Tuesday, January 17, 2017

FTC sues Qualcomm over antitrust violation; Apple may buy baseband chipsets from other suppliers

Late last month, a ruling against Qualcomm by Korea's Fair Trade Commission (KFTC) was significant and elicited positive reactions in the U.S. and in Europe. From today's perspective, the KFTC decision seems to have been little more than a prelude to what Qualcomm is now facing in its own country: an antitrust action brought by the Federal Trade Commission of the United States. The FTC has filed the following complaint with the the United States District Court for the Northern District of California (this post continues below the document):

17-01-17 FTC Complaint v. Qualcomm by Florian Mueller on Scribd

I'm not surprised that Qualcomm's stock is tanking. This antitrust action is huge. Basically, what the FTC is saying is that Qualcomm is leveraging its monopolies (some in the form of patent rights and others due to the market position of its baseband processors) in ways that enable it to charge several times more for its standard-essential wireless patents than market prices and that its "no license-no chips" policy threatens to force the last remaining competitors, such as Intel, out of the market.

The KFTC decision had mentioned parties that participated in the proceedings, and they included Samsung, Apple, and Intel. Today's FTC complaint places particular emphasis on how Qualcomm has abused its monopoly against Apple and basically forced Apple into an exclusive deal. I remember from various Samsung v. Apple and Motorola v. Apple cases five years ago that Apple originally used Infineon chips; Intel acquired Infineon's baseband chip business; and then Apple switched to Qualcomm. As the FTC complaint notes in its paragraph 129, "Apple is a particularly important OEM from the perspective of a nascent baseband processor supplier and confers benefits on a nascent supplier that make the supplier a stronger contender for other OEMs' business" thanks to the large volumes of premium handsets it sells, the ways in which suppliers would benefit from engaging with Apple's engineering teams, the technical validation that being chosen by Apple means for a supplier (given Apple's high requirements), the opportunity to field-test processors in a global market, and a "reputation halo effect from selling to Apple."

The fact that the FTC brought this case in the Northern District of California (though Qualcomm is based further down south) suggests that Apple witnesses will play a key role in the further proceedings.

In terms of what conduct by Qualcomm is anticompetitive, a strategy described by the FTC as a "no license-no chips" policy is front and center:

"3. Qualcomm has excluded competitors and harmed competition through a set of interrelated policies and practices:

a. Qualcomm withholds its baseband processors unless a customer accepts a license to standard-essential patents on terms preferred by Qualcomm, including elevated royalties that the customer must pay when using competitors' processors ('no license-no chips').


The first three parts of paragraph 77 show that Qualcomm's business terms may have to change fundamentally now:

"a. Qualcomm's royalties are disproportionately high relative to the value contributed by its patented inventions, and often are several times higher than the royalties of other SEP licensors that have made similar technical contributions;

b. Qualcomm has continued to calculate royalties as a percentage of a handset's price, even though handsets today offer a number of features—including cameras, high-resolution touch-screen displays, powerful applications and graphics processors—other than cellular connectivity;

c. Qualcomm's standard royalty rate has not fallen, even though many of Qualcomm's patents related to CDMA technology have expired; [...]"

I've consistently opposed royalties based on the entire price of a highly multifunctional end product. The smallest salable unit should be determinative. Now, with this FTC lawsuit, that principle may finally be recognized by U.S. case law.

The FTC is seeking a permanent injunction against what it deems anticompetitive, abusive behavior.

I'm sure it's no coincidence that the FTC decided to bring this complaint more or less on the eve of the inauguration of the 45th president of the United States, Donald J. Trump. The incoming administration will inherit this lawsuit. It will then have to decide how (and how vigorously) to pursue it.

While some antitrust offenders have previously been let off the hook by Republican federal governments after a transition, I'm optimistic that this case here is different. First, the president-elect is not an old-school Republican when it comes to certain aspects of economic policy and regulation. My loyal readers know that I've been a Trump fan for a long time; I already wrote about his "increasingly possible" presidency more than a year ago. I was amazed when a Republican convention, for the first time ever, supported the notion of penalizing companies for moving jobs out of the United States. To me, that is not the antithesis of conservatism but a long-overdue realization of what needs to be done, and similarly, there's no reason why antitrust enforcement would be incompatible with conservative principles. Without fair competition, there is no economic conservatism. Second, it's hard to imagine that the 45th POTUS would be more sympathetic to patent holders than to companies that make highly multifunctional products.

The FTC has a case against Qualcomm that has nothing to do with ideology. This is not about "big government" or "small government," let alone about "capitalism" versus "socialism." It's all about defending the principle of fair competition. I'll go into more detail on the issues here over time. What I can say is that the FTC's complaint is very impressive. The only question it raises is why it took so long. Well, better late than never.

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