FTC, Qualcomm offer closing arguments in trial over mobile chip licenses

The United States Federal Trade Commission’s case versus Qualcomm is now in the hands of a judge.

On Tuesday the 2 sides provided their hour-long closing arguments in a case that might have huge ramifications for the innovation world. The FTC has actually implicated Qualcomm of running a monopoly in the mobile chip market, which injured competitors and triggered handset makers to raise their rates.

For the FTC to win the case, it has the concern of revealing that Qualcomm had a monopoly, that it had market power which it utilized that power in settlements with handset makers to command high royalties. The FTC likewise needs to reveal that Qualcomm’s conduct hurt rivals which the anticompetitive actions continue or will begin once again in the future.

FTC lawyer Jennifer Milici kicked things off Tuesday afternoon by detailing how Qualcomm utilized its power in the 3G and 4G chip market to require handset makers like Apple to sign licensing contracts with exceedingly high royalties. If Qualcomm isn’t stopped, she stated, it’ll do the exact same thing in the 5G market.

Qualcomm “acquired monopoly power in the modem chip market and instead of simply competing on its merits” set up “roadblocks” that injured competitors, Milici stated. “It’s beyond dispute the conduct is ongoing.”

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FTC vs. Qualcomm: Why you should care

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Qualcomm attorney Robert Van Nest of law firm Keker, Van Nest & Peters, argued during his closing that the FTC didn’t meet its burden in the case and that Qualcomm won business “through superior innovation and better products.”

“High royalties alone is not the basis for their complaint of harm,” Van Nest said. “They have to show harm to competition.” But he said such harm hasn’t occurred: Intel now supplies all modems for Apple’s iPhones, MediaTek is the world’s second biggest wireless chipmaker, and Samsung and Huawei have developed their own modems. 

“If the task is to decide whether Qualcomm maintained its position through innovation, skill, technology or through licensing practices, it’s a lay-down hand,” Van Nest said. The FTC hasn’t “proven anything with respect to licensing practices that had impact on advancement of this technology.”

Qualcomm has been battling the FTC in a San Jose, California, courtroom since Jan. 4. The FTC wrapped up its antitrust case against the company on Jan. 15, and Qualcomm rested its defense Friday. The trial has revealed the inner workings of tech’s most important business, smartphones, showing how suppliers wrestle for dominance and profit. 

Judge Lucy Koh will now decide the outcome of the case. She noted earlier in the trial that she likely won’t be issuing her normal speedy decision, as she has a lot of evidence, testimony and case law to consider. Still, the FTC on Tuesday asked for a possible timeline for the decision. It’s facing another government shutdown in mid-February and would have to justify keeping lawyers on the clock if a verdict was impending.

Koh said she didn’t know how long it would take but asked the FTC to check in again before a potential shutdown. 

“I’m generally fairly fast,” Koh said. “[But] something of this magnitude is going to take longer” than other typical movements.

Qualcomm is the world’s most significant supplier of mobile chips, and it developed innovation that’s vital for linking phones to cellular networks. The business obtains a substantial part of its income from licensing those innovations to numerous gadget makers, with the charge based upon the worth of the phone, not the elements.

Because Qualcomm owns patents connected to 3G, 4G and 5G networking innovation, along with other functions like software application, all handset makers constructing a gadget that links to cellular networks need to pay it a licensing charge, even if they do not utilize Qualcomm’s chips.

But the FTC suit might break that design. The United States federal government has actually implicated Qualcomm of running a monopoly in cordless chips, requiring consumers like Apple to deal with Qualcomm solely and charging “excessive” licensing charges for its innovation, in part by wielding its “no license, no chips” policy. Qualcomm’s practices avoided competitors from getting in the marketplace, increased the expense of phones and in turn injured customers, who dealt with greater handset rates, the FTC stated.

Qualcomm states the FTC’s suit is based upon “flawed legal theory.” It’s likewise states consumers select its chips due to the fact that they’re the very best which it’s never ever stopped offering processors to consumers, even when they’re fighting over licenses.

“The FTC hasn’t come close to meeting its burden of proof in this case,” Don Rosenberg, executive vice president and basic counsel of Qualcomm, stated in a declaration Tuesday following closing arguments. “All real-world evidence presented at trial showed how Qualcomm’s years of R&D and innovation fostered competition, and growth for the entire mobile economy to the benefit of consumers around the world. Our licensing rates — which were set long before we had a chip business, and revalidated time and again — fairly and accurately reflect the value of our patent portfolio. Qualcomm’s technology has been the foundation of a thriving, competitive industry.”

No license, no chips

During the trial, the FTC called witnesses from business like Apple, Samsung, Intel and Huawei and had professionals affirm about the supposed damage Qualcomm’s licensing practices have actually triggered the mobile market.

Qualcomm, on the other hand, called business executives, agents from handset makers and chip competitors, and economics professionals to challenge the FTC’s accusations in the event. The business looked for to reveal that competitors is healthy in the mobile chip market which Qualcomm hasn’t obstructed the market.

