Qualcomm's South Korean antitrust appeal enters end-game as final court clashes loom

12 August 2019 2:50pm
microchip

9 Aug 2019. By Hyung-jo Choi.

Qualcomm’s fight to reverse massive fines and business-model-changing corrective orders imposed by South Korean competition regulator is nearing its end. The US chipmaker and the Korea Fair Trade Commission are due to present their final arguments on August 12 and 14 after an intense showdown lasting from October 2018 until two months ago.

The final outcome of the trial is likely to hinge upon whether Qualcomm can convince judges at the Seoul High Court that it did not violate its obligations as a standard-essential patent holder by not providing licenses to rival chipmakers, and that it didn’t abuse its power in the modem chip market to force others to cave in to its demands, which included licensing terms drafted to its disproportionate benefit.

Qualcomm is appealing a 2016 antitrust decision by the KFTC to levy fines of 1.03 trillion won ($872.9 million) and corrective measures, including an order to renegotiate its existing patent licenses with carriers upon request. The appeal is a high-stakes move by the company, in which a loss could see it come under immense pressure to renegotiate its patent licenses worldwide.

The list of witnesses who testified at the court — nine from Qualcomm and four from the KFTC — ranged from a former KFTC commissioner to a former chief economist at the US Department of Justice, with arguments raised that were similar to those deployed in a court duel between the US Fair Trade Commission and Qualcomm in California in May.

— Refusing SEPs to chipmakers —

Arguably the most contentious point of the trial has been whether Qualcomm's refusal to license SEPs to other chip companies could be justified.

The KFTC determined that as an SEP holder, Qualcomm had an obligation to license its patents on fair, reasonable, and non-discriminatory, or Frand, terms to willing licensees, including rival component makers. Since Qualcomm had not granted licenses to them, it had essentially violated its Frand obligations, the regulator said.

Qualcomm refuted that allegation.

Alex Rogers, executive vice president and president of Qualcomm Technology Licensing, the company’s licensing division, said in his testimony on Oct. 15 last year that licensing at the handset level was already an industry practice when Qualcomm entered the market.

Additionally, Rogers explained that although the company had certain agreements with a small number of modem chipmakers in the past, a US Supreme Court ruling in a case between Quanta Computer and LG Electronics in 2008 created “risk” for it by changing the law on whether a company could license on a non-exhaustive basis, which had forced Qualcomm to move away from such agreements with component makers.

John Whealan, associate dean for intellectual property law studies at George Washington University Law School, backed Rogers’ view, saying on Nov. 14 that Qualcomm’s licensing practices had changed over time with the evolution of US patent-exhaustion law, and amid the implications of the Quanta ruling.

Whealan said that the risk of patent exhaustion increased for companies with large patent portfolios, such as Qualcomm, which had forced changes to their licensing practice, as Rogers had testified.

Qualcomm also brought in a witness from Europe who had previously worked for a core European telecom standards-setting body — the European Telecommunications Standards Institute, or Etsi.

Bertram Huber, a lawyer who sat on the IP rights committee at Etsi and who was involved in the drafting of Etsi's IP rights policy, said on Dec. 19 that the exact language of the policy indicated that SEP holders had to grant Frand licenses on “equipment,” defined as any system or device fully conforming to a standard.

Huber said some cellular industry practices at the time had relevance under Etsi’s IP rights policy, which “did not fall out of the blue but was drafted considering certain industry realities at the time.”

Lee Hwang-soo, a professor of electrical and electronic engineering at the Korea Advanced Institute of Science and Technology, lent support to that argument on Jan. 21.

Lee testified that whether something “conforms” to standards could be tested only once all the components were assembled into a device connected to a network.

Lee also backed up another claim by Rogers that Qualcomm patents were best realized at the device level by explaining that although some of Qualcomm’s patents could be implemented at the chip level, most could not be realized fully at that stage.

Arguments refuting those points were made by KFTC witness Friedhelm Rodermund on Jan. 23.

