On Wednesday, the Ninth Circuit filed an order whereby Circuit Judge Johnnie B. Rawlinson and Circuit Judge Consuelo M. Callahan vote to deny the Federal Trade Commission’s (FTC) petition for a rehearing en banc in its suit against cellular chip manufacturer and telecommunications giant Qualcomm and District Judge Stephen Joseph Murphy, III of the Eastern District of Michigan, sitting by designation, so recommends.
In August, the Ninth Circuit ruled against the FTC in its decision regarding whether Qualcomm violated the Sherman Act. The FTC averred that Qualcomm unreasonably restrained trade and illegally monopolized the code division multiple access (CDMA) and premium long-term evolution (LTE) cellular chip markets. Specifically, the FTC asserted that Qualcomm used its dominant market position to set forth policies that hindered competition and further solidified its purported monopoly position. In particular, the FTC had an issue with Qualcomm’s “no license, no chips” policy, under which it did not sell chips to original equipment manufacturers (OEMs) unless they paid for a separate patent license, typically a standard essential patent. As a result, Qualcomm collected large royalties and allegedly violated patent FRAND terms. The district court held that Qualcomm had an antitrust duty to license its patents to direct competitors, however the appellate panel disagreed finding the argument that the purported anticompetitive surcharge as royalty rates did not constitute antitrust violations and that the lower court did not establish “a cogent theory of anticompetitive harm.” The Ninth Circuit also found that the FTC’s argument that Qualcomm violated FRAND terms failed because the FTC did not show harm. The Ninth Circuit vacated the Northern District of California’s decision and reversed the permanent injunction on a few of Qualcomm’s business practices. Thus, the appellate panel held that Qualcomm’s patent royalty is shielded from antitrust scrutiny, this facially neutral fee cannot harm competition, and the Ninth Circuit dismissed the district court’s findings about harm to Qualcomm’s customers.
In September, the FTC filed a petition for a rehearing en banc. The FTC argued that the panel “disregarded precedent” by “elevating patent-law labels over economic substance,” “holding that facially ‘neutral’ fees cannot violate the antitrust laws,” and “holding that harms to Qualcomm’s customers are ‘beyond the scope of antitrust law’ and demanding a showing of ‘direct’ harm to competitors.” Specifically, the FTC claimed that the Supreme Court “repeatedly instructed that the Sherman Act ‘is aimed at substance rather than form’…and that court must look beyond labels to ‘the economic reality of the relevant transactions.’” As a result, the FTC asserted that the appellate court should have determined that the so-called patent royalties were not royalties, but rather to secure its chip monopoly, as Judge Lucy Koh in the Northern District of California found. Notably, the problem is that Qualcomm’s “royalties” conceal a chip-driven surcharge that is the economic equivalent of the fees in United Shoe and Caldera…Just like those fees, the surcharge is extracted through monopoly power and penalizes purchases of competing products,” which the FTC argued is anticompetitive. However, the FTC claimed that the Ninth Circuit the “panel declared that because Qualcomm has concealed its surcharge in a ‘patent royalty,’ the entire payment is subject to challenge only ‘in patent law, not antitrust law.’” Moreover, this contradicts the economic substance reasoning. Additionally, the FTC proffered that the Ninth Circuit mischaracterized the surcharge as “chip neutral” and that “‘by definition’ a facially ‘neutral’ charge cannot distort competition.” However, the FTC claimed that this is based “on an erroneous premise… that an OEM pays the same surcharge ‘whether an OEM buys Qualcomm’s chips or a rival’s chips,’” which, according to the FTC, is not true. Lastly, the FTC alleged that the appellate panel “seriously erred” when it dismissed the district court’s “findings about the harm to OEMs – including higher prices that are passed on to retail consumers – because OEMs ‘are Qualcomm’s customers, not its competitors.’” The FTC argued that the Ninth Circuit erroneously believed “that such harm is not cognizable because it ‘falls outside the relevant antitrust markets.’” However, the FTC claimed that this is a misstatement of the law. As a result, the FTC sought a rehearing en banc.
The appellate order stated that “[t]he full court has been advised of the petition for rehearing en banc and no judge has requested a vote on whether to rehear the matter en banc.” As a result, the request is denied.
The FTC is represented by its own counsel. Qualcomm is represented by Cravath, Swaine & Moore; Goldstein & Russell; Keker Van Nest & Peters; Wilson Sonsini Goodrich & Rosati; and Morgan, Lewis & Bockius.
