A federal judge sided with the Federal Trade Commission (FTC) and ruled that Qualcomm (NASDAQ: QCOM) used anticompetitive practices to unlawfully stifle competition related to wireless modem technology used in smartphones. The Tuesday ruling found that the chipmaker abused its dominant position in the industry and resorted to unfair licensing practices that "strangled competition."
U.S. District Court Judge Lucy Koh handed down a comprehensive 230-page decision, laying out a list of practices that Qualcomm used to force mobile phone makers to pay excessive fees for use of its patents, many of which are considered "industry-essential," and are therefore required to be licensed at fair and reasonable terms.
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A big blow to Qualcomm
The decision, which will have a far-reaching impact in the industry if it's upheld, also ordered Qualcomm to renegotiate patent licensing agreements with all its customers. It forbids the company from threatening to withhold chips from suppliers as a bargaining tool. The judge also said Qualcomm would be required to submit to regulatory monitoring for the next seven years to ensure it complies with the ruling.
As outlined in the case, one of the most reviled tactics used by Qualcomm in its licensing agreements was to demand 5% of the sale price of each phone -- even if its chips weren't used -- rather than charging a set price per chip. This meant that makers of premium smartphones were required to pay more for the same technology than those that sold budget handsets. This allowed Qualcomm to unfairly profit from innovations made by others, according to complaints by rivals. Because the company held key patents related to wireless technology, it would refuse shipments to those that balked at its terms.
Qualcomm denied the allegations, but executives from a number of cellphone makers testified that they were forced into unfair deals because of the tactics. The judge said that the testimony of Qualcomm CEO Steve Mollenkopf and President Cristiano R. Amon was directly contradicted by company emails and communications from the two, and therefore lacked credibility.
"Qualcomm's licensing practices have strangled competition in the ... [wireless modem] chip markets for years, and harmed rivals, OEMs [original equipment manufacturers], and end consumers in the process," Koh wrote in the decision.
A long, bitter battle...
The case was brought by the FTC in 2017, alleging that Qualcomm charged onerous fees to competitors for the use of its patents, and mirrored many of the claims brought in a similar suit by Apple (NASDAQ: AAPL). The iPhone maker charged that Qualcomm maintained a virtual monopoly on the chips that allowed cellphones to connect with mobile data networks.
Apple and Qualcomm reached a surprise settlement last month that would allow Apple to begin using its rival's modem chips again. The deal included a six-year license of the technology and a payment from Apple, but the amount of the royalty wasn't disclosed. In the conference call to discuss its Q2 results, Qualcomm said it would record revenue in a range of $4.5 billion to $4.7 billion in the third quarter, which would include a cash payment from Apple and a release of "related liabilities."
It isn't clear at this time whether the ruling will have any impact on the agreement that was reached between Apple and Qualcomm.
...that isn't over yet
The celebrations in the cellphone industry could be short-lived.
Soon after the ruling was made public, Qualcomm issued a statement saying that it "strongly disagrees" with the decision in the case and plans to seek an immediate stay of the ruling while it launches an expedited appeal to the Ninth U.S. Circuit Court in San Francisco.
For the moment, Wall Street is concerned about the ruling's effect on Qualcomm. The decision caused Qualcomm shares to plunge 12.3% in early afternoon trading on Wednesday.
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Danny Vena owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.