Qualcomm is a major opponent, perhaps the strongest opponent, of patent litigation reform. It’s becoming pretty obvious why. A few weeks ago, the Korean Fair Trade Commission went after Qualcomm for its anti-competitive licensing practices. This time, it’s the U.S. Federal Trade Commission going after Qualcomm for its licensing practices.
I wrote about the KFTC action recently, in which the KFTC fined Qualcomm about $850 million and ordered it to stop its abusive licensing practices. The KFTC found that Qualcomm dominated the pool of essential patents for the CDMA cellular phone standard, and it used those patents to monopolize the market for CDMA chipsets:
- It refused to license to competitors, even though as part of the standard-setting process, Qualcomm had committed to license to anyone on fair and reasonable terms
- It forced handset companies to separately take a patent license if they wanted to buy Qualcomm chips. That was on top of the purchase price for the chips.
- It forced handset companies to give Qualcomm licenses to their own patents, for free.
With the FTC complaint, we find a little bit more about Qualcomm’s practices. For example, we learn why requiring companies to take a separate patent license in order to purchase chips is abusive. Normally, the purchase of the chips would be enough without a license, because, under the first sale and patent exhaustion doctrines, a seller automatically gives a license to the purchaser for any of the seller’s relevant patents.
Qualcomm, however, forces its customers to take a separate patent license that entitles Qualcomm to a percentage of the price of the entire device that uses its chips. That is, a smartphone manufacturer has to pay Qualcomm a percentage of the price of the entire phone for each phone sold, in addition to paying for the chips. That’s essentially extortion.
Apple, which sells higher priced phones and tablets, has paid Qualcomm billions in royalties because of this tactic. And, according to a lawsuit that Apple filed last week, when it complained to Qualcomm, Qualcomm offered it a “deal”: if Apple agreed to use only Qualcomm chips, Qualcomm would rebate some of the royalties it had paid. To get the rebates, Apple had to agree to an exclusive arrangement with Qualcomm. Apple would lose its rebates if it bought chips from any other manufacturers, if it disclosed any of the details of the agreements, or violated some other conditions of the agreements.
According to Apple’s complaint, when Apple was summoned to testify before the KFTC, Qualcomm wanted Apple to lie. When Apple didn’t, Qualcomm then decided that Apple had forfeited its unpaid rebates, to the tune of about $1 billion. (Apple claims that the agreements specifically allowed it to cooperate with investigations by a government agency.)
Qualcomm paints itself as the hero of the small inventor and a major innovator. Based on what we’ve learned in the last few weeks, it’s clear that Qualcomm is worse than any ordinary patent trollAn entity in the business of being infringed — by analogy to the mythological troll that exacted payments from the unwary. Cf. NPE, PAE, PME. See Reitzig and Henkel, Patent Trolls, the Sustainability of ‘Locking-in-to-Extort’ Strategies, and Implications for Innovating Firms.. It lied to standard setting organizations about its willingness to license its essential patents, and it uses those patents to monopolize segments of the cellular chip market. At the same time, it forces companies to pay an exorbitant tax based on inventions that Qualcomm had nothing to do with.
No wonder Qualcomm made over $6 billion in profit on licensing alone in 2016.
In light of Qualcomm’s actual business model, it isn’t surprising that Qualcomm wants the patent system to stay basically as it is. But Qualcomm has no credibility with respect to patent reform. We shouldn’t be listening to Qualcomm’s arguments against patent reform any more than we’d listen to a bank robber’s arguments against hiring more bank guards.