FTC, Qualcomm give closing arguments in trial over cellular chip licenses

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The US Federal Commerce Fee’s case in opposition to Qualcomm is now within the palms of a decide.

 

On Tuesday the 2 sides introduced their hour-long closing arguments in a case that would have massive implications for the know-how world. The FTC has accused Qualcomm of working a monopoly within the cellular chip market, which harm rivals and brought about handset makers to boost their costs.

 

For the FTC to win the case, it has the burden of displaying that Qualcomm had a monopoly, that it had market energy and that it used that energy in negotiations with handset makers to command excessive royalties. The FTC additionally has to point out that Qualcomm’s conduct harm opponents and that the anticompetitive actions proceed or will begin once more sooner or later.

 

FTC legal professional Jennifer Milici kicked issues off Tuesday afternoon by detailing how Qualcomm used its energy within the 3G and 4G chip market to pressure handset makers like Apple to signal licensing agreements with excessively excessive royalties. If Qualcomm is not stopped, she stated, it’s going to do the identical factor within the 5G market.

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Qualcomm ‘acquired monopoly energy within the modem chip market and as a substitute of merely competing on its deserves’ put up ‘roadblocks’ that harm rivals, Milici stated. ‘It is past dispute the conduct is ongoing.’

 

Qualcomm legal professional Robert Van Nest of legislation agency Keker, Van Nest & Peters, argued throughout his closing that the FTC did not meet its burden within the case and that Qualcomm received enterprise ‘by means of superior innovation and higher merchandise.’

 

‘Excessive royalties alone just isn’t the premise for his or her grievance of hurt,’ Van Nest stated. ‘They’ve to point out hurt to competitors.’ However he stated such hurt hasn’t occurred: Intel now provides all modems for Apple’s iPhones, MediaTek is the world’s second greatest wi-fi chipmaker, and Samsung and Huawei have developed their very own modems.

 

‘If the duty is to determine whether or not Qualcomm maintained its place by means of innovation, ability, know-how or by means of licensing practices, it is a lay-down hand,’ Van Nest stated. The FTC hasn’t ‘confirmed something with respect to licensing practices that had affect on development of this know-how.’

 

 

Qualcomm has been battling the FTC in a San Jose, California, courtroom since Jan. 4. The FTC wrapped up its antitrust case in opposition to the corporate on Jan. 15, and Qualcomm rested its defense Friday. The trial has revealed the interior workings of tech’s most essential enterprise, smartphones, displaying how suppliers wrestle for dominance and revenue.

 

Decide Lucy Koh will now determine the end result of the case. She famous earlier within the trial that she possible will not be issuing her regular speedy determination, as she has numerous proof, testimony and case legislation to contemplate. Nonetheless, the FTC on Tuesday requested for a doable timeline for the choice. It is going through one other authorities shutdown in mid-February and must justify holding legal professionals on the clock if a verdict was impending.

 

Koh stated she did not understand how lengthy it could take however requested the FTC to verify in once more earlier than a possible shutdown.

 

‘I am typically pretty quick,’ Koh stated. ‘[But] one thing of this magnitude goes to take longer’ than different common motions.

 

Qualcomm is the world’s greatest supplier of mobile chips, and it created know-how that is important for connecting telephones to mobile networks. The corporate derives a good portion of its income from licensing these innovations to tons of of gadget makers, with the price primarily based on the worth of the cellphone, not the elements.

 

As a result of Qualcomm owns patents associated to 3G, 4G and 5G networking know-how, in addition to different options like software program, all handset makers constructing a tool that connects to mobile networks need to pay it a licensing price, even when they do not use Qualcomm’s chips.

 

However the FTC lawsuit might break that mannequin. The US authorities has accused Qualcomm of operating a monopoly in wi-fi chips, forcing prospects like Apple to work with Qualcomm solely and charging ‘extreme’ licensing charges for its know-how, partially by wielding its ‘no license, no chips’ coverage. Qualcomm’s practices prevented rivals from getting into the market, drove up the price of telephones and in flip harm customers, who confronted increased handset costs, the FTC stated.

