Is Qualcomm price gouging phone makers? Not everyone thinks so

Dissenting FTC voice sees an Obamaesque assault on tech licensing

Analysis America’s competition commissioners didn’t want to prosecute Google, which operates a monopoly in over a dozen markets, so why are they complaining about Qualcomm?

Yesterday, the FTC filed a complaint against the San Diego chip giant following a South Korean indictment, and two EU probes into Qualcomm’s practices. Qualcomm also paid almost $1bn in China to make antitrust violation allegations in the Middle Kingdom go away.

There’s no smoke without fire, you might think – but not everyone agrees. The complaint was filed on a 2‑1 vote, with FTC Commissioner Maureen Olhausen the dissenting commissioner. Olhausen rarely dissents from the regulator's decisions (the record shows just one) – but here she calls the situation “extraordinary.” You can read her statement here [PDF].

The FTC is going after Qualcomm based on flawed legal theory, and in a way that poses a threat to US IPR worldwide, she argues. She also wonders why the complaint was filed in the dying hours of the Obama administration.

Let’s recap what Qualcomm has been accused of doing.

A CDMA pioneer, Qualcomm designs chips and licenses its radio technology for phones. Inter-industry wrangles over the composition of the 3G patent pool took up much of the late 1990s. Qualcomm is the largest player in both the application processor and baseband chip markets.

The FTC alleges that the chip designer ties licenses for its radio communications knowhow to its silicon, and this is an unfair tax: “a tax that excludes these competitors and harms competition.”

The watchdog throws a sprinkle of Zeitgeisty stardust over its allegation: “By excluding competitors, Qualcomm impedes innovation that would offer significant consumer benefits, including those that foster the increased interconnectivity of consumer products, vehicles, buildings, and other items commonly referred to as the Internet of Things.”

Specifically, the trade watchdog says that if licensees don’t pay for the right to use Qualcomm's technology, they don’t get any chips. “The risk of losing access to Qualcomm baseband processors is too great for a cell phone manufacturer to bear because it would preclude the manufacturer from selling phones for use on important cellular networks,” the regulator claims.

Secondly, the FTC argues that Qualcomm refuses to license standard essential patents on FRAND terms to competitors. On top of a one-time license fee, Qualcomm charges manufacturers royalties based on the price tag of each phone sold that uses its technology. This approach irks regulators.

Thirdly, Qualcomm unfairly extracted an exclusivity deal for baseband processors from Apple, the watchdog says.

The FTC notes that for the past decade, Qualcomm has, thanks to its extensive patent war chest, had little competition in CDMA baseband silicon, and today doesn’t face competition from its closest rival MediaTek, which doesn’t offer a multimode CDMA processor suitable for premium flagship phones (Apple, Samsung and Huawei design their own chips). Intel gave up on making any further LTE baseband last year – to put it bluntly, it’s going to sit it out until 5G comes along.

The FTC also notes that Qualcomm’s share of the LTE (aka 4G) patent pool is lower than its share of the CDMA (3G) patent pool. Nokia with 19 per cent has a higher share than Qualcomm with 13 per cent.

Public copies of the legal paperwork filed by the regulator is redacted, so we can’t see at what rate Qualcomm licenses its standard-essential patents (SEPs), but the FTC says these are higher than other people’s SEPs. The FTC also claims that by tying licensing royalties to chip supplies, phone makers are reluctant to challenge the rates in court lest they be cut off from Qualy's silicon.

Because it’s so special, Apple won rebates from Qualcomm, which the FTC says were so large that “if they were attributed as discounts to the price of Qualcomm baseband processors reasonably contestable by a Qualcomm competitor, the resulting price of Qualcomm processors would be below Qualcomm’s cost.”

All this makes Commissioner Olhausen’s rare dissent an interesting read.

The majority of commissioners have “danced around” the main point of whether Qualcomm is charging higher royalties than it should, she writes.

“The complaint fails to allege that Qualcomm charges more than a reasonable royalty. That pleading failure is no accident – it speaks to the dearth of evidence in this case,” writes Olhausen. “Reasonable royalties are not an exclusionary tax.”

Olhausen gave a fascinating interview to the American Bar Association outlining her approach to antitrust policy where SEPs are in play. Patents aren't perfect, she explained, but they are vital to US economic success.

“I do have one overarching concern,” said Olhausen. “In the US, antitrust law protects the competitive process but does not mandate particular outcomes. We protect the means by which markets freed from artificial restraints provide lower prices, higher output, and greater innovation. The Sherman Act is not a price-regulation statute.”

And in case anyone missed the point, she added:

“I understand the urge to condemn perceived price gouging, especially when the affected product is vital for some patents. It is important to remember, however, that antitrust does not regulate prices.”

When the patent system works, it obliges an industrial user of an invention to either license the invention or invent their own ingenious solution: either way, creativity is rewarded somehow. This is a property rather than a "commons-based view" of inventiveness, where inventions are natural resources, like mountains or prairies, over which people must be able to roam for free. (The nature of patent protection terms only ensures that an invention remains private property for a short time: 20 years from filing. The licensing window is very brief.)

Last year, President Obama appointed a Google executive to run the US Patent Office. Michelle K Lee had set up and run Google's patent litigation business. The appointment was described as "crony capitalism" and "a gift" to Google.

It’s fair to infer, therefore, that at the heart of Olhausen’s concern is that Obama’s leaving gift is allowing the US government to set the price of intellectual property in a market. Qualcomm told us yesterday that it would contest the complaint vigorously. ®

Bootnote

Olhausen previously served as an attorney for the splendidly named former FTC Commissioner, Orson Swindle.

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