Antitrust Law Daily FTC wins injunction against Qualcomm in antitrust modem chip market case
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Wednesday, May 22, 2019

FTC wins injunction against Qualcomm in antitrust modem chip market case

By Nicole D. Prysby, J.D.

Qualcomm engaged in anticompetitive behavior by conditioning the supply of modem chips on a customer’s patent license status, refusing to license its cellular standard essential patents, and entering into exclusive dealing arrangements for the supply of modem chips.

The federal district court in San Jose, California, has found that Qualcomm, Inc. violated the FTC Act by engaging in extensive anticompetitive conduct, including: refusing to sell its modem chips to original equipment manufacturers (OEMs) until the OEMs signed a separate patent license agreement, refusing to license its cellular standard essential patents (SEPs) to rival modem chip suppliers, engaging in exclusive arrangements for the supply of modem chips, and charging unreasonably high royalty rates. Qualcomm’s licensing practices eliminated a competing standard, suppress rivals’ sales, prevent rivals from developing new and maintaining ongoing business relationships with OEMs, and harm rivals’ standing. Qualcomm’s rivals have either exited the market or have been unfairly hobbled in their ability to compete due to Qualcomm’s anticompetitive behavior. Because the unlawful conduct was likely to recur, an injunction was issued. Qualcomm was prohibited from conditioning the supply of modem chips on a customer’s patent license status, was required to make exhaustive SEP licenses available to modem-chip suppliers on fair, reasonable, and non-discriminatory (FRAND) terms, and was prohibited from entering into exclusive dealing agreements for the supply of modem chips (FTC v. Qualcomm, Inc.May 21, 2019, Koh, L.).

Background. The FTC sued Qualcomm, seeking injunctive relief to undo and prevent the company’s "unfair methods of competition." According to the FTC, Qualcomm voluntarily committed to the two U.S. telecommunications industry standard setting organizations that Qualcomm would grant licenses for the company’s standard essential patents on FRAND terms to applicants wishing to implement cellular standards. The FTC contended that Qualcomm breached these contractual commitments and rejected requests from modem-chip competitors to license patents essential to practicing these standards. The FTC also alleged that Qualcomm engaged in other anticompetitive behavior, such as exclusive deals with Apple and charging unreasonably high royalty rates. The FTC alleged that Qualcomm’s conduct violated Section 5(a) of the FTC Act, because it violated both Section 1 and Section 2 of the Sherman Act and also constituted unfair methods of competition in violation of the FTC Act.

Market share and market power. The court considered Qualcomm’s market share and market power in the relevant markets (the market for Code Division Multiple Access or CDMA modem chips and the market for premium Long-Term Evolution or LTE modem chips). With respect to both markets, the court concluded that Qualcomm possessed monopoly power because it had maintained a large share of the market, existing competitors had been unable to quickly increase their output, and there were structural barriers to entering the market (such as significant front-end investments).

Anticompetitive conduct. The court next concluded that Qualcomm used its monopoly power in the CDMA and premium LTE modem chip markets to engage in a wide variety of anticompetitive acts against OEMs. The anticompetitive acts include refusing to sell modem chips to an OEM until the OEM signs a separate patent license agreement, threatening to cut off (or cutting off) OEMs’ chip supply to coerce OEMs into signing Qualcomm’s patent license agreements, and using "chip incentive funds" to reduce the price of Qualcomm’s chips and induce OEMs to agree to Qualcomm’s licensing terms. Qualcomm also refused to provide samples of Qualcomm modem chips, withheld technical support, and delayed delivery of software until OEMs sign Qualcomm’s patent license agreements. The court found that Qualcomm engaged in one or more acts of this anticompetitive behavior towards LG Electronics, Sony, Samsung, Huawei, Motorola, Lenovo, Blackberry, Curitel, BenQ, Apple, VIVO, Wistron, Pegatron, ZTE, Nokia, and additional smaller Chinese OEMs.

Qualcomm also engaged in anticompetitive acts by refusing to license its cellular SEPs to rival modem chip suppliers. This practice promoted rivals’ exit from the market, prevented rivals’ entry, and delayed or hampered the entry and success of other rivals. While there is generally no duty to aid competitors, Qualcomm has an antitrust duty to license its SEPs to rival modem chip suppliers. Qualcomm terminated a voluntary and profitable course of dealing in that it previously licensed its rivals (as required by its FRAND commitments), but voluntarily stopped although doing so was profitable. Qualcomm’s refusal to license rivals was motivated by anticompetitive malice—Qualcomm was willing to sacrifice short-term benefits in order to obtain higher profits in the long run from excluding competition. And Qualcomm has refused to sell products already sold at retail, as there is an existing market for modem chip SEP licenses.

