After years of investigations, lawsuits, and fines, a checkered past of patent abuse and exploitation appears to have caught up with a major U.S. chip developer.
Qualcomm Inc. now finds itself as a defendant in a Federal Trade Commission (FTC) antitrust suit, in which the plaintiff argues the San Diego company leveraged its position as owner of certain essential patents for wireless phones and devices to impose unfair licensing terms on customers and drive out competing manufacturers. The FTC suit is the most recent—and most significant—of a series of setbacks Qualcomm has weathered since late December. Apple has sued the company over patent-licensing terms, and the Korea Fair Trade Commission has fined Qualcomm $853 million for antitrust violations in the South Korean market.
These developments fit a pattern of complaints and rulings from respected competition agencies in Europe, Taiwan and China about Qualcomm’s abuse of patent law and disregard of conventional industry patent-sharing agreements. Now, a group of Qualcomm shareowners, alarmed over the 16% drop in the company’s stock price since January 13 in the wake of the latest allegations, have brought a class action suit against the company. All this has a number of Wall Street analysts, including The Motley Fool, openly wondering how long Qualcomm can sustain its troll-like strategy.
Qualcomm prefers to be viewed as an innovative leader in wireless technology, but in actuality, royalties from legacy patents dating from the 1990s are what drive a large share of its profits. While its manufacturing business contributes most of its revenues, patent licensing accounted for $6.5 billion of its pre-tax profit in 2016, compared to $1.8 billion derived from its chip business.
Patent licensing is also its most secure business. Qualcomm pioneered an alternative digital wireless standard that secured enough U.S. support to guarantee that it would be incorporated into future global standards. As a result, Qualcomm’s 1990s-era patents remain standards-essential in today’s smartphones and tablets.
Its behavior since has been cause for concern as Qualcomm has sought to use its market dominance to normalize its abusive licensing practices. To be sure, standards-essential patents are coveted in industry standards making, and just about every technology company lobbies hard to get its proprietary technology baked into a worldwide standard. But in return for this revenue-boosting privilege, other technology companies have agreed to abide by fair, reasonable and non-discriminatory (FRAND) terms in making those patents available. Qualcomm, on the other hand, has disregarded FRAND practices for years—behavior that has strained the system and threatens to grind competition to a halt.
For example, past investigations have found Qualcomm has withheld licenses from phone manufacturers that use chip sets from manufacturers other than Qualcomm. U.S. chip makers such as Broadcom, Marvell, Freescale and Nvidea have all exited the wireless market since 2014, decisions the FTC suit claims stem from Qualcomm illegally exploiting its patent monopoly.
Apple’s suit claims Qualcomm is demanding 5% of the purchase price of every Apple smartphone for the right to use technology that contributes very little to the overall functionality of the device. As I wrote last month in The Daily Caller, the 5% demand is out of line with FRAND terms and goes far beyond fair compensation. For every $600 iPhone sold, Qualcomm wants a $30 royalty. All this does is increase the cost for consumers and slow adoption. If the owner of a patent on a car rear-window defroster were to demand the same terms, it would amount to $1,000 on every $20,000 auto—a sum that wildly exceeds the value it adds to the vehicle.
The industry, along with Qualcomm’s own shareholders, are fed up with this. For its part, Qualcomm claims there’s nothing to see here—just business as usual. Of the Korea Fair Trade Commission fine, it argued the Korean government “seeks to disrupt established licensing practices that have been accepted by the wireless industry and used by major patent holders for decades.”
This is a poor defense. The wireless industry only accepted Qualcomm’s practices because it had no choice. In trying to justify itself, Qualcomm sounds very much like the line taxi monopolies are taking against Uber. They want local governments to ignore the consumer benefits of ride-sharing and instead stop Uber because it’s “disrupting established practices” accepted by the taxi-using public for decades.
While government intervention and antitrust actions should be taken judiciously, the FTC is correct to act here. In fact, the ever-growing list of court decisions and government sanctions against Qualcomm suggest its action is overdue.
It’s time to put the real facts on the table in a U.S. Court where the “that’s the way we’ve always done it” defense will be exposed.
[Originally Published at Forbes]