 

Qualcomm says the FTC’s lawsuit is predicated on ‘flawed authorized idea.’ It is also says prospects select its chips as a result of they’re the most effective and that it is by no means stopped offering processors to prospects, even once they’re battling over licenses.

 

‘The FTC hasn’t come near assembly its burden of proof on this case,’ Don Rosenberg, government vice chairman and basic counsel of Qualcomm, stated in a press release Tuesday following closing arguments. ‘All real-world proof introduced at trial confirmed how Qualcomm’s years of R&D and innovation fostered competitors, and development for your entire cellular economic system to the advantage of customers around the globe. Our licensing charges — which have been set lengthy earlier than we had a chip enterprise, and revalidated repeatedly — pretty and precisely replicate the worth of our patent portfolio. Qualcomm’s know-how has been the muse of a thriving, aggressive trade.’

 

No license, no chips

 

In the course of the trial, the FTC referred to as witnesses from firms like Apple, Samsung, Intel and Huawei and had specialists testify concerning the alleged hurt Qualcomm’s licensing practices have brought about the cellular trade.

 

Qualcomm, in the meantime, referred to as company executives, representatives from handset makers and chip rivals, and economics experts to dispute the FTC’s allegations within the case. The corporate sought to point out that competitors is wholesome within the cellular chip market and that Qualcomm hasn’t hampered the trade.

 

The corporate has argued that its broad patent portfolio and improvements justify its charges. CEO Steve Mollenkopf, who took the stand early in the trial, defended the corporate’s licensing practices, saying the way in which his firm sells chips to smartphone makers is finest for everyone concerned and is the only method to license the know-how.

 

The guts of the FTC’s case against Qualcomm is a so-called ‘no license, no chips coverage.’ Qualcomm sells processors that join phones to mobile networks, however it additionally licenses its broad portfolio as a gaggle. For a set price — primarily based on the promoting value of the tip gadget, sometimes a cellphone — the producer will get to make use of all of Qualcomm’s know-how. It is cellphone makers that pay the licensing price, not chipmakers.

 

To get entry to Qualcomm’s chips, that are broadly thought-about to be on the bleeding fringe of wi-fi innovation, a cellphone maker first has to signal a patent licensing contract with Qualcomm. The corporate has lengthy been the chief in 4G LTE, and it is forward of rivals within the nascent 5G market. The best-end telephones, like these from Samsung, have tended to make use of its modems. However the FTC argues such a requirement hurts competitors and cements Qualcomm’s monopoly energy.

 

Apple Chief Working Officer Jeff Williams testified that his firm felt it needed to signal contracts for quantities it thought too excessive — a royalty of $7.50 per iPhone — to take care of entry to Qualcomm’s chips.

 

‘We have been looking at a rise of over $1 billion per yr in licensing, so we had a gun to our head,’ Williams stated as he defined why Apple signed one other licensing settlement in 2013, regardless of being sad with the phrases. He added that Apple has wished to make use of Qualcomm’s chips for its newer units, however Qualcomm refused to promote processors for the iPhone.

 

Different firms, like Huawei and Lenovo, made comparable feedback throughout their testimony. And throughout the trial, the FTC has pointed to communication from a former Qualcomm licensing government, Eric Reifschneider, to cellular chip prospects like Motorola and Sony Cell as proof of threats to chop off provide.

 

In a single occasion, Reifschneider wrote in an electronic mail to a Sony Cell government that ‘QCT (Qualcomm’s chip enterprise) has been delivery chips to SMC (Sony Cell) for nearly three weeks now with no license in place. It is not going to be doable for that to proceed.’

 

However Qualcomm and executives from some firms have testified that Qualcomm has by no means lower off chip provide throughout contract negotiations. A few of these executives have stated in dwell testimony and video depositions introduced by Qualcomm that its rivals did not have the know-how required for his or her units.

 

Matthias Sauer, an Apple government and a witness referred to as by Qualcomm, testified earlier in January that Intel’s modems did not meet the technical requirements required for the corporate’s iPhones in 2014. Although Intel additionally could not meet Apple’s chip necessities for the iPad, it could’ve used them anyway, he stated, had Qualcomm not supplied incentives to stick with its chips. His remarks echoed comments from colleague Tony Blevins early within the trial.

