On May 21, U.S. District Judge Lucy Koh ruled that Qualcomm used its monopoly power to coerce companies into paying “unreasonably high” royalties on Qualcomm’s wireless inventions. In particular, Qualcomm’s practice of requiring handset makers such as Apple and Samsung to sign a patent license agreement before the handset maker could purchase their modem chips was deemed anticompetitive (the “no license/no chip” policy).

Qualcomm’s share-based rebates, in which Qualcomm required certain customers such as LG Electronics and Samsung to buy a percentage of its total chip from Qualcomm as a condition of getting a rebate (typically 85 percent), and Qualcomm’s exclusive deal with Apple (which also involved rebates on the royalty rate) also were deemed anticompetitive.

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Hal Singer: Doug, let’s talk about Qualcomm’s “no-license, no-chip policy” to set the stage. What is the traditional rubric under which antitrust assesses such conduct? It is tying? It is bundling? Exclusive dealing? Are these two separate products? What chapter of a future antitrust treatise would one find this case?

Doug Melamed: It could be in a variety of sections—including tying, monopolization, or antitrust and IP—but I think the more important point is to understand the substance of the issue. Qualcomm has monopoly power in chips. It ties its chips to licenses for its SEPs when used in either its chips or competitors’ chips. As with all such ties, the effect is to use some of its chip power to increase the price it can charge for the license. Unlike tying, though, to the extent only SEPs are involved, it does not divert demand from substitutes for the tied licenses. It might not increase the total price—chip plus license—for Qualcomm chips, but it directly increases the cost to the customer of competitors’ chips because it increases the price of the license.

Singer: I realize that conduct can straddle many bins, and that life is messy, but it helps our readers to know generally where this conduct fits.

Melamed: I understand, but analogies are usually imperfect. Qualcomm’s no license/no chips policy does not directly harm competition in any technology market. But the effect of the policy—increased price for licenses for rivals’ chips—harms competition in the chip market. The increased license price means either fewer chip sales by Qualcomm’s competitors or a reduced price of competitors’ chips to offset the artificial increase in the license price. In effect, Qualcomm imposes a tax on rivals and thereby reduces rivals’ incentives for innovation and entrenches Qualcomm’s monopoly. Although the factual impact takes some work to unpack, as a matter of law, it’s an easy case. It is an artificial contrivance that harms rivals to an existing monopoly.

Does the decision represent a victory for customer-facing tech platforms in their dealings with input providers? Could it threaten innovation or certain pricing models, as some scholars have claimed? And if so, which firms in the U.S. economy are most vulnerable to new antitrust liability? To answer those questions, we invited Jonathan Barnett of USC’s Gould School of Law, Stanford Law School’s Doug Melamed, and Fiona Scott Morton of Yale’s School of Management to a Bytes Chat. The Chat was moderated by Hal Singer, editor of Washington Bytes and Senior Fellow of the George Washington Institute of Public Policy. The transcript was edited lightly for readability, and each contributor had the opportunity to refine answers and add hyperlinks after the Chat.