The Korea Fair Trade Commission (“KFTC”) recently issued a press release stating its intent to issue a written decision that will impose an $865 Million sanctions and a corrective order against Qualcomm for abuse in licensing standard essential patents (“SEPs”) in the mobile communications industry. Specifically, on December 28, 2016, the KFTC released a three-page English-translated summary of a 27-page Korean-language press release. Qualcomm issued its own press release, which includes an unofficial English translation of the 27-page KFTC press release.
This was only a press release by the KFTC and an actual written decision has yet to issue from which any action will be taken. Accordingly, at this point we provide a summary of the KFTC Press Release and conclude with important questions or issues to look for when the actual written decision of the KFTC issues. For example, Korean-based Samsung had some of the same or similar licensing practices as U.S.-based Qualcomm and prevailed in U.S. litigation on whether such practices breached the same ETSI FRAND obligations at issue here. The KFTC written decision may show why Samsung’s activities were okay, but Qualcomm’s were not.
To be clear: This is a summary based on a review of an unofficial translation of the KFTC Press Release and may not reflect actual facts or the facts and theories upon which the KFTC ultimately bases its written decision. In other words, assume that the qualification “The KFTC Press Release may indicate that …” applies to everything below since there could be error in the KFTC’s factual findings, the unofficial translation of it, or our summary thereof.
Qualcomm and its affiliates (collectively “Qualcomm”) owns patents essential to mobile cellular technology standards (“SEPs”) of several standard development organizations (“SDOs”) with commitments on licensing those patents on fair, reasonable and non-discriminatory terms and conditions (“FRAND”). Specifically, Qualcomm made certain FRAND commitments to ETSI and other SDOs on three generations of cellular standards at issue here:
- 2G (CDMA)
- 3G (WCDMA)
- 4G (LTE)
KFTC indicates that Qualcomm holds over 90% of the SEPs on 2G CDMA technology, but had a smaller share of SEPs on later generations of the standard: 27% of the 3G WCDMA standard and 16% of the 4G LTE standard.
Industry transition from one generation of the standard to the next takes time while consumers replace their old mobile handsets and cellular providers update their infrastructure. Accordingly, the newest generation of mobile handsets and cellular infrastructure must be backward compatible with earlier generations of the standard. For example, current mobile handsets typically operate in multiple-modes to implement 2G, 3G and 4G cellular standards and, thus, require SEP licenses on all three generations.
Qualcomm sells integrated circuit modem chips used in mobile handsets to implement the cellular standards. One Qualcomm entity sells the modem chips and another Qualcomm entity separately licenses Qualcomm patents that cover handsets in which the modem chips are used. Qualcomm will not supply its modem chips to a handset company that is not currently licensed under Qualcomm patents.
KFTC indicates that Qualcomm only offers a comprehensive license to its entire portfolio of cellular patents that includes both SEPs and non-SEPs. Qualcomm licenses its patents to handset companies regardless of whether they use Qualcomm mobile chips or a competitor’s mobile chips. The licensing terms may include the handset company granting Qualcomm a cross-license to the handset company’s patents.
Competing cellular modem chip suppliers have asked for a license to Qualcomm’s SEPs. But Qualcomm either refused to grant them a license or has entered limited, non-exhaustive licenses with restrictive terms that do not extend a license to handsets that use those chips (the handset companies must seek such license rights from Qualcomm). The number of modem chip competitors has decreased. In 2008, there were 11 major suppliers of cellular chips. Since that time, 9 of those suppliers have exited the chip selling market.
Conducts in Violation
The KFTC Press Release indicates that Qualcomm participated in three specific areas of conduct that combined to form an unfair business model:
- Qualcomm not licensing SEPs to competitor chip suppliers (or restricting those licenses)
- Qualcomm not selling its modem chips to handset companies that are not licensed to Qualcomm patents that cover those chips.
- Qualcomm licensing together as a single patent portfolio its SEPs and non-SEPs without fairly negotiating the licensing terms and requiring free cross-licenses to handset company patents
First, KFTC indicates that Qualcomm violated FRAND commitments by refusing to license SEPs to competing chip suppliers or licensing them under restrictive terms. Those restrictions included limits on to whom the competitor could sell or would have the right to use the chips–i.e., apparently a non-exhaustive license.
