While Qualcomm Incorporated (“Qualcomm”) has been highly successful in licensing its standard essential patents (SEPs), its unique licensing practice has also stirred up legal conflicts with national antitrust authorities in all IP5 countries. In particular, administrative/legal proceedings were instituted against Qualcomm by the Korea Fair Trade Commission (“KFTC”) for violation of the fair, reasonable and non discriminatory (FRAND) commitment, with some of the major ICT companies joining in the proceedings as interveners.

Recently, the Seoul High Court affirmed the sanctions imposed by KFTC on Qualcomm for its anticompetitive conducts committed in licensing out its SEPs (Case No. 2017Nu48, decided on December 4, 2019).

▶Case History

In February 2015, KFTC initiated an investigation on Qualcomm’s licensing practice, suspecting that Qualcomm may have violated the Korean Monopoly Regulation and Fair Trade Act (“Fair Trade Act”). During the investigation, Qualcomm’s customer companies, as well as its competitors, intervened in the proceeding and assisted KFTC by submitting their own briefs and evidentiary materials in support of the arguments contained in the briefs.

The interveners were: Intel and MediaTek, baseband chipset suppliers, being direct competitors of Qualcomm; LG and Apple being SEP licensees as handset manufacturers that purchase modem chips from Qualcomm; and Samsung and Huawei, making both chipsets and smartphones, having wanted to acquire full manufacturing licenses from Qualcomm, but having been denied.

Eventually, KFTC issued a corrective order in January 2017, directing Qualcomm to remedy its licensing practice (Case No. 2017-025).

Qualcomm brought a suit against KFTC’s administrative order before the Seoul High Court, and the above-mentioned interveners participated in the litigation again. Samsung and Apple, while the action was pending, reached a settlement with Qualcomm, whereas LG, Intel, Huawei and MediaTek continued to intervene in the suit.

▶Qualcomm’s Licensing Model

The KFTC position was that Qualcomm had monopoly power over modem chips, by virtue of its SEPs thereon, and breached the FRAND commitment through its anticompetitive conducts. The accused illegal acts can be categorized into three, as discussed below.

(i) Refusal to License: Qualcomm refused to grant an “exhaustive” SEP license to competing chipset suppliers. That is, to avoid patent exhaustion by the initial authorized sale under a full or regular patent license agreement, Qualcomm instead offered a covenant not to sue, under which it was not to sue the competing chipset suppliers but could sue those companies that purchased chipsets from the competing chipset suppliers. Such “refusal to license” policy prevented Qualcomm’s patent rights from being exhausted when the competitors sold modem chips manufactured with Qualcomm’s patented technology to smartphone manufacturers. 

(ii) No License, No Chip: Under its “no license, no chip” policy, Qualcomm required smartphone makers to sign a separate royalty-bearing SEP license agreement in order to purchase its modem chips. As a result, Qualcomm established a licensing scheme of forcing the smartphone makers to purchase modem chips from Qualcomm: unless the smartphone makers purchased modem chips from Qualcomm, they would be in breach of the license agreement for infringing Qualcomm’s SEPs.

(iii) Licensing Terms: Qualcomm’s license agreements with the smartphone manufactures contained certain terms and conditions that were deemed unilaterally favorable to itself. In particular, the royalty rate was calculated based on the unit price of each handset, not that of each chipset, for every licensed patent. Further, the license terms included a royalty-free grant-back clause that set up a “patent umbrella” centered on Qualcomm.

▶KFTC Order

Article 3-2(1)(iii) of the Fair Trade Act mandates that a market-dominant entity shall not unfairly interfere with a third party’s business. The Examination Guidelines of KFTC illustrates abusive conducts of a market dominant entity: for instance, (a) imposing a condition unreasonable in light of ordinary business practices, or (b) forcing an overreaching transaction or condition on other parties.

KFTC concluded that Qualcomm’s licensing practices violated Article 3-2(1)(iii) of the Fair Trade Act, for the reasons that (i) Refusal to License constituted an abuse of its market dominant position illustrated as “(a)” in the Guidelines, while (ii) No License, No Chip and (iii) Licensing Terms corresponded to the abusive conduct “(b)”.

Consequently, KFTC ordered Qualcomm to take corrective measures to rectify the abusive conducts, and also imposed a penalty in excess of 1 trillion won (equivalent to about 1 billion USD). This penalty amount is the highest ever levied since the establishment of KFTC. 

▶Seoul High Court Decision

The Seoul High Court’s decision on appeal may be summarized as follows: 

(1) As for (i) Refusal to License and (ii) No License,  No Chip, Qualcomm’s practices were illegal and the KFTC remedies were appropriate. 

With regard to (iii) Licensing Terms, however, Qualcomm’s conduct was not illegal per se. 

(2) Despite such ruling on the Licensing Terms, however, the penalty imposed was appropriate in its entirety in light of Qualcomm’s the other two violative conducts (i.e., Refusal to License and No License, No Chip).

First, with regard to Refusal to License, the Court found (i) Qualcomm’s practice of offering a non-exhaustive covenant to the competitors did not conform to its FRAND commitment, and was also against the customary licensing practice in the ICT field; and (ii) Qualcomm’s internal documents showed that it intentionally hindered rival makers from manufacturing and selling their chipsets. Although Qualcomm did not actually raise any patent infringement claim against the commercial use of the competitors’ modem chips, it was possible to do so against the handsets installed with the competitors’ modem chips. Therefore, the High Court ordered Qualcomm to render exhaustive licenses available to willing licensees in a diligent manner. 

With respect to No License, No Chip, the Court noted that (i) Qualcomm forced a separate license agreement that contained disadvantageous terms and conditions to the handset makers, and (ii) Qualcomm intentionally strengthened its monopoly position in the licensing and chipset markets by lowering its chipset price, made possible from the royalties it earned from the licensees. Accordingly, the High Court held that Qualcomm shall not condition its supply of modem chips on the buyer’s undertaking to enter into a patent license agreement.

Lastly, as to the Licensing Terms, the Court held that the handset-based royalty rate and the royalty-free grant-back clause were not illegal per se. The High Court also pointed out that KFTC (and the interveners) failed to produce any evidence showing harm to the chipset makers or buyers arising from these licensing terms. 

Qualcomm’s appeal to the Supreme Court is currently pending, with the above four interveners participating (Case No. 2020Du31897).

▶Remarks

After Quanta v. LG (553 U.S. 617) in 2008, which held that a patent is exhausted by an authorized sale despite an attempt by the patentee to condition the sale, Qualcomm modified its SEP license policy to competitors from “conditioned license” into “refusal to license or covenant not to sue.” 

As can be seen from the above, however, the Seoul High Court determined that Qualcomm’s such modified licensing policy is anticompetitive. 

In contrast to the Seoul High Court decision, the U.S. Court of Appeals for the Ninth Circuit recently rendered a unanimous decision (FTC v. Qualcomm, 935 F.3d 752, August 11, 2020) that, without explicitly addressing whether or not Qualcomm breached FRAND commitment, reversed the U.S. District Court’s injunctive order prohibiting Qualcomm’s business practices. The Ninth Circuit determined that Qualcomm’s modified licensing strategy was not proven to have undermined competition in the relevant market.

It remains to be seen, therefore, how these Qualcomm cases, running in parallel in Korea and the United States, would be ultimately decided, testing the boundaries of FRAND commitment and antitrust law.