Qualcomm licensing chief defends practices as FTC antitrust trial continues

26 January 2019 00:00 by Mike Swift

The president of Qualcomm’s patent-licensing business testified today that the company never threatened to cut off the supply of modem chips to smartphone makers, even those that stopped paying royalties to the chipmaker.

As Qualcomm’s trial defense against antitrust claims by the Federal Trade Commission continued into the ninth day of the trial, Alex Rogers, the president of Qualcomm Technology Licensing, or QTL, also defended QTL’s long-running practice of licensing its patents based on the value of a full device, rather than charging rates as a percentage of specific components covered by the company’s patents.

Rogers testified Qualcomm’s policy allows phonemakers to access technology that would otherwise be restricted, by allowing it to be easily incorporated into technology standards. “Basically, everybody in the industry has access to that,” Rogers said during testimony in San Jose, California. Qualcomm also presented video depositions from executives at Ericsson and InterDigital confirming those companies also license at the device level, not the component level.

At the start of 2018, Rogers testified that Qualcomm had dropped the cap on the highest phone price for which it would set license fees, to a cap of $400 from the previous $500, as part of a license deal with Samsung that was extended to the full industry and was also blessed by the Korea Fair Trade Commission.

And he said Qualcomm tried to reach a deal with Apple in 2016 and 2017 in which the companies would use arbitration to arrive at a fair rate to license each other’s standard-essential patents, similar to the model the FTC mandated in settlements with Google and Motorola Mobility in 2013.

But Apple wanted the arbitrators to evaluate each of the thousands of patents in the companies’ portfolios for whether it was infringed, essential to a standard and other measures. “It just simply wasn’t practical,” Rogers said of Apple’s proposal.

Rogers’ claim that Qualcomm had never threatened to cut of the supply of chips to a phone-maker was immediately challenged during his cross-examination by FTC lawyer Dan Matheson. The core of the FTC’s allegations against Qualcomm is that the company used its market power over baseband modem chips to extract royalty rates for its SEPs above the fair, reasonable and nondiscriminatory — or Frand — rates.

One tool Qualcomm used to get leverage, multiple companies have testified during the trial, was the threat of cutting off high-end modem chips that phonemakers couldn't obtain anywhere other than Qualcomm.

“You have personally observed instances” when Qualcomm told a phonemaker that it needed to sign a patent license, or Qualcomm would terminate modem chip shipments," Matheson told Rogers today. “Isn’t that right?”

“I don’t recall that,” Rogers said.

The FTC lawyer then confronted Rogers with a 2012 e-mail chain on which he was copied, between Eric Reifschneider, the former senior vice president of its licensing business, and an executive at Sony. In the exchange, Reifschneider told a Sony executive that while Qualcomm had continued to ship chips to Sony while it hadn’t signed a patent license, “it will not be possible for that to continue” unless Sony signed the license.

“That’s a threat to cut to off chip supply to Sony, isn’t it?” Matheson asked Rogers.

“I think the Sony matter resolved quite amicably.”

“I didn’t ask whether it resolved amicably,” Matheson responded, before hitting Rogers with the same question. “That’s a threat to cut off chip supply to Sony, isn’t it?”

“I don’t know the full context of this,” Rogers protested.

“No further questions,” Matheson snapped, in an exchange that essentially ended Qualcomm’s defense in open court. The FTC is expected to present rebuttal witnesses as the trial continues Monday, with closing arguments scheduled Tuesday in San Jose.

— Expert testimony —

Much of Friday was taken up by more than three hours of testimony from one of Qualcomm’s key expert witnesses, Aviv Nevo, a former deputy assistant attorney general for economic analysis at the US Department of Justice's Antitrust Division.

Nevo testified that data from 1990 to 2015 shows that Qualcomm didn't leverage its market power in modem chips to force phonemakers to pay higher-than-reasonable rates to license its standard-essential patents. Nor did Qualcomm’s conduct create a “tax” on competition, as the FTC alleges, Nevo testified.

“My conclusion is that the FTC’s theory is just not borne out in actual market data, so there is no support for the theory in the data,” Nevo said.

For the past three decades, Qualcomm’s licenses have been based at about 5 percent of a device’s cost, a ratio that didn’t change significantly even as Qualcomm gained market power in chips. If Qualcomm was actually using its dominance in chips to extract higher-than-Frand patent royalties, that percentage would have increased or pulled back along with Qualcomm’s level of dominance, Nevo testified.

“The FTC theory’s prediction that there would be different rates during periods of high market power just is not borne out in the data,” Nevo said. Nor has there been any harm to competition, he said, with the average price of handsets declining and the quality of products improving.

“What I found is at a high level, this is a thriving industry,” Nevo said, although he also acknowledged that he couldn't rule out that but for Qualcomm’s business practices, the improvements in the industry might have been even greater.

But, in testimony that seemed to be addressed to US District Judge Lucy Koh, Nevo said “there is a huge downside risk” of a ruling that changes the status quo of the industry, “really throwing it into chaos and really disrupting it. There is a real downside risk of any intervention in this industry.”

In the FTC’s cross-examination, FTC lawyer Jennifer Milici went hard at the quality of Nevo’s analysis, pointing out that he had omitted Qualcomm licenses with Samsung, Sony, Blackberry, LG Electronics and certain contracts with Huawei from his analysis. Nevo also acknowledged he had omitted government-dictated licensing agreements in China and South Korea.

“Do you have any idea what share of the handset market you included?” Milici asked Nevo, forcing the expert to answer, “I can’t tell you.”

Milici also questioned how Qualcomm’s license rate could be Frand, and stay so unchanged over more than two decades when mobile phone technology, Qualcomm’s market power and the size of Qualcomm’s patent portfolio had changed so radically.

“And yet this rate is consistent across 25 years?” Milici asked.

“Yeah, it seems like it’s consistently a Frand rate,” Nevo said.

In his redirect from Qualcomm lawyer Robert Van Nest, Nevo said two government-directed licenses in China and one in Korea couldn’t fairly be compared with negotiated deals between private companies. Nevo said he had to exclude the deals with Samsung and Sony because of fee arrangements between the companies that made those deals impossible to compare with other license royalties.

“They are really a different animal and it’s not clear how to compute an effective royalty rate that is comparable to the other,” Nevo said.

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