Second, KFTC indicates concern that Qualcomm would not supply Qualcomm’s modem chips to handset companies that were not currently licensed under Qualcomm’s patents. KFTC was concerned that Qualcomm used the supply of its chips as negotiation leverage in the patent licensing negotiations, because handset companies could not sell handsets without a supply of modem chips.
Third, KFTC indicated three general concerns about Qualcomm’s portfolio licensing to handset companies:
- Qualcomm requires a comprehensive portfolio license to all Qualcomm patents all at once, rather than distinguishing between SEPs and non-SEPs or between each of the 2G, 3G and 4G generations of the standards at issue.
- Qualcomm provided non-negotiable terms without allowing handset companies to assess the value of Qualcomm’s patents.
- Qualcomm required around handset companies to cross-license their patents to Qualcomm for free.
Conducts Combine to Form Unfair Business Model
The press release indicates that the three conducts above combined to form a single unfair, anticompetitive business model, as follows (see also diagram below):
- Qualcomm’s not licensing/restrictive licensing to competing chip suppliers allows Qualcomm to monopolize the chipset market.
- Qualcomm evades the FRAND commitment by using its control over the supply of Qualcomm chips to impose unfavorable licensing terms on handset companies, including free cross-licenses.
- The cross-licenses then make Qualcomm’s chips more favorable to purchase than the competitors’ chips that do not have a cross-license.
This third point above is what KFTC calls a “patent umbrella” that protects handsets that use Qualcomm’s chips from patent attack and makes them more favorable than competitor chips that do not have such an umbrella.
Anticompetitive Effect by Relevant Market
The KFTC Press Release indicates there are three relevant markets on which Qualcomm’s conduct had an anticompetitive effect:
- Modem Chip Market
- Cellular SEP License Market
- R&D Innovation
First, concerning the modem chip market, the KFTC Press Release indicates that Qualcomm had a double-standard by receiving licenses from handset companies (the cross-licenses) without granting licenses to modem chip competitors. This creates an unlevel playing field between Qualcomm chips and competitor chips—the patent umbrella issue discussed above—such that competing modem chip suppliers cannot compete against Qualcomm based on only the merits of their chips. Further, handset companies wanting to purchase competitor chips still must negotiate with Qualcomm for a license. Further, competing chipset suppliers cannot sell chips to unlicensed handset companies because they may be sued by Qualcomm. So chip set competitors can only sell to handset companies already licensed under Qualcomm’s patents, making it difficult to develop new customers. The KFTC Press Release indicates that the competitive effect on the chipset market can be verified by two indicia.
- 9 of 11 major modem chip suppliers (about 80%) exited the market between 2008 and 2015 with no significant competitor entering the market.
- An increase in Qualcomm’ market share/concentration in modem chips even though the market has evolved to 4G from 2G (see KFTC chart below with redlines added to show 25% increase in Qualcomm’s market share).
Second, concerning the cellular SEP license market, KFTC indicates that FRAND commitments require SEP holders to license on FRAND terms to anyone in order to reduce the SEP holders’ monopoly power in owning patents to technology required to practice the standard. Breaching that FRAND commitment harms the standard-setting process. But handset companies must accept Qualcomm’s licensing demands, even if they are not FRAND, because Qualcomm will not supply them modem chips without a license and the handset company’s entire business will shut down. Qualcomm’s business model allows them to effectively obtain an injunction without any court action, because Qualcomm can immediately suspend its supply of Qualcomm modem chips to unlicensed handset companies.
KFTC further indicates that patent holdup has occurred based on three licensing terms:
- Qualcomm licensing only the entire portfolio of SEPs and non-SEPs, so handset companies wanting only licenses to SEPs also must license unnecessary patents.
- Qualcomm has kept the same licensing rate over long term licenses even though Qualcomm’s contribution of SEPs declined over each new generation of the cellular standard.
- Qualcomm obtained free cross-licenses to handset company patents.
Third, concerning competition in cellular innovation, KFTC indicates that handset companies lost incentive to invest in research and development (“R&D”), because any cellular SEPs they obtained would be cross-licensed to Qualcomm for free. Qualcomm collects a significant portion of any increased value-added created by those companies’ innovation efforts.
