Antitrust Alert: Japan Challenges "Essential" Patent Licenses Under Anti-Monopoly Act
The Japan Fair Trade Commission ("JFTC") has announced a cease and desist order requiring that Qualcomm Inc. rescind license provisions that required licensees to cross-license their patents to Qualcomm and refrain from asserting their own patents against Qualcomm or Qualcomm licensees. The second such order in the last two years, the JFTC has clearly signaled that it views such provisions as unlawful when imposed by a dominant licensor of "essential" IP rights.
The patents in question bear on standards for cellular equipment that had been adopted for use in Japan. In 2000, the Association of Radio Industries and Businesses ("ARIB"), designated by the Japanese Ministry of Posts and Telecommunications as responsible for communications standards in Japan, adopted W-CDMA and CDMA2000 as the third-generation (3G) wireless telecommunications standards, in accordance with the international standard adopted by the International Telecommunication Union. ARIB announced that any company owning intellectual property rights essential to the manufacture and sale of 3G ARIB standards-compliant devices ("Essential IP Rights") must submit to ARIB a letter declaring what Essential IP Rights the company owns and that the company must license the IP unconditionally or under Fair, Reasonable and Non-Discriminatory ("FRAND") terms.
An owner of Essential IP Rights, Qualcomm submitted its confirmation letter to ARIB, declaring that Qualcomm would license its IP on FRAND terms. At least one Japanese manufacturer also did the same.
Licensing Conduct Challenged
Given Qualcomm's declaration, Japanese handset manufacturers recognized that they had to obtain licenses from Qualcomm to manufacture or sell their own CDMA wireless telecommunications products. The JFTC alleged that, despite its FRAND commitment, Qualcomm had demanded that the Japanese handset manufacturers agree in their licenses that they would grant Qualcomm royalty-free licenses to their IP (a cross-license) and not to assert their own IP rights against Qualcomm, Qualcomm customers, or Qualcomm licensees (non-assertion provisions).
According to the JFTC, the Japanese handset manufacturers had no choice. To manufacture standards-compliant devices, the Japanese Manufacturers needed to license the Qualcomm IP. And to encourage acceptance of the cross-license and non-assertion provisions, Qualcomm had threatened to increase the manufacturers' lump-sum contract payment Qualcomm's license terms and to file lawsuits seeking to enjoin the Japanese manufacturers from selling 3G standards-based wireless base stations.
Effects of the Licensing Conduct
In its order of September 28, 2009, the JFTC found that the Qualcomm non-assertion provisions tended to diminish the incentives of Japanese manufacturers to engage in research and development related to products using CDMA technologies and to further strengthen Qualcomm's position in these technology markets, impeding fair competition. The JFTC found that the cross-license and non-assertion provisions violated section 13 (trading on restrictive terms) of the Designation of Unfair Trade Practices (JFTC Public Notice No.15 of 1982) and also Article 19 of the Antimonopoly Act.
Cease and Desist Order
The JFTC ordered Qualcomm to rescind the royalty-free cross-license provisions, to rescind the Non-Assertion Provisions, and to refrain from similar conduct regarding Qualcomm IP rights related to wireless telecommunications. Qualcomm also was ordered to notify the Japanese manufacturers of the measures it has taken to comply with the rescissions of the cross-license and non-assertion provisions. The order applies to Qualcomm licenses with Japanese handset manufacturers, Japanese handset sellers, Japanese base station (antenna equipment which supports mobile service) manufacturers, and Japanese base station sellers.
Under the AMA, Qualcomm may request a hearing on the matter to challenge the JFTC's factual and legal conclusions. On September 30, Qualcomm announced it "will exercise its right under Japanese law to have a full evidentiary hearing. If the JFTC affirms the order following administrative review, Qualcomm will pursue an appeal before the Japanese courts."
Similarities to the JFTC Microsoft Decision
In September 2008, the JFTC issued a similar order relating to Microsoft license agreements with OEMs for sales of the Microsoft Windows operating system. The JFTC required that Microsoft eliminate all provisions requiring OEM Windows licensees not to assert their IP rights against Microsoft. In that decision, the JFTC stated that Microsoft's actions might adversely affect the fair competition in the PC audio/visual technology market and violated section 13 (trading on restrictive terms) of the Designation of Unfair Trade Practices and Article 19 of the Antimonopoly Act.
The JFTC's challenge to Qualcomm's cross-license provisions and its prohibition of non-assertion provisions in both the Microsoft and Qualcomm cases provides a strong indication that such clauses will be strictly scrutinized and are likely to be regarded as a violation of the Antimonopoly Act if imposed by a dominant licensor of "essential" IP rights.
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