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Qualcomm Won't Have to Renegotiate Licenses During FTC Appeal

Susan Decker and Ian King

(Bloomberg) -- Qualcomm Inc. won’t have to renegotiate its patent licenses while appealing an antitrust ruling won by the U.S. Federal Trade Commission, a federal appeals court ruled.

Qualcomm has raised “serious questions” about the merits of the trial court’s ruling, a panel of the U.S. Court of Appeals for the Ninth Circuit said Friday in an order putting the May 21 decision on hold.

Forcing the chipmaker to enter into new contracts imposes changes that “cannot be easily undone should Qualcomm prevail on appeal,” the three-judge panel in San Francisco said in a seven-page order that was unusually detailed. There’s no guarantee the three judges who considered Qualcomm’s request will be on the panel hearing the appeal in January

U.S. District Judge Lucy Koh found in May that Qualcomm’s “no license, no chips” policy unfairly leveraged the company’s market position to force customers to pay inflated prices for chips and royalties for their technology. She ordered the company to end the policy and renegotiate some of its contracts.

Read More: Judge’s Conundrum: Is Qualcomm a Monopolist, or Merely a Bully?

Qualcomm has argued that Koh’s order would undermine its entire business. Under the original ruling, the company would be forced to renegotiate patent-licensing contracts with phone makers, a process that could slash its largest source of profit. It would create binding arrangements that wouldn’t be reversed, even if Qualcomm got the ruling overturned on appeal.

The San Diego-based chipmaker is unusual in the chip industry because it gets the majority of its profit from fees on patents that cover the fundamentals of how modern phone systems work. Apple Inc., Samsung Electronics Co. and all of the world’s biggest phone makers have to pay whether or not they use its chips. That arrangement has caused intense legal fights and regulatory scrutiny around the world for Qualcomm.

The case has split the U.S. government, especially the two agencies charged with antitrust matters. While the FTC -- an independent agency -- argued that Qualcomm harmed competition, the U.S. Justice Department said Koh’s ruling harmed consumers.

Qualcomm also got the backing of other areas of the Trump administration, as both the Defense Department and Department of Energy said the order threatens national security and America’s lead role in 5G, the next-generation of wireless technology that promises to transform everything from robotic surgery to autonomous vehicles.

“Whether the district court’s order and injunction represent a trailblazing application of the antitrust laws, or instead an improper excursion beyond the outer limits of the Sherman Act, is a matter for another day,” the appeals panel said, referring to the federal antitrust law.

The language of the ruling has improved Qualcomm’s chance of winning the appeal or reaching a settlement with the agency, said Jennifer Rie, an analyst with Bloomberg Intelligence.

Ankur Kapoor, an antitrust lawyer with Constantine Cannon in New York who’s not involved in the case, said the panel’s detailed ruling may be an attempt to “explain their thinking” in a case with high stakes for the company. He said the court wanted to maintain the status quo, especially considering the potential impact to Qualcomm’s long-term business and the fact that the appeal is being expedited, with a decision expected shortly after January arguments.

In some ways, Qualcomm’s licensing program “appears significantly impaired regardless” because of the legal strains on the company and the slowdown in the “horrendous” chip market, said Stacy Rasgon, an analyst with Bernstein Research.

FTC ‘Disappointed’

FTC Bureau of Competition Director Bruce Hoffman said he was disappointed in the court’s ruling and noted that only part of the court’s ruling was put on hold. Qualcomm still can’t enter into exclusive deals on modem chips, can’t interfere with any customer’s ability to communicate with government agencies and must submit to monitoring, which the FTC said promotes competition. Qualcomm didn’t ask the appeals court to put those aspects on hold.

“The Bureau of Competition will monitor Qualcomm’s conduct relating to the on-going injunctive provisions, and we stand ready to evaluate any information from industry participants relating to whether Qualcomm is complying with its obligations,” Hoffman said.

The court order previews some of the arguments that Qualcomm is expected to make when it files its written arguments with the Ninth Circuit later Friday. Qualcomm will argue that Koh stretched the definition of antitrust rules under U.S. law and ignored evidence that showed there was competition.

Koh had no right to decide that Qualcomm’s rates were unreasonable, order the company to give licenses to its competitors or decide whether or not it has to supply chips to handset makers, the San Diego-based company contends.

The case is Federal Trade Commission v. Qualcomm, 17-220, U.S. Court of Appeals for the 9th Circuit (San Francisco).

To contact the reporters on this story: Susan Decker in Washington at sdecker1@bloomberg.net;Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net, Peter Blumberg, Steve Stroth

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