While Qualcomm may have chalked up a big win in settling its global feud with Apple, it didn’t fare quite as well against the Federal Trade Commission. Late Tuesday, Judge Lucy H. Koh ruled that Qualcomm had violated antitrust laws, charged high royalties for its patents, and ordered Qualcomm submit to monitoring for seven years to ensure fair competition.
This is a big deal for a number of reasons, but first, some background. The FTC’s main argument was Qualcomm knowingly used its baseband processor (modems) patents to crush the competition, thereby violating its “Fair, Reasonable, and Non-Discriminatory” (FRAND) commitments. FRAND commitments are basically there to ensure standard-setting organizations (SSO) keep their proprietary tech available to the competitors for a reasonable price. Qualcomm made its name pioneering CDMA technology—the communication standard currently used by Verizon and Sprint networks—but was accused by the FTC of strong-arming manufacturers into exclusive deals and charging higher royalties for using tech from competitors. An unfavorable ruling would be devastating for Qualcomm, which makes the majority of its revenue on licensing its patents and charging royalties.
For Qualcomm, its nightmare has basically come true. In her 233-page ruling, Judge Koh ordered five remedies. First, she stated Qualcomm cannot withhold modem chips based on a customer’s patent license status and has to negotiate or renegotiate license terms “in good faith under conditions free from the threat of lack of access.” Second, it has to make its standard-essential patents (SEP) licenses available on FRAND terms and agree to arbitration or judicial dispute resolution to define those terms, if necessary. Third, Judge Koh banned Qualcomm from entering explicit or de facto exclusive deal agreements with regard to its modem chipsets. Fourth, Qualcomm was told it can’t interfere with any customer going to a government agency. Lastly, and perhaps most damning for Qualcomm, Judge Koh ordered Qualcomm undergo seven years of monitoring. More specifically, Qualcomm will have to report to the FTC on a yearly basis how it’s complying with the first four court-ordered guidelines.
As for Qualcomm, the company has already issued a statement saying it intends to appeal—after all, its shares fell 11 percent in premarket trading following the ruling. That said, it doesn’t look great for Qualcomm. In the ruling, Koh called out the company’s shoddy defense. In particular, she blasted Qualcomm’s testimonies for directly contradicting emails, handwritten notes, and recorded statements provided to the IRS. One damning example involves a Qualcomm executive sending Motorola a letter to complain it wasn’t licensing its modem chip SEP to Qualcomm, demonstrating the company’s executives clearly understood FRAND. She also called out a PowerPoint slide that illustrated Qualcomm definitely understood its practices could be in violation of antitrust laws.
“In addition to giving testimony under oath at trial that contradicted their contemporaneous emails, handwritten notes and recorded statements to the IRS, some Qualcomm witnesses also lacked credibility in other ways. For example, Dr. Irwin Jacobs (Qualcomm Co-Founder), Steve Mollenkopf (Qualcomm CEO), and Dr. James Thompson (Qualcomm CTO) gave such long, fast, and practiced narratives on direct examination that Qualcomm’s counsel had to tell the witnesses to slow down...By contrast, when cross examined by the FTC, each witness was very reluctant and slow to answer, and at times cagey.”
Koh noted that it was clear Qualcomm “stopped licensing rivals because Qualcomm decided that it was more lucrative to license only OEMs.” She also specifically stated that she found “Qualcomm’s royalty rates are unreasonably high.”
Basically, Judge Koh was not having any of Qualcomm’s bullshit.
This might seem like industry mumbo-jumbo, but there are a few important implications going forward. Mainly, Judge Koh did find Qualcomm’s anti-competitive practices ultimately did harm consumers. Not only did these practices make phones more expensive, but Qualcomm’s high royalties were also seen as potentially dissuading OEMs from investing in new features that would benefit consumers because they’d have to pay more. And it’s not just small OEMs that could be deterred. For example, Koh cites Apple COO Jeff Williams’s testimony in her ruling.
“Apple spends a lot of time its products really beautiful, so we’ll spend an extra $60 on the stainless steel and aluminum enclosures and things like that. And per the agreement, if we spent cost on that, say that extra $60, it has nothing to do with their IP, the Qualcomm arrangement would have them collect $3. SO that, that didn’t make sense to us, and still doesn’t today.”
Enclosures are one thing, but in its separate case against Qualcomm, Apple also pointed to features like Touch ID, advanced displays, and better cameras as innovations Qualcomm profited off of despite having nothing to do with their development. Apple eventually settled because its back was up against a wall with regard to Qualcomm’s stranglehold over 5G modem chipsets. With Intel looking like it would be increasingly unable to deliver a competing 5G modem by 2020, Apple’s stand against Qualcomm crumbled into a six-year licensing deal. At the time, Apple’s capitulation had many wondering how it might impact the FTC’s case, but in hindsight, perhaps it merely strengthened it.
On that note, Koh’s mandate that Qualcomm either negotiate or renegotiate its existing licensing deals could have a far-reaching impact on how phones are priced going forward, especially now that 5G is on the horizon. That’s especially true given Qualcomm has basically cornered the 5G chipset market, and it’s likely Qualcomm would’ve continued its greedy ways without FTC intervention.