Two years after the U.S. Federal Trade Commission sued Qualcomm Inc., unleashing a series of existential challenges to the chipmaker’s business model, the company is about to get its chance to square the record.
Lawyers for the regulatory agency and the company are set to begin presenting arguments Friday in a 10-day non-jury trial over claims that Qualcomm is abusing its strength in the market for smartphone components to force Apple Inc. and others to pay inflated license fees.
While the two sides have said they’re in settlement negotiations, U.S. District Judge Lucy Koh in San Jose refused to delay proceedings and narrowed the scope of Qualcomm’s arguments in pre-trial rulings.
The case challenges Qualcomm’s business model, casting a shadow over one of the fundamental reasons the San Diego company been so successful in the smartphone era. Losing to the FTC would threaten billions of dollars the company makes in licensing fees, which have been used to develop better chips and invent technology. Any cut to Qualcomm’s ability to pay for industry-leading research and design jeopardizes its future competitiveness as well as its current profits.
After the FTC filed its complaint in January 2017, Apple quickly followed with a similar suit, accusing Qualcomm of holding the industry ransom with patents that underpin how modern phone systems work. That move spawned a global web of litigation involving the two companies, with Qualcomm saying in October that Apple owed it $7 billion in unpaid licensing fees.
Qualcomm has also been subject to regulatory action in other countries, something it says Apple engineered through unfair lobbying. It is appealing a decision in Korea, won a reversal of a judgment against it in Taiwan and paid a fine in China. The European Union also has an open investigation.
In the FTC case, Qualcomm argues that the U.S. has its facts wrong and has failed to demonstrate any evidence of anti-competitive behavior by the chipmaker against rivals.
Nonetheless, Qualcomm has taken a couple of pre-trial hits from the judge. Although a key part of the government’s case is its allegation that the company tried to force Apple to use its chips exclusively, Koh ruled that Qualcomm can’t point to Apple’s growing dependence on Intel Corp. to prove otherwise.
Currently Qualcomm doesn’t give licenses to its chipmaker rivals such as Intel and MediaTek Inc. Qualcomm argues they don’t need the licenses because it gets paid by the handset makers and has never sued them for using its technology.
The FTC contends that Qualcomm’s refusal to license patents to competitors including Intel and Samsung Electronics Co. was part of a scheme to maintain its monopoly.
Koh concluded in November that Qualcomm is required to license patents under commitments the chipmaker made to industry groups to provide them on fair and reasonable terms.
Intel and Samsung have supported the FTC in friend-of-the-court filings, arguing that Qualcomm’s defense is outdated since its years of “dominance through innovation and hard work” have been replaced with monopolistic practices. Those practices “suppress competition and harm consumers,” Intel said in a May 2017 filing.
The FTC case and Apple’s rapid follow-up caused a selloff in Qualcomm’s stock on concern that its ability to charge for patents was under threat. That in turn led to a hostile takeover bid by Broadcom Inc. that the U.S. government thwarted on national security grounds.
A key issue in the FTC case is how Qualcomm gets paid for licensing its technology. The company owns the invention by which multiple data streams can use the same set of radio frequencies.
None of its opponents deny that Qualcomm came up with innovative technology that is key to industry standards. They challenge the extent to which Qualcomm uses its patents on those inventions to extract fees. Currently the company gets paid a percentage of the total selling price of each phone sold. Even amid nonpayments and disputes, that revenue totaled $5.2 billion in its most recent financial year.
Qualcomm’s adversaries claim that’s unfair because there’s so much other technology that makes a phone attractive and useful that comes from elsewhere. They argue that Qualcomm should set fees based on the price of the component that uses its technology. That’s a drop to the low tens of dollars from a basis in the hundreds of dollars.
The way Qualcomm sees it: Without its technology, smartphones wouldn’t be able to access the internet — an iPhone would be more like an expensive iPod.
Sanford C. Bernstein analyst Stacy Rasgon said in a research note that the FTC trial has “potential to be one of the more important events” in Qualcomm’s broader showdown with Apple, while the chipmaker’s track record in preliminary skirmishes has been “less than stellar.”
Still, Qualcomm has scored some victories. It brought separate patent suits against Apple in Germany and China, winning bans on the sale of some iPhone models.
Those cases are aimed at forcing Apple to settle the broader dispute. That’s not going to happen until the FTC case is out of the way, according to UBS analyst Timothy Arcuri.
The FTC case, Arcuri wrote in a research note, will “likely then drive the Apple-related cases one way or the other.”
King and Mehrotra write for Bloomberg.