The Federal Trade Commission has filed suit against Qualcomm, alleging that the company exploited its position as the dominant provider of baseband radios for LTE devices. In its brief, the FTC argues that Qualcomm used its position to extort higher royalties from smartphone manufacturers. The FTC asserts that Qualcomm enforces a “No license, no chips,” policy in which it will not sell parts to a cell phone manufacturer unless the manufacturer agrees to its patent and licensing terms. The terms of these licenses apparently include substantially elevated license rates on chips manufactured by Qualcomm competitors, which amounts to an unfair tax to any company that wants to build a smartphone with a non-Qualcomm processor.
Qualcomm is also under investigation for refusing to license standards-essential patents to its competitors. It has long been recognized in patent law that organizations can benefit from creating a standard implementation for a technology or capability that everyone can take advantage of. 2G, 3G, HSDPA+, 4G, LTE — all of these technologies are implemented according to specific standards. When companies contribute IP to the formation of a standard, they are typically required to obey what are known as Fair, Reasonable, and Nondiscriminatory rules (FRAND):
Fair – terms are not anticompetitive and would not be considered unlawful if imposed by a dominant firm in its relative market.
Reasonable – the licensing rate for the patents themselves will not result in dramatic cost increases or make the industry uncompetitive. The licensing rate would not be unreasonable if all firms were charged the same rate.
Nondiscriminatory: Licensees are treated equally. Rates are allowed to vary based on external factors like order volume, length of contract, or the creditworthiness of the licensee. Whatever the variations are, however, all licensees must be treated equally.
FRAND agreements are typically voluntary between the standards body and the patent holder, but the contracts are legally binding. If Qualcomm is indeed refusing to license standards-essential patents to competing baseband suppliers, it would explain both why the company shot to a near-complete lock on the LTE market following that technology’s introduction, as well as shedding some light on why nearly all of the other LTE providers gave up and went home. As of mid-2016, reports suggested Qualcomm had a 50% market share (that’s actually down significantly from where it used to be), with the remaining market divided between Samsung, Intel, MediaTek, and Spreadtrum. Samsung and MediaTek were 37% of the remaining 50% in the first half of 2016, but that may have begun to change since some percentage of iPhones also rely on an Intel broadband chip. Note that this data is worldwide, not US-specific.
The FTC also alleges that Qualcomm signed an exclusivity deal with Apple from 2011 – 2016 in which Apple agreed to only use Qualcomm baseband chips and Qualcomm gave the company a lower licensing rate as a result. This complaint against the company is just the latest in a string of similar findings. South Korea fined Qualcomm $854 million for its licensing practices, while China fined it $954 million after its own antitrust probe. The EU investigation is ongoing as well.
Obviously our ability to evaluate this complaint is limited, since there are sections redacted and we haven’t seen any of the evidence on which the complaint is based. We cannot, for example, draw any conclusions on Qualcomm’s licensing rates or its offers of exclusivity, and since we’re talking about patent standards, those terms matter. One puzzling aspect to the FTC’s filing is that it seeks to draw differentiation between the high-end LTE market in the United States and the general market for LTE in lower-end smartphones. The complaint specifically alleges that Qualcomm faces limited competition for premium LTE processors (definitely true, as evidenced by the overwhelming number of smartphones that use Qualcomm radios). It does not make a general complaint about the rest of the LTE market, though it does state that Qualcomm’s royalty rates and non-FRAND licensing terms apply to the general market for baseband, rather than the premium LTE space.
Qualcomm has issued its own dissenting statement, arguing that the FTC’s case is significantly flawed. “This is an extremely disappointing decision to rush to file a complaint on the eve of Chairwoman Ramirez’s departure and the transition to a new Administration, which reflects a sharp break from FTC practice,” said Don Rosenberg, Qualcomm’s executive vice president and general counsel.
The timing of this announcement is interesting, said Anshel Sag, an analyst with Moor Insights Strategy, as it comes within the last week of the current administration as their FTC appointees prepare to step down. “It will be very interesting to see how the Trump administration and their appointees handle this bombshell of a complaint,” he said. “I believe that the Trump administration may end up being much less heavy-handed with how they approach this complaint than the Obama administration would have been.”