Qualcomm is a monopoly and needs to renegotiate offers, judge guidelines

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Qualcomm is a monopoly and must renegotiate deals, judge rules

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Qualcomm unlawfully injured rivals in the cordless chip market and utilized its dominant position to require unneeded licensing charges on handset makers like Apple, United States District Court Judge Lucy Koh stated in a long-awaited judgment provided late Tuesday.

Qualcomm needs to alter how it operates and renegotiate license handle its consumers, according to the judgment, which came 4 months after a trial over the concern ended. To hold the business responsible, Qualcomm should likewise send compliance and tracking reports for the next 7 years and report to the United States Federal Trade Commission on a yearly basis.

“Qualcomm’s licensing practices have strangled competition in the CDMA and premium LTE modem chip markets for years, and harmed rivals, OEMs, and end consumers in the process,” Koh composed in her judgment. 


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In a statement, Qualcomm said it would immediately seek a stay of the district court’s judgement and an expedited appeal to the US Court of Appeals for the 9th Circuit.

“We strongly disagree with the judge’s conclusions, her interpretation of the facts and her application of the law,” Don Rosenberg, executive vice president and general counsel for Qualcomm, said in a statement Wednesday.

FTC Competition Director Bruce Hoffman said in a statement Wednesday that “yesterday’s decision that Qualcomm’s practices violate the antitrust laws is an important win for competition in a key segment of the economy. FTC staff will remain vigilant in pursuing unilateral conduct by technology firms that harms the competitive process.”

Apple, which played a big role in the FTC’s case, declined to comment.

The ruling is a boon for Qualcomm’s customers and rivals, many of which supported the FTC’s case in hopes of securing lower licensing deals and getting greater access to the mobile market. Apple in particular played a large role in the case, with executives, such as Chief Operating Officer Jeff Williams, testifying that they felt they had no option but to agree to Qualcomm’s terms. If Apple didn’t give into Qualcomm’s demands, he said, it worried about losing access to Qualcomm’s chips.

During the trial, the FTC argued Qualcomm’s licensing policies hurt consumers by causing higher smartphone pricing. But even though Koh ruled in the FTC’s favor, there’s little chance that handset makers like Apple and Samsung will lower their prices. Instead, even as Qualcomm has lowered its licensing rates, prices for the latest and greatest devices from those companies and others have continued to rise. 

Antitrust arguments

The decision comes more than two years after the FTC accused Qualcomm of operating a monopoly in wireless chips. The FTC said Qualcomm forced customers like Apple to work exclusively with it and charged “excessive” licensing fees for its technology, in part by wielding a “no license, no chips” policy. Qualcomm’s practices prevented rivals from entering the market, drove up the cost of phones and in turn hurt consumers, who faced higher handset prices, the FTC said.

Qualcomm argued the FTC’s lawsuit was based on “flawed legal theory” and that customers choose its chips because they’re the best. It also argued that competition is fierce in the mobile chip market and that Qualcomm never stopped providing processors to customers, even when they’ve been arguing over licenses.

The two sides battled in a San Jose, California, courtroom for most of January. The FTC wrapped up its antitrust case against the company on Jan. 15, and Qualcomm rested its defense 10 days later. Both sides presented closing arguments Jan. 29. The trial revealed the inner workings of tech’s most important business, smartphones, showing how suppliers wrestle for dominance and profit.

For Qualcomm, the verdict calls into question the company’s entire business model. While it sells processors that connect devices to mobile networks, it also generates a significant percentage of its revenue from licensing. If it can’t collect royalties based on the value of a handset — which it had done in the past — it will generate less money and may have to rethink its model entirely. Even if it appeals the ruling, Qualcomm’s licensees likely will try to alter their contracts.

Koh, in her ruling, said that Qualcomm can’t force a customer to sign a license before it will supply it with chips. It “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.

Appealing the ruling

It’s unclear what impact the ruling will have on Qualcomm’s recent settlement with Apple, but it’s likely that deal took into account a ruling in favor of the FTC. Ultimately, the case could take years to resolve as it works its way through the appeals process. 

Apple “just signed an agreement that was quite favorable for [Qualcomm] … and naturally requires QCOM modems for its 5G phone in 2020,” UBS analysts noted. “It appears extremely not likely that this news would affect the current multi-year AAPL settlement.”

It normally takes the 9th Circuit about 2 to 3 years to release judgments in antitrust cases, stated Ankur Kapoor, an antitrust partner at Constantine Cannon. It’s most likely the court will fast-track the case, which implies it might have a choice in about a year, he stated. 

“For tech antitrust, this is the greatest choice because the Microsoft case,” Kapoor stated. 

In the meantime, the 9th Circuit most likely will approve Qualcomm an emergency situation stay of the injunction that requires it to alter its practices. For Qualcomm’s appeal, it’ll need to concentrate on the legal basis of the judgment.

