The Federal Trade Commission (FTC) recently filed a lawsuit against Qualcomm accusing it of violating the patent licensing commitments it made to prominent standards-setting organizations in order to maintain its monopoly on the chips used in cellphones and other mobile devices. This FTC action has attracted significant media attention. Its outcome will provide helpful guidance on the importance of the FRAND licensing commitment. These commitments will become increasingly important with the “internet of things” (IoT) as more vertical sectors begin to deploy standardized communication technologies. Some organizations – including ACT | The App Association – have issued public statements regarding the importance of this case. The fact that there are differing views on the case being expressed simply underscores the need for judicial guidance on these key issues. This blog post aims to provide the facts of and context around the FTC’s action against Qualcomm – what it is, and what it is not.
There is little serious debate today over whether patent licensing abuses, particularly in the case of Standards Essential Patents (SEPs), pose a major threat to the economics and competitiveness of any industry that relies on standards to produce products and services that can communicate or interoperate. SEP licensing abuses – where SEP holders demand unreasonable licensing terms from those seeking to implement these industry standards - are deeply damaging to technology advancements and American consumers who benefit from these advances. As we have explained in a number of other blog posts, FRAND commitments – made voluntarily by patent owners in order to have their patents included in a widely-used standard – are intended to provide important safeguards to implementers while providing these patent holders with the opportunity to seek reasonable licensing terms. The resulting standards can then provide an effective foundation for further competition and new innovation. As a result, FRAND is a cornerstone of future technology-driven improvements in the products and services we increasingly use in our personal and work lives. Reasonable access to SEPs in industry standards is a “must have” for those who want to have a legitimate chance to compete in new tech-driven areas, such as IoT.
So when a patent owner promises to give access to those SEPs on FRAND terms, and then breaks that promise, it can present incredible burdens on implementers of the standard. This is especially true for small businesses relying on such promises in good faith. Small businesses simply do not have the resources to address financially debilitating litigation and other gamesmanship when it comes to implementing industry standards. When FRAND promises are broken, these innovators face a choice: (i) accept excessive royalty demands made by the SEP holders, (ii) change their product’s design in order to not use the agreed-upon standard (imagine the impossible task of designing around standard electrical sockets), or (iii) more practically, abandon their business plans altogether. In the end, competition and innovation is stunted and it is the consumer who suffers resulting fewer choices and higher prices.
Led by the U.S. government’s policies well over a decade ago, a diversity of competition agencies around the world have come to recognize the impact of certain SEPs-related abuses. By intervening in some instances where patent holders fail to honor FRAND commitments, competition authorities have indicated that upholding these promises benefits the economy and protects consumers. The natural result of FRAND abuses is that there are fewer end products and higher prices, and consumers and innovators lose if the FTC and other competition authorities fail to appropriately hold patent owners to the FRAND promises they make.
Entities that have benefited from what a number of regulators have asserted are anti-competitive abuses of FRAND-encumbered SEPs have a deep interest in seeking to prevent any developments that would further clarify what FRAND obligations mean so that they can continue their licensing practices. They suggest, for example, that government action seeking to protect consumers and competition from their conduct is motivated by politics or a desire to discriminate against American businesses, ignoring the fact that a large number of American companies support the FTC’s action to address SEP abuse. We should not be distracted from the economic and consumer harms, particularly on small businesses, that FRAND abuse causes in the United States and elsewhere.
With its action against Qualcomm in a California federal court, the FTC has moved to ensure that FRAND promises have meaning. Regardless of the outcome, this suit, which the FTC brought in good faith, should be heard on its merits, and its resolution will help contribute to clarity regarding the effect of a FRAND commitment and what related conduct is or is not acceptable. All stakeholders impacted by SEPs – particularly small business innovators that the App Association represents – will benefit as a result.