How Qualcomm won in Japan

Last week, Japanese competition regulators revoked a previous finding that Qualcomm had violated the country’s Antimonopoly Act, handing a much-needed victory to the US chipmaker that has come under antitrust scrutiny around the world.

The end to the decades-long case marked only the third time the Japan Fair Trade Commission, or JFTC, has completely reversed itself in the past 30 years.

Over the past several years, Qualcomm has become the subject of competition probes in a half-dozen jurisdictions, including China, Europe, Japan, South Korea, Taiwan and the United States. The investigations all focus on Qualcomm’s standard-essential patent licensing. Japan’s probe was the first, looking into its handling of 3G technologies.

Ten years ago, the JFTC said the San Diego, California-based company dealt with Japanese companies under restrictive conditions, a type of unfair trade practice, which likely hampered fair competition.  

The regulator alleged that Qualcomm coerced Japanese companies to offer their intellectual property rights related to CDMA wireless technologies free of charge to Qualcomm and not to assert their intellectual property rights to Qualcomm, its customers and licensees. That conduct discouraged further research and development by Japanese companies and solidified Qualcomm’s position in the market for CDMA technologies, the JFTC said.

Qualcomm appeals

Over the next nine years, the JFTC held a series of hearings in which examiners analyzed Qualcomm’s standard essential patents, or SEPs, and agreements for CDMA and W-CDMA technologies for 3G with 14 Japanese manufacturers of cellphones and base stations, including NEC, Sony, Sharp and Panasonic. The hearings focused on the scope of the royalty-free agreements and non-assertion patent provision, or NAP, agreements.

Last week, the JFTC revoked the entire cease-and desist order, saying that the commission hasn’t found sufficient evidence to recognize that Qualcomm had hampered fair competition. The JFTC said that Qualcomm’s non-assertion clauses were limited, and some companies managed to win lower fees on other items than Qualcomm’s technology SEPs. The JFTC investigators also failed to prove that Qualcomm’s IP contracts have hampered the Japanese companies’ research and development activities.  

While Qualcomm was battling to reverse the JFTC’s cease-and-desist order, it also came under scrutiny elsewhere in the world. Those investigations, however, largely focused on newer technology and Qualcomm’s so-called “no license, no chip” practice where the company would refuse to sell chips to phonemakers unless they agreed to a SEP license, and whether that practice violated Qualcomm’s pledge to standards bodies to license its technology on to fair, reasonable, and non-discriminatory, or Frand, terms.

In 2015, Qualcomm agreed to settle a probe with China’s competition authority for nearly a billion dollars. The next year, South Korea’s regulator imposed a record fine of $865 million. Qualcomm is appealing the decision in South Korea. The South Korean regulator said today it would reduce its first fine imposed on the company in 2009 by $43.2 million to 224.5 billion won, or about $200 million.

In 2017, Taiwan’s antitrust authority imposed a record breaking fine of $773 million. Last August, Qualcomm reached a settlement with the agency in which it agreed to pay NT$2.73 billion, or about $93 million, withdraw its appeal and make separate investments in Taiwan.

The cases in the EU and US remain ongoing.

The JFTC’s administrative appeal hearings found no evidence to prove that Qualcomm engaged in unfair trade practices in breach of the Antimonopoly Act.   

In all of the cases in Asia, local companies were key complainants against Qualcomm. In China, Qualcomm had to agree to renegotiate its licenses with Chinese smartphone makers as part of its settlement. In South Korea, Samsung was a major source of information for the KFTC.

Taiwan has competing chipmakers, and Japan’s top electronics makers — the backbone of the Japanese industry — were competing fiercely against each other in the Japanese cellphone-device market back in the 2000s, and complained to the regulator about Qualcomm’s high royalty rates.

In Taiwan, though, regulators extracted a promise from Qualcomm that it would make greater investments in the country — believed to be as much as $700 million — that will aid the country’s local electronics industry.

In Japan, meanwhile, the market for domestic cellphone makers has largely collapsed, swept away by Apple’s iPhones; only Sony Mobile Communications and Sharp still make mobile devices. That left few active complainants pushing for tough sanctions against Qualcomm in Japan.

Antitrust experts also said the JFTC’s theory of harm in the original order was weak, especially the effect on incentives for research and development. Unlike other regulators, the JFTC investigators didn’t focus on Qualcomm’s possible violation of Frand terms, said Yasumi Ochi, law professor at Meiji University Law School, and Akinori Uesugi, former JFTC secretary general. In the JFTC’s 100-page hearing judgment, the word "Frand" doesn’t appear at all, except once by the Qualcomm side (in the context that Japanese companies could have insisted on violations of Frand terms).

“It’s become globally clear that violation of Frand terms by a company that made that commitment could constitute an antitrust violation, and the lack of this analysis was a fatal mistake,” said Akinori Uesugi, now a senior consultant at Freshfields Bruckhaus Deringer.

A JFTC official told MLex that the investigators conducted further probes following the original order, focusing on the scope of royalty-free licenses and NAP clauses as well as whether the contracts between Qualcomm and the Japanese companies were out of balance. “No-license, no-chip” policy hasn’t become an issue in Japan, MLex was told, because Japanese companies only wanted Qualcomm licenses.

Japanese antitrust experts also suggested the JFTC has relied too much on its 2008 Microsoft hearing judgment, which upheld a finding that Japanese electronics manufacturers were forced to agree on NAP clauses for the Windows operating system, unjustly restricting businesses and hampering fair competition in the PC’s audio-visual technology market.

“The case should have been closed much sooner,” said Akira Negishi, antitrust lawyer at Kikkawa Law Offices in Osaka, and a specially-appointed professor at Kobe University. He added that the JFTC should conduct more precise analysis from now, because conditions for defining unfair trade practices have become stricter than before.

- Additional reporting by Xu Yuan in Hong Kong and Mike Swift in San Francisco