The US has sued Qualcomm over the way it licenses its technology for mobile phones, hitting at the business that generates most of the US chip company’s profits.
The case follows an investigation begun in 2014, but which was accelerated in recent weeks as the Federal Trade Commission moved towards filing a high-profile antitrust case just days before a new administration takes control in Washington.
Qualcomm’s shares fell more than 4 per cent on a report by Bloomberg about the impending action. It comes three weeks after South Korea said it would slap a $854m fine on the company over similar licensing concerns.
The FTC’s decision to sue was on a majority 2-1 vote by its commissioners, whose ranks were depleted from the normal five ahead of the change of administration.
In an unusual statement of dissent, commissioner Maureen Ohlhausen claimed the action was based on a “flawed legal theory . . . that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine US intellectual property rights in Asia and worldwide”. Ms Ohlhausen, a Republican appointee, was outvoted by the two Democratic appointees on the commission.
Given the . . . change in administration that will bring major changes in the composition of the commission, this may be last-minute grandstanding with little danger to Qualcomm
“Given the dissent of one commissioner and the change in administration that will bring major changes in the composition of the commission, this may be last-minute grandstanding with little danger to Qualcomm,” said Erik Gordon, assistant professor at the University of Michigan’s Ross School of Business.
The US complaint centres on the patents that other companies need to license to be able to implement communications standards such as 3G. Given the obligatory use of these so-called standards essential patents, companies like Qualcomm agree to certain limits on how they negotiate licences.
According to the lawsuit, filed in the Northern district of California, Qualcomm unfairly uses its other main business — selling baseband processors to handset makers — to force them to agree to pay higher royalties for its patents. Under a company policy called “no licence, no chips”, Qualcomm threatens to cut off the supply of its basebands unless the customers agree to its patent licensing terms, resulting in higher fees, the FTC alleges.
The US action also challenged the chip company over its practice of only licensing its technology to handset makers, and refusing to sell it to rival makers of basebands such as Intel and Taiwan’s MediaTek, which compete with it in selling components for devices like smartphones.
That complaint echoed the action late last year by South Korean regulators, who also said Qualcomm should make its technology available to component suppliers. Critics say that levying royalties only on handset makers, based on the total cost of their products, is a way for the chipmaker to charge higher fees than it would otherwise be able to.
However, Qualcomm executives argue that only a small portion of their patents are exclusively linked to cell phone basebands, which handle communications between the device and a mobile network. They claim their technology is integral to many other aspects of how phones function, making it natural to charge based on the overall product.
In a further allegation, the FTC accused Qualcomm of giving Apple preferential royalty rates in return for buying only Qualcomm basebands between 2011 and 2016, a policy that the regulators say was designed to hurt other makers of basebands.
Qualcomm shot back at the FTC, accusing it of rushing to file a case before this week’s presidential inauguration and of coming up with a complaint that was based on a flawed legal theory, a lack of economic support and misconceptions about the mobile technology industry.
“This is an extremely disappointing decision to rush to file a complaint on the eve of . . . the transition to a new administration,” said Don Rosenberg, general counsel.
Qualcomm denied the central argument in the FTC’s case, that it “withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms”.
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