Qualcomm is a monopoly and must renegotiate agreements, rule the rules

Judge Lucy Koh, in a ruling late Tuesday, said that Qualcomm mistakenly removed competitors from the wireless chip market and used its dominant position to impose unnecessary license fees.

Qualcomm must change the way it does business and renegotiate license agreements with its customers, in accordance with the decision. 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 LTE premium modem markets for years, and have hurt competition, OEMs and end-users," Judge Lucy Koh said in a statement. her decision.

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

"We strongly disagree with the judge's findings, her interpretation of the facts and her application of the law," said Don Rosenberg, Executive Vice President and Senior Legal Counsel of Qualcomm, in a statement.

The FTC did not immediately respond to a request for comment. Apple, who played an important role in the FTC case, declined to comment.

This decision is a boon for Qualcomm's customers and rivals, many of whom supported the FTC's cause in the hopes of securing lower license agreements and better access to the mobile market. Apple in particular has played an important role in this business. Leaders, such as Chief Operating Officer Jeff Williams, testified that they felt they had no choice but to accept Qualcomm's terms. If Apple did not yield to Qualcomm's requirements, he said, the company was worried about losing access to Qualcomm's chips.

During the trial, the FTC argued that Qualcomm's licensing policies were harming consumers by raising smartphone prices. But even if Koh has decided in favor of the FTC, it is unlikely that handset manufacturers like Apple and Samsung lower their prices. Instead, even though Qualcomm lowered its license fees, the prices of the most recent and best performing devices from these and other companies continued to increase.

Antitrust Arguments

The decision comes more than two years after the FTC accused Qualcomm of exercising a monopoly on wireless chips and four months after the trial began in San Jose, California. The FTC said Qualcomm had forced customers such as Apple to work exclusively with it and had charged "excessive" license fees for its technology, including applying a "no license, no chip" policy. Qualcomm's practices prevented competitors from entering the market, driving up the price of phones and, in turn, harming consumers, who faced higher prices for handsets, said the company. FTC.

Qualcomm argued that the pursuit of the FTC was based on an "erroneous legal theory" and that customers chose its chips because they were the best. He also argued that competition was fierce in the mobile chip market and that Qualcomm had never stopped providing processors to customers even when they were competing for licenses.

The two parties fought in a courtroom in San Jose for most of the month of January. On January 15, the FTC closed its antitrust proceedings against the company and Qualcomm allowed its defense to rest 10 days later. Both parties presented their closing arguments on 29 January. The trial revealed the inner workings of the main technology business, smartphones, and shows how vendors are fighting for dominance and profit.

For Qualcomm, the verdict challenges the entire business model of the company. While selling processors that connect devices to mobile networks, it also generates a significant percentage of its license revenue. If he can not charge royalties based on the value of a handset – which he had done in the past – he will generate less money and may need to rethink entirely. his model. Even if he appeals the decision, Qualcomm's licensees will likely try to change their contracts.

Appeal the decision

The impact of the decision on the recent agreement between Qualcomm and Apple is not clear, but it is likely that this agreement has taken into account a decision favorable to the FTC. In the end, it may take years before the case is resolved during the appeals process.

Ankur Kapoor, antitrust partner of Constantine Cannon, has generally stated that the 9th circuit takes about two to three years to render rulings in antitrust cases. It is likely that the court will speed up the handling of the case, which means it could make a decision in about a year, he said.

"For rustproofing technology, it's the biggest decision made since the Microsoft case," Kapoor said.

In the meantime, the 9th Circuit will likely grant Qualcomm an urgent stay of injunction that will require it to change its practices. To appeal Qualcomm, it will be necessary to focus on the legal basis of the decision.

"The only chance for Qualcomm to overturn this decision on appeal concerns a question of law, a question of law," he added. "The most important is whether the breach of FRAND's obligations may constitute a violation of antitrust laws or it is only a breach of contract."

The dominance of Qualcomm's chips

Qualcomm is the world's leading supplier of mobile chips and has created an essential technology for connecting phones to cellular networks. The company derives a significant portion of its revenue from the licensing of inventions to hundreds of device manufacturers, with charges being based on the value of the phone and not the components.

Qualcomm owns patents related to 3G, 4G and 5G network technologies, as well as other features such as software, all handset manufacturers who build a device that connects to a cellular network must pay a license even if they do not use Qualcomm's chips. .

