Judge Koh Responses on Antitrust-IP Intersection Promise More of the Same

On October 5, the Senate Judiciary Committee considered the nomination of Judge Lucy Koh, currently of the U.S. Federal District for the Northern District of California, to an appointment by President Biden to the United States Court of Appeals for the Ninth Circuit. After that hearing, several Senators submitted written questions, which Judge Koh responded to last week.

Unusual Level of Interest in FTC v. Qualcomm Rationale

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There is no indication that Judge Koh’s nomination to the Ninth Circuit is in jeopardy, but it is noteworthy, and at least somewhat unusual, numerous Senators asked Judge Koh virtually the same questions regarding her decision in FTC v. Qualcomm. This level of overlapping interest by multiple members of the Senate Judiciary Committee, which IPWatchdog.com has learned was not coordinated and developed organically, is normally reserved for nominees to the Supreme Court, and even then, typically reserved to social or constitutional issues. So, even though it is believed Judge Koh can and will easily receive a favorable confirmation vote, the questions relating to the intersection of antitrust and patent law demonstrate a keen awareness and interest in these issues on the Senate Judiciary Committee.

Senators Dick Durbin (D-IL), Tom Cotton (R-AR), Ted Cruz (R-TX), Mike Lee (R-UT), and Thom Tillis (R-NC) all directed pointed written questions to Judge Koh that asked her to explain the rationale for her decision in FTC v. Qualcomm, which was subsequently overruled by the Ninth Circuit and not appealed to the Supreme Court by the Federal Trade Commission.

Judge Koh summarized the FTC position, and her decision as follows:

The FTC identified three specific practices as anticompetitive. First, the FTC challenged Qualcomm’s practice of refusing to sell code division multiple access (“CDMA”) modem chips and premium Long Term Evolution (“LTE”) modem chips to an original equipment manufacturer (“OEM”) unless “the OEM sign[ed] a separate patent license agreement.” Qualcomm, 411 F. Supp. 3d at 697. Second, the FTC challenged Qualcomm’s practice of refusing to provide licenses for standard essential patents (“SEPs”) to rival chip manufacturers. Id. at 758. Third, the FTC challenged Qualcomm’s de facto exclusive dealing contracts with Apple. Id. at 763.

After considering all the evidence and the parties’ arguments, I found that “Qualcomm’s licensing practices have strangled competition in the CDMA and premium LTE modem chip markets for years, and harmed rivals, OEMs, and end consumers in the process.” Id. at 812. I also found that “Qualcomm’s conduct ‘unfairly tends to destroy competition itself.’” Id. (quoting Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993)). Applying the above-described legal standards to these factual findings, I “conclude[d] that Qualcomm’s licensing practices [we]re an unreasonable restraint of trade under § 1 of the Sherman Act and exclusionary conduct under § 2 of the Sherman Act.” Id. (citing Microsoft, 253 F.3d at 58-59). Thus, I held that “Qualcomm’s practices violate[d] § 1 and § 2 of the Sherman Act” and that Qualcomm was “liable under the FTC Act, as ‘unfair methods of competition’ under the FTC Act include ‘violations of the Sherman Act.’” Id. (quoting Fed. Trade Comm’n v. Cement Inst., 333 U.S. 683, 693-94 (1948)).

Defending her decision, Judge Koh explained to the Committee that when the case was appealed, “the Ninth Circuit reviewed a different set of arguments and evidence than I did.” She explained:

First, the FTC changed its theory regarding Qualcomm’s refusal to license SEPs to rival chip manufacturers. Second, the Department of Justice submitted merits arguments in support of Qualcomm for the first time on appeal and introduced new evidence on appeal. Third, retired Federal Circuit Judge Paul R. Michel submitted for the first time on appeal an argument about a method for calculating patent royalties and an argument that antitrust law should not be used to resolve disputes involving patent license agreements. Fourth, former FTC Commissioner Joshua Wright submitted for the first time on appeal an argument that the antitrust laws should not be used to resolve contract disputes between private parties. The Ninth Circuit noted all these developments and specifically relied on Judge Michel’s and Mr. Wright’s briefs for its conclusion regarding Qualcomm’s refusal to license SEPs to rival chip manufacturers. Qualcomm, 969 F.3d at 997.

What Koh’s Responses Ignore

While this answer will likely satisfy the Senate Judiciary Committee, it conveniently glosses over what really happened and makes it seem like the case she decided was different than the case that was decided by the Ninth Circuit, which is not true. The facts were the same, and to the extent different legal arguments were made it was because Judge Michel, Mr. Wright, the Department of Justice and others had to point out that Judge Koh’s ruling violated basic tenets of antitrust law. Indeed, the Department of Justice brief explained that Judge Koh’s decision “reflects basic misunderstandings of antitrust law.”

What Judge Koh leaves out of the explanation of her decision is that it contradicted Supreme Court precedent and expanded the duty to deal beyond anything the Supreme Court had previously acknowledged. See e.g. FTC v. Qualcomm Decision Mangles Sherman Act Section 2. Judge Koh’s decision, for example, went well beyond the outer bounds of the Supreme Court’s decisions in in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) and  Verizon Communications Inc. v. Law Offices of Curtis v. Trinko LLP, 540 U.S. 398 (2004), which establish the right to refuse to deal unless there is no valid business reason for the refusal. In this case, Qualcomm elected not to deal with competitors and chose to join a more lucrative business venture licensing at the device-level. Therefore, unlike those in Aspen Skiing, the actions of Qualcomm were of the sort never found to violate the antitrust laws, at least prior to Judge Koh’s decision.

