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Full Opinion
FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FEDERAL TRADE COMMISSION, No. 19-16122
Plaintiff-Appellee,
D.C. No.
v. 5:17-cv-00220-
LHK
QUALCOMM INCORPORATED, A
Delaware corporation,
Defendant-Appellant, OPINION
SAMSUNG ELECTRONICS COMPANY,
LTD.; SAMSUNG SEMICONDUCTOR
INC.; INTEL CORPORATION;
ERICSSON, INC.; SAMSUNG
ELECTRONICS AMERICA, INC.;
MEDIATEK INC.; APPLE INC.,
Intervenors,
NOKIA TECHNOLOGIES OY;
INTERDIGITAL, INC.; LENOVO
(UNITED STATES), INC.; MOTOROLA
MOBILITY LLC,
Intervenors.
Appeal from the United States District Court
for the Northern District of California
Lucy H. Koh, District Judge, Presiding
2 FTC V. QUALCOMM
Argued and Submitted February 13, 2020
San Francisco, California
Filed August 11, 2020
Before: Johnnie B. Rawlinson and Consuelo M. Callahan,
Circuit Judges, and Stephen J. Murphy, III, * District Judge.
Opinion by Judge Callahan
SUMMARY **
Antitrust
The panel vacated the district courtâs judgment, and
reversed the district courtâs permanent, worldwide
injunction prohibiting several of Qualcomm Incorporatedâs
core business practices.
The Federal Trade Commission (âFTCâ) contended that
Qualcomm violated the Sherman Act, 15 U.S.C. §§ 1, 2, by
unreasonably restraining trade in, and unlawfully
monopolizing, the code division multiple access (âCDMAâ)
and premium long-term evolution (âLTEâ) cellular modern
chip markets.
*
The Honorable Stephen J. Murphy, III, United States District
Judge for the Eastern District of Michigan, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
FTC V. QUALCOMM 3
Qualcomm has made significant contributions to the
technological innovations underlying modern cellular
systems, including CDMA and LTE cellular standards.
Qualcomm protects and profits from its innovations through
patents, which it licenses to original equipment
manufacturers (âOEMâ). Qualcommâs patents include
cellular standard essential patents (âSEPsâ), non-cellular
SEPS, and non-SEPs. Because SEP holders could prevent
industry participants from implementing a standard by
selectively refusing to license, international standard-setting
organizations require patent holders to commit to license
their SEPs on fair, reasonable, and nondiscriminatory
(âFRANDâ) terms before their patents are incorporated into
standards.
The panel framed the issues to focus on the impact, if
any, of Qualcommâs practices in the area of effective
competition: the markets for CDMA and premium LTE
modern chips.
The panel began by examining the district courtâs
conclusion that Qualcomm had an antitrust duty to license
its SEPs to its direct competitors in the modern chip markets
pursuant to the exception outlined in Aspen Skiing Co. v.
Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). The
panel held that none of the required elements for the Aspen
Skiing exception were present, and the district court erred in
holding that Qualcomm was under an antitrust duty to
license rival chip manufacturers. The panel held that
Qualcommâs OEM-level licensing policy, however novel,
was not an anticompetitive violation of the Sherman Act.
The panel rejected the FTCâs contention that even
though Qualcomm was not subject to an antitrust duty to deal
under Aspen Skiing, Qualcomm nevertheless engaged in
anticompetitive conduct in violation of § 2 of the Sherman
4 FTC V. QUALCOMM
Act. The panel held that the FTC did not satisfactorily
explain how Qualcommâs alleged breach of its contractual
commitment itself impaired the opportunities of rivals.
Because the FTC did not meet its initial burden under the
rule of reason framework, the panel was less critical of
Qualcommâs procompetitive justifications for its OEM-level
licensing policyâwhich, in any case, appeared to be
reasonable and consistent with current industry practice.
The panel concluded that to the extent Qualcomm breached
any of its FRAND commitments, the remedy for such a
breach was in contract or tort law.
The panel next addressed the district courtâs primary
theory of anticompetitive harm: Qualcommâs imposition of
an âanticompetitive surchargeâ on rival chip suppliers via its
licensing royalty rates. The panel held that Qualcommâs
patent-licensing royalties and âno license, no chipsâ policy
did not impose an anticompetitive surcharge on rivalsâ
modem chip sales. Instead, these aspects of Qualcommâs
business model were âchip-supplier neutralâ and did not
undermine competition in the relevant markers. The panel
held further that Qualcommâs 2011 and 2013 agreements
with Apple have not had the actual or practical effect of
substantially foreclosing competition in the CDMA modem
chip market. Also, because these agreements were
terminated years ago by Apple itself, there was nothing to be
enjoined.
FTC V. QUALCOMM 5
COUNSEL
Thomas C. Goldstein (argued), Kevin K. Russell, and Eric
F. Citron, Goldstein & Russell P.C., Bethesda, Maryland;
Gary A. Bornstein, Antony L. Ryan, Yonatan Even, and M.
Brent Byars, Cravath Swaine & Moore LLP, New York,
New York; Robert A. Van Nest, Eugene M. Paige, Cody S.
Harris, and Justina Sessions, Keker Van Nest & Peters LLP,
San Francisco, California; Willard K. Tom, Morgan Lewis
& Bockius LLP, Washington, D.C.; Geoffrey T. Holtz,
Morgan Lewis & Bockius LLP, San Francisco, California;
Richard S. Taffet, Morgan Lewis & Bockius LLP, New
York, New York; Michael W. McConnell, Wilson Sonsini
Goodrich & Rosati, Palo Alto, California; for Defendant-
Appellant.
Brian H. Fletcher (argued), Special Counsel; Michele
Arington, Assistant General Counsel; Heather Hippsley,
Deputy General Counsel; Ian R. Conner, Deputy Director;
Daniel Francis, Associate Director; Jennifer Milici, Chief
Trial Counsel; Alexander Ansaldo, Joseph Baker, Wesley
Carson, Geoffrey Green, Rajesh James, Kenneth Merber,
and Mark Woodward, Attorneys, Bureau of Competition;
Federal Trade Commission, Washington, D.C.; for Plaintiff-
Appellee.
Michael F. Murray (argued), Deputy Assistant Attorney
General; William J. Rinner, Chief of Staff and Senior
Counsel; Daniel E. Haar, Acting Chief, Competition Policy
and Advocacy Section; Jennifer Dixton, Patrick M.
Kuhlmann, and Jeffrey D. Negrette, Attorneys; Antitrust
Division, United States Department of Justice, Washington,
D.C.; for Amicus Curiae United States.
6 FTC V. QUALCOMM
Jonathan S. Massey, Matthew M. Collette, and Kathryn
Robinette, Massey & Gail LLP, Washington, D.C., for
Amicus Curiae Ericsson, Inc.
Amanda Tessar, Perkins Coie LLP, Denver, Colorado; Sarah
E. Fowler, Perkins Coie LLP, Palo Alto, California; for
Amicus Curiae Act | The App Association.
Henry C. Su, Ankur Kapoor and David Golden, Constantine
Cannon LLP, Washington, D.C., for Amicus Curiae High
Tech Inventors Alliance.
Steven C. Holtzman and Gabriel R. Schlabach, Boies
Schiller Flexner LLP, San Francisco, California, for Amicus
Curiae MediaTek Inc.
John J. Vecchione, Michael Pepson, and Jessica Thompson,
Cause of Action Institute, Washington, D.C., for Amicus
Curiae Cause of Action Institute.
Garrard R. Beeney and Akash M. Toprani, Sullivan &
Cromwell LLP, New York, New York, for Amicus Curiae
Dolby Laboratories, Inc.
Erik S. Jaffe, Schaerr Jaffe LLP, Washington, D.C., for
Amici Curiae Antitrust and Patent Law Professors,
Economists, and Scholars.
Matthew J. Dowd, Dowd Scheffel PLLC, Washington, D.C.,
for Amicus Curiae The Honorable Paul R. Michel (Ret.).
Andrew G. Isztwan, InterDigital Inc., Wilmington,
Delaware, for Amicus Curiae InterDigital Inc.
FTC V. QUALCOMM 7
Robert P. Taylor, RPT Legal Strategies PC, San Francisco,
California, for Amicus Curiae Alliance of U.S. Startups &
Inventors for Jobs (USIJ).
Jarod M. Bona, Aaron R. Gott, Luis Blanquez, and Luke
Hasskamp, Bona Law PC, La Jolla, California; Alexander
Shear, Bona Law PC, New York, New York; for Amici
Curiae International Center for Law & Economics and
Scholars of Law and Economics.
Ryan W. Koppelman, Alston & Bird LLP, Palo Alto,
California, for Amicus Curiae Nokia Technologies Oy.
David W. Kesselman, Amy T. Brantly, and Monica M.
Castillo Van Panhuys, Kesselman Brantly Stockinger,
Manhattan Beach, California, for Amicus Curiae Professor
Jorge L. Contreras.
Sandeep Vaheesan, Open Markets Institute, Washington,
D.C., for Amicus Curiae Open Markets Institute.
Thomas G. Hungar and Nick Harper, Gibson Dunn &
Crutcher LLP, Washington, D.C.; Joshua Landau, Computer
& Communications Industry Association, Washington,
D.C.; for Amicus Curiae Computer and Communications
Industry Association.
Ian Simmons, Benjamin J. Henricks, Brian P. Quinn, and
Scott Schaeffer, OâMelveny & Myers LLP, Washington,
D.C.; Michael D. Hausfeld and Scott Martin, Hausfeld LLP,
New York, New York; for Amici Curiae Law and
Economics Scholars.
Charles Duan, R Street Institute, Washington, D.C., for
Amicus Curiae R Street Institute.
8 FTC V. QUALCOMM
Gregory P. Stone, Benjamin J. Horwich, Justin P. Raphael,
and Stephanie G. Herrera, Munger Tolles & Olson LLP, San
Francisco, California; Donald B. Verrilli Jr., Munger Tolles
& Olson LLP, Washington, D.C.; for Amicus Curiae Intel
Corporation.
Andrew J. Pincus, Mayer Brown LLP, Washington, D.C.,
for Amici Curiae Association of Global Automakers and
Alliance of Automobile Manufacturers.
John (âJayâ) Jurata Jr., Randall C. Smith, Thomas King-Sun
Fu, and Emily Luken, Orrick Herrington & Sutcliffe LLP,
Washington, D.C., for Amici Curiae Continental
Automotive Systems Inc., and Denso Corporation.
Jean-Claude André and David R. Carpenter, Sidley Austin
LLP, Los Angeles, California; Raymond A. Atkins and
Joseph V. Coniglio, Sidley Austin LLP, Washington, D.C.;
for Amicus Curiae Timothy J. Muris.
Randy M. Stutz, American Antitrust Institute, Washington,
D.C., for Amici Curiae American Antitrust Institute and
Public Knowledge.
David H. Herrington, and Alexandra K. Theobald, Cleary
Gottlieb Steen & Hamilton LLP, New York, New York;
Daniel P. Culley and Jessica A. Hollis, Cleary Gottlieb Steen
& Hamilton LLP, Washington, D.C.; for Amicus Curiae Fair
Standards Alliance.
FTC V. QUALCOMM 9
OPINION
CALLAHAN, Circuit Judge:
This case asks us to draw the line between
anticompetitive behavior, which is illegal under federal
antitrust law, and hypercompetitive behavior, which is not.
The Federal Trade Commission (âFTCâ) contends that
Qualcomm Incorporated (âQualcommâ) violated the
Sherman Act, 15 U.S.C. §§ 1, 2, by unreasonably restraining
trade in, and unlawfully monopolizing, the code division
multiple access (âCDMAâ) and premium long-term
evolution (âLTEâ) cellular modem chip markets. After a
ten-day bench trial, the district court agreed and ordered a
permanent, worldwide injunction prohibiting several of
Qualcommâs core business practices. We granted
Qualcommâs request for a stay of the district courtâs
injunction pending appeal. FTC v. Qualcomm Inc., 935 F.3d
752 (9th Cir. 2019). At that time, we characterized the
district courtâs order and injunction as either âa trailblazing
application of the antitrust lawsâ or âan improper excursion
beyond the outer limits of the Sherman Act.â Id. at 757. We
now hold that the district court went beyond the scope of the
Sherman Act, and we reverse.
