Qualcomm is facing a trio of antitrust actions involving mobile phone chips in California courts, but antitrust may be the least of its worries right now. The U.S. Supreme Court’s May 30 decision on patent exhaustion seems to call into question Qualcomm’s entire business model.
Apple spotlighted the high court’s Lexmark decision in an amended complaint filed today in its San Diego antitrust case against the chipmaker. The Cupertino-based iPhone maker takes direct aim at Qualcomm’s practice of selling modem chips to Apple’s contract manufacturers while at the same time demanding royalties for Qualcomm’s contributions to the wireless technology.
“For the entire patent licensing world outside of Qualcomm, a customer that purchases a patented product automatically receives a license by operation of law to the seller’s patents pursuant to the ‘first sale,’ or patent exhaustion, doctrine,” Apple states in the amended complaint filed by Fish & Richardson partner Juanita Brooks. “Qualcomm, however, insists that its customers, such as Apple’s [contract manufacturers], pay not only for the chipsets themselves but for a separate patent license.”
That won’t fly following Lexmark, Apple insists. “This is precisely the kind of double-dipping, extra-reward system that the court’s decision in Lexmark forbids,” Apple states.
â–ºREAD MORE: How Patent Policy Made Qualcomm an Antitrust Target
Apple’s team also includes Fish partner Ruffin Cordell and Boies Schiller Flexner partners William Isaacson and Karen Dunn.
Qualcomm general counsel Don Rosenberg said in a written statement that Apple is understating Qualcomm’s contribution to Apple’s mobile products. “Apple knows well that Qualcomm has been the de facto R&D arm of the industry,” Rosenberg said. “Qualcomm’s patented inventions make possible not only connectivity and high-speed data transmission across mobile networks, but also high-precision GPS navigation, app store operations, power management and battery efficiency, mobile video including advanced compression, graphics, camera imaging and facial-recognition technology, audio quality andaudio file compression, and much, much more.”
Qualcomm has said in the past it is not affected by patent exhaustion because it sells and licenses chips through separate business units. What the Federal Trade Comission criticizes in an antitrust suit as a “no license no chips policy” Qualcomm has simply described as its unwillingness to sell chips to patent infringers.
The FTC’s complaint and Apple’s original complaint, both filed in January, focused on traditional notions of antitrust behavior, though both included the sale of exhausted patents as a subsidiary issue.
Since then the patent exhaustion landscape has been turned upside down. The Supreme Court had hinted 10 years ago that patent licenses might be exhausted by a first sale, but the high court left no doubt with Lexmark. “We conclude that a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale,” Chief Justice John Roberts wrote for the court.
Qualcomm had argued against that outcome in an amicus curiae brief to the Supreme Court. “Any effort to revise patent exhaustion law to limit the freedom of contract among sophisticated parties may needlessly disrupt those relationships, longstanding industry practices and the ability of innovators like Qualcomm to recover a reasonable return,” the company stated in its amicus brief in Lexmark.
Qualcomm several years ago organized its business into separate divisions for chip design and sales (Qualcomm CDMA Technologies Inc.) and for licensing (Qualcomm Technologies Licensing). In an April motion to dismiss the FTC complaint, Qualcomm says that royalties Qualcomm Technologies Licensing receives are separate from the price of chips bought from Qualcomm CDMA.
There’s good reason for Qualcomm to refuse to sell modem chips to manufacturers that haven’t licensed Qualcomm’s standard-essential patents, or SEPs, Qualcomm states in its motion, signed by Cravath Swaine & Moore partner Gary Bornstein. “By definition, unlicensed [manufacturers] making standard-compliant handsets infringe Qualcomm’s SEPs,” Qualcomm stated.
Qualcomm’s team also includes Cravath partner Evan Chesler, Quinn Emanuel Urquhart & Sullivan partner David Nelson and Jones Day partner Karen Hewitt.
Apple says infringement is no longer an issue following Lexmark, notwithstanding Qualcomm’s reorganization, which Apple dismisses as “a corporate shell game in an attempt to side-step the law.”
The FTC alleges that Qualcomm violates the Sherman Act by using the threat of withholding chip supply to leverage excessive royalties for standard-essential patents. Numerous consumer class actions have been related to the FTC case and all are pending before U.S. District Judge Lucy Koh.
The FTC action is getting amicus curiae support from Apple’s smartphone rival Samsung Electronics Co., which manufactures chips for some of its own mobile phones, and Intel Corp., which says it’s “ready, willing and able to challenge Qualcomm’s market dominance” but has been stymied by Qualcomm’s “interlocking web of abusive patent and commercial practices.”
The FTC itself is split about its own lawsuit. A filing last month in the lawsuit notes that acting FTC chair Maureen Ohlhausen dissented from the filing of the complaint “and she has not changed her views.” That leaves Commissioner Terrell McSweeny in support. The other three commission seats are vacant.
In Apple’s amended complaint filed Tuesday, the company accuses Qualcomm of retaliating against its original complaint by suing Apple contract manufacturers such as Foxconn and Pegatron.
Apple also accuses Qualcomm of withholding $1 billion in royalty “rebates” owed to Apple because of the smartphone maker’s cooperation with regulatory agencies. “That is called retaliation, obstruction of justice, and greed,” Apple says in its amended complaint.
In its answer to Apple’s original complaint, Qualcomm described Apple as “a late-comer to the cellular industry [that] contributed virtually nothing to the development of core cellular technology,” and who now wants to pay less than fair value. Qualcomm accuses Apple of intentionally supplying false information about Qualcomm to government agencies and interfering with Qualcomm’s contracts with Apple’s manufacturers.