Qualcomm seemed to get a sympathetic ear Thursday from a panel of U.S. Ninth Circuit Court judges hearing the San Diego company's appeal of last year's verdict that it violated anti-monopoly laws.
During oral arguments in San Francisco, the three-judge panel asked questions that appeared skeptical of some of the legal underpinnings of the lower court's finding last spring.
The judges probed whether Qualcomm's conduct rose to the level of an antitrust violation. They pushed a lawyer from the U.S. Federal Trade Commission for precedents that supported San Jose District Judge Lucy Koh's ruling against Qualcomm.
"Anti-competitive behavior is illegal under the Sherman Act. Hyper competitive behavior is not," said Judge Stephen Murphy, who is a guest judge from Michigan. "This case asks us to draw the line between the two."
Brian Fletcher, special counsel for the FTC who is a former assistant solicitor general, said Qualcomm's business practices are anti-competitive because it leveraged its monopoly power in one market - cellphone chips - to force smartphone makers to pay unreasonably high prices in another market - patent royalties.
"The critical thing that distinguishes it from what is normal in business is (Qualcomm) is not competing on the merits," said Fletcher. "If they make it hard for competitors because they make a better product or sell it for less, no problem. That is not the case here."
Qualcomm is seeking to reverse Koh's findings that its "no license, no chips" policy and other business practices were anti-competitive.
There is a lot at stake. Koh required Qualcomm to drastically change its business model around patent licensing.
Today, Qualcomm licenses its trove of 140,000 mobile patents to smartphone makers, charging a percentage of the price of the phone up to a $400 cap.
Koh's injunction would force Qualcomm to license patents based on the price of the smallest salable unit, essentially the chips inside mobile phones.
That could complicate patent licensing for Qualcomm, resulting in additional litigation and possibly cutting royalty revenue to the point where it would hinder the company's ability to invest in research and development.
Since Qualcomm is the leading U.S. company developing 5G technology, the potential of reduced R&D spending has gotten the attention of the U.S. Justice Department, the Department of Defense and Department of Energy.
Deputy Attorney General Michael Murray of the DOJ's antitrust division told the appellate panel on Thursday that Koh's ruling was based on a "novel" legal theory and should be "vacated because it was entered without consideration of the public interest, including national security concerns."
Under the FTC's legal theory adopted by Koh, Qualcomm's high patent royalties act at a "surcharge" or "tax" on rival chipmakers.
Smartphone makers owe Qualcomm royalties for using its intellectual property even if they buy chips from semiconductor rivals such as Intel or MediaTek, which don't pay patent fees to Qualcomm.
"When you require your customers to pay you even when they buy from someone else, that interrupts the ordinary competitive functioning of the market," said Fletcher, the FTC lawyer. "It means rivals can't come in and undercut your price."
Qualcomm contends it has two separate businesses - patent licensing and chips. Patent laws encourage the company to license its technology broadly at prices that give it an incentive to innovate.
Qualcomm lawyer Tom Goldstein said the FTC had taken "things that the law encourages, re-labels them and deems them illegal. There is nothing in the history of antitrust law that does something like that, re-characterizes something that is encouraged by the law as if it were something illegal as if it were a tax."
The Ninth Circuit panel seemed concerned that Koh's ruling might have been an overreach based on past antitrust precedents.
"The Supreme Court tells us not to focus on harm to competitors but harm to competition" in an overall market, said Judge Johnnie Rawlinson. "Is that the standard, making it more difficult for competitors? Because that's the nature of business, to make it more difficult for your competitors to operate."
The panel seemed to wrestle with whether Qualcomm should be punished for its uncommon business model of licensing patents and selling chips in the mobile market, said David Reichenberg, an antitrust attorney with Cozen O'Connor in New York.
"They want to avoid a world of a standard-less standard for anti-competitive conduct." said Reichenberg. "They were really searching for that authority, and I think one of the reasons that people were up in arms about this case in general was the question of what are you basing this on? What line of cases? What theory of harm?"
The Ninth Circuit panel made no decisions in the case Thursday. It is expected to take several months before it issues a ruling.
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