I
A
Founded in 1985, Qualcomm dubs itself âthe worldâs
leading cellular technology company.â Over the past several
decades, the company has made significant contributions to
the technological innovations underlying modern cellular
systems, including third-generation (â3Gâ) CDMA and
fourth-generation (â4Gâ) LTE cellular standardsâthe
standards practiced in most modern cellphones and
10 FTC V. QUALCOMM
âsmartphones.â Qualcomm protects and profits from its
technological innovations through its patents, which it
licenses to original equipment manufacturers (âOEMsâ)
whose products (usually cellphones, but also smart cars and
other products with cellular applications) practice one or
more of Qualcommâs patented technologies.
Qualcommâs patents include cellular standard essential
patents (âSEPsâ), non-cellular SEPs, and non-SEPs.
Cellular SEPs are patents on technologies that international
standard-setting organizations (âSSOsâ) choose to include in
technical standards practiced by each new generation of
cellular technology. SSOsâalso referred to as standards
development organizations (âSDOsâ)âare global
collaborations of industry participants that âestablish
technical specifications to ensure that products from
different manufacturers are compatible with each other.â
Microsoft Corp. v. Motorola, Inc., 696 F.3d 872, 875 (9th
Cir. 2012) (âMicrosoft IIâ) (citing Mark A. Lemley,
Intellectual Property Rights and Standard-Setting
Organizations, 90 Calif. L. Rev. 1889 (2002)). Cellular
SEPs are necessary to practice a particular cellular standard.
Because SEP holders could prevent industry participants
from implementing a standard by selectively refusing to
license, SSOs require patent holders to commit to license
their SEPs on fair, reasonable, and nondiscriminatory
(âFRANDâ) terms before their patents are incorporated into
standards. 1
1
See generally Joshua D. Wright, SSOs, FRAND, and Antitrust:
Lessons from the Economics of Incomplete Contracts, 21 GEO. MASON
L. REV. 791 (2014) (discussing the role of SSOs in the selection and
enforcement of standards and whether antitrust law has, or should have,
a role in regulating the SSO contracting processes).
FTC V. QUALCOMM 11
Some of Qualcommâs SEPs and other patents relate to
CDMA and premium LTE technologiesâthat is, the way
cellular devices communicate with the 3G and 4G cellular
networksâwhile others relate to other cellular and non-
cellular applications and technologies, such as multimedia,
cameras, location detecting, user interfaces, and more.
Rather than license its patents individually, Qualcomm
generally offers its customers various âpatent portfolioâ
options, whereby the customer/licensee pays for and
receives the right to practice all three types of Qualcomm
patents (SEPs, non-cellular SEPs, and non-SEPs).
Qualcommâs patent licensing business is very profitable,
representing around two-thirds of the companyâs value. But
Qualcomm is no one-trick pony. The company also
manufactures and sells cellular modem chips, the hardware
that enables cellular devices to practice CDMA and premium
LTE technologies and thereby communicate with each other
across cellular networks. 2 This makes Qualcomm somewhat
unique in the broader cellular services industry. Companies
such as Nokia, Ericsson, and Interdigital have comparable
SEP portfolios but do not compete with Qualcomm in the
modem chip markets. On the other hand, Qualcommâs main
competitors in the modem chip marketsâcompanies such as
MediaTek, HiSilicon, Samsung LSI, ST-Ericsson, and VIA
2
Qualcommâs licensing and modem chip businesses are run out of
two different divisions: (1) Qualcomm Technology Licensing, which is
responsible for granting licenses to Qualcommâs patent portfolios and
determining what royalty rates to charge for those licenses; and
(2) Qualcomm CDMA Technologies, which is responsible for
manufacturing, pricing, and selling Qualcommâs CDMA and premium
LTE modem chips. Id. at 669â75.
12 FTC V. QUALCOMM
Telecom (purchased by Intel in 2015)âdo not hold or have
not held comparable SEP portfolios. 3
Like its licensing business, Qualcommâs modem chip
business has been very successful. From 2006 to 2016,
Qualcomm possessed monopoly power in the CDMA
modem chip market, including over 90% of market share.
From 2011 to 2016, Qualcomm possessed monopoly power
in the premium LTE modem chip market, including at least
70% of market share. During these timeframes, Qualcomm
leveraged its monopoly power to âcharge monopoly prices
on [its] modem chips.â Qualcomm, 411 F. Supp. 3d at 800.
Around 2015, however, Qualcommâs dominant position in
the modem chip markets began to recede, as competitors like
Intel and MediaTek found ways to successfully compete.
Based on projections from 2017 to 2018, Qualcomm
maintains approximately a 79% share of the CDMA modem
chip market and a 64% share of the premium LTE modem
chip market. 4
B
Qualcomm licenses its patent portfolios exclusively at
the OEM level, setting the royalty rates on its CDMA and
LTE patent portfolios as a percentage of the end-product
3
The now-defunct modem chip supplier ST-Ericsson presents the
only partial exception to this general pattern. ST-Ericsson was a joint
venture between Ericsson, which does have a large SEP portfolio, and
STMicroelectronics. The company was dissolved in 2013. See TCL
Commcân Tech. Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, No.
CV 15-2370 JVS(DFMx), 2018 WL 4488286, at *44 (C.D. Cal. Sept.
14, 2018), revâd in part, vacated in part, 943 F.3d 1360 (Fed. Cir. 2019).
4
According to Qualcomm, its market share in premium LTE modem
chips dropped below 50% in 2017. Appellantâs Opening Br. at 118.
FTC V. QUALCOMM 13
sales price. This practice is not unique to Qualcomm. As
the district court found, â[f]ollowing Qualcommâs lead,
other SEP licensors like Nokia and Ericsson have concluded
that licensing only OEMs is more lucrative, and structured
their practices accordingly.â 5 Id. at 754â55. OEM-level
licensing allows these companies to obtain the maximum
value for their patented technologies while avoiding the
problem of patent exhaustion, whereby âthe initial
authorized [or licensed] sale of a patented item terminates all
patent rights to that item.â Quanta Comput., Inc. v. LG
Elecs., Inc., 553 U.S. 617, 625 (2008); see also Adams v.
Burke, 84 U.S. 453, 457 (1873) (when a patented item is
âonce lawfully made and sold, there is no restriction on [its]
use to be implied for the benefit of the patentee or his
assignees or licenseesâ). Due to patent exhaustion, if
Qualcomm licensed its SEPs further âupstreamâ in the
manufacturing process to competing chip suppliers, then its
patent rights would be exhausted when these rivals sold their
products to OEMs. OEMs would then have little incentive
to pay Qualcomm for patent licenses, as they could instead
5
According to Nokia and other companies, OEM-level licensing is
now the industry norm. See Br. of Amicus Curiae Nokia Technologies
Oy at 4 (âRequiring component-level licensing contravenes industry
norms, leads to the ATIS and TIA IPR Policies being inconsistent with
[other SSO policies], and could have unintended consequences for other
SEP holders and the industry at large.â); Br. of Amicus Curiae Dolby
Laboratories, Inc. at 16 (âThe consistent experience of Dolby, a licensor
to thousands of licenses under SEPs, is that FRAND licensing of SEPs
takes place at the end-product level.â); see also Br. of Amici Curiae
Continental Automotive Systems, Inc. and Denso Corporation at 1â2
(â[J]ust as in the smartphone industry, many cellular SEP-holders restrict
their licensing in the automotive industry solely to the manufacturers of
consumer goods (here, the Big Three and other automakers), meaning
that upstream manufacturers like amici are left out in the cold.â).
14 FTC V. QUALCOMM
become âdownstreamâ recipients of the already exhausted
patents embodied in these rivalsâ products. 6
Because rival chip manufacturers practice many of
Qualcommâs SEPs by necessity, Qualcomm offers these
companies what it terms âCDMA ASIC Agreements,â
wherein Qualcomm promises not to assert its patents in
exchange for the company promising not to sell its chips to
unlicensed OEMs. 7 These agreements, which essentially
function as patent-infringement indemnifications, include
reporting requirements that allow Qualcomm to know the
details of its rivalsâ chip supply agreements with various
OEMs. But they also allow Qualcommâs competitors to
practice Qualcommâs SEPs royalty-free.
Qualcomm reinforces these practices with its so-called
âno license, no chipsâ policy, under which Qualcomm
6
The terms âupstreamâ and âdownstreamâ refer to the
manufacturing chain for consumer products such as cellphones that
contain component parts produced by different companies that are
sequentially installed until the end-product takes shape, at which point it
is sold by an OEM (the most âdownstreamâ manufacturer in the chain)
directly to consumers. See MEMC Elec. Materials, Inc. v. Mitsubishi
Materials Silicon Corp., 420 F.3d 1369, 1372, 1374 (Fed. Cir. 2005)
(describing the upstream and downstream manufacturing process in the
context of silicon wafers used in semiconductors).
7
See Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1209 (Fed.
Cir. 2014) (âBecause the standard requires that devices utilize specific
technology, compliant devices necessarily infringe certain claims in
patents that cover technology incorporated into the standard.â).
Previously, in the 1990s, Qualcomm provided ânon-exhaustive licensesâ
to rival chip suppliers, charging a royalty rate on their chipset sales.
Qualcomm, 411 F. Supp. 3d at 673, 754. According to Qualcomm, these
were actually ânon-exhaustive, royalty-bearing agreements with
chipmakers that explicitly did not grant rights to the chipmakerâs [OEM]
customers.â Appellantâs Opening Br. at 45.
FTC V. QUALCOMM 15
refuses to sell modem chips to OEMs that do not take
licenses to practice Qualcommâs SEPs. Otherwise, because
of patent exhaustion, OEMs could decline to take licenses,
arguing instead that their purchase of chips from Qualcomm
extinguished Qualcommâs patent rights with respect to any
CDMA or premium LTE technologies embodied in the
chips. This would not only prevent Qualcomm from
obtaining the maximum value for its patents, it would result
in OEMs having to pay more money (in licensing royalties)
to purchase and use a competitorâs chips, which are
unlicensed. Instead, Qualcommâs practices, taken together,
are âchip supplier neutralââthat is, OEMs are required to
pay a per-unit licensing royalty to Qualcomm for its patent
portfolios regardless of which company they choose to
source their chips from.
Although Qualcommâs licensing and modem chip
businesses have made it a major player in the broader
cellular technology market, the company is not an OEM.
That is, Qualcomm does not manufacture and sell cellphones
and other end-use products (like smart cars) that consumers
purchase and use. Thus, it does not âcompeteââin the
antitrust senseâagainst OEMs like Apple and Samsung in
these product markets. Instead, these OEMs are
Qualcommâs customers. 8
8
Samsung presents the one exception to this rule, as it is both one
of Qualcommâs OEM customers and one of its competitors in the modem
chip markets (Samsung LSI is Samsungâs modem chip division). 411 F.
Supp. 3d at 746, 750. However, as Samsung LSI does not sell chips
externally, âSamsung is not a competitor [of Qualcomm] to sell modem
chips to external OEMs.â Id. at 750.
16 FTC V. QUALCOMM
C
Over the past several decades, as Qualcommâs licensing
and modem chip businesses thrived and the company gained
more and more market share, its OEM customers and rival
chipmakers grew frustrated with the companyâs business
practices. The targets of these complaints included
Qualcommâs practice of licensing exclusively at the OEM
level and refusing to license rival chipmakers, its licensing
royalty rates, its âno license, no chipsâ policy, and
Qualcommâs sometimes aggressive defense of these policies
and practices. Qualcommâs customers occasionally
attempted to âdisciplineâ its pricing through arbitration
claims, negotiations, threatening to change chip suppliers,
and litigation. These maneuvers generally resulted in
settlements and renegotiated licensing and chip-supply
agreements with Qualcomm, even as OEMs continued to
look elsewhere for less expensive modem chip options.
