A federal Judge has ruled that Qualcomm violated antitrust laws by using its top position in smartphone chips to extract excessive patent license fees for its cellular inventions, striking a major blow to the San Diego company's business model.
After four months of deliberations, U.S. District Judge Lucy Koh found against Qualcomm in an antitrust lawsuit brought two years ago by the U.S. Federal Trade Commission.
The 233-page decision requires Qualcomm to renegotiate patent agreements and offer standard essential patents licenses to rival chip makers, which opens the door to component level patent licensing.
Today, Qualcomm licenses its cellular patents based on a percentage of the price of smartphones, subject to caps. Component level licensing could significantly reduce Qualcomm's profits from patent fees, which fund much of its research and development work in advanced wireless technologies.
"This is a gut punch to Qualcomm and could have a major ripple impact across the smartphone industry," said Daniel Ives, managing director at Wedbush Securities. "It could not come at a worse time for Qualcomm going into 5G and its pricing power on chips."
Qualcomm said it would immediately seek a stay while it appeals Koh's ruling to the Ninth Circuit Court of Appeals.
"We strongly disagree with the judge's conclusions, her interpretation of the facts and her application of the law," said Don Rosenberg, Qualcomm's general , in a statement.
Koh's ruling comes a month after Qualcomm settled a separate lawsuit with Apple, which involved antitrust allegations similar to the FTC's claims.
Apple executives were top witnesses in the FTC's case. The settlement, which included a six year patent license agreement and multi-year chip supply deal between the two companies, was seen by investors as a sign that the FTC case against Qualcomm was weak.
"We do believe that, post the Apple settlement, that some investors might have hoped that the judge would have softened her views in the wake of the Apple capitulation," said Bernstein Research Analyst Stacy Rasgon. "Apparently not."
The FTC's decision to bring an antitrust lawsuit against Qualcomm came in the waning days of the Obama administration and was controversial, with then-Commissioner Maureen Ohlhausen writing in dissent that the lawsuit rested on a flawed legal theory.
The U.S. Justice Department's antitrust division also sought a hearing before any sanctions were issued against Qualcomm, arguing that harsh requirements could hurt U.S. competitiveness in upcoming 5G wireless technologies. Koh denied the request as unnecessary.
In a January trial in federal court in San Jose, Qualcomm lawyers argued that the FTC failed to prove that Qualcomm's business practices harmed competition and consumers in a thriving smartphone market.
The FTC argued that Qualcomm used its dominant market share in 3G and 4G smartphone processors to force smartphone makers to pay too much to licenses its standard essential patents.
Koh ruled that Qualcomm must negotiate patent licenses with customers free of the threat of a lack of access to its chips, and it must make exhaustive patent licenses available to rival modem chip suppliers, such as Samsung, MediaTek and Huawei. She also imposed seven years of monitoring.
"They will appeal it, so there will no near term impact as this continues to run through the court system," said Ives. "But what it does is Qualcomm goes from a position of strength to a few steps down with this ruling."
Since Qualcomm is the U.S. leader in 5G technologies, Ives believes Koh's decision could weaken U.S. efforts to curb China's Huawei from becoming the dominant player in the 5G race globally.
"Qualcomm is dealt a blow with this FTC ruling as the main (U.S.) 5G arms dealer," he said. "Huawei's leverage is strengthened on 5G."
Qualcomm's shares dropped nearly 11% to $69.48 in mid-day trading on the Nasdaq exchange.
Visit The San Diego Union-Tribune at www.sandiegouniontribune.com