BALANCING BETWEEN FAIR COMPETITION AND INNOVATION: ANALYSING FTC V. QUALCOMM

Source : Daily Sun

This article has been authored by Utkarshini Rai, a third-year student at NUSRL, Ranchi.

A Brief Background

The interface between Intellectual Practice Rights (IPR) and Competition Law has been one of the most discussed and debated topics in recent times. While IPR can be said to promote monopoly, competition policy seeks to create a fairer market. Their interplay is important as patent rights encourages innovation while the competition policies makes sure that the said innovation can enter the market. Consequently, patent rights are time-bound to prevent establishment of a monopoly and repressing further innovation.

Standardized technologies enable interoperability between devices. The earphone jack used to be its flagbearer since it was found in all the devices which had the capability to play music. The European Union (EU) has also been pushing for common charging ports on all mobile phones for interoperability as well as to reduce the amount of e-waste. They are set by Standard Development Organisations (SDOs) to maintain healthy competition and create user friendly devices, but contain technical specifications which might be patent protected. The patents necessary to enforce these standards are called Standard Essential Patents (SEPs).

SEPs are licensed through Fair, Reasonable, and Non-Discriminatory (FRAND) terms to prevent lock-ins by patent holders. The case FTC v. Qualcomm Inc. dealt with this issue where the United States’ Federal Trade Commission (FTC) sued Qualcomm for anti-competitive and monopolistic practices. Qualcomm is one the leading companies in modem chip manufacturing, especially 5G technology.

The standardized wireless technology is based on CDMA (3G) and LTE (4G) modem chips. The FTC alleged that these two markets were unlawfully monopolized by Qualcomm due to its breach of contractual Sub-Sovereign Obligations (SSO), which maintained and abused its dominant position by three means:

1. Requiring modem chip customers (Original Equipment Manufacturers, hereinafter OEMs) to license its patents separately before being able to buy the chips (named “no license, no chips policy” by the FTC).

2. Declining to license SEPs to rival modem chip suppliers.

3. Forming exclusive dealing arrangements with Apple.

This article attempts to analyse whether Qualcomm’s policies are anti-competitive or are fair from the perspective of IPR.

An Analysis of Qualcomm’s Policies

Qualcomm does not license its patents to rival chip makers, but only to OEMs. It does so to prevent OEMs purchasing modem chips from rivals manufacturers without paying license fees i.e. “patent exhaustion”. But the competing chipmakers must also use Qualcomm’s SEPs in their own products by default, so the latter provides them royalty-free licensing to practice SEPs in exchange for their supply agreements with OEMs. The OEMs are then charged per-unit licensing royalty by Qualcomm for the use of their SEP chips.

FTC alleged that this practice of not licensing SEPs was an abuse of its dominant position under Section 2 of Sherman Act and Section 5 of the FTC Act. The American Antitrust Institute also filed an amicus alleging that Qualcomm had engaged in conduct which was reasonably capable of making a contribution of maintaining its monopoly power. But the Ninth Circuit Court found no evidence of singling out of any specific chip manufacturer. Further, any alleged harm was taken on by OEMs and not the competing players. They also got Qualcomm’s SEPs royalty free and the agreements were manufacturer neutral. So, the allegations did not materialise. The Court lastly noted that anti-trust regulations don’t solve contractual disputes.

The FTC also alleged that Qualcomm regulated the competitors’ prices by increasing the contractual license price which included the nominal chip price and the royalty surcharge. The Ninth Circuit Court held that the surcharge was payable by the OEMs or end-customers but did not harm its rivals in the relevant market. More importantly, the policy would only be potentially anti-competitive if it was exclusionary in the manner where Qualcomm refused to license its SEPs to OEMs, not competitors, unless they first agreed to buy Qualcomm’s chips. However, under the current “no license, no chips” policy, no difference was made to Qualcomm regardless of the source of chips for the OEMs. It, therefore, couldn’t be said that the policy was monopolistic but rather again aimed at yielding returns through the technology developed by Qualcomm.

Lastly, any harm from the breach of SSO by Qualcomm was borne by OEMs and not rival chip makes. So, the conduct couldn’t be said to be anti-competitive.

