Qualcomm suffered a setback in its legal battle with U.S. Federal Trade Commission on Tuesday when a federal judge ruled that the San Diego company is obligated to offer patent licenses to competitors.
The decision could have wide-ranging implications for Qualcomm’s patent licensing business model – which today collects patent royalties based on the wholesale price of smartphones – not individual components inside them.
Device level royalties have been the norm in the cellular industry for decades. In August, the FTC asked U.S. District Judge Lucy Koh in San Jose to rule that Qualcomm’s pledges to two U.S. standard setting organizations require it to offer patent licenses to all comers – including chip competitors.
While Koh’s ruling does not prevent device level licensing, it does pave the way for chip-level licensing, which Qualcomm contends is impractical and puts it at a disadvantage.
Qualcomm did not respond to request for comment. It may respond when it reports fiscal fourth quarter financial results on Wednesday.
Koh’s partial summary judgment is a narrow ruling. It does not speak to the broader legal theory behind the FTC’s ongoing antitrust lawsuit against Qualcomm, which is scheduled for trial in January.
Today, Qualcomm sells its cellular chips to smartphone makers. It also licenses its portfolio of 130,000 global patents. It sells chips and patents separately.
The company refuses to license chip competitors such as Intel and MediaTek. The licenses signed by smartphone makers cover the entire device. Therefore, no additional licenses are necessary, according to Qualcomm..
The FTC argued that the plain language in Qualcomm’s pledge to standard setting organizations require it to offer licenses to chip makers who request them. Excluding competitors violates Qualcomm’s promise not to discriminate.
Koh agreed. In a written ruling, she pointed to a past patent infringement lawsuit in which Qualcomm argued that network equipment maker Ericsson could not discriminate by refusing to grant a license to Qualcomm.
If Qualcomm is forced to license chip suppliers, it could trigger patent exhaustion. That means Qualcomm would no longer be able to collect standard essential patent royalties based on the price of the entire smartphone.
Apple – also embroiled in a legal war with Qualcomm – is seeking chip level licensing. In 2016, antitrust regulators in South Korea required Qualcomm to grant patent licenses to chip competitors. The company is appealing.
In court filings and interviews, Qualcomm has argued that chip level licensing is not required under its agreements with Telecommunications Industry Association and the American National Standards Institute.
In addition, the company contends component licensing misinterprets how cellular technology works.
Qualcomm says its cellular inventions are not limited to a single piece of silicon such as the cellular modem. Delivering high-speed wireless broadband requires myriad chips and software working as a system not only inside smartphones but also across the broader cellular network.
That’s why the cellular industry has licensed smartphone makers instead of chip suppliers for three decades. A chip level licensing requirement for Qualcomm would put it out of sync with the rest of the industry and the top standard setting organization in Europe, which has supported device-level royalties.
For its standard essential cellular patents, Qualcomm charges 3.25 percent of the smartphone price up to a $400 cap – or a maximum of $13 per phone.
Standard essential technologies enable interoperability – so a text message sent from an iPhone on AT&T is received on an Android phone on Verizon.
In a court filing last month, Qualcomm and the FTC revealed they were in settlement talks. It is unclear how Koh’s ruling might influence negotiations.
Qualcomm shares ended trading Tuesday up 16 cents at $63.63 on the Nasdaq exchange.