On May 21, 2019, the Northern District Court of California delivered a lengthy rebuke to Qualcomm for its licensing practices.  While Qualcomm is known as a leading supplier of cellular modem chips, the majority of its revenue comes not from the sales of the chips themselves, but from the patent royalty fees Qualcomm charges purchasers.  To maximize royalty fees, Qualcomm employs an unconventional “no license, no chips” business model that conditions sales on entering into licensing agreements with Qualcomm.  In a 233-page opinion, Judge Lucy H. Koh found that this practice violated Sections 1 and 2 of the Sherman Act.

The court’s detailed factual and legal analysis addressed a myriad of legal issues.  One particular issue of interest is the court’s conclusion that Qualcomm had a duty under antitrust law to license its patents to competitors.  Companies contemplating entering business deals with competitors often consider whether cooperating with rivals presents antitrust risks—but Qualcomm underscores that, under some circumstances, refusing to cooperate with rivals could also create potential liability.  Below, we discuss the Qualcomm court’s analysis of whether and under what circumstances antitrust laws might require a company to cooperate with its rivals.

Qualcomm’s Antitrust Duty to License Its SEPs to Rivals:

The alleged anticompetitive conduct at issue in Qualcomm arose from Qualcomm’s holdings of standard essential patents (SEPs) for modem chip technology.  Although in the past Qualcomm had licensed its SEPs to competing modem chip suppliers—and, in fact, was required to do so under commitments to two cellular standard setting organizations—Qualcomm decided to stop doing so.  Instead, it would offer licenses only to original equipment manufacturers (OEMs), such as Apple.  The court found that Qualcomm decided to change its licensing practices because it “determined that it was far more lucrative to license only OEMs.”

In Verizon Communications Incorporated v. Law Offices of Curtis V. Trinko, LLP, the Supreme Court held that “there is no duty to aid competitors.”  The rationale behind this rule is threefold.  First, compelling successful firms “to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.”  Second, enforced sharing requires the courts to impose their own views of “proper price, quantity, and other terms of dealing—a role for which they are ill suited.”  Third, the Court warned that “compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion.”

The Qualcomm court, however, found that Qualcomm’s practices were an exception to the general rule. In its analysis, the court relied on a three-factor test derived from the Ninth Circuit’s holding in MetroNet Services v. Qwest Corporation, a case in which that court found that a telephone services provider had no obligation to offer services at a rate that would allow third parties to purchase those services and profitably resell them.  Citing MetroNet, the Qualcomm court held that a company violates the antitrust duty to deal when it:  (1) makes a “unilateral termination of a voluntary and profitable course of dealing”; (2) refuses to deal to a competitor even though it is being compensated at retail price, demonstrating anticompetitive malice; and (3) refuses to provide competitors with a product that is “already sold in a retail market to other customers.”

Applying this test, the court found that Qualcomm had a duty under the Sherman Act to license its SEPs to rival modem chip suppliers.  First, the court found that Qualcomm terminated a voluntary and profitable course of dealing.  The court explained that Qualcomm had once licensed rival modem chip suppliers.  Despite earning profits from collecting royalty fees, Qualcomm ultimately chose to stop this practice.  The court ruled that this conduct weighted toward finding a duty to license competitors.

Second, the court held that Qualcomm’s refusal to license its SEPs to competitors was motivated by anticompetitive malice.  In support of this finding, the court cited numerous statements and documents showing that the reason Qualcomm changed its licensing practices was to avoid competition from rivals. In particular, the court highlighted a Qualcomm presentation urging employees to “make sure [a competitor] can only go after [certain] customers” to accomplish the goal of “reduc[ing the] # of [competitor’s] 3G customers.”  The court found that these statements and others demonstrated that Qualcomm’s conduct was “characterized by a ‘willingness to sacrifice short-term benefits’—like profitable licenses from modem chip rivals— ‘in order to obtain higher profits in the long run from the exclusion of competition.’”

Third, the court held that Qualcomm’s refusal to do business with select competitors within an existing market for SEP licenses weighted toward establishing an antitrust duty.  Unlike in Trinko, where the defendant’s property—elements of its local telephone network—could only be shared with competitors “at considerable expense and effort,” Qualcomm would not have to expend additional effort to enter into agreements with rivals.  Indeed, the court emphasized that Qualcomm had licensed chips to rivals in the past and continues to offer licenses to OEMs in the chip retail market.