 

Qualcomm, in the meantime, has stated it had professional enterprise causes for having strict contracts with Apple, together with how expensive it is to design modems particularly for Apple.

 

Sparring throughout closing arguments

 

On Tuesday, FTC legal professional Milici argued that the no license, no chips coverage ‘put up roadblocks for opponents.’ She stated there was ‘constant’ testimony from handset makers corresponding to Apple, Samsung, Lenovo, Motorola and LG that they apprehensive they’d lose entry to Qualcomm’s modems in the event that they did not signal licenses below phrases they did not like.

 

‘Qualcomm has acknowledged unambiguously that it has by no means threatened chip provide,’ Milici stated. ‘That is only a semantic trick.’ In ‘instance after instance,’ she stated, Qualcomm demanded robust phrases, the shopper resisted, then Qualcomm stated if the 2 sides did not attain settlement, the shopper would not be capable of purchase chips anymore.

 

‘Prospects who heard these statements definitely considered them as threats,’ she stated. ‘Inner Qualcomm paperwork present Qualcomm executives knew their feedback can be taken as threats, they usually have been meant to be taken that manner.’

 

 

Milici added that ‘the very fact they did not have to chop off chip provide is proof of market energy.’ Prospects had no different viable modem choices, so that they needed to signal licensing offers with Qualcomm to get its chips.

 

‘We do not know and might’t know what the market would appear to be with out’ Qualcomm’s licensing practices hurting rivals, Milici stated. She stated there isn’t any method to know if Qualcomm would’ve been first in LTE had it not thrown up obstacles for chip opponents. ‘The whole market was affected by roadblocks,’ she stated. ‘We do not understand how profitable [Qualcomm’s rivals] would have been.’

 

Qualcomm legal professional Van Nest, in the meantime, stated throughout his closing arguments that the businesses that testified did so as a result of they need to pay decrease licensing charges.

 

‘They’re all massive refined firms with their very own leverage,’ he stated. ‘Their testimony was, ‘Oh yeah, we felt threatened and needed to do what we did.’ I might say this testimony was introduced to this courtroom in a really deceptive vogue.’

 

Van Nest famous that the FTC introduced video testimony from firms like BlackBerry and Lenovo, the place executives stated they felt threatened by Qualcomm. However Qualcomm could not current contradictory testimony — the place the executives stated they by no means truly acquired threats or had their chip provide lower off — till it was its flip to current its protection.

 

He additionally stated the FTC failed to point out that Qualcomm had any market energy after 2016. That September was the primary time Apple used Intel chips within the iPhone. And competitors in cellular chips has solely gotten extra fierce since then, with Qualcomm dropping share in that market and MediaTek and Intel saying they’re going to quickly have 5G chips accessible.

 

‘We all know 5G goes to be aggressive,’ Van Nest stated. ‘There is no such thing as a proof of believable chip leverage.’

 

‘Heavy hammer’

 

Each side introduced economics specialists all through the course of the trial to again up their arguments.

 

Within the case of the FTC, Carl Shapiro, a professor of economics on the College of California, Berkeley, supplied the important thing testimony about Qualcomm’s affect on the cellular market. His testimony sought to point out that Qualcomm’s ‘unusually excessive’ royalty charges harm opponents, handset makers and customers.

 

Shapiro initially took the stand two weeks ago, detailing how Qualcomm continues to harm the cellular chip market. He testified again Monday because the FTC’s key rebuttal witness.

 

Dropping entry to Qualcomm’s modems would impose prices on handset makers, together with not with the ability to provide to customers, Shapiro stated in his preliminary testimony.

 

‘That is a really heavy hammer that Qualcomm is bringing down, at the least as a risk, in these negotiations,’ Shapiro stated.

 

As a part of its protection, Qualcomm final week referred to as three economics specialists to rebut Shapiro’s claims. They testified that Shapiro’s methodology was flawed and that he did not think about what was taking place in the true world.

