Loyalty to the royalty

Is American chipmaker Qualcomm in trouble? Joachim Frommhold of Weinmann Zimmerli examines the facts

The California-based technology company Qualcomm is faced with a number of complaints regarding unfair competition.

Present conflicts involving Qualcomm evoke questions about appropriate royalties as equitable remuneration to holders of intellectual property rights and patents in particular.

Qualcomm is an international technology company and leading supplier for mobile phone manufacturers. Qualcomm deals primarily with solutions in the area of telecommunications, focusing on CDMA, one of the major international mobile communication standards, and is one of the market leaders in chips for mobile phones and wireless solutions for voice and data communication.

Over approximately the last 10 years, Qualcomm has been the largest supplier of baseband processors complying with CDMA standards for mobile communication and its market share was dominant between 2012 and 2015. Qualcomm holds a high share of standard-essential patents related to second-gen CDMA, but a smaller share of patents related to third-gen CDMA and LTE wireless standards.

Qualcomm is innovative and very active in the area of IP rights, particularly patents. A search of databases reveals that nearly 10,000 single patents or patent applications have been filed in its name. Thanks to this significant patent portfolio, Qualcomm makes an essential portion of its revenue from licensing specific devices and technologies. According to its latest earnings reports, license fees represent more than 30 percent of the total revenue of the company.

But in light of this business, Qualcomm has been in trouble in China, South Korea and the US.

In February 2015, Qualcomm announced that it had agreed to a fine of more than $975 million in order to settle anti-trust claims aired by China’s National Development and Reform Commission. They involved its patent licensing policy.

In December 2016, as a result of several years of investigation, the Korean Fair Trade Commission (KFTC) fined the company about $850 million for its patent royalty practice, including improper negotiations over patent licences. The KFTC claimed that Qualcomm forced phone manufacturers into unfair licensing deals. The company allegedly took advantage of its position as a key supplier of mobile phone chips by forcing phone makers to pay royalties for a bundle of licences, including some that they probably did not require. According to the regulator, the company also denied competitors, such as Samsung or Intel, access to its patents. Qualcomm will probably will appeal against the Korean ruling and the fine may be adjusted or even canceled as a result.

In the US, the Federal Trade Commission (FTC) filed a lawsuit in the US District Court for the Northern District of California on 17 January this year. The complaint sought a permanent injunction against the company, targeting an “unlawful maintenance of a monopoly” based on patents over baseband processors as well as semiconductor devices for mobile phones. The FTC alleged that the company engaged in exclusionary tactics, such as withholding processors from customer refusing to take licences with elevated royalty fees. The FTC`s complaint stated that “by using its monopoly power to obtain elevated royalties that apply to baseband processors supplied to its competitors, Qualcomm in effect collects a ‘tax’ on cell phone manufacturers when they use non-Qualcomm processors”. Additionally, the company allegedly granted preferred licensing conditions to Apple between 2011 and 2016, in exchange for Apple agreeing not to use chips from other suppliers.

Despite the fact that Qualcomm holds a smaller share of patents related to third generation CDMA and LTE wireless standards, the company has granted original equipment manufacturers licences for standard-essential patents, which, according to the FTC, include base royalty rates that are significantly higher than other respective licensors. Furthermore, the FTC alleged that Qualcomm denied manufactures the opportunity to challenge the terms of licence contracts in court, a practice that is “anomalous” among both component suppliers as well as standard-essential patent licensors.

The complaint also accused the company of refusing to license its standard-essential patents, thereby violating its fair, reasonable and non-discriminatory (FRAND) commitments.

Qualcomm dismissed the lawsuit on the grounds that the respective legal theory is deficient and based on a false understanding of telecommunication technologies. According to Qualcomm, the FTC filed the lawsuit without knowledge of all relevant facts.

Then on 20 January, Apple filed a separate complaint that follows closely on the heels of the complaint of the FTC and also claims unlawful monopoly practices against Apple in China. Apple argued that it had to pay unfair (five-times more than others) licence fees. Moreover, Qualcomm allegedly withheld an agreed payment of nearly about $1 billion to Apple (in reaction to Apple’s cooperation with the KFTC). Furthermore, Apple argued that Qualcomm refused to grant licences to other chip manufacturers, such as Intel, to prevent them from manufacturing these chips as well. In a second lawsuit, Qualcomm faces complaints from Apple over its standard-essential patent licensing practice.

Several conservative groups have written to US President Donald Trump, asking him to terminate the FTC’s investigation into Qualcomm. These conservative groups argue that the FTC’s complaint is a “midnight litigation” and a misuse of anti-trust litigation because it was filed during the last days of Obama`s presidency. This opinion was supported by FTC commissioner Maureen Ohlhausen, who stated that the FTC’s complaint lacks evidence and is based on a flawed legal theory.

Furthermore it was argued that the FTC’s job is to “protect American consumers, rather than invite foreign competitors to attack our innovators” and that the complaint of the FTC would “undercut patent property rights and conservative free markets principles”.

Authorities mainly argue with the concept of FRAND licensing terms. The concept of FRAND denotes a voluntary licensing commitment that standard-setting organisations request from owners of, usually, patents that are or may become essential to practice of a technical standard. The purpose of these commitments is to protect implementers of a standard and to assure adequate remuneration for the investment made by standard-essential patent holders.

Courts in the US, but in other jurisdictions as well, have found that, in appropriate circumstances, an implementer of a standard is an intended third-party beneficiary of a FRAND agreement, and is entitled to certain rights conferred by such an agreement. But because a patent grants an exclusive right to use the covered technology, a standard-setting organisation generally must obtain permission from the patent holder to set a patented technology as a standard.

Therefore, the organisation has to request that a patent holder clarify its willingness to offer to license its standard-essential patents on FRAND terms.

One of the most common policies is to require that a patent holder voluntarily agrees that its patented technology can become a standard and to license that technology on FRAND terms (for example, see the US Court of Appeals for the Ninth Circuit’s 2012 ruling in Microsoft v Motorola).

Patent owners might have insufficient incentives to contribute their technologies to a standard-setting organisation without the promise of an adequate royalty. Therefore, the patent holder may agree to contribute its technology to the standard, thus forgoing the exclusive use or the exclusive licensing of its technology, in exchange for the assurance that it will receive adequate compensation in reasonable royalties.

But lot of market players disagree with the FRAND concept and do not agree that all respective standards be licensed on fair and non-discriminatory terms. In 2015, the Court of Justice of the EU’s interpretation of FRAND licensing terms in Huawei v ZTE significantly diverged from the so-called Orange-Book-Standard.
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