Coverage: FTC files charges against Qualcomm

The Federal Trade Commission went after Qualcomm on Tuesday, accusing the semiconductor company of business practices that allowed it to maintain a monopoly on a type of chip used in cellphones.

Ian King, David McLaughlin and Joel Rosenblatt of Bloomberg have the news:

Qualcomm’s exclusive deal with Apple was detailed in a Federal Trade Commission lawsuit accusing the chipmaker of illegally maintaining a monopoly for semiconductors used in mobile phones and pocketing elevated royalties from customers.

“Qualcomm recognized that any competitor that won Apple’s business would become stronger, and used exclusivity to prevent Apple from working with and improving the effectiveness of Qualcomm’s competitors,” the FTC said in the lawsuit filed Tuesday.

The lawsuit presents yet another regulatory challenge to Qualcomm’s most lucrative business, technology licensing. The chipmaker gets most of its profits from selling the rights to use patents that are essential to all modern mobile phone systems. Qualcomm has argued that its licensing follows industry standards that have been in place for more than 20 years and are used by other companies.

Last month, South Korea, home to two of Qualcomm’s largest customers, fined the San Diego-based company 1.03 trillion won ($890 million) and described its practices as monopolistic. Qualcomm has said it would appeal that decision. The chipmaker is also the subject of investigations by the European Union and Taiwanese authorities. Its shares fell as much as 5.6 percent Tuesday, before closing down 4 percent at $64.19.

Therese Poletti of MarketWatch.com reported that the company disputed the allegations:

The FTC noted in its complaint that these agreements “effectively foreclosed Qualcomm’s competitors from gaining baseband processor business at Apple.”

Qualcomm issued a statement saying the central thesis of the FTC’s complaint is wrong.

“The portrayal of facts offered by the FTC as the basis for the agency’s case is significantly flawed,” the company said. “In particular, Qualcomm has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms.”

Qualcomm’s shares fell about 4% Tuesday after news of the lawsuit hit. The company’s stock fell sharply in late 2015 as it faced resistance to its licensing practices, but has bounced back in the past year, gaining more than 40%.

The San Diego company is a pioneer in CDMA technology and has patents on key innovations and underlying technologies for cellphones. It licenses its patents to cellphone makers around the world and its licensing business is far more profitable than revenue from its chipsets.

In an interesting twist, the FTC decision to sue the chip maker, which came two years after its investigation began in 2014, was not unanimous. One of the three FTC commissioners, Maureen Ohlhausen, dissented, and issued what she said was a rare statement as she faced an “extraordinary situation.” She said the enforcement action was “based on a flawed legal theory” ahead of a new incoming administration, and that by its mere issuance, the action “will undermine U.S. intellectual property rights in Asia and world-wide.”

Kif Leswing of Business Insider reported Qualcomm paid Apple billions in rebates to use its chips:

The deal allegedly included “substantial incentive payments” on the condition that Apple would continue using Qualcomm’s baseband processors “exclusively” in all iPhone and iPad models from 2011 and 2012.

“In all, Qualcomm’s 2011 and 2013 agreements with Apple provided for billions of dollars in conditional rebates from Qualcomm to Apple,” according to a complaint filed by the FTC.

Qualcomm not only makes the chip that lets phones like Apple’s connect to high-speed LTE wireless networks, but it also owns a significant amount of the underlying patents and intellectual property.

Qualcomm licenses that IP to other companies, like Intel and MediaTek, that also make LTE baseband processors.

Basically, the FTC is alleging that Qualcomm strong armed phone makers by essentially bundling its chips along with its licenses. If a phone maker like Apple were to use Qualcomm’s chips, then it would get a deal on the associated property licenses.  If a phonemaker were to use a competitor’s chips, then it would pay extra IP royalties.

The discount on the licenses was allegedly paid to Apple in the form of conditional rebates. Conditions allegedly included not using a competitive wireless technology backed by Intel, agreeing not to sue Qualcomm over royalties, and using Qualcomm chips in forthcoming iPhones and iPads.

Qualcomm and Apple allegedly struck deals in 2007, 2011, and 2013 over these royalties.