Could Judge Koh’s reasoning be adopted

under Art. 102 TFEU?

12 November 2019
 FTC v. Qualcomm

❑ license for the manufacture and sale of certain modem chips (CDMA) –
semiconductors that enable handsets to communicate with each other
across cellular networks
❑ provided only to original equipment manufacturers (OEMs), and not
semiconductor manufacturers
❑ the amount of royalty rates
 FTC v. Qualcomm
Judge Koh held that Qualcomm:
❑ had a duty to license competitors
▪ also because it had previously done so: anticompetitive refusal to deal –
termination of a prior, voluntary, and profitable course of dealing
❑ used contracts with critical customers to exclude competitors
▪ offered key customers rebates, discounted royalties and incentives
conditioned on the use of its products, insulating market share
❑ coerced its modem chip customers to take licenses to its patents with
excessive royalty rates
 FTC v. Qualcomm

According to Qualcomm's internal documents referenced in the ruling, the

company:
❑ had understood that under its FRAND commitment, upstream licensing was
required, also as advised by its legal counsel
❑ used to license rival chip manufacturers in the past, but changed the practice
because it was “humongously more lucrative” to license only OEMs
 FTC v. Qualcomm

❑ Other SEP holders used to grant chip-level licenses

▪ Qualcomm license agreement with Ericsson
▪ Samsung chip-level cross-license agreements with Intel and Google

❑ Other SEP holders “have imitated Qualcomm’s practice because it is

lucrative”
“Following Qualcomm’s lead, other SEP licensors like Nokia and Ericsson have
concluded that licensing only OEMs is more lucrative, and structured their
practices accordingly” (130: 11-13)
 FTC v. Qualcomm
Judge Koh considered a number of practices anticompetitive, including:
❑ Threatening customers to:
▪ cut off or delay supply
▪ withdraw or withhold technical, engineering support
▪ charge higher patent royalty rates if customers used rivals’ products
❑ Providing customers:
▪ incentive funds and rebates conditioned on volume commitments or use of its
products
▪ exclusivity deals
❑ Requiring customers to grant royalty-free cross-licenses to customers’
patents for access to necessary inputs
 FTC v. Qualcomm

Judge Koh considered that Qualcomm’s royalty rates were excessive as they:
❑ remained constant even as
▪ Qualcomm demanded patent cross-licenses from customers (varied in value)
▪ its proportion of SEPs declined with successive standards
❑ were driven by Qualcomm’s modem chip market power rather than the value
of the SEPs
▪ Qualcomm did not provide patent lists or claim charts
▪ rates did not reflect its contribution to standards
▪ its chips did not drive the value of the end-product against which the royalty
was assessed
 Huawei v ZTE

❑ Huawei v ZTE did not explicitly address license availability

❑ However, the CJEU held that any user of standard-essential IP rights “if
he is not the proprietor, is required to obtain a licence prior to any use”
(para 58)
▪ a component manufacturer is a user of a standard and is thus “required to
obtain a licence prior to any use”
 Horizontal Guidelines

❑ Commission’s Horizontal Guidelines, para 285:

▪ 'participants wishing to have their IPR included in the standard to provide an
irrevocable commitment in writing to offer to license their essential IPR to all
third parties on fair, reasonable and non-discriminatory terms’

❑ Commission subsequently referred to “all interested third parties” in

the Google/Motorola Mobility decision, para 113
 Potential to exclude
❑ Article 102 TFEU prohibits practices that have the effect “of limiting
production, innovation, and technological development”
❑ Such practices can be anticompetitive not only when they are directly “to the
prejudice of consumers”, but also when they are detrimental to consumers
through their impact on competition
▪ TeliaSonera
❑ It suffices to show that such practices have the potential effect to exclude
products thus limiting consumer choice and reducing competition
▪ British Airways plc v Commission; Post Danmark A/S v Konkurrencerådet
 Potential to exclude

Qualcomm’s refusal to grant a license has:

❑ delayed Intel’s entry into the CDMA and premium LTE modem chip markets
❑ HiSilicon [Huawei] generally only sells modem chips to Huawei
❑ promoted Broadcom and Texas Instruments exit from the market
❑ prevented Samsung from selling its modem chips to external OEMs
❑ LGE has not entered the market
 Indispensability

❑ In Motorola, the Commission considered that companies implementing the

relevant standard are at risk that their products “may be banned from the
market”
❑ In Huawei v ZTE, the court considered that “SEP status means that its
proprietor can prevent products manufactured by competitors from appearing
or remaining on the market and, thereby, reserve to itself the manufacture of
the products in question”
▪ Commissioner Margrethe Vestager has referred to Huawei v ZTE as applying
to “whoever exercises the patent right in question”
 Legitimate expectations

