FTC, Qualcomm start antitrust trial, foreshadowing divergent views of Qualcomm history

Qualcomm launched its defense against the Federal Trade Commission’s antitrust claims by invoking 30 years of corporate R&D history that it says fostered a vibrant global smartphone market, as a 10-day trial began today in Silicon Valley that will illuminate the heart of the smartphone connectivity industry.

In dueling 30-minute opening statements before US District Judge Lucy Koh in San Jose, California, lawyers for the FTC and Qualcomm foreshadowed two divergent visions of Qualcomm’s role in the mobile device industry, and its leverage over device makers that rely on wireless communications standards like LTE and the forthcoming 5G.

Qualcomm attorney Robert Van Nest said the company’s three-decade practice of relying on patent royalties to primarily fund its research and development, rather than revenue from its sale of modem chips that allow smartphones and other devices to connect to cellular networks, has produced an industry where average phone prices are dropping, quality is improving, and competition is strong.

"The participants in this market are absolutely thriving. Apple and Samsung are two of the most valuable companies in the world," he said, and Intel is now supplying modem chips to Apple’s iPhone.

Attempting to burnish Qualcomm’s image as a disruptive innovator whose risky technology bets paid off, Van Nest showed Koh a 1980s photo of Qualcomm founder Irwin Jacobs driving around San Diego and other cities in a van with a transmitter to prove to doubters that its CDMA technology would work. CDMA stands for “code division multiple access,” which allows a device to send multiple coded messages simultaneously to a base station.

CDMA has now become a leading technology for how mobile devices connect to cellular networks. “Qualcomm has spent billions of dollars, Your Honor, to develop these technologies, and they are typically the ones out in front,” Van Nest told Koh. “Qualcomm is typically the company that turn these ideas into a product, before anyone else does.”

Evidence of the strength of competition in the industry, Van Nest said, is that Qualcomm is no longer dominant, as Apple, Samsung and Huawei use suppliers such as Intel or make their own modem chips, rather than buying them from Qualcomm. "In 2017, Qualcomm supplied only 34 percent of total modem chips worldwide,” Van Nest said.

The FTC’s Jennifer Milici, however, detailed four key elements of Qualcomm’s business strategy, “an entrenched corporate policy” that the enforcer says violates the Sherman Act. Foremost among them, the FTC lawyer said, is Qualcomm’s “no license-no chips” policy — that the San Diego chipmaker would exclusively sell its products to companies that took a license to Qualcomm’s full patent portfolio.

That allowed Qualcomm to extract royalties for standard-essential patents above the fair, reasonable and non-discriminatory, or Frand, rate that it was contractually committed to offer. "You cannot tie a monopoly in chips to royalty negotiations, and get an actual market rate,” Milici told Koh.

Qualcomm also made incentive payments to manufacturers that licensed its patents, refused to license its patents to rival chipmakers, and entered into exclusivity deals with Apple with an eye to blocking other competitors from entering the baseband processor chip market, the FTC lawyer told Koh.

Qualcomm entered deals with Apple in 2011 and 2013 to be the exclusive modem chip supplier for Apple’s iPhone and iPad, knowing "there would not be enough volume for another competitor to enter the [modem chip] market," Milici told Koh.

That deal, she told Koh, delayed Intel from being able to enter the modem chip market to supply Apple and compete with Qualcomm.

The FTC doesn’t dispute that Qualcomm has valuable patents and technology. But, Milici told Koh, referring to one of the government’s most famous technology antitrust cases, “Making valuable technology does not exempt a company from the antitrust laws. No one ever accused Microsoft of failing to make valuable technology."

Qualcomm several times, in secret projects codenamed “Berlin” and “Project Phoenix,” explored splitting its patent licensing and chip businesses into separate companies.

But, Milici said, Qualcomm concluded that splitting them up would prevent Qualcomm from extracting the same high royalties as the telecom industry transitions to 5G technology, by exposing Qualcomm to more patent litigation and limiting Qualcomm’s leverage in licensing negotiations.

“We know the license rates charged by Qualcomm are too high, and not Frand, because Qualcomm uses its chip power to charge higher rates,” she said.

The FTC’s trial against Qualcomm is one of three key trial challenges to the legality of Qualcomm’s business model that the company will face this year. Apple is also pursuing antitrust claims against Qualcomm in a trial scheduled for April in San Diego, and a private class-action antitrust case is due to go to trial before Koh later this year.

Van Nest today disputed the FTC’s claim that threats by Qualcomm to disrupt the availability of its chips to original equipment manufacturers had ever undermined competition. There was always the “assurance of continued supply,” he said. “There's a big difference between hard bargaining, and threats and coercion.”

And he said Qualcomm’s exclusivity deal with Apple didn't delay Intel’s entry into the modem chip market. Intel recognized that it couldn't compete with Qualcomm’s superior modem chip technology, so it channeled research and development away from CDMA chips. That was what delayed Intel’s entry into the market, he said.

Intel “made a decision to do that and move to other technology,” Van Nest told Koh. “So what happened? When Apple needed them for CDMA technology, they weren’t ready,” and Apple was forced to make the determination of Intel that “these guys aren’t ready for prime time.”