In its analysis, the Qualcomm court relied heavily on Aspen Skiing Company v. Aspen Highlands Skiing Corporation, an outlying 1985 case in which the Supreme Court held that the owner of three ski resorts in Aspen had a duty under antitrust law to cooperate with the owner of the fourth resort in offering a joint “all-Aspen” lift ticket.  Although the Supreme Court noted in Trinko that Aspen Skiing was “at or near the outer boundary of [Section] 2 liability,” the Qualcomm court reasoned that Qualcomm’s conduct was sufficiently analogous to Aspen Skiing to justify a finding that there was a duty to deal, because in both cases the defendant exited voluntary agreements with rivals to secure a dominant hold in the market. 

Takeaways:

It is well-understood that joint business ventures between rivals can be a fraught area because they risk triggering antitrust liability.  The Qualcomm decision underscores the importance of examining business conduct from the opposite angle:  Companies should consider not only whether doing deals with rivals will trigger antitrust liability, but whether refusing to do so could as well.  Below, we offer five key takeaways that businesses should consider when evaluating whether to enter a business deal with a competitor.

First, while the Qualcomm analysis focuses on patent licensing, the impact of the decision will likely resonate across all sectors.  Judge Koh’s reliance on Aspen Skiing demonstrates that the antitrust duty to deal with rivals applies broadly to all types of businesses—ranging from an international company providing modem chips for millions of cellular devices to a ski resort in Aspen selling tickets to local tourists.  Any company that enters business deals with competitors—including joint venture agreements, content licensing agreements, retail agreements where the wholesaler also sells directly to the public— should familiarize itself with the Qualcomm ruling and consider the potential antitrust risks associated with discontinuing these arrangements.

Second, companies should carefully consider whether entering into agreements with rivals is beneficial in the long-term, for once a company adopts a practice of doing business with competitors, it may be forced to continue that practice.  Such an obligation could arise even long after the original deals conclude.  In Qualcomm, Judge Koh held that because Qualcomm had licensed its SEPs to competitors in the 1990s, it had an obligation to license those patents to different competitors 30 years later.

Third, when companies contemplate ending deals with rivals, they should focus their analysis on business factors that do not relate to competition with those rivals.  For example, in MetroNet, the court held that Qwest’s decision to terminate “per system pricing” and switch to “per location pricing” was permissible in part because it was motivated by a desire to maintain a price discrimination structure, and not to exclude competitors.  In contrast, the Qualcomm court concluded that, based on the evidentiary record, Qualcomm’s decision was “characterized by a ‘willingness to sacrifice short-term benefits’—like profitable licenses from modem chip rivals— ‘in order to obtain higher profits in the long run from the exclusion of competition.’”  Although the boundaries of the antitrust duty to deal with rivals are unsettled, business considerations like cost, the desire to deal with other competitors offering more favorable terms, or evolving business strategies should be sufficient to allow a company to decline business deals with rivals without triggering liability.

Fourth, the court’s discussion of the evidentiary record illustrates that the standard for finding anticompetitive malice is flexible.  Judge Koh took a deep dive into the evidentiary record and analyzed emails written by executives, handwritten notes, recorded statements to the IRS and internal company presentations for signs of anticompetitive malice.  Even generic references to the company’s interest in “protecting” its chipset business and reducing a competitor’s market share were cited as evidence of anticompetitive malice.  Companies would be well-advised to carefully monitor the language used when discussing any business strategy relating to deals with competitors, to avoid inadvertently creating a paper trail that could later be construed as showing “anticompetitive malice.”

Fifth, the Qualcomm ruling underscores the basic principle that the documents are what make or break an antitrust case.  In evaluating the evidence, Judge Koh found the company’s “internal, contemporaneous documents more persuasive than Qualcomm’s trial testimony prepared specifically for this antitrust litigation.”  Namely, the court conducted a detailed analysis of how Qualcomm executives’ testimonies conflicted with company documents, including ones they themselves had written.  While witness examinations can be effective fact-finding tools, the court “largely discount[ed] Qualcomm’s trial testimony prepared specifically for this litigation and instead relie[d] on these witnesses’ own contemporaneous emails, handwritten notes, and recorded statements to the IRS.”  The lesson was stark:  You can’t run away from the documents.

Looking Ahead:

In response to the ruling, Qualcomm publicly announced that it plans to seek a stay of the court’s judgement and an expedited appeal to the Ninth Circuit.  The court’s ruling on the duty to deal with competitors will likely be a major issue addressed in that appeal.  While players in the technology space will undoubtedly be tracking case developments, companies across all sectors that do business with competitors should familiarize themselves with Judge Koh’s opinion to ensure that its dealings with their rivals do not inadvertently trigger a continuing duty to deal.

This article was also published in Law360.  A PDF of the full article is available here or via the link at the top of the page.