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Qualcomm didn't have all the license negotiating power, exec testifies

And the company never stopped supplying chips to companies during disputes, Qualcomm's Fabian Gonell says.

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Samsung has long used Qualcomm chips in its devices. 

Angela Lang/CNET

Qualcomm doesn't have all the power when it comes to negotiating licensing contracts, a company executive testified Friday. Instead, handset makers have options to reach terms they view as more favorable, he said. 

Fabian Gonell, senior vice president of licensing strategy and legal counsel for Qualcomm's licensing business, said during a trial Friday that Samsung, Sony Mobile and others have reached agreements with Qualcomm that differed from its normal pacts. He noted that Qualcomm didn't stop providing chips to them while the licensing agreements were being disputed, and he added there was no part of Qualcomm's licensing agreements that wasn't negotiable.  

"We had a provision that had to do with export compliance [that was] considered untouchable," Gonell said. "But at some point, somebody wanted to touch it, and it was touchable."

Gonell's testimony on Friday shed light into Qualcomm's licensing practices. He sought to counteract statements by Apple and others that they felt they had no option but to accept licensing terms they didn't like so they wouldn't lose access to Qualcomm chips. 

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It took Samsung and Qualcomm two years to sign a new licensing agreement, Gonell said. 

"Everything was unusual," Gonell said. "It was an incredibly customized agreement. Almost everything was an issue. Samsung is very sophisticated. They're very hard negotiators."

What Samsung ended up doing was paying Qualcomm an upfront licensing fee "an order of magnitude larger" than average, Gonell said. Samsung then transferred patents to Qualcomm and cross-licensed its overall patent portfolio. The "risk-sharing" royalty rate was variable and was based on how well Samsung phones sold, he said. 

In the case of Sony Mobile, the two ended up agreeing on a royalty rate that's lower than Qualcomm's typical rate, Gonell said. 

Qualcomm has been battling the Federal Trade Commission in a San Jose, California, courtroom since Jan. 4. On Tuesday afternoon, the FTC wrapped up its case against the company and Qualcomm has since been presenting its defense. 

The FTC has accused Qualcomm of operating a monopoly in wireless chips, forcing customers like Apple to work with Qualcomm exclusively and charging excessive licensing fees for its technology in part by wielding its "no license, no chips" policy. But Qualcomm says the FTC's lawsuit is based on "flawed legal theory." It also has said that customers choose its chips because they're the best and that it has never stopped providing processors to customers, even when they're battling over licenses.

No license, no chips

The "no license, no chips policy" is at the heart of the FTC's case against Qualcomm. Qualcomm sells processors that connect phones to cellular networks, but it also licenses its broad portfolio as a group. For a set fee -- based on the selling price of the end device, typically a phone -- the manufacturer gets to use all of Qualcomm's technology. It's phone makers that pay the licensing fee, not chipmakers. 

To get access to Qualcomm's chips, which are broadly considered to be on the bleeding edge of wireless innovation, a phone maker first has to sign a patent licensing contract with Qualcomm. Qualcomm has long been the leader in 4G LTE, and it's ahead of rivals in the nascent 5G market. The highest-end phones, like those from Samsung, have tended to use its modems. But the FTC argues such a requirement hurts competition and cements Qualcomm's monopoly power.

Apple Chief Operating Officer Jeff Williams on Monday testified that his company felt that it had to sign contracts for amounts it thought too high -- a royalty of $7.50 per iPhone -- to maintain access to Qualcomm's chips. 

"We were staring at an increase of over $1 billion per year in licensing, so we had a gun to our head," Williams said as he explained why Apple signed another licensing agreement in 2013, despite being unhappy with the terms. He added that Apple has wanted to use Qualcomm's chips for its newer devices, but Qualcomm refused to sell processors for the iPhone. 

Other companies like Huawei and Lenovo made similar comments during their testimony. But Gonell on Friday said Qualcomm has never cut off chip supply to companies during contract negotiations and he used the example of Samsung and Sony to show companies can push for different terms in their agreements.  

He noted that Oppo and Vivo stopped paying Qualcomm for over a year because of a licensing dispute, while Huawei also cut off payments. Apple, through its contract manufacturers, hasn't paid for licensing Qualcomm's technology in over two years. But Qualcomm kept shipping all of them chips, Gonell testified. 

"If there's a licensee disputing the terms of its license, we continue to supply chips if they want them," he said. 

Licensing battle

The FTC, aided by chipmaker Intel and iPhone vendor Apple, filed suit against Qualcomm two years ago. The US says Qualcomm has a monopoly on modem chips and harmed competition by trying to maintain its power. Qualcomm's "excessive" royalty rates 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. 

The FTC in the trial has called witnesses from companies like Apple, Samsung, Intel and Huawei and called experts to testify about the alleged harm Qualcomm's licensing practices have caused the mobile industry. The trial has revealed the inner workings of tech's most important business, smartphones, showing how suppliers wrestle for dominance and profit.

When licensing to a phone maker, Qualcomm charges an upfront fee and then collects royalties based on the selling price of the device, Gonell said Friday. When Qualcomm first licensed its CDMA technology, it charged a 5 percent royalty on phones. That rate dropped when 4G LTE came out, and China set a new, lower rate in November 2017, 3.25 percent, which Qualcomm then rolled out across its licensing base. That move also capped the value of handsets, which its royalty is based on, at $400, even if a device sold for triple that. 

Gonell said Friday that Qualcomm's cap for a full portfolio license is $20 per device and $13 for only Qualcomm's essential patents. 

Qualcomm has argued that its broad patent portfolio and innovations justify its fees. CEO Steve Mollenkopf, who took the stand a week ago, defended the company's licensing practices, saying the way his company sells chips to smartphone makers is best for everybody involved and is the simplest way to license the technology. 

Gonell reiterated those comments, noting licensing mobile technology at the handset level has been common practice in the industry. He said licensing all of Qualcomm's technology to chipmakers wouldn't make sense, something Qualcomm has argued since the start of the case. 

The FTC has said Qualcomm's refusal to give licenses to its rivals is part of its efforts to maintain its monopoly. Judge Lucy Koh in November agreed and ruled that Qualcomm has to license its wireless chip patents to its chip competitors like Intel.

"We're talking about cellular essential patents. Standards are written in a way that describe user equipment," Gonell said Friday. "If you do licensing at the modem chip level, you'll also have to do some licensing at the device level." 

He noted such a practice would "make licensing a lot more cumbersome and more inefficient."

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