Qualcommâs competitors in the modem chip markets
contend that Qualcommâs business practices, in particular its
refusal to license them, have hampered or slowed their
ability to develop and retain OEM customer bases, limited
their growth, delayed or prevented their entry into the
market, and in some cases forced them out of the market
entirely. These competitors contend that this result is not
just anticompetitive, but a violation of Qualcommâs
contractual commitments to two cellular SSOsâthe
Telecommunications Industry Association (âTIAâ) and
Alliance for Telecommunications Industry Solutions
(âATISâ)âto license its SEPs âto all applicantsâ on FRAND
terms. 9 Qualcomm argues that it has no antitrust duty to deal
9
Under the TIA contract, Qualcomm agreed to make its SEPs
âavailable to all applicants under terms and conditions that are
FTC V. QUALCOMM 17
with its rivals, and in any case OEM-level licensing is
consistent with Qualcommâs SSO commitments because
only OEM products (i.e., cellphones, tablets, etc.) âpracticeâ
or âimplementâ the standards embodied in Qualcommâs
SEPs. Furthermore, Qualcomm argues that it substantially
complies with the TIA and ATIS requirements by not
asserting its patents against rival chipmakers.
In 2011 and 2013, Qualcomm signed agreements with
Apple under which Qualcomm offered Apple billions of
dollars in incentive payments contingent on Apple sourcing
its iPhone modem chips exclusively from Qualcomm and
committing to purchase certain quantities of chips each year.
Again, rivals such as Intelâas well as Apple itself, which
was interested in using Intel as an alternative chip supplierâ
complained that Qualcomm was engaging in anticompetitive
business practices designed to maintain its monopolies in the
CDMA and premium LTE modem chip markets while
making it impossible for rivals to compete. 10 In 2014, Apple
reasonable and non-discriminatory . . . and only to the extent necessary
for the practice of any or all of the Normative portions for the field of
use of practice of the Standard.â FTC v. Qualcomm Inc., No. 17-CV-
00220-LHK, 2018 WL 5848999, at *3 (N.D. Cal. Nov. 6, 2018). Under
the ATIS contract, Qualcomm committed to making its SEPs âavailable
to applicants desiring to utilize the license for the purpose of
implementing the standard . . . under reasonable terms and conditions
that are demonstrably free of any unfair discrimination.â Id.
10
Under the 2013 agreement, Qualcomm paid Apple a âmarketing
fundâ (effectively a price rebate on chips) of $2.50 per iPhone sold with
a Qualcomm chip and $1.50 per iPad sold with a Qualcomm chip, plus
hundreds of millions of dollars in âincentive fundsâ contingent on Apple
purchasing at least 100 million Qualcomm chips in 2015 and 2016.
411 F. Supp. 3d at 732. The agreement contained a âclawback
provisionâ providing that if Apple sold devices without Qualcomm
chips, then it would have to reimburse Qualcomm all or a large
18 FTC V. QUALCOMM
decided to terminate these agreements and source its modem
chips from Intel for its 2016 model iPhone.
D
In January 2017, the FTC sued Qualcomm for equitable
relief, alleging that Qualcommâs interrelated policies and
practices excluded competitors and harmed competition in
the modem chip markets, in violation § 5(a) of the FTC Act,
15 U.S.C. § 45(a), and §§ 1 and 2 of the Sherman Act,
15 U.S.C. §§ 1, 2. After a ten-day bench trial, the district
court concluded that âQualcommâs licensing practices are an
unreasonable restraint of trade under § 1 of the Sherman Act
and exclusionary conduct under § 2 of the Sherman Act.â11
Qualcomm, 411 F. Supp. 3d at 812 (citing United States v.
Microsoft Corp., 253 F.3d 34, 58â59 (D.C. Cir. 2001)). The
district court ordered a permanent, worldwide injunction
prohibiting Qualcommâs core business practices. Id. at 820â
24.
The district courtâs decision consists of essentially five
mixed findings of fact and law: (1) Qualcommâs âno license,
no chipsâ policy amounts to âanticompetitive conduct
against OEMsâ and an âanticompetitive practice[] in patent
license negotiationsâ; (2) Qualcommâs refusal to license
rival chipmakers violates both its FRAND commitments and
percentage of the per-unit marketing funds, as well as the incentive
funds. Id.
11
Because the district court concluded that Qualcomm violated the
Sherman Act and thereby violated the FTC Actâwhich prohibits
â[u]nfair methods of competition,â including Sherman Act violationsâ
it did not address whether Qualcommâs conduct constituted a standalone
violation of the FTC Act. Id. at 683.
FTC V. QUALCOMM 19
an antitrust duty to deal under § 2 of the Sherman Act; 12
(3) Qualcommâs âexclusive dealsâ with Apple âforeclosed a
âsubstantial shareâ of the modem chip marketâ in violation
of both Sherman Act provisions; (4) Qualcommâs royalty
rates are âunreasonably highâ because they are improperly
based on its market share and handset price instead of the
value of its patents; and (5) Qualcommâs royalties, in
conjunction with its âno license, no chipsâ policy, âimpose
an artificial and anticompetitive surchargeâ on its rivalsâ
sales, âincreas[ing] the effective price of rivalsâ modem
chipsâ and resulting in anticompetitive exclusivity.
Qualcomm, 411 F. Supp. 3d at 697â98, 751â62, 766, 771â
92 (citations omitted). âCollectively,â the district court
found, these policies and practices âcreate insurmountable
and artificial barriers for Qualcommâs rivals, and thus do not
further competition on the merits.â Id. at 797.
The district court concluded that â[b]y attacking all
facets of rivalsâ businesses and preventing competition on
the merits, [Qualcommâs] practices âharm the competitive
process and thereby harm consumers.ââ Id. (quoting
12
The district court granted the FTCâs pretrial motion for partial
summary judgment on the issue of whether Qualcommâs SSO
commitments contractually require it to license its SEPs on FRAND
terms to competing modem chip suppliers. 2018 WL 5848999, at *1, 15.
The district court concluded that âNinth Circuit precedent establishes
that Qualcommâs FRAND commitments include an obligation to license
to all comers, including competing modem chip suppliers.â Id. at *10
(citing Microsoft II, 696 F.3d at 876 (noting that â[m]any SSOs try to
mitigate the threat of patent holdup by requiring members who hold IP
rights in standard-essential patents to agree to license those patents to all
comers on terms that are âreasonable and nondiscriminatory,â or
âRAND.ââ (quoting Lemley, supra, at 1902, 1906)); Microsoft Corp. v.
Motorola, Inc., 795 F.3d 1024, 1031 (9th Cir. 2015) (âMicrosoft IIIâ)
(â[An] SEP holder cannot refuse a license to a manufacturer who
commits to paying the RAND rate.â)).
20 FTC V. QUALCOMM
Microsoft, 253 F.3d at 58). Accordingly, the district court
held that the FTC met its burden under the Sherman Act of
proving âmarket power plus some evidence that the
challenged restraint harms competition.â Id. at 804 (quoting
Ohio v. Am. Express Co., 138 S. Ct. 2274, 2284 (2018)).
Furthermore, the district court held that it could âinferâ a
causal connection between Qualcommâs conduct and
anticompetitive harm because that conduct ââreasonably
appear[s] capable of making a significant contribution to . . .
maintaining monopoly power.ââ Id. at 804â05 (alterations
in original) (quoting Microsoft, 253 F.3d at 79).
Qualcomm timely appealed. It asks us to reverse the
district courtâs Sherman Act ruling, vacate the district
courtâs injunction and summary judgment ruling on
Qualcommâs SSO commitments, and remand the latter for
trial. For the reasons that follow, we reverse the district
courtâs Sherman Act ruling and its issuance of a worldwide
injunction. Because our reversal does not depend on the
district courtâs grant of partial summary judgment with
respect to Qualcommâs contractual commitments to license
its SEPs to rival chip suppliers, we vacate that order as moot
without reaching its merits. 13
13
See supra note 12. Although the FTC discussed Qualcommâs
FRAND commitments in its complaint and argued that âQualcommâs
refusal to license competing manufacturers of baseband processors, in
contravention of its FRAND commitments, contributes to its ability to
tax its competitorsâ sales and maintain its monopoly,â the complaint
itself only alleged antitrust violations and requested equitable relief
ânecessary to redress and prevent recurrence of Qualcommâs violations
ofâ the FTC Act and Sherman Act.
FTC V. QUALCOMM 21
II
Antitrust law, like patent law, is âaimed at encouraging
innovation, industry and competition.â Atari Games Corp.
v. Nintendo of Am., Inc., 897 F.2d 1572, 1576 (Fed. Cir.
1990) (citing Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861,
876â77 (Fed. Cir. 1985)). âDespite the opportunities for
conflict . . . a central goal of both patent and antitrust law is
the promotion of the public benefit through a competitive
economy.â Intâl Wood Processors v. Power Dry, Inc.,
792 F.2d 416, 427 (4th Cir. 1986); see also Am. Express,
138 S. Ct. at 2290 (â[I]t is â[t]he promotion of interbrand
competition,â after all, that âis . . . the primary purpose of the
antitrust laws.ââ (some alterations in original) (quoting
Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S.
877, 890 (2007))). Indeed, the Federal Circuit, which
frequently examines cases at the intersection of patent and
antitrust law, has commented that â[t]he patent and antitrust
laws are complementary, the patent system serving to
encourage invention and the bringing of new products to
market by adjusting investment-based risk, and the antitrust
laws serving to foster industrial competition.â Intergraph
Corp. v. Intel Corp., 195 F.3d 1346, 1362 (Fed. Cir. 1999)
(citing Loctite Corp., 781 F.2d at 866â67).
Among the antitrust laws, the Sherman Act, 15 U.S.C.
§§ 1, 2, is particularly âimportant to the preservation of
economic freedom and our free-enterprise system.â United
States v. Topco Assocs., Inc., 405 U.S. 596, 610 (1972).
Enacted in 1890, when the emergence of trusts and
monopolies with the power to suppress competition and
completely control markets had become a matter of great
public concern,
[t]he Sherman Act was designed to be a
comprehensive charter of economic liberty
22 FTC V. QUALCOMM
aimed at preserving free and unfettered
competition as the rule of trade. It rests on
the premise that the unrestrained interaction
of competitive forces will yield the best
allocation of our economic resources, the
lowest prices, the highest quality and the
greatest material progress, while at the same
time providing an environment conducive to
the preservation of our democratic political
and social institutions.
N. Pac. Ry. Co. v. United States, 356 U.S. 1, 4 (1958). In
pursuit of these goals, the Sherman Act protects âthe
freedom guaranteed each and every business . . . to
competeâto assert with vigor, imagination, devotion, and
ingenuity whatever economic muscle it can muster.â Topco
Assocs., 405 U.S. at 610.
A
Section 1 of the Sherman Act prohibits â[e]very contract,
combination in the form of trust or otherwise, or conspiracy,
in restraint of trade or commerce among the several States.â
15 U.S.C. § 1. The Supreme Court âhas long recognized
that, â[i]n view of the common law and the law in this
countryâ when the Sherman Act was passed, the phrase
ârestraint of tradeâ is best read to mean âundue restraint.ââ
Am. Express, 138 S. Ct. at 2283 (alteration in original)
(quoting Standard Oil Co. of N.J. v. United States, 221 U.S.
1, 59â60 (1911)); see also State Oil Co. v. Khan, 522 U.S. 3,
10 (1997) (noting that § 1 of the Sherman Act is understood
âto outlaw only unreasonable restraintsâ) (emphasis added)
(citation omitted). Thus, â[t]o establish liability under § 1, a
plaintiff must prove (1) the existence of an agreement, and
(2) that the agreement was in unreasonable restraint of
FTC V. QUALCOMM 23
trade.â Aerotec Intâl, Inc. v. Honeywell Intâl, Inc., 836 F.3d
1171, 1178 (9th Cir. 2016) (emphasis added) (citing Am.
Needle, Inc. v. Natâl Football League, 560 U.S. 183, 189â90
(2010)).