 

Dueling specialists

 

Aviv Nevo, a College of Pennsylvania economics and advertising and marketing professor, on Friday referred to as into query Shapiro’s use of idea to find out the harm allegedly brought on by Qualcomm’s licensing practices. As an alternative, Nevo stated he examined the ‘real-world’ agreements Qualcomm had with firms to find out that the charges weren’t extreme.

 

Nevo testified that the FTC’s idea that Qualcomm makes use of its energy within the chip market to cost extreme royalty charges ‘is simply not born out of precise market knowledge.’ He stated ‘there isn’t any help for the speculation within the knowledge.’ Nevo additionally testified that the cellular trade is powerful.

 

‘At a excessive degree, it is a thriving trade,’ Nevo stated. ‘Costs are declining. Portions are skyrocketing.’

 

Nevo additionally stated there have been professional enterprise causes for Qualcomm’s licensing insurance policies. ‘One is discount in transaction price,’ he stated. ‘The opposite is permitting rival chipmakers to function freely with entry to tech with no want for a license.’

 

Shapiro on Monday stated a few of Nevo’s methodology, conclusions and assumptions were ‘fabricated,’ ‘outrageous’ and ‘all messed up.‘ He famous that Nevo’s methodology had ‘measurement issues.’ He additionally stated that Nevo fell quick by not doing a check to find out when Qualcomm had market energy.

 

Final Tuesday, Edward Snyder, dean of the Yale Faculty of Administration and a professor of economics and administration, criticized Shapiro’s methodology and stated the issues Qualcomm’s rivals had have been attributable to selections they made that had nothing to do with Qualcomm.

 

He famous that three components clarify an organization’s success or failure: foresight, funding and execution. Snyder evaluated Intel, MediaTek, Broadcom and others to look at their place available in the market and the way they carried out primarily based on these three components.

 

Intel, for one, ‘exhibited … poor foresight concerning the trade. They invested inefficiently, they usually encountered execution issues,’ stated Snyder, who at one time labored for the Justice Division’s antitrust division. MediaTek had good foresight and funding, however it had some execution issues, Snyder stated. It has now resolved these, serving to it grow to be the No. 2 modem provider on the earth. Broadcom, for its half, failed on all three, Snyder stated, inflicting it to go away the modem trade.

 

And Tasneem Chipty, a specialist in competitors coverage and antitrust economics from consultancy Matrix Economics, attacked Shapiro’s definition of the market and of market energy.

 

She accused Shapiro of taking a ‘shortcut’ when evaluating whether or not the cellular chip market was aggressive and stated he ‘has overstated Qualcomm’s market energy.’ She stated there isn’t any ‘proof of constant and unconstrained market energy of the kind’ that may harm competitors or ‘coerce OEMs [handset makers] into onerous enterprise phrases that may rob them of billions of {dollars}.’

 

Licensing rivals?

 

The FTC has stated Qualcomm’s refusal to offer licenses to its chip rivals is a part of its efforts to take care of its monopoly. Decide Koh in November agreed and ruled that Qualcomm has to license its wi-fi chip patents to its chip opponents like Intel.

 

However Dirk Weiler, head of requirements coverage at Nokia, testified final week that it has lengthy been trade normal to license know-how to handset makers, not chipmakers. Alongside together with his position at Nokia, Weiler additionally serves as chairman of the European Telecommunications Requirements Institute. The nonprofit requirements physique’s Mental Property Rights Coverage requires firms to offer licenses for tools.

 

‘What’s my understanding of the trade observe is within the case of the mobile enterprise, this implies these firms license, for instance, the handset and never any subpart of the handset,’ Weiler stated.

 

And Nevo on Friday stated if Qualcomm does not license on the gadget degree anymore, issues might get difficult quick. If the corporate switched to easily licensing on the chip degree, it could want to supply a number of tiers, as a result of among the know-how would apply to an total cellphone and never simply the processor.

 

‘The variety of license agreements can be giant,’ Nevo stated. However the true situation ‘is the very fact every negotiation now will grow to be much more complicated. Events, chipmakers and OEMs, would have incentives to level to the opposite get together because the one truly practising on the license.’

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