The Korean Fair Trade Commission (“KFTC”) has just taken extreme action against Qualcomm for anti-competitive practices. The KFTC fined Qualcomm about $850 million and ordered it to change the way it licenses its standard-essential patents. Why did the KFTC do this? Well, Qualcomm breaks its commitments to standard setting organizations, strong-arms its customers into giving free cross-licenses, and blocks competitors from entering its chip market. Even more amazing is that Qualcomm doesn’t deny its conduct; Qualcomm doesn’t see anything wrong with the way it does business.
If you’ve followed the patent reform debate, you’re probably familiar with Qualcomm. Qualcomm has literally spent millions opposing reform, including around $6 million lobbying in the first 3 quarters of 2016, millions on television and print ads, a lot of money given to law schools to fund sympathetic research, and on and on. It’s hard to blame the company, given that Qualcomm’s licensing segment netted about $6.5 billion in profit in fiscal year 2016. You can find that information, and more, in Qualcomm’s 10-K for 2016.
Turns out that Qualcomm makes much of its licensing money through anti-competitive practices. The KFTC investigated Qualcomm for over a year and found some facts that show a deliberate (and successful) attempt to monopolize the CDMA chip market using its CDMA-essential patents (see this unofficial translation of the KFTC’s press release for more):
- Channel Division Multiplexing Access (CDMA) is an older protocol for wireless communication. Although newer phones use faster protocols, they need to be backwards compatible for networks that haven’t yet been upgraded. Qualcomm was involved in creating the CDMA standard and has a number of patents that it says are essential to practicing the standard. In fact, Qualcomm holds about 90% of the patents that are claimed as essential for CDMA.
- As part of its work on the standard, Qualcomm committed to licensing its CDMA-essential patents in a fair, reasonable, and non-discriminatory fashion, known as a "Fair, Reasonable, and Non-Discriminatory" licensing. A licensing commitment made for standard-essential patents in the context of technology standard setting activities. See also RAND. commitment.
- Qualcomm makes and sells chips that implement the CDMA protocol.
- Qualcomm refuses to license other chip manufacturers. Apparently, Qualcomm determined that it would be difficult to remain profitable in the CDMA market if it did license other chip manufacturers.
- Qualcomm licenses phone manufacturers, but only if they buy Qualcomm chips.
- As part of its licenses to phone manufacturers, Qualcomm requires the licensees to take a license on a large portfolio of patents, whether or not they have anything to do with the chips being purchased.
- When Qualcomm licenses phone manufacturers, the deal requires that the manufacturers grant Qualcomm a license to their own patents for free.
- As a result, Qualcomm’s share of the CDMA chip market was over 90% from 2008 to 2014, although its market share dropped to 83% in 2015.
The KFTC found that Qualcomm’s conduct was so egregious, it fined the company about $865 million. It also required Qualcomm to change its licensing practices with respect to any manufacturers that do business in South Korea, which is essentially every chip manufacturer and phone manufacturer.
Qualcomm denies none of the KFTC’s factual findings. Instead, its public response to the KFTC’s decision mainly argues that Qualcomm has been doing these things for years and not much harm has been done.
The Taiwan Fair Trade Commission is investigating Qualcomm for nearly identical reasons as the KFTC. Qualcomm is also being investigated for similar anti-competitive licensing practices in the United States and Japan. Qualcomm’s licensing practices seem to be a central part of its business model worldwide.
The KFTC did a very thorough investigation. It did not restrict itself to Korean companies. A number of foreign companies, including Apple, Intel, NVidia, and Huawei participated in the investigation. This is no parochial procedure; the KFTC looked not just at the effect of Qualcomm’s practices on Korean companies (like Samsung and LG Electronics), but also at the effect on companies that do business in South Korea.
The KFTC held seven separate hearings and Qualcomm actively participated. There’s little question that the KFTC’s factual findings are accurate.
Qualcomm may see nothing wrong with its way of doing business, but it’s hard to see its conduct as anything other than a violation of its "Fair, Reasonable, and Non-Discriminatory" licensing. A licensing commitment made for standard-essential patents in the context of technology standard setting activities. See also RAND. commitments with respect to CDMA. Qualcomm clearly discriminates against other chip manufacturers by refusing to license them. And it’s hardly fair and reasonable for Qualcomm to use its CDMA patents to force companies to buy Qualcomm chips and to give free cross-licenses.
Qualcomm is apparently appealing the KFTC’s decision, so it will be some years before we see if Qualcomm actually has to change its practices. But given that anti-competitive conduct is actually Qualcomm’s business model, we can expect Qualcomm to continue as it has until some government steps in.