The antitrust case could decide how smartphones get made in the future — and what they cost.
Editors’ note: The trial between the FTC and Qualcomm ended Jan. 29, and it’s now in a judge’s hands to decide a verdict.
A court case that could affect the future of our smartphones is now in a judge’s hands.
The US Federal Trade Commission two years ago 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.
The case went to trial Jan. 4, with executives from tech’s biggest companies testifying about Qualcomm’s licensing practices. The FTC and Qualcomm, and it’s now up to Judge Lucy Koh to decide the verdict. At the same time, the two sides .
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 5Gnetworking 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.
The lawsuit is 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.
What happened with the trial?
The trial started Jan. 4 and lasted for 10 days. Closing arguments took place Jan. 29. Court sessions were held Mondays, Tuesdays and Fridays in San Jose, California, presided over by Judge Koh, who oversaw the epic Apple vs. Samsung patent battle. There’s no jury in this case, which means Koh will issue her ruling in a court filing.
It’s unclear when a verdict will be issued. Koh said she likely won’t be handing down her normal speedy decision, as she has a lot of evidence, testimony and case law to consider.
“I’m generally fairly fast,” Koh said during the last day of the trial. “[But] something of this magnitude is going to take longer” than other average cases.
What did the FTC have to prove?
For the FTC to win the case, it has the burden of showing that Qualcomm had a monopoly, that it had market power and that it used that power in negotiations with handset makers to command high royalties. The FTC also has to show that Qualcomm’s conduct hurt competitors and that the anticompetitive actions continue or will start again in the future.
The FTC argued that Qualcomm used its power in the 3G and 4G chip market to force handset makers like Apple to sign licensing agreements with excessively high royalties. If Qualcomm isn’t stopped, the FTC said, it’ll do the same thing in the 5G market.
Qualcomm, meanwhile, argued that the FTC didn’t meet its burden in the case and that Qualcomm won business “through superior innovation and better products.”
It also said its royalty practices didn’t hurt competitors. Intel now supplies all modems for Apple’s iPhones, MediaTek is the world’s second biggest wireless chipmaker, and Samsung and Huawei have developed their own modems.
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.
Apple partners paid Qualcomm a licensing fee five times higher than it thought was fair,. Apple wanted to pay $1.50 per device in royalties to Qualcomm, based on a 5 percent fee for the cost of each $30 modem connecting iPhones to mobile networks. Instead, it ended up paying $7.50 per phone, he said.
“The whole idea of a percentage of the cost of the phone didn’t make sense to us,” Williams said. “It struck at our very core of fairness. At the time we were making something really really different.”
What did 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.”
It’s unclear what happens to the partial summary judgment. Koh could overturn it or keep it in place, depending on what she ultimately rules in the case.
How did Qualcomm respond?
Qualcomm has said the FTC’s lawsuit is based on “flawed legal theory” and asked the court to dismiss the lawsuit before the trial began (which the court didn’t do).
“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 impact does this have on consumers?
The FTC says Qualcomm’s practices have caused higher smartphone pricing. And at least one group of consumers agrees. Last year, a group sued Qualcomm and applied for class action status, which Judge Koh granted in late September.
The lawsuit could represent one of the biggest class action lawsuits in history, with essentially 350 million cellphone owners impacted. The plaintiffs have asked for $5 billion. Qualcomm in October asked the 9th US Circuit Court of Appeals to allow it to appeal Judge Koh’s decision.
This suit is being heard in conjunction with the FTC case. The 9th Circuit on Jan. 23 said Qualcomm can appeal Koh’s ruling that granted class action status. Following the appeals court decision, Koh said in an order that she would stay the case pending the 9th Circuit’s decision on Qualcomm’s impending appeal.
And Apple COO Williams said Qualcomm won’t give the company modems for its newer iPhones, something that could slow down Apple’s shift to 5G. It’s believed the next iPhone will only use chips from Intel, which lags behind Qualcomm in the move to the new, ultrafast mobile market. By the 2019 holiday season, every major Android vendor in the US will have a 5G phone available. But Intel’s 5G modem isn’t expected to hit phones until 2020.
“We have been unable to get them to support us on new design wins past that time [when Apple filed a lawsuit against Qualcomm],” Williams said. “This has been a challenge.”
