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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