(CN) — A Ninth Circuit panel ruled Tuesday that chipmaker Qualcomm did not engage in antitrust behavior, handing the technology company a major win by reversing a lower court decision with potentially devastating consequences to its business.
“The district court erred in holding that Qualcomm is under an antitrust duty to license rival chip manufacturers,” wrote U.S. Circuit Judge Consuelo Callahan in a unanimous opinion. “We hold that Qualcomm’s OEM-level licensing policy, however novel, is not an anticompetitive violation of the Sherman Act.”
At issue is Qualcomm’s novel business practice of requiring smartphone manufacturers — called OEMs, or original equipment manufacturers, during the trial — to license certain aspects of its cellular technology as a condition of providing those manufacturers with chips necessary for the phones to connect to the cellular network.
The Federal Trade Commission said the practice was monopolistic because it forced companies like Apple, Samsung, Google, LG and others to pay licensing fees in order to get equipment needed to make their devices function. This cost was then passed onto consumers even as Qualcomm gained significant market share and then used that share to extract licensing fees.
According to the Ninth Circuit panel, Qualcomm applied licensing fees to its customers, not its competitors, meaning much of the antitrust law U.S. District Judge Lucy Koh used to arrive at her decision did not apply in this case.
Also, Qualcomm used its licensing fee structure and chip sales evenly throughout the industry, further evidence it did not break antitrust regulations according to the panel.
“While Qualcomm’s policy toward OEMs is ‘no license, no chips,’ its policy toward rival chipmakers could be characterized as ‘no license, no problem,’” Callahan, a George W. Bush appointee, wrote. “Qualcomm applies the latter policy neutrally with respect to all competing modem chip manufacturers.”
Qualcomm hailed the decision as a complete legal victory and a vindication of its business practices.
“The court of appeals’ unanimous reversal, entirely vacating the district court decision, validates our business model and patent licensing program and underscores the tremendous contributions that Qualcomm has made to the industry,” said Qualcomm executive vice president and general counsel Don Rosenberg.
Indeed, the decision said that Qualcomm’s business practices were less anticompetitive and more innovative, which is why the chipmaker was able to achieve such a remarkable market share and charge premiums for its services for a brief period before competitors caught up.
“The goal is to ‘distinguis[h] between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer’s best interest,” Callahan wrote. “Novel business practices — especially in technology markets — should not be conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.”
The Federal Trade Commission argued — and Koh agreed — Qualcomm’s practices were harmful to consumers in that they caused all smartphone manufacturers to pay exorbitant fees to license technological patents fundamental to the operation of cellular devices, costs that were passed onto consumers collectively.
Furthermore, the government argued those fees and the market share allowed Qualcomm to turn that revenue into increased research and development which shouldered out potential competitors for years.
The Ninth Circuit was not persuaded by either argument.
Instead, the panel pointed out that competitors like Intel and MediaTek entered the market in 2016 and have taken a substantial bite out of Qualcomm’s market share since.
Callahan was joined in the unanimous decision by U.S. Circuit Judge Johnnie Rawlinson, appointed by Bill Clinton and U.S. District Court Judge Stephen Murphy, also a George W. Bush appointee sitting by designation from the Eastern District of Michigan.
Koh issued her 233-page decision in May 2019, siding with the FTC and enjoining Qualcomm from continuing its “no license, no chips” policy. The Ninth Circuit lifted the injunction soon after.
The FTC could not be reached for comment. The agency could ask the Ninth Circuit to review the case en banc or it could appeal the decision to the U.S. Supreme Court.