30 September 2009

Japan Fair Trade Commission Accuses Qualcomm of Anticompetitive Practices

San Diego, USA-based Qualcomm is in the business of licensing patents its holds covering the CDMA wireless telephony standard. Such patents cover technologies related to CDMA integrated circuits and CDMA base stations. Qualcomm participates in various standards-setting organizations related to the CDMA standard in which Qualcomm promises to license its technically essential patents on fair, reasonable, and non-discriminatory terms. In reliance on such promises, the members of such standards-setting groups agree to approve and promote the CDMA-related standards in question. The Japanese government, specifically, the Japanese Ministry of Posts and Telecommunications (MPT), adopted such standards for exclusive use in Japan.

Qualcomm's patent licensing agreements with manufacturers of CDMA-based chips, base stations and other equipment mandate that such licensees agree never to assert patents such manufacturers may have that read on the same technologies that Qualcomm is licensing, on a royalty-free basis. Manufacturers who refuse to assent to this non-assertion covenant are denied access to the patent licenses from Qualcomm.

By order dated September 30, 2009, the Japan FTC has ordered Qualcomm to cease such licensing practices. The order itself can be found here. Qualcomm's press release regarding this order can be found here.

In its press release, Qualcomm justifies its practices by making the following assertions:

A) "None of our Japanese licensees were forced to enter into license agreements with us."

B) "The provisions at issue were subject to arms-length negotiations" and "are common in technology licensing agreements".

C) "These provisions promote 'patent peace' and reduce transaction costs and licensing fees."

With respect to the argument in (A) above, it's true that manufacturers are not obligated to license the patents from Qualcomm; but if they don't, they cannot manufacture telephony devices and equipment compliant with the telephony standards adopted by the Japanese government.

With respect to the assertion in (B), such provisions are not common, in my opinion. While it is not uncommon for a technology licensor to attempt to extract patent non-assertion covenants from its licensees, such clauses are rarely if ever agreed to unless the licensor has superior bargaining leverage over the licensee, or unless there's separate consideration flowing to the licensee in exchange for such non-assertion promises. Qualcomm knows that the licensees in Japan have little choice but to agree to Qualcomm's terms. As such, it's extermely doubtful that such provisions were truly the subject of "arms-length negotiations". Rather, they were, in all likelihood, presented to the Japanese manufacturers on a take-it-or-leave-it basis.

Finally, the argument in (C) that such clauses promote "patent peace" is true, but such peace accrues solely to the benefit of Qualcomm. The Japan FTC concluded that such clauses have the effect of frustrating legitimate research and development efforts of the Japanese manufacturers and thereby impede competition.

Qualcomm has sixty days to request an evidentiary hearing and Qualcomm has indicated that it intends to do so.

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