Chip suppliers are going to face some challenging decisions in the wake of U.S. District Judge Lucy Koh's ruling this week in the Federal Trade Commission's antitrust action against Qualcomm Technologies Inc.

The question will be whether to accept Koh's decision that they're required to license their standard-essential patents to chip-making competitors or continue brushing them off.

“It's a very sobering ruling for large-scale standard-essential patent holders, especially in the 3G, 4G, 5G licensing space,” Goodwin Procter counsel Monte Cooper said. “It's only one district court judge's interpretation” of a chip supplier's commitment to fair, reasonable and non-discriminatory (FRAND) royalties, “but it's a very influential district court judge in a very influential case.”

Koh ruled Tuesday that when Qualcomm signed on with standard-setting organizations such as the Telecommunications Industry Association, Qualcomm promised to license its standard-essential patents (SEPs) at FRAND rates not only to handset makers, but also to competing chip makers.

She looked to two Ninth Circuit decisions involving FRAND disputes between Microsoft and Motorola Mobility. “Those binding precedents are clear: a SEP holder that commits to license its SEPs on FRAND terms must license those SEPs to all applicants,” Koh wrote.

Cooper has been following the Qualcomm litigation as a veteran of SEP licensing and litigation and as counsel to Sequans Communications, one of numerous third parties in the case. If major SEP holders such as Ericsson and Nokia accede to Koh's ruling, it will likely depress the royalty income they earn not only on phones, but other consumer items like drones, even cars. But if they continue refusing to license competitors, they could risk getting hauled into court and accused of breaching their FRAND obligations.

“It's definitely going to make life more complicated for SEP holders in the 3G and 4G space,” he said. “That's going to be a tough decision for in-house [attorneys] to make.”

The FTC sued Qualcomm in January 2017, in the wake of antitrust actions by the governments of South Korea, China, Taiwan and the EU that resulted in nine-figure penalties.

The FTC alleges that Qualcomm has violated its FRAND obligations in two ways: by refusing to license to competitors and by threatening to withhold chips from handset makers who won't pay its going rate. Both strategies leverage Qualcomm's monopoly power in violation of state and federal antitrust law, the FTC alleges.

Tuesday's ruling addressed only the FTC's first allegation. It focused on commitments Qualcomm made to standard-setting organizations to license its SEPs “to all applicants under terms and conditions that are reasonable and non-discriminatory.”

Koh granted partial summary judgment to the FTC that those commitments are binding contracts and apply not only to handset makers but competing chip suppliers such as Intel Corp. She pointed out that in the Microsoft v. Motorola cases, the Ninth Circuit held that such commitments apply “to all comers” and that an SEP holder “cannot refuse a license to a manufacturer who commits to paying the RAND rate.” The Federal Circuit, too, has held that SEP holders must grant licenses to “an unrestricted number of applicants.”

“Qualcomm is unable to identify any court that has made a contrary statement about the scope of a SEP holder's FRAND commitments,” she wrote.

Further, she reasoned, TIA guidelines accompanying the agreements specifically identify “a willingness to license all applicants except for competitors of the licensor” as an example of discriminatory conduct under the TIA IPR policy. That language isn't part of the contract, but it's extrinsic evidence of the contracting parties' intent under California law, she wrote.