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Qualcomm Forced Apple to Exclusively Use Chips, US Says

Jan. 17, 2017
A new FTC lawsuit accuses the San Diego-based chipmaker of illegally maintaining a monopoly over semiconductors used in cellphones and pocketing elevated royalties from customers.

Qualcomm Inc. forced Apple Inc. to use its chips exclusively in return for lowering licensing fees, unfairly cutting out competitors, the U.S. said in a lawsuit against the semiconductor company.

Qualcomm’s exclusive deal with Apple was detailed in a Federal Trade Commission lawsuit Tuesday that accuses the biggest maker of mobile phone chips of illegally maintaining a monopoly over semiconductors used in cellphones and pocketing elevated royalties from customers.

"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.

The lawsuit presents yet another regulatory challenge to Qualcomm’s most lucrative business, technology licensing. The chipmaker gets most of its profits from selling the rights to use patents that are essential to all modern mobile phone systems. Qualcomm has argued that its licensing follows industry standards that have been in place for more than 20 years and are used by other companies.

Last month, South Korea, home to two of its largest customers, fined Qualcomm 1.03 trillion won ($890 million) and described its practices as monopolistic. The San Diego-based company said it will appeal that decision. The chipmaker is also the subject of investigations by the European Union and Taiwanese authorities. Its shares fell as much as 5.6% Tuesday, before closing down 4% at $64.19.

A Qualcomm representative said the company is preparing a response to the lawsuit filed in federal court in San Jose, California. Apple spokesman Josh Rosenstock declined to comment on the case.

Qualcomm is the biggest developer of the technology that underlies how mobile devices communicate. The company has been heavily criticized for its high royalty rate demands and licensing conditions. It’s resulted in a slew of regulatory investigations worldwide.

Deals Struck

The chipmaker has argued that the beneficiaries of regulatory action--phone-makers--have struck new deals that acknowledge the validity of Qualcomm’s patents and that users of its technology benefit from its heavy spending on research and development.

The FTC case stems from a process where companies get together to develop industry standards so devices from different manufacturers can interoperate--so, for instance, data sent from an Apple phone can be received and understood by one made by Samsung Electronics Co.

Since the companies that develop those standards have the advantage of ensuring their patented inventions get included in the new specifications, they pledge to license the patents on “reasonable and non-discriminatory” terms.

That phrase has been purposefully left undefined. As a result, courts and regulators have been struggling to interpret what’s fair and reasonable, and it has been a key issue during the legal wars among smartphone manufacturers.

Import Bans

The FTC has been scrutinizing the use of foundational patents in licensing disputes, particularly in telecommunications. Weighing in on an earlier Google patent case against Microsoft Corp., the agency in 2012 advocated for limits on the ability of the U.S. International Trade Commission to impose import bans when so-called “standard-essential patents” are infringed.

It kept that position regarding an import ban imposed on Apple phones in a case brought by Samsung in 2013. President Barack Obama’s administration overturned the ban, citing concerns that some patent owners could engage in “hold up,” meaning they would demand unreasonably high royalties under threat of withholding use of basic technology needed to make a phone work.

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