Qualcomm's loss in Seoul set to reverberate across company’s global modem-chip business

Qualcomm’s loss in its appeal in South Korea may haunt the US chip giant’s global cellular chip business, with a Seoul court siding with the decision by the Korea Fair Trade Commission for the majority of its 2016 decision, including the relevant markets set by the regulator.

The Seoul High Court announced its ruling today, in which a panel of judges ruled mostly in favor of the KFTC for the regulator’s sanctions, including the record fines of 1.03 trillion won ($862 million) against Qualcomm, imposed in late 2016.

Along with the financial penalties, the regulator also handed down corrective orders, including banning the company from engaging in unfair licensing agreements with rival chipmakers and ordering it to negotiate licensing terms with willing chipset manufacturers.

And in a significant decision for Qualcomm’s global antitrust defense, the court determined that the KFTC’s decision to identify the global chip and licensing markets as the relevant ones for the case was appropriate, as were the measures imposed on Qualcomm based on this finding.

For the chipset market, the court found that the KFTC’s decision to recognize the dominant market position of the complainant after considering various factors, including globally applicable standards, was acceptable.

This means that the regulator’s attempt to impose corrective measures at a global level will be upheld, unless the Supreme Court decides to reverse such findings by the lower court when Qualcomm appeals today's decision.

In a statement released this afternoon, Qualcomm's general counsel, Don Rosenberg, said the company disagreed with the court's decision and "will immediately seek to appeal those provisions to the Korea Supreme Court."

— ‘Misconducts’ ruling —

The court upheld most of the KFTC’s decision against Qualcomm’s practice of refusing or restricting licenses of cellular SEPs to rival chip producers, or what the regulator categorized as “misconduct 1.”

The court determined that Qualcomm cannot exclude rival chipmakers from licensing agreement given its commitment to offer licensing conditions that are fair, reasonable and non-discriminatory, or Frand, with various standard-setting organizations.

The court also said that it’s possible for competing chip companies to experience a rise in cost due to the risk of patent attack and recognized that such conduct harms competition in the chip market.

The Seoul court rejected the argument by the US chipmaker that its commitment to the European Telecommunications Standards Institute, or ETSI, only obliges it to license its standard-essential patents, or SEPs, at the end-device level, rather than at the component level. Qualcomm had argued during the trial that its licensing practice changed upon the Quanta ruling in 2008, after which it became riskier to have non-exhaustive agreements with rival chipmakers.

Former ETSI experts presented diverging views on this matter.

Bertram Huber, a lawyer who sat on ETSI’s IP rights committee, said the standards body's policy allowed companies to license their patents at a device level, rather than at component level. At a later hearing, Friedhelm Rodermund, who worked on ETSI’s technical committees, said Qualcomm was wrong to make such a claim because each component in a handset has to implement “necessary” standards.

“Licensing at the modem chipset level is realistically possible and it is difficult to say that [licensing at the component level] is markedly inefficient [compared to licensing at the device level],” said the presiding judge Noh Tae-ak. The judge also said that Qualcomm’s practices have led to the exit of various rival chip companies, as claimed by the KFTC.

The court, however, rejected the KFTC’s finding that Qualcomm completely restricted the use of SEPs by the rival companies, saying that some chipmakers were still able to produce and sell modem chipsets without exhaustive licenses from Qualcomm.

In regards to “misconduct 2,” also known as “no license, no chip” policy of Qualcomm, the court said that Qualcomm had abused its dominance and coerced phone companies to enter into unfair licensing agreements, threatening them to cut the supply of chips.

During the trial, witnesses for the KFTC testified that Qualcomm used chip supply as leverage in patent talks.

The court said that Qualcomm failed to uphold its Frand commitment and that threats by Qualcomm created an effect of limiting competition and bolstered the US company’s dominant market position. The court cited internal Qualcomm documents as well as the fact that the business model for cellular chips was different from the model for other components, such as NFC Wi-fi chips.

Judges, however, dismissed the KFTC’s findings for “misconduct 3” entirely.

The regulator had found in its 2016 decision that Qualcomm forced unfair terms, such as combining SEPs and non-SEPs in the form of patent portfolio and excessive royalty on handset makers. The KFTC had also taken issue with the cross-licensing agreement, where Qualcomm was able to use phone makers’ patents for free.

This decision was welcomed by Qualcomm's Don Rosenberg.

"[W]e are gratified that the court rejected the KFTC’s finding that our licensing terms are not fair, reasonable and non-discriminatory, and reversed the KFTC’s remedial order to renegotiate those licenses,” Rosenberg said.

During the trial, Alex Rogers, executive vice president and president of Qualcomm Technology Licensing, the company’s licensing division, testified that it was “impractical” to break down the portfolio. This position was reiterated in a later hearing by Aviv Nevo, a former deputy assistant attorney general for economic analysis at the US Department of Justice antitrust division, who said such licensing practice was “pro-competitive” and one that had a “valid business justification."

The court said that the KFTC failed to demonstrate that the royalty obtained by Qualcomm from phone makers was in fact “above-Frand." During the trial, witnesses for both the KFTC and Qualcomm touched on the appropriate Frand royalty rate, with the economist for the KFTC saying he has not quantified such figure while the economic expert for Qualcomm saying that “Frand rates should be determined based on ex-ante rates, before standards were adopted” and that Qualcomm rate was not above the Frand rate.

The court also found it difficult to determine that Qualcomm has forced unfair terms and obtained cross grants without providing proper compensations, citing lack of evidence to support the alleged imbalance in compensation between Qualcomm and the handset manufacturers for these agreements.

“Fully paid, royalty-free” cross-licensing agreements mean that the appropriate compensations for the patents are already reflected in the calculation of the final royalty paid by the phone makers to Qualcomm, the court ruled.

As a result of its ruling, the court nullified corrective orders related to “misconduct 3.”

— Penalty calculations —

Because the financial penalties imposed on Qualcomm were calculated by the KFTC based on the “misconduct 1” and “misconduct 2,” the court didn't order the regulator to retract or modify its penalty decision.

The court briefly touched on Qualcomm’s arguments that its defense right had been violated during the KFTC proceedings, saying that given the importance of evidence restricted from Qualcomm, among other things, it is difficult to determine that the company’s right of defense was substantially undermined.

“Qualcomm’s appeal has been dismissed for the most part,” said the KFTC through a press release following the decision.

“The KFTC will analyze the decision and take appropriate measures to get ready for the Supreme Court appeal while monitoring the implementation of the corrective orders based on the decision [by the high court].”

- Additional reporting by Mike Swift