A federal appeals court has tossed out a lower court ruling that Qualcomm abused its dominance of the modem chip market to force customers to pay inflated royalties for its patent portfolio. The appeals court forcefully rejected Judge Lucy Koh’s 2019 analysis of Qualcomm’s business practices and held that Qualcomm’s behavior was merely “hypercompetitive,” not anticompetitive.

The two rulings could not have been more different. In last year’s 233-page ruling, Judge Koh explained Qualcomm’s business practices in so much detail that it took us more than 3,500 words just to summarize her findings. This week’s ruling by the Ninth Circuit Appeals Court was shorter—56 pages—and more theoretical.

The appeals court acknowledged that “from 2006 to 2016, Qualcomm possessed monopoly power in the CDMA modem chip market, including over 90% of market share.” However, the court found that the Federal Trade Commission—which brought the lawsuit against Qualcomm—had failed to prove that Qualcomm had abused that power. The court reasoned that Qualcomm’s licensing practices were simply designed to maximize the company’s revenue—and that in itself isn’t illegal.

“The plaintiff must show that diminished consumer choices and increased prices are the result of a less competitive market due to either artificial restraints or predatory and exclusionary conduct,” the appeals court ruled.

Judge Koh thought the FTC had demonstrated predatory and exclusionary conduct. She described how Qualcomm threatened to abruptly cut off the modem chip supply of smartphone makers who challenged Qualcomm’s high patent rates. She found Qualcomm structured deals with Apple, Samsung, LG, and other smartphone vendors to discourage them from doing business with other chipmakers. She cited internal documents in which Qualcomm executives acknowledged the anticompetitive impact of these policies.

But three judges from the Ninth Circuit Appeals Court ignored much of this evidence and waved the rest away.

“I would describe it as a victory of theory over facts,” said Tim Wu, a legal scholar at Columbia University. Wu told Ars that the Ninth Circuit showed “an indifference to the actual effects” of Qualcomm’s conduct.

How Qualcomm boxed out competitors

Qualcomm refused to sell chips to anyone who hadn’t already agreed to license Qualcomm’s patent portfolio—a policy known as “no license, no chips.” The loss of access to Qualcomm’s modem chips was a powerful threat because Qualcomm held a near monopoly on some categories of cellular modems.

In a 2014 internal email, for example, a Qualcomm executive wrote that Qualcomm’s stranglehold over the CDMA market gave the company a lot of leverage in negotiations with Apple. At the time, the CDMA standard was used by Verizon and Sprint in the United States and some other carriers overseas. Without Qualcomm’s chips, Apple might not have been able to sell phones for those networks.

“We are the only supplier today that can give them a global launch,” the Qualcomm executive wrote. “Without us they would lose big parts of North America, Japan and China. That would really hurt them.”

That leverage enabled Qualcomm to charge what the FTC—and Judge Koh—considered to be inflated patent royalty rates. But those high rates depended on maintaining Qualcomm’s dominance.

One way Qualcomm prevented rivals from gaining traction was refusing to license its patents to other chipmakers. Ordinarily, a chip vendor is expected to license necessary patents on behalf of its customers. But Qualcomm rejected licensing requests from other chipmakers, insisting instead that smartphone vendors obtain a license directly from Qualcomm.

As a result, Qualcomm was able to charge a fee to every smartphone maker whether or not they purchased Qualcomm’s chips. Qualcomm demanded royalties based on the price of the entire smartphone, not just on the value of the chips that were covered by Qualcomm’s patents. In effect, Judge Koh ruled, Qualcomm imposed a tax on the sale of non-Qualcomm chips.

Patent shenanigans

Even worse, Judge Koh pointed out that Qualcomm had previously agreed to license many of its patents—those necessary to implement wireless standards—on fair, reasonable, and non-discriminatory (FRAND) terms. In Koh’s view, Qualcomm broke that commitment when it refused to license its patents to other chipmakers. Qualcomm also insisted that smartphone makers license its non-FRAND patents along with the FRAND patents, another potential violation of FRAND rules.

Qualcomm offered other chipmakers a promise not to sue them for patent infringement without charge. In this week’s ruling, the Ninth Circuit characterized this as a harmless “no license, no problem” policy. But Mark Patterson, an antitrust scholar at Fordham University, told Ars that this wasn’t quite accurate.

In exchange for a promise not to sue, Qualcomm demanded that rivals provide access to their sales data, which is normally considered a sensitive trade secret. This data helped to guide Qualcomm’s efforts to prevent other chip companies from gaining traction in the market.

And Qualcomm knew exactly what it was doing, as this comically candid 2009 slide from an internal presentation illustrates:

Qualcomm’s strategy was to make sure that MediaTek—a rival supplier of modem chips—could only do business with companies that had a Qualcomm patent license (referred to as “WCDMA SULA”), thereby limiting MediaTek to around 50 customers. Having fewer customers made it harder for MediaTek to achieve the scale required to sell 3G chips profitably. Meanwhile, Qualcomm aimed to “destroy” MediaTek’s profits in the older 2G market, depriving MediaTek of cash it could invest in 3G chips.

This slide went unmentioned by the Ninth Circuit as it dismissed claims that Qualcomm had harmed competition.

https://arstechnica.com/?p=1698262