Intellectual Property

Obama Administration’s Parting Shot at Qualcomm May Miss Its Mark

Licensing practices in cell phone industry get a closer look from the FTC.

In the last week of the Obama Administration, the Federal Trade Commission filed an antitrust lawsuit against Qualcomm, but some observers doubt the claim the company was using anticompetitive practices to maintain a monopoly on chips for mobile devices will stick.

With 65% of the market according to ABI Research, Qualcomm is the world’s leading supplier of broadband processors. These semiconductors enable communications in cell phones and other mobile devices. They are also the most expensive component of the cellphone.

The company also licenses patents considered essential to widely adopted cellular standards such as Code Division Multiple Access (CDMA), the main standard for third-generation cellular networks and Long-Term Evolution (LTE), the main standard for fourth-generation cellular networks. Cell phones and tablets sold by Qualcomm’s customers must follow these standards even if they use processors from Qualcomm’s competitors.

Qualcomm has also made commitments to standard-setting organizations agreeing to license the standard-essential patents to all applicants on fair, reasonable and nondiscriminatory (FRAND) terms.

On Jan. 17, the FTC sued Qualcomm and charged the company with violating the FTC Act in three ways. First, the agency said Qualcomm maintains a “no license, no chips” policy. This means Qualcomm withholds its baseband processors unless a customer agrees to also license its standard-essential patents on terms extremely favorable to Qualcomm, such as paying elevated royalties when customers use competitors’ processors.  The complaint called this an anticompetitive tax on the use of rivals’ processors.

The second violation claimed Qualcomm refuses to license its standard-essential patents to competing suppliers of baseband processors as promised.

Finally, the FTC claimed the company extracted an exclusive arrangement from Apple in exchange for reduced patent royalties from 2011 to 2016, hobbling competitors.

South Korea’s antitrust regulators have made similar claims against Qualcomm. In December, they fined the company $854 million for unfair practices in patent licensing. Qualcomm has said it will appeal.

The impact of this enforcement action on the mobile communications industry is huge,” said Robert Ginsburg, founder of legal consulting firm RBG Global, of the FTC complaint.

Qualcomm responded to the complaint, saying it was based on a flawed legal theory, lacked economic support and contained significant misconceptions about the mobile technology industry. The company added it “has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms.”

Qualcomm also said that the FTC filed the complaint just days before the change of the administration though only three of five FTC commissioners are in place.

“This is an extremely disappointing decision to rush to file a complaint on the eve of Chairwoman Ramirez’s departure and the transition to a new Administration, which reflects a sharp break from FTC practice,” said Don Rosenberg, Qualcomm’s general counsel.

However, Braden Perry, a regulatory and government investigations attorney with  Kennyhertz Perry LLC who has also served as a federal enforcement attorney for the Commodity Futures Trading Commission, said this was not a sharp break from FTC practice. He said the agency had obviously been investigating this for some time because the only reason the FTC would file a lawsuit is if it had enough information to make the charges. And the only way it would have enough information, said Perry, would be if it had already been doing an investigation and subpoenaing documents.

“In a monopoly allegation, it takes many years to build a case,” said Perry. “Likely, the FTC wanted to get its complaint on file prior to the regime change to ensure the litigation would move forward.”

Perry said a change in administrations would bring a change to the leadership of the regulatory agencies. He explained that it’s a lot easier for a new administration to close an investigation, but once a lawsuit is filed, if you want to get rid of it, it has to be publicly dismissed.

“Then you have to admit defeat and regulatory agencies don’t like to admit defeat,” said Perry. “It’s the optics. Federal lawsuits are very public.”

Not only was the complaint filed with two empty chairs on the commission, which will likely be filled by President Trump with pro-business Republicans, but also unusual was that the vote was not unanimous at 2-1.

FTC Commissioner Maureen Ohlhausen, in voting against the filing, made another equally unusual move:  She made a dissenting statement explaining her logic.

“Rather than allege that Qualcomm charges above-FRAND royalties, the complaint dances around that essential element,” Ohlhausen wrote. “It alleges that Qualcomm’s practices disrupt license challenges and bargaining in the shadow of law, and that the ensuing royalties are ‘elevated.’ But the complaint fails to allege that Qualcomm charges more than a reasonable royalty. That pleading failure is no accident; it speaks to the dearth of evidence in this case. Although the complaint frames its price-squeeze claim as a ‘tax,’ it overlooks the fact that reasonable royalties are not an exclusionary tax, even if paid by competitors. And it includes no allegation of below cost pricing (presumably of chipsets) by Qualcomm, even if one infers an antitrust duty to deal with chipset manufacturers.”

Anil Doradla, a technology stock analyst at William Blair, a financial services firm, is similarly skeptical.

“Although the complaint represents a negative for Qualcomm, we believe that the FTC’s action from yesterday will not bear fruit in the end,” wrote Doradla after the complaint was filed. “We believe there are three key reasons that the FTC’s complaint will not materialize into significant retribution for Qualcomm: 1) partisan dynamics within the FTC, 2) the dynamics of the new Republican administration, and 3) the diminished relevance of customer-specific issues highlighted in the complaint.”

Still, Ronald J. Colombo, professor of law at the Maurice A. Deane School of Law at Hofstra University,  sees potential in the case.

“If the FTC should win it would level the playing field in respect to this piece of technology and lower prices for consumers and offer more choice.”

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