Injecting itself into what has become a global legal battle, the Federal Trade Commission has filed a complaint in federal district court charging Qualcomm with using anticompetitive sales and licensing tactics to “maintain a monopoly in the supply of a key semiconductor device used in cell phones and other consumer products.”

Critics of the action—which coincides with regulatory actions in Asia and lawsuits by consumer tech giant Apple—say it could undermine U.S. intellectual property rights in Asia and, potentially, on a global scale.

Qualcomm is the world’s dominant supplier of baseband processors, devices that manage cellular communications in mobile products. The FTC alleges it used its dominant position as a supplier of certain baseband processors “to impose onerous and anticompetitive supply and licensing terms on cell phone manufacturers and to weaken competitors.”

Qualcomm also holds patents it has declared essential to industry standards that enable cellular connectivity, a statement from the FTC says. These standards were adopted by standard-setting organizations for the telecommunications industry, which include Qualcomm and many of its competitors.

In exchange for having their patented technologies included in the standards, participants typically commit to license their patents on what are known as “fair, reasonable, and non-discriminatory,” or FRAND, terms. When a patent holder that has made a FRAND commitment negotiates a license, it is typically constrained by the fact that if the parties are unable to reach agreement the patent holder may have to establish reasonable royalties in court.

According to the FTC, by threatening to disrupt cell phone manufacturers’ supply of baseband processors, “Qualcomm obtains elevated royalties and other license terms for its standard-essential patents that manufacturers would otherwise reject.”

“I have been presented with no robust economic evidence of exclusion and anticompetitive effects, either as to the complaint’s core ‘taxation’ theory or to associated allegations like exclusive dealing.”
Commissioner Maureen Ohlhausen

“These royalties amount to a tax on the manufacturers’ use of baseband processors manufactured by Qualcomm’s competitors, a tax that excludes these competitors and harms competition. Increased costs imposed by this tax are passed on to consumers,” the complaint says. “By excluding competitors, Qualcomm impedes innovation that would offer significant consumer benefits, including those that foster the increased interconnectivity of consumer products, vehicles, buildings, and other items commonly referred to as the Internet of Things.”

The FTC further alleges that Qualcomm maintains a “no license, no chips” policy under which it will supply its baseband processors only on the condition that cell phone manufacturers agree to the company’s preferred license terms. It says this tactic forces cell phone manufacturers to pay elevated royalties to Qualcomm on products that use a competitor’s baseband processors. The policy was described as “an anticompetitive tax on the use of rivals’ processors.”

“The risk of losing access to Qualcomm baseband processors is too great for a cell phone manufacturer to bear because it would preclude the manufacturer from selling phones for use on important cellular networks,” the FTC said in a statement.

The Commission also claims that the company extracted exclusivity from Apple in exchange for reduced patent royalties. “Qualcomm precluded Apple from sourcing baseband processors from its competitors from 2011 to 2016,” it said in a statement. “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 is seeking a court order to undo and prevent Qualcomm’s “unfair methods of competition in violation of the FTC Act.” The agency also wants Qualcomm ordered “to cease anticompetitive conduct and take actions to restore competitive conditions.”

The Commission vote to file the complaint was 2-1. Both a public and sealed version were filed in the U.S. District Court for the Northern District of California on Jan. 17, 2017. Commissioner Maureen Ohlhausen dissented.

TRUMPING THE FTC

The legal battles between the Federal Trade Commission, Qualcomm, and Apple could have an unexpected referee: President Donald J. Trump. A Jan. 26 letter signed by a coalition of conservative groups is asking Trump to step in, invalidate the FTC’s pursuit of its case, and appoint new leadership at the Commission. A selection from the letter follows:
We write to express our deep disappointment with the recent decision of the Federal Trade Commission to issue a flurry of last-minute complaints against U.S. companies days before your administration took office, and urge you to effect swift changes in FTC policies and leadership by appointing Maureen Ohlhausen as permanent chair of the FTC.
Commissioner Ohlhausen has pledged to uphold intellectual property rights and undertake only evidence-based antitrust investigations, in contra-distinction to the politically motivated actions taken by the outgoing FTC that harm U.S. companies relative to Asian competitors. We acknowledge and appreciate her being named acting FTC chair.
We are particularly concerned with the decision by outgoing FTC leadership to bring a rushed and reckless complaint against Qualcomm only three days before you took office. The FTC's complaint against Qualcomm is midnight regulation at its worst, a misuse of antitrust litigation to promote a destructive policy agenda that aims to undercut patent property rights and conservative free market principles.
Throughout her tenure as Democratic chair of the FTC, Edith Ramirez has repeatedly used indefensible Section 5 enforcement theories to advance antitrust policies that weaken U.S. patent rights to the detriment of America's technology leadership, competitiveness and jobs. The FTC's complaint against Qualcomm is the latest example of this destructive agenda.
As Commission Ohlhausen stated in her strongly worded dissent, the FTC's complaint against Qualcomm is legally baseless, lacking in economic and evidentiary support and sets a precedent that will cause real harm to our economy and U.S. intellectual property rights worldwide. Specifically, the complaint signals to foreign antitrust authorities that U.S. companies are fair game for similarly damaging, and equally frivolous, enforcement actions overseas —often in naked attempts to steal U.S. patented technology or eliminate U.S. competition from their domestic markets.
Asian countries such as China, South Korea, and Taiwan have been targeting innovative U.S. companies with specific goals: to steal U.S. technology.
This foreign technology grab threatens U.S. leadership in the development of innovative technologies. If Asian companies can access our best technology through nefarious government enforcement actions, both U.S. competitiveness and national security are at stake. We cannot allow our Asian trading partners to interpret the Obama administration's lame-duck FTC action as a precedent to justify antitrust attacks against American firms and their patent rights.
Eagle Forum Education & Legal Defense Fund
U.S. Business & Industry Council
Constitutional Congress, Inc.
Home School Legal Defense Association
Americans for Tax Reform
Family Association
Property Rights Alliance
American Conservative Union
Campaign for Liberty
Family Pac Federal
Source: American Conservative Union

