Anti-trust issues in patent licensing agreements. FTC v. QUALCOMM

Anti-trust issues in patent licensing agreements. FTC v. QUALCOMM

A patent is a set of exclusive rights granted by a government to the inventor of a new invention.  To be granted a patent in the United States an inventor must file a patent application with the United States Patent and Trademark Office.  The patent application must demonstrate that the inventions described in the patent application meets all the criteria for a patent to be granted.  Simply stated, to be granted a patent, the invention must be new, useful and not obvious.  A patent examiner will be assigned to review the patent application and if all the requirements are met, the inventor will be granted a patent on the invention.  A patent grants its owner the exclusive right to make, use, sell and import the invention in the United States. If someone other than the patent owner attempts to exercise one of these exclusive rights that can be considered patent infringement.

A patent grants its owner a significant amount of control over the invention described in the patent.  However, patent law does not exist in a vacuum.  Other branches of law, such as anti-trust still apply to patent owners.  The Sherman Antitrust Act was enacted in 1890.  It is codified in Title 15 of United States Code section 1 to 7.  Broadly speaking the Act outlaws behavior that would unfairly contain competition between different companies.  While a patent is not a violation of the Sherman Antitrust act, using a patent to leverage an unfair advantage over competitors and constrain trade can be a violation.

FEDERAL TRADE COMMISSION v. QUALCOMM INC, 17-CV-00220 (N.D.CA 2019) is a case which illustrates how a company can get in trouble when patents are used to gain an unfair advantage.  The defendant in this case is a major manufacturer of integrated circuits, or microchips.  The defendant has a large patent portfolio related to cellular modems.  Cellular modems allow a cellphone to connect to a cellular network and communicate with other devices on the internet.  Cellular modems are an essential component of all modern mobile devices like cellphones and tablets. While the defendant was not the only cellular modem manufacturer, the defendant’s technology was considered superior to most competitors.

The defendant would sell their chips to mobile device manufacturers and require manufacturers to license patented technology.  Manufactures like Huawei, ZTE, and Apple all bought cellular modem chips from the defendant for  use in their mobile devices.  The defendant would adjust the royalty rate for a license based on the ratio microchips purchased from the defendant versus competitors.  For instance if Huawei purchase 100% of its cellular modems from the defendant the royalty rate would be 2.625%, if Huawei bought show chips from a competitor of the defendant the royalty rate would be higher.

The Federal Trade Commission is tasked with enforcing laws related to competition in the United States.  The defendant’s licencing scheme eventually became known the Federal Trade Commission and a lawsuit was filed.  In that lawsuit the Federal Trade Commission alleged that the variable royalty rate based on microchip purchases violated several provisions of the Sherman Antitrust Act.

The judge in the case agreed with the Federal Trade Commission.  In her 233 page ruling Judge Koh detailed all the reasons why the evidence supported her decision.  The judge found that the defendant was using the patents as leverage to squeeze out rival microchip manufacturers.  Licensing a patent does not violate antitrust laws, but adjusting the fees charged in a patent license agreement for the purpose of eliminating competition goes beyond the rights granted by patent law.

The judge ordered the defendants to renegotiate all current licenses and not condition the sale of microchips based a license.  The defendant is also barred from entering into exclusive supply agreements for cellular modems.  The defendants are required to report to the Federal Trade Commission for the next 7 years to demonstrate compliance with the ruling.

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