DOJ, FTC Split on Antitrust in Patent Licensing Looms Over Trial

The chiefs of the U.S. Department of Justice and the Federal Trade Commission usually present a united front about enforcing the antitrust laws, something both agencies are empowered to do. But the agencies currently vocally disagree over whether specific conduct should violate the antitrust laws.

In fact, the FTC is trying to prove in a bench trial that chip giant Qualcomm Inc. abused its monopoly in modem chipsets through conduct that DOJ antitrust chief Makan Delrahim has repeatedly said the Sherman Act should permit.

Patent law and antitrust law are in tension: one grants a monopoly as a reward to innovation, the other worries about monopolies that reduce competition, including abuses of the patent system. The tension is particularly acute where industry standardization enthrones a single technology, a standard essential patent (SEP), as the linchpin in a market.

The agencies disagree about the line between a deserved monopoly and one that damages the marketplace. They also disagree about the proper balance of power between patent holder and licensee and when antitrust law should apply.

The agencies are operating under different law, but the disagreement is fundamental. The FTC brought its case against Qualcomm under FTC Act Section 5, 15 U.S.C. §45, as an alleged unfair method of competition—but under a theory that Qualcomm’s conduct is monopolization that would violate Sherman Act Section 2, 15 U.S.C. §2.

Section 5 cases rarely result in court trials. Since the FTC first issued a statement on its standalone FTC Act powers in 2015, it’s unclear to what extent their authority extends past the margins of the Sherman Act. That makes it hard to know whether a violation of Section 5 also would be a violation of the Sherman Act.

Courts are poised to clarify the patent-holder issue this year. U.S. District Court for the Northern District of California Judge Lucy H. Koh must decide whether to enjoin Qualcomm’s conduct after the bench trial concludes this month, and a private civil case under a related theory is scheduled for jury trial in May 2019.

But the agencies have an important role in developing the law. Fundamental policy differences could lead to divergent enforcement outcomes and a greater relative role for FTC Act Section 5 and state law enforcement. If the two agencies continue to disagree, more frictions between patent and antitrust law may be adjudicated in the nebulous world of “unfair” conduct rather than under the Sherman Act. 

Standards Stymie

Standardization brings great benefits to consumers, allowing us flexibility in picking devices that will all function interchangeably or in conjunction. When USB thumb drives work with all types of computers, for example, customers have many choices and lots of freedom to use components as they wish. But standardization also makes a set of technologies vital for most all manufacturers. How do we best ensure innovation and competition in the marketplace if the standard gives one patent holder industry-wide power?

Once a standard is adopted, a SEP owner could extract high royalties from whole industries based on its bargaining position as vital to adhere to the standard, rather than the underlying value of the patent itself. If the SEP holder won’t license the technology, the standard-setting organization might see its standard fail because industry participants can’t use it without violating patents and taking huge litigation risks.

To prevent these kinds of licensing “hold ups,” standard setting organizations that pick a technology for all member manufacturers require the winning patent holder license to all members on “fair, reasonable, and non-discriminatory” (FRAND) terms. If the two sides can’t agree on terms, the licensee can take the SEP holder to court and ask the court to determine the FRAND price for the license. But laws don’t require FRAND licensing, the obligation is based on contracts that SEP holders make with standard setters when the standard is adopted.

The availability of a court determination of FRAND terms impacts licensing negotiations. According to the FTC’s Qualcomm complaint, courts routinely set a price much lower than the patent holder sought. If the licensee’s costs of suing are low compared to the royalties the patent holder demands, both sides know the licensee can balk, the FTC said in its complaint. “Bargaining over royalties and other licensing terms occurs ‘in the shadow of the law,’” the FTC said.

Qualcomm keeps that from happening with a “no license, no chips” policy. Qualcomm won’t sell chipsets to a customer unless that customer buys a patent license. If a manufacturer challenges Qualcomm’s license terms, it might be forced to shut down all cell phone production throughout the fight. By radically raising the cost of challenging Qualcomm’s royalty demands in court, Qualcomm extracts high royalties and anticompetitive contract terms, the FTC alleges.

The FTC also alleges that Qualcomm bolsters its monopoly by refusing to license its chips to rivals and used exclusive contracts with Apple to lock out rivals.

Judge Koh has already held that Qualcomm was obligated to license its patents in baseband processors, also called “modem chips” for cell phones, under FRAND terms. She will decide after the trial whether Qualcomm has abused market power in specific chip markets and harmed competition.

Direct Disagreement

DOJ antitrust chief Makan Delrahim has repeatedly countered concerns that patent holders abuse their monopoly power. He has said that antitrust shouldn’t restrict patent holders from enforcing their rights, including rights in SEPs, and has also argued that licensee conduct is more likely to undermine competition.

In a Dec. 7, 2018 speech to patent lawyers, Delrahim said that patent holders should be able to enjoin access to an invention while litigating about FRAND terms. He decried a 2013 joint statement between the DOJ and the U.S. Patent and Trademark Office that said that, when an SEP owner subject to FRAND requirements seeks “an injunction or exclusion order” from the court during litigation of the FRAND royalty, that “may harm competition and consumers.” Delrahim withdrew the DOJ’s assent to the joint statement, saying that antitrust’s only concern is “the goal of optimizing the incentives for innovation—namely, dynamic competition.”