Ohlhausen said she rarely writes dissenting statements when the Commission, against her vote, authorizes litigation. With the Commission’s 2-1 decision to sue Qualcomm, however, she faces “an extraordinary situation” and “an enforcement action based on a flawed legal theory that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration and, that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide.”

“The fundamental element of this theory is a royalty overcharge,” Ohlhausen wrote. “If Qualcomm charges reasonable royalties for its patents, then there is no anticompetitive “tax”—the complaint’s nomenclature for a price squeeze—but only the procompetitive monetization of legitimate patent rights. Importantly, there is no suggestion that Qualcomm charges higher royalties to OEMs that buy non-Qualcomm chipsets. The complaint’s taxation theory requires that Qualcomm charge OEMs unreasonably high royalties.”

Rather than allege that Qualcomm charges above-FRAND royalties, “the complaint dances around that essential element,” she added. It fails to allege that Qualcomm charges more than a reasonable royalty.

That “speaks to the dearth of evidence in this case,” she said. Although the complaint frames its price-squeeze claim as a “tax,” it overlooks the fact that reasonable royalties are not an exclusionary tax, even if paid by competitors.

“I have been presented with no robust economic evidence of exclusion and anticompetitive effects, either as to the complaint’s core ‘taxation’ theory or to associated allegations like exclusive dealing,” Ohlhausen wrote.

In a statement, Qualcomm said it will “vigorously contest” the complaint and defend its business practices.

“[We believe] the complaint is based on a flawed legal theory, a lack of economic support and significant misconceptions about the mobile technology industry,” it said. “The complaint seeks to advance the interests and bargaining power of companies that have generated billions in profit from sales of products made possible by the fundamental 3G and 4G cellular technology developed by innovators like Qualcomm.”

The portrayal of facts offered by the FTC “is significantly flawed,” the company added. “Qualcomm has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms. The FTC’s allegation to the contrary—the central thesis of the complaint—is wrong.”

Politics—notably the deregulation stance taken by the current, Republican-led Congress and President Donald Trump—also factored into the company’s defense. “Despite an appeal from members of Congress to refrain from ‘midnight litigation’ with novel and untested legal theories that could damage competition in the U.S., the FTC accelerated the investigation of Qualcomm and directed the filing of the complaint just days before the change of the Administration [with] only three of five FTC commissioners in place,” the company’s statement says.

“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 Don Rosenberg, executive vice president and general counsel. “In our recent discussions with the FTC, it became apparent that it still lacked basic information about the industry and was instead relying on inaccurate information and presumptions. In fact, 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. 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.”

“The intellectual-property-rights policies of the cellular standards organizations do not require licensing at the component level, and the FTC does not have the authority to rewrite industry policy,” he added. “That is for the industry, not a regulator, to decide.”

The backdrop to the FTC’s action is both a regulatory action in South Korea and multiple lawsuits filed by Apple.

Qualcomm was fined the equivalent of $854 million by the Korea Fair Trade Commission for the same business practices cited in the FTC’s complaint. Apple, with a complaint filed on Jan. 20 in Federal District Court for the Southern District of California, seeks $1 billion in damages, accusing Qualcomm of “charging royalties for technologies [it has] nothing to do with.” On Jan. 25, Apple also filed lawsuits in the Chinese courts, including in the Beijing Intellectual Property Court, alleging violations of China's Anti-Monopoly Law. It is seeking 1 billion yuan in damages, roughly $145 in U.S. currency.

“This is an unprecedented and insupportable decision relating to licensing practices that have been in existence in Korea and worldwide for decades and that the KFTC reviewed but did not question in a previous investigation of Qualcomm,” a statement from the company said, announcing that it will file for an immediate stay of the corrective order and appeal the KFTC’s decision to the Seoul High Court. “Qualcomm strongly disagrees with the KFTC’s announced decision, which Qualcomm believes is inconsistent with the facts and the law, reflects a flawed process, and represents a violation of due process rights owed American companies under the Korea-U.S. Free Trade Agreement.” The company will appeal the amount of the fine and the method used to calculate it.

Qualcomm also hit back against Apple’s lawsuits during a Jan. 25 earnings call. A takeaway: It wants to pay less for Qualcomm’s technology by pushing back against deals other companies around the world had no dispute with.

“Apple has intentionally mischaracterized our agreements and negotiations, as well as the enormity and value of the technology we have invented, contributed, and shared with all mobile device makers through our licensing program,” Rosenberg said. “It has been actively encouraging regulatory attacks on Qualcomm’s business in various jurisdictions around the world, as reflected in the recent KFTC decision and FTC complaint, by misrepresenting facts and withholding information.

“These filings by Apple’s Chinese subsidiary are just part of Apple’s efforts to find ways to pay less for Qualcomm's technology,” he added. “Apple was offered terms consistent with terms accepted by more than one hundred other Chinese companies and refused to even consider them.”

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