FTC Alleges Qualcomm Extracted Baseband Exclusivity and Prevented Apple From Releasing WiMax iPhone for Partial Royalty Relief

FTC Alleges Qualcomm Extracted Baseband Exclusivity and Prevented Apple From Releasing WiMax iPhone for Partial Royalty Relief

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The FTC has filed a complaint in federal district court charging Qualcomm with using anticompetitive tactics to maintain its monopoly in the supply of baseband processors used in cellular phones.

Notably, a big part of the complaint alleges that Qualcomm extracted baseband processor exclusivity from Apple in exchange for partial royalty relief.

The FTC reveals that Apple entered into agreements with Qualcomm in 2007, 2011, and 2013. In the 2007 agreement Qualcomm stipulated that Apple would not sell or license a smartphone that implemented WiMax, a rival technology to LTE.

Under a 2007 agreement, Qualcomm agreed to rebate to Apple royalties that Qualcomm received from Apple’s contract manufacturers in excess of a specified per-handset cap. Qualcomm’s payment obligations were conditioned upon, among other things, Apple not selling or licensing a handset implementing the WiMax standard, a prospective fourth-generation cellular standard championed by Intel and opposed by Qualcomm.

In subsequent agreements, Qualcomm conditioned royalty relief on Apple exclusively using their baseband processors.

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Qualcomm and Apple entered into additional agreements in 2011 and 2013. Under these agreements, Qualcomm provided Apple large lump sum payments that constituted partial relief from Qualcomm royalties. Qualcomm conditioned this relief on Apple’s exclusive use of Qualcomm baseband processors in new iPhone and iPad models.

Under Qualcomm’s 2011 agreement with Apple, Qualcomm agreed to make substantial incentive payments from 2011 through 2016, explicitly conditioned upon Apple using Qualcomm baseband processors exclusively in all new iPhone and iPad models. If, during this period, Apple launched a new handset with a non-Qualcomm baseband processor, it would forfeit all future payments and, depending on when a handset launched, could be required to refund past payments.

Qualcomm’s 2013 agreements with Apple modified and extended the exclusivity arrangement set forth in the companies’ 2011 agreement. Under the 2013 agreements, Qualcomm agreed to rebate to Apple royalties that Qualcomm collected from Apple’s contract manufacturers in excess of modified per-handset caps. Qualcomm’s obligation to make these rebate payments was subject to, among other terms, a new condition—that Apple neither initiate nor induce others to initiate litigation claiming that Qualcomm had failed to offer a license on FRAND terms. Qualcomm also agreed to make substantial incentive payments in 2013, 2014, 2015, and 2016, explicitly conditioned on Apple sourcing baseband processors for new iPad and iPhone models exclusively from Qualcomm. If, during this period, Apple launched a new handset with a non-Qualcomm baseband processor, it would forfeit all future incentive payments and, depending on when a handset launched, could be required to refund past incentive payments.
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As a result of the terms in its agreements with Qualcomm, Apple
sourced baseband processors exclusively from Qualcomm for all new iPad and iPhone products that it launched over the five-year period from October 2011 until September 2016. The new iPhone 7 uses baseband processors from Qualcomm and Intel.

The FTC has charged Qualcomm with violating the FTC Act. The complaint alleges that Qualcomm:

● Maintains a “no license, no chips” policy under which it will supply its baseband processors only on the condition that cell phone manufacturers agree to Qualcomm’s preferred license terms. The FTC alleges that this tactic forces cell phone manufacturers to pay elevated royalties to Qualcomm on products that use a competitor’s baseband processors. According to the Commission’s complaint, this is an anticompetitive tax on the use of rivals’ processors. “No license, no chips” is a condition that other suppliers of semiconductor devices do not impose. 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.

● Refuses to license standard-essential patents to competitors. Despite its commitment to license standard-essential patents on FRAND terms, Qualcomm has consistently refused to license those patents to competing suppliers of baseband processors.

● Extracted exclusivity from Apple in exchange for reduced patent royalties. Qualcomm precluded Apple from sourcing baseband processors from Qualcomm’s competitors from 2011 to 2016. Qualcomm recognized that any competitor that won Apple’s business would become stronger, and used exclusivity to prevent Apple from working with and improving the effectiveness of Qualcomm’s competitors.

The complaint was approved by a 2 to 1 vote. Notably, the dissenting vote was from Commissioner Maureen K. Ohlhausen who strongly opposes the complaint. "I have been presented with no robust economic evidence of exclusion and anticompetitive effects, either as to the complaint’s core “taxation” theory or to associated allegations like exclusive dealing", says Ohlhausen. "What I have been presented with is simply a possibility theorem." You can read Ohlhausen's full statement of dissent here.

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FTC Alleges Qualcomm Extracted Baseband Exclusivity and Prevented Apple From Releasing WiMax iPhone for Partial Royalty Relief
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