âRestraints that are not unreasonable per se are judged
under the ârule of reason.ââ Am. Express, 138 S. Ct. at 2283
(quoting Business Elecs. Corp. v. Sharp Elecs. Corp.,
485 U.S. 717, 723 (1988)). âThe rule of reason requires
courts to conduct a fact-specific assessment of âmarket
power and market structure . . . to assess the [restraint]âs
actual effectâ on competition.â Id. (alterations in original)
(emphasis added) (quoting Copperweld Corp. v. Indep. Tube
Corp., 467 U.S. 752, 768 (1984)); see also In re Natâl
Football Leagueâs Sunday Ticket Antitrust Litig., 933 F.3d
1136, 1150 (9th Cir. 2019) (âUnder this rule, we examine
âthe facts peculiar to the business, the history of the restraint,
and the reasons why it was imposed,â to determine the effect
on competition in the relevant product market.â (quoting
Natâl Socây of Profâl Engârs v. United States, 435 U.S. 679,
692 (1978))). âThe goal is to âdistinguis[h] between
restraints with anticompetitive effect that are harmful to the
consumer and restraints stimulating competition that are in
the consumerâs best interest.ââ Am. Express, 138 S. Ct.
at 2284 (alteration in original) (quoting Leegin Creative
Leather Prods., 551 U.S. at 886).
In Am. Express, for example, the Supreme Court held
that the plaintiffs failed to meet their burden to show that
antisteering provisions in American Expressâs merchant
agreementsâwhich prohibit merchants from encouraging
customers at the point of sale to use other credit cards, like
Visa, with lower transaction feesâhave anticompetitive
effects that harm consumers. Id. at 2280, 2289â90. Instead,
Amexâs unique business model and the antisteering
24 FTC V. QUALCOMM
provisions it relies on have increased competition in the
credit card transaction market by forcing rivals like Visa and
Mastercard to adapt and innovate, which has ultimately
benefited consumers by âincreas[ing] the quality and
quantity of credit-card transactions.â Id. at 2290. In other
words, what appeared at first to be anticompetitiveâ
Amexâs unique business model and its use of antisteering
clausesâwas actually procompetitive and innovative. It
just took a while for the market to adjust.
A plaintiff may prove that a restraint has anticompetitive
effect either âdirectly or indirectly.â Am. Express, 138 S. Ct.
at 2284. Direct evidence includes ââproof of actual
detrimental effects [on competition],ââ id. (alteration in
original) (quoting FTC v. Ind. Fedân of Dentists, 476 U.S.
447, 460 (1986)), âsuch as reduced output, increased prices,
or decreased quality in the relevant market,â id. (citing 1 J.
Kalinowski, Antitrust Laws and Trade Regulation
§ 12.02[2] (2d ed. 2017); Craftsmen Limousine, Inc. v. Ford
Motor Co., 491 F.3d 380, 390 (8th Cir. 2007); Virgin Atl.
Airways Ltd. v. British Airways PLC, 257 F.3d 256, 264 (2nd
Cir. 2001)). Indirect evidence involves âproof of market
power plus some evidence that the challenged restraint
harms competition.â Id. (citing 1 Kalinowski § 12.02[2];
Tops Markets, Inc. v. Quality Markets, Inc., 142 F.3d 90, 97
(2nd Cir. 1998); Spanish Broadcasting Sys. of Fla. v. Clear
Channel Commcâns, Inc., 376 F.3d 1065, 1073 (11th Cir.
2004)).
Whereas § 1 of the Sherman Act targets concerted
anticompetitive conduct, § 2 targets independent
anticompetitive conduct. Am. Needle, Inc., 560 U.S. at 190.
The statute makes it illegal to âmonopolize . . . any part of
the trade or commerce among the several States.â 15 U.S.C.
§ 2. To establish liability under § 2, a plaintiff must show:
FTC V. QUALCOMM 25
ââ(a) the possession of monopoly power in the relevant
market; (b) the willful acquisition or maintenance of that
power; and (c) causal antitrust injury.ââ Somers v. Apple,
Inc., 729 F.3d 953, 963 (9th Cir. 2013) (quoting Allied
Orthopedic Appliances Inc. v. Tyco Health Care Grp. LP,
592 F.3d 991, 998 (9th Cir. 2010) (âAllied Orthopedicâ)).
âThe mere possession of monopoly power, and the
concomitant charging of monopoly prices, is not [itself]
unlawful; [instead,] it is an important element of the free-
market system.â Verizon Commcâns Inc. v. Law Offices of
Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) (âTrinkoâ).
âThe opportunity to charge monopoly pricesâat least for a
short periodâis what attracts âbusiness acumenâ in the first
place; it induces risk taking that produces innovation and
economic growth.â Id.
âTo safeguard the incentive to innovate, the possession
of monopoly power will not be found unlawful [under § 2]
unless it is accompanied by an element of anticompetitive
conduct.â Id. Accordingly, plaintiffs are required to prove
âanticompetitive abuse or leverage of monopoly power, or a
predatory or exclusionary means of attempting to
monopolize the relevant market.â Allied Orthopedic,
592 F.3d at 1000 (quoting Foremost Pro Color, Inc. v.
Eastman Kodak Co., 703 F.2d 534, 545â46 (9th Cir. 1983));
see also United States v. Grinnell Corp., 384 U.S. 563, 570â
71 (1966) (distinguishing âwillful acquisitionâ of monopoly
power from âdevelopment as a consequence of a superior
product, business acumen, or historic accidentâ). â[T]o be
condemned as exclusionary, a monopolistâs act must have an
âanticompetitive effectâââthat is, it âmust harm the
competitive process and thereby harm consumers.â
Microsoft, 253 F.3d at 58. âIn contrast, harm to one or more
competitors will not suffice.â Id.; see also Spectrum Sports,
Inc. v. McQuillan, 506 U.S. 447, 458 (1993) (noting that the
26 FTC V. QUALCOMM
antitrust laws are directed ânot against conduct which is
competitive, even severely so, but [only] against conduct
which unfairly tends to destroy competition itselfâ).
Allegations that conduct âhas the effect of reducing
consumersâ choices or increasing prices to consumers do[]
not sufficiently allege an injury to competition . . . [because]
[b]oth effects are fully consistent with a free, competitive
market.â Brantley v. NBC Universal, Inc., 675 F.3d 1192,
1202 (9th Cir. 2012) (citations omitted); see also Brooke
Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S.
209, 237 (1993) (âWhere . . . output is expanding at the same
time prices are increasing, rising prices are equally
consistent with growing product demand.â). Instead, in
order to prove a violation of the Sherman Act, the plaintiff
must show that diminished consumer choices and increased
prices are the result of a less competitive market due to either
artificial restraints or predatory and exclusionary conduct.
See Am. Express, 138 S. Ct. at 2288 (âThis Court will ânot
infer competitive injury from price and output data absent
some evidence that tends to prove that output was restricted
or prices were above a competitive level.ââ (quoting Brooke
Grp. Ltd., 509 U.S. at 237)).
Furthermore, novel business practicesâespecially in
technology marketsâshould not be âconclusively presumed
to be unreasonable and therefore illegal without elaborate
inquiry as to the precise harm they have caused or the
business excuse for their use.â Microsoft, 253 F.3d at 91
(citing N. Pac. Ry. Co., 356 U.S. at 5). âBecause innovation
involves new products and business practices, courts[â] and
economistsâ initial understanding of these practices will
skew initial likelihoods that innovation is anticompetitive
and the proper subject of antitrust scrutiny.â Geoffrey A.
Manne & Joshua D. Wright, Innovation and the Limits of
FTC V. QUALCOMM 27
Antitrust, 6 J. Comp. L. & Econ. 153, 167 (2010); see also
Rachel S. Tennis & Alexander Baier Schwab, Business
Model Innovation and Antitrust Law, 29 Yale J. on Reg. 307,
319 (2012) (explaining how âantitrust economists, and in
turn lawyers and judges, tend to treat novel products or
business practices as anticompetitiveâ and âare likely to
decide cases wrongly in rapidly changing dynamic markets,â
which can have long-lasting effects particularly in
technological markets, where innovation âis essential to
economic growth and social welfareâ and âan erroneous
decision will deny large consumer benefitsâ).
Regardless of whether the alleged antitrust violation
involves concerted anticompetitive conduct under § 1 or
independent anticompetitive conduct under § 2, the three-
part burden-shifting test under the rule of reason is
essentially the same. See Standard Oil Co. of N.J., 221 U.S.
at 61â62; Microsoft, 253 F.3d at 58â59. Under § 1, âthe
plaintiff has the initial burden to prove that the challenged
restraint has a substantial anticompetitive effect that harms
consumers in the relevant market.â Am. Express, 138 S. Ct.
at 2284 (citing 1 Kalinowski § 12.02[1]; P. Areeda & H.
Hovenkamp, Fundamentals of Antitrust Law § 15.02[B] (4th
ed. 2017) (Areeda & Hovenkamp); Capital Imaging Assoc.,
P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d 537, 543
(2nd Cir. 1993)). âIf the plaintiff carries its burden, then the
burden shifts to the defendant to show a procompetitive
rationale for the restraint.â Id. (citing 1 Kalinowski
§ 12.02[1]; Areeda & Hovenkamp § 15.02[B]; Capital
Imaging Assoc., 996 F.2d at 543). âIf the defendant makes
this showing, then the burden shifts back to the plaintiff to
demonstrate that the procompetitive efficiencies could be
reasonably achieved through less anticompetitive means.â
Id. (citing 1 Kalinowski § 12.02[1]; Capital Imaging Assoc.,
996 F.2d at 543).
28 FTC V. QUALCOMM
Likewise, âif a plaintiff successfully establishes a prima
facie case under § 2 by demonstrating anticompetitive effect,
then the monopolist may proffer a âprocompetitive
justificationâ for its conduct.â Microsoft, 253 F.3d at 59
(citing Eastman Kodak Co. v. Image Tech. Servs., Inc.,
504 U.S. 451, 483 (1992)). âIf the monopolist asserts a
procompetitive justificationâa nonpretextual claim that its
conduct is indeed a form of competition on the merits
because it involves, for example, greater efficiency or
enhanced consumer appealâthen the burden shifts back to
the plaintiff to rebut that claim.â Id. If the plaintiff cannot
rebut the monopolistâs procompetitive justification, âthen
the plaintiff must demonstrate that the anticompetitive harm
of the conduct outweighs the procompetitive benefit.â Id.
The similarity of the burden-shifting tests under §§ 1
and 2 means that courts often review claims under each
section simultaneously. If, in reviewing an alleged Sherman
Act violation, a court finds that the conduct in question is not
anticompetitive under § 1, the court need not separately
analyze the conduct under § 2. Williams v. I.B. Fischer Nev.,
999 F.2d 445, 448 (9th Cir. 1993). However, although the
tests are largely similar, a plaintiff may not use indirect
evidence to prove unlawful monopoly maintenance via
anticompetitive conduct under § 2. See Broadcom Corp. v.
Qualcomm Inc., 501 F.3d 297, 307â08 (3d Cir. 2007)
(distinguishing between proving the existence of monopoly
power through indirect evidence and proving
anticompetitive conduct itself, the second element of a § 2
claim). In this respect, proving an antitrust violation under
§ 2 of the Sherman Act is more exacting than proving a § 1
violation, although courts have also held that the third
element of a § 2 claim, the causation element, may be
inferred. See Microsoft, 253 F.3d at 79.
FTC V. QUALCOMM 29
B
A threshold step in any antitrust case is to accurately
define the relevant market, which refers to âthe area of
effective competition.â Am. Express, 138 S. Ct. at 2285
(citation omitted); see also Image Tech. Servs., Inc. v.
Eastman Kodak Co., 125 F.3d 1195, 1202 (9th Cir. 1997)
(âThe relevant market is the field in which meaningful
competition is said to exist.â (citing United States v.