In a September 2018 speech, Delrahim said that “an antitrust cause of action premised on a failure to abide by FRAND commitments would be inconsistent with Section 2 of the Sherman Act.” Indeed, he said use of that theory is against the policies underlying the Sherman Act.

Those statements put Delrahim’s DOJ in direct conflict with the FTC’s case against Qualcomm. It suggests that Qualcomm is entirely within its rights to refuse to supply any product without a license while awaiting court adjudication of licensing disputes. After all, the effect is the same as an injunction: the licensee can’t make the standardized product while it waits for an outcome from the courts. Indeed, Delrahim’s DOJ just moved to intervene against a licensee seeking to get court-determined FRAND terms that asked for a TRO against the patent holder alleged to be interfering in its business while the case progresses.

Delrahim hasn’t stopped there. He also said that patent “hold up,"—when the holder of a standard-essential patent demands high royalties based on market power derived from the standard—shouldn’t be an antitrust concern. He is more concerned about “hold out"—when licensees refuse to license a patent or adopt a standard to artificially reduce royalties or kill a disruptive technology. He reasoned that the patent holder is the innovator who took a risk developing the product and is entitled to a monopoly.

FTC Chairman Joseph Simons, in a September 2018 speech at Georgetown University Law Center, addressed this open “inconsistency” between the agencies’ stated positions. He agreed with Delrahim that “breach of a FRAND commitment, standing alone, is not sufficient to support a Sherman Act case.” But he said there is a violation when “the breach, fraud or deception” contributes to “the acquisition or maintenance of monopoly power in a properly-defined market” or involves an agreement that “unreasonably restrains trade.”

Simons agreed with Delrahim that patent “hold out” can “raise serious concerns under antitrust law” if licensees collude. But he also stressed that the Commission “believe[s] that hold-up raises potential antitrust issues, as well.”

“I want to make clear that the FTC will continue our economically grounded and fact-based enforcement of the antitrust laws in this area,” Simons said. “Consistency across the two federal enforcement agencies” is “beneficial,” Simons said, but the FTC’s “non-partisan antitrust enforcement agenda is critical to the success” of the agency.

Few Precedents

If Judge Koh decides for the FTC, she won’t be the first to say FRAND “hold up” can be anticompetitive.

Several court cases alleging that a SEP holder violated the Sherman Act have survived motions to dismiss. For example, Microsoft Mobile Inc. sued Interdigital Inc. alleging that Interdigital lied to get its cellular phone technology adopted as standard, then refused to license on FRAND terms. The parties settled after Delaware Federal Judge Richard G. Andrews said Microsoft had stated a Sherman Act §2 case, denying Interdigital’s motion to dismiss.

Asus Computer Intl.'s similar case against Interdigital is scheduled for jury trial in May 2019 after N.D. California Judge Beth Labson Freeman partially denied summary judgment against Asus’s claims that Interdigital violated its FRAND obligations and monopolized the market.

That means that Judge Koh will have the recent reasoning of Judge Freeman on which to rely in assessing the FTC’s allegations. Not long after Judge Koh’s opinion, we may also have a verdict from a jury on the Asus case.

There is little recent precedent on the outlines of the FTC Act Section 5 case against Qualcomm and how the agency’s authority extends under the Act beyond the Sherman Act’s underpinnings. The FTC has not litigated and prevailed on an antitrust case using its standalone FTC Act authority since the 1960s—the agency lost three cases in the 1980s, but hasn’t litigated one since. Its most recent cases have involved settlements, including in other cases where the agency alleged that an SEP holder had violated agreed licensing terms.

Koh’s opinion will be important in both areas.

Expanding Role?

There are always nuances between how the two agencies approach their work. They are distinct organizations with distinct roles. But they are almost always broadly on the same page about policy, and work to coordinate guidelines and procedure to minimize confusion and cost to the public. Although the FTC works under a distinct statute and mandate, both agencies are dedicated to protecting competitive, transparent markets.

But there are differences inherent in the underlying law each agency enforces. The FTC Act, the Supreme Court has said, “was designed to supplement and bolster the Sherman Act and the Clayton Act—to stop in their incipiency acts and practices which, when full blown, would violate those Acts” in addition to current violations of the antitrust law. The FTC’s more expansive approach to enforcement makes sense in that framework.

If the FTC has to take on more policing of unilateral anticompetitive conduct, that has implications for litigants. Dominant firms may not see improved predictability if they are held to the nebulous standards of Section 5 instead of the clearer confines of Section 2. This policy disagreement on the role of innovation in markets and problematic market power may signal a more fundamental difference in how the agencies will carry out their mandate. Specific industries may see inconsistent outcomes as a result.

There are other differences opening up between the two enforcers that have potential implications for merging parties and litigants. Upcoming analyses will highlight and track differences between the two agencies that impact merger review.

The case is FTC v. Qualcomm Inc., N.D. Cal., 17-cv-00220, 1/11/19.