It’s a been a while since WC wallowed in some geekiness. This is admittedly a long post, and involves both geeky law and technogeekery. But this will affect every cell phone in the United States and most of the phones abroad. Here we go:
Qualcomm is a San Diego, California-based microchip manufacturer. For more than 19 years, it has held an international near-monopoly on the the design and manufacture of modem chips, the microchips that enable smart phones to use cell phone service. Qualcomm doesn’t manufacture the modem chips; it outsources that. But it owns some 140,000 patents, many of them indispensable to the design and manufacture of modem chips. When it distributes the modem chips, Qualcomm licenses – not sells, licenses – the use of the modem chips to cell phone manufacturers.1
Licensing is very profitable for Qualcomm. In 2015, David Wise (Qualcomm Senior Vice President and Treasurer) stated in a presentation shared with Alex Rogers (QTL President) that “QTL represents the vast majority of our value at $50-$70B” and that “1 point of royalty is $16-$20B.” At trial, Wise agreed that QTL has historically “represented at least two thirds of the value of Qualcomm.”
Remarkably, Qualcomm has maintained its near-monopoly and high profits across three different generations of cell phone service, fighting off attempts by other companies to get a piece of the very profitable modem microchip market.
How did they do it?
They violated, egregiously and repeatedly, the antitrust laws of the United States. They violated, repeatedly and egregiously, the rules of the standards setting organizations that underpin complex cell phone technology. For 19 years. And their own internal documents make clear they did so knowingly and intentionally.
It’s completely impractical to set out all of Qualcomm’s violations of law and contract here. It would take another 233 pages of blog post and an extensive table of abbreviations. WC isn’t going to attempt it. But a couple of examples can stand for the dozens of matters U.S. District Judge Lucy Koh describes in her decision.
It’s a violation of antitrust law to “bundle,” to require a customer who wants to license one product – a modem microchip, for example – to buy a whole bunch of other stuff they don’t want, at a higher price, if you, as seller or licensor, have a monopoly or near-monopoly in the desired product. But Qualcomm, which has a near-monopoly on modem chips, did exactly that. It required, under its software licenses, all of its customers to buy a great deal of pricey stuff they didn’t want. And if you refused, well, Qualcomm wouldn’t license you the modem microchips.
It’s a violation of antitrust law to refuse to sell your product to someone who is or might be a competitor. Yet Qualcomm was found to have done exactly that, as well as imposing patent licenses that required the licensee to refrain from competing with Qualcomm in the design, manufacture or sale of modem microchips.
Those violations, and a host of others Judge Koh described in that 233 page decision, enabled Qualcomm to leverage not just high prices for its modem microchips, but to insist upon a price based on the total retail price of the cell phone incorporating its modem chip. For example, Qualcomm licensed its modem chips to Apple for Apple’s iPhones for 5% of the retain price of the iPhone. Never mind that the modem chip was a tiny, tiny part of a multi-function electronic device. Notably, only Qualcomm’s chip price was a percentage of the total cell phone price; all of dozens ofother chips that make up a smart phone are sold at a flat unit price. That’s the power of a monopoly; that’s the result of illegal exercise of monopoly power.
Qualcomm wields that monopoly chip power against [cell phone manufacturers] by cutting off chip supply, threatening to cut off chip supply, refusing to provide chip samples, withholding technical support, and delaying delivery of software or threatening to require the return of software—all to coerce [cell phone manufacturers] to sign patent license agreements that sustain Qualcomm’s unreasonably high royalty rates.
Thus, Qualcomm leverages its monopoly chip supply and engages in a host of anticompetitive practices to avoid exhaustion and ensure that [cell phone manufacturers] acquiesce to Qualcomm’s license demands. For example, Qualcomm cuts off chip supply, threatens to cut off chip supply, threatens to withhold engineering support, and delays and threatens to take back software, among other tactics—all to coerce an OEM into signing a Qualcomm license agreement before purchasing modem chips, unlike any other component supplier in the industry.
Like every other company involved in the cell phone industry – the carriers, the cell phone tower companies, the software suppliers, the chip makers and the cell phone manufacturers – Qualcomm was a part of industry standards organizations like the Third Generation Partnership Project and the Third Generation Partnership Project 2, which are global collaborative partnerships of standards/development/standards-setting organizations and other industry participants that develop technical specifications for cellular standards.
