The U.S. Federal Trade Commission’s suit against Qualcomm, charging it used anticompetitive tactics to maintain its market share, deserves more attention than it is getting.
The case against the company, which manufactures chipsets and holds patents essential to the function of mobile phones and other consumer products, is controversial. Shortly after it was filed - just before the Obama Administration left town - a group of prominent conservatives wrote President Donald Trump, calling the suit “a misuse of antitrust litigation to promote a destructive policy agenda that aims to undercut property rights and conservative free market principles.” They labeled the decision to go forward with it a last minute “midnight” regulatory action deserving of suspicion and asked that FTC Commissioner Maureen Ohlhausen be placed in charge of the agency in order to terminate the action.
On one point at least they prevailed. Ohlhausen was named acting chairman of the FTC replacing Democrat Edith Ramirez who, the conservative leaders charged, “repeatedly used indefensible Section 5 enforcement theories to advance antitrust policies that weaken U.S. patent rights to the detriment of America's technology leadership, competitiveness and jobs.” To date though, no decision has been made on withdrawing the complaint.
Many federal agencies try to ram unfinished business through every time an administration comes to an end. It’s true many of these actions are suspect -- and deservedly so. They amount to little more than an effort to keep a thumb on the scale by those who are about to lose power. Ohlhausen is, without doubt, a much better choice (from a market perspective, at least) to lead the FTC than Ramirez, who resigns soon from the commission and some of the others whom Trump may eventually appoint chairman. What all that doesn’t mean is the Qualcomm complaint is automatically without merit, particularly when viewed in the full context of the many investigations and challenges into its licensing practices from government authorities and private industry alike.
Technology companies and innovators of all sizes and competition authorities around the world have expressed concern for the impact of Qualcomm’s business practices and licensing protocols. In three recent challenges to how it does business Qualcomm has been found to have violated well-recognized, widely adhered to rules and laws for licensing of standard essential patents under “Fair, Reasonable and Non-Discriminatory” terms-- or FRAND as it is known in the industry.
In December 2016 the Korea Fair Trade Commission fined Qualcomm Inc. $853 million for breaching international competition law by limiting other chip makers’ access to its patents. The company was also found to have forced mobile-phone manufacturers into unfair license agreements by refusing to supply crucial phone chips to those that disagreed with its terms.
As mentioned, Qualcomm was recently sued by the FTC, which claimed the company used its dominant position in the market to impose onerous terms on phone manufacturers, hobble competitors, and lock others out of the market. Apple was next to file suit against Qualcomm arguing it leveraged its monopoly position as a manufacturer of baseband chips to seek “onerous, unreasonable and costly” terms for patents, and that it had blocked Apple’s ability to choose another supplier for chipsets.
If that were not enough, other American companies like Intel, Broadcom, and Texas Instruments, have made similar claims. The Apple complaint alone seeks $1 billion in rebate payments the company claims Qualcomm has withheld as retribution for Apple’s participation in an investigation by South Korea’s competition regulator.
This recent onslaught of litigation facing Qualcomm is nothing new. In 2009 the KFTC fined Qualcomm $235 million after a three-year investigation. In 2015 the European Union launched two investigations into possible exclusionary pricing of chipsets and unfair licensing schemes. In 2015 China imposed a $975 million fine as part of an agreement to settle antitrust investigation there. There’s more, all on the same theme: Qualcomm’s licensing practices are under intense scrutiny around the world.
Here’s why. Failure to adhere to FRAND licensing practices harms competition for connected devices which drives up costs, limits consumer choice and slows innovation. As the FTC complaint put it, Qualcomm’s behavior acts like an unfair “tax” on competitors and consumers. New technologies including devices, apps, and services are constantly changing the landscape within the dynamic wireless industry – a virtuous cycle of innovation that is assisted by proper FRAND licensing of standards-essential patents – SEPs - and hindered when abusive bad actors like Qualcomm dismiss their agreed upon licensing obligations and take unfair advantage of their power conferred by profiting from the inclusion of its patents which were deemed essential to technology standards like the 3G , 4G, and LTE cellular technologies at issue in the recent suits and regulatory actions.
Qualcomm exclusively manufactures its chipsets overseas, but Qualcomm’s competitors manufacture sophisticated chips in the U.S. for many uses. It’s fair to assume they would manufacture a lot more if Qualcomm would more fairly license its SEP technology in the mobile device space. On the surface it looks as though their anti-competitive practices keep jobs overseas, rather than increasing U.S. economic growth and employment prospects. For this reason and for the tremendous drag its licensing practices are having on mobile innovation, it is not at all unreasonable the current FTC complaint move ahead, despite the criticisms lodged against it. If the company has done no wrong they will have the chance to prove it.