The business has actually argued that its broad patent portfolio and developments validate its charges. CEO Steve Mollenkopf, who took the stand early in the trial, safeguarded the business’s licensing practices, stating the method his business offers chips to smart device makers is finest for everyone included and is the easiest method to certify the innovation.

The heart of the FTC’s case versus Qualcomm is a so-called “no license, no chips policy.” Qualcomm offers processors that link phones to cellular networks, however it likewise certifies its broad portfolio as a group. For a set charge– based upon the asking price of completion gadget, generally a phone– the maker gets to utilize all of Qualcomm’s innovation. It’s phone makers that pay the licensing charge, not chipmakers.

To get access to Qualcomm’s chips, which are broadly thought about to be on the bleeding edge of cordless development, a phone maker initially needs to sign a patent licensing agreement withQualcomm The business has actually long been the leader in 4G LTE, and it leads competitors in the nascent 5G market. The highest-end phones, like those from Samsung, have actually tended to utilize its modems. But the FTC argues such a requirement harms competitors and cements Qualcomm’s monopoly power.

Apple Chief Operating Officer Jeff Williams affirmed that his business felt it needed to sign agreements for quantities it believed too expensive– a royalty of $7.50 per iPhone– to keep access to Qualcomm’s chips.

“We were staring at an increase of over $1 billion per year in licensing, so we had a gun to our head,” Williams stated as he discussed why Apple signed another licensing arrangement in 2013, in spite of being dissatisfied with the terms. He included that Apple has actually wished to utilize Qualcomm’s chips for its more recent gadgets, however Qualcomm declined to offer processors for the iPhone.

Other business, like Huawei and Lenovo, made comparable remarks throughout their testament. And throughout the trial, the FTC has actually indicated interaction from a previous Qualcomm licensing executive, Eric Reifschneider, to mobile chip consumers like Motorola and Sony Mobile as proof of dangers to cut off supply.

In one circumstances, Reifschneider composed in an e-mail to a Sony Mobile executive that “QCT (Qualcomm’s chip business) has been shipping chips to SMC (Sony Mobile) for almost three weeks now without a license in place. It will not be possible for that to continue.”

But Qualcomm and executives from some business have actually affirmed that Qualcomm has actually never ever cut off chip supply throughout agreement settlements. Some of those executives have actually stated in live testament and video depositions provided by Qualcomm that its competitors didn’t have actually the innovation needed for their gadgets.

Matthias Sauer, an Apple executive and a witness called by Qualcomm, affirmed previously in January that Intel’s modems didn’t satisfy the technical requirements needed for the business’s iPhones in2014 Though Intel likewise could not satisfy Apple’s chip requirements for the iPad, it would’ve utilized them anyhow, he stated, had Qualcomm not provided rewards to stick with its chips. His remarks echoed remarks from coworker Tony Blevins early in the trial.

Qualcomm, on the other hand, has stated it had genuine organization factors for having stringent agreements with Apple, consisting of how pricey it is to develop modems particularly forApple

Sparring throughout closing arguments

On Tuesday, FTC lawyer Milici argued that the no license, no chips policy “put up roadblocks for competitors.” She stated there was “consistent” testament from handset makers such as Apple, Samsung, Lenovo, Motorola and LG that they stressed they ‘d lose access to Qualcomm’s modems if they didn’t sign licenses under terms they didn’t like.

“Qualcomm has stated unambiguously that it has never threatened chip supply,” Milici stated. “This is just a semantic trick.” In “example after example,” she stated, Qualcomm required hard terms, the consumer withstood, then Qualcomm stated if the 2 sides didn’t reach arrangement, the consumer would not have the ability to purchase chips any longer.

“Customers who heard these statements certainly viewed them as threats,” she stated. “Internal Qualcomm documents show Qualcomm executives knew their comments would be taken as threats, and they were intended to be taken that way.”

Milici included that “the fact they didn’t have to cut off chip supply is proof of market power.” Customers had no other feasible modem alternatives, so they needed to sign licensing handle Qualcomm to get its chips.

“We don’t know and can’t know what the market would look like without” Qualcomm’s licensing practices injuring competitors, Milici stated. She stated there’s no chance to understand if Qualcomm would’ve been initially in LTE had it not tossed up barriers for chip rivals. “The entire market was affected by roadblocks,” she stated. “We do not understand how effective [Qualcomm’s rivals] would have been.”

Qualcomm lawyer Van Nest, on the other hand, stated throughout his closing arguments that the business that affirmed did so due to the fact that they wish to pay lower licensing rates.

“They’re all big sophisticated companies with their own leverage,” he stated. “Their testimony was, ‘Oh yeah, we felt threatened and had to do what we did.’ I would say this testimony was presented to this court in a very misleading fashion.”

Van Nest kept in mind that the FTC provided video testament from business like BlackBerry and Lenovo, where executives stated they felt threatened byQualcomm But Qualcomm could not provide inconsistent testament– where the executives stated they never ever in fact gotten dangers or had their chip supply cut off– till it was its rely on provide its defense.

