A U. S. regulator has sued Qualcomm over the way it licenses cellular patents to smartphone makers — joining South Korea and potentially other governments in seeking to upend the San Diego’s company’s patent royalty practices.
The Federal Trade Commission filed the civil lawsuit Tuesday in U. S. District Court in Northern California. The company also faces investigations in Europe, Japan and Taiwan.
The FTC lawsuit comes a month after the Korea Fair Trade Commission fined Qualcomm $865 million over patent royalties. The company vowed to fight in South Korea’s courts, calling the regulators’ action inconsistent with the facts and a misapplication of fundamental tenets of competition law.
The FTC alleges Qualcomm used its dominant market share in wireless chips to get excessive royalties on key, standard essential patents, which are supposed to be made available at reasonable rates under law.
The agency also says Qualcomm gave Apple rebates in exchange for being the exclusive supplier of cellular modems in iPhones from 2011 through 2015 — hurting competitors.
The FTC isn’t seeking specific damages but asked the court to take steps to prevent Qualcomm’s alleged anti-competitive practices from happening again.
The agency’s governing board voted 2-1 to bring the lawsuit. Commissioner Maureen Ohlhausen objected on the grounds that court action is based on a flawed legal theory, will undermine U. S. intellectual property rights worldwide and comes on the eve of a new presidential administration.
Qualcomm echoed those concerns, calling the FTC’s lawsuit “midnight litigation” brought as Chairwoman Edith Ramirez leaves the agency and President-Elect Donald Trump takes over the White House.
“Qualcomm was still receiving requests for information from the agency that would be necessary to an informed view of the facts when it became apparent that the FTC was driving to file a complaint before the transition to the new Administration,” said Qualcomm General Counsel Don Rosenberg in a written statement. “We have grave concerns about the two Commissioners’ decision to bring this case despite a lack of evidence supporting the allegations and theories in the complaint.”
Qualcomm makes money not only designing mobile semiconductors, but also by licensing its vast portfolio of wireless patents on key cellular technology.
While sales of wireless semiconductors generated nearly two-thirds of Qualcomm’s $23.5 billion in revenue last year, patent licensing accounted for the bulk of its $5.7 billion in profit.
The company’s patent licensing business has been controversial, with smartphone makers complaining that the company charges too much for its intellectual property.
Qualcomm contends that its cellular technology is vital to making smartphones truly mobile. Without it, devices could not tap into the wireless Internet from virtually anywhere.
Qualcomm charges patent royalties that average about 3 percent based on the wholesale price of the smartphone. The company typically licenses its entire wireless patent portfolio, which includes thousands of diverse inventions.
Regulators worldwide ratcheted up scrutiny of Qualcomm in the wake of China’s 13-month long anti-monopoly probe, which resulted in a $975 million fine in February 2015.
The FTC began investigating Qualcomm’s patent business in late 2014. In its complaint Tuesday, the agency singled out Qualcomm’s “no license, no chips” policy, which requires smartphone makers that buy the company’s wireless semiconductors to also license its patents.
The FTC contends that the tactic forces cell phone manufacturers to pay higher royalties regardless of whether they buy chips from Qualcomm or rivals such Intel or MediaTek.
“This is an anti-competitive tax on the use of rivals’ processors,” said the FTC in a statement.
Because of its dominant market position, the risk of losing access to Qualcomm’s cellular modems is too great for smartphone makers to not take a license, according to the complaint. Qualcomm licenses patents to device makers but refuses to license to rival chip firms, according to the FTC.
In addition, the complaint says Qualcomm gave Apple rebates to make sure it was the exclusive supplier of cellular modems in iPhones from 2011 through 2015.
“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,” said the FTC.
During that period, Qualcomm had a significant technology advantage over rivals in performance of 4G LTE wireless data modems. Last year, Apple began using Intel for LTE chips in some iPhones as it caught up with Qualcomm.
Qualcomm’s shares ended trading Tuesday down 4 percent at $64.19 on the Nasdaq.
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