The court then concluded that Qualcomm’s exclusive deals with Apple (the 2011 Transition Agreement (TA) and the 2013 First Amendment to Transition Agreement (FATA)), violate the Sherman Act. Through the TA and FATA, Qualcomm shrunk rivals’ sales and foreclosed its rivals from the positive network effects of working with Apple, thereby maintaining monopoly power in the CDMA and premium LTE modem chip markets that Qualcomm has used to sustain unreasonably high royalty rates. The exclusive deals’ anticompetitive effect was compounded by their lengthy (five-year) duration.

The court also concluded that Qualcomm’s royalty rates are unreasonably high, sustained by its monopoly chip power rather than by the company’s patent portfolio. Qualcomm’s contributions to cellular standards do not justify its unreasonably high royalty rates, because Qualcomm is not the top standard contributor (other patent holders like Nokia and Ericsson have made comparable or even greater contributions to cellular standards). Qualcomm’s unreasonably high royalty rates impose a surcharge on rivals’ modem chips because under Qualcomm’s patent license agreements with OEMs, Qualcomm charges its unreasonably high royalty rates anytime an OEM sells a handset, even when that handset contains a rival’s modem chip. And the use of chip incentive funds exacerbates the effect of Qualcomm’s surcharge on rivals’ chips. Qualcomm’s refusal to license rivals also helps sustains Qualcomm’s unreasonably high royalty rates.

Qualcomm’s interrelated practices create insurmountable and artificial barriers for Qualcomm’s rivals, and do not further competition on the merits. Qualcomm’s chip incentive funds for OEMs lower the effective price of Qualcomm’s modem chips, result in exclusivity, and restrict the OEM customer base available to Qualcomm’s rivals. The surcharge on rivals’ modem chips imposed by Qualcomm’s unreasonably high royalty rates increases the cost of rivals’ chips, which reduces demand for rivals’ chips and reduces rivals’ margins. By attacking all facets of rivals’ businesses and preventing competition on the merits, these practices harm the competitive process and thereby harm consumers. Qualcomm’s licensing practices eliminated a competing standard (WiMax), suppress rivals’ sales, prevent rivals from developing new and maintaining ongoing business relationships with OEMs, and harm rivals’ standing with SSOs, network vendors, and operators. Qualcomm’s rivals have either exited the market or have been unfairly hobbled in their ability to compete. Even if Qualcomm’s rivals have contributed to their own failings, where a government agency seeks injunctive relief, the court need only conclude that Qualcomm’s conduct made a "significant contribution" to Qualcomm’s maintenance of monopoly power.

Injunctive relief. The court concluded that the evidence demonstrated that Qualcomm’s anticompetitive conduct is ongoing and therefore an injunction was warranted. The court imposed the following remedies: Qualcomm must not condition the supply of modem chips on a customer’s patent license status and must negotiate or renegotiate license terms with customers in good faith under conditions free from the threat of lack of access to or discriminatory provision of modem chip supply or associated technical support or access to software. Qualcomm must make exhaustive SEP licenses available to modem-chip suppliers on FRAND terms and to submit, as necessary, to arbitral or judicial dispute resolution to determine such terms. Qualcomm may not enter express or de facto exclusive dealing agreements for the supply of modem chips. Qualcomm may not interfere with the ability of any customer to communicate with a government agency about a potential law enforcement or regulatory matter. In order to ensure Qualcomm’s compliance, the court ordered Qualcomm to submit to compliance and monitoring procedures for a period of seven years.

FTC Competition Director’s statement. In response to the decision, FTC Bureau of Competition Director Bruce Hoffman Bruce Hoffman said in a statement released today: "Yesterday’s decision that Qualcomm’s practices violate the antitrust laws is an important win for competition in a key segment of the economy." Hoffman added that the "FTC staff will remain vigilant in pursuing unilateral conduct by technology firms that harms the competitive process."

FTC Commissioner Rohit Chopra’s statement. "Qualcomm’s customers and competitors will finally be able to negotiate licenses without the threat of having Qualcomm cut off their chip supply," said FTC Commissioner Rohit Chopra in a statement released today. "The public grants intellectual property protections to promote innovation. But when companies abuse these benefits conferred by the public, they must be held accountable."

The case is No. 17-CV-00220-LHK.

Attorneys: Geoffrey M. Green for the FTC. Richard J. Stark (Cravath, Swaine and Moore LLP) for Qualcomm Inc.

Companies: Qualcomm Inc.

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