INTC Intel Corporation

By Brent Kendall and Tripp Mickle 

A federal judge dealt a setback Tuesday to Qualcomm Inc.'s defense against an antitrust lawsuit brought by the Federal Trade Commission, ruling that the chip maker must license some of its industry-essential patents to rival chip suppliers.

The ruling Tuesday by U.S. District Judge Lucy Koh in San Jose, Calif., poses a threat to the Qualcomm's business model, analysts said. Its technology is widely used in smartphones, but the San Diego-based company hasn't licensed patents for that technology to chip-making rivals like Intel Corp. Instead, it has included licenses only for manufacturers or device makers, charging a percentage of the price of a smartphone.

When Qualcomm's intellectual property was incorporated into cellular communications standards, the company made commitments to standard-setting organizations that it would make its relevant patents available for use. Qualcomm has argued that the agreements didn't require it to license technology to rivals.

Judge Koh rejected that argument. She said court precedent established that Qualcomm's commitments "include an obligation to license to all comers, including competing modem chip suppliers." And those licenses have to be offered on fair and reasonable terms, the judge said.

"This is a game-changer for the industry," said Florian Mueller, an intellectual-property analyst who studies patent litigation.

Qualcomm historically has licensed patents by charging device makers a percentage of the sales price up to $400 on handsets. The ruling means that it could only assess fees based on the $15 to $20 cost of modem chips in the future, Mr. Mueller said.

Qualcomm didn't immediately provide comment. The FTC declined to comment.

The decision could indirectly benefit Apple Inc., which filed a lawsuit in January 2017 alleging the chip supplier demanded unfair terms for patents and required manufacturers license its patents to get Qualcomm chips. This year, Apple dropped Qualcomm as a supplier of modem chips for its latest lineup of iPhones, relying instead on chips from Intel.

Apple and Intel declined to comment on the decision.

The FTC-Qualcomm case hasn't yet gone to trial, so is far from over. But it resolves in the government's favor one of several important issues in Qualcomm's ongoing legal fight.

The FTC sued Qualcomm in early 2017, alleging the company engaged in unlawful tactics to maintain a monopoly on baseband processors used in cellphones. The commission made several allegations, some of which weren't a subject of Tuesday's ruling. The trial is set to begin in January, though the FTC and Qualcomm have engaged in settlement negotiations. The two sides had asked Judge Koh to hold off on issuing her ruling while they continued those talks, but the judge declined. Her ruling potentially could give more leverage to the FTC.

The FTC and Apple complaints have weighed on Qualcomm. After filing suit, Apple and Huawei Technologies Co., a Chinese smartphone maker, began withholding payments for royalties that Qualcomm depended on for more than half of its pretax profits.

Qualcomm's shares, which have rebounded in recent months on its plans to repurchase $30 billion in shares, rose 0.25% to $63.63 on Tuesday.

RBC Capital Markets analyst Amit Daryanani said he expects Qualcomm to appeal the case. He said that a future settlement of the FTC case "could signal start of resolution" in its dispute with Apple, as well.

Qualcomm reports third quarter results on Wednesday and will likely address the FTC decision during a call with analysts, who expect the company to explain its implications.

Write to Brent Kendall at brent.kendall@wsj.com and Tripp Mickle at Tripp.Mickle@wsj.com

(END) Dow Jones Newswires

November 06, 2018 19:28 ET (00:28 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.