This past April, I participated in a 7-person panel at the Fordham IP Institute comprised of lawyers with significant interest in the telecommunications industry. The primary focus of the discussion centered around the various issues facing Qualcomm within the context of antitrust law, as well as with a broader perspective. The discussion was timely in light of the current US trade issues with China where Qualcomm appears to be a major bargaining chip.
Within the antitrust context, we discussed many of the “usual suspects” including:
Whether a standard essential patent (SEP), i.e., a patent that is claimed to read on a technical standard, automatically grants someone market dominance subjecting the SEP to antitrust scrutiny.
Whether portfolio licensing of SEPs was permitted, and if not, what were the parameters of what can and cannot be included within the portfolio to avoid illegal bundling.
Whether Qualcomm’s no-chip, no license approach was impermissible.
The permissibility and implications of Qualcomm’s requirement for passthrough rights, or that Qualcomm licensees grant it cross-license with the right of sublicense to all Qualcomm chipset customers.
We also discussed the notable fact (and the implications therefrom) that much of the intellectual energy behind the regulatory investigations of Qualcomm has come from East Asia and especially China.
Administrative Burdens
In my comments, I tried to steer the conversation toward the practical implications of the many anti-trust critiques discussed. I noted satisfying regulators’ supposed demands that licensors only license patents that are in fact essential (as opposed to those that are merely thought to be essential patents) that are then in force and applicable to the precise technical needs of the licensee. This would require a licensor to fully understand its portfolio, know its licensees, and offer tailor-made licenses to licensee. This is a huge administrative burden that most companies cannot afford.
Regulators do not seem to understand the extent of this burden (though many smaller licensees seem to think the regulators do in fact understand this, and the regulators’ true goals are to raise the barriers of entry to SEP licensing). In fact, I noted that it was suggested to me by a well regarded regulator that SEP licenses should have constantly changing royalty rates, fluctuating based on the essentiality and validity and enforceability of the licensee’s SEP portfolio. In my view, such an approach defies the entire point of entering into a license and settlement in the first place.
When discussing passthrough rights and Qualcomm, I noted how significant and often under-appreciated this issue is. I mentioned that the alleged 4x difference between Ericsson’s and Nokia’s recent settlements with Apple, can — in my view ù in large measure be explained by the fact that one portfolio is subject to Qualcomm passthrough rights and the other is not.
I also noted that the significance of the passthrough rights can be further seen in the settlement Qualcomm achieved with China’s National Development and Reform Commission (NDRC). The high fine paid for violations and the NDRC authorizing Qualcomm to charge 2/3 of their standard royalty rates, received much press (and for good reason). What I argued was even more important, was Qualcomm was prohibited from demanding of Chinese licensees passthrough right for Qualcomm’s customers. I noted there are only two companies that stand to benefit from this requirement. These two companies, according to recent studies have the largest SEP holdings for 4G and the incipient 5G in China and are some of the most active patent filers of SEP and other patents the world-over. They are Huawei and ZTE. I further noted that, in my view, the entire point of the NDRC’s investigation of Qualcomm was to provide Huawei and ZTE a very big advantage in their efforts to become net licensors.
My final observations on the panel included that it was interesting that the Chinese regulator’s review of Qualcomm’s proposed merger with NXP, a major Chip manufacturer, seems oddly (I would say purposefully) timed to coincide with when the Beijing courts are likely to decide whether to issue the Qualcomm-requested injunction against Apple. That said, the announcement in late May that the Chinese regulators may have approved the Qualcomm-NXP merger only serves to illustrate that predictions in the SEP licensing space are notoriously hard to make in this fast changing space.
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