No one likes a bait-and-switch. It offends fairness and common decency.
But did you know that if you own a smartphone, it’s likely you’ve been the victim of a high-tech bait-and-switch? Not from the phone or app makers, but from Qualcomm courtesy of its infamous licensing practices.
Smartphones have thousands of patents covering all aspects of their functionality. Some of those functions have been standardized in private standards-setting organizations (SSOs) through the voluntary contributions of technology makers, including Qualcomm itself.
Qualcomm develops chipsets for premium smartphones (like Apple’s iPhone and Samsung’s Galaxy). It also contributes a number of underlying communications protocols – or, Standard Essential Patents (SEPs) – to the standard that enables smartphones to work with others.
As that standard was developed, Qualcomm made a promise that if the SSOs included the company’s patents into mobile communications standards, it would license its patents to any willing party on fair, reasonable and non-discriminatory terms (FRAND). This is the accepted practice between parties because absent such promises, the SEP-holder could hold-up others who depend on those patents to operate.
Here’s the bait and switch: The SSOs relied on Qualcomm’s promises, and then built the company’s patents into the mobile communications standard. This means that smartphone manufacturers have to have access to Qualcomm’s patents in order for their devices to work on most cellular networks.
However, according to the Federal Trade Commission (FTC), Qualcomm did not uphold its promises. Earlier this year, the agency brought suit against the company, alleging, among other things, that the chipmaker refuses to license its SEPs to competing chipmakers, not only violating its FRAND commitments, but illegally undermining alternatives that need those SEPs to compete.
A diverse group of tech companies are supporting the FTC case, hoping to bring some reasonableness to this situation.
[F]or years Qualcomm has maintained an interlocking web of abusive patent and commercial practices that subverts competition on the merits. These practices have coerced mobile-phone manufacturers (also known as “original equipment manufacturers” or “OEMs”) into purchasing the chipsets they need from Qualcomm and Qualcomm alone. The FTC’s detailed complaint documents the Qualcomm practices that have created that coercive business climate and stymied competition. Qualcomm’s behavior has inflicted and continues to inflict precisely the harms that the antitrust laws seek to protect against: harm to the competitive process, to consumer welfare, and to innovation and progress.
This case presents a simple question: By excluding would-be competitors from making and selling licensed chipsets and cementing its market power by forcing downstream customers to accept onerous licensing terms, has Qualcomm harmed competition? As the [FTC] Complaint makes clear, the answer is yes—not only does this conduct violate Qualcomm’s FRAND commitments, but it also contravenes the Sherman Act by eliminating competition.
Qualcomm continues to defend its licensing practices and motioned to have the FTC’s case thrown out, arguing that the complaint was “based on a flawed legal theory, a lack of economic support and significant misconceptions about the mobile technology industry.” However, Qualcomm’s motion was recently rejected by Judge Lucy Koh of the District Court for the Northern District of California. In her opinion, Judge Koh clearly rebutted Qualcomm’s “nothing to see here” defense, noting that the FTC had “adequately alleged” anticompetitive behavior. The ruling sets the stage for this important trial to move forward.
Judge Koh’s ruling in a U.S. Court is a significant step given the credibility of the U.S. Court system and the need for a thorough domestic investigation on the heels of multiple competition authorities around the world investigating and finding fault with Qualcomm’s licensing and royalty stacking practices, ultimately issuing the company massive fines, including one for $853 million levied last December by officials in South Korean for unfair licensing practices; and another for $975 million in early 2015 from regulators in Chinese to address royalty and licensing matters. Other government investigations are pending.
To be sure, companies must be paid for their risk and technological advances. They should not, however, hold an industry and its consumers over a barrel through repulsive, bait-and-switch tactics. The FTC investigation and suit will help shed some much needed light on this bad behavior and hopefully make it easier for Qualcomm’s competitors, inventors and manufacturers to gain FRAND access to the standard technologies needed to create new products and services for consumers.
The future of mobile competition, consumer welfare, and innovation are at stake if Qualcomm’s anticompetitive behavior is allowed to persist.
Mike Wendy is president of Media Freedom, a 501(c)(3) non-profit organization.