Continental Can Co., 378 U.S. 441, 449 (1964))). â[C]ourts
usually cannot properly apply the rule of reason without an
accurate definition of the relevant market.â Am. Express,
138 S. Ct. at 2285. Otherwise, ââthere is no way to measure
[the defendantâs] ability to lessen or destroy competition.ââ
Id. (alteration in original) (quoting Walker Process Equip.,
Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177
(1965)). Furthermore, in assessing alleged antitrust injuries,
courts must focus on anticompetitive effects âin the market
where competition is [allegedly] being restrained.â Am. Ad
Mgmt., Inc. v. Gen. Tel. Co. of Cal., 190 F.3d 1051, 1057
(9th Cir. 1999). âParties whose injuries, though flowing
from that which makes the defendantâs conduct unlawful,
are experienced in another market do not suffer antitrust
injury.â Id.; see Intergraph Corp., 195 F.3d at 1353 (noting
that â[t]he prohibited conduct must be directed toward
competitors and must be intended to injure competitionâ
(emphasis added) (citing Spectrum Sports, 506 U.S.
at 458)). 14
14
But see Am. Ad Mgmt., 190 F.3d at 1057 n.5 (noting that the
Supreme Court âhas carved a narrow exception to the market participant
requirement for parties whose injuries are âinextricably intertwinedâ with
the injuries of market participantsâ (citing Blue Shield v. McCready,
457 U.S. 465 (1982))).
30 FTC V. QUALCOMM
Here, the district court correctly defined the relevant
markets as âthe market for CDMA modem chips and the
market for premium LTE modem chips.â Qualcomm, 411 F.
Supp. 3d at 683. Nevertheless, its analysis of Qualcommâs
business practices and their anticompetitive impact looked
beyond these markets to the much larger market of cellular
services generally. Thus, a substantial portion of the district
courtâs ruling considered alleged economic harms to
OEMsâwho are Qualcommâs customers, not its
competitorsâresulting in higher prices to consumers. These
harms, even if real, are not âanticompetitiveâ in the antitrust
senseâat least not directlyâbecause they do not involve
restraints on trade or exclusionary conduct in âthe area of
effective competition.â Am. Express, 138 S. Ct. at 2285.
The district courtâs consideration of anticompetitive
impacts outside of the relevant markets is reflected in the
way it framed and organized the issues. For example, the
first, major portion of the district courtâs rule of reason
analysis (âAnticompetitive Conduct Against OEMs and
Resulting Harmâ) provides a detailed account of
Qualcommâs âanticompetitive acts against OEMsâ via the
companyâs âno license, no chipsâ policy. Qualcomm, 411 F.
Supp. 3d at 697â744. Yet when the district court set forth
its primary theory of anticompetitive harmâthat
Qualcommâs licensing royalty rates âimpose a surcharge on
rivalsâ modem chips,â thereby inhibiting free and fair
competition in the relevant marketsâit did so only in
passing. Id. at 790â92.
Moreover, throughout its analysis, the district court
failed to distinguish between Qualcommâs licensing
practices (which primarily impacted OEMs) and its practices
relating to modem chip sales (the relevant antitrust market).
This was, no doubt, intentional: the district court
FTC V. QUALCOMM 31
characterized Qualcommâs various business practices as
âinterrelatedâ and mutually reinforcing, and it described
their anticompetitive effects as âcompoundingâ and
âcycl[ical].â Id. at 797â98. But even if Qualcommâs
practices are interrelated, actual or alleged harms to
customers and consumers outside the relevant markets are
beyond the scope of antitrust law.
III
Accordingly, we reframe the issues to focus on the
impact, if any, of Qualcommâs practices in the area of
effective competition: the markets for CDMA and premium
LTE modem chips. Thus, we begin by examining the district
courtâs conclusion that Qualcomm has an antitrust duty to
license its SEPs to its direct competitors in the modem chip
markets. We then consider Qualcommâs royalty rates, its
âno license, no chipsâ policy, and its agreements with Apple
in 2011 and 2013 to supply all or a substantial portion of the
modem chips Apple used for its pre-2016 model iPhones.
Throughout our analysis, we review for clear error the
district courtâs findings of fact and we review de novo its
conclusions of law and any mixed questions of law and fact.
OneBeacon Ins. Co. v. Haas Indus., Inc., 634 F.3d 1092,
1096 (9th Cir. 2011).
A
âAs the Supreme Court has repeatedly emphasized, there
is âno duty to deal under the terms and conditions preferred
by [a competitorâs] rivals[.]â Aerotec Intâl, 836 F.3d at 1184
(quoting Pac. Bell Tel. Co. v. linkLine Commcâns, Inc.,
555 U.S. 438, 457 (2009) (âlinkLineâ)). Likewise, âthe
Sherman Act âdoes not restrict the long recognized right of
[a] trader or manufacturer engaged in an entirely private
32 FTC V. QUALCOMM
business, freely to exercise his own independent discretion
as to parties with whom he will deal.ââ Trinko, 540 U.S.
at 408 (alteration in original) (quoting United States v.
Colgate & Co., 250 U.S. 300, 307 (1919)); see linkLine,
555 U.S. at 448 (âAs a general rule, businesses are free to
choose the parties with whom they will deal, as well as the
prices, terms, and conditions of that dealing.â (citing
Colgate, 250 U.S. at 307)). This is because the antitrust
laws, including the Sherman Act, âwere enacted for âthe
protection of competition, not competitors.ââ Brunswick
Corp. v. Pueblo BowlâOâMat, Inc., 429 U.S. 477, 488
(1977) (emphasis added) (quoting Brown Shoe Co. v. United
States, 370 U.S. 294, 320 (1962)). Or, as we recently put it,
in a bit more colorful terms: âCompetitors are not required
to engage in a lovefest.â Aerotec Intâl, 836 F.3d at 1184.
The one, limited exception to this general rule that there
is no antitrust duty to deal comes under the Supreme Courtâs
decision in Aspen Skiing Co. v. Aspen Highlands Skiing
Corp., 472 U.S. 585 (1985). There, the Court held that a
company engages in prohibited, anticompetitive conduct
when (1) it âunilateral[ly] terminat[es] . . . a voluntary and
profitable course of dealing,â MetroNet Servs. Corp. v.
Qwest Corp., 383 F.3d 1124, 1132 (9th Cir. 2004); (2) âthe
only conceivable rationale or purpose is âto sacrifice short-
term benefits in order to obtain higher profits in the long run
from the exclusion of competition,ââ Aerotec Intâl, 836 F.3d
at 1184 (quoting MetroNet Servs., 383 F.3d at 1132); and
(3) the refusal to deal involves products that the defendant
already sells in the existing market to other similarly situated
customers, see MetroNet Servs., 383 F.3d at 1132â33. The
Supreme Court later characterized the Aspen Skiing
exception as âat or near the outer boundary of § 2 liability.â
Trinko, 540 U.S. at 409.
FTC V. QUALCOMM 33
The district courtâs conclusion that Qualcommâs refusal
to provide exhaustive SEP licenses to rival chip suppliers
meets the Aspen Skiing exception ignores critical differences
between Qualcommâs business practices and the conduct at
issue in Aspen Skiing, and it ignores the Supreme Courtâs
subsequent warning in Trinko that the Aspen Skiing
exception should be applied only in rare circumstances. As
a result, the FTC concedes error here. We agree.
First, the district court was incorrect that âQualcomm
terminated a âvoluntary and profitable course of dealingââ
with respect to its previous practice of licensing at the chip-
manufacturer level. Qualcomm, 411 F. Supp. 3d at 759â60
(quoting MetroNet Servs., 383 F.3d at 1131). In support of
this finding, the district court cited a single piece of record
evidence: an email from a Qualcomm lawyer regarding 3%-
royalty-bearing licenses for modem chip suppliers. But this
email was sent in 1999, seven years before Qualcomm
gained monopoly power in the CDMA modem chip market.
Furthermore, Qualcomm claims that it never granted
exhaustive licenses to rival chip suppliers. Instead, as the
1999 email suggests, it entered into ânon-exhaustive,
royalty-bearing agreements with chipmakers that explicitly
did not grant rights to the chipmakerâs customers.â
Appellantâs Opening Br. at 45.
According to Qualcomm, it ceased this practice in
response to developments in patent lawâs exhaustion
doctrine, see, e.g., Quanta Comput., 553 U.S. at 625 (noting
that âthe initial authorized sale of a patented item terminates
all patent rights to that itemâ), which made it harder for
Qualcomm to argue that it could provide ânon-exhaustiveâ
licenses in the form of royalty agreements. Nothing in the
record or in the district courtâs factual findings rebuts these
claims. The FTC offered no evidence that, from the time
34 FTC V. QUALCOMM
Qualcomm first gained monopoly power in the modem chip
market in 2006 until now, it ever had a practice of providing
exhaustive licenses at the modem chip level rather than the
OEM level.
Second, Qualcommâs rationale for âswitchingâ to OEM-
level licensing was not âto sacrifice short-term benefits in
order to obtain higher profits in the long run from the
exclusion of competition,â the second element of the Aspen
Skiing exception. Aerotec Intâl, 836 F.3d at 1184 (internal
quotation marks and citation omitted). Instead, Qualcomm
responded to the change in patent-exhaustion law by
choosing the path that was âfar more lucrative,â both in the
short term and the long term, regardless of any impacts on
competition. Qualcomm, 411 F. Supp. 3d at 753. The
district court itself acknowledged that this was Qualcommâs
purpose, observing: âFollowing Qualcommâs lead, other
SEP licensors like Nokia and Ericsson have concluded that
licensing only OEMs is more lucrative, and structured their
practices accordingly.â Id. at 754â55. Because
Qualcommâs purpose was greater profits in both the short
and long terms, the second required element of the Aspen
Skiing exception is not present in this case. 15
15
Throughout its analysis, the district court conflated the desire to
maximize profits with an intent to âdestroy competition itself.â
Spectrum Sports, 506 U.S. at 458. As noted supra, the goal of antitrust
law is not to force businesses to forego profits or even â[t]he opportunity
to charge monopoly prices,â which is âwhat attracts âbusiness acumenâ
in the first place.â Trinko, 540 U.S. at 407. Here, Qualcommâs desire to
maximize profits both in the short-term and the long-term undermines,
rather than supports, the district courtâs finding of anticompetitive
conduct under § 2. See Douglas H. Ginsburg et al., Section 2 Mangled:
FTC v. Qualcomm on the Duty to Deal, Price Squeezes, and Exclusive
Dealing 13 (Geo. Mason U. Law & Econ. Res. Paper Series, Paper
FTC V. QUALCOMM 35
Finally, unlike in Aspen Skiing, the district court found
no evidence that Qualcomm singles out any specific chip
supplier for anticompetitive treatment in its SEP-licensing.
In Aspen Skiing, the defendant refused to sell its lift tickets
to a smaller, rival ski resort even as it sold the same lift
tickets to any other willing buyer (including any other ski
resort); moreover, this refusal was designed specifically to
put the smaller, nearby rival out of business. 472 U.S.
at 593â94. Qualcomm applies its OEM-level licensing
policy equally with respect to all competitors in the modem
chip markets and declines to enforce its patents against these
rivals even though they practice Qualcommâs patents
(royalty-free). Instead, Qualcomm provides these rivals
indemnifications through the use of âCDMA ASIC
Agreementsââthe Aspen Skiing equivalent of refusing to
sell a skier a lift ticket but letting them ride the chairlift
anyway. Thus, while Qualcommâs policy toward OEMs is
âno license, no chips,â its policy toward rival chipmakers
could be characterized as âno license, no problem.â Because
Qualcomm applies the latter policy neutrally with respect to
all competing modem chip manufacturers, the third Aspen
Skiing requirement does not apply.
As none of the required elements for the Aspen Skiing
exception are present, let alone all of them, the district court
erred in holding that Qualcomm is under an antitrust duty to
license rival chip manufacturers. We hold that Qualcommâs
No. 19-21, 2019) (âThe district court expands Aspen Skiing well beyond
the âouter boundaryâ of Section 2 by applying it to all contracts
previously negotiated by the defendant firm and by inferring the firm
was willing to sacrifice profits even in the face of evidence the firm had
changed its business model to increase current profits.â).
36 FTC V. QUALCOMM
OEM-level licensing policy, however novel, is not an
anticompetitive violation of the Sherman Act.