Rodermund, who formerly worked on technical committees at Etsi, argued against Huber's regarding the relevance of an industry practice, saying that Etsi policy had "been created in a way that should last for decades for many different generations” and that looking narrowly at specific practices at a given point in time put too many constraints on policy that was meant to be more flexible.

Bertrand Fages, a law professor at Sorbonne University in Paris, was brought in two months later, on March 18, to paint a different picture of flexibility. Fages told the court that under Etsi's policy, governed by French law, it was up to patent holders to choose whether to license at the component level, and that the policy did not prohibit them from licensing only at the device level.

— “No license, no chips” —

The KFTC also took issue with Qualcomm's so-called “no license, no chips” policy, under which the company did not sell chips unless handset manufacturers first signed license deals, which FTC had also found to be problematic.

Both the KFTC and the FTC found that business conduct unique, implemented only by Qualcomm, and damaging to competition in the sector.

The KFTC alleged that Qualcomm had often used the supply of chips as leverage in its talks with licensees such as Samsung and LG. In its written decision in 2016, the KFTC used a letter from Qualcomm’s Korea office to its headquarters as evidence of such a threat.

Kim Sang-pyo, a sales executive at Qualcomm CDMA Korea, told an October hearing  that such allegations were false. The local executive told judges that the letter was an attempt to obtain confirmation from headquarters on whether the handset maker concerned held licenses to certain specific types of chips. He went as far as saying that it was large phone makers that had leverage over Qualcomm, not the other way around, as argued by the KFTC.

Kim Jeong-jung, who oversaw LG Electronics’ licensing division in the early 2000s, gave a contrasting testimony on March 20, saying not only that Qualcomm had threatened to cut chip supplies, but that it had actually done so on one occasion.

Qualcomm’s co-founder, Irwin Jacobs, admitted at a hearing in California that the company had stopped supplying chips to LG in 2004, which was arguably a turning point in the US FTC-Qualcomm trial.

Jeong Seong-hoon, a South Korean economist and former commissioner at the KFTC, testified on March 20, saying that Qualcomm had combined its licensing and chip businesses to create a business model that denied licenses to rival chipmakers and fortified its dominant market position. The company then exploited that position to force unfair terms on handset companies through the "no license, no chips" policy.

Jeong also said that Qualcomm's patent licensing practices, which involved charging handset companies “above-Frand” royalties, had created a “Qualcomm tax” on rivals and increased their costs.

— More flashpoints —

Another economist testified that such conduct by Qualcomm gave it an unfair edge in the research and development race, a crucial key to survival in the rapidly changing cellular sector.

Qualcomm has argued that its position in the chip market and its extensive SEP portfolio are the results of its commitment to, and investment in, research and development. Rogers told the court that the company had poured as much as 20 percent of its revenue into research efforts every year, more than any other in the industry.

Yi Sang-seung, a professor of economics at Seoul National University, said on May 22 that Qualcomm had created a structure in which the burden of excessive royalties was shared between device makers and chip suppliers, which had forced down margins for the latter. As a result of falling margins, those companies had fewer incentives and means to invest.

Yi also countered a claim made by Aviv Nevo, a former deputy assistant attorney general for economic analysis at the DOJ’s antitrust division.

Nevo said on May 20 that market evidence he had analyzed did not support the KFTC's conclusion that Qualcomm had more market power at a certain point in time, which should have been shown by commensurate fluctuations in royalty rates.

Lee In-ho, a colleague of Yi's from Seoul National University, made a similar argument, saying that the KFTC had failed to demonstrate cause and effect in its charges against Qualcomm that its licensing practices had harmed competition in the chip industry, based on factors such as chip prices and transaction volumes, citing Moore’s law.

In response, Yi said Qualcomm’s royalty rates had remained steady [at five percent of a device’s cost] because that was the company’s business strategy, as had been evident in the FTC-Qualcomm trial.

Qualcomm's appellate trial is likely to produce a decision by the end of the year.

ABA 2019