The Federal Trade Commission on Tuesday accused Qualcomm (QCOM) of employing illegal tactics to maintain a monopoly on a key component of smartphones and other electronic devices known as "baseband processors." The FTC is seeking a court order to undo and prevent Qualcomm's unfair methods of competition.
The news hit Qualcomm shares hard, shaving a little more than $2 off its share price in afternoon trading Tuesday. The shares were trading at $66.67 at 1.15 p.m Eastern time but had dropped to $64.19 at the market's close. However, shares are up 1% in after-hours trading.
EDITOR'S NOTE: This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.
Qualcomm is the world's dominant supplier of baseband processors, which manage cellular communications in mobile products, and the FTC alleged in a complaint filed in U.S. District Court in San Jose, Calif., that the company has used its dominant position as a supplier of some types of baseband processors to impose "onerous and anticompetitive supply and licensing terms" on cellphone makers and to weaken competitors.
The charges come only a few weeks after South Korean regulators imposed a massive $865 million fine on Qualcomm for failing to license its cellphone chipset patents that are included in global industry standards on fair and reasonable terms.
Like the Korean Fair Trade Commission, the FTC accused Qualcomm of violating its obligation to license patents that are included in global industry standards on fair, reasonable and non-discriminatory, or "FRAND," terms.
In an twist that could cast doubt on the FTC's willingness to pursue the case after President Trump takes office, the Republican Commissioner Maureen Ohlhausen dissented from the decision to bring the case by her two remaining Democratic colleagues, current Chairwoman Edith Ramirez and Commissioner Terrell McSweeny. Ohlhausen is expected to be named acting FTC chairwoman after Trump takes office Friday. If Ohlhausen continues as FTC chair after Trump's eventual FTC nominees are confirmed she could have the Republican majority she needs to withdraw the case.
Qualcomm said it will "vigorously contest" the FTC's allegations. "Qualcomm has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms," the company said in a statement addressing the government's lawsuit.
Qualcomm criticized the FTC's decision to file the case only days before the Obama Administration ends. "This is an extremely disappointing decision to rush to file a complaint on the eve of Chairwoman Ramirez's departure and the transition to a new Administration, which reflects a sharp break from FTC practice," said Don Rosenberg, company general counsel.
"In our recent discussions with the FTC, it became apparent that it still lacked basic information about the industry and was instead relying on inaccurate information and presumptions. In fact, Qualcomm was still receiving requests for information from the agency that would be necessary to an informed view of the facts when it became apparent that the FTC was driving to file a complaint before the transition to the new administration. We have grave concerns about the two commissioners' decision to bring this case despite a lack of evidence supporting the allegations and theories in the complaint. We look forward to defending our business in federal court, where we are confident we will prevail on the merits."
Qualcomm also holds patents essential to industry standards that enable cellular connectivity. The patents were included in standard-setting organizations for the telecommunications industry, which include Qualcomm and many of its competitors. In exchange for having their patented technologies included in the standards, participants are required to license their patents on FRAND terms.
According to the FTC's complaint, Qualcomm threatened to disrupt cell phone manufacturers' supply of baseband processors, a threat the company was able to leverage into "elevated royalties and other license terms for its standard-essential patents that manufacturers would otherwise reject."
The unjustly high royalties "amount to a tax on the manufacturers' use of baseband processors manufactured by Qualcomm's competitors, a tax that excludes these competitors and harms competition," the FTC said.
According to the the FTC specific illegal actions taken by Qualcomm have included maintaining a "no license, no chips" policy under which it supplies baseband processors to cellphone makers only on Qualcomm's preferred license terms, which forces them to pay royalties above market levels. Cellphone makers have no choice but to comply, the FTC said, because without the Qualcomm processors a phone maker would be unable to make phones for important cellular networks.
Other violations include refusing to license standard-essential patents to competitors and extracting an agreement by Apple Inc. (AAPL) to exclusively use Qualcomm processors.
In her dissent, Ohlhausen said "extreme circumstances" compelled her to voice objections to the litigation. The lawsuit, she wrote, "lacks economic and evidentiary support, was brought on the eve of a new presidential administration, and will undermine U.S. intellectual property rights in Asia and worldwide."