By Tripp Mickle, Brent Kendall and Asa Fitch
Qualcomm Inc. unlawfully suppressed competition in the market
for cellphone chips and used its dominant position to exact
excessive licensing fees, a federal judge ruled in a decision that
could challenge the company's business model and shake up the
smartphone industry.
The decision by U.S. District Judge Lucy Koh in San Jose, made
public late Tuesday night, sided with the Federal Trade Commission,
which brought an antitrust lawsuit against Qualcomm in January
2017. The ruling comes one month after Qualcomm struck a settlement
in a separate but similar lawsuit brought by Apple Inc., which
agreed to continue paying licensing fees.
Judge Koh found that Qualcomm violated antitrust law, charging
unreasonably high royalties for its patents and eliminating rivals.
She challenged its practice of collecting billions of dollars by
charging royalties on a percentage of a smartphone's price.
"Qualcomm's licensing practices have strangled competition" in
key parts of the modem chip market for years, "and harmed rivals,
OEMs, and end consumers in the process," the judge wrote. She added
that the company's lead in developing modem chips for smartphones
using 5G, the new generation of cellular technology, made it likely
that behavior would continue.
The judge ordered that Qualcomm negotiate or renegotiate
licensing agreements with customers free of unfair tactics, such as
threatening to cut off access to its chips. Qualcomm also must
license its patents to rival chip makers at fair and reasonable
prices, and can't sign exclusive supply agreements with smartphone
makers like Apple that block rivals from selling chips into
devices.
Judge Koh said Qualcomm must submit to monitoring for the next
seven years to ensure it abides by the remedies.
Qualcomm on Wednesday said it plans to seek an immediate stay of
the judgment and an expedited appeal to the Ninth U.S. Circuit
Court of Appeals in San Francisco. "We strongly disagree with the
judge's conclusions, her interpretation of the facts and her
application of the law," said Don Rosenberg, Qualcomm executive
vice president and general counsel.
Qualcomm's stock sank 10% Wednesday morning. The shares had
soared after the company's agreement with Apple on April 16, which
allayed investors' worries that a prolonged legal tussle with a
much larger tech titan would undermine the San Diego company's
business model. Qualcomm's share price rose by more than 50% after
the deal, though it has lost some of that ground this month.
The judge's ruling clouds the outlook for Qualcomm, which long
has generated more profit from patent licensing than the sale of
its chips. The decision could lower costs for Apple and other
smartphone makers that have complained Qualcomm's pricing tactics
allowed it to profit off innovations unrelated to its patents such
as new displays or cameras.
Judge Koh's ruling that Qualcomm must license some of its
industry-essential patents to rival chip suppliers -- something it
previously refused to do -- means Qualcomm may have to forgo
royalties of 5% of the sales price up to $400 on handsets and
instead assess fees based on the $15 to $20 cost of modem
chips.
The FTC didn't immediately respond to requests for comment.
In addition to the FTC case, Qualcomm faces a class-action
lawsuit from consumers asserting similar antitrust claims and
seeking billions in damages.
The ruling also has U.S. policy implications. The Trump
administration has held Qualcomm up as vital to U.S. national
interests in competing with China for dominance in 5G technology,
which is starting to be rolled out in the world's cellular networks
this year.
The Justice Department took the unusual step of wading into the
FTC-Qualcomm case early this month, asking for a hearing on any
penalty against Qualcomm in a bid to limit damage to
next-generation cellular technology the company is developing.
Judge Koh, however, said in her ruling that a hearing on remedies
wasn't necessary.
The FTC case focused on Qualcomm's policy of selling its chips
only to companies that agree to pay licensing fees for a group of
cellular-technology patents that Qualcomm owns.
Qualcomm is by far the leading supplier of chips that connect
phones to wireless networks. The FTC said that dominance gave
Qualcomm the leverage to force companies to pay steeper licensing
fees than what Qualcomm's patents are worth. The commission alleged
that Qualcomm's licensing conditions meant that it got paid even
when device makers built phones using another company's chips, a
situation that made rival chips less attractive in the
marketplace.
Qualcomm said that, since its early days, it has licensed its
patented cellular technologies for an upfront fee and used the
revenue to invest in research and development. The company said it
didn't change its approach once it grew into a leading seller of
chips.
The cellular market is healthy and competitive, Qualcomm argued,
noting that its market share has dropped in recent years. And it
said its customers -- including Apple, Samsung Electronics Co. and
Huawei Technologies Co. -- were too big and powerful to be pushed
around by Qualcomm.
The same issues were at the heart of the bitter, two-year legal
battle between Qualcomm and Apple. The iPhone maker's settlement
with Qualcomm included a six-year licensing agreement that analysts
estimate will pay the chip maker $8 to $9 per device in licensing
fees.
The FTC decision has the potential to increase demand for modem
chips sold by rivals like MediaTek Inc. Those chips for years were
less attractive, analysts said, partly because smartphone makers
who bought them also had to pay Qualcomm's high patent
royalties.
Intel Corp., another competitor, last month said it would halt
efforts to develop 5G modem chips for smartphones because it
couldn't see a path to profitability. The company has been losing
more than $1 billion annually on its modem business, according to a
person familiar with the operation.
Judge Koh pointed to numerous suppliers who had exited the modem
market because Qualcomm made it difficult for them to win supply
agreements with smartphone makers. She said rivals that remain in
the market like MediaTek have been hobbled by Qualcomm's
practices.
Qualcomm is likely to appeal Tuesday's ruling. If it does, the
case would go to the Ninth U.S. Circuit Court of Appeals, based in
San Francisco.
Write to Tripp Mickle at Tripp.Mickle@wsj.com, Brent Kendall at
brent.kendall@wsj.com and Asa Fitch at asa.fitch@wsj.com
(END) Dow Jones Newswires
May 22, 2019 11:59 ET (15:59 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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