In yet another sign that the EU’s executive body is ready to hand out heavy penalties for breaking competition rules, the European Commission has hit Qualcomm, the world’s largest smartphone chip-maker, with a €997.4 million (U.S.$1.23 billion) fine for setting up a deal to be Apple’s sole supplier for five years.

The Commission held that Qualcomm’s attempts to secure exclusive supply terms with the computer giant was an abuse of its dominant position, with the company effectively paying Apple to use its chips. The Commission found that Qualcomm prevented rivals from competing in the market by making “significant” illegal payments to Apple—amounting to billions of dollars largely through price reductions—on condition that it would not buy from rivals.

The penalty—the third largest imposed by the Commission for market abuse, after Google’s €2.42 billion (US$2.99 billion) fine last year and Intel’s €1.06 billion (U.S.$1.31 billion) fine in 2009—equals 4.9 percent of Qualcomm’s global revenues for 2017. The maximum fine the Commission can impose is 10 percent.

The decision bolsters EU Competition Commissioner Margrethe Vestager’s reputation of being an aggressive regulator. In recent years, her office has mounted a concerted campaign against tax avoidance, anti-competitive behaviour and the mishandling of private data.

“This is a huge fine by any standards and shows that Commissioner Vestager is starting 2018 very aggressively,” says Assimakis Komninos, a lawyer at White & Case in Brussels.

Aside from the fine, the Commission has also demanded an undertaking from Qualcomm that it does not engage in such practices (or those with a similar effect) in the future.

In a statement issued on 24 January, Vestager said: “Qualcomm paid billions of U.S. dollars to a key customer, Apple, so that it would not buy from rivals. These payments were not just reductions in price—they were made on the condition that Apple would exclusively use Qualcomm’s baseband chipsets in all its iPhones and iPads. This meant that no rival could effectively challenge Qualcomm in this market, no matter how good their products were. Qualcomm’s behaviour denied consumers and other companies more choice and innovation.”

The same day Qualcomm issued a statement saying that it “strongly disagrees” with the decision and will immediately appeal it to the General Court of the European Union, the EU’s second-highest court.

“This is a huge fine by any standards and shows that Commissioner Vestager is starting 2018 very aggressively.”
Assimakis Komninos, Lawyer, White & Case

“We are confident this agreement did not violate EU competition rules or adversely affect market competition or European consumers,” said Don Rosenberg, executive vice president and general counsel of Qualcomm in a public statement. “We have a strong case for judicial review, and we will immediately commence that process.”

Despite knowingly participating in the scheme, Apple did nothing wrong—according to the Commission’s logic. Speaking at a press conference, Commissioner Vestager said that the case was all about Qualcomm’s behaviour and “was not about Apple and there are no repercussions on its side.” The Commission believes that Apple became trapped in a contract that it could not get out of—though it was paid several billion dollars for the trouble.

One lawyer, who declined to be named, said that it is “bizarre” that no sanction has been made against Apple. “For over five years the company knowingly connived in an exclusivity deal with a supplier that already accounted for a near total share of the market. Apple must have had an idea that it was furthering Qualcomm’s dominant position, particularly when it was being financially rewarded for doing so.”

The background to the case stretches all the way back to 2011 when Qualcomm first signed an exclusivity agreement with Apple. Under the terms of the arrangement, Qualcomm would make significant payments to Apple on the condition that the company agreed to exclusively use Qualcomm long-term evolution (LTE) chipsets in its iPhone and iPad devices. In 2013, this agreement was extended to the end of 2016—covering a period of five and a half years in total.

Between 2011 and 2016 Qualcomm held a dominant position in the global market for LTE baseband chipsets: In fact, it had a market share of over 90 percent.

Under the terms of the agreement, Qualcomm could cease these payments if Apple launched a device with a chipset supplied by a rival, as well as seek reimbursement for a large proportion of previous payments for most of the time the agreement was in place.

