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DOJ: Antitrust ruling against Qualcomm could ‘put our nation’s security at risk’

The Justice, Energy and Defense departments say an appeals court should grant Qualcomm a reprieve for remedies ordered by a district court.

Qualcomm and the FTC are facing off in the US District Court in San Jose.

Qualcomm and the FTC in January faced off in US District Court in San Jose, Calif.

Stephen Shankland/CNET

The US Justice Department is weighing in on Qualcomm's appeal of a ruling that declared the chip giant to be a monopoly. And the government's citing national security and 5G leadership as reasons for an appeals court to let Qualcomm delay renegotiating its licensing contracts.

The Justice Department on Tuesday filed an amicus brief with the US Court of Appeals for the Ninth Circuit, asking the judges to grant Qualcomm a reprieve. The filing followed a request by Qualcomm last week that the appeals court grant a stay in remedies ordered by US District Court Judge Lucy Koh in May after she declared the wireless chip provider to be a monopoly

At the time, Qualcomm said carrying out the remedies -- before the case went through the appeals process -- would be irreversible and would change its business model. The reforms included renegotiating licensing agreements previously reached with handset makers like LG, licensing wireless patents to rival chip makers and submitting to monitoring by the Federal Trade Commission. Qualcomm wanted the injunctions to be put on hold while the case made its way through the appeals process. 

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The Justice Department on Tuesday sided with Qualcomm, as did the US Department of Energy CIO Max Everett and Ellen Lord, the under secretary of defense for acquisition and sustainment. They cited 5G and national security as reasons for granting Qualcomm's reprieve. The Justice Department also said Qualcomm will likely win an appeal that will overturn the May ruling. The group said Judge Koh "misapplied Supreme Court precedent," and the ordered remedy is "unprecedented." 

"The district court's ruling threatens competition, innovation and national security," the Justice Department said. "Immediate implementation of the remedy could put our nation's security at risk, potentially undermining US leadership in 5G technology and standard-setting, which is vital to military readiness and other critical national interests."

Everett said the Department of Energy "believes that any remedy that causes undue financial strain on Qualcomm may result in undermining Qualcomm's position in the growing 5G market (among other telecommunications markets) and ceding to foreign entities, in particular China, a dominant position in the development and expansion of 5G technology." He noted that Qualcomm plays a key role in US telecom infrastructure and supply chain, and its competitive position "is critically important to the Department of Energy."

And Lord of the Defense Department said that the department "firmly believes that any measure that inappropriately limits Qualcomm's technological leadership, ability to invest in research and development (R&D), and market competitiveness, even in the short-term, could harm national security. The risks to national security include the disruption of DOD's supply chain and unsure US leadership in 5G." 

She added that the Defense Department believes Qualcomm is the market leader in wireless chips because of its expertise and R&D expenditure and that Qualcomm holds important Defense Department security clearance and contracts.

"A hobbled Qualcomm, without the ability to make significant investments in R&D, presents a serious threat to DOD's extensive networks, advanced telecommunications systems, and ultimately its ability to control the battlespace," Lord said.

This isn't the first time parts of the US government have jumped to Qualcomm's defense, even though it was a US government agency -- the FTC -- that brought the antitrust lawsuit against Qualcomm two years ago. 

President Donald Trump a year ago blocked Broadcom's proposed $117 billion acquisition of Qualcomm, saying the deal threatened to "impair the national security" of the US. Then in May, before Koh issued her ruling, the Justice Department asked for a hearing on Qualcomm's possible punishment if a California judge agreed with the FTC. The Justice Department said the court should carefully consider what remedy to carry out because it's worried about the US' position in the race to 5G.

Qualcomm and the FTC declined to comment. 

Monopoly battle

Two years ago, the FTC accused Qualcomm of operating a monopoly in wireless chips. The FTC said Qualcomm forced customers like Apple to work exclusively with it and charged "excessive" licensing fees for its technology, in part by wielding a "no license, no chips" policy. Qualcomm's practices prevented rivals from entering the market, drove up the cost of phones and in turn hurt consumers, who faced higher handset prices, the FTC said.