“The just possibility for Qualcomm to reverse this on appeal is on a pure concern of law, a pure legal concern,” he added. “The huge one is whether offense of FRAND commitments can make up an antitrust offense or if it’s simply a breach of agreement.” 

Qualcomm’s chip supremacy

Qualcomm is the world’s greatest company of mobile chips, and it produced innovation that’s necessary for linking phones to cellular networks. The business obtains a substantial part of its profits from licensing those developments to numerous gadget makers, with the charge based upon the worth of the phone, not the parts.

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

Qualcomm’s consumers like Apple have actually argued that’s incorrect, and the FTC has actually concurred, stating Qualcomm charges excessive.

The heart of the FTC’s case versus Qualcomm was a so-called “no license, no chips policy.” Qualcomm offers processors that link phones to cellular networks, however it likewise accredits its broad portfolio as a group. For a set charge — based upon the asking price of completion gadget, normally a phone — the producer 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 with Qualcomm. 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 argued such a requirement hurt competitors and sealed Qualcomm’s monopoly power.

For the FTC to win the case, it needed to reveal 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 needed to reveal that Qualcomm’s conduct hurt rivals which the anticompetitive actions continue or will begin once again in the future.

The FTC argued that 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, the FTC stated, it’ll do the exact same thing in the 5G market.

“If the decision is sustained, it will require a change in Qualcomm’s business practices,” stated Cornell Law antitrust teacher George Hay. “While any changes that are implemented will have no immediate impact on their dominance in the chip market, over time it may lead to more competition.”

Battling in court

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.

Apple’s Williams affirmed that his business felt it needed to sign agreements for quantities it believed 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, regardless 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 statement. And throughout the trial, the FTC 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.”

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

The business has actually argued that its broad patent portfolio and developments validate its charges. CEO Steve Mollenkopf, who was called by the FTC early in the trial, protected the business’s licensing practices, stating the method his business offers chips to mobile phone makers is finest for everyone included and is the most basic method to accredit the innovation.

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

Qualcomm likewise argued that it had genuine company factors for having stringent agreements with Apple, consisting of how pricey it is to create modems particularly for Apple. 

The judgment’s treatments

Earlier this month, the United States Justice Department requested a hearing on Qualcomm’s possible penalty if Koh ruled in the FTC’s favor. The DOJ stated the court must thoroughly consider what solution to perform, since it’s concerned about the United States’ position in the race to 5G. But Koh rejected the hearing demand. 

Koh, in her judgment, stated Qualcomm needs to adhere to 5 treatments:

  1. “Qualcomm should not condition the supply of modem chips on a consumer’s patent license status and should work out or renegotiate license terms with consumers in great faith under conditions devoid of the hazard of absence of access to or inequitable arrangement of modem chip supply or associated technical assistance or access to software application. 
  2. “Qualcomm needs to make extensive SEP licenses readily available to modem-chip providers on reasonable, affordable and nondiscriminatory (“FRAND”) terms and send, as required, to arbitral or judicial conflict resolution to figure out such terms. 
  3. “Qualcomm might not get in reveal or de facto special dealing contracts for the supply of modem chips.
  4. “Qualcomm might not interfere with the capability of any client to interact with a federal government company about a possible police or regulative matter. 
  5. “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 years. Specifically, Qualcomm shall report to the FTC on an annual basis Qualcomm’s compliance with the above remedies ordered by the court.”

The very first and 2nd treatments are “the most onerous, requiring renegotiation of existing licenses, and mandating offering chipset licenses (which, as always, opens up the possibility of chipset-level royalties and the specter of patent exhaustion),” Bernstein expert Stacy Rasgon kept in mind. “In practice, we don’t know what will happen next.” 

Making good with Apple

While Apple was among Qualcomm’s fiercest critics, the 2 settled their conflicts in April. 

The 2 sides revealed the surprise arrangement through a joint news release on April 16 at the exact same time legal representatives provided opening arguments in their trial in a San Diego court house. Apple and its agreement makers had actually provided their declarations, and Qualcomm’s head attorney had actually almost completed his remarks when the courtroom buzzed with the unanticipated news. 

The CEOs of both business — Apple’s Tim Cook and Qualcomm’s Steve Mollenkopf — had actually been anticipated to affirm. As just recently as January, Cook stated the iPhone maker wasn’t in talks with Qualcomm. 

As part of the arrangement, Apple will make a payment to Qualcomm for a concealed amount. The licensing pact, working April 1, 2019, will last for 6 years and consists of a two-year extension alternative. Apple and Qualcomm likewise signed a multiyear chipset supply arrangement, which implies Qualcomm modems might quickly make their method back into iPhones.

CNET’s Shelby Brown added to this report.

Originally released May 22, 6: 20 a.m. PT
Updates, 8: 05 a.m.: Adds remarks from judgment, remarks from antitrust attorney, extra info; 11: 46 a.m.: Includes remark from FTC, expert and attorney and includes more info about treatments. 1: 50 p.m.: Adds expert remark.