Qualcomm’s loss in IP licensing

INTRODUCTION:

Qualcomm faced a setback from the US federal trade commission after it ruled that the latter is making undue advantage of its dominant position in the field of chip manufacturing, an essential part of cell phones. US District Court Judge Lucy Koh said in a long-awaited ruling that the company should must re-negotiate its terms related agreement with cell phone companies regarding supply of chips. It has to change its way of doing business for the purpose of building a sustainable market and to have a free flow of trade and avoiding favoritism to any particular party. The company holds patents right against the majority of chips used by the cell phone companies. This provides the exclusive right to Qualcomm with respect to determining terms of license provided to the cell phone manufacturing companies regarding usage of the chips.

ANTI-COMPETITIVE PRACTICES:

Qualcomm is accused of charging royalties which are in excess of the value of its patent right over the chips. It has been observed by the court that since Qualcomm is in a dominant position related to ownership of Standard essential patent of mobile chips, it should must commit to the licensing of their patents in reasonable and non-discriminatory terms, which has not been the case with Qualcomm. It has forced cell phone companies to adhere to its unnecessary conditions before the grant of license. Qualcomm engaged in anticompetitive behavior by refusing to sell chips to cell phone manufacturers that would not sign a separate license agreement that covered not only the patents in Qualcomm chips, but also Qualcomm’s SEPs in other manufacturers’ chips. Because of its strong position in the chip market, Qualcomm increased its licensing leverage by threatening to withhold (or actually withholding) chips that cell phone manufacturers needed.[1] The company has been further involved in anti-competitive practices by making De Facto exclusive dealing agreements with cell phone companies such as apple. It provided rebates to apple in return of exclusive supply agreement for the supply of chips to the cell phone company. The court found Qualcomm’s previous voluntary and profitable licensing deals with competitors particularly problematic and concluded that Qualcomm’s real justification for not licensing rivals was to prevent them from effectively competing.[2]  Qualcomm also blocked opportunities for rival companies in the field of the chip industry from making field testing and engineering collaboration with cell phone companies. Such practice of Qualcomm also hurts consumers as cell phone companies manufacture gradually increased the price for covering up excessive charge for a license to use chips manufactured by Qualcomm. The position of Qualcomm has been such that the manufactures had been left with no choice but to agree with their terms of licensing agreement.

REMEDIES PROVIDED BY THE COURT:

(1) Qualcomm must not condition the supply of modem chips on a customer’s patent license status and Qualcomm must negotiate or renegotiate license terms with customers in good faith under conditions free from the threat of lack of access to or discriminatory provision of modem chip supply or associated technical support or access to the software.

(2) Qualcomm must make exhaustive SEP licenses available to modem-chip suppliers on fair, reasonable, and non-discriminatory (“FRAND”) terms and to submit, as necessary, to arbitral or judicial dispute resolution to determine such terms.

(3) Qualcomm may not enter express or de facto exclusive dealing agreements for the supply of modem chips.

(4) Qualcomm may not interfere with the ability of any customer to communicate with a government agency about a potential law enforcement or regulatory matter.

(5) In order to ensure Qualcomm’s compliance with the above remedies, the Court orders Qualcomm to submit to compliance and monitoring procedures for a period of seven (7) years. Specifically, Qualcomm shall report to the FTC on an annual basis Qualcomm’s compliance with the above remedies ordered by the Court.[3]

Impact of the ruling: The court’s decision serves blow to Qualcomm as the company had a plan of expanding its business in the field of the 5G chip market. Now onwards, the company will have to reduce pricing of license related to chip manufactured by them. It has to restrain itself from taking undue advantage of its dominant position as a company has been restricted from making any unwarranted terms in the agreement related to the supply of chips. The decision also opens the market for rival companies to get greater access to the mobile market. Several analysts have also been saying that in the coming day’s price of the cell phone might get reduced owing to lower licensing fees.

Author:  Amit Ranjan, Legal intern at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at Ankit Kumar <[email protected]>

References:

[1] https://www.pepperlaw.com/publications/qualcomm-loss-raises-risks-for-substantial-market-participants-ip-licensing-decisions-and-ability-to-provide-loyalty-discounts-2019-06-07/

[2] https://www.pepperlaw.com/publications/qualcomm-loss-raises-risks-for-substantial-market-participants-ip-licensing-decisions-and-ability-to-provide-loyalty-discounts-2019-06-07/

[3] http://www.fosspatents.com/2019/05/breaking-news-federal-trade-commission.html