Late yesterday evening, Judge Koh issued her anxiously-awaited ruling in the FTC v. Qualcomm litigation. The 233-page opinion extensively describes Qualcomm’s anti-competitive conduct, how it has harmed both existing and potential competitors as well as consumers, and how that conduct has ultimately harmed competition in the LTE and 5G markets. It would normally be hard to summarize a 233-page opinion in a single blog post, but in this case, I can do it in three words:
The FTC won.
“Qualcomm’s licensing practices have strangled competition in the CDMA and premium LTE modem chip markets for years, and harmed rivals, OEMs, and end consumers in the process.”
Last year, Judge Koh issued a summary judgment ruling that signaled her skepticism of Qualcomm’s licensing practices. In that ruling, Judge Koh found that Qualcomm was obligated to license its competitors to Qualcomm’s standard-essential patents (SEPs).
Yesterday’s ruling made that finding explicit. In a section of the ruling that extensively describes Qualcomm’s history of refusing to license, Judge Koh found that Qualcomm’s refusal to license “has promoted rivals’ exit from the market, prevented rivals’ entry, and delayed or hampered the entry and success of other rivals.” That history included refusing actual competitors like MediaTek and Intel as well as potential competitors like Samsung. And even when they occasionally did provide licenses, such as to VIA, the licenses contained onerous terms like only allowing VIA to sell to customers who also had licenses from Qualcomm and requiring VIA to provide Qualcomm with detailed information on their chipset sales—information that is normally considered sensitive information that no company willingly shares with its competitors.
That refusal to license has had real harms. As Judge Koh summarized, “Qualcomm’s refusal to license has prevented rivals’ entry, impeded rivals’ ability to sell modem chips externally or at all, promoted rivals’ exit, and delayed rivals’ entry.” And as she notes elsewhere, those harms have spread, with the result that “other SEP licensors like Nokia and Ericsson have concluded that licensing only OEMs is more lucrative, and structured their practices accordingly.”
“[M]any Qualcomm executives’ trial testimony was contradicted by these witnesses’ own contemporaneous emails, handwritten notes, and recorded statements to the Internal Revenue Service (“IRS”).”
Patent Progress has previously explained why no one should listen to Qualcomm. And why one still shouldn’t listen to Qualcomm. And we’ve explained how Qualcomm’s public statements are often inconsistent with the facts and its own actions.
It would appear Judge Koh agrees. Focusing on how Qualcomm’s trial approach was to rely on witnesses whose self-serving testimony contradicted their own statements in recorded evidence, Judge Koh provided multiple pages of examples of Qualcomm witnesses testifying under oath that something did not occur, followed by the emails or other documents showing that exactly that thing had occurred. A particularly frequent example was witnesses testifying they weren’t aware of instances in which Qualcomm had cut off or threatened to cut off chip supply… followed by documentary evidence of their awareness.
For example, Qualcomm’s CEO Steve Mollenkopf testified he was unaware of such threats. But the evidence at trial included an email from Sony’s CEO to Mollenkopf about Qualcomm actually cutting off chip supply to Sony as well as an email from Mollenkopf acknowledging that he should threaten Huawei with chipset supply disruption as part of patent license negotiations.
Beyond Judge Koh’s description of how Qualcomm witnesses gave “testimony under oath at trial that contradicted their contemporaneous emails, handwritten notes, and recorded statements to the IRS,” she also noted that several witnesses were so coached that Qualcomm’s own lawyers had to ask them to slow down as well as instances in which witnesses who could discuss the details of Qualcomm modem chips on direct examination suddenly couldn’t recall whether a Qualcomm modem included CDMA on cross.
“Qualcomm’s practice of refusing to sell modem chips until an OEM signs a patent license agreement, and Qualcomm’s associated threats, generate and sustain Qualcomm’s unreasonably high royalty rates.”
The threat of chip supply disruption wasn’t just a reason to distrust the testimony of Qualcomm’s witnesses. Judge Koh also explained how that tactic enabled Qualcomm to charge supra-FRAND royalties—and how those royalty rates “impose an artificial and anticompetitive surcharge on the price of rivals’ modem chips”, including some instances where Qualcomm “charged OEMs higher royalty rates when OEMs purchase rivals’ chips than when OEMs purchase Qualcomm’s chips,” further harming competition.
After extensively discussing Qualcomm’s historical tactics against over a dozen OEMs, ranging from Apple to ZTE, Judge Koh described how these tactics had harmed competition. Using “practices that are unique within Qualcomm and unique in the industry,” Qualcomm “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.” All of this combined to “ensure that OEMs will sign Qualcomm’s license agreements and generally result in exclusivity.”
Using these threats as leverage, Qualcomm could extract higher than reasonable royalty rates and could ensure that competitors were forced out of—or could never enter—the market, fortifying Qualcomm’s monopoly power.
