Qualcomm wins appeal against FTC case over its modem licensing business

In February of this year the US Federal Trade Commission won a ruling that Qualcomm’s chip licensing practices were anticompetitive. That has just been overturned.

The US Court of Appeals for the Ninth Circuit had a look at the ruling and concluded it failed to meet any reasonable evidence and due-process thresholds. The original case was focused on Qualcomm’s practice of charging a license fee for its IP as well the charging for the physical modem chips, which had also been the focus of Apple’s hilariously ill-fated legal attack. This was judged to be anticompetitive in somehow restricting the business activities of Qualcomm’s competitors.

“This case asks us to draw the line between anticompetitive behaviour, which is illegal under federal antitrust law, and hypercompetitive behaviour, which is not,” said Circuit Judge Consuelo Callahan, who was one of the Judges presiding over the appeal. The FTC contends that Qualcomm violated the Sherman Act by unreasonably restraining trade in, and unlawfully monopolizing, the CDMA and premium LTE cellular modem chip markets.

“After a ten-day bench trial, the district court agreed and ordered a permanent, worldwide injunction prohibiting several of Qualcomm’s core business practices. We granted Qualcomm’s request for a stay of the district court’s injunction pending appeal. FTC v. Qualcomm Inc. At that time, we characterized the district court’s order and injunction as either ‘a trailblazing application of the antitrust laws’ or ‘an improper excursion beyond the outer limits of the Sherman Act’. We now hold that the district court went beyond the scope of the Sherman Act, and we reverse.”

This seems like the final vindication of Qualcomm’s business model after years of battling Apple and antitrust authorities. It presumably does charge a premium for its modems, which are usually better than everyone else’s. At the premium end of the modem market Qualcomm does seem to have something close to a monopoly, but it also sems to be successfully walking that tightrope by charging just as much as it can legally get away with. Here are a couple of key paragraphs from the ruling.

The panel held that the FTC did not satisfactorily explain how Qualcomm’s 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 Qualcomm’s procompetitive justifications for its OEM-level licensing policy—which, 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 court’s primary theory of anticompetitive harm: Qualcomm’s imposition of an “anticompetitive surcharge” on rival chip suppliers via its licensing royalty rates. The panel held that Qualcomm’s patent-licensing royalties and “no license, no chips” policy did not impose an anticompetitive surcharge on rivals’ modem chip sales. Instead, these aspects of Qualcomm’s business model were “chip-supplier neutral” and did not undermine competition in the relevant markers. The panel held further that Qualcomm’s 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.