KFTC indicates that it will enter remedial orders on four main points.
First, KFTC will require a negotiation process if modem chipset competitors request a license to Qualcomm’s SEPs and that process will result in an exhaustive license:
- Qualcomm sends draft license agreement, including royalty calculation, to chipset competitors who request a license.
- Parties negotiate toward a final license agreement.
- If parties reach an impasse, an independent third-party will make a binding determination of the licensing terms.
Second, Qualcomm must sell modem chips to handset companies even if they are not licensed under Qualcomm’s patents. This condition does not apply to handset companies that are clearly unwilling licensees, such as those who refuse to enter good faith negotiations.
Third, Qualcomm cannot coerce terms without going through a process to calculate fair compensation, such as terms requiring a license to both SEPs and non-SEPs and all generations of the standard or terms demanding a cross-license.
Fourth, Qualcomm must give notice of these remedial measures to modem chipset and handset suppliers and report to KFTC if Qualcomm executes or amends agreements based on the remedial orders.
KFTC indicates that the scope of the order covers transactions as follows:
For Handset Companies, the remedial order covers Qualcomm transactions with:
- Handset manufacturers headquartered in Korea.
- Handset manufacturers/sellers that sell handsets in Korea.
- Enterprises that supply handsets to a handset company that sells handsets in Korea.
For Modem Chipset Companies, the remedial order covers Qualcomm transactions with:
- Chipset manufacturers headquartered in Korea.
- Enterprises that supply modem chipsets to a handset company that falls within items 1-3 above.
Questions Raised by KFTC’s Press Release
The KFTC’s Press Release is fairly conclusory on the facts and theories underlying its decision, which is simply the nature of a press release versus an actual final written decision. The conclusory nature makes it difficult to fully understand the decision and raises more questions than it answers. Hopefully the final written decision will provide more insight into the following questions and others raised by the Press Release.
1. Questions re granting exhaustive patent license to chip suppliers
The KFTC Press release indicates that a crucial part of its decision is that Qualcomm breached its FRAND obligations to SDOs by licensing its SEPs to handset companies, rather than chip suppliers who requested a license. The press release appears to discuss the FRAND commitments generically, rather than the specific terms of the relevant FRAND commitment. This may be due to the nature of this being a press release summary and not the final decision with detailed findings. But the specific terms of the FRAND commitment, of course, are controlling, rather than some generic abstract FRAND idea. (See our Dec. 5, 2015 post on Ericsson v. D-Link, where the U.S. Federal Circuit requires considering the specific RAND commitment at issue and not RAND in the abstract).
KFTC indicates that a FRAND commitment to ETSI is at issue here, which is governed by Section 6.1 of the ETSI IPR Policy. The ETSI IPR Policy on its face distinguishes between end product “EQUIPMENT” and “components” that may be used in such EQUIPMENT. The FRAND obligation extends to the sale of EQUIPMENT, not the sale of just components. Further, the condition that triggers the FRAND commitment—i.e., only patents that are ESSENTIAL—is defined in terms of EQUIPMENT, not components thereof.
In contrast to end product EQUIPMENT, the FRAND obligation with respect to “components” falls within the MANUFACTURE of EQUIPMENT where such manufacturer is provide a license to “make or have made customized components and sub-systems”–e.g., a handset MANUFACTURER is licensed to make components or to have those components made by someone else, such as a modem chip supplier. There appears no obligation to separately license component suppliers or provide an exhaustive license for sales of those components.
But judge for yourself: Below are relevant excerpts from Section 6.1 of the ETSI IPR Policy and here is a link to that entire policy:
ETSI Intellectual Property Rights Policy (20 April 2016)
Section 6 Availability of Licenses
6.1 When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licences on fair, reasonable and non-discriminatory (“FRAND”) terms and conditions under such IPR to at least the following extent:
- MANUFACTURE, including the right to make or have made customized components and sub-systems to the licensee’s own design for use in MANUFACTURE;
- sell, lease, or otherwise dispose of EQUIPMENT so MANUFACTURED;
- repair, use, or operate EQUIPMENT; and
- use METHODS.
The above undertaking may be made subject to the condition that those who seek licenses agree to reciprocate.
Section 15 DEFINITIONS
4 “EQUIPMENT” shall mean any system, or device fully conforming to a STANDARD.
