Qualcomm's Patent Nuclear War Turning Into Nuclear Winter

from the none-of-this-is-good dept

We haven't written much about Qualcomm and Apple's all out nuclear war over patents, but a few recent developments suggest it's worth digging in and discussing. In some ways it sweeps in other companies (mainly Intel) and also involves the FTC and the ITC. I won't go through the entire history here because I'd still be writing this post into next year. Qualcomm is a pretty massive company and while it does produce some actual stuff, it has long acted quite similar to a patent troll. It has also vigorously opposed basically all patent reform efforts, while at the same time quietly funding a bunch of "think tanks" that go after anyone advocating for patent reform (I expect some fun comments to show up below).

The reason Qualcomm acts this way is that it has long abused the patent system to jack up prices to ridiculous rates. And it's finally facing something of a reckoning on that. In early 2017, the FTC went after Qualcomm for abusing its patents -- notably: "using anticompetitive tactics to maintain its monopoly in the supply of a key semiconductor device used in cell phones and other consumer products." Specifically, the FTC alleged that Qualcomm, despite promises to the contrary to get its patents into important standards, was not following the FRAND (Fair, Reasonable and Non-Discriminatory) licensing of its patents, as required to have its inventions be a part of the standard. Just days later, Apple sued Qualcomm, also regarding Qualcomm's patent shakedown, claiming that Qualcomm had been massively overcharging Apple for the use of its patents, rather than licensing them on a FRAND basis.

A few months later, Qualcomm sued Apple, claiming that it had been sharing Qualcomm's proprietary code with Intel. Apple had been using chips from both Qualcomm and Intel, but was in the process of dropping Qualcomm entirely. Qualcomm also launched multiple parallel proceedings at the ITC. As we've discussed for over a decade now, patent holders ridiculously get two shots at anyone they accuse of patent infringement (so long as the accused manufacturers its goods outside the US). The International Trade Commission (for reasons that make no sense) feels that it can judge on its own if patents have been infringed, and if so, it can block the further importation of the "infringing" good. That's the only remedy at the ITC, but it can have quite an impact, obviously, in blocking a product out of the US market. Incredibly, the ITC need not follow the same rules as a regular court and it can do its own analysis while a case is in federal court (which might rule entirely differently).

So that's the history. Basically, Apple and Qualcomm are in an all out patent nuclear war, with the FTC and ITC involved around the edges. In the last few weeks, however, pretty much everything has been looking pretty bad for Qualcomm. While an administrative law judge at the ITC did find some infringement, he (somewhat surprisingly) announced that he would not recommend an import ban (again, this is the only remedy the ITC can offer). The full ITC needs to review this recommendation and make a final call. Tons of patent maximalists are screaming their heads off about how the ITC must start blocking iPhones, but as Judge Thomas Pender recognized, banning an entire product because it may have infringed on a single patent is ridiculous. In the language of the judge "the statutory public interest factors weigh against issuing a limited exclusion order as to products found to infringe patents asserted in this investigation." In other words, "grow up Qualcomm, this isn't such a big deal that you get to completely ban the product."

And, now, the latest is that the FTC's case against Qualcomm went in the FTC's direction, with Judge Lucy Koh granting the FTC's motion for partial summary judgment and saying that Qualcomm was violating its FRAND promises. This isn't everything to do with the case, but does involve questions around whether or not Qualcomm can limit its licensing to just device makers, or if it also has to license its patents to other chipmakers, like Intel. And Koh points out that basically everyone recognizes that the FRAND agreement it made applies to everyone -- not just a limited subset of companies. Koh repeatedly highlights Qualcomm's own previous statements that support this.

Furthermore, Koh points out that allowing Qualcomm to discriminate against chipmakers would hand the company a total monopoly, and that clearly goes against the concept behind the FRAND agreement to put the technology into the standard:

If a SEP holder could discriminate against modem chip suppliers, a SEP holder could embed its technology into a cellular standard and then prevent other modem chip suppliers from selling modem chips to cellular handset producers. See Lemley, Intellectual Property Rights, 90 Calif. L. Rev. at 1902 (stating that a company with a SEP “will effectively control the standard; its patent gives it the right to enjoin anyone else from using the standard”). Such discrimination would enable the SEP holder to achieve a monopoly in the modem chip market and limit competing implementations of those components, which directly contradicts the TIA IPR policy’s stated purpose to “enable competing implementations that benefit manufacturers and ultimately consumers.” TIA IPR at 6. See Borg v. Transamerica Ins. Co., 47 Cal. App. 4th 448, 456 (1996) (holding that a court may not interpret a contract in a way that contradicts the contract’s plain meaning). Qualcomm never attempts to explain how discrimination against modem chip suppliers is consistent with the stated purposes of the IPR policies.

I know there's a lot of jargon in there, but it's basically saying that the whole point of the standardization process, as everyone agreed, was to create standardization across multiple competitors (while still allowing a reasonable license for patent holders). But if Qualcomm can reinterpret this agreement to say that FRAND only applies to downstream users, then that completely overturns the entire intention of the standards making process and just gives Qualcomm a total monopoly on the chips (going well beyond its patents). Qualcomm will undoubtedly appeal, but it's not a good start for the company.

Oh, and speaking of not a good start, the post-Apple world for Qualcomm isn't looking great either. Its latest earnings projections going forward were below what Wall St. was expecting and some are noticing a $5-billion-ish Apple-shaped hole in the books.

While I've been equally critical of Apple in the past when it's abused the patent system, in this situation it seems pretty clear that Qualcomm completely overplayed its hand with its patents in ways that were abusive, and that drove up costs in an unfair manner, against its own agreements. And so far, the various courts and administrative bodies are not buying into Qualcomm's desperate attempts to keep up its monopolizing.

It all goes back to the point we've been making for decades: if you have a good product, compete in the marketplace. Don't abuse the patent system to try to block competitors or to artificially inflate the price. That just telegraphs that you're bad at innovating and you know that competitors can do a better job than you. Qualcomm is now learning how that plays out in the long run.

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Filed Under: antitrust, ftc, itc, monopoly, patents, phones, sep, standards, standards essential patents
Companies: apple, intel, qualcomm

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  1. icon
    nerd bert (profile), 13 Nov 2018 @ 6:30pm

    Re: Objecting to calling this Nuclear Winter...

    Because the patent war here isn't a total war...

    Given how Qualcomm behaves, functions, and prices its chips, it really is the equivalent of total war. FRAND licencing will enable serious competition from many sources to Qualcomm products and without the extravagant prices Qualcomm charges for its chips it will be hurt financially. Especially since so many of the competitors will have cheaper methods of fabricating the chips. Intel has its own fabs, fairly underutilized so there's plenty of capacity there, and Qualcomm has a fair number of folks who can get wafers from TSMC cheaper than they can because they can get higher volumes.

    That Qualcomm portfolio is very valuable and the patents are real and foundational for many products. Qualcomm got them into the standards that govern most radio products by claiming FRAND compliance. But, much like a company called Rambus did years earlier with SDRAM, Qualcomm turned around and used those patents against other suppliers to prevent them from competing effectively with Qualcomm by jacking their prices to the point that Qualcomm made more money if a company chose a competing product rather than Qualcomm's.

    But, like Rambus, Qualcomm has been found to have gamed the system and the licensing agreements are being forced back to FRAND levels. This will not bode well for Qualcomm. They've grown fat and unfocused by manipulating the market and, frankly, they've pissed off their biggest single customer. How pissed is Apple? There have been rumors in the semiconductor industry that Broadcom made an offer for Qualcomm because Apple asked them to do so (Trump stopped them for various reasons involving the DoD).

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