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Qualcomm: The FTC is trying to 'hobble a quintessential' US tech company

Qualcomm logo seen displayed on smart phone. (Photo by Igor Golovniov/SOPA Images/LightRocket via Getty Images)

Qualcomm Inc., (QCOM) the world’s largest supplier of modem chips for mobile devices, faced its first day of trial Friday defending antitrust allegations from the U.S. Federal Trade Commission.

The trial is underway amid the U.S. government shutdown that has otherwise shuttered the Commission.

Qualcomm’s legal battles over anticompetitive claims have ensued around the globe with allegations from government regulatory agencies and companies that use its processors, most notably Apple, which has been going after Qualcomm in multiple lawsuits. Qualcomm accuses Apple of spurring regulatory attacks.

The FTC’s action against Qualcomm was filed in a San Jose federal district court nearly two years ago, alleging the company unfairly wielded its manufacturing dominance and patents in the market for baseband processors — chips used and required by telecommunication industry standards to manage cellular communications like phone calls and internet access in mobile products.

In a pre-trial brief, Qualcomm suggested that the FTC’s action could hurt U.S. innovation and potentially even aid the controversial Chinese tech giant Huawei.

“In its zeal to hobble a quintessential American technology company—without a shred of evidence regarding anticompetitive effects—the FTC risks providing an opening for Huawei to dominate 5G technology, and stifling innovation just when it’s needed most,” Qualcomm wrote in the brief.

The FTC’s ruling could amount to multi-billion dollar outcomes for Apple or Qualcomm, however the actual remedies the FTC would provide remains opaque, as a significant amount of evidence remains under seal. Qualcomm claimed in a separate, overlapping, case in October that Apple owes the company $7 billion in unpaid patent royalties at issue in the FTC case.

“It’s difficult to [quantify] until the judge makes the necessary ruling on to what she thinks is the relevant market,” Monte Cooper an IP attorney who has expertise in standard essential patents and represented third party, Sequans Communications S.A., (SQNS), in the past.

“As it relates to the scope of relief that the court would order it's it's extremely difficult to say because again, much of the information that is generating these accusations has not been disclosed to the public.”

An ‘anticompetitive tax’?

“We believe the basis of the FTC case, like several other cases, is unfounded, and we think we can prove that,” Qualcomm general counsel Don Rosenberg told Bloomberg in December.

According to the FTC, Qualcomm pushed cellular device manufacturers into contractual ultimatums, requiring manufacturers to agree to Qualcomm’s onerous licensing terms as a condition to use its processors. As the FTC sees it, Qualcomm’s licensing royalties amount to an “anticompetitive tax” on users of rival company processors, reduces innovation, and inflates consumer prices for cell phones and tablets. The FTC is demanding that Qualcomm issue licenses to rival chip makers under standard-essential patents under “FRAND” terms, meaning those that are fair, reasonable and nondiscriminatory.

Following the FTC’s January 2017 complaint, Apple and a group of Apple suppliers filed the overlapping lawsuit against Qualcomm in San Diego Superior Court and ceased paying Qualcomm royalties. Apple brought similar actions against Qualcomm in the UK and Taiwan, as well as patent infringement cases against Qualcomm.

Qualcomm says its share of chip sales has plummeted

Qualcomm has countered with multiple complaints against Apple in the U.S. District Court for the Southern District of California and in San Diego Superior Court. The company claims in the respective lawsuits that Apple must make good on royalties for use of its processors, and that Apple breached Qualcomm’s Master Software Agreement. Other complaints filed by Qualcomm against Apple in the U.S. and abroad claim that Apple infringed on multiple Qualcomm patents.

The global market for cellular device processors remains dominated by Qualcomm. In court documents Qualcomm says its global market share of modem chips for 2017 was 34%, and its share of one of the processors at issue, “premium LTE,” dropped by more than half to 49.2% between 2012 to 2017. Earlier in 2018, Apple dropped Qualcomm as a supplier of chips for its latest devices and has since boosted efforts to produce more chips in-house.

Qualcomm says the FTC’s monopoly argument falls flat, in part because new chip makers have already eroded its market share.

“The FTC will point to no evidence showing that any competing chipmaker left the market or was foreclosed from competing because of Qualcomm’s licensing practices,” Qualcomm’s counsel wrote in a pretrial brief. “On the contrary, entry has increased and Qualcomm’s share of chip sales in the alleged markets has dropped precipitously.”

The FTC is seeking an injunction that would stop Qualcomm from engaging in what it calls “no license, no chips” behavior. The agency is also asked the judge to order Qualcomm to license its standard-essential patents to rival chipmakers in compliance with FRAND standards. In a November ruling, the judge said Qualcomm is required to license its standard-essential patents to rival chipmakers.

“What they’re saying is that as part of the proof that Qualcomm’s behavior is anticompetitive...is they are producing royalties that would not otherwise be at the price level they are, and one way they have accomplished that is by refusing to license as a component at the modem chip level to other modem chip suppliers,” Cooper said.

“Qualcomm has no antitrust duty to deal with competing chipmakers,” counsel for the company said in a brief.

Qualcomm has asserted that only two of Qualcomm’s baseband processors are at issue: those that comply with CDMA standards, and premium baseband processors, which comply with advanced LTE standards, neither of which the company claims are proper antitrust markets.

The company goes on in its pretrial brief to argue that the court should carefully evaluate how its decision will impact U.S. chipmaker competitiveness in the global market.

“[M]arket realities demonstrate that the cellular industry is healthy, competitive, and thriving — and that Qualcomm’s share of CDMA and “premium LTE” chip sales has been falling drastically as other chip makers have decided to invest and compete more aggressively,” Qualcomm wrote.

Yahoo Finance reached out to counsel for the FTC and counsel for Qualcomm, seeking comment. Qualcomm did not comment on the matter. No immediate response was received from the FTC.

Alexis Keenan is a New York-based reporter for Yahoo Finance. She previously produced live news for CNN and is a former litigation attorney. Follow her on Twitter at @alexiskweed

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