Qualcomm Leans on Appeals, Trump Help to Reverse US FTC Order

The San Diego-based chipmaker is dealing with the fallout from a decision by a California federal judge.

Qualcomm Leans on Appeals, Trump Help to Reverse US FTC Order

Qualcomm, smarting from a major legal setback that could unravel its business model, will now look to an appeals process that historically has gone in its favour - as well as to possible intervention from the Trump administration, which is eager to ensure the US company remains competitive in 5G technology.

The San Diego-based chipmaker is dealing with the fallout from a decision by a California federal judge, who sided with the Federal Trade Commission in a case brought in 2017 accusing the company of anticompetitive practices. Qualcomm is asking that US District Judge Lucy Koh's decision be put on hold while it pursues a rapid appeal, where it may get support from other branches of the federal government, which in the past have indicated the company's importance to US technology leadership and security outweigh questions about how it does business.

Koh's judgment this week came about a month after Qualcomm settled a worldwide legal fight with Apple. The relief gained by that settlement and the hope for a future clear of costly legal entanglements, which had sent Qualcomm's stock rallying this year, is now on hold. Its stock was down 10.9% at the close on Wednesday in New York. Shares fell as much as 2.7% during pre-market trading Thursday.

Koh endorsed almost all of the FTC's accusations against Qualcomm and said the company will need to change the way it operates. A chief concern for shareholders is the order to renegotiate technology licensing deals with all major phone makers. Those agreements generate billions of dollars in high-margin revenue for Qualcomm each year.

If the chipmaker is forced to do that, customers such as Apple, Samsung Electronics, and Huawei Technologies, could cut what they pay to use patents underpinning how modern phone networks work. Such an action is exactly what the Trump administration's Justice Department was hoping to avoid when it recently asked the judge to limit the scope of any penalties she planned to levy against Qualcomm. Attorneys for the government had told Koh that an aggressive remedy could undermine innovation and the company's central role in commercializing 5G mobile networks.

Koh baulked at the suggestion that she needed to hear more arguments three months after the 11-day trial concluded on January 30. The Trump administration is likely to support Qualcomm through its appeals process, arguing some of Koh's injunctions will stifle American innovation and possibly threaten national security.

But government filings won't be a silver bullet in Qualcomm's quest to overturn the judge's decisions related to the company's anti-competitive practices.

"If there is a national security concern, then that's something the appeals courts will have to consider," said Ankur Kapoor, an antitrust attorney in New York. "But the support of the Justice Department is no trump card. If the evidence shows that Qualcomm itself undermined industry innovation with its anti-competitive behaviour, the government's support will only take Qualcomm so far."

Qualcomm brought in more than $5 billion in licensing revenue last year, helping fuel an industry-leading research-and-design effort that makes Qualcomm's chips and inventions central to high-speed mobile data systems and devices. That leadership is seen as crucial for the US by the Trump administration.

Qualcomm still exists as an independent company because of the administration's viewpoint. A hostile takeover bid from Broadcom was thwarted at the last minute by a presidential order in March 2018 that cited security concerns and fears the acquisition would lead to less investment in 5G.

Beyond any support Qualcomm gets from the administration, the company also has legal moves left to play out. Appeals and settlements are legal venues where Qualcomm has fared better than with initial decisions. The company's licensing model has been challenged for years in jurisdictions around the world.

In South Korea, home to Samsung, the US chipmaker is appealing two rulings that it transgressed antitrust rules. Samsung, as part of a recent agreement with Qualcomm, won't oppose the appeal as one of rulings is re-examined. Japan's Fair Trade Commission this year reversed an almost decade-old cease-and-desist order against Qualcomm related to licensing agreements.

In Taiwan, home to its nearest direct rival MediaTek, an initial ruling against Qualcomm's business practices was overturned. And in China, the biggest market for smartphones, the chipmaker emerged from an investigation by antitrust authorities with the right to charge licensing fees, albeit after paying a fine.

That record aside, if Koh's ruling were to stand, "it would have the potential to upend Qualcomm's licensing model, forcing them to renegotiate agreements with existing licensees, ostensibly at lower rates,'' according to Raymond James analyst Chris Caso.

Some still believe Qualcomm's negotiating and courtroom skills will win out.

"The ruling by Judge Koh in the FTC case versus Qualcomm may appear daunting, but in our opinion, they are unlikely to change the reality for the company or investors," according to Morgan Stanley analyst James Faucette.

© 2019 Bloomberg


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