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Qualcomm Violated Antitrust Laws, U.S. Judge Rules Qualcomm Violated Antitrust Laws, U.S. Judge Rules
(about 8 hours later)
Qualcomm abused its position as a giant of the semiconductor industry to harm competition and charge cellphone makers excessive licensing fees, a federal judge has ruled, striking at the heart of the company’s business and potentially shaking up the smartphone industry. Qualcomm abused its position as a giant of the semiconductor industry to harm competition and overcharge cellphone makers, a federal judge has ruled, striking at the heart of the company’s business and sending shock waves through the smartphone industry.
In a decision issued late Tuesday, Judge Lucy Koh of Federal District Court in San Jose, Calif., found that Qualcomm’s patent-licensing practices violated antitrust law. In a decision issued late Tuesday, Judge Lucy Koh of the Federal District Court in San Jose, Calif., found that Qualcomm’s patent-licensing practices violated antitrust law. The Federal Trade Commission sued Qualcomm in 2017, arguing that the company used its monopoly position as the supplier of two kinds of wireless chips to compel handset makers to pay “onerous” fees for the use of its patents.
The decision was a victory for the Federal Trade Commission, which sued Qualcomm in 2017 over its patent practices. The agency accused the chip maker of charging “onerous” fees for the use of its patents, some of which were considered industry standards meant to be licensed on fair, reasonable terms.
“Qualcomm’s licensing practices have strangled competition” in the market for wireless modem chips for years, Judge Koh wrote in the public version of her ruling, parts of which were redacted to protect trade secrets.“Qualcomm’s licensing practices have strangled competition” in the market for wireless modem chips for years, Judge Koh wrote in the public version of her ruling, parts of which were redacted to protect trade secrets.
Judge Koh ordered Qualcomm to strike new licensing agreements without the onerous terms, and said that the company must submit to seven years of monitoring by the trade commission. The ruling was a resounding victory for the trade commission, which recently found itself at odds with the Justice Department over regulating wireless technology considered critical to national competitiveness and defense. About a month ago, Qualcomm reached a settlement with Apple in a parallel case involving many of the same issues, a deal that had seemed to ease the biggest potential threat that Qualcomm faced.
Qualcomm said on Wednesday that it would immediately seek a stay of Judge Koh’s decision and an expedited appeal at the United States Court of Appeals for the Ninth Circuit. The ruling threatens Qualcomm’s unconventional business model, which has long affected the features and prices of most smartphones and has prompted antitrust scrutiny on three continents. As the largest maker of chips that provide communications capability to mobile phones, Qualcomm requires phone makers to pay patent royalties based on the price of each handset whether or not the companies use its chips. Unlike other semiconductor makers, Qualcomm makes most of its profit from patent fees rather than from its products.
“We strongly disagree with the judge’s conclusions, her interpretation of the facts and her application of the law,” Don Rosenberg, the company’s executive vice president and general counsel, said in a statement. Judge Koh ruled that the company must abandon its practice of not selling chips to phone makers unless they first agree to license Qualcomm patents. She ordered Qualcomm to renegotiate all of its existing patent-licensing deals.
Judge Koh’s ruling comes about a month after Qualcomm and Apple agreed to settle a global legal battle over the royalties Qualcomm charges for its chips. It was unclear what impact, if any, the decision would have on the companies’ agreement. Judge Koh also said the company must begin offering patent licenses to rival chip makers under fair terms. She also prohibited Qualcomm from entering into exclusive arrangements with handset makers, as she ruled it had with companies like Apple and Samsung.
Qualcomm is considered the industry leader in wireless modem chips, and it could become even more dominant as the race to develop next-generation 5G wireless networks accelerates. “It’s a grand slam” for the trade commission and against Qualcomm, said Kevin Arquit, an antitrust lawyer at the law firm Kasowitz Benson Torres. “It completely affirms the F.T.C.’s theory of the case.”
The company pioneered a major strain of cellular technology that became a mainstay in the third major generation of mobile networks, and it went on to become the biggest maker of chips based on its patented technology. Qualcomm said it would immediately seek a stay of Judge Koh’s decision and an expedited appeal at the United States Court of Appeals for the Ninth Circuit.
Companies that sought to make 3G phones and later models were compelled to pay royalties to Qualcomm, whether or not they used its chips, under a formula that was historically based on 5 percent of a handset’s wholesale price. “We strongly disagree with the judge’s conclusions, her interpretation of the facts and her application of the law,” Don Rosenberg, the company’s executive vice president and general counsel, said in a statement on Wednesday.
