OEMs instead of chip suppliers to prevent patent exhaustion. Additionally, Qualcomm also manufactures and sells cellular modern chips required to practice the technology standards to OEMs. OEMs must follow a “no license, no chips” policy by Qualcomm because Qualcomm refuses sell its chips if the OEMs do not have a license.
Chip manufacturers including rivals, who supply the licensed OEMs with Qualcomm chips are essentially granted a covenant not to sue. Qualcomm promises not to assert its patents if the chip manufacturer promises not to sell its chips to unlicensed OEMS in the “CDMA ASIC Agreements.” Qualcomm allows the chip supplier to manufacture the chips without royalty payments as long as they report supply agreements with OEMs to Qualcomm as well.
The Ninth Circuit Opinion
The Ninth Circuit unanimously found that FTC failed to prove that Qualcomm’s business practices caused any antitrust violations. The court found that Qualcomm’s refusal to license its patents to rival chip manufacturers is not an antitrust violation. Qualcomm fails to single out any specific chip manufacturer but provides the “CDMA ASIC Agreements” to allow chip suppliers the ability to practice Qualcomm’s patents without fear of enforcements. Qualcomm’s policy of “no license, no problem,” is applied neutrally to all competing chip manufacturers.
The “no license no chips” policy is permissible. The court found no harm in the relevant markets. The court refused to determine if the royalty rates were too high. If the royalty rates were too high, the potential harm would be to Qualcomm’s customers and not Qualcomm’s competitors, thus being outside the relevant markets. Qualcomm’s royalties were “chip-supplier neutral” because the royalty rates were based on the OEMs’ licensing agreement without any relevance to where the OEMs got their chips from. Although the royalty rates may be high, OEMs can purchase Qualcomm chips or a rival’s chips.
Potential Problems for Qualcomm:
Although, the court ruled in favor of Qualcomm under antitrust, Qualcomm might be facing future patent exhaustion problems. Patent exhaustion can occur when any licensed manufactured product is sold. The patent is exhausted for the sold product and the patent owner is then unable to sue for infringement. Patent exhaust occurs for all downstream purchases of the patented product. In this case, if Qualcomm had licensed the chip manufacturers, the patent would be exhausted when the chip manufacturer sold the patent chips to the OEMs. Therefore in this scenario, Qualcomm could not assert its patent against OEMs who did not license their products. Qualcomm’s business strategy attempts to avoid this pitfall and require the license to the OEMs themselves.
The Ninth Circuit opinion found Qualcomm’s business strategy valid. However, the problem occurs because Qualcomm might be giving the chip manufacturers a legal license. The Ninth Circuit also wrote that the “’CDMA ASIC Agreements’ functionally act as de facto licenses.” Although, the “CDMA ASIC Agreements” appear like a covenant not to sue, in recent years, courts have found little distinguishing differences between a covenant not to sue and a license. In Ortho Pharm. Corp. v. Genetics Institute, Inc., the court stated “A license may amount to no more than a covenant by the patentee not to sue the licensee for making, using or selling the patented invention.” If the chip manufacturers have a valid license, then the OEMs can use and purchase those chips without having to pay any royalties to Qualcomm because the patent would be exhausted. The Ninth Circuit only dealt with antitrust issues, but the patent exhaustion issue might be a topic for the future.
Currently, Qualcomm has won a victory for their practices in the Ninth Circuit. The Ninth Circuit has already declined to rehear the case, but the FTC still have the option to appeal to the Supreme Court.
 FTC v. Qualcomm Inc., 969 F.3d 974 (9th. Cir. 2020).
 Id. at 984
 Id. at 995.
 Id. at 1002.
 Jason Rantanen, “No License, No Problem” – Is Qualcomm’s Ninth Circuit Antitrust Victory a Patent Exhaustion Defeat? https://patentlyo.com/patent/2020/09/qualcomms-antitrust-exhaustion.html
 Id. at 996.
 52 F.3d 1026, 1031 (Fed. Cir. 1995).