The Federal Trade Commission (FTC) has filed a complaint in federal district court charging Qualcomm Inc. with using anticompetitive tactics to maintain its monopoly in the supply of a key semiconductor device used in cell phones and other consumer products.
Qualcomm is the world's dominant supplier of baseband processors - devices that manage cellular communications in mobile products. The FTC alleges that Qualcomm has used its dominant position as a supplier of certain baseband processors to impose onerous and anticompetitive supply and licensing terms on cell phone manufacturers and to weaken competitors.
Qualcomm also holds patents that it has declared essential to industry standards that enable cellular connectivity. These standards were adopted by standard-setting organizations for the telecommunications industry, which include Qualcomm and many of its competitors. In exchange for having their patented technologies included in the standards, participants typically commit to license their patents on what are known as fair, reasonable, and non-discriminatory, or "FRAND," terms.
When a patent holder that has made a FRAND commitment negotiates a license, ordinarily it is constrained by the fact that if the parties are unable to reach agreement, the patent holder may have to establish reasonable royalties in court.
According to the complaint, by threatening to disrupt cell phone manufacturers' supply of baseband processors, Qualcomm obtains elevated royalties and other license terms for its standard-essential patents that manufacturers would otherwise reject. These royalties amount to a tax on the manufacturers' use of baseband processors manufactured by Qualcomm's competitors, a tax that excludes these competitors and harms competition. Increased costs imposed by this tax are passed on to consumers, the complaint alleges.
"By excluding competitors, Qualcomm impedes innovation that would offer significant consumer benefits, including those that foster the increased interconnectivity of consumer products, vehicles, buildings, and other items commonly referred to as the Internet of Things," FTC says.
The complaint alleges that Qualcomm maintains a "no license, no chips" policy under which it will supply its baseband processors only on the condition that cell phone manufacturers agree to Qualcomm's preferred license terms. The FTC alleges that this tactic forces cell phone manufacturers to pay elevated royalties to Qualcomm on products that use a competitor's baseband processors. According to the Commission's complaint, this is an anticompetitive tax on the use of rivals' processors.
In addition, FTC says that Qualcomm refuses to license standard-essential patents to competitors, and has extracted exclusivity from Apple in exchange for reduced patent royalties. Qualcomm precluded Apple from sourcing baseband processors from Qualcomm's competitors from 2011 to 2016, according to the complaint.
The FTC is seeking a court order to undo and prevent Qualcomm's methods of competition in violation of the FTC Act. The FTC has asked the court to order Qualcomm to cease its anticompetitive conduct and take actions to restore competitive conditions.
Qualcomm says that the FTC accelerated the investigation of Qualcomm and directed the filing of the complaint just days before the change of the Administration though only three of five FTC commissioners are in place.
"This is an extremely disappointing decision to rush to file a complaint on the eve of Chairwoman Ramirez's departure and the transition to a new Administration, which reflects a sharp break from FTC practice," said Don Rosenberg, executive vice president and general counsel, Qualcomm Incorporated. "In our recent discussions with the FTC, it became apparent that it still lacked basic information about the industry and was instead relying on inaccurate information and presumptions. In fact, Qualcomm was still receiving requests for information from the agency that would be necessary to an informed view of the facts when it became apparent that the FTC was driving to file a complaint before the transition to the new Administration. We have grave concerns about the two Commissioners' decision to bring this case despite a lack of evidence supporting the allegations and theories in the complaint. We look forward to defending our business in federal court, where we are confident we will prevail on the merits."