B
Conceding error in the district courtâs conclusion that
Qualcomm is subject to an antitrust duty to deal under Aspen
Skiing, the FTC contends that this court may nevertheless
hold that Qualcomm engaged in anticompetitive conduct in
violation of § 2. This is so, the FTC urges, because
(1) âQualcomm entered into a voluntary contractual
commitment to deal with its rivals as part of the SSO
process, which is itself a derogation from normal market
competition,â and (2) Qualcommâs breach of this contractual
commitment âsatisfies traditional Section 2 standards [in
that] it âtends to impair the opportunities of rivals and . . .
does not further competition on the merits.ââ Appelleeâs Br.
at 69, 77 (quoting Cascade Health Sols. v. PeaceHealth,
515 F.3d 883, 894 (9th Cir. 2008)). We disagree.
Even if the district court is correct that Qualcomm is
contractually obligated via its SSO commitments to license
rival chip suppliersâa conclusion we need not and do not
reach 16âthe FTC still does not satisfactorily explain how
Qualcommâs alleged breach of this contractual commitment
itself impairs the opportunities of rivals. It argues the breach
âfacilitat[es] Qualcommâs collection of a surcharge from
rivalsâ customers.â Appelleeâs Br. at 77. But this refers to a
distinct business practice, licensing royalties, and alleged
harm to OEMs, not rival chipmakers. In any case,
Qualcommâs royalties are âchip-supplier neutralâ because
Qualcomm collects them from all OEMs that license its
patents, not just ârivalsâ customers.â The FTC argues that
16
See supra notes 12 and 13.
FTC V. QUALCOMM 37
Qualcommâs breach directly impacts rivals by âotherwise
deterring [their] entry and investment.â Id. But this ignores
that Qualcommâs âCDMA ASIC Agreementsâ functionally
act as de facto licenses (âno license, no problemâ) by
allowing competitors to practice Qualcommâs SEPs
(royalty-free) before selling their chips to downstream
OEMs. Furthermore, in order to make out a § 2 violation,
the anticompetitive harm identified must be to competition
itself, not merely to competitors. Microsoft, 253 F.3d at 58.
The FTC identifies no such harm to competition.
The FTCâs conclusion that OEM-level licensing does not
further competition on the merits is not only belied by
MediaTek and Intelâs entries into the modem chip markets
in the 2015â2016 timeframe, it also gives inadequate weight
to Qualcommâs reasonable, procompetitive justification that
licensing at the OEM and chip-supplier levels
simultaneously would require the company to engage in
âmulti-level licensing,â leading to inefficiencies and less
profit. Qualcommâs procompetitive justification is
supported by at least two other companiesâNokia and
Dolbyâwith similar SEP portfolios to Qualcommâs. 17
More critically, this part of the FTCâs argument skips ahead
17
See Br. of Amicus Curiae Nokia Technologies Oy at 18â19
(noting that â[t]here are good reasons for SEP owners to structure their
licensing programs to license end-user products,â including the reduction
of âtransaction costs and complexities associated with negotiating and
executing licenses at multiple points in the supply chain,â the avoidance
of âoverlapping and duplicative licensing,â âexpedite[d] access to SEPs
for the entire supply chain,â and âgreater visibility to what products are
actually licensed, for example, for auditing purposesâ); Br. of Amicus
Curiae Dolby Laboratories, Inc. at 28 (âForcing SEP holders to license
component suppliers would interfere with historical precedents and
established practices, and produce significant inefficiencies and lack of
transparency regarding whether products in the stream of commerce are
in fact licensed.â).
38 FTC V. QUALCOMM
to an examination of Qualcommâs procompetitive
justifications, failing to recognize that the burden does not
shift to Qualcomm to provide such justifications unless and
until the FTC meets its initial burden of proving
anticompetitive harm. Because the FTC has not met its
initial burden under the rule of reason framework, we are
less critical of Qualcommâs procompetitive justifications for
its OEM-level licensing policyâwhich, in any case, appear
to be reasonable and consistent with current industry
practice.
The FTC points to one case, Broadcom Corp. v.
Qualcomm Inc., 501 F.3d 297 (3rd Cir. 2007), as support for
its argument that a companyâs breach of its SSO
commitments may rise to the level of an antitrust violation.
But in that earlier antitrust action against Qualcomm, the
alleged anticompetitive conduct was not Qualcommâs
practice of licensing at the OEM level while not enforcing
its patents against rival chip suppliers; instead, Broadcom
asserted that Qualcomm intentionally deceived SSOs by
inducing them to standardize one of its patented
technologies, which it then licensed at âdiscriminatorily
higherâ royalty rates to competitors and customers using
non-Qualcomm chipsets. Id. at 304. The Broadcom court
held that Qualcommâs âintentionally false promise to license
[its SEP] on FRAND terms . . . coupled with an SDOâs
reliance on that promiseâ and Qualcommâs subsequent
discriminatory pricing sufficiently alleged âactionable
anticompetitive conductâ under § 2 to overcome
Qualcommâs motion to dismiss. Id. at 314.
Here, the district court found neither intentional
deception of SSOs on the part of Qualcomm nor that
Qualcomm charged discriminatorily higher royalty rates to
competitors and OEM customers using non-Qualcomm
FTC V. QUALCOMM 39
chips. Instead, it is undisputed that Qualcommâs current
royalty ratesâwhich the district court found âunreasonably
highâ (a finding discussed in greater detail in the next section
of our opinion)âare based on the patent portfolio chosen by
the OEM customer regardless of where the OEM sources its
chips. Furthermore, competing chip suppliers are permitted
to practice Qualcommâs SEPs freely without paying any
royalties at all. Thus, the Third Circuitâs âintentional
deceptionâ exception to the general rule that breaches of
SSO commitments do not give rise to antitrust liability does
not apply to this case. 18
Finally, we note the persuasive policy arguments of
several academics and practitioners with significant
experience in SSOs, FRAND, and antitrust enforcement,
who have expressed caution about using the antitrust laws to
remedy what are essentially contractual disputes between
private parties engaged in the pursuit of technological
innovation. The Honorable Paul R. Michel, retired Chief
Judge of the Court of Appeals for the Federal Circuit, argues
that it would be a mistake to use âthe hammer of antitrust
law . . . to resolve FRAND disputes when more precise
scalpels of contract and patent law are effective.â Amicus
Curiae Br. of The Honorable Paul R. Michel (Ret.) at 23.
18
See Wright, supra note 1, at 803 (âThere is no empirical evidence
that supports the proposition that breach of an SSO contractâeven one
resulting in higher royalty ratesâis somehow analogous to the collusive
interaction between rivals conventionally condemned by the antitrust
laws, or that it generates similar economic effects. Furthermore, courts
have uniformly rejected this view when interpreting and applying the
Sherman Act. In particular, to date there does not appear to be a single
case that finds breach of an SSO agreement without proof that deception
resulted in acquisition of market power, a violation of the Sherman Act.â
(citing Rambus Inc. v. FTC, 522 F.3d 456, 466â67 (D.C. Cir. 2008), cert.
denied, 555 U.S. 1171 (2009); Broadcom, 501 F.3d at 310â12)).
40 FTC V. QUALCOMM
Judge Michel notes that â[w]hile antitrust policy has its place
as a policy lever to enhance market competition, the rules of
contract and patent law are better equipped to handle
commercial disputes between the worldâs most sophisticated
companies about FRAND agreements.â Id. at 24. Echoing
this sentiment, a former FTC Commissioner, Joshua Wright,
argues that âthe antitrust laws are not well suited to govern
contract disputes between private parties in light of remedies
available under contract or patent law,â and that âimposing
antitrust remedies in pure contract disputes can have harmful
effects in terms of dampening incentives to participate in
standard-setting bodies and to commercialize innovation.â
Wright, supra note 1, at 808â09.
In short, we are not persuaded by the FTCâs argument
that we should adopt an additional exception, beyond the
Aspen Skiing exception that the FTC concedes does not
apply here, to the general rule that âbusinesses are free to
choose the parties with whom they will deal, as well as the
prices, terms, and conditions of that dealing.â linkLine,
555 U.S. at 448 (citing Colgate, 250 U.S. at 307). We
therefore decline to hold that Qualcommâs alleged breach of
its SSO commitments to license its SEPs on FRAND terms,
even assuming there was a breach, amounted to
anticompetitive conduct in violation of § 2.
C
We next address the district courtâs primary theory of
anticompetitive harm: Qualcommâs imposition of an
âanticompetitive surchargeâ on rival chip suppliers via its
licensing royalty rates. According to the district court,
Qualcommâs unreasonably high royalty rates
enable Qualcomm to control rivalsâ prices
because Qualcomm receives the royalty even
FTC V. QUALCOMM 41
when an OEM uses one of Qualcommâs
rivalâs chips. Thus, the âall-inâ price of any
modem chip sold by one of Qualcommâs
rivals effectively includes two components:
(1) the nominal chip price; and (2)
Qualcommâs royalty surcharge.
Qualcomm, 411 F. Supp. 3d at 791. This central component
of the district courtâs ruling is premised on the district courtâs
findings that Qualcommâs royalty rates are
(1) âunreasonably highâ because they are improperly based
on Qualcommâs monopoly chip market share and handset
price instead of the âfair value of Qualcommâs patents,â and
(2) anticompetitive because they raise costs to OEMs, who
pass the extra costs along to consumers and are forced to
invest less in other handset features. Id. at 773â90, 795,
820â21. The FTC agrees with this aspect of the district
courtâs ruling, pointing out that its âreasonablenessâ
determination regarding Qualcommâs royalty rates is a
factual finding subject to clear error review and arguing that
this finding âwas supported by overwhelming evidence.â
Appelleeâs Br. at 44 (citing Faulkner v. Gibbs, 199 F.2d 635,
639 (9th Cir. 1952)).
We hold that the district courtâs âanticompetitive
surchargeâ theory fails to state a cogent theory of
anticompetitive harm. Instead, it is premised on a
misunderstanding of Federal Circuit law pertaining to the
calculation of patent damages, it incorrectly conflates
antitrust liability and patent law liability, and it improperly
considers âanticompetitive harms to OEMsâ that fall outside
the relevant antitrust markets. Furthermore, even if we were
to accept the district courtâs conclusion that Qualcommâs
royalty rates are unreasonable, we conclude that the district
42 FTC V. QUALCOMM
courtâs surcharging theory still fails as a matter of law and
logic.
1
First, the district courtâs determination that Qualcommâs
royalty rates are âunreasonableâ because they are based on
handset prices misinterprets Federal Circuit law regarding
âthe patent rule of apportionmentâ and the smallest salable
patent-practicing unit (âSSPPUâ). The district court
observed âthat âit is generally required that royalties be
based not on the entire product, but instead on the
[SSPPU].ââ Qualcomm, 411 F. Supp. 3d at 783 (quoting
LaserDynamics, Inc. v. Quanta Comput., Inc., 694 F.3d 51,
67 (Fed. Cir. 2012)). The district court then cited an
unpublished, district court case for the proposition that âthe
modem chip . . . âis the proper [SSPPU]â in a cellular
handset.â Id. (quoting GPNE Corp. v. Apple, Inc., No. 12-
CV-02885-LHK, 2014 WL 1494247, at *13 (N.D. Cal. Apr.
16, 2014)). 19 Based on LaserDynamics and GPNE, the
district court concluded that âQualcomm is not entitled to a
royalty on the entire handset.â Id.
Even if we accept that the modem chip in a cellphone is
the cellphoneâs SSPPU, the district courtâs analysis is still
fundamentally flawed. No court has held that the SSPPU
concept is a per se rule for âreasonable royaltyâ calculations;
instead, the concept is used as a tool in jury cases to
minimize potential jury confusion when the jury is weighing
complex expert testimony about patent damages. See
Ericsson, 773 F.3d at 1226 (explaining that the SSPPU
concept is a flexible evidentiary tool, not an unyielding
19
GPNE was presided over by the same district court judge that
presided over this case.
FTC V. QUALCOMM 43
substantive element of patent damages law); VirnetX, Inc. v.
Cisco Sys., Inc., 767 F.3d 1308, 1327â28 (Fed. Cir. 2014)
(same); LaserDynamics, 694 F.3d at 68 (same). As this case
involved a bench trial, the potential for jury confusion was
absent.
Moreover, the Federal Circuit rejected the premise of the
district courtâs determination: that the SSPPU concept is
required when calculating patent damages. See
Commonwealth Sci. & Indus. Research Org. v. Cisco Sys.,
Inc., 809 F.3d 1295, 1303 (Fed. Cir. 2015) (âThe rule Cisco
advancesâwhich would require all damages models to
begin with the [SSPPU]âis untenable [and] conflicts with
our prior approvals of a methodology that values the asserted
patent based on comparable licenses.â) (citations omitted).
