Years of Qualcomm’s aggressiveness with its patent licensing may have finally reached a tipping point as Apple, along with trade agencies in the U.S. and South Korea are demanding greater accountability from the San Diego company.
In the past two months, a lawsuit by Apple, a second suit by the U.S. Federal Trade Commission (FTC) and a record fine from the Korea Fair Trade Commission (KFTC) have called attention to the egregious licensing demands Qualcomm makes for patents on technology used in the chips built into consumer wireless devices. Qualcomm’s patents are standards essential, that is, when international standards bodies hammered out the ways phones and connected devices would work, Qualcomm’s patented intellectual property was baked into the standard.
This is not unusual, but in return for the right to participate in standards making, companies that profit when their proprietary technology is adopted into a global standard are expected to make those patents available under fair, reasonable and non-discriminatory (FRAND) terms. It is here Qualcomm shows a pattern of bad behavior.
The Apple case involves a series of complicated license agreements and what constitutes reasonable royalties, but at heart they illustrate Qualcomm’s break with FRAND procedures. For example, the suit claims Qualcomm demands Apple pay patent royalties as a fixed percentage of the purchase price of every smartphone and tablet, even if that price reflects memory capacity, screen resolution and other features unrelated to Qualcomm’s patent. Based on Qualcomm’s own statements in its 10K reports, financial analysts believe Qualcomm seeks a royalty ranging from $15 to $21 per device, depending on the model.
For an idea of how incongruent this demand is with typical FRAND licensing, in a lawsuit between Motorola and Microsoft over the royalty rates for standards essential patents, the judge in the case ruled that a royalty rate of about one-half a cent per unit was fair after examining existing FRAND terms. That ruling was upheld by the Ninth Circuit Court of Appeals.
Moreover, Apple claims Qualcomm wants royalties from sales of devices that don’t contain Qualcomm chips. Qualcomm contends that if Apple’s products rely on its patents, it should be paying. Again, this is out of line with FRAND practices, under which Qualcomm should be seeking royalties from the chip manufacturers themselves—companies like Intel and Foxconn. But Qualcomm refuses to license its patents to other chip makers, another breach of FRAND agreements. By locking out competitors and pushing its royalty demands down the supply chain, Qualcomm, Apple argues, is improperly using its monopoly on a set of crucial wireless patents to strong arm competitors out of the market and gouge customers.
Apple isn’t alone. In December, after a three-year investigation, the KFTC fined Qualcomm an unprecedented $853 million for breaching international competition law by limiting other chip makers’ access to its patents. The investigation also found Qualcomm forced mobile-phone manufacturers into unfair license agreements by refusing to supply crucial phone chips to those that disagreed with its terms. The KFTC investigation even spills over into Apple’s lawsuit: Apple claims Qualcomm has withheld $1 billion in royalty rebates in retaliation for its cooperating with the South Korean trade agency.
The U.S. FTC further punctuated this disturbing trend last month when it sued Qualcomm, alleging that its licensing practices amounted to illegal tactics to drive out competitors. Indeed, Qualcomm rivals Broadcom, Marvell, Freescale and Nvidia have all exited the wireless chip market since 2014. Texas Instruments exited in 2012, and with it went 1700 American jobs.
The Apple and U.S. FTC lawsuits and the KFTC fine are just the most recent challenges to Qualcomm’s patent licensing practices. They follow European Union investigations in 2010, 2014 and 2015, an investigation by the government of Taiwan, a $975 million fine in China as part of a settlement after an antitrust investigation there, and an earlier KFTC investigation in 2009.
To be fair, the radio technology Qualcomm patented indeed is significant in the way it helps support an extraordinary amount of connections over a limited number of frequencies. Yet, while all businesses seek to advance their own interests, Qualcomm’s blatant disregard for long-standing industry agreements regarding patent licensing come at the expense of customers, partners and in the end, consumers.
How many more lawsuits and fines will it take before Qualcomm changes its behavior? For the sake of innovators, the economy, and American jobs, let’s hope the courts and national antitrust authorities can finally bring the “Qualcomm Tax” to an end.
Steven Titch is an independent policy analyst focusing on telecommunications, internet and information technology. His work has been published by the R Street Institute, the Heartland Institute, the Reason Foundation and the Competitive Enterprise Institute.