Five Takeaways From Qualcomm's Move to Block Koh's Order
The San Diego chip giant says that if Judge Lucy Koh's antitrust order isn't stayed pending appeal, it will be forced into lousy licensing deals that can never be undone. But the only authority for that proposition is Qualcomm itself.
May 29, 2019 at 02:04 PM
5 minute read
The original version of this story was published on The Recorder
Qualcomm Inc. has vowed to appeal U.S. District Judge Lucy Koh's ruling last week that it unfairly used its market power over CDMA and premium 4G LTE modem chips to extract supracompetitive royalties from smartphone makers and their manufacturers.
But getting a decision from the Ninth Circuit could take years. In the meantime, Qualcomm needs to get Koh's sweeping injunction—which requires it to renegotiate all of its licenses and offer FRAND rates to chip-making competitors—put on hold.
Qualcomm asked Koh for a stay pending appeal Tuesday evening, in a motion signed by Cravath, Swaine & Moore partner Gary Bornstein. If the judge doesn't grant it, Qualcomm will undoubtedly file a similar motion with the Ninth Circuit. Here are five quick takeaways.
1. Qualcomm's best argument: Prejudicial patent chaos. If Koh's order isn't stayed, a lot of smartphone makers could demand new licenses on presumably better terms. Or worse, from Qualcomm's point of view, they could now declare themselves licensed by virtue of their phones using Qualcomm chips. “Any new agreements that Qualcomm is compelled to enter while the appeal is pending would remain effective even if Qualcomm ultimately prevails before the Ninth Circuit,” Bornstein writes. “This would not only irreparably harm Qualcomm, but also would deny Qualcomm its right to effective appellate review.”
2. But why couldn't Humpty Dumpty be put back together? Borstein warns that once it's forced to “radically restructure its business relationships,” Qualcomm “will not be able to return to its pre-injunction business in an orderly fashion. Nor will it be able to unwind licensing agreements it has renegotiated in the shadow of an Order that is later overturned.” OK, but why not? The only authority Qualcomm cites for this is a declaration from Alex Rogers, president of Qualcomm's licensing division, who says Qualcomm endured similar hardships when China's regulatory authorities issued a similar injunction, which Qualcomm later settled. But Qualcomm survived that ordeal. Plus, it's possible Qualcomm negotiated for this contingency when it struck a licensing deal with Apple last month. If they did, why not make deals with other licensees contingent on the outcome of an appeal?
3. Qualcomm's weakest argument: the one Judge Koh revealed as a “pretext.” Qualcomm continues to argue that it shouldn't have to license its standard-essential patents (SEPs) to chipmaking competitors because doing so causes “inefficiencies and difficulties “ that are “well known in the industry.” Koh pointed out that Qualcomm did once license its SEPs to competitors, and still does so in segments where it does not possess market power. She quoted multiple Qualcomm executives' explanation to the Internal Revenue Service that the reason they refuse is it's more profitable to license at the OEM level—“humongously” so, in the words of Qualcomm senior VP for licensing strategy Fabian Gonell. The “humongously” quote appears five times in Koh's opinion. She definitely isn't going to extend a stay on this ground, but Qualcomm can try its luck with the Ninth Circuit.
4. Qualcomm has plenty of other potential grounds for a stay. As Qualcomm says in the motion, Koh's decision presents many serious issues on which fair-minded jurists could disagree. The company has come up with quite a laundry list: the scope of Qualcomm's FRAND obligations, the proof required to find breach of an antitrust duty to deal, the viability of the FTC's “surcharge” theory of competitive harm, the use of Federal Circuit damages case law to gauge reasonable royalties, and the FTC's burden to prove the likely recurrence of an antitrust violation, among others. But “taken together,” Bornstein says, “these questions overwhelmingly require leaving the status quo in place while Qualcomm pursues its appeal.”
5. 5G might make or break the stay, and the appeal. Part of Koh's rationale for the injunction was that Qualcomm is poised to dominate the next generation of wireless technology. But, Bornstein notes, Koh cut off discovery before the introduction of 5G. “No record evidence demonstrates that Qualcomm currently possesses (or recently possessed) monopoly power” over the sale of 5G modem chips, “a segment that was never alleged to constitute a relevant antitrust market, let alone one in which Qualcomm possesses market power,” Bornstein writes. This argument sounds correct on the law, but it also requires some chutzpah, given that Qualcomm's primary U.S. competitor on 5G, Intel, exited the market just last month on the same day Qualcomm struck its chip supply deal with Apple.
“Put simply,” Bornstein writes, “the stakes are high, and the readily foreseeable harms to Qualcomm and the public interest are neither academic nor hypothetical.” For Koh, that might be the very reason for denying a stay pending appeal. But for the right Ninth Circuit motions panel, it might be enough to grant one.
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