California Judge Rules that Qualcomm Violated American Antitrust Law

In 2017, the Federal Trade Commission (FTC) charged semiconductor and telecommunications equipment giant, Qualcomm, with anticompetitive behavior. After a protracted legal battle, Judge Lucy Koh of the District Court for the Northern District of California ruled that the company had indeed violated antitrust law, creating potentially seismic repercussions for the chipmaker’s business – and the wireless chip market itself.

Allegations and Findings

The FTC suit “[alleged] that Qualcomm has used its dominant position as a supplier of certain baseband processors to impose onerous and anticompetitive supply and licensing terms on cell phone manufacturers and to weaken competitors.” Companies like Apple, BlackBerry, and others were reliant on Qualcomm chips in order to launch new products globally and would struggle – if not be completely paralyzed – without the supply.

That fact gave Qualcomm huge leverage when negotiating contracts. Ars Technica’s comprehensive breakdown of the legal opinion revealed the extent to which Qualcomm was able to “extract patent royalty rates that were far higher than those earned by other companies with similar patent portfolios.” For example, Qualcomm calculated licensing fees “based on the value of the entire phone, not just the value of chips that embodied Qualcomm’s patented technology,” giving them income independent of their own cellular technology patents. Internal data “showed [the company’s] patent licensing operation brought in $7.7 billion in 2016—more than the combined patent licensing revenue of 12 other companies with significant patent portfolios.”

Koh’s opinion details further questionable action from Qualcomm. Companies were required to sign patent licensing deals in order to gain access to Qualcomm technology necessary to their business – itself not an unusual stipulation. The deals were weighted heavily in Qualcomm’s favor, however, with the equipment-maker maintaining the option to terminate supply of vital parts should customers allow the deal to expire, attempt to renegotiate terms, or fight the structure of the deal in court.

Qualcomm also structured deals around terms “that explicitly discouraged companies from using non-Qualcomm wireless chips” by offering “rebates on every Qualcomm chip they sold.” The rebates were only obtainable, however, if cell phone manufacturers “used Qualcomm chips for at least 85 percent – or in some cases even 100 percent – of the phones they sold.” These rebates could generate significant income for the recipients – Apple received “hundreds of millions of dollars in rebates and marketing incentives between 2013 and 2016” – but Qualcomm could stop payments if Apple neglected to use Qualcomm chips.

The Ruling

Judge Koh’s multi-part ruling determined that, as structured, Qualcomm’s business practices were anti-competitive and failed to uphold their fair, reasonable, and non-discriminatory (FRAND) obligation of licensing pertaining to so-called standards essential patents.

The decision featured five stipulations: first, Qualcomm “must not condition the supply of modem chips on a customer’s patent license status and Qualcomm must negotiate or renegotiate license terms with customers in good faith under conditions free from the threat of lack of access to or discriminatory provision of modem chip supply or associated technical support or access to software.”

Second, the chipmaker must “make exhaustive SEP licenses available to modem-chip suppliers on [FRAND] terms and to submit, as necessary, to arbitral or judicial dispute resolution to determine such terms.” Third, Qualcomm is barred from “[entering] express or de facto exclusive dealing agreements for the supply of modem chips” – in other words, no more rebate deals. Fourth, “Qualcomm may not interfere with the ability of any customer to communicate with a government agency about a potential law enforcement or regulatory matter.”

The fifth provision is perhaps most important: “in order to ensure Qualcomm’s compliance with the above remedies, the Court orders Qualcomm to submit to compliance and monitoring procedures for a period of seven (7) years.” Qualcomm is required to “report to the FTC on an annual basis” regarding compliance on all orders.

Qualcomm’s Response

Qualcomm expressed “[strong disagreement] with the judge’s conclusions, her interpretation of the facts and her application of the law,” said executive vice president and general counsel of Qualcomm Don Rosenberg in a press release. A further statement called the evidence at trial “inconsistent with the real-world facts,” with Qualcomm’s dominance a byproduct of “the very essence of competition – innovation and superior products.” The company further maintained that the FTC “demonstrated no harm to competition, while other testimony portrayed a chip market that is thriving, dynamic, and innovative with intense competition, declining prices, improved chip performance, and declining Qualcomm market share.”

What Comes Next?

The legal battle is not over – Qualcomm will appeal the ruling at the Ninth Circuit Court of Appeals, asking Koh for a temporary stay until the appeal is heard. This means that any changes are speculative until the appeal is finalized. But should the ruling be upheld, companies like Samsung or Intel (should they choose to continue in the sector) can grab a more significant foothold in a market long dominated by one player. The cellular equipment landscape soon may look very different for chipmakers and cell phone manufacturers, but just how different remains to be seen.

Quandary Peak Research

Based in Los Angeles, Quandary Peak Research provides software litigation consulting and expert witness services. We rapidly analyze large code bases, design documents, performance and usage statistics, and other data to answer technical questions about the structure and behavior of software systems.

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