❑ In Huawei v ZTE, the court, in line with the Commission’s reasoning in

Motorola, considered that the indispensable nature of SEPs and the existence
of legitimate expectations that SEP holders would grant FRAND licences
amounted to exceptional circumstances
❑ EU courts have held in cases including Magill, Bronner, IMS, and Microsoft that
in exceptional circumstances a refusal to license without objective
justification may infringe Art. 102 TFEU
▪ This has been held to apply when the effect of the refusal is to limit production
or technical development
 Limit production or technical development

❑ Selective SEP licensing by both vertically integrated entities and NPEs who
are not active in the downstream market might be distorting competition
❑ Such exclusion might restrict R&D at intermediate levels and/or limit the
ability to compete for all customers
▪ if the intermediary is neither licensed itself, nor covered by the “have made”
provisions of a downstream licence, this might chill incentives to innovate
▪ potential customer foreclosure is more likely in multi-tier markets where
intermediate suppliers could be wary of developing new or aftermarket
products not already contracted for by OEMs
 Loyalty or exclusivity rebates

❑ If a dominant company makes discounts conditional on customers

sourcing all or most requirements from the dominant company this may
have a foreclosure effect
▪ Hoffmann-La Roche
❑ Following Intel, an antitrust assessment of loyalty rebates would need to
establish whether they have the effect of reducing the ability of rivals to
compete effectively
 Exclusive deals
Qualcomm’s exclusive deals foreclosed other market players from:
“(1) a revenue boost critical to funding R&D and acquisitions
(2) exposure to Apple’s “best-in-class” engineering resources
(3) a foothold at Apple for future handsets
(4) opportunities to field test new products with Apple
(5) business opportunities from other OEMs
(6) enhanced standing in SSOs, and
(7) opportunities to conduct early field testing and prototyping with network
vendors and operators”
 Reasonable relationship to the economic value

❑ The CJEU confirmed in early abuse of dominance cases that when a price
is excessive in relation to the “economic value” of the product, it may be
considered abusive
▪ United Brands
❑ Horizontal Guidelines clarify that:
▪ “in case of a dispute, the assessment of whether fees charged for access to
IPR in the standard-setting context are unfair or unreasonable should be
based on whether the fees bear a reasonable relationship to the economic
value of the IPR”
FRAND Valuation

As noted by the European Commission in the SEP Communication:

❑ SEP valuation “should not include any element resulting from the
decision to include the technology in the standard”
❑ FRAND terms should “bear a clear relationship to the economic value
of the patented technology”
 [Reminder] FTC v. Qualcomm

Judge Koh considered that Qualcomm’s royalty rates were excessive as they:
❑ remained constant even as
▪ Qualcomm demanded patent cross-licenses from customers (varied in value)
▪ its proportion of SEPs declined with successive standards
❑ were driven by Qualcomm’s modem chip market power rather than the value
of the SEPs
▪ Qualcomm did not provide patent lists or claim charts
▪ rates did not reflect its contribution to standards
▪ its chips did not drive the value of the end-product against which the
royalty was assessed
 Hypothetical
If:
❑ SEP holder based its royalty rate on the end-product, the value of the
specific technology should be distinguished from that of other
technologies that fall outside the scope of the SEP – unpatented
technologies or technologies that the patent holder did not create
❑ it proved very difficult to distinguish the value of SEP-covered invention
from the value of other inventions integrated into the end-product?

Could that in itself serve as an argument that the royalty rate based on the
end-product by its very nature might lack a “reasonable relationship to the
economic value of the IPR”?
 Intellectual Ventures v Vodafone
Regional Court of Düsseldorf held that:
❑ Intellectual Ventures’ refusal to offer a FRAND licence to Vodafone’s suppliers
was discriminatory
▪ Similar to Sisvel v. Haier: the “non-discriminatory” requirement of FRAND does
not require to treat all licensees in exactly the same way – if such
differentiation can be objectively justified
❑ Limiting the scope of licence offer to Vodafone’s B2C DSL business,
excluding its wholesale DSL business, contradicted FRAND commitment
❑ Not seeking SEP license fees from users of the relevant standard who were
SEP holder’s investors or its law firm’s clients was discriminatory
 Intellectual Ventures v Vodafone

The Court concluded that:

❑ At the very least, Intellectual Ventures should have reached out to other
potential licensees requesting to take a licence, especially in light of a
limited remaining validity period of the SEPs in question
❑ SEP holders are obliged to provide, along with the SEP licensing offer,
royalty calculation for the SEP licence in a way that would allow the
potential licensee to assess whether the SEP holder’s offer is indeed non-
discriminatory
 Thank You
Fair Standards Alliance
https://fair-standards.org