Qualcommillegally hurt competitors in the wireless chip market and used its dominant position to force unnecessary licensing fees on handset makers like Apple, US District Court Judge Lucy Koh said in a long-awaited ruling issued late Tuesday.
Qualcomm must change how it does business and renegotiate license deals with its customers, according to the ruling, which came four months after a trial over the issue ended. To hold the company accountable, Qualcomm must also submit compliance and monitoring reports for the next seven years and report to the US Federal Trade Commission on an annual 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 wrote in her ruling.
Powerful chipmaker Qualcomm is just too powerful, judge…
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.
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 of course needs QCOM modems for its 5G phone in 2020,” UBS analysts noted. “It seems highly unlikely that this news would impact the recent multi-year AAPL settlement.”
It typically takes the 9th Circuit about two to three years to issue rulings in antitrust cases, said Ankur Kapoor, an antitrust partner at Constantine Cannon. It’s likely the court will fast-track the case, which means it could have a decision in about a year, he said.
“For tech antitrust, this is the biggest decision since the Microsoft case,” Kapoor said.
In the meantime, the 9th Circuit probably will grant Qualcomm an emergency stay of the injunction that forces it to change its practices. For Qualcomm’s appeal, it’ll have to focus on the legal basis of the ruling.
“The only chance for Qualcomm to overturn this on appeal is on a pure question of law, a pure legal issue,” he added. “The big one is whether or not violation of FRAND obligations can constitute an antitrust violation or if it’s just a breach of contract.”
Qualcomm’s chip dominance
Qualcomm is the world’s biggest provider of mobile chips, and it created technology that’s essential for connecting phones to cellular networks. The company derives a significant portion of its revenue from licensing those inventions to hundreds of device makers, with the fee based on the value of the phone, not the components.
Because Qualcomm owns patents related to 3G, 4G and 5G networking technology, as well as other features like software, all handset makers building a device that connects to cellular networks have to pay it a licensing fee, even if they don’t use Qualcomm’s chips.
Qualcomm’s customers like Apple have argued that’s wrong, and the FTC has agreed, saying Qualcomm charges too much.
The heart of the FTC’s case against Qualcomm was a so-called “no license, no chips policy.” Qualcomm sells processors that connect phones to cellular networks, but it also licenses its broad portfolio as a group. For a set fee — based on the selling price of the end device, typically a phone — the manufacturer gets to use all of Qualcomm’s technology. It’s phone makers that pay the licensing fee, not chipmakers.
To get access to Qualcomm’s chips, which are broadly considered to be on the bleeding edge of wireless innovation, a phone maker first has to sign a patent licensing contract with Qualcomm. The company has long been the leader in 4G LTE, and it’s ahead of rivals in the nascent 5G market. The highest-end phones, like those from Samsung, have tended to use its modems. But the FTC argued such a requirement hurt competition and cemented Qualcomm’s monopoly power.
For the FTC to win the case, it had to show that Qualcomm had a monopoly, that it had market power and that it used that power in negotiations with handset makers to command high royalties. The FTC also had to show that Qualcomm’s conduct hurt competitors and that the anticompetitive actions continue or will start again in the future.
The FTC argued that Qualcomm used its power in the 3G and 4G chip market to force handset makers like Apple to sign licensing agreements with excessively high royalties. If Qualcomm isn’t stopped, the FTC said, it’ll do the same thing in the 5G market.
“If the decision is sustained, it will require a change in Qualcomm’s business practices,” said Cornell Law antitrust professor 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 companies like Apple, Samsung, Intel and Huawei and had experts testify about the alleged harm Qualcomm’s licensing practices have caused the mobile industry.
Apple’s Williams testified that his company felt it had to sign contracts for amounts it thought too high — a royalty of $7.50 per iPhone — to maintain 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 said as he explained why Apple signed another licensing agreement in 2013, despite being unhappy with the terms. He added that Apple has wanted to use Qualcomm’s chips for its newer devices, but Qualcomm refused to sell processors for the iPhone.
Other companies, like Huawei and Lenovo, made similar comments during their testimony. And during the trial, the FTC pointed to communication from a former Qualcomm licensing executive, Eric Reifschneider, to mobile chip customers like Motorola and Sony Mobile as evidence of threats to cut off supply.
In one instance, Reifschneider wrote in an email 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, meanwhile, called company executives, representatives from handset makers and chip rivals, and economics experts to dispute the FTC’s allegations in the case. The company sought to show that competition is healthy in the mobile chip market and that Qualcomm hasn’t hampered the industry.
The company has argued that its broad patent portfolio and innovations justify its fees. CEO Steve Mollenkopf, who was called by the FTC early in the trial, defended the company’s licensing practices, saying the way his company sells chips to smartphone makers is best for everybody involved and is the simplest way to license the technology.
Executives from Qualcomm and other companies testified that Qualcomm has never cut off chip supply during contract negotiations. Some of those executives said in live testimony and video depositions presented by Qualcomm that its rivals didn’t have the technology required for their devices.
Qualcomm also argued that it had legitimate business reasons for having strict contracts with Apple, including how expensive it is to design modems specifically for Apple.
The ruling’s remedies
Earlier this month, the US Justice Department asked for a hearing on Qualcomm’s possible punishment if Koh ruled in the FTC’s favor. The DOJ said the court should carefully consider what remedy to carry out, because it’s worried about the US’ position in the race to 5G. But Koh denied the hearing request.
Koh, in her ruling, said Qualcomm has to comply with five remedies:
- “Qualcomm must not condition the supply of modem chips on a customer’s patent license status and 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.
- “Qualcomm must make exhaustive SEP licenses available to modem-chip suppliers on fair, reasonable and nondiscriminatory (“FRAND”) terms and submit, as necessary, to arbitral or judicial dispute resolution to determine such terms.
- “Qualcomm may not enter express or de facto exclusive dealing agreements for the supply of modem chips.
- “Qualcomm may not interfere with the ability of any customer to communicate with a government agency about a potential law enforcement or regulatory matter.
- “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 first and second remedies 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 analyst Stacy Rasgon noted. “In practice, we don’t know what will happen next.”
Making nice with Apple
While Apple was one of Qualcomm’s fiercest critics, thetwo settled their disputes in April.
The two sides announced the surprise agreement through a joint press release on April 16 at the same time lawyers presented opening arguments in their trial in a San Diego courthouse. Apple and its contract manufacturers had given their statements, and Qualcomm’s head lawyer had nearly finished his remarks when the courtroom buzzed with the unexpected news.
The CEOs of both companies — Apple’s Tim Cook and Qualcomm’s Steve Mollenkopf — had been expected to testify. As recently as January, Cook said the iPhone maker wasn’t in talks with Qualcomm.
As part of the agreement, Apple will make a payment to Qualcomm for an undisclosed sum. The licensing pact, taking effect April 1, 2019, will last for six years and includes a two-year extension option. Apple and Qualcomm also signed a multiyear chipset supply agreement, which means Qualcomm modems could soon make their way back into iPhones.
CNET’s Shelby Brown contributed to this report.
Originally published May 22, 6:20 a.m. PT
Updates, 8:05 a.m.:Adds comments from ruling, comments from antitrust lawyer, additional information; 11:46 a.m.: Includes comment from FTC, analyst and lawyer and adds more information aboutremedies. 1:50 p.m.: Adds analyst comment.