5 “METHODS” shall mean any method or operation fully conforming to a STANDARD.
6 “ESSENTIAL” as applied to IPR means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operating EQUIPMENT or METHODS which comply with a STANDARD without infringing that IPR. For the avoidance of doubt in exceptional cases where a STANDARD can only be implemented by technical solutions, all of which are infringements of IPRs, all such IPRs shall be considered ESSENTIAL.
8 “MANUFACTURE,” shall mean production of EQUIPMENT.
Hopefully the KFTC’s written decision will explain its interpretation of ETSI’s IPR Policy (governed by French law), because a critical basis for the KFTC’s decision is that Qualcomm breached its FRAND commitment to ETSI by licensing handset equipment, rather than the modem chip components of that equipment. That conclusion appears facially inconsistent with the wording of the ETSI IPR Policy on which the FRAND commitment is based.
2. Questions re supplying modem chips to unlicensed handset companies
The KFTC Press Release indicates that another crucial part of its decision is that Qualcomm would not supply chips to a handset company that is not licensed under Qualcomm’s patents and that Qualcomm would stop providing chips at any time absent a license, which gave Qualcomm undue leverage to force the chip supplier to enter a license. This raises a question as to what particular circumstances the KFTC considered here.
For example, a handset company typically will know that it needs to obtain a patent license well before it needs or runs out of chips for its products and take timely action beforehand. Existing licensing terms typically span years and provide a willing licensee time to negotiate a renewed license before the existing license ends. A new market entrant without an existing license can negotiate its initial license before requiring chips for production as part of its development process, which would include other lead-time issues such as obtaining regulatory approval before releasing the product.
Further, forcing a patent owner to sell products to aid someone’s infringement of their patents is a fairly direct affront to the patent right—i.e., being forced to assist someone to infringe your patent. Contrast that to, for example, patent litigation in the U.S. International Trade Commission where ALJ Essex ruled that a handset company that uses SEP technology prior to obtaining a license to that SEP may violate ETSI’s IPR Policy and be an unwilling licensee subject to injunctive relief (see our July 2, 2014 post).
Hopefully the KFTC written decision will explain the circumstances that prevented handset companies from timely obtaining a license before being supplied modem chips, whether from Qualcomm or a competing modem chip supplier, and why those circumstances require such a direct affront to the patent right.
3. Questions re comprehensive portfolio licensing
The KFTC Press Release indicates that another crucial part of its decision is that Qualcomm would only offer a license to its entire portfolio of patents – SEPs and non-SEPs. Licensing an entire portfolio is not unreasonable in itself because a company will need a license to all relevant patents—e.g., someone who licenses just the SEPs may not have sufficient rights to sell a product free of the patent owner’s infringement claims unless they also license the non-SEPs. Companies typically do not license only a portion of a patent portfolio if that does not provide them freedom to operate without a license to the remaining portions of the patent portfolio. Further, KFTC’s concern about Qualcomm not separately licensing each generation of the standard is somewhat at odds with its indication that it was important for new generation handsets to be backward compatible with and use prior generations of the standard.
In U.S. litigation, Korean-based Samsung successfully argued that it did not breach its ETSI FRAND obligation (also at issue here) in offering a comprehensive license to both SEPs and non-SEPs (see our July 8, 2013 post). This raises the question whether there were handset companies that actually sought but were refused a license to only Qualcomm’s SEPs on certain generations of the standard, rather than KFTC simply observing the result of typical industry portfolio licensing. This also raises issues about the difference between both Samsung’s and Qualcomm’s entire portfolio licensing practices.
4. Questions re cross-licenses from licensee handset companies and the patent umbrella.
The KFTC Press Release indicates that another crucial part of its decision is that Qualcomm required each licensed handset company to grant a cross-license on that handset company’s patents for free, thus giving Qualcomm an advantage over competing chip suppliers who did not negotiate their own cross-license with handset companies. The cross-licensing issue raises several questions.
First, if Qualcomm had an advantage in selling its chips that included the cross-license, why did competing chip suppliers not obtain their own cross-licenses for selling their chips? Was that simply a poor business decision by the competing chip suppliers or did Qualcomm do something that kept their competitors from getting a cross-license – e.g., did Qualcomm obtain an exclusive cross-license that precluded the handset company from licensing other chip suppliers?
