Qualcomm Makes Case To Appeals Court That It Didn’t Hurt Competition

According to a report in the Wall Street Journal, a federal appeals court appeared receptive to Qualcomm‘s appeal of a ruling that found it was illegally maintaining a monopoly in cellphone chips and extracting unreasonably high royalty rates for patents that are essential to the industry.

A three-judge panel of the Ninth U.S. Circuit Court of Appeals repeatedly questioned arguments by the Federal Trade Commission, which sued Qualcomm in 2017 for alleged antitrust violations.

Near the end of the hourlong hearing Thursday, Judge Consuelo Callahan suggested Qualcomm’s practices had been “overly capitalistic but not necessarily anticompetitive.” She also voiced skepticism of FTC arguments that Qualcomm’s tactics had unlawfully raised costs incurred by its chip rivals.

Judges on the panel said that, even if the evidence showed that Qualcomm charged high royalty rates for its patents, that wasn’t necessarily evidence that the company had stifled the competitive process.

“Anticompetitive behavior is illegal under the Sherman Act. Hypercompetitive behavior is not,” said Judge Stephen J. Murphy, a visiting judge from Michigan. “This case asks us to draw the line between the two.”

The case cuts to the heart of Qualcomm’s business model and promises broad stakes for two areas of the law that are often in tension—antitrust, which is designed to promote competition, and patent law, which gives intellectual-property owners the right to exclude competitors from using their inventions unless they pay licensing fees.

The litigation also comes with an unusual twist: Two different government agencies that enforce U.S. antitrust laws disagree on whether Qualcomm’s conduct is unlawful and argued against one another Thursday.

San Diego-based Qualcomm designs and markets chips that facilitate cellphones’ communications with cell towers. It owned about 43% of the global market for such chips, according to a Strategy Analytics report from last year’s second quarter.

The company also has a licensing arm that collects royalties when others use a portfolio of more than 140,000 patents world-wide, many of which cover key telecommunications technologies. Licensing revenues are only a fraction of chip sales, but the division is a driver of Qualcomm’s overall profits because its margins are much better.

The Federal Trade Commission sued Qualcomm in the final days of Democratic control under the Obama administration. It focused on a central Qualcomm business policy that FTC lawyers described as “no license, no chips.”

The FTC said Qualcomm enjoyed monopolies in two types of modem chips and wouldn’t sell those must-have chips to device makers unless those companies also paid to license a broader portfolio of Qualcomm’s patents. That structure made it difficult for phone makers to challenge Qualcomm’s royalty rates, and the arrangement also meant those manufacturers were paying Qualcomm royalties even if they used a competitor’s chips in their phones, FTC lawyer Brian Fletcher told the panel.