Qualcomm Just Lost Its Monumental FTC Trial

It's been a few months since the Federal Trade Commission's antitrust lawsuit against Qualcomm (NASDAQ:QCOM) wrapped up at the end of January, and federal Judge Lucy Koh has now ruled against the mobile chip giant in a scathing 233-page decision that lambasts Qualcomm for a wide range of anticompetitive business practices. The news comes a little over a month after Qualcomm and Apple (NASDAQ:AAPL) announced a surprise settlement. The Cupertino tech giant had lodged a separate but very similar complaint around the same time as the FTC.

Qualcomm shares have plunged on the news, as its fundamental business model is now in jeopardy.

What Koh found

One of the core complaints was Qualcomm's "no license, no chips" policy, where the company would not sell chips to customers unless they also inked a licensing agreement. This agreement undermined competition in the market, while allowing Qualcomm to charge elevated royalty rates for its intellectual property (IP).

In particular, Qualcomm knew that its exclusivity agreement with Apple would decimate rivals, since Apple has long been the largest buyer of stand-alone cellular modems. "Similarly, Qualcomm entered an exclusive deal with Apple because doing so would eliminate competition," Koh wrote.

Koh added, "In addition, Qualcomm refused to license its rivals and restricted rivals' customer base with the intent to prevent rivals from investing in research and development, and to weaken them in the market." That's similar to the argument that Apple had originally made in its initial complaint: "And by foreclosing competitors from dealing with Apple, a key purchaser of chipsets, Qualcomm facilitated the marginalization and exit of many of those competitors, enhancing its own monopoly power."

Koh doesn't pull any punches when describing the net result: "In combination, Qualcomm's licensing practices have strangled competition in the CDMA and premium LTE modem chip markets for years, and harmed rivals, OEMs, and end consumers in the process."

Qualcomm shouldn't continue business as usual

The court has issued injunctive relief that covers many parts of Qualcomm's business and anticompetitive practices:

• Qualcomm cannot condition chip supply on having a license, and it cannot threaten to withhold chip supply in order to negotiate licensing terms.
• The company must make its standards-essential patents (SEPs) available for rivals to license on a fair, reasonable, and non-discriminatory (FRAND) basis.
• Qualcomm cannot enter into any exclusivity supply agreements.
• The company cannot interfere with customers cooperating with government agencies regarding law enforcement or regulatory matters.
• Qualcomm will be subject to compliance monitoring for seven years, reporting to the FTC on an annual basis.

Naturally, Qualcomm disagrees and will appeal. "We strongly disagree with the judge's conclusions, her interpretation of the facts and her application of the law," Qualcomm general counsel Dan Rosenberg said in a statement. The company is seeking a stay of the judgment and an expedited appeal.

"This is a resounding victory for the U.S. competition enforcement agency over Qualcomm," writes FOSS Patents' Florian Mueller.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

This article originally appeared in The Motley Fool.