Qualcomm argued the FTC's lawsuit was based on "flawed legal theory" and that customers choose its chips because they're the best. It also argued that competition is fierce in the mobile chip market and that Qualcomm never stopped providing processors to customers, even when they'd been arguing over licenses.

The parties faced off in an 11-day trial in January. In May, Koh ruled in the FTC's favor, saying Qualcomm was a monopoly that illegally hurt competitors in the wireless chip market. The ruling, which came four months after the trial ended, said Qualcomm must change how it does business and renegotiate license deals with its customers. To hold the company accountable, the court said Qualcomm must also submit compliance and monitoring reports for the next seven years and report to the FTC on an annual basis.

"Qualcomm's licensing practices have strangled competition in the CDMA and premium LTE modem chip markets for years, and harmed rivals, OEMs, and end consumers in the process," Koh wrote in her ruling in May.

The ruling came as a surprise to Qualcomm and others in the mobile market. For Qualcomm, the verdict called into question the company's entire business model. While it sells processors that connect devices to mobile networks, it also generates a significant percentage of its revenue from licensing. If it can't collect royalties based on the value of a handset -- which it had done in the past -- it will generate less money and may have to rethink its model entirely. Even though it's appealing the ruling, Qualcomm's licensees likely will try to alter their contracts.

Koh, in her ruling, said Qualcomm can't force a customer to sign a license before it'll supply that company with chips. It "must negotiate or renegotiate license terms with customers in good faith under conditions free from the threat of lack of access to or discriminatory provision of modem chip supply or associated technical support or access to software."

Though Qualcomm likely won't have to renegotiate its new agreement with Apple -- the two settled their long-running licensing and patent disputes during opening arguments in a May trial -- it'll have to offer other customers the chance to change their terms.

Qualcomm's appeal

Qualcomm filed a motion last week with the US Appeals Court for the Ninth Circuit, asking the court to grant a stay because carrying out the actions would "fundamentally change the way it has done business for decades." If the appeals court ultimately finds in Qualcomm's favor, the chip giant said, the company won't be able to undo the changes it's made. Qualcomm also filed a request for an expedited briefing and hearing for the appeal. 

"This court has repeatedly found that a stay is warranted when -- as here -- an injunction imposes changes on a party's business practices and commercial arrangements that cannot be undone by this court's later reversal of the district court's judgment," Qualcomm said in its filing requesting the stay. "There is no basis to depart from that settled, sound practice."

Qualcomm also invoked the global race to 5G and the US' priority to lead when it comes to the super fast, next-generation technology. 

"Unless stayed, the injunction will significantly impair an American company that is the worldwide leader in the development of cellular technologies, at a critical moment in the development of the worldwide standards for next-generation 5G cellular systems, thereby forfeiting the lead to foreign interests," Qualcomm's filing said. 

The company said firms are already are trying to renegotiate their contracts with Qualcomm and noted it "will be forced to negotiate under the cloud of an injunction requiring it to accept terms to which it would not otherwise agree."

Wireless networking gear giant Ericsson -- one of the companies that testified in the January trial -- also filed an amicus brief in Qualcomm's favor on Monday. The wireless networking gear giant argued that the district court's order requiring Qualcomm to license its standard essential patents to other chipmakers, as well as the requirement it renegotiate its current licenses, "threatens to disrupt the stability and predictability necessary to permit 5G investments to go forward."

"The district court's injunction substantially alters the status quo governing Qualcomm's relationship with other players in the cellular phone industry," Ericsson said. "Requiring Qualcomm to negotiate new licenses and to re-negotiate existing licenses -- with the expectation (realistic or not) that it could seek to re-negotiate those agreements if it wins its appeal -- creates an unacceptable level of uncertainty in the industry and threatens significant disruption that should be avoided by maintaining the status quo pending appeal."

Originally published July 16 at 5:01 p.m. PT
Update July 17 at 8:36 a.m. PT: Adds FTC declining to comment.