The Federal Circuit has also observed that ââ[s]ophisticated
parties routinely enter into license agreements that base the
value of the patented inventions as a percentage of the
commercial productsâ sales price,â and thus â[t]here is
nothing inherently wrong with using the market value of the
entire product.ââ Exmark Mfg. Co. Inc. v. Briggs & Stratton
Power Prods. Grp., LLC, 879 F.3d 1332, 1349 (Fed. Cir.
2018) (some alterations in original) (quoting Lucent Techs.,
Inc. v. Gateway, Inc., 580 F.3d 1301, 1339 (Fed. Cir. 2009)).
These statements of law and current practice run counter to
the district courtâs conclusion that patent royalties cannot be
based on total handset price and that doing so exposes a firm
to potential antitrust liability.
A second problem with the district courtâs âunreasonable
royalty rateâ conclusion is that it erroneously assumes that
royalties are âanticompetitiveââin the antitrust senseâ
unless they precisely reflect a patentâs current, intrinsic
value and are in line with the rates other companies charge
for their own patent portfolios. Neither the district court nor
44 FTC V. QUALCOMM
the FTC provides any case law to support this proposition,
which sounds in patent law, not antitrust law. See 35 U.S.C.
§ 284 (entitling a patent owner to âdamages adequate to
compensate for the infringement, but in no event less than a
reasonable royalty for the use made of the invention by the
infringerâ (emphasis added)). We decline to adopt a theory
of antitrust liability that would presume anticompetitive
conduct any time a company could not prove that the âfair
valueâ of its SEP portfolios corresponds to the prices the
market appears willing to pay for those SEPs in the form of
licensing royalty rates. 20
Finally, even assuming that a deviation between
licensing royalty rates and a patent portfolioâs âfair valueâ
could amount to âanticompetitive harmâ in the antitrust
sense, the primary harms the district court identified here
were to the OEMs who agreed to pay Qualcommâs royalty
ratesâthat is, Qualcommâs customers, not its competitors.
These harms were thus located outside the âareas of effective
competitionââthe markets for CDMA and premium LTE
modem chipsâand had no direct impact on competition in
those markets. See Rambus, 522 F.3d at 464 (noting that if
a practice âraises the price secured by a sellerâ or otherwise
20
Qualcomm and several amici additionally argue that the district
court committed reversible legal error by failing to apply the governing
legal standard for determining whether a royalty is reasonableâthat is,
by âusing the claimantâs established royalties.â Appellantâs Reply Br.
at 16â17 (quoting U.S. Natâl Bank of Portland v. Fabri-Valve Co. of Am.,
235 F.2d 565, 568 (9th Cir. 1956)); see also, e.g., Amicus Curiae Br. of
The Honorable Paul R. Michel (Ret.) at 18â22 (discussing a long line of
Federal Circuit cases emphasizing the âestablished royaltyâ rule and
criticizing the district courtâs failure to even acknowledge this body of
case law). Because our holding does not depend on the âreasonablenessâ
of a licensorâs royalties, a determination that sounds in patent law and
not antitrust law, we need not decide whether the method the district
court used to assess reasonableness in this case was erroneous.
FTC V. QUALCOMM 45
harms customers, âbut does so without harming competition,
it is beyond the antitrust lawsâ reachâ); accord NYNEX Corp.
v. Discon, Inc., 525 U.S. 128, 136 (1998) (no Sherman Act
violation where âconsumer injury naturally flowed not so
much from a less competitive market . . . as from the
exercise of market power that is lawfully in the hands of a
monopolist . . . combined with a deception worked upon the
regulatory agency that prevented the agency from
controlling [the monopolistâs] exercise of its monopoly
powerâ).
2
Regardless of the âreasonablenessâ of Qualcommâs
royalty rates, the district court erred in finding that these
royalties constitute an âartificial surchargeâ on rivalsâ chip
sales. In Caldera, Inc. v. Microsoft Corp., 87 F. Supp. 2d
1244 (D. Utah 1999), the primary case relied upon by the
district court for its surcharging theory, Microsoft required
OEMs âto pay [it] a royalty on every machine the OEM
shipped regardless of whether the machine contained MS
DOS or another operating system.â Id. at 1249â50. This
resulted in OEMs having to pay two royalties instead of one
for a portion of their product base unless they chose to
exclusively install Microsoftâs operating system in their
products. Id. at 1250. Microsoftâs policy thus had âthe
practical effect of exclusivity,â as it imposed a naked tax on
rivalsâ software even when the end-productâan individual
computer installed with a non-Microsoft operating systemâ
contained no added value from Microsoft. Id. The Caldera
court held that this hidden surcharge, combined with
Microsoftâs related practices that were designed to secure
exclusivity, were sufficient to defeat Microsoftâs motion for
summary judgment on the question of whether its policy
46 FTC V. QUALCOMM
amounted to anticompetitive conduct in violation of § 2. Id.
at 1250â51.
Qualcommâs licensing royalties are qualitatively
different from the per-unit operating-system royalties at
issue in Caldera. When Qualcomm licenses its SEPs to an
OEM, those patent licenses have valueâindeed, they are
necessary to the OEMâs ability to market and sell its cellular
products to consumersâregardless of whether the OEM
uses Qualcommâs modem chips or chips manufactured and
sold by one of Qualcommâs rivals. And unlike Caldera,
where OEMs who installed non-Microsoft operating
systems in some of their products were required to pay
royalties for both the actual operating system and MS DOS
(which was not installed), here OEMs do not pay twice for
SEP licenses when they use non-Qualcomm modem chips.
Thus, unlike Microsoftâs practice, Qualcommâs practice
does not have the âpractical effect of exclusivity.â Even the
FTC concedes that âthis case differs from Caldera in [that]
Qualcomm holds patents practiced by its rivalsâ chips, and
no one disputes that Qualcomm is entitled to collect a royalty
equal to the reasonable value of those patents.â Appelleeâs
Br. at 39.
In its complaint and in its briefing, the FTC suggests that
Qualcommâs royalty rates impose an anticompetitive
surcharge on its rivalsâ sales not for the reasons at play in
Caldera, but rather because Qualcomm uses its licensing
royalties to charge anticompetitive, ultralow prices on its
own modem chipsâpushing out rivals by squeezing their
profit margins and preventing them from making necessary
investments in research and development. 21 But this type of
21
One of Qualcommâs main competitors, Intel, shares this theory.
See Br. of Intel Corporation as Amicus Curiae at 3â4 (arguing that
FTC V. QUALCOMM 47
âmargin squeezeâ was rejected as a basis for antitrust
liability in linkLine. 555 U.S. at 451â52, 457. There,
multiple digital subscriber line (âDSLâ) high-speed internet
service providers complained that AT&T was selling them
access to AT&Tâs must-have telephone lines and facilities at
inflated wholesale rates and then shifting those increased
profits to charge ultra-low rates for DSL services at retail,
effectively squeezing these DSL competitors out of the
market. Id. at 442â44. The Court rejected the plaintiffsâ
assertion of anticompetitive harm, holding that AT&T was
under no antitrust duty to deal with its competitors on the
wholesale level, and that the plaintiffs failed to introduce
evidence of predatory pricing (that is, charging below cost)
at the retail level. 22 Id. at 450â51.
Here, not only did the FTC offer no evidence that
Qualcomm engaged in predatory pricing, the district courtâs
entire antitrust analysis is premised on the opposite
proposition: that Qualcomm âcharge[s] monopoly prices on
modem chips.â Qualcomm, 411 F. Supp. 3d at 800. Indeed,
the district court faulted Qualcomm for lowering its prices
only when other companies introduced CDMA modem chips
to the market to effectively compete. Id. at 688â89. We
Qualcomm âshift[s] part of its chip revenues into its royalty rates,
overcharging on the patent royalty, while undercharging for chips . . .
[which] destroys the normal competitive process in the chip marketâ).
22
The Court explained in linkLine that âto prevail on a predatory
pricing claim, a plaintiff must demonstrate that: (1) âthe prices
complained of are below an appropriate measure of its rivalâs costsâ; and
(2) there is a âdangerous probabilityâ that the defendant will be able to
recoup its âinvestmentâ in below-cost prices.â 555 U.S. at 451 (quoting
Brooke Grp. Ltd., 509 U.S. at 222â24); see also Atl. Richfield Co. v. USA
Petroleum Co., 495 U.S. 328, 340 (1990) (âLow prices benefit
consumers regardless of how those prices are set, and so long as they are
above predatory levels, they do not threaten competition.â).
48 FTC V. QUALCOMM
agree with Qualcomm that this is exactly the type of
âgarden-variety price competition that the law encourages,â
Appellantâs Reply Br. at 43, and are aware of no authority
holding that a monopolist may not lower its rates in response
to a competitorâs entry into the market with a lower-priced
product.
D
As with its critique of Qualcommâs royalty rates, the
district courtâs analysis of Qualcommâs âno license, no
chipsâ policy focuses almost exclusively on alleged
âanticompetitive harmsâ to OEMsâthat is, impacts outside
the relevant antitrust market. The district court labeled
Qualcommâs policy âanticompetitive conduct against
OEMsâ and an âanticompetitive practice[] in patent license
negotiations.â Qualcomm, 411 F. Supp. 3d at 697â98. But
the district court failed to identify how the policy directly
impacted Qualcommâs competitors or distorted âthe area of
effective competition.â Am. Express, 138 S. Ct. at 2285.
Although OEMs consistently described Qualcommâs âno
license, no chipsâ policy as âunique in the industry,â none
articulated a cogent theory of anticompetitive harm. Instead,
they objected to Qualcommâs licensing royalty rates, which
they have to pay regardless of whether they chose to
purchase their chips from Qualcomm or a competitor (or else
risk a patent infringement suit from Qualcomm).
Furthermore, it appears that OEMs have been somewhat
successful in âdiscipliningâ Qualcommâs pricing through
arbitration claims, negotiations, threatening to move to
different chip suppliers, and threatened or actual antitrust
litigation. These maneuvers generally resulted in
settlements and renegotiated licensing and chip-supply
agreements with Qualcomm, even as OEMs continued to
look elsewhere for cheaper modem chip options. A good
FTC V. QUALCOMM 49
example of this is Appleâs 2014 decision to switch to Intel
as its main chip supplier, demonstrating that Qualcommâs
âno license, no chipsâ policy did not foreclose competition
in the modem chip markets.
According to the FTC, the problem with âno license, no
chipsâ is that, under the policy, âQualcomm will not sell
chips to a cellphone [OEM] like Apple or Samsung unless
the OEM agrees to a license that requires it to pay a
substantial per-phone surcharge even on phones that use
rivalsâ chips.â Appelleeâs Br. at 1 (emphasis in original).23
But this argument is self-defeating: if the condition imposed
on gaining access to Qualcommâs chip supply applies
regardless of whether the OEM chooses Qualcomm or a
competitor (in fact, this appears to be the essence of
Qualcommâs policy), then the condition by definition does
not distort the âarea of effective competitionâ or impact
competitors. At worst, the policy raises the âall-inâ price
that an OEM must pay for modem chips (chipset + licensing
royalties) regardless of which chip supplier the OEM
chooses to source its chips from. As we have already
discussed, whether that all-in price is reasonable or
unreasonable is an issue that sounds in patent law, not
antitrust law. Additionally, it involves potential harms to
Qualcommâs customers, not its competitors, and thus falls
outside the relevant antitrust markets.
The district court stopped short of holding that the âno
license, no chipsâ policy itself violates antitrust law. For
23
See also Appelleeâs Br. at 9 (âQualcomm uses its chip monopoly
to force OEMs to pay Qualcomm a surcharge even when they use its
rivalsâ chips.â) (emphasis in original); id. at 35 (â[Qualcomm] forced
customers to accept terms that raised the costs of using rivalsâ chips, as
a condition of access to its own must-have chips.â).
