U.S. District Judge Lucy Koh denied Qualcomm’s motion to dismiss Monday, finding that the Federal Trade Commission adequately supported its claims that the chip manufacturer uses its monopoly power to manipulate the market.
“FTC has adequately alleged that Qualcomm entered into de facto exclusive dealing arrangements with Apple from October 2011 until September 2016, and that these de facto exclusive dealing arrangements foreclosed a substantial share of the market for premium LTE modem chips,” Koh wrote in her 50-page ruling. “Accordingly, FTC has adequately alleged that Qualcomm’s exclusive dealing arrangements with Apple violated the Sherman Act.”
Qualcomm is the foremost manufacturer of the modem chips used in cellular communications devices such as smartphones. The chips allow the devices to communicate with cellular networks.
The company’s development of these modem chips amounts to a standard essential patent (SEP), or a piece of technology that is fundamental to a given technological operation — in this case, the modem chips are critical to the cellular technology in smartphones.
Qualcomm had about an 80 percent share of the market for modem chips during the time in question, and it earns most of its revenue from royalties. When a consumer buys an iPhone, that device contains modem chips developed by Qualcomm, which gets a percentage of every phone bought.
While Apple only makes money when the iPhone is purchased, Qualcomm dominates the market to the point where it is getting royalties when any premium cellular device is purchased.
The Federal Trade Commission accused Qualcomm of using its market dominance to engage in anticompetitive behavior. Specifically, the federal agency claims the company refuses to license its standard essential patents to competing modem chip manufacturers, both threatens and incentivizes cellular device manufacturers like Apple and Google to exclusively use its product, and abuses its leverage to get royalties that are above market rate.
Qualcomm does not deny its monopoly power, but says it doesn’t engage in anticompetitive behavior.
For instance, it asserts there is no evidence the royalties it receives for modem chips are above market rate.
But Koh disagreed, finding enough support for claims that Qualcomm is collecting royalties related to its patents that exceed fair, reasonable and non-discriminatory (FRAND) terms for the lawsuit to proceed.
“Qualcomm collects the same 5 percent royalty on the total value of a 2017 smartphone as Qualcomm collected on the total value of a 2006 phone, despite the fact that both handset technology and Qualcomm’s SEP portfolio has changed dramatically over the last decade,” Koh noted in her ruling.