Finding a Middle Ground

Patents are exclusive in nature whereas standards are public, with SEPs being somewhere in the middle. Such exclusivity provides corporates the incentive to innovate and invest in research and development (R&D). FRAND disputes, like in the present case, are better dealt with under IPR laws rather than competition law. This is because competition law does not take into account the process and cost of developing technology which puts the companies in leading positions. The kind of position in market possessed by Qualcomm is largely owing to its expenditure amounting to billions of dollars in research and development on technology. The corporation took a huge risk by investing high amounts simply in research of technology which paid off in its favour and put it at a position to be able to create SEPs that is being used by all the chip makers and in turn, the OEMs.

The litigation involving the FTC seemed to be targeted more at the OEMs attempting to get the cellular chips at a lower cost and without the hassle of licensing, instead of genuinely investigating anti-competitive conduct. By getting injunctions on Qualcomm’s policies, OEMs would be the sole stakeholders who gained anything. The injunction would have reduced profits from wireless intellectual property (IP) and modems which would diminish its cost and make it easier for them to manufacture chips by themselves. Essentially, they would have received the returns of the intellectual property of another corporation which did not even fall in the same market category.

The Ninth Circuit Appeal ruling is important in the respect that it has deliberated with in great detail about the impact of Qualcomm’s practices on its competitors. Only then it could be concluded that such policies were aimed more at developing and protecting intellectual property and not establishing and maintaining market dominance. Even the internal Bain report showed that the company was at least twice as efficient in research and development than its competitors.

Article I, Section 8, Clause 8 of the United States’ Constitution also makes IP rights a constitutional right, which is commonly referred as the Patent and Copyright Clause. IP rights have been increasingly promoted for the betterment of all the stakeholders and are said to improve competition. IP exclusivity allows innovation and more players to enter the market and provides incentives to invest time and money into development of new and better products. 5G technology can also be said to be a result of IP exclusivity. If Qualcomm or any other chip manufacturer had to give away their technology straight-away to OEMs, there would be no incentive or scope for the development of such cutting-edge technology in any area. The patent system itself has been touted as the incentive for R&D and beneficial to market players as well as the end-consumers.

India has seen its own tussle between the Competition Commission of India (CCI) and various regulatory authorities including the Controller of Patents, established under the Patents Act, 1970. The first case in this regard was Telefonaktiebolaget L.M. Ericsson v. CCI & Another (“Ericsson case”) before the Delhi High Court. The dispute concerned SEPs distributed by the Appellant in 2G, 3G, and 4G technology where the negotiations with its competitors on FRAND terms had failed. This led to the Appellant initiated proceedings for violation of its patent rights via infringement of SEPs. CCI found the Appellant’s abuse of dominance with respect to patent rights which the Delhi High Court upheld by reasoning that there was “no irreconcilable repugnancy between the Competition Act, 2002 and the Patents Act”, which permitted CCI’s jurisdiction in this dispute.

Recently in Monsanto Holdings Pvt. Ltd. & Ors. v. CCI & Ors. before the Delhi High Court, a similar issue was decided upon. According to CCI, the Appellant was in a dominant position in its relevant market and had imposed stringent conditions in the sub-license agreements which discouraged other parties from dealing with the Appellant’s competitors and also amounted to restricting the development of alternate know-hows. The Appellants had challenged the Commission’s order contending that it did not have any jurisdiction as the issues raised were related to exercise of rights granted under the Patents Act and any practice of abuse by a patentee would fall exclusively within the scope of the Patents Act. They also challenged the application of Ericsson case in their matter. Consequently, they argued that the findings were required to be determined by the Controller of Patents before being investigated by the CCI.

The Delhi High Court confirmed the applicability of Ericsson case and stated that an agreement imposes reasonable conditions for the protection of patent rights but any unreasonable conditions imposed by an anti-competitive agreement would not be permitted under Section 3(5) of the Competition Act.

Takeaway

From aforementioned cases, it can be inferred that in any jurisdiction, while the legislations governing patent rights and competition policies have different purviews altogether, their interplay is important to ensure a fair market where new technology and innovation is encouraged. That being said, a case by case analysis is necessary to determine whether a market leader is protecting its investment in new ventures or is simply abusing its dominant position to crush competition. This will ensure that the objectives of both legislations are being fulfilled while also considering the benefit of all the stakeholders.