Does Qualcomm's Value Chain Licensing System Survive Its Settlement With Broadcom? (Part Two)

Does Qualcomm's Value Chain Licensing System Survive Its Settlement With Broadcom? (Part Two)

Sean O'Connor is a Professor at the University of Washington School of Law and Chair of the Law, Technology & Arts Group, specializing in intellectual property and business law involving biotechnology, cyberspace/information technology, and new media/digital arts.  Professor O'Connor is an IP Osgoode Research Affiliate.

This is the second part of Professor O'Connor's feature blog post "Does Qualcomm's Value Chain Licensing System Survive Its Settlement With Broadcom?" Part one can be read here.

Spring-boarding off the Quanta decision, Broadcom's declaratory judgment action argued that Qualcomm was misusing its patents to force upstream and downstream parties to license those patents in a "double recovery" or "double compensation" scheme.  Qualcomm's response was that the upstream and downstream parties were instead simply "sharing" the market value royalty in a beneficial diversification of the risk for either party, rather than either of them having to pay the full royalty and "collect" or "recoup" portions of it from others. 

As a preliminary point of analyzing the parties' claims, we should acknowledge that Quanta's "substantial embodiment" and method exhaustion holding brought into starker relief the fact that Qualcomm will now be seen to be licensing at least some patent claims twice.  In other words, it is harder now for Qualcomm to argue that it is licensing only the chip claims to the upstream chipmaker (under the APLA), and only the system claims to the downstream handset maker (under the SULA). This means that Qualcomm arguably now can only assert that its licensing system is proper on the grounds that it can license the same thing to two parties.  While neither party raised the following in their filings, there must be an implicit argument that vertical multiple licenses are more questionable somehow than horizontal multiple licenses.  Clearly, a patent owner can license the same patent to multiple unaffiliated parties in horizontal relation -- i.e., multiple chipmakers. So the second issue is why there would be anything wrong with licensing the same patent to multiple vertical parties?

Broadcom argued that because there is/will be a sale of the licensed chips from the chipmaker to the handset maker, the patent is exhausted as to the sold chips and thus Qualcomm has no legitimate property/rights to use as consideration in contracting with the handset maker to enter a SULA.  To follow this out, if the handset makers are only, or primarily, entering into the SULA under pain of a patent infringement suit, then Qualcomm is misusing its patents because it is extracting value beyond the legitimate patent monopoly in the realm of the patent-exhausted, sold (or to be sold) chips.  Of course, this presumes that the handset maker could buy the chips from the chipmaker absent the SULA, which of course it cannot because of Qualcomm's restrictions on the chipmaker through the APLA.  But Broadcom was trying to argue that Qualcomm is still misusing its patents because it has taken both upstream and downstream parties hostage, in a manner of speaking, by setting out a double license situation that is take-it-or-leave-it for both upstream and downstream parties. This is somewhat persuasive if one thinks of the licenses as being offered/granted at different times, such that the first offered/granted should preclude the ability to demand the second on pain of patent misuse.  But, when presented as a kind of simultaneous grant/offer to both upstream and downstream parties that merely partitions the full market value royalty and license fees between then, the system does not seem so problematic.

While I don't see anything invalid or illegal with Qualcomm's upstream and downstream licensing system from a pure patent licensing perspective (I am not commenting on whether such a system could be viewed as anti-competitive in some circumstances under antitrust/competition law), I do think that Broadcom raised an interesting additional issue.  Because the authorized chip sales from the APLA licensed chipmaker to the SULA licensed handset maker are indeed likely subject to patent exhaustion, if the handset maker does anything with the purchased chips in contravention of the SULA, then Qualcomm's only legal action is likely limited to contract remedies, and not patent infringement remedies.  This is because Qualcomm does not seem to have required APLA licensed chip makers to engage in only conditioned sales of chips to SULA licensed assemblers (which would raise the question about whether Mallinckrodt is still good law).  Many of us had been focused on the fact that post-Quanta there was still nothing improper about limiting a manufacturing license sell/vend right to a certain category of purchasers (such as Qualcomm's APLA limitation on chipmakers to sell only to SULA licensed handset makers).  But that is a completely separate issue from the fact that once the authorized sale of chips to a SULA licensed handset maker occurs, then exhaustion has likely applied to any further patent claims for those sales/chips.  It is possible that a licensing system in which the manufacturer's sell/vend license is limited not just to a category of purchasers, but also to appropriately conditioned sales to those purchasers, would preserve the right of the patent owner to pursue patent infringement claims against a wayward downstream licensee.  This will depend on the continued validity of Mallinckrodt as good law. But as to authorized unconditioned sales, Qualcomm may only assert breach of contract claims for the wayward SULA licensee who turns around and resells the chips or otherwise operates outside the scope of the SULA.  This is not to treat contract remedies as inconsequential, but unless extraordinary relief is provided for in the contract, then remedies on par with potent patent remedies such as injunctions will be unavailable.

When the district court dismissed Broadcom's declaratory judgment action -- for want of an active case or controversy in part because Broadcom is not a party to an APLA or SULA, and was not actively being threatened with a specific patent infringement suit from Broadcom at the time -- that denied us the chance to get a direct ruling on Qualcomm's licensing system. But the hope for an appeal that might have kept the case alive has been entirely snuffed out with the Settlement Agreement that includes the out of court settlement of all active disputes between the parties, including any appeal of the declaratory judgment dismissal.  Further, the Settlement Agreement is quite clear that by its own terms it does not question or disrupt any other licenses and agreements that the parties have with third parties, with the exceptions of some limited third party beneficiaries that are largely either Broadcom's or Qualcomm's customers.  Thus, Broadcom has effectively dropped, and released forever, its claims against Qualcomm's licensing system.  Further, while I am uncertain because of the redactions in the publicly released version of the Agreement, it does seem that its terms preserve the contours of Qualcomm's licensing system even as to Broadcom and its customers (with the provisions for "exhaustive" and "nonexhaustive" licenses, with the former perhaps being similar to SULAs and the latter similar to APLAs).  At the same time, the major division -- especially as Broadcom sums up the terms of the Agreement in the text of the 8-K itself -- seems to be that Qualcomm gets the combined patent portfolio under the cross license only for cellular products, while Broadcom gets the portfolio only for non-cellular products.  Further, Qualcomm will buy a substantial number of Broadcom's patents outright through an assignment provision in the deal.

Presumably the Settlement was signed off on by the various courts involved. And ending this patent war is likely good for the telecommunications and chip manufacturer community overall.  But one does have to worry about the anticompetitive effects of both Qualcomm's licensing system and the division of the cellular and non-cellular market between the parties.  On the other hand, I am generally in favor of at least the value chain licensing part as I think it promotes commercialization over the increasingly long value chains presented by modern high tech commercialization pathways.  So on balance, I'm more concerned that the Settlement "stick" and not fall apart too soon.  I have been watching the Showtime series "The Tudors" on DVD recently and I have visions of the Broadcom-Qualcomm Settlement as yet another of the "grand alliances" variously among England, France, and Spain of the historical period that would be honored while convenient, and cast away when not.