A federal district court in California granted partial summary judgment for the Federal Trade Commission (FTC) and ordered a standard essential patent (SEP) holder to license its intellectual property for cellular communication standards to all willing applicants. FTC v. Qualcomm Inc., Case No. 17-cv-00220 (N.D. Cal. Nov. 6, 2018) (Koh, J).

The decision requires Qualcomm to license its alleged SEPs to all comers, regardless of whether they make component products or end-devices, and represents a significant victory for the FTC in enforcing its view of an SEP holder’s commitments to license patents on fair, reasonable and non-discriminatory (FRAND) terms.

The FTC sued Qualcomm in 2017, alleging that the company violated Section 5 of the FTC Act by refusing to license its alleged SEPs to other modem chip suppliers in violation of industry agreements, thus ensuring that customers had to rely on Qualcomm for their modem chip supply. Section 5 of the FTC Act prohibits “unfair methods of competition in or affecting commerce.” 15 USC § 45(a)(1). According to the FTC, Qualcomm then used its position as a “dominant supplier” of modem chips to require customers to license Qualcomm’s alleged SEPs for “elevated royalties.” In August 2018, the FTC filed a motion for partial summary judgment to determine whether two agreements with industry standard-setting organizations (SSOs) required Qualcomm to license its alleged SEPs to all comers on FRAND terms.

Qualcomm holds patents that facilitate cellular connectivity through networks that implement cellular communication standards and that are alleged as SEPs. Industry SSOs develop and manage these standards and often incorporate patented technology into the standards they adopt. To avoid conferring market power on the patent holder, SSOs have intellectual property rights (IPR) policies that require members to make assurances that any SEPs incorporated into industry standards will be licensed to all applicants on FRAND terms. Qualcomm is a member of two telecommunications SSOs, both of which maintain IPR policies. The parties did not dispute that Qualcomm made several commitments to license SEPs on FRAND terms and that those commitments constituted binding contracts. Rather, Qualcomm asserted that the policies only required it to license its SEPs to suppliers of end-devices—not those that manufactured components.

The court considered Qualcomm’s statements to the SSOs and the SSOs’ IPR policies. The court rejected Qualcomm’s contention that the policies contained limitations that did not require it to license its alleged SEPs to component manufacturers. Rather, the court found that the plain text of the policies required patent holders to license SEPs to “all applicants” or “any applicant” that commit(s) to paying a FRAND rate. The policies did not contain any limitations as to which entities could receive a license. Nor did the policies specify that only applicants that “practice” or “implement” whole standards could receive licenses. In fact, the policies contemplated that an applicant could receive a license to practice a portion of the standard or for the purpose of implementing a standard.

The court also analyzed companion guidelines that explained the intent behind the SSOs’ IPR policies. The guidelines for one SSO explained that an SEP holder’s FRAND commitments prevent an SEP holder from “securing a monopoly in any market” as a result of including patented technology in a standard. Thus, the court concluded that if a patent holder could discriminate against component suppliers, it could achieve a monopoly in the component market and limit competing implementations of those components. Moreover, the court found that Qualcomm had licensed its alleged SEPs to another component supplier and that Qualcomm itself had received licenses to supply components. Therefore, the SSO IPR policies required Qualcomm to license its alleged SEPs to component modem chip suppliers.

Practice Note: This decision may affect how SEP holders license their patents in the future. Going forward, SEP holders must review any FRAND commitment and ensure that they are adhering to their agreed willingness to license their SEPs to any potential implementer. The ruling may also affect royalty structures by restructuring licensing negotiations from the end-device (or integrator) level to the components level, resulting (subject to exhaustion, allocation and indirect infringement principles) in a proliferation of licenses from the SEP holder, i.e., throughout the supply chain. Subject to exhaustion principles, integrators and component manufacturers will both have to ensure that they have sufficient SEP license scope so that their products (i.e., either an integrated device or a component of it) will not be subject to attack by an SEP holder.