Second, was there a particular problem with the scope of the cross-license that KFTC found problematic. For example, in U.S. litigation, Samsung successfully defeated a charge that it breached ETSI’s IPR policy (at issue here) by requiring handset companies to cross-license patents, which cross-licensing was found to be a common term in Samsung SEP licenses and in the industry in general. (see our July 8, 2013 post). Indeed, SDO IPR Policies often permit—and ETSI’s IPR Policy at issue here expressly permits—“reciprocity”, where a patent owner permissibly may condition granting a FRAND license on the prospective licensee granting a cross-license on its own SEPs for that standard.
Further, Apple and Korean-based Samsung were two of the three handset companies from which the KFTC took submissions here and reportedly use Qualcomm modem chips. Both companies have been in a widely-publicized patent war spanning several years involving SEPs and non-SEPs (see, e.g., our Dec. 6, 2016 post; Oct. 7, 2016 post; Dec. 23, 2015 post; Aug. 6, 2014 post; May 21, 2014 post; Mar. 12, 2014 post; Feb. 5, 2014 post). So these two major handset companies that use Qualcomm chips plainly have patent portfolios to assert that are not hindered by any flow-through of a cross-license to Qualcomm. So what is the specific scope and terms of the cross-licenses that KFTC found problematic here?
5. Questions re extraterritorial limitations of the remedial order
The KFTC Press Release is not clear on the scope of its remedial order, including whether it is limited to handsets sold in Korea and Korean patents or if it has extraterritorial reach affecting the licensing of patents from other countries or activity that occurs in other countries. For example, the ruling indicates it applies to companies that supply handsets to companies that sell them in Korea without indicating whether the ruling applies only to the handsets supplied in Korea. A ruling that goes beyond activities in Korea and Korean patents may be viewed unfavorably—and perhaps unenforceable—in the U.S. and other countries.
For example, the Federal Circuit recently explained that U.S. patents govern access to U.S. markets and are governed solely by U.S. law (see our Feb. 16, 2016 post). The Federal Circuit stressed that U.S. law does not extraterritorially interfere with foreign patents rights that provide access to foreign markets and, importantly, foreign laws do not interfere with U.S. patent rights that permit access to U.S. markets. The Federal Circuit indicated that licensing terms that a foreign government requires a U.S. patent owner to enter as to its U.S. patents may not be enforceable. Further, the Second Circuit recently ruled that a U.S. antitrust claim could not be raised in the U.S. based on breach of a FRAND-Z standard-setting obligation where a foreign company refused to grant licenses on its foreign patents and filed foreign infringement actions under its foreign patents (see our June 5, 2014 post). Similarly, the European Union considered a consent decree with Samsung that was specifically limited in scope to the European Economic Area (see our Oct. 18, 2013 post).
Hopefully the KFTC’s written decision will provide more specific limitations on the scope of its order, including whether its limited to licensing of Korean patents for handsets sold in Korea.
6. Questions re valuation of the patents and licensing terms
The KFTC Press Release indicates that Qualcomm’s handset licensing rates did not change even though Qualcomm’s share of SEPs decreased with each successive generation of the cellular standard from 2G to 4G. Unchanged rates may not be unreasonable depending on the circumstances and valuation considered. KFTC indicates that new generation handsets typically require backward compatibility such that a 4G handset also must have 2G and 3G technology and licensed thereto. So the licensing rate reasonably could even increase from generation-to-generation of the standard as a handset company would need a license to not only the prior generation patents but also additional patents on the new generation of the standard. Further, U.S. courts have eschewed using pure patent counting for valuing a patent portfolio—i.e., cannot consider all SEPs of a standard to have the same equal value such that the value of an SEP portfolio is determined solely by the percentage of SEPs in that portfolio. A small patent portfolio reasonably could have more value than a large portfolio; this could depend, for example, on whether the smaller patent portfolio covers important and valuable features to handsets implementing the new generation of the standard or only tangential optional features with nominal value.
Hopefully the final written decision will explain how KFTC valued each generation of Qualcomm’s patents to determine whether it was unreasonable for Qualcomm not to lower (or raise) its licensing rate as newer generations of the standard were introduced.