On January 12, 2017, the U.S. Department of Justice and the Federal Trade Commission issued updated “Antitrust Guidelines for the Licensing of Intellectual Property” for the first time since 1995. The updated Guidelines are intended to play a fundamental role in the agencies’ analysis and enforcement approach to antitrust implications resulting from the licensing of intellectual property.
Five days later, on January 17, the FTC sued Qualcomm for “exclusionary conduct that taxes its competitors’ baseband processor sales, reduces competitors’ ability and incentive to innovate, and raises prices paid by consumers for cellphones and tablets.” Central to that allegation, the FTC asserts, is Qualcomm’s “no license-no chips” policy whereby customers must license Qualcomm’s IP when using competitor’s chips, or else Qualcomm will refuse to sell its own chips to that customer. The U.S. government is coming to this party late, after investigations were opened by China, South Korea, Japan and the European Commission.
The following day, the antitrust plaintiff’s bar followed with a consumer class action complaint filed in the same Northern District of California court as the federal case.
Updated DOJ and FTC Antitrust Guidelines The U.S. government first issued comprehensive IP Licensing Guidelines in 1995. Although the principles espoused in the previous Guidelines remain sound, changes in antitrust and IP laws and policies resulted in the Guidelines being misaligned. The updated Guidelines reflect intervening statutory and case law changes and align with recent enforcement and policy work, including the 2010 revisions to the Horizontal Merger Guidelines. The modernized Guidelines echo three of the foundational principles that have guided the agencies’ analysis of IP issues:
- Antitrust implications resulting from conduct involving IP is analyzed the same as conduct involving other forms of property, taking into account the specific characteristics of a particular property right;
- There is no presumption that IP ownership creates market power; and
- IP licensing is, generally speaking, procompetitive.
Some of the intervening statutory and case law changes reflected in the updated Guidelines include:
- The U.S. Supreme Court’s 2006 decision in Illinois Tool Works v. Independent Ink Inc., holding that a patent does not necessarily confer market power to the owner;
- The U.S. Supreme Court’s 2007 decision in Leegin Creative Leather Products Inc. v. PSKS Inc., applying the “rule of reason” analysis to resale price maintenance agreements; and
- Passage of the federal Defend Trade Secrets Act, which the Guidelines acknowledge creates a federal private cause of action for misappropriation of trade secrets and, as with patents, the trade secret does not necessarily confer market power to the owner.
Going forward, the emphasis of the updated Guidelines is to apply an effects-based analysis that focuses on evaluating the harm to competition caused by any particular practice, rather than on the harm to any individual competitor. Further, the Guidelines reflect an economically grounded approach to antitrust analysis of IP licensing, to support a strong and procompetitive IP licensing system for the benefit of consumers and to promote innovation.
In addition to the updated Guidelines, the public and the business community may consult a wide body of DOJ and FTC guidance—agency reports, statements, speeches and enforcement decisions; when evaluating the agencies’ approach to IP licensing.
Federal Trade Commission v. Qualcomm Inc. On the heels of updating the Guidelines, the FTC sued Qualcomm on January 17, 2017, alleging an unlawful maintenance of a monopoly in baseband processors that amounts to unfair competition under Section 5 of the FTC Act. According to the complaint, Qualcomm has excluded competitors through interrelated policies and practices, referred to as “no license-no chips.” Under that policy, the FTC alleges, customers must sign and pay for licenses for standard-essential patents for any use of non-Qualcomm chips, or else Qualcomm will refuse to sell Qualcomm chips to that customer. The complaint further asserts that Qualcomm’s policy hews against its own FRAND commitments under the CDMA and LTE cellular communications standards. The FTC claims that the policy amounts to an anti-competitive “tax” on customers wishing to use competing chips.
This enforcement action follows similar investigations brought by the governments of China, South Korea and Japan, and by the European Commission. The China and South Korean investigations resulted in hefty fines leveled by those governments in 2015 and 2016, respectfully.
The FTC’s suit is not without controversy. Some commentators have noted the timing of the litigation during the late stage of the Obama administration and imminent shift to Republican control, leading some to question the wisdom of proceeding. Notably, one FTC Commissioner, Republican Maureen K. Ohlhausen, voted against the litigation and issued a dissenting statement. In that statement, she argues that the enforcement action is “based on a flawed legal theory . . . that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and . . . will undermine U.S. intellectual property rights in Asia and worldwide.” Whether the assigned district court judge, Howard Lloyd, agrees with Commissioner Ohlhausen remains to be seen.
The case is Federal Trade Commission v. Qualcomm Inc., Case No. 5:17-cv-220 (N.D. Cal.).
Consumer Class Action As is typical in the U.S., this set of government accusations has spawned at least one consumer class action. The complaint, filed the day after the FTC complaint, alleges that Qualcomm’s licensing practices illegally inflated costs for phone and tablet manufacturers. Consumers, then, ultimately paid inflated prices for these items when the manufacturers passed the improper license fees along to consumers, according to the complaint. More similar complaints are likely and can be expected to settle eventually if not defeated in the early stages.
The case is Bornstein v. Qualcomm Inc., Case. No. 5:17-cv-234 (N.D. Cal.).
Conclusion Final resolution of the U.S. government’s claims and of the class action could be delayed by politics in the U.S., while the FTC awaits the February resignation of one commissioner, and appointments by the Trump administration to fill three vacancies.
Due to the fact- and legal-intensive inquiries needed when analyzing antitrust issues, obtaining formal legal opinions can still prove helpful when evaluating antitrust risk.