(Bloomberg) -- Qualcomm Inc. forced Apple Inc. to use its chips exclusively in return for lower licensing fees, unfairly cutting out competitors, the U.S. said in a lawsuit against the biggest maker of mobile phone chips.
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.
Qualcomm said in a statement that it would fight the FTC’s complaint, which it said is based on flawed legal theory and seeks to advance the interests and bargaining power of mobile-phone manufacturers. The company also criticized the timing of the case just before President-elect Donald Trump takes office on Friday and FTC Chairwoman Edith Ramirez is slated to step down on Feb. 10.
‘Rush to File’
“This is an extremely disappointing decision to rush to file a complaint on the eve of Chairwoman Ramirez’s departure and the transition to a new administration, which reflects a sharp break from FTC practice,” said Qualcomm General Counsel Don Rosenberg.
Qualcomm is the biggest developer of the technology that underlies how mobile devices communicate. The company has been heavily criticized for its high royalty-rate demands and licensing conditions, which have led to a slew of regulatory investigations worldwide.
The chipmaker has argued that the beneficiaries of regulatory action -- phone-makers -- have struck new deals that acknowledge the validity of Qualcomm’s patents. The company contends users of its technology benefit from its heavy spending on research and development.
Qualcomm has two businesses, selling the right to use patents on the fundamentals of cellular technology and designing and selling chips. Underlining the importance of those patents, it brought in $7.66 billion of licensing revenue in its most recent financial year. That translated to $6.5 billion of pretax profit. Chip revenue of $15.4 billion contributed only $1.8 billion to its profit.
Tuesday’s FTC case in federal court in San Jose, California, stems from a process in which companies get together to develop industry standards so devices from different manufacturers can interoperate -- so, for instance, data sent from an Apple phone can be received and understood by one made by Samsung Electronics Co.
Since the companies that develop those standards have an advantage in ensuring their patented inventions get included in the new specifications, they pledge to license the patents on “reasonable and non-discriminatory” terms.
That phrase has been left undefined. As a result, courts and regulators have been struggling to interpret what’s fair and reasonable, and it has been a key issue during the legal wars among smartphone manufacturers.
The crux of the FTC’s case against Qualcomm is the claim that it offered Apple rebates on licensing fees in return for it exclusively using Qualcomm modem chips in the iPhone from 2011 to 2016. Citing agreements between the two companies, the FTC said in its complaint that Qualcomm intended to create “de facto exclusive deals that were as effective as express purchase requirements and that effectively foreclosed Qualcomm’s competitors from gaining processor business at Apple.”
Qualcomm said in its statement that it has never withheld or threatened to withhold chip supply in order to obtain unfair or unreasonable licensing terms.
“The FTC’s allegation to the contrary -- the central thesis of the complaint -- is wrong,” the company said.
Apple spokesman Josh Rosenstock declined to comment on the case.
The FTC lawsuit marks a new front in the agency’s challenges to anticompetitive conduct in patent licensing, said Michael Carrier, a professor at Rutgers Law School who specializes in antitrust and intellectual property law. Unlike past cases, the agency is targeting royalties collected by Qualcomm as excessive.
FTC Wades In
“This is a more aggressive complaint than we’ve seen in the past,” Carrier said. “Once you say higher royalties are a problem, the FTC is wading a little more in the details of what the royalties should be.”
The FTC seeks a court order stopping Qualcomm’s alleged misconduct. Possible remedies could include disgorgement of unjust profits from past licenses or a requirement to obtain pre-approval for license terms in the future, said Mark Lemley, a professor at Stanford Law School.
The FTC voted 2-1 to bring the case with Commissioner Maureen K. Ohlhausen dissenting. Ohlhausen, a Republican, said the lawsuit is based on a flawed legal theory that “lacks economic and evidentiary support” and will undermine U.S. intellectual property rights.
The case is Federal Trade Commission v. Qualcomm Inc., 17-cv-00220, U.S. District Court, Northern District of California (San Jose).
--With assistance from Susan Decker and Alex Webb
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