Indeed, the Ninth Circuit in overturning Judge Koh’s decision held that “none of the required elements for the Aspen Skiing exception were present, and the district court erred in holding that Qualcomm was under an antitrust duty to license rival chip manufacturers.” The Ninth Circuit also said there was no evidence in the record to uphold Judge Koh’s finding that “Qualcomm terminated a ‘voluntary and profitable course of dealing’ with respect to its previous practice of licensing at the chip-manufacturer level”. The Ninth Circuit also found there was no evidence that Qualcomm singled out any specific chip supplier for anticompetitive treatment in its SEP-licensing practices.

Judge Koh, who said she would apply the Ninth Circuit’s decision in FTC v. Qualcomm moving forward, summarized her understanding of the Court’s decision as follows:

The Ninth Circuit held that the FTC failed to show that Qualcomm’s practices violated Section 2 of the Sherman Act. First, the Ninth Circuit held that “Qualcomm’s practice of licensing its SEPs exclusively at the OEM level does not amount to anticompetitive conduct in violation of § 2, as Qualcomm is under no antitrust duty to license rival chip suppliers.” Id. at 1005. Although the Ninth Circuit declined to address whether “Qualcomm has breached any of its [fair, reasonable, and non-discriminatory] commitments,” the Ninth Circuit stated that “the remedy for such a breach lies in contract and patent law.” Id. Second, the Ninth Circuit held that “Qualcomm’s patent-licensing royalties and ‘no license, no chips’ policy do not impose an anticompetitive surcharge on rivals’ modem chip sales.” Id. According to the Ninth Circuit, “these aspects of Qualcomm’s business model are ‘chip-supplier’ neutral and do not undermine competition in the relevant antitrust markets.” Id. Third, the Ninth Circuit held that “Qualcomm’s 2011 and 2013 agreements with Apple ha[d] not had the actual or practical effect of substantially foreclosing competition in the CDMA modem chip market.” Id. “Furthermore, because these agreements were terminated years ago by Apple itself, there [was] nothing to be enjoined.” Id.

Most of what Judge Koh answered was a repetition of the statements above, cut and pasted as necessary to address the scope of the question asked by each Senator.

With respect to a question from Senator Tillis about her finding that Qualcomm’s offered royalty rate was “unreasonable,” Judge Koh explained:

Under Federal Circuit law, “it is generally required that royalties be based not on the entire product, but instead on the ‘smallest salable patent-practicing unit.’” LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012). There is a “narrow exception to this general rule,” which states that “[i]f it can be shown that the patented feature drives the demand for an entire multi-component product,” it is reasonable for the royalty to be “a percentage of revenues or profits attributable to the entire product.” Id.

Applying this precedent, I determined that Qualcomm had not based its royalty rate on the “smallest salable patent-practicing unit” and that the trial record established that modem chips do not drive demand for mobile handsets. Fed. Trade Comm’n v. Qualcomm Inc., 411 F. Supp. 3d 658, 782 (N.D. Cal. 2019). Accordingly, in light of my other findings that Qualcomm had inflated its royalty rate, I did not find it necessary to separately find what the reasonable rate was.

Judge Koh’s response begins correctly and then veers off course without acknowledging her error. While it is absolutely true that apportionment is required, the smallest salable patent-practicing unit is not mandatory. As best and most succinctly explained:

Judge Randall Rader, while sitting as a district court judge, coined the term “smallest saleable patent-practicing unit” in the context of an evidentiary ruling on the admissibility of certain damages testimony in a jury trial. The determination of admissibility lies in the discretion of the trial judge, and in the damages context, identifying an SSPPU can be one useful guidepost. But the SSPPU concept was never intended to be, and is not, a rigid rule prescribing how patent damages and royalties must be calculated in all contexts. Notably in the 2015 case of Commonwealth Scientific & Industrial Research Organization v. Cisco Systems, Inc. (“CSIRO”), the Federal Circuit rejected the argument that all damages models must be based on SSPPU and instead affirmed a district court’s use of a damages analysis that made no reference to SSPPU.

See David Kappos & Hon. Paul R. Michel, The Smallest Salable Patent-Practicing Unite: Observations on its Origins, Development, and Future, 32 Berkeley Tech. L.J. 1433 (2018). Recently, the United States Court of Appeals affirmed a district court ruling in HTC v. Ericsson, where the jury based the royalty not on the SSPPU argued by the defendant HTC, but on comparable licenses argued by Ericsson. Therefore, it is simply erroneous to suggest that royalties or damages must be based on the SSPPU.

Dodging the New Madison Question

Judge Koh also dodged questions from Senator Tillis relating to the New Madison Approach, adopted by former Assistant Attorney General Makan Delrahim as a means of addressing the nexus between antitrust and patent law. Judge Koh simply deflected by saying it would be inappropriate for her to comment on any particular legal argument outside the context of an actual dispute, but that she would consider such arguments based on the New Madison Approach “fully and fairly and apply United States Supreme Court and Ninth Circuit precedent.”

Of course, those familiar with Judge Koh’s decision in FTC v. Qualcomm can likely predict how she will react to arguments based on the New Madison Approach. Unless Judge Koh fundamentally changes her view of antitrust law, it seems likely that she will hold views largely in line with those of implementers and contrary to the interests of innovators.