(Bloomberg) -- Qualcomm Inc. shares fell the most in more than two years after a U.S. judge ruled that the company violated antitrust law by abusing its dominant position in the market for cellphone chips to exact excessive licensing fees from phone makers and suppress competition.
The ruling, made public late Tuesday in California, challenges Qualcomm’s business model and could upend the smartphone industry. U.S. District Judge Lucy Koh sided with the Federal Trade Commission in a case brought in 2017 accusing the company of anti-competitive practices. The ruling comes one month after Qualcomm and Apple Inc. struck a settlement in a similar lawsuit brought by the iPhone maker, which agreed to continue paying the licensing fees.
“Qualcomm’s licensing practices have strangled competition” in certain modem chip markets “for years, and harmed rivals, OEMs and end consumers in the process,” the judge wrote. She also found that Qualcomm’s key role in manufacturing modem chips for smartphones using 5G made it likely that its behavior would continue.
Qualcomm said it will seek an immediate stay and appeal. “We strongly disagree with the judge’s conclusions, her interpretation of the facts and her application of the law," said Don Rosenberg, executive vice president and general counsel of Qualcomm. The company didn’t have a comment beyond the statement and Apple didn’t immediately respond to a request for comment.
While some investors might have expected Koh to have “softened” her stance after the Apple settlement, that wasn’t the case, with the judge ruling against Qualcomm on “virtually every” measure, Bernstein analyst Stacy Rasgon wrote in a note. He said Qualcomm could possibly win on appeal, especially due to the recent Apple settlement.
Qualcomm shares fell as much as 11 percent, to $69.03, Wednesday morning in New York. It was the biggest intraday decline since January 2017. The shares had rallied after the agreement with Apple in April, which eased investors’ concerns that a drawn out legal battle with Apple would undermine Qualcomm’s business.
Koh’s ruling casts a pall over Qualcomm’s business model and has broad implications for the smartphone industry. Qualcomm’s licensing business, which provides the majority of corporate profits, funds an industry-leading research and design effort that has made its chips the central technology in shifts between generations of mobile phone technology. Any separation or change to that could hurt its competitiveness.
Koh ordered Qualcomm to negotiate or renegotiate licensing agreements with customers “in good faith” and under conditions that wouldn’t threaten to cut off access to its chips. Qualcomm will also have to license its patents to competing chipmakers on “fair, reasonable and non-discriminatory terms.”
Koh has also prohibited Qualcomm from entering into exclusive agreements for the supply of its chips. That includes existing deals with Apple, Samsung Electronics Co. and five other handset makers. These exclusive deals could ”foreclose rivals” from competing in the 5G market, Koh said in her order.
Qualcomm currently has the most advanced 5G modems in the market and almost all phones launched or planned for the new services are using them.
Renegotiating its existing licensing agreements would force an overhaul at Qualcomm of a business that brought in more than $5 billion of high-margin revenue last year.
“It makes little sense for the court, having found that Qualcomm’s patent licenses are the product of anticompetitive conduct, to leave those licenses in place,” the ruling said.
Koh said Qualcomm must be subject to monitoring for the next seven years to make sure it follows guidelines to ensure fair competition.
Qualcomm tried to resolve the FTC’s claims starting months before the case went to trial. But Bloomberg News reported that the company hit a wall with the U.S. government in February, failing to win over a majority of the FTC and its top officials despite extensive negotiations.
The ruling also comes as the U.S. is waging a war against China over dominance of 5G networks, which President Donald Trump views as key to national security. The government has said Qualcomm is key to heading off China’s dominance in the next generation of cellular networks that’s beginning to be rolled out worldwide this year.
“While we don’t know what Trump’s options are, we would not be surprised if he were to interject himself into the process,” Christopher Rolland, an analyst at Susquehanna Investment Group, wrote in a note.
(Updates with shares in first paragraph.)
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