Source 21st century economic report
By Huang Wanyi
On August 11 local time, the U.S. Court of Appeals for the Ninth Circuit overturned the antitrust lawsuit filed by the district court against Qualcomm, holding that the FTC did not have sufficient evidence to prove that the commercial operation of the patent license of Qualcomm was suspected of anti competition.
After years of judicial disputes and disagreements with mobile phone manufacturers, Qualcomm’s most profitable patent licensing business model has finally come to life. In addition to the favorable judgment of the court of appeal, in July, Qualcomm and Huawei signed a long-term patent license agreement worth $1.8 billion, and the two giants reached a “settlement” on patent issues.
Since 2017, the Federal Trade Commission (FTC) has filed a lawsuit against the alleged anti competition of Qualcomm’s patent licensing business activities, believing that Qualcomm abused its dominant position in the wireless communication market and charged unreasonable high patent fees. In May 2019, judge Lucy KOH of San Jose district court, California, upheld the charge. In this regard, Qualcomm said it was not satisfied and immediately filed an appeal.
On August 11, the U.S. Court of Appeal ruled that Qualcomm’s patent licensing business activities did not constitute anti competition, overturning the district court’s 2019 decision.
After winning the appeal, Qualcomm issued a high-profile statement on the company’s official website: “this decision validates our business model and licensing plan, and highlights the company’s great contribution to the industry. We thank the panel of judges for its thoughtful consideration of this important case. ”
“No license, no chip” policy is controversial
Qualcomm’s “no license, no chip” policy is a key consideration for the court of appeal and the district court to make different decisions. Under this policy, Qualcomm can refuse to sell the chips to equipment manufacturers (OEMs) who are not willing to purchase the necessary patents (SEPs) of Qualcomm standards, that is, the equipment manufacturers must agree to purchase the patents of Qualcomm before they can buy their chips.
The court of Appeal held that if Qualcomm does not implement the “no license, no chip” policy, then due to the “patent exhaustion principle” in the intellectual property law, OEM manufacturers may refuse to pay for patent authorization on the ground that the purchased chips already contain patents.
From the perspective of anti-monopoly law, Qualcomm is suspected of taking advantage of its dominant position in the market of essential patents and chips for wireless communication standards to implement anti competition. However, from the perspective of intellectual property law, the principle of “exhaustion of patent rights” stipulates that any person will no longer have to pay for the patent when selling or using the product.
“The central view of the FTC is that Qualcomm’s” no license, no chip “policy harms competition, but the” no license, no chip “policy is an exclusive part of patents.” Randall R. rader, former chief justice of the U.S. Court of Appeals for the federal circuit, said in an interview with 21st century business reporter that patent owners are explicitly granted the right to exclude others from manufacturing and using patents, including, of course, excluding competitors who want to buy Qualcomm chips but do not pay for the patents.
There are different interpretations of frand principle
Another key factor in the revision of the high pass antitrust case is that the court of appeal and the district court interpret the frand principle differently. In the communication industry, as the standard essential patent holder may block the market participants by refusing to grant, before a patent becomes a standard essential patent, the standard essential patent holder must promise to grant the patent according to the frand principle of “fairness, reasonableness and non discrimination”.
Judge rader analyzed: “the frand principle requires that the fees for patent licensing should be reasonable, but there is no anti-monopoly plan for anti competitive behavior. Antitrust protection is the competition itself, not the specific competitors and their pricing requirements! Competition policy has nothing to do with pricing policy. The market determines the price. Obviously, the pricing and patent licensing policies of Qualcomm do not offend the market, because the market has been accepting these policies for many years, and the product prices are falling and benefiting consumers. ”
The court of Appeal held that Qualcomm has no anti-monopoly obligation to grant patents to chip manufacturer competitors. If patents are sold to chip competitors in the production process, OEM manufacturers can obtain patents directly from competitors’ products without paying patent fees to Gaotong. However, the district court and the Federal Trade Commission held that Qualcomm had an anti-monopoly obligation to grant patents to chipmaker competitors.
If the “patent exhaustion principle” in intellectual property law is considered, Qualcomm can only grant patents to OEM manufacturers such as mobile phones, but not chip competitors. However, in fact, Qualcomm still has a CDMA ASIC agreement for chip competitors, which stipulates that chip competitors licensed by Qualcomm must promise not to sell chips to equipment manufacturers without patent authorization.
However, in the view of antitrust law scholars, patent licensing business model is much more complex, especially for the communication industry which is committed to the unification of standards. Liu Xu, a researcher at the intellectual property and competition law research center of Tongji University, believes that every necessary patent accepted as a standard can form a separate market, in which the patent owner has a dominant position.
Liu Xu told 21st century business reporter that the patent licensing model of Qualcomm should distinguish between the standard essential patent market and the non-standard essential patent market. In terms of patents that do not have a dominant market position, Qualcomm is free to determine the conditions, objects and rates of patent licensing; however, in terms of standard essential patents, it needs to comply with the competition laws of various countries and cannot abuse its dominant market position.
In a report released in February this year, plytics, a German patent research organization, pointed out that more and more patent licensing disputes have exposed such problems: who must be authorized, OEM or supplier? Is authorization based on parts or end products? Is the royalty a fixed fee or a proportion of the price of the product? Plytics believes that it is necessary to re-examine the different interpretations of frand principle on the necessary patent authorization of 5g standard.