“Through [exclusivity arrangements with Apple], Qualcomm shrunk rivals’ sales and foreclosed its rivals from the positive network effects of working with Apple, which the Court discusses below. In so doing, Qualcomm maintained the monopoly power in the CDMA and premium LTE modem chip markets that Qualcomm has used to sustain QTL’s unreasonably high royalty rates.”
Using what were effectively exclusivity deals, where Qualcomm charged extremely high royalties and then scaled them back to merely unreasonably high royalties via rebate payments that could be clawed back if Apple ceased to exclusively use Qualcomm chips, Qualcomm tried to eliminate any competitors.
Don’t take my word for it. Don’t even take Judge Koh’s word for it. Here’s what Qualcomm’s CEO said when arranging the first Apple exclusivity deal:
“[T]here are significant strategic benefits as it is unlikely that there will be enough standalone modem volume to sustain a viable competitor without [Apple’s] slot.”
(Slot or socket are terms used in electronics for winning the contract to supply a particular chip to an OEM.)
In other words, Qualcomm’s own testimony makes clear that it pursued exclusivity deals in order to try to ensure it would never have to face competition. And it wasn’t just the Apple deals—Judge Koh describes other instances where Qualcomm used similar techniques, such as with Blackberry, LG, Samsung, Lenovo, and Motorola.
It wasn’t just about eliminating competition for Qualcomm, of course. That was important, but it was important in part because it enabled Qualcomm to charge royalties that were far in excess of the reasonable royalty it had voluntarily committed to limit itself to.
“Qualcomm’s own documents repeatedly recognize that Qualcomm’s unreasonably high royalty rates are set by its monopoly chip market share rather than the value of its patents.”
Qualcomm’s documents, along with uniform testimony from OEMs, establishes that Qualcomm’s royalty rates are higher than any other cellular patent holder. There’s nothing that justifies this. For example, Judge Koh describes how, even though “Qualcomm helped design the patent portfolio scoring system of the patent pool Avanci,” the Avanci system “scores Qualcomm’s portfolio comparably to Ericsson’s even though Ericsson’s licensing revenue is a small fraction of Qualcomm’s.” Even when Qualcomm has its thumb on the scale, evaluation systems don’t show its patents as having an outsized significance—except for Qualcomm’s monopoly chip market share.
Even though, as Judge Koh explains, “Qualcomm’s share of SEPs is declining, Qualcomm’s patents expire with successive standards, and Qualcomm receives crosslicenses to OEMs’ patent portfolios.” Qualcomm can do this, and ensure that its rates aren’t tested in litigation, because of the monopoly power it holds.
“In accordance with the principles above and consistent with the Court’s findings of fact and conclusions of law, the Court orders the following injunctive relief:”
Given all of the evidence described above (and in extensive detail in Judge Koh’s opinion), it should come as no surprise that the ultimate result is an injunction against specific Qualcomm conduct. Judge Koh’s order sets out the following requirements:
- Qualcomm must not condition the supply of modem chips on a customer’s patent license status and Qualcomm must negotiate or renegotiate license terms with customers in good faith under conditions free from the threat of lack of access to or discriminatory provision of modem chip supply or associated technical support or access to software.
- Qualcomm must make exhaustive SEP licenses available to modem-chip suppliers on fair, reasonable, and non-discriminatory (“FRAND”) terms and to submit, as necessary, to arbitral or judicial dispute resolution to determine such terms.
- Qualcomm may not enter express or de facto exclusive dealing agreements for the supply of modem chips.
- Qualcomm may not interfere with the ability of any customer to communicate with a government agency about a potential law enforcement or regulatory matter.
- In order to ensure Qualcomm’s compliance with the above remedies, the Court orders Qualcomm to submit to compliance and monitoring procedures for a period of seven (7) years. Specifically, Qualcomm shall report to the FTC on an annual basis Qualcomm’s compliance with the above remedies ordered by the Court.
These requirements provide a strong remedy against Qualcomm’s history of anti-competitive conduct. They would enhance competition in 5G, providing avenues for new entrants into the chipset market and reducing prices to the innovators who will provide truly transformative applications of 5G. And they would allow existing customers to renegotiate their licenses without the threat of chip supply disruption in the background.
Customers might even choose to eliminate their patent licenses and maintain the chip supply agreements, relying on patent exhaustion. Qualcomm’s win in achieving a settlement with Apple that has a patent license and a separate chip supply agreement might actually turn into a loss, with Apple forcing Qualcomm to abide by its chip supply agreement while renegotiating a patent license with Qualcomm unable to abuse the threat of cutting off chips.
It’s safe to say that Qualcomm will appeal this decision in an attempt to protect its ability to charge unreasonable prices, harm competitors, and ensure that new competitors do not arise. At the appellate level, Judge Koh’s decision will provide a solid foundation for rejecting Qualcomm’s attempts.
“IT IS SO ORDERED.”
