Qualcomm is a monopoly and must renegotiate deals, judge rules - CNET

US District Judge Lucy Koh, in a ruling issued late Tuesday, said that Qualcomm wrongfully suppressed competitors in the wireless chip market and used its dominant position to force unnecessary licensing fees.

Qualcomm must change how it does business and renegotiate license deals with its customers, according to the ruling. 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," Judge Lucy Koh wrote in her ruling.

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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 of Qualcomm, said in a statement Wednesday.

The FTC didn't immediately respond to a request for comment. 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, and four months after the case went to trial in San Jose, California. 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 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.

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.

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 antirust, 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 will 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 argues such a requirement hurts competition and cements 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.

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.

Making nice with Apple

While Apple was one of Qualcomm's fiercest critics, the two 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 at 6:20 a.m. PT
Update at 8:05 a.m. PT: Adds comments from ruling, comments from antitrust lawyer, additional information.

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