Qualcomm did not violate antitrust law by using its monopoly power over smartphone chips by charging substantial licensing fees and threatening to cut off all supplies to equipment manufacturers that refused to pay the rates, a federal appeals court ruled Tuesday, reversing a lower-court ruling.
U.S. District Judge Lucy Koh of San Jose had ruled in May 2019, after holding a non-jury trial, that the San Diego technology giant had illegally used its domination of the chip market to charge unreasonable royalty fees to manufacturers and stifle competition. She ordered Qualcomm to change its practices and renegotiate its contracts.
But a panel of the Ninth U.S. Circuit Court of Appeals in San Francisco put Koh’s ruling on hold last August, and on Tuesday another Ninth Circuit panel overturned the ruling.
Qualcomm has not engaged in illegal “anti-competitive behavior,” but only in “hyper-competitive behavior,” Judge Consuelo Callahan said in the 3-0 ruling.
The policy challenged in the case, called “no license, no chips,” denied sales to makers of phone handsets that refused to pay Qualcomm’s patent royalties — which the company charged even on chips that were bought from other suppliers. But Callahan said the manufacturers are “Qualcomm’s customers, not its competitors.”
“Qualcomm’s patent-licensing royalties and ‘no license, no chips’ policy do not impose an anti-competitive surcharge on rivals’ modem chip sales,” she said. “Profit-seeking behavior alone is insufficient to establish antitrust liability.”
The ruling was joined by Ninth Circuit Judge Johnnie Rawlinson and by U.S. District Judge Stephen Murphy of Detroit, temporarily assigned to the appeals court.
Qualcomm’s policy was challenged by the Federal Trade Commission in a 2017 lawsuit. The FTC’s Bureau of Competition director, Ian Conner, said, “The court’s ruling is disappointing and we will be considering our options.” The commission could ask the full appeals court for a rehearing or appeal to the Supreme Court.
Joshua Landau, lawyer for the Computer and Communications Industry Association, a trade group that filed arguments against Qualcomm, said Koh’s ruling last year “detailed how Qualcomm’s anti-competitive business practices have driven its competitors out of the modem business and raised prices in the cellular industry. The Ninth Circuit ignored ignored those factual findings.”
But Dan Rosenberg, Qualcomm’s general counsel, said the ruling “validates our business model and patent licensing program and underscores the tremendous contributions that Qualcomm has made to the industry.”
The Trump administration’s Justice Department rejected the FTC’s position and filed arguments backing Qualcomm.
Apple had sued Qualcomm in 2017 over its charges for sales of chips used in iPhones. But Apple agreed to a settlement in April 2019 and said it would pay royalties for at least six years, and a one-time payment of at least $4.5 billion, while using Qualcomm chips in its phones.
The core of Tuesday’s ruling, said David Reichenberg, a New York antitrust lawyer not involved in the case, was that the FTC “did not explain how allegedly charging too high a royalty injured competitors” — for example, how Qualcomm’s practices hindered Intel’s sales of its own chips.
He said the court reasoned that, as an individual cellphone consumer, “you can still buy from whoever you want,” as long as you “still pay a royalty to which Qualcomm is entitled.” To show an antitrust violation, Reichenberg said, the federal commission needed to find “an overcharge that consumers are paying that they shouldn’t have had to pay.”
Apple bought most of Intel’s smartphone modem business last year for $1 billion, in a deal that Intel said in court documents made it incur a multibillion-dollar loss. Intel executives alleged in filings in the case that Qualcomm’s tactics forced it out of the market.
Bob Egelko is a San Francisco Chronicle staff writer. Email: begelko@
sfchronicle.com Twitter: @BobEgelko