The history of Qualcomm’s antitrust lawsuit
Although the company has won a comeback in the United States, in the past few years, it has been fined heavily in China, South Korea and other places for suspected anti competition in patent licensing business activities.
In December 2019, the Seoul High Court of South Korea upheld the Korean Fair Trade Commission’s lawsuit against Qualcomm, ruling that the company abused its dominant market position, discriminated against competitors seeking to use its standard essential patents, hindered the competition in the baseband chip market, and issued a fine of 1.03 trillion won.
In 2015, China’s national development and Reform Commission (NDRC) ruled that, by taking advantage of its dominant position in the necessary patent license market of wireless communication standards, Qualcomm was fined 60% for collecting unfair high price patent license fees, including charging license fees for expired necessary wireless standard patents, requiring the licensee to grant free reverse license for patents, and tying up necessary patent licenses for non wireless standards without reasonable reasons A fine of 100 million yuan.
Why does the same issue of Qualcomm encounter different judgments in different countries? Xu Ming, associate professor of Shanghai Institute of international intellectual property of Tongji University, told 21st century economic reporter: “first, there are differences in the legal systems of different countries, and there are differences in the definition standards of” monopoly “in different countries. In addition, it is not ruled out that there is a tendency of state protection. As a global benchmark company for mobile phone chips, once it is identified as a monopoly in the United States, it is likely to trigger anti-monopoly review of the company in other countries. Therefore, the courts of the United States may have a tendency to protect its own companies. ”
Patent licensing contributes 70% of profits
Qualcomm has to go all out for these lawsuits. If its most profitable patent licensing business is branded as abuse of market dominance, it will severely damage its core business model.
According to the quarterly report as of June 30, 2020, according to GAAP, the total revenue of Qualcomm in the third quarter was 4.893 billion U.S. dollars, and the profit before tax was $868 million. Among them, the QCT department responsible for chip R & D and sales had a revenue of $3.807 billion, a pre tax profit of $603 million, and a revenue of $1.044 billion and a pre tax profit of $646 million.
It can be seen that although the patent licensing business of Qualcomm accounts for only one fifth of the total revenue, it contributes as much as 70% of its profits. In fact, it is not only Qualcomm, but also patent licensing, especially the standard essential patent license. It can be said that it is the “cash cow” of the whole wireless communication industry. According to the statistics of iplytics, nine technology companies, including Qualcomm, Ericsson, Nokia, interdigital, Huawei, Broadcom, IBM, Philips and acacia, contributed 93% of the global patent licensing revenue in 2016.
“The charging mode of patent licensing is very common in the communication industry, which is a typical patent intensive industry. Patent licensing is a very important source of revenue for communication enterprises. ” Xu Ming said that there was a saying in the industry that “the first-class enterprises sell standards, the second-class enterprises sell patents, and the third-class enterprises sell products”. In the 3G era, there was also a saying that “no CDMA technology solution can bypass the patents of Qualcomm”. By combining patents with technical standards, Qualcomm has achieved considerable economic benefits.
In the 3G and 4G era, Qualcomm has established its leading position in the wireless communication patent market with a number of necessary patents for CDMA and LTE standards respectively. According to the official data of Qualcomm, in the fiscal year of 2019, the company holds more than 140000 patents, has more than 300 patent authorized objects in the world, and more than 13 billion mobile devices in the world have been granted patents from Qualcomm.
Now, the 5g patent licensing scheme of Qualcomm has come out. According to the 5g NR standard patent license fee statement issued by Qualcomm in November 2017, OEM manufacturers are charged a patent license fee of 2.275% of the selling price of single-mode mobile phones and 3.25% of the selling prices of multi-mode mobile phones.
Can 5g standard patent still win?
In the view of industry insiders, the evaluation of global 5g leadership depends on the number of standard necessary patents, not just the number of patents. After all, the standard necessary patents are the threshold that can not be bypassed. According to the statistics of international famous law firm Bird & bird, Ericsson, Samsung and Qualcomm respectively hold 15.8%, 14.1% and 12.6% of the world’s 5g standard essential patents, ranking the top three. European, American and Korean enterprises still lead the standard patent market, while Huawei and ZTE rank fifth and seventh with 10.9% and 8.6%.
“5g chip market is different from 3G and 4G in the past. It can not only be used in mobile phones and tablets, but also widely used in the Internet of things,” Liu Xu wrote in an article. Therefore, if Qualcomm makes use of its market position in the 5g modem chip market, or with the huge revenue from the necessary royalty of 5g standard to cross subsidize its 5g chip business, it may crowd out competitors. ”
Compared with 3G and 4G, the number of 5g technology players is increasing. Changing the monopoly situation of Western technology companies may break the monopoly tradition of patent licensing business model. However, at the same time, more and more devices have emerged in the 5g era, not only smart phones, but also terminal devices based on the Internet of things such as autonomous driving, manufacturing industry and medical departments, which makes patent licensing, especially the standard necessary patent licensing market, more effective.
“Incorporating patents into technical standards is a win-win solution, which is one of the reasons why Chinese enterprises are competing for the voice of 5g technical standards. “Xu Ming told reporters that in the short term, the mode of patent authorization in the communication industry will not change much. However, in the long run, the status quo that one or several patent licensing companies are dominant in the communication industry may change. In the initial stage of the communication industry, the technology development is relatively slow, but the current technology development speed is faster and faster. In the future, we will rely on individual patent licensing to obtain revenue The difficulty will be greatly increased, and the importance of the business model relying on patent license to obtain revenue will gradually decrease.