Thomas Goldstein. ( Photo: Diego M. Radzinschi/ALM)

The U.S. Court of Appeals for the Ninth Circuit sounded highly skeptical Thursday of the Federal Trade Commission's antitrust win last year against Qualcomm Inc.

Judges Consuelo Callahan and Johnnie Rawlinson peppered FTC special counsel Brian Fletcher with hostile questions, while U.S. District Judge Stephen Murphy III, visiting from Michigan, was only slightly more friendly.

Callahan noted repeatedly during the hourlong hearing that the FTC has "conceded that the district court was wrong" that Qualcomm has an antitrust duty to deal with smartphone-makers and rival chip manufacturers. "The house of cards starts to fall if you pull that out," she told Fletcher.

Fletcher conceded that U.S. District Judge Lucy Koh found "more than she had to" to support her injunction that blocked a Qualcomm policy known as no license, no chips.

"Not only more than she had to, but it was wrong," Callahan emphasized, adding that the FTC's fallback argument "doesn't really resonate."

Koh threw the antitrust book at the San Diego chipmaker in May, finding in a 233-page order that Qualcomm illegally monopolized markets for the CDMA and 4G LTE modem chips used in premium smartphones.

The judge gave the Federal Trade Commission almost everything it wanted following a bench trial early last year, ordering Qualcomm to immediately stop threatening to cut off chip supplies to smartphone manufacturers who balk at its licensing terms—aka no license, no chips—and to renegotiate existing license agreements free of that threat. Koh further ordered Qualcomm to make its standard-essential patents available to rival chip suppliers—not just smartphone makers, or OEMs—on fair, reasonable and nondiscriminatory terms.

On Thursday, Goldstein & Russell partner Thomas Goldstein argued that a lot had changed since then: A Ninth Circuit motions panel stayed Koh's injunction, describing it as at or outside the boundaries of antitrust law. The Justice Department warned that the injunction could put national security at risk. And the FTC disclaimed Koh's duty-to-deal analysis.

The FTC's alternative legal theory is unprecedented, he said. "In the whole history of antitrust law, the FTC has fallen back to a 1999 decision from the district of Utah that dealt with a very different situation," he said.

Goldstein didn't get much pushback from the court. Callahan quoted from a portion of Koh's ruling that found Qualcomm's licensing a departure from industry practice. "Does that equate to anticompetitive, or is that just being a disrupter?" she asked.

Goldstein said the premise of that passage was wrong. "All of the major SEP owners do what we do and that is license at the OEM level and not to their chip rivals," he said.

Fletcher argued that Koh's ruling is grounded in specific factual findings about how Qualcomm's conduct has harmed competition "under well-settled antitrust standards." Smartphone manufacturers testified that they paid inflated royalties "only because Qualcomm says to them, 'If you don't agree to pay these royalties, we won't sell you any chips.'" That's an illegal surcharge because "it reflects the value of Qualcomm's monopoly in chips, not the value of its patents."

But Callahan told him that she couldn't find any antitrust cases that say a royalty must reflect the intrinsic value of patents.

Further, Rawlinson asked, "What would be wrong with that? Doesn't the Supreme Court say that patent holders have the right to price their patents? What would be anticompetitive about that?"

Fletcher argued that Qualcomm is "taking part of the monopoly price of its chips, and it's moving them over into the patent royalties." That hamstrings competition from other IP owners who are trying to license their technology, he said.

"What case says that's anticompetitive, even if it's doing that?" Rawlinson asked.

That forced Fletcher to point to the Caldera case from Utah, which Rawlinson quickly pointed out is not only a district court decision but from outside the Ninth Circuit.

Fletcher argued that the case was brought by the Justice Department and ended in a consent decree that was approved by the U.S. Court of Appeals for the D.C. Circuit.

Most of the argument revolved around no-license-no-chips. Toward the end, Callahan asked what the court would do with Koh's summary judgment order finding that Qualcomm has a contractual obligation to license its patents to rival chipmakers on FRAND terms.

Fletcher argued that that portion of the injunction doesn't implicate the duty to deal. "There's no long-running recognized right to renege on voluntary contractual commitments," he argued.

But Goldstein urged the court to find triable issues as to whether Qualcomm breached the contracts, and either end the case there or send it back to Koh for further trial proceedings.

About the only encouraging words for the FTC came from Murphy, the visiting district court judge. "Say what you will" about Koh's rationale, "the district court took this case extremely seriously" and put an exceptional level of work into her analysis, he said.

At the end of the day, he said, "Anticompetitive behavior is illegal under the Sherman Act. Hyper-competitive behavior is not. This case asks us to draw the line between the two."