(Reuters) – Qualcomm Inc illegally suppressed competition in the market for smartphone chips by threatening to cut off supplies and extracting excessive licensing fees, a US judge ruled, a decision that could force the company to overhaul its business practices.
The decision issued late Tuesday night by US District Judge Lucy Koh in San Jose, California, caused Qualcomm shares to plunge 11% on Wednesday.
“Qualcomm’s licensing practices have strangled competition” in parts of the chip market for years, harming rivals, smartphone makers, and consumers, Koh wrote in a 233-page decision.
She ordered the San Diego-based company to renegotiate licensing agreements at reasonable prices, without threatening to cut off supplies, and ordered that it be monitored for seven years to ensure its compliance.
Qualcomm said it will immediately ask Koh to put her decision on hold, and also seek a quick appeal to the federal appeals court in California.
“We strongly disagree with the judge’s conclusions, her interpretation of the facts and her application of the law,” general counsel Don Rosenberg said in a statement.
Koh’s decision followed a 10-day non-jury trial in January, and is a victory for the US Federal Trade Commission, which has accused Qualcomm in 2017 of violating antitrust law.
The decision followed Qualcomm’s April 16 settlement of a long-running legal battle with Apple Inc, where Apple agreed once again to use Qualcomm chips in its iPhones, displacing Intel Corp.
It is unclear whether the sanctions will be challenged by the US Department of Justice, which has taken a different view of the case than the FTC and emerged as an ally to Qualcomm.
On May 2, the Justice Department argued Koh should hold a hearing before placing sanctions on Qualcomm. Placing stringent conditions on the company would “reduce competition and innovation in markets for 5G technology,” the agency said.
The courts are not required to defer to the Justice Department’s recommendations. But “the possibility certainly exists for Qualcomm to prevail upon appeal,” given the government’s “somewhat schizophrenic” approach to the case, Bernstein analyst Stacy Rasgon wrote.
The Justice Department was not immediately available for comment on Wednesday.
Qualcomm shares have risen about 51% since the company’s settlement with Apple last month. The fall on Wednesday left them still comfortably above their level before the Apple deal.
Koh said Qualcomm engaged in “extensive” anticompetitive conduct targeting more than one dozen original equipment manufacturers including Apple, BlackBerry, Huawei, Lenovo, LG, Motorola, Samsung, and Sony, often by cutting off or threatening to cut off chip supplies or withholding technical support.
She also said Qualcomm’s monopoly power in modem chips enabled the company to sustain “unreasonably high” royalty rates not justified by its contributions to the marketplace.
“With practices that result in exclusivity and eliminate opportunities to compete for OEM business, Qualcomm undermines rivals in every facet,” she wrote.
She also found Qualcomm knew its licensing practices harmed competition “yet continued anyway” despite government investigations in China, Japan, Korea, Taiwan, the European Union and the United States.
“This evidence of Qualcomm’s intent confirms the court’s conclusion that Qualcomm’s practices cause anticompetitive harm because no monopolist monopolizes unconscious of what he is doing,” she wrote.
Koh also said testimony from some Qualcomm witnesses “lacked credibility,” faulting Chief Executive Steve Mollenkopf and others for giving “long, fast, and practiced narratives” and saying company emails and notes contradicted his testimony.
Koh said Qualcomm cannot bundle patent licensing deals with its hardware, a practice regulators called “no license, no chips.” That ruling could give chip customers more leverage in negotiations over patent terms and result in lower royalty rates for Qualcomm.
Koh also said Qualcomm must license its patents to rival chipmakers like MediaTek Inc.
Qualcomm argued during the trial that it achieved market dominance through technological leadership. The company began its licensing business in the 1980s and 1990s, decades before it began selling chips, and has charged broadly similar patent rates since then.
Qualcomm also argued that the FTC failed to show harm to competition, arguing that the chip industry is thriving and prices are declining.
Qualcomm’s next move will likely be to request Koh’s ruling is put on hold while the company seeks expedited review by the 9th US Circuit Court of Appeals.
Gaston Kroub, a patent lawyer in New York not involved in the case, said Koh’s decision was unlikely to be reversed on appeal because she made detailed factual findings and witness credibility determinations. Appeals courts are reluctant to second-guess such findings by trial judges, he said.
Qualcomm makes cellphone processors and modem chips,but generates most profits by licensing its technology tomobile phone makers.
“Qualcomm’s customers and competitors will finally be able to negotiate licenses without the threat of having Qualcomm cut off their chip supply,” FTC Commissioner Rohit Chopra said in statement.
Rasgon, the Bernstein analyst, said Koh had indicated at trial she was leaning against Qualcomm, but some investors had hoped her views would be “softened” by the Apple settlement.
“Apparently not,” Rasgon wrote.
(Reporting by Sayanti Chakraborty in Bengaluru; Additional reporting by Jan Wolfe in Washington, D.C., Stephen Nellis in San Francisco, and Vibhuti Sharma in Bengaluru; Editing by Arun Koyyur, Bernard Orr and Nick Zieminski)