Those cellular standards often incorporate patented technology. The patent holders want their patents included, not just because it underpins better products but also because it helps sell the technology. When patent technology is included in the international standards, it’s called standard essential patents (“SEPs”). If you play in the standards/development/standards-setting organizations’ pool, you agree to license the SEPs to your fellow organization members on fair, reasonable, and nondiscriminatory (“FRAND”) terms. It’s called the “FRAND Commitment.”
Judge Koh found that Qualcomm had repeatedly, egregiously and intentionally violated the FRAND Commitment. Again, Judge Koh describes numerous violations, but WC will only describe two samples.
Qualcomm paid Apple rebates to lower Apple’s royalty payments to $10 per iPhone and $9 per iPad. In exchange, Apple promised that “all the ApplePhones it markets, offers to sell and sells will implement one or more CDMA standards.”JX0078-001. Apple would forfeit the BCPA rebates if Apple took any of three actions adverse toQualcomm’s licensing business: (1) initiating FRAND litigation against Qualcomm; (2) inducing a third party to initiate FRAND litigation against Qualcomm; or (3) arguing that any Qualcomm modem chip sale exhausted Qualcomm’s patents.
So Apple, one of the biggest players in the smart phone industry, was forced by Qualcomm’s near-monopoly power to trade away its FRAND Commitment from Qualcomm to get the “fair, reasonable and nondiscriminatory price” it was entitled to under that commitment. Qualcomm went on to violate the Hog Principle2 by also requiring a “clawback” provision:
In addition, if Apple launched a handset with a non-Qualcomm modem chip in 2015 or 2016, Apple would have to pay back hundreds of millions in VIF funds.
That’s both a FRAND Commitment violation and an antitrust violation.
Apple wasn’t the only customer to get squeezed by Qualcomm’s breaches of the FRAND Commitment. Among the other cell phone manufacturer’s to get squeezed was VIVO:
In sum, Qualcomm engaged in anticompetitive conduct by using the threat of cutting off VIVO’s chip supply to enter an exclusive agreement with VIVO that prevented VIVO from using MediaTek modem chips even though the MediaTek chips had competitive advantages and were more compatible with VIVO’s handset.
Judge Kohn found that Qualcomm committed antitrust and FRAND Commitment violations to cell phone manufacturers – OEMs for “Original Equipment Manufacturers” – pretty much across the board, documenting 15 separate companies that were injured:
In sum, Qualcomm has engaged in extensive anticompetitive conduct against OEMs. In practices that are unique within Qualcomm and unique in the industry, Qualcomm refuses to sell its modem chips exhaustively and to sell modem chips to an OEM until the OEM signs a separate patent license agreement. To enforce those licensing practices, Qualcomm has cut off OEMs’ chip supply, threatened OEMs’ chip supply, withheld sample chips, delayed software and threatened to require the return of software, withheld technical support, and refused to share patent claim charts or patent lists. In addition, Qualcomm has required OEMs to grant [Quallcomm] cross-licenses (often royalty-free) to OEMs’ patent portfolios and charged OEMs higher royalty rates on rivals’ chips. All of these tactics ensure that OEMs will sign Qualcomm’s license agreements and generally result in exclusivity.
And if you were a cell phone manufacturer who also made modem microchips, Qualcomm, completely refused to sell you modem chips at all, a violation of the FRAND Commitment.
Judge Koh also impliedly found the Qualcomm executives who testified at trial had lied, their testimony flatly contradicted by the written evidence, much of it from Qualcomm’s own records. She found their conduct was so bad that a five part injunction was enteerd against Qualcomm and its affiliates. When implemented, the modem microchip world will change pretty significantly.
Good for the FTC for bringing the case. And congratulations to their staff lawyers on their success.
Of course, the United States was the last large economy to act against Qualcomm. Japan, Korea, the Republic of China, Taiwan and the European Union had long since started enforcement actions. Perhaps the United States’ delay was due in part to the $8.5 million a year that Qualcomm spends on lobbying.
Qualcomm has announced it will appeal and that it is confident that the appellate court will overturn Judge Koh’s decision. Not much chance.
- Unless noted otherwise, all of the block qutations are from the Findings of Fact and Conclusions of Law written by U.S. District Judge Lucy Koh, dated May 19, 2019, following a three week trial in January of this year. The document is 233 pages long, dense with acronyms, computer terms and arcane discussion of antitrust law. It’s more or less a textbook of the interface of microtechnology and antirust law. WC is necessarily simplifying that opinion in this blog post. Interested readers are invited to attempt the decision itself. If you want the quotes in context, the page numbers from which they were taken should appear if you hover over the quote. ↩
- “Pigs get fed; hogs get slaughtered.” ↩