Qualcomm's customers such as Apple claimed that it was fake and the FTC agreed, claiming that Qualcomm was charging too much.

The heart of the FTC case against Qualcomm was a policy called "no license, no chips". Qualcomm sells processors that connect phones to cellular networks, but also licenses its broad portfolio as a group. For a fixed price – based on the final device sales price, usually a phone – the manufacturer uses all Qualcomm technologies. It's the phone makers who pay the license fees, not the chip makers.

To gain access to Qualcomm chips, which are generally considered to be at the forefront of wireless innovation, a phone manufacturer must first sign a patent license agreement with Qualcomm. The company has long been a leader in 4G LTE and ahead of rivals in the nascent 5G market. High-end phones, like those of Samsung, tend to use its modems. But the FTC argues that such a requirement undermines competition and strengthens Qualcomm's monopoly power.

To win the case, the FTC had to show that Qualcomm had a monopoly, that it had market power and that it had used this power in negotiations with handset manufacturers to obtain high royalties. The FTC also had to demonstrate that Qualcomm's conduct had harmed competitors and that anti-competitive actions were continuing or recurring in the future.

The FTC argued that Qualcomm had used its power in the 3G and 4G chip market to force handset manufacturers such as Apple to sign license agreements with excessively high royalties. If Qualcomm is not shut down, the FTC said it would do the same thing in the 5G market.

Fight in court

During the trial, the FTC called witnesses from companies such as Apple, Samsung, Intel and Huawei and had experts testify about the alleged wrongs that Qualcomm's licensing practices caused to the communications industry. mobile.

Williams testified that his company felt it was necessary to sign contracts for amounts deemed too high – a fee of $ 7.50 per iPhone – to maintain access to Qualcomm's chips.

"We were looking at a license increase of over $ 1 billion a year, so we had a gun on the head," Williams said, explaining why Apple signed another licensing agreement in 2013, while He was not satisfied with the conditions. He added that Apple wanted to use Qualcomm chips for its new devices, but Qualcomm refused to sell processors for iPhone.

Other companies, such as Huawei and Lenovo, made similar comments in their testimony. And during the trial, the FTC evoked communications from a former Qualcomm license manager, Eric Reifschneider, with mobile chip customers like Motorola and Sony Mobile, as evidence of supply-cutting threats. .

In one case, Reifschneider wrote in an email to a Sony Mobile official that "QCT (the chip sector of Qualcomm) has been sending chips to SMC (Sony Mobile) for almost three weeks now without a license. possible for this, to continue. "

Qualcomm, at the same time, called on company executives, representatives of handset manufacturers and rival competitors and economics experts to challenge the FTC's allegations in this case. The company sought to demonstrate that competition was healthy in the mobile chip market and that Qualcomm had not hindered the industry.

The company has argued that its broad patent portfolio and innovations justify its fees. Chief Executive Steve Mollenkopf, who was called by the FTC at the start of the trial, defended the company's licensing practices, saying that the way his company sold chips to smartphone makers was better for everyone involved and was the simplest way to license technology.

The executives of Qualcomm and other companies testified that Qualcomm never cut chip supplies during contract negotiations. Some of these leaders said in live testimony and video testimony by Qualcomm that its rivals did not have the technology required for their devices.

Qualcomm also argued that it had legitimate business reasons to enter into strict contracts with Apple, including the high cost of designing modems specifically for Apple.

Do good with Apple

While Apple was one of the fiercest critics of Qualcomm, the two have settled their differences in April.

Both parties announced the surprise deal by a joint press release on April 16, at the same time that the lawyers presented arguments for their pleadings during their lawsuit in a San Diego court. Apple and its subcontractors had given their statements, and Qualcomm's chief counsel had almost finished his remarks when the audience room buzzed with unexpected news.

The leaders of both companies – Tim Cook of Apple and Steve Mollenkopf of Qualcomm – were to testify. Last January, Cook had stated that the iPhone maker was not in talks with Qualcomm.

As part of this agreement, Apple will make a payment to Qualcomm for an undisclosed amount. The licensing agreement, effective April 1, 2019, will run for six years and includes a two-year extension option. Apple and Qualcomm have also signed a multi-year chipset supply agreement, which means that Qualcomm modems may soon return to their iPhone.

Shelby Brown of CNET contributed to this report.

Originally published at 6:20 pm Pacific Time
Updated at 8:05 AM: Adds the comments of the decision, the comments of the antitrust lawyer, additional information.