The antitrust case could decide how smartphones get made in the future — and what they cost.

Josh Miller/CNET

A court case now underway could affect the future of our smartphones.

The US Federal Trade Commission has accused Qualcomm of operating a monopoly in wireless chips, forcing customers like Apple to work with it exclusively and charging excessive licensing fees for its technology.

In sessions that started Jan. 4, a judge is hearing arguments to decide if that’s the case.

Qualcomm is the world’s biggest provider of mobile chips, and it created technology that’s essential for connecting phones to cellular networks. The company derives a significant portion of its revenue from licensing those inventions to hundreds of device makers, with the fee based on the value of the phone, not the components.

Because Qualcomm owns patents related to the 3G, 4G and 5G networking technology — as well as other features like software — all handset makers building a device that connects to cellular networks have to pay it a licensing fee, even if they don’t use Qualcomm’s chips.

But the FTC lawsuit could break that model. It’s the latest in a series of legal battles for Qualcomm that include a fight against its former major customer, Apple, and against regulators in South Korea, China and the European Union. In the US, the FTC in January 2017 accused Qualcomm of maintaining a monopoly that extracted high royalty fees and weakened competition. It says Qualcomm forced Apple and other handset makers to use its chips exclusively in exchange for lower licensing fees, a practice that excludes competitors and harms competition.

Qualcomm has denied the allegations and says the FTC doesn’t have evidence of any anticompetitive behavior against rival chipmakers.

The two sides have said they’ve been working on a settlement, but the judge in the case wouldn’t delay the trial.

Qualcomm declined to comment ahead of the trial. The FTC’s Office of Public Affairs, affected by the government shutdown, didn’t respond to a request for comment ahead of the trial.

What’s going on with the trial?

The trial started Jan. 4 and will last for 10 days. Closing arguments are slated for Feb. 1. Court sessions are held Mondays, Tuesdays and Fridays in San Jose, California, presided over by Judge Lucy Koh, who oversaw the epic Apple vs. Samsung patent battle. There’s no jury in this case, which means Koh issues her ruling in a filing, whenever she’s made her decision.

What’s Qualcomm again?

You may not know the Qualcomm name (unless you live in its hometown of San Diego and frequent Qualcomm Stadium), but the odds are pretty high you’ve used a device with its technology. Qualcomm is best known for its chips that connect phones to cellular networks, as well as its Snapdragon processors that act as the brains of mobile devices. Without a modem in your device, you wouldn’t be able to hail a Lyft to take you home or check Facebook while you’re waiting in line at a food truck.

Qualcomm is one of the key component suppliers to Samsung, OnePlus and other phone makers. The chip company previously was the primary supplier of modems for iPhones, but a patent battle with Apple has caused the tech giant to use Intel components instead.

What technology does Qualcomm make?

Along with its processors, Qualcomm invents a lot of technology that’s used in mobile devices. The company says it’s invested more than $40 billion in research and development over the past three decades, and its patent portfolio contains more than 130,000 issued patents and patent applications worldwide.

Some Qualcomm patents relate to multimedia standards, mobile operating systems, power management, Wi-Fi, Bluetooth and even airplane mode. The company is also the pioneer of CDMA, the 3G mobile network standard used by Verizon and Sprint, and it’s innovated in 4G and 5G network connectivity.

“Qualcomm’s inventions are necessary for the entire cellular network to function — they are not limited to technologies in modem chipsets or even cell phones,” Qualcomm said in a filing in a patent battle with Apple.

Who licenses Qualcomm’s technology?

Qualcomm licenses its technology to more than 340 companies, particularly phone vendors. It doesn’t license its patents to chipmakers, though, which is something governments and Apple have taken issue with. But Qualcomm argues that chipmakers don’t need licenses because the handset makers already cover the cost of using its technology.

Apple licenses Qualcomm’s technology through its manufacturers, like Foxconn, instead of having a license of its own. Apple says that it’s been trying for five years to negotiate a direct license with Qualcomm but that the terms offered weren’t fair.

What does the FTC say?

The FTC’s lawsuit, filed two years ago, accuses 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 its heavily redacted complaint, the FTC said the patents Qualcomm holds are standard-essential patents — technology that is essential to the industry and must be licensed to competitors under fair, reasonable and nondiscriminatory terms. 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 customers have accepted elevated royalties and other license terms that do not reflect an assessment of terms that a court or other neutral arbiter would determine to be fair and reasonable,” the FTC said in its complaint.

What happened before the trial?

