Qualcomm violated antitrust law: U.S. Judge

by Ike Obudulu Posted on May 22nd, 2019

San Jose, California: Qualcomm Inc illegally suppressed competition in the market for smartphone chips by threatening to cut off supplies and extracting excessive licensing fees, a U.S. judge ruled, a decision that could force the company to overhaul its business practices. China, the European Union, and South Korea earliers ruled that Qualcomm violated antitrust laws.

Qualcomm is the largest maker of modem chips for connecting smartphones to wireless networks. Its customers, including Apple and Samsung, complain that the company uses unfair practices, such as threatening to withhold supplies of chips, to force companies to agree to excessive licensing fees for its technology. Apple and Qualcomm settled their own separate, complicated legal battle last month.

The decision issued late Tuesday night by U.S. District Judge Lucy Koh in San Jose, California, caused Qualcomm shares to plunge 12.5 percent on Wednesday.

“Qualcomm’s licensing practices have strangled competition” in parts of the chip market for years, harming rivals, smartphone makers, and consumers, Koh wrote in a 233-page decision.

She ordered the San Diego-based company to renegotiate licensing agreements at reasonable prices, without threatening to cut off supplies, and ordered that it be monitored for seven years to ensure its compliance.

Qualcomm said it will immediately ask Koh to put her decision on hold, and also seek a quick appeal to the federal appeals court in California.

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

Koh’s decision followed a 10-day non-jury trial in January, and is a victory for the U.S. Federal Trade Commission, which has accused Qualcomm in 2017 of violating antitrust law.

The decision followed Qualcomm’s April 16 settlement of a long-running legal battle with Apple Inc, where Apple agreed once again to use Qualcomm chips in its iPhones, displacing Intel Corp.

It is unclear whether the sanctions will be challenged by the U.S. Department of Justice, which has taken a different view of the case than the FTC and emerged as an ally to Qualcomm.

On May 2, the Justice Department argued Koh should hold a hearing before placing sanctions on Qualcomm. Placing stringent conditions on the company would “reduce competition and innovation in markets for 5G technology,” the agency said.

The courts are not required to defer to the Justice Department’s recommendations. But “the possibility certainly exists for Qualcomm to prevail upon appeal,” given the government’s “somewhat schizophrenic” approach to the case, Bernstein analyst Stacy Rasgon wrote.

The Justice Department was not immediately available for comment on Wednesday.

Undermining Rivals

Koh said Qualcomm engaged in “extensive” anticompetitive conduct targeting more than one dozen original equipment manufacturers including Apple, BlackBerry, Huawei, Lenovo, LG, Motorola, Samsung, and Sony, often by cutting off or threatening to cut off chip supplies or withholding technical support.

She also said Qualcomm’s monopoly power in modem chips enabled the company to sustain “unreasonably high” royalty rates not justified by its contributions to the marketplace.

“With practices that result in exclusivity and eliminate opportunities to compete for OEM business, Qualcomm undermines rivals in every facet,” she wrote.

She also found Qualcomm knew its licensing practices harmed competition “yet continued anyway” despite government investigations in China, Japan, Korea, Taiwan, the European Union and the United States.

“This evidence of Qualcomm’s intent confirms the court’s conclusion that Qualcomm’s practices cause anticompetitive harm because no monopolist monopolizes unconscious of what he is doing,” she wrote.

Koh also said testimony from some Qualcomm witnesses “lacked credibility,” faulting Chief Executive Steve Mollenkopf and others for giving “long, fast, and practiced narratives” and saying company emails and notes contradicted his testimony.

Koh said Qualcomm cannot bundle patent licensing deals with its hardware, a practice regulators called “no license, no chips.” That ruling could give chip customers more leverage in negotiations over patent terms and result in lower royalty rates for Qualcomm.

Koh also said Qualcomm must license its patents to rival chipmakers like MediaTek Inc.

Qualcomm argued during the trial that it achieved market dominance through technological leadership. The company began its licensing business in the 1980s and 1990s, decades before it began selling chips, and has charged broadly similar patent rates since then.

Qualcomm also argued that the FTC failed to show harm to competition, arguing that the chip industry is thriving and prices are declining.

Qualcomm’s next move will likely be to request Koh’s ruling is put on hold while the company seeks expedited review by the 9th U.S. Circuit Court of Appeals.

Qualcomm makes cellphone processors and modem chips,but generates most profits by licensing its technology to mobile phone makers.

Rasgon, the Bernstein analyst, said Koh had indicated at trial she was leaning against Qualcomm, but some investors had hoped her views would be “softened” by the Apple settlement.

“Apparently not,” Rasgon wrote.

The ruling puts a fresh legal cloud over a company thought to be finally free of it. The battle with Apple spanned more than two years and cost Qualcomm a fortune in legal fees and lost business. It was only the latest in many legal and regulatory showdowns the company has faced over the years. Qualcomm was indeed a key developer of much of the technology used by nearly every wireless device today, but its business model of selling both chipsets and charging royalties on that technology has earned it few friends. Executives from several major device makers ranging from Samsung to Sony to LG testified against Qualcomm during the FTC trial.

Qualcomm’s stock price rocketed more than 50% following the Apple settlement but had shed about 10% over the last week after U.S. chip makers effectively were banned from selling to Huawei. The shares lost another 11% Wednesday morning. The FTC’s ruling makes the investment case a legal guessing game rather than a clear play on the future of 5G. For Qualcomm investors, that is sadly familiar territory.

Image: A sign on the Qualcomm campus is seen, as chip maker Broadcom Ltd announced an unsolicited bid to buy peer Qualcomm Inc for $103 billion, in San Diego, California, USA.

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