But Qualcomm executives have made comments in recent months about their willingness to supply processors to Apple. During an earnings call in July, Cristiano Amon, the head of Qualcomm’s chip business, said that “if the opportunity present itself, I think we will be a supplier of Apple.” And in September, financial chief George Davis said during a Citi conference, “we would welcome the engagement with Apple on 5G.”
What did the FTC argue in court?
The FTC presented its evidence against Qualcomm and. 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.
The FTC 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. Qualcomm’s practices 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.
What did 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, testified on Jan. 14 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.
What did Qualcomm’s experts say?
Qualcommto contradict Shapiro’s testimony. Aviv Nevo, a University of Pennsylvania economics and marketing professor, to determine the damage allegedly caused by Qualcomm’s licensing practices. Instead, Nevo said he examined the “real-world” agreements Qualcomm had with companies to determine the rates weren’t excessive.
Nevo testified that the FTC’s theory that Qualcomm uses its power in the chip market to charge excessive royalty rates “is just not born out of actual market data.” He noted “there’s no support for the theory in the data.” Nevo also testified that the mobile industry is strong and that Qualcomm had legitimate business reasons for its licensing policies.
Edward Snyder, dean of the Yale School of Management and a professor of economics and management, criticized Shapiro’s methodology and said the problems Qualcomm’s rivals had were due to choices they made that had nothing to do with Qualcomm. And Tasneem Chipty, a specialist in competition policy and antitrust economics from consultancy Matrix Economics, attacked Shapiro’s definition of the market and of market power.
“Shapiro has overstated Qualcomm’s market power,” Chipty said. She said there’s no “evidence of consistent and unconstrained market power of the type” that would hurt competition or “coerce OEMs [handset makers] into onerous business terms that would rob them of billions of dollars.”
What other people testified for the FTC?
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 6Sand 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 use only 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 argues 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.
iPhone XS, XS Max and XR: 27 tips and tricks to master Apple’s latest phones
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 did other tech companies say?
The trial is a rare time Apple and Samsung have agreed. The two companies, along with Intel, Lenovo and various others, sided with the FTC, and executives from those companies testified on the government’s behalf.
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.
Dirk Weiler, head of standards policy at Nokia, testified for Qualcomm that it has long been industry standard to license technology to handset makers, not chipmakers. Along with his role at Nokia, Weiler also serves as chairman of the European Telecommunications Standards Institute. The nonprofit standards body’s Intellectual Property Rights Policy requires companies to give licenses for equipment.
“What is my understanding of the industry practice is in the case of the cellular business, this means these companies license, for example, the handset and not any subpart of the handset,” Weiler said.
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 2018. “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 itwhen 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’s 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 XS, XS 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 did Qualcomm say in court about its licensing practices?
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.”
What did witnesses say on Qualcomm’s behalf?
Qualcomm called company executives, representatives from handset makers and chip rivals, and economics experts to dispute the FTC’s allegations in the case. The company sought to show that competition is healthy in the mobile chip market and that Qualcomm hasn’t hampered the industry.
The company has argued that its broad patent portfolio and innovations justify its fees. And Qualcomm representatives and executives from some of its customers testified that Qualcomm has never cut off chip supply during contract negotiations. Some of those executives have said in live testimony and video depositions presented by Qualcomm that its rivals didn’t have the technology required for their devices.
Matthias Sauer, an Apple executive and a witness called by Qualcomm, testified that Intel’s modems didn’t meet the technical standards required for the company’s iPhones in 2014. Though Intel also couldn’t meet Apple’s chip requirements for the iPad, it would’ve used them anyway, he said, had Qualcomm not offered incentives to stay with its chips. His remarks echoed comments from colleague Tony Blevins early in the trial.
Qualcomm, meanwhile, has said it had legitimate business reasons for having strict contracts with Apple, including how expensive it is to design modems specifically for Apple.
Fabian Gonell, senior vice president of licensing strategy and legal counsel for Qualcomm’s licensing business, said that Qualcomm doesn’t have all the power when it comes to negotiating licensing contracts. Instead, handset makers have options to reach terms they view as more favorable, he said.
First published Jan. 4, 6 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.
Updated Jan. 23, 5:04 p.m. PT: Added information about a consumer lawsuit.
Updated Feb. 7, 5 a.m. PT: Added information about the end of the trial.