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

At that time, she granted the FTC’s motion for partial summary judgment in its suit against Qualcomm. The FTC had sought a ruling that declared “two industry agreements obligate Qualcomm to license its essential patents to competing modem chip suppliers.”

How does Qualcomm respond?

Qualcomm has said the FTC’s lawsuit is based on “flawed legal theory” and has asked the court to dismiss the lawsuit (which the court hasn’t done).

“Qualcomm has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms,” Qualcomm said in a statement at the time of the FTC complaint. “The FTC’s allegation to the contrary — the central thesis of the complaint — is wrong.”

What’s happened so far in court?

The FTC presented its evidence against Qualcomm and rested its case Jan. 15. During the first six days of the trial, the FTC presented witnesses from companies like Apple, Samsung and Ericsson and experts from intellectual property consultancies and universities. It even called Qualcomm CEO Steve Mollenkopf. The trial has revealed the inner workings of tech’s most important business — smartphones — showing how suppliers wrestle for dominance and profit.

What do the FTC’s experts say?

Carl Shapiro, a professor of economics at the University of California, Berkeley, took the stand Jan. 15 to analyze the impact of the no license, no chips policy and Qualcomm’s royalty rates on handset makers, chip rivals and consumers. He concluded that Qualcomm had monopoly power over CDMA modem chips and over premium LTE modem chips through 2016.

“It’s my view they harmed competition in those two markets,” he said.

He testified that Qualcomm is using its market power and its monopoly power over chips to extract an “unusually high amount” for royalties for patents. That raises the cost for rivals, weakens them as competitors and fortifies Qualcomm’s monopoly power, Shapiro said.

Losing access to Qualcomm’s modems would impose costs on handset makers, including not being able to supply to consumers, he said. “That’s a very heavy hammer that Qualcomm is bringing down, at least as a threat, in those negotiations,” Shapiro said.

Michael J. Lasinski, CEO of IP consulting firm 284 Partners, on Jan. 14 testified that Qualcomm’s licensing fees are “far too high to be consistent with their FRAND operations.” Standard essential patents must be licensed in a fair, reasonable, and non-discriminatory manner.

An Ericsson licensing executive, Christina Petersson, said in video testimony that a fair royalty rate for multimode LTE should be 6 percent to 8 percent per device. Lasinski said he determined it should be 6 percent because there’s a lot more going into a phone than when Ericsson came up with its rate.

Who else is involved in the trial?

The witnesses called by the FTC have included executives from some of the biggest names in tech: Apple, Samsung, Huawei, Lenovo and various others. Many, including Ira Blumberg, vice president of intellectual property at Lenovo, have testified that they feared Qualcomm would stop supplying chips if they failed to sign the license agreement or tried to challenge its legal terms.

Challenging Qualcomm is “not a viable option because we don’t know whether Qualcomm would follow through on their threat to cut off supply,” Blumberg said in video testimony played for the court. “We can’t take that risk.”

What does Apple have to do with this?

The FTC complaint specifically relates to how Qualcomm dealt with Apple, one of the world’s biggest handset makers.

The Cupertino, California, giant makes its own application processor — the brains of the iPhone — but it relies on third-party chips for network connectivity. From the iPhone 4S in 2011 to the iPhone 6S and 6S Plus in 2015, the sole supplier for those chips was Qualcomm. The following year, Apple started using Intel modems in some models of the iPhone 7 and 7 Plus, but it still used Qualcomm in versions for Verizon and Sprint. Apple’s latest phones now only use Intel 4G chips.

The FTC said that Qualcomm forced Apple to pay licensing fees for its technology in exchange for using its chips in iPhones.

“Qualcomm recognized that any competitor that won Apple’s business would become stronger, and used exclusivity to prevent Apple from working with and improving the effectiveness of Qualcomm’s competitors,” the FTC said in a statement.

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 in a court filing. “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.”

The company took a blow when Koh ruled it can’t cite Apple’s growing relationship with Intel as evidence in the FTC case that it hasn’t operated a monopoly.

What’s up with Apple’s fight with Qualcomm?

Apple filed a lawsuit against Qualcomm three days after the FTC’s complaint, saying the wireless chipmaker didn’t give fair licensing terms for its processor technology.

The iPhone maker thinks it should pay a fee based only on the value of Qualcomm’s connectivity chips, not the entire device. It says Qualcomm is “effectively taxing Apple’s innovation” and that Apple “shouldn’t have to pay them for technology breakthroughs they have nothing to do with.” Qualcomm, meanwhile, says the iPhone wouldn’t exist without its technology.

The two companies have been battling all over the world. In late December, a German court found that Apple infringed Qualcomm’s technology for power savings in smartphones and ruled that the iPhone maker must halt sales of the device in Germany.