He likewise stated the FTC stopped working to reveal that Qualcomm had any market power after2016 That September was the very first time Apple utilized Intel chips in the iPhone. And competitors in mobile chips has actually just gotten more intense ever since, with Qualcomm losing share in that market and MediaTek and Intel stating they’ll quickly have 5G chips offered.

“We know 5G is going to be competitive,” Van Nest stated. “There is no evidence of plausible chip leverage.”

‘Heavy hammer’

Both sides provided economics professionals throughout the course of the trial to support their arguments.

In the case of the FTC, Carl Shapiro, a teacher of economics at the University of California, Berkeley, offered the crucial testament about Qualcomm’s effect on the mobile market. His testament looked for to reveal that Qualcomm’s “unusually high” royalty rates harm rivals, handset makers and customers.

Shapiro at first took the stand 2 weeks ago, detailing how Qualcomm continues to harm the mobile chip market. He affirmed once again Monday as the FTC’s crucial rebuttal witness.

Losing access to Qualcomm’s modems would enforce expenses on handset makers, consisting of not having the ability to provide to customers, Shapiro stated in his preliminary testament.

“That’s a very heavy hammer that Qualcomm is bringing down, at least as a threat, in those negotiations,” Shapiro stated.

As part of its defense, Qualcomm recently called 3 economics professionals to rebut Shapiro’s claims. They affirmed that Shapiro’s method was flawed which he didn’t consider what was taking place in the real life.

Dueling professionals

Aviv Nevo, a University of Pennsylvania economics and marketing teacher, on Friday cast doubt on Shapiro’s usage of theory to identify the damage supposedly triggered by Qualcomm’s licensing practices. Instead, Nevo stated he analyzed the “real-world” contracts Qualcomm had with business to identify that the rates weren’t extreme.

Nevo affirmed that the FTC’s theory that Qualcomm utilizes its power in the chip market to charge extreme royalty rates “is just not born out of actual market data.” He stated “there’s no support for the theory in the data.” Nevo likewise affirmed that the mobile market is strong.

“At a high level, this is a thriving industry,” Nevo stated. “Prices are declining. Quantities are skyrocketing.”

Nevo likewise stated there were genuine organization factors for Qualcomm’s licensing policies. “One is reduction in transaction cost,” he stated. “The other is allowing rival chipmakers to operate freely with access to tech without a need for a license.”

Shapiro on Monday stated a few of Nevo’s method, conclusions and presumptions were “fabricated,” “outrageous” and “all ruined.” He kept in mind that Nevo’s method had “measurement problems.” He likewise stated that Nevo failed by refraining from doing a test to identify when Qualcomm had market power.

Last Tuesday, Edward Snyder, dean of the Yale School of Management and a teacher of economics and management, slammed Shapiro’s method and stated the issues Qualcomm’s competitors had was because of options they made that had absolutely nothing to do withQualcomm

He kept in mind that 3 elements describe a business’s success or failure: insight, financial investment and execution. Snyder assessed Intel, MediaTek, Broadcom and others to analyze their position in the market and how they carried out based upon those 3 elements.

Intel, for one, “exhibited … poor foresight about the industry. They invested inefficiently, and they encountered execution problems,” stated Snyder, who at one time worked for the Justice Department’s antitrust department. MediaTek had excellent insight and financial investment, however it had some execution issues, Snyder stated. It has actually now dealt with those, assisting it end up being theNo 2 modem provider worldwide. Broadcom, for its part, stopped working on all 3, Snyder stated, triggering it to leave the modem market.

And Tasneem Chipty, an expert in competitors policy and antitrust economics from consultancy Matrix Economics, assaulted Shapiro’s meaning of the marketplace and of market power.

She implicated Shapiro of taking a “shortcut” when examining whether the mobile chip market was competitive and stated he “has overstated Qualcomm’s market power.” She stated there’s no “evidence of consistent and unconstrained market power of the type” that would harm competitors or “persuade OEMs [handset makers] into difficult organization terms that would rob them of billions of dollars.”

Licensing competitors?

The FTC has actually stated Qualcomm’s rejection to offer licenses to its chip competitors belongs to its efforts to keep its monopoly. Judge Koh in November concurred and ruled that Qualcomm needs to license its cordless chip patents to its chip rivals likeIntel

But Dirk Weiler, head of requirements policy at Nokia, affirmed recently that it has actually long been market requirement to certify innovation to handset makers, not chipmakers. Along with his function at Nokia, Weiler likewise functions as chairman of the European Telecommunications StandardsInstitute The not-for-profit requirements body’s Intellectual Property Rights Policy needs business to offer licenses for devices.

“What is my understanding of the industry practice is in the case of the cellular business, this means these companies license, for example, the handset and not any subpart of the handset,” Weiler stated.

And Nevo on Friday stated if Qualcomm does not certify at the gadget level any longer, things might get made complex quickly. If the business changed to just accrediting at the chip level, it would require to provide several tiers, due to the fact that a few of the innovation would use to a general phone and not simply the processor.

“The number of license agreements would be large,” Nevo stated. But the genuine concern “is the fact each negotiation now will become a lot more complex. Parties, chipmakers and OEMs, would have incentives to point to the other party as the one actually practicing on the license.”

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