European Commission gets tough on market abuse

In the past 15 years, the European Commission has shown a greater appetite to investigate competition cases and to hand out some of the stiffest penalties ever recorded for those companies that abuse their dominant position.
Article 102 of the Treaty on the Functioning of the European Union (TFEU) and Article 54 of the EEA Agreement prohibit abuse of a dominant position.
The following cases are the top fines for abuse of market dominance (Article 102 of TFEU) imposed by the Commission:
Google (2017): €2.42 billion/U.S.$2.99 billion
Intel (2009): €1.06 billion/U.S.$1.31 billion
Qualcomm (2018): €997 million/U.S.$1.23 billion
Microsoft (2004): €497 million/U.S.$613.9 million
Servier (2014): €428 million/U.S.$528.8 million
Telefonica Broadband (2007): €152 million/U.S.$187.8 million
Lundbeck (2013): €146 million/U.S.$180.3 million
—Neil Hodge

Internal documents seen by the Commission show that Apple gave serious consideration to switching part of its baseband chipset requirements to Intel (the largest supplier for chipsets used in computers). It decided, however, against doing so until the agreement came to an end because of the costs involved.

Apple, which accounts for one-third of all LTE chipset demand, only started to source part of its baseband chipset requirements from Intel in September 2016 when the agreement with Qualcomm was about to expire and the cost of switching under its terms was limited.

The agreement meant that Qualcomm’s rivals were denied the possibility to compete effectively for Apple’s significant business, no matter how good their products were. They were also denied business opportunities with other customers that could have followed from securing Apple as a customer.

The Commission opened its investigation on 16 July 2015. On 8 Dec. 2015—just five months later—it sent Qualcomm its “charge sheet,” a Statement of Objections setting out its preliminary concerns. It sent a follow-up letter in February 2017 setting out additional facts ahead of its final decision.

Vestager said her staff had reviewed “qualitative and quantitative evidence” to assess the impact of Qualcomm’s conduct. This looked at the extent of the company’s dominance; the size of the payments to Apple; evidence from Apple’s files of it “seriously” considering changing suppliers; and the importance for small companies of signing deals with Apple to show their legitimacy.

The Commission felt that the abuse was so bad that it rejected the findings of a “price-cost” test presented by Qualcomm. Under this test, if the price exceeds a certain measure of cost, then an “as-efficient competitor” that makes products of an equal standard could compete with the dominant company.

Separately, on 8 Dec. 2015, the Commission also sent Qualcomm a Statement of Objections concerning another investigation it was carrying out into Qualcomm’s behaviour—this time on potential predatory pricing. The preliminary findings of that investigation suggest that Qualcomm sold its chips at below cost price from 2009 to 2011 to force a competitor out of the market. That investigation is ongoing.

Compliance seems to be a problem for Qualcomm, and large fines are becoming something of a habit: On average, the company will have paid out nearly U.S.$1 billion a year to anti-trust authorities around the world since 2015, and the Commission’s fine is just one of a number of investigations into Qualcomm in multiple jurisdictions.

Back in 2015 Qualcomm agreed to pay a U.S.$975 million fine for violating China’s anti-monopoly law. In December 2016, Qualcomm was fined U.S.$850 million in South Korea for unfair patent licensing, while last October Taiwanese regulators fined it U.S.$774 million for violating anti-trust rules. Last year, the U.S. Federal Trade Commission launched an investigation into the company’s pricing models over allegations that it charges partners unreasonable fees.

One of the most contentious issues is the way in which Qualcomm licenses its intellectual property to device makers, charging them a percentage of the total selling price of their devices. Apple, which launched a U.S.1 billion complaint against Qualcomm last year over withheld rebates and being overcharged for chips, alleges that such royalties act as a tax on any innovative features it adds to its products and is yet another way in which the chipmaker is abusing its market power. Qualcomm counters that Apple has lied to regulators in an unfair attempt to bully it into charging less.

While Qualcomm may have become battle-hardened by its recent legal fights, at least one lawyer thinks that it should get used to losing in the courts once again over its appeal of the Commission’s decision. Jonathan Compton, a partner at law firm DMH Stallard, believes that Qualcomm’s appeal “stands no chance of success.”

“It’s there in black and white in documents that the Commission already has—Qualcomm paid Apple handsomely not to use anyone else, not just in one agreement, but in two. The company would be better off looking at who gave it the legal advice that this was acceptable behaviour rather than trying to appeal this decision,” he says.