Judge Bans Q’comm’s “no license, no chips” policy

Article By : Rick Merritt

Judge Lucy Koh called Qualcomm's licensing practices on cellular patents anti-competitive in a sweeping 233-page decision

Qualcomm must end its “no license, no chips” policy and renegotiate all of its existing licenses for cellular patents, a San Jose judge ruled. The 233-page decision will impact virtually all cellular chip and systems vendors on the cusp of a transition to 5G.

Judge Lucy Koh also ruled that Qualcomm cannot enter any exclusive licensing deals, essentially invalidating its recent landmark deal with Apple. In addition, it must license its standards-essential patents (SEPs) to chip rivals and let the U.S. Federal Trade Commission (FTC) monitor its licensing practices for seven years.

If it stands, the ruling could slash billions of dollars off of Qualcomm’s existing and future licensing revenues. Qualcomm said that it will seek an immediate stay of the ruling and an expedited appeal.

“We strongly disagree with the judge’s conclusions, her interpretation of the facts, and her application of the law,” said Don Rosenberg, general counsel of Qualcomm.

The decision cites the potential for Qualcomm’s anti-competitive behavior to adversely affect the rollout of 5G cellular. “There is a sufficient likelihood that Qualcomm will hold monopoly power in the 5G modem chip market such that exclusive dealing agreements for the supply of modem chips could foreclose competition in that emerging market,” Judge Koh wrote.

In court testimony, Qualcomm said that it has more than 130,000 cellular patents. It claims that it has a 12- to 24-month lead in 5G silicon over rivals such as Huawei, Samsung, and Mediatek. The same day that Qualcomm struck its exclusive deal with Apple in April, Apple’s LTE chip suppler, Intel, ended plans for 5G modems.

Beyond appeals that could drag on for years, the ruling faces scrutiny from the Trump administration, which has weighed in before on 5G. Earlier this month, the Department of Justice filed an unusual “statement of interest” in the case, advising Koh not to disrupt 5G markets.

The White House aims to curb Huawei’s 5G sales, citing national security concerns. It also quashed Broadcom’s hostile takeover of Qualcomm, also raising national security concerns over 5G when Broadcom was still based in Singapore.

Defending her decision, Judge Koh detailed both Qualcomm’s behavior and legal precedents for her ruling. In a 68-page section, the ruling details Qualcomm’s anti-competitive deals with more than 16 OEMs, including Apple, Huawei, LGE, Samsung, Sony, and Vivo.

“Qualcomm has cut off OEMs’ chip supply, threatened OEMs’ chip supply, withheld sample chips, delayed software and threatened to require the return of software, withheld technical support, and refused to share patent claim charts or patent lists,” Koh wrote, calling the practices “unique in the industry.”

The decision also cites numerous incentives that hampered competition, including rebates to Apple for exclusivity and a 2018 payment of $100 million to Samsung so it would not raise antitrust issues with regulators. “Chip incentive funds result in exclusivity and near-exclusivity and, by preserving Qualcomm’s royalty rates, enable Qualcomm to continue to collect its unreasonably high royalty rates on rivals’ chips,” she wrote.

Koh devoted 10 pages of the ruling to detailing how Qualcomm refused to license at least nine chip rivals, including Broadcom, Huawei’s HiSilicon, Intel, LGE, Mediatek, Samsung, and Texas Instruments. It set what she suggested was an unfair industry practice.

“Qualcomm stopped licensing rival modem chip suppliers … because Qualcomm determined that it was far more lucrative to license only OEMs,” she wrote. “Following Qualcomm’s lead, other SEP licensors like Nokia and Ericsson have concluded that licensing only OEMs is more lucrative and structured their practices accordingly.”

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Judge Koh said that this graphic from a Qualcomm presentation suggested harmful intent in licensing deals with Mediatek. (Source: FTC vs. Qualcomm)

Decision takes into account impact on 5G

The decision comes as 5G networks and systems are just starting a ramp, and many say they will be key to their growth. Qualcomm has at least a dozen licensees whose deals may already cover 5G, Koh wrote, citing Qualcomm’s own documents and comments.

“To permit Qualcomm to continue to charge unreasonably high royalty rates would perpetuate its artificial surcharge on rivals’ chips, which harms rivals, OEMs, and consumers, and would enable Qualcomm to continue to reap the fruits of its Sherman Act violation,” she said. “Thus, the Court finds it necessary to require Qualcomm to renegotiate those license agreements.”

Qualcomm typically charges handset makers a fraction of a handset’s selling price as a patent royalty fee —7% in a deal with Apple. In a January 2018 presentation to stockholders, Qualcomm said that its revenues more than doubled in the transition to LTE and that it was “poised to achieve substantial returns on 5G investment.”

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Presentations to executives in May and July 2012 suggest that Qualcomm knew it was engaging in potentially anti-competitive behavior, Koh said. (Source: FTC vs. Qualcomm)

However, Qualcomm’s royalties are “unreasonably high,” Koh wrote. “According to internal Qualcomm documents not created for antitrust investigations, other patent holders like Nokia and Ericsson have made comparable or even greater contributions to cellular standards than Qualcomm.”

The high rates “may dissuade OEMs from investing in new features that would benefit consumers because an OEM will have to pay Qualcomm additional royalties if the new features add to the handset’s price,” she added.

Koh cited a Qualcomm strategic plan from 2008 in which executives said that cellular modems drove value in past handsets, but now, value comes from new user experiences.

Analysts, some of whom were still reviewing the 233-page decision, had mixed opinions.

Patrick Moorhead of Moor Insights & Strategy called the ruling “a travesty … [with] many inaccuracies and omissions that should make a stay and appeal successful.”

For example, he said, “Judge Koh says Qualcomm created device-based licensing. It didn’t. Ericsson did.”

The ruling could lower Qualcomm’s royalties, but it won’t change the fact that most handset makers use Qualcomm chips, said Linley Gwennap of the Linley Group. “I don’t see these changes helping other chipmakers win business from Qualcomm. Most of the OEMs’ design decisions are based on the merits of the chips, not the licensing.”

Kevin Krewell of Tirias Research called the remedies “severe.” He questioned whether the FTC will continue to push the case hard under appeal, given pressure from the Department of Justice.

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