And earlier that month, Qualcomm won preliminary injunctions in a Chinese court, which ordered four of Apple’s Chinese subsidiaries to stop importing or selling iPhones due to patent infringement. The patents involved technology that lets iPhone users adjust and reformat the size and appearance of photographs, and manage applications using a touchscreen when viewing, navigating and dismissing applications.

Apple reportedly plans to issue a software update in China to alter its technology so it no longer infringes Qualcomm patents. But the patent at issue in Germany relates to hardware and can’t be easily tweaked.

What do other tech companies say?

Along with Apple, Samsung and Intel have also sided with the FTC.

Samsung in May 2017 filed an amicus brief that supported the FTC’s suit. It’s one of Qualcomm’s biggest customers, but it also competes with the company when it comes to mobile chips.

“In both capacities, Samsung has directly experienced, and been directly harmed by, the exclusionary conduct alleged in the FTC’s complaint,” Samsung said in its court filing. “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.

Intel also filed an amicus brief in support of the FTC’s case against Qualcomm.

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

How does Qualcomm’s licensing business work?

Some companies license patents on an individual basis; Qualcomm licenses all its patents 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 been the norm in the mobile industry for patent holders to base their licensing fees on the total value of a handset, so Qualcomm isn’t alone there. Ericsson, Huawei, Nokia, Samsung and ZTE also charge licensing fees based on the entire device.

Part of the dispute between Apple and Qualcomm is that Apple believes its licensing fee should be based on the Qualcomm chip used in the device, not the entire phone.

“They do some really great work around standards-essential patents, but it’s one small part of what an iPhone is,” Apple CEO Tim Cook said in May. “It has nothing do with the display or the Touch ID or a gazillion other innovations that Apple has done. And so we don’t think that’s right, and so we’re taking a principled stand on it.”

What does licensing have to do with the FTC case?

Key to the FTC’s argument is Qualcomm’s so-called “no license, no chips” policy. 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.

The FTC has argued the no license, no chips policy gives Qualcomm too much leverage in negotiations and prevents competitors from entering the wireless chip market. Huawei, Intel, Lenovo and others testified during the trial that Qualcomm required them to sign licenses before being able to buy the company’s chips.

And Apple, which has been fighting Qualcomm in patent and licensing lawsuits around the globe, sent two executives to testify on behalf of the FTC. Apple, arguably the most powerful company in technology, said it felt it had no options when it came to negotiating over Qualcomm’s licensing fees.

“We were staring at an increase of over $1 billion per year in licensing, so we had a gun to our head,” Apple Operating Chief Jeff Williams said as he explained why Apple signed another licensing agreement in 2013, despite being unhappy with the terms.

Apple wanted to use Qualcomm’s 4G LTE processors in its 2018 iPhones, but the chipmaker wouldn’t sell to it, Williams said. Qualcomm did continue providing Apple with chips for its older iPhones, including the iPhone 7 and 7 Plus, but it wouldn’t give Apple chips for last year’s iPhone XSXS Max and XR, Williams said. Qualcomm, for its part, has testified that it wants to keep supplying chips to iPhones and has been trying to win back business at Apple.

What has Qualcomm said in court about its licensing?

Mollenkopf, Qualcomm’s CEO, said on the stand that as of spring 2018, the company still was trying to win a contract supplying chips for iPhones, but that it hadn’t “had any new business” from Apple since its previous contracts expired. Because of the trial’s evidence date limitations, he wasn’t allowed to discuss the current state of Qualcomm’s business with Apple.

Mollenkopf also testified that Qualcomm’s practices of offering a license before selling chips to companies is simply the best way to get things done for the whole industry, not just for his company. That’s because Qualcomm’s patent licenses cover lots more technology a phone might use than simply what’s in his company’s modem chips, which let phones talk to mobile networks.

“We only sell to companies with a license because not all the IP [intellectual property] is covered in the chip. What we want to do is make sure the [phone makers] are covered,” Mollenkopf said. He pointed to the security framework used when phones connect to a network as an example. “It’s not embodied in the chip, it’s not in the phones, but it’s in all these things,” Mollenkopf said. “There’s a tremendous amount of IP we generate that makes the system work.”

CNET’s Sean Keane contributed to this report.

First published Jan. 4, 6:00 a.m. PT.
Updated Jan. 7, 8:15 a.m. PT: Added information about testimony by Huawei and Lenovo.
Updated Jan. 17, 4:35 p.m. PT: Added information about FTC’s case and witnesses through Jan. 15.

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