U.S. Markets closed

Qualcomm’s Bid to Settle U.S. Monopoly Case Hits Roadblock

Ian King and David McLaughlin

(Bloomberg) -- Qualcomm Inc. has hit a wall with U.S. officials in its effort to resolve a federal antitrust lawsuit ahead of a court decision that could compromise the chipmaker’s business model.

The company has yet to win over a majority of the U.S. Federal Trade Commission and its top officials despite extensive talks with the agency, according to people familiar with the process. Both sides are attempting to reach an agreement before a judge rules in the agency’s lawsuit accusing Qualcomm of abusing its market dominance, said the people, who asked not to be named because they didn’t have authority to speak publicly about the matter.

Any settlement decision rests with four members of the five-member commission -- two Democrats and two Republicans -- because the Republican chairman, Joseph Simons, is recused.

One of the challenges to reaching an agreement is winning over the two Democratic commissioners, Rohit Chopra and Rebecca Kelly Slaughter, said one of the people. Another person said the negotiations are fluid and that the difficulties in reaching consensus aren’t strictly due to a split between the Republicans and Democrats on the panel. The FTC bureau overseeing the case hasn’t signed off on an agreement, that person said.

Significant Progress

Still, Qualcomm has made significant progress in the negotiations, and an agreement with the FTC could be reached quickly, said one of the people. If the court rules in favor of the FTC by saying Qualcomm abused its market position, Qualcomm would still have an opening to negotiate a settlement with the agency on how to change its licensing practices, another person said.

The Democrats have pushed for more aggressive antitrust enforcement at the agency. Both wrote dissents in two recent merger reviews in which they opposed decisions by the majority of the commission that allowed deals to close. With Simons recused in the Qualcomm case due to a conflict, any settlement needs the support of three commissioners. Simons previously worked at law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP in Washington where he represented companies on antitrust matters.

Spokesmen for Qualcomm and the FTC declined to comment. Qualcomm shares were little changed at $52.36 at 11:44 a.m. in New York.

Business Model

If no settlement is reached, an adverse ruling for Qualcomm could threaten the company’s business model. Qualcomm’s licensing unit supplies it with more than $5 billion a year in high-margin revenue, which helps fund an industry-leading research and design effort that’s made its technology central to smartphones and networks. Any government-prescribed restriction on Qualcomm’s right to charge a percentage of the price of every smartphone sold would bring profound changes to the industry and potentially threaten its future.

While the FTC has challenged Qualcomm’s business practices as harming competition, President Donald Trump’s administration has intervened in the past in support of the San Diego-based chipmaker. The president blocked Broadcom Inc.’s hostile takeover bid for Qualcomm last year, citing the risk to the U.S.’s leadership in the next generation of wireless technology known as 5G if investment by Qualcomm was curtailed.

Trump Tweet

Trump’s Broadcom decision centered on preventing Huawei Technologies Co. from gaining an edge in 5G innovation. Yet an adverse ruling for Qualcomm would benefit Huawei and other customers of the chipmaker, which testified on behalf of the FTC. On Thursday, Trump tweeted that U.S. companies "must step up their efforts" to build 5G.

The FTC sued Qualcomm in January 2017 in the last days of the Obama administration when the agency was led by Democrats. The lawsuit accused the chipmaker of illegally using its market position to force companies such as Apple Inc. to pay inflated technology license fees.

The 11-day FTC trial spanned much of January and came to a close on Jan. 29 when Judge Lucy Koh signaled she would not issue a swift ruling, which she’s otherwise known for. “I’m generally fairly fast; relatively fast. But something of this magnitude will take longer than your average law and motion matter,” said Koh at the end of the trial.

Judge’s Conundrum: Is Qualcomm a Monopolist, or Merely a Bully?

During the trial, witnesses from Qualcomm’s customer base, including Huawei and Apple, argued that the maker of smartphone components had coerced them into paying licensing by threatening to suspend chip supply. Apple is bringing a separate antitrust suit against the chipmaker and has cut off licensing payments and chip orders.

No evidence of antitrust violations was established, said Qualcomm, which asserted that its practices were “industry norms.’’

Qualcomm has resolved other disputes with regulators around the world, which the company argues have been unfairly instigated by Apple to apply pressure, by agreeing not to treat customers and rivals unfairly in return for the right to continue to charge licensing fees.

It paid a fine in China and saw another financial penalty levied in Taiwan reversed on appeal. Its right to charge royalties in those two jurisdictions was reaffirmed. The company is also appealing a verdict against it in Korea and faces an investigation by the European Union.

(Updates with Trump tweet on 5G in 10th paragraph.)

--With assistance from Kartikay Mehrotra.

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net;David McLaughlin in Washington at dmclaughlin9@bloomberg.net

To contact the editors responsible for this story: Sara Forden at sforden@bloomberg.net;Jillian Ward at jward56@bloomberg.net

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.