50 FTC V. QUALCOMM
good reason: neither the Sherman Act nor any other law
prohibits companies like Qualcomm from (1) licensing their
SEPs independently from their chip sales and collecting
royalties, and/or (2) limiting their chip customer base to
licensed OEMs. As we have noted, â[a]s a general rule,
businesses are free to choose the parties with whom they will
deal, as well as the prices, terms, and conditions of that
dealing.â linkLine, 555 U.S. at 448 (2009) (citing Colgate,
250 U.S. at 307); cf. Am. Express, 138 S. Ct. at 2289â90
(holding that Amexâs antisteering provisions did not unduly
restrain trade). Indeed, the FTC accepts that this is the state
of the law when it concedes that âQualcomm holds patents
practiced by its rivalsâ chips, and . . . is entitled to collect a
royaltyâ on them. Appelleeâs Br. at 39.
In addition, the district courtâs criticism of âno license,
no chipsâ treats that policy as if Qualcomm is making SEP
licenses contingent upon chip purchases, instead of the other
way around. If Qualcomm were to refuse to license its SEPs
to OEMs unless they first agreed to purchase Qualcommâs
chips (âno chips, no licenseâ), then rival chip suppliers
indeed might have an antitrust claim under both §§ 1 and 2
of the Sherman Act based on exclusionary conduct. This is
because OEMs cannot sell their products without obtaining
Qualcommâs SEP licenses, so a âno chips, no licenseâ policy
would essentially force OEMs to either purchase
Qualcommâs chips or pay for both Qualcommâs and a
competitorâs chips (similar to the no-win situation faced by
OEMs in the Caldera case). But unlike a hypothetical âno
chips, no licenseâ policy, âno license, no chipsâ is chip-
neutral: it makes no difference whether an OEM buys
Qualcommâs chip or a rivalâs chips. The policy only insists
that, whatever chip source an OEM chooses, the OEM pay
Qualcomm for the right to practice the patented technologies
FTC V. QUALCOMM 51
embodied in the chip, as well as in other parts of the phone
or other cellular device.
This is not to say that Qualcommâs âno license, no chipsâ
policy is not âunique in the industryâ (it is), or that the policy
is not designed to maximize Qualcommâs profits
(Qualcomm has admitted as much). But profit-seeking
behavior alone is insufficient to establish antitrust liability.
As the Supreme Court stated in Trinko, the opportunity to
charge monopoly prices âis an important element of the free-
market systemâ and âis what attracts âbusiness acumenâ in
the first place; it induces risk taking that produces innovation
and economic growth.â Trinko, 540 U.S. at 407. The record
suggests that this case is more like Am. Express, where a
companyâs novel business practice at first appeared to be
anticompetitive, but in fact was disruptive in a manner that
was beneficial to consumers in the long run because it forced
rival credit card companies to adapt and innovate. 138 S. Ct.
at 2290. Similarly here, companies like Nokia and Ericsson
are now â[f]ollowing Qualcommâs leadâ with respect to
OEM-level licensing, and beginning in 2015 rival
chipmakers began to successfully compete against
Qualcomm in the modem chip markets. We decline to
ascribe antitrust liability in these dynamic and rapidly
changing technology markets without clearer proof of
anticompetitive effect.
E
Having addressed the primary components of the district
courtâs antitrust ruling with respect to Qualcommâs general
business practices, we now address the district courtâs more
specific finding that from 2011 to 2015, Qualcomm violated
both sections of the Sherman Act by signing âexclusive
dealsâ with Apple that âforeclosed a âsubstantial shareâ of
the [CDMA] modem chip market.â Qualcomm, 411 F.
52 FTC V. QUALCOMM
Supp. 3d at 771â72 (quoting Tampa Elec. Co. v. Nashville
Coal Co., 365 U.S. 320, 327 (1961)).
âExclusive dealing involves an agreement between a
vendor and a buyer that prevents the buyer from purchasing
a given good from any other vendor.â Allied Orthopedic,
592 F.3d at 996. Because â[t]here are âwell-recognized
economic benefits to exclusive dealing arrangements,
including the enhancement of interbrand competition,ââ an
exclusive dealing arrangement is not per se illegal. Id.
(quoting Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157,
1162 (9th Cir. 1997)). Instead, such an arrangement violates
the Sherman Act under the rule of reason only if âits effect
is to âforeclose competition in a substantial share of the line
of commerce affected.ââ Id. (quoting Omega Envtl.,
127 F.3d at 1162); see also Caldera, 87 F. Supp. 2d at 1251
(â[T]he competition foreclosed by the contract must be
found to constitute a substantial share of the relevant market
. . . [t]hat is to say, the opportunities for other traders to enter
into or remain in that market must be significantly limitedâ)
(quoting Tampa Elec., 365 U.S. at 328).
Qualcomm argues that its agreements with Apple were
âvolume discount contracts, not exclusive dealings
contracts.â Unlike exclusive dealing arrangements, âvolume
discount contracts are legal under antitrust law . . . [b]ecause
the contracts do not preclude consumers from using other . . .
services.â W. Parcel Express v. United Parcel Serv. of Am.,
Inc., 190 F.3d 974, 976 (9th Cir. 1999) (citing Fedway
Assocs., Inc. v. United States Treasury, 976 F.2d 1416, 1418
(D.C. Cir. 1992)). Likewise, conditional agreements that
provide âsubstantial discounts to customers that actually
purchase[] a high percentage of their . . . requirements fromâ
a firm are not exclusive dealing arrangements, de facto or
actual, unless they âprevent[] the buyer from purchasing a
FTC V. QUALCOMM 53
given good from any other vendor.â Allied Orthopedic, 592
F.3d at 996â97; see also XI Philip E. Areeda & Herbert
Hovenkamp, Antitrust Law, ¶ 1807a at 129 (2d ed. 2000)
(noting that â[d]iscounts conditioned on exclusivity in
relatively short-term contracts are rarely problematicâ).
The district court concluded that the Apple agreements
were not volume discount contracts, but rather âde facto
exclusive dealsâ that âcoerced â[Apple] into purchasing a
substantial amount of [its] needs from [Qualcomm]ââ and
thereby ââsubstantially foreclosed competitionâ in the
[CDMA modem chip] market.â Qualcomm, 411 F. Supp. 3d
at 763, 766 (some alterations in original) (quoting Aerotec
Intâl, 836 F.3d at 1182; Tampa Elec., 365 U.S. at 334). The
FTC argues that these agreements ââeasilyâ qualified as de
facto exclusive-dealing agreements under Tampa Electricâs
âpractical effectâ test.â Appelleeâs Br. at 87; see Tampa
Elec., 365 U.S. at 326 (holding that a contract is exclusive,
even though it does not contain specific agreements not to
use the goods of a competitor, if its âpractical effectâ is to
prevent such use) (citation omitted).
There is some merit in the district courtâs conclusion that
the Apple agreements were structured more like exclusive
dealing contracts than volume discount contracts. 24
24
Of note, the agreements did not just provide substantial discounts
to Apple in exchange for Apple âpurchas[ing] a high percentage of [its]
. . . requirements fromâ Qualcomm. Allied Orthopedic, 592 F.3d at 996.
Instead, they sought to âprevent[] the buyer [Apple] from purchasing a
given good [CDMA modem chips] from any other vendor,â id., by
making volume discounts (or âincentive fundsâ) contingent on
exclusivity. Nor were these agreements âeasily terminable,â even
though Apple did, in fact, terminate them. See id. at 997 (noting that
â[t]he âeasy terminabilityâ of an exclusive dealing arrangement
ânegate[s] substantially [its] potential to foreclose competitionââ
54 FTC V. QUALCOMM
However, we do not agree that these agreements had the
actual or practical effect of substantially foreclosing
competition in the CDMA modem chip market, or that
injunctive relief is warranted.
During the relevant time period (2011â2015), the record
suggests that the only serious competition Qualcomm faced
with respect to the Apple contracts was from Intel, a
company from whom Apple had considered purchasing
modem chips prior to signing the 2013 agreement with
Qualcomm. The district court made no finding that any
other specific competitor or potential competitor was
affected by either of Qualcommâs agreements with Apple,
and it is undisputed that Intel won Appleâs business the very
next year, in 2014, when Appleâs engineering team
unanimously recommended that the company select Intel as
an alternative supplier of modem chips. The district court
found that âQualcommâs exclusive deals . . . delayed Intelâs
ability to sell modem chips to Apple until September 2016.â
Id. at 737. There is no indication in the record, however, that
Intel was a viable competitor to Qualcomm prior to 2014â
2015, or that the 2013 agreement delayed Appleâs transition
to Intel by any more than one year. 25 Given these undisputed
facts, we conclude that the 2011 and 2013 agreements did
(quoting Omega Envtl., 127 F.3d at 1163â64)). Clearly, the requirement
that Apple forfeit or reimburse Qualcomm millions of dollars in
incentive funds was a strong deterrent to termination.
25
See Appellantâs Opening Br. at 110 (pointing out that at trial, the
FTC itself only contended âthat the [2013] agreement foreclosed Intel
from supplying chips for a mere five iPad models released over three
years and âperhapsâ delayed Intelâs ability to sell chips for the iPhone by
one yearâ).
FTC V. QUALCOMM 55
not have the actual or practical effect of substantially
foreclosing competition in the CDMA modem chip market.
Furthermore, â[a]s a general rule, â[p]ast wrongs are not
enough for the grant of an injunctionâ; [instead,] an
injunction will only issue if the wrongs are ongoing or likely
to recur.â FTC v. Evans Prods. Co., 775 F.2d 1084, 1087
(9th Cir. 1985) (quoting Enricoâs, Inc. v. Rice, 730 F.2d
1250, 1253 (9th Cir. 1984)); see also 15 U.S.C. § 53(b)
(providing that the FTC âmayâ seek an injunction in federal
district court only when the defendant âis violating, or is
about to violate,â one or more of the antitrust laws). Even if
we were to agree with the district court that the Apple
agreements were exclusive dealing contracts that
substantially foreclosed competition in the relevant antitrust
markets, it is undisputed that these agreements do not pose
any current or future threat of anticompetitive harm. Despite
the âclawback provisions,â Apple itself terminated the
agreements in 2015âtwo years before the FTC filed its
action. Thus, while we agree with the district court that these
were structured more like exclusive dealing contracts than
volume discount contracts, they do not warrant the issuance
of an injunction.
IV
Anticompetitive behavior is illegal under federal
antitrust law. Hypercompetitive behavior is not. Qualcomm
has exercised market dominance in the 3G and 4G cellular
modem chip markets for many years, and its business
practices have played a powerful and disruptive role in those
markets, as well as in the broader cellular services and
technology markets. The company has asserted its economic
muscle âwith vigor, imagination, devotion, and ingenuity.â
Topco Assocs., 405 U.S. at 610. It has also âacted with sharp
elbowsâas businesses often do.â Tension Envelope Corp.
56 FTC V. QUALCOMM
v. JBM Envelope Co., 876 F.3d 1112, 1122 (8th Cir. 2017).
Our job is not to condone or punish Qualcomm for its
success, but rather to assess whether the FTC has met its
burden under the rule of reason to show that Qualcommâs
practices have crossed the line to âconduct which unfairly
tends to destroy competition itself.â Spectrum Sports, 506
U.S. at 458. We conclude that the FTC has not met its
burden.
First, Qualcommâs practice of licensing its SEPs
exclusively at the OEM level does not amount to
anticompetitive conduct in violation of § 2, as Qualcomm is
under no antitrust duty to license rival chip suppliers. To the
extent Qualcomm has breached any of its FRAND
commitments, a conclusion we need not and do not reach,
the remedy for such a breach lies in contract and patent law.
Second, Qualcommâs patent-licensing royalties and âno
license, no chipsâ policy do not impose an anticompetitive
surcharge on rivalsâ modem chip sales. Instead, these
aspects of Qualcommâs business model are âchip-supplier
neutralâ and do not undermine competition in the relevant
antitrust markets. Third, Qualcommâs 2011 and 2013
agreements with Apple have not had the actual or practical
effect of substantially foreclosing competition in the CDMA
modem chip market. Furthermore, because these
agreements were terminated years ago by Apple itself, there
is nothing to be enjoined.
We therefore REVERSE the district courtâs judgment
and VACATE its injunction as well as its partial grant of
summary judgment.