Major phone makers, particularly Apple, have argued that Qualcomm’s royalty rates were disproportionate to the value of its inventions. The trade commission came to a similar conclusion, finding that phone makers had no leverage to negotiate for lower rates because Qualcomm could cut off shipments of chips that could not be obtained elsewhere. Qualcomm’s stock fell 11 percent in trading on Wednesday.
Qualcomm denied using such an approach, but executives from handset makers like Huawei, Lenovo, Motorola and Sony testified at a trade commission trial in January that the possibility of hardball tactics influenced their royalty negotiations with Qualcomm Judge Koh’s 233-page decision, which followed a 10-day trial in January, did not carry any immediate financial penalty. But it underscored the stiff legal headwinds that Qualcomm continues to face, despite the settlement with Apple. Antitrust lawyers said it was unclear whether the decision would affect the agreements struck by the companies, which were considered a major victory for Qualcomm.
In the April 16 settlement, reached shortly after the start of a trial in a separate case initiated by Apple, the iPhone maker agreed to pay Qualcomm back royalties. Qualcomm has estimated that as a result of the settlement, it would receive at least $4.5 billion in one-time revenue in the quarter ending in June. Apple also agreed to make future royalty payments and to resume buying chips from Qualcomm for future high-end phones.
Several hours after the settlement was disclosed, Intel, which replaced Qualcomm as the supplier of chips for the latest Apple iPhones, announced that it would stop developing chips for the next generation of wireless technology, known as 5G. Intel subsequently acknowledged that it was trying to sell its smartphone modem-chip business.
Judge Koh’s decision could aid lawyers in a lawsuit that seeks up to $5 billion in damages from Qualcomm on behalf of smartphone buyers who say the company royalty rates inflated prices for the devices. Judge Koh certified the case as a class action in September. Qualcomm is appealing the ruling.
In addition to disputing the trade commission’s antitrust allegations, Qualcomm has argued that its business model enables it to make investments in wireless technology that are vital to national security. Last year, President Trump blocked a potential hostile takeover of the company by Broadcom, which recently moved its headquarters from Singapore to California, on that grounds that a deal could weaken America’s leadership in technologies like the new 5G cellular networks.
The Justice Department, in an unusual move, recently urged Judge Koh to hold evidentiary hearings about potential remedies if she ruled against Qualcomm in the trade commission case. The commission, in a five-sentence rebuttal, called the Justice Department filing “untimely” and said it disagreed with a number of its contentions. Both agencies enforce antitrust actions; the trade commission has taken the lead on some high-profile cases targeting individual chip companies.
Judge Koh declined to hold hearings on potential remedies, citing legal precedents that included rulings in Microsoft’s antitrust battle with the Justice Department.
Judge Koh said in her ruling that she found Qualcomm executives were generally not credible in their testimony. Instead, she leaned extensively on internal company documents, documents from customers and competitors, and testimony from those companies. She studied Qualcomm’s dealings with 16 major handset makers and an unspecified number of smaller companies from China.
Her findings about Qualcomm’s credibility may make her ruling more difficult to challenge on appeal, said Barbara Sicalides, an antitrust lawyer at the law firm Pepper Hamilton.
Others disagreed.
“To be found guilty, harm must be proved,” said Patrick Moorhead, an analyst at the research firm Moor Insights & Strategy. “And there was no evidence shown of harm to consumers, chip makers or handset makers.” He predicted that Qualcomm would win on appeal.
Judge Koh’s ruling was meant to cover not just current smartphones but models based on emerging 5G standards. The technology is a focus of the Trump administration’s crackdown on the Chinese telecommunications giant Huawei and its ability to buy chips from American suppliers like Qualcomm.
Qualcomm became the dominant chip maker after pioneering a major strain of cellular technology that became a mainstay in the third major generation of mobile networks. Companies that sought to make so-called 3G phones and later models were compelled to pay royalties to Qualcomm, whether or not they used its chips, under a formula that was historically based on 5 percent of a handset’s wholesale price.
Major phone makers, particularly Apple, chafed at Qualcomm’s royalty rates but said they had no leverage to negotiate to lower them because Qualcomm could cut off shipments of chips that could not be obtained elsewhere.
Qualcomm denied using such an approach, but executives from handset makers like Huawei, Lenovo, Motorola and Sony testified in January that the possibility of hardball tactics influenced their royalty negotiations with Qualcomm.