Chip maker is accused of anticompetitive tactics involving
device used in cellphones
By Brent Kendall and Ted Greenwald
WASHINGTON -- The Federal Trade Commission on Tuesday sued
Qualcomm Inc., alleging the semiconductor company engaged in
unlawful tactics to maintain a monopoly on a type of chip used in
cellphones.
The FTC, in a suit filed in a California federal court, alleged
that Qualcomm used its position as the dominant provider of
baseband processors, devices that enable cellular communications,
to impose onerous terms on phone manufacturers and hobble
competitors.
Qualcomm, which holds patents on essential cellular
technologies, won't sell its processors unless a customer agrees to
the company's preferred patent-licensing terms, which force phone
makers to pay elevated patent royalties to Qualcomm when they use a
competitor's chips, the FTC alleged.
The complaint specifically highlighted Qualcomm's dealings with
Apple Inc., saying that when the iPhone maker sought relief from
high royalties, Qualcomm conditioned partial relief on Apple using
Qualcomm's baseband chips exclusively from 2011 to 2016.
Qualcomm said it would fight the FTC's suit, which it said is
based on flawed legal theory and "significant misconceptions about
the mobile technology industry." The company said it has never
withheld or threatened to withhold its chips to gain unfair
licensing terms, and it accused the FTC of filing the complaint
before it had all the facts.
Apple declined to comment.
Qualcomm shares fell 4% in 4 p.m. trading on the Nasdaq Stock
Market, though shares regained some of those losses in after-hours
trading.
The commission also alleged that Qualcomm wrongly refused to
license its "standard-essential" patents to competitors despite an
obligation to do so.
"Qualcomm has engaged in exclusionary conduct that taxes its
competitors' baseband processor sales, reduces competitors' ability
and incentive to innovate, and raises prices paid by consumers for
cellphones and tablets," the FTC said in its court filing.
The suit asks a federal judge to prohibit the alleged conduct
and to take actions to restore a competitive landscape. The suit
also seeks "redress" for Qualcomm's alleged violations, which
potentially would allow a judge to impose monetary penalties.
The FTC's action came on a 2-1 partisan vote in the waning days
of a Democratic majority at the commission. Current FTC Chairwoman
Edith Ramirez, an Obama appointee, announced last week that she
would step down on Feb. 10.
The FTC's current lone Republican, Commissioner Maureen
Ohlhausen, dissented from the filing of the lawsuit. She is likely
to become acting head of the agency after President-elect Donald
Trump takes office.
"This is an extremely disappointing decision to rush to file a
complaint on the eve of Chairwoman Ramirez's departure and the
transition to a new administration, which reflects a sharp break
from FTC practice," said Don Rosenberg, Qualcomm executive vice
president and general counsel.
The FTC normally has five members but has been operating with
three commissioners for nearly a year. When Ms. Ramirez leaves, the
FTC will have three vacancies. It could take months for the Trump
Administration to fill those openings, but an eventual
Republican-majority at the FTC potentially would have the ability
to take a different course of action regarding Qualcomm.
In the intervening months, the lawsuit could leave Ms. Ohlhausen
overseeing a case she didn't support.
In dissent, she said the lawsuit "lacks economic and evidentiary
support" and would "undermine U.S. intellectual property rights in
Asia and world-wide."
The FTC's probe of Qualcomm has been long-running, but
commission staffers only finished their investigation recently, and
that is why the lawsuit came so late in Ms. Ramirez's tenure,
according to a person familiar with the matter.
The FTC action is the latest of a series of recent regulatory
challenges to Qualcomm's business model. The company got about two
thirds of its $23.56 billion in revenue in its latest fiscal year
from selling chips, but the majority of its pretax profit comes
from royalties for its technology. It typically licenses its
patents to handset makers as a comprehensive package, charging a
royalty of up to 5% of the wholesale price of each device, whether
or not it uses a Qualcomm chip. Qualcomm typically doesn't license
intellectual property to other chip makers.
South Korea's antitrust authority in late December said it would
fine the company about $853 million for alleged violations, the
highest such penalty levied on a company in that country. Qualcomm
said it would contest that decision. The South Korean authority,
like the FTC, demanded that Qualcomm cease selling chips to handset
makers only if they buy a license. It also demanded that the
company unbundle its patent licenses and offer them to chip
makers.
Last year, Qualcomm agreed to a settlement with Chinese
antitrust authorities that included a $975 million fine and
required the company to alter its business practices. Chinese
regulators, however, didn't challenge Qualcomm's model of charging
royalties to handset makers.
In addition, The European Commission in late 2015 said it had
charged Qualcomm with illegally paying a major customer to
exclusively use its chips and selling chips below cost to force a
competitor, Icera Inc., out of the market.
Write to Brent Kendall at brent.kendall@wsj.com and Ted
Greenwald at Ted.Greenwald@wsj.com
(END) Dow Jones Newswires
January 18, 2017 02:48 ET (07:48 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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