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Qualcomm makes case to appeals court that it didn't hurt competition

The company argues before the Ninth Circuit panel of three judges.

The Ninth Circuit Court of Appeals in San Francisco is considering Qualcomm's case. 
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Qualcomm is back in a courtroom, this time making the case for why it didn't hurt competition in the smartphone chip business. 

The company, represented by attorney Thomas Goldstein of the firm Goldstein & Russell, on Thursday appeared before the US Court of Appeals for the Ninth Circuit in downtown San Francisco. Qualcomm is hoping the appeals court will overturn a ruling by a district court judge that declared it to be a monopoly and ordered it to renegotiate its licensing contracts.  

Qualcomm during the hearing didn't dispute that it has a monopoly in 3G and 4G LTE chips. But it maintains that it didn't wield that power to harm competition. "What has gone wrong in the competitive process?" Goldstein said. "The answer is nothing." He noted that Qualcomm's business practices could be an issue of contract violations but not an antitrust issue. 

The US Federal Trade Commission, meanwhile, tried to make it clear how Qualcomm's "no license, no chip" policy undercut rivals and caused handset makers to shift business to Qualcomm. Brian Fletcher, an attorney who teaches at Stanford University, spoke for the FTC.

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He said Qualcomm is making it harder for competitors not because its policies have meant lower chip prices but "because it's demanding customers pay Qualcomm even when they decide to buy from rival suppliers."

The hearing is the latest twist in a legal saga that began three years ago when the FTC accused Qualcomm of operating a monopoly and forcing Apple and other customers to work with it exclusively. The FTC also accused the company of charging excessive licensing fees for its technology. As part of the district court's ruling, Qualcomm must submit compliance and monitoring reports for the next seven years and report to the FTC annually. 

Thursday's hearing marks Qualcomm's attempt to have that ruling overturned. The three appeals court judges likely won't make a decision for three months to over a year as they weigh the evidence. 

Whatever they decide could have big implications for the mobile industry and what our future phones look like. Qualcomm supplies modems to everyone from Apple to OnePlus, and its technology has been vital in helping the industry move quickly to 5G. Samsung's new Galaxy S20 phones and its Z Flip foldable, unveiled Tuesday, all use Qualcomm's processors. The FTC said Qualcomm's practices ultimately have caused higher smartphone pricing and have hurt consumers (though prices are unlikely to decline, even if the district court's ruling is upheld). Qualcomm said the current ruling and remedies would hurt the country's leadership position in 5G

The court's process

The appeals court on Thursday included three judges: Consuelo M. Callahan, who was appointed by President George W. Bush; Johnnie B. Rawlinson, who was appointed by President Bill Clinton; and Stephen Murphy III, a Michigan district court judge who sometimes sits on the Ninth Circuit court. 

The proceedings were directed by whatever questions the judges had for the attorneys. Qualcomm had 20 minutes to answer questions, followed by the US Department of Justice taking five minutes to explain why it's supporting Qualcomm, and then the FTC had time to explain why the ruling should be upheld. The day ended with a rebuttal by Qualcomm. 

At one point, Murphy said he was having a hard time keeping up with the FTC's arguments. And Rawlinson noted the case was a "challenging" one, indicating a ruling could take some time. 

The judges' questions didn't seem to clearly indicate which way they're leaning. They pressed both sides with probing questions about the impact on the market. One area they focused on was whether Qualcomm's actions should be considered anticompetitive or capitalistic -- whether it was profiting because it hurt rivals or because it was really good at competing. 

"Is there a conflating of profitable and anticompetitive?" Callahan asked Qualcomm attorney Goldstein. "Yes, that is exactly right," he said. 

Chip monopoly?

As the world's biggest provider of mobile chips, Qualcomm created technology that's essential for connecting phones to cellular networks from 3G to the new 5G standard. The company derives a significant portion of its revenue from licensing those inventions to hundreds of smartphone makers, with the fee based on the value of the phone, not the components. If a device connects to a cellular network, Qualcomm likely wants a licensing fee from the handset maker. It doesn't provide licenses to rival chipmakers, arguing the patents are essential to the device itself, not just the components, and they're covered by its agreement with the handset makers.

In early 2017, the FTC filed a lawsuit accusing Qualcomm of maintaining a monopoly over chips for cellular phones through a "no license, no chips" policy. That policy imposed "onerous" supply and patent-licensing terms to extract high royalties from cellphone makers and weaken competitors, the commission said. In particular, Qualcomm's refusal to license its patents to rival chipmakers hurt competition, the FTC said.

Qualcomm's relationship with Apple, one of its biggest and most important customers, was key to the case, with the FTC arguing that Qualcomm forced Apple to use its chips exclusively in exchange for lower licensing fees. Apple at the same time sued Qualcomm over its patent licensing practices. The two companies reached a settlement in April, paving the way for Qualcomm to supply 5G modems for the next iPhone

Callahan on Thursday questioned how much Qualcomm's practices could have hurt Apple. 

"I think there should be an argument, who's the Goliath there?" Callahan said. "Apple's more of a Goliath than Qualcomm."

Duking it out

Qualcomm and the FTC, meanwhile, battled in a San Jose, California, court in January 2019. In May, US District Court Judge Lucy Koh ruled in the FTC's favor and declared Qualcomm to be a monopoly. She said Qualcomm must change how it does business and renegotiate license deals with its customers. Qualcomm must also submit compliance and monitoring reports for the next seven years and report to the FTC on an annual basis.

Two months later, Qualcomm officially asked the appeals court for permission to hold off on making the changes. It argued that carrying out the actions would "fundamentally change the way it has done business for decades." If the appeals court ultimately found in Qualcomm's favor, the chip giant said, the company wouldn't be able to undo the changes it had made. The Ninth Circuit in August sided with Qualcomm and said it didn't have to comply with the order until the case had made its way through the appeals process.

On Qualcomm's side is the DOJ, which argues Qualcomm is essential for making the US a leader in the race for 5G. In July, the DOJ -- in a rare and high-profile disagreement with the FTC --  filed an amicus brief with the Ninth Circuit, asking the judges to grant Qualcomm a reprieve. "The district court's ruling threatens competition, innovation and national security," the Justice Department said at the time. 

"It's unprecedented for DOJ to openly oppose FTC, but that's what's happening here," Cowen analyst Paul Gallant noted. "DOJ's support could help Qualcomm here."

The judges on Thursday seemed skeptical about how much the remedies would actually hurt national security and the move to 5G. They pressed DOJ attorney Michael Murray for evidence of that (the attorney said if the case was sent back to district court, his agency would present more information) and questioned how the DOJ would recommend narrowing the remedies. 

"Here the remedy expands to the 5G space even though that was not at issue in the trial," Murray said. He suggested that one way to make the remedies less harmful would be removing 5G from them. 

Originally published Feb. 13, 11:04 a.m. PT
Update, 1:23 p.m. PT: Adds additional comments from the hearing.