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FTC says Qualcomm is a monopoly, case should proceed

The US trade group says a court shouldn't dismiss its suit against the chipmaker. Samsung agrees with the FTC.

César Salza / CNET

And so continues the battle over Qualcomm's licensing practices.

The US Federal Trade Commission on Friday defended its antitrust lawsuit from January, saying in a legal filing with the US District Court in San Jose, California, that the court shouldn't dismiss its complaint against Qualcomm. The group has accused Qualcomm, the world's biggest mobile chipmaker, of forcing Apple into an exclusive chip deal. Qualcomm maintained a monopoly that extracted high royalty fees and weakened competition, the FTC said. Qualcomm denies the claims and last month asked for a court to dismiss the antitrust suit.

"Qualcomm uses its monopoly power to make [handset manufacturers] pay a royalty overcharge -- a tax -- when buying modem chips from its competitors," the FTC said Friday. "Qualcomm further hampers those competitors by denying them the licenses it promised would be available on FRAND terms during standard- setting. And Qualcomm foreclosed its competitors from selling to a uniquely important customer, Apple, for half a decade using exclusive contracts."

On their own, each of those arguments "present a forceful antitrust case," the FTC said. "Together, they easily surpass the plausibility threshold at the pleading stage."

Qualcomm in a statement reiterated its argument that the suit shouldn't proceed.

"The Federal Trade Commission's latest submission to the court does nothing to cure the fundamental flaws in its complaint against Qualcomm: no coherent theory of competitive harm and no allegations of the type of conduct that the antitrust laws are designed to address," Qualcomm said. "The complaint therefore should be dismissed."

Qualcomm is the world's biggest provider of mobile chips, and it created some of the essential standards for connecting phones to cellular networks. The company derives a significant portion of its revenue from licensing that technology to hundreds of handset manufacturers and others. Because Qualcomm owns patents related to 3G and 4G phones, any handset maker building a device that connects to the newer networks has to pay it a licensing fee, even if they don't use Qualcomm's chips.

Qualcomm has come under scrutiny in recent years for alleged monopolistic practices. Two years ago, it paid China nearly $1 billion to end a 14-month antitrust investigation in that country. Then, in December, South Korea hit Qualcomm with a $850 million fine following a three-year investigation. The South Korean Fair Trade Commission accused the chipmaker of having an "unfair business model" and creating a monopoly with its practices. Those all come on top of the FTC's complaint.

Apple in January filed suit against Qualcomm in the US, alleging the wireless chipmaker didn't give fair licensing terms for its technology. Apple also said Qualcomm sought to punish it for cooperating in a South Korean investigation into Qualcomm's licensing practices by withholding a $1 billion rebate. Last month, Apple said it had stopped paying royalties to contract manufacturers for phone patents owned by Qualcomm, starting with devices sold during the March quarter. That dealt a blow to Qualcomm's financial results.

Chip monopoly?

The FTC's lawsuit from January accused 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.

The FTC's original complaint said the patents Qualcomm held are standard-essential patents -- technology that is essential to the industry and must be licensed to competitors under fair, reasonable and nondiscriminatory terms (FRAND). But the complaint alleges that Qualcomm consistently refused to license some standard-essential patents to rival chipmakers, in violation of its FRAND commitments.

Qualcomm's motion to dismiss last month contended that the FTC's complaint failed to support claims of antitrust violations or competitive harm.

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The case is at a "highly important juncture," Florian Mueller, a patent expert who maintains the blog Foss Patents, said Friday.

"Unlike patent infringement and other commercial cases that are fact-intensive, this antitrust case is centered around some very important questions of law," Mueller said. "Qualcomm's dual-monopoly business model presents some unique issues, and the FTC's task in this litigation is to convince the court that this case fits within an established pattern of anticompetitive conduct."

He added that the FTC makes a "very important point" that's also central to Apple's argument against Qualcomm: "Considering how multifunctional today's smartphones are, 'a 5 [percent] royalty on a 2006 phone is not economically equivalent to a 5 [percent] royalty on a 2017 smartphone.'"

Frenemies

Samsung, the world's biggest handset maker, hasn't filed any lawsuits against Qualcomm, but it did file an amicus brief in support of the FTC on Friday, saying the court shouldn't dismiss the antitrust suit. In it, the company noted that it's a Qualcomm customer (it uses Qualcomm's chips in devices like the Galaxy S8), and it's also a potential competitor (Samsung builds and sells chips).

"In both capacities, Samsung has directly experienced, and been directly harmed by, the exclusionary conduct alleged in the FTC's complaint," it said in a court filing Friday. "Qualcomm refuses to license its [standard essential patents] on fair, reasonable, and non-discriminatory ... terms so that Samsung can make and can sell licensed chipsets. Given its position, Samsung is uniquely situated to assist the court in understanding the important antitrust principles at stake in this case."

Samsung said in its filing that Qualcomm agreed to fairly license its technology if standards bodies adopt tech that required the use of Qualcomm patents. But the South Korean company said Qualcomm hasn't kept its side of the bargain. Instead of licensing its standard essential patents to rival chipmakers, it only gives licenses to handset manufacturers.

"Because Qualcomm does not license [chipset] competitors, handset manufacturers have no choice but to accept Qualcomm's onerous terms," Samsung said. "Qualcomm directly excludes competitors and harms competition."

Intel, one of Qualcomm's main rivals in semiconductors, also filed an amicus brief on Friday. The company, which was late and has struggled in the mobile chip market, became a supplier of iPhone mobile chips in Apple's latest models, the iPhone 7 and 7 Plus.

"Although Qualcomm has driven nearly all of its competitors out of the premium LTE chipset market, Intel has not thrown in the towel," Intel said in a court filing.

The company noted that Qualcomm's business dealings with Apple "put Intel's commercial success at risk and will do so in the future if Qualcomm is allowed to persist in its anticompetitive tactics. As the only remaining competitor in the premium LTE chipset market ... any harm to Intel's premium chipset business will have profound anticompetitive effects on the market as a whole."

Update at 1:30 p.m. PT with Samsung's amicus brief filing.

Update at 2:05 p.m. PT with Qualcomm's comment.

Update at 3:25 p.m. PT with Intel's amicus brief filing.

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