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Qualcomm (QCOM) Wins Favorable Antitrust Ruling Against FTC

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In a major relief to an adverse antitrust ruling against it, Qualcomm Incorporated QCOM has secured a landmark judgment when the U.S. Ninth Circuit Court of Appeals reversed an earlier ruling by federal judge Lucy Koh. The favorable decision validated its patent licensing business and reinforced the fairness of the competitive marketplace. Additionally, the higher court vacated an injunction against Qualcomm that mandated the chipmaker to change its intellectual property practices and redo its licensing deals with firms like Apple Inc. AAPL and Samsung Electronics Co. SSNLF.

Overseeing the Federal Trade Commission's (“FTC”) litigation against Qualcomm, Lucy Koh issued a ruling in favor of the former in May 2019 and observed that the chip manufacturer had violated anti-trust regulations through monopolistic trade practices. Notably, FTC alleged that it used anti-competitive policies to drive sales of its smartphone chips and reportedly followed “no license, no chips” trade policy, under which chips were only sold to those manufacturers that agreed to inflated patent licensing terms. In order to encourage fair competition, the ruling ordered Qualcomm to renegotiate licensing contracts with customers to ensure that both buyers and other chipmakers are not forced to pay exorbitant licensing fees on its patents. It also directed the company to end any exclusive agreement with customers, which prevented other chip makers from making a production bid.

Refuting all the charges, Qualcomm reasoned that its licensing business was started decades ago before it began selling chips. The company stressed that it assumed technology leadership through continued R&D efforts and hard bargaining with smartphone manufacturers throughout the world. Moreover, the licensing rates were mostly kept unchanged once it started selling chips and had been market-driven, contrary to the allegations. The company also reasoned that offering patent licenses to rival firms like Mediatek Inc. would rob royalty revenues of as much as $20 per phone, jeopardizing the sustainability of its revenue model.

The trial seemed to invoke mixed responses from within the government as the Department of Justice — the other primary antitrust regulator in the country — disagreed with FTC's legal theory and viewed the decision as anti-consumer. The Pentagon and the Department of Energy also observed that the enforceability of the decision would harm national security interests.

Considering all these views, the appeals court unanimously gave the verdict that Qualcomm has not violated the antitrust laws and had not resorted to any anti-competitive trade practices. The judgment also opined that its business model was rather “chip-supplier neutral”, paving the way for the raft of new agreements, which were already in place, to continue without any legal hassles. Unsatisfied with the verdict, the FTC is likely to consider its legal options and request the appeals court to reconsider its decision.

Nevertheless, the favorable ruling has been a shot in the arm for Qualcomm, which recently inked a settlement agreement with Huawei to resolve earlier disputes related to its license agreement that expired on Dec 31, 2019. The company also entered into a new long-term, global patent license agreement, including cross-license rights to certain Huawei patents, covering sales beginning Jan 1, 2020. Per the agreement, Qualcomm currently expects to generate revenues of approximately $1.8 billion in fourth-quarter fiscal 2020, with additional payments to be made in installments in the following quarters.

Qualcomm currently carries a Zacks Rank #2 (Buy). Another favorably-ranked stock in the industry with the same rank is Nokia Corporation NOK. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.   

Nokia has a long-term earnings growth expectation of 15.6%. It delivered an earnings surprise of 37.5%, on average, in the trailing four quarters.

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Nokia Corporation (NOK) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
QUALCOMM Incorporated (QCOM) : Free Stock Analysis Report
Samsung Electronics Co. (SSNLF) : Free Stock Analysis Report
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