The South Korean Fair Trade Commission (KFTC) has fined Qualcomm $865 million dollars for violations of antitrust law. Qualcomm, as one might expect, strongly disputes the charges. Several of the company’s business practices got it into trouble with the KFTC, including its practice of charging royalty rates based on the price of the smartphone rather than the SoC or chipset, as well as various royalty rates for Qualcomm patents.
Bloomberg reports that Qualcomm only licensed its patents to mobile phone manufacturers and didn’t properly negotiate license terms. It is also accused of coercing customers to sign patent licenses, and not paying fairly for the patents held by other phone manufacturers. Smartphone patent litigation tends to be a blizzard of claims and counter-claims, since any single smartphone contains a huge group of technologies and products. Qualcomm has previously been accused of using financial incentives and predatory pricing to distort the EU market, but the KFTC agreement appears to rely on a different set of allegations and problems than the EU’s investigation from mid-2015.
Qualcomm, as you might expect, is having a bit of a meltdown.
“Qualcomm strongly believes that the KFTC findings are inconsistent with the facts, disregard the economic realities of the marketplace, and misapply fundamental tenets of competition law,” Don Rosenberg, executive vice president and general counsel for Qualcomm, said. “Importantly, this decision does not take issue with the value of Qualcomm’s patent portfolio. Qualcomm’s enormous R&D investments in fundamental mobile technologies and its broad-based licensing of those technologies to mobile phone suppliers and others have facilitated the explosive growth of the mobile communications industry in Korea and worldwide, brought immense benefits to consumers, and fostered competition at all levels of the mobile ecosystem.”
The reason this decision takes no notice of these issues is because the value of Qualcomm’s patent portfolio has literally nothing to do with whether or not Qualcomm properly licensed, charged-for, or cross-licensed the patents within that portfolio. It’s like an individual claiming that a huge fine doesn’t take issue with the size and beauty of his house, or the work he’s done helping puppies with crippling cocaine addictions at a local soup kitchen.
As ZDNet reports, the KFTC had already internally decided that Qualcomm’s patent licensing terms were an abuse of Standards Essential Patents (SEPs) and in violation of Fair, Reasonable, and Nondiscriminatory (FRAND) terms. These are rules applied in situations in which a company or companies holds patents that are deemed essential to a given standard. Qualcomm, in this case, has a number of patents related to the implementation of 3G and 4G, and it’s unlikely that a 4G modem can be constructed without infringing on Qualcomm’s patents (at least, not without a substantial engineering effort that would render the final product non-viable in the market). Firms that hold SEPs are generally required by standard-setting organizations like IEEE to license their patents under terms deemed fair, reasonable, and non-discriminatory as part of a condition of working to create a new standard.
FRAND is not a legal term, but the phrase is generally defined as follows: Fair means the patent licensing terms wouldn’t be judged as being a violation of antitrust law if applied by a dominant corporation in its home market. Reasonable means the licensing rate doesn’t dramatically increase the cost of a new technology or make the new technology non-competitive. Non-discriminatory means that individual licensees are treated in a similar manner. You can charge Company A more than Company B if Company B has negotiated a licensing deal based on volume discounts or if Company B has better credit, but the underlying eligibility to take a license must be identical for each customer. You can’t deny a competitor a license simply because they want to compete with you using a commonly-defined standard, in other words.
This isn’t the first time Qualcomm has run into trouble over its licensing and patent practices. Qualcomm agreed to pay $975 million to Chinese regulators earlier this year, as well as to lower its licensing rates. It ran into trouble with the KFTC in 2009 over its patents on CDMA (Code Division Multiple Access), which were also ruled to be SEP. That case remains pending before the Supreme Court. The IEEE itself has called for industry partners to stop relying on handset-pricing when deriving licensing rates and to charge royalties based on chipsets instead.