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Apple infamously settled its dispute with Qualcomm last month, but just because the iPhone maker was willing to lay down arms didn’t mean that some of its accusations against the behemoth chip maker weren’t valid, and it looks like a U.S. District Judge agrees.
One of Apple’s biggest gripes with Qualcomm from the very beginning was that the company was extracting excessive royalty licensing fees from companies like Apple that were pretty much forced to use Qualcomm chips. In other words, Apple claimed that Qualcomm was using its near-monopolistic position in the smartphone chip market to extort huge payments out of Apple and other smartphone makers.
While it looked like the two companies were ready to go to the mattresses in a fight that had become intensely personal, just as the trial was set to begin last month, Apple raised the white flag of surrender and acquiesced to almost all of Qualcomm’s demands for back payments and licensing fees. However, while it may have appeared from this decision that Apple was tacitly declaring Qualcomm’s licensing position to be correct, neither of the two companies ever actually said that — instead they simply announced the cessation of hostilities and a new licensing deal that would allow Apple to actually begin producing iPhones with 5G modem chips.
It was an undoubtedly difficult but pragmatic decision on the part of Apple, but the the company saw the writing on the wall and realized that Qualcomm was their only option if they had any hope of getting 5G technology into an iPhone before the year 2025. However, maybe Apple wasn’t actually giving up, but simply stepping aside to let somebody else fight its battle on another front.
U.S. Regulators Kept Up the Fight
In the midst of all of this, the U.S. Federal Trade Commission had no such compunctions about continuing its antitrust lawsuit against Qualcomm, where it has long been accusing the chipmaker of exactly the same anticompetitive behaviour that Apple had been railing against. Qualcomm of course tried to get the lawsuit dropped on the fairly shaky legal grounds that the FTC’s claims were without merit, but U.S. District Judge Lucy Koh ruled back in 2017 that this was the whole point of a lawsuit — to actually determine whether claims made by a plaintiff have any merit.
Well, it now turns out that they do. According to CNBC, Judge Koh ruled earlier this week that Qualcomm violated antitrust laws by illegally suppressing competition in the smartphone chip market in a move that basically amounted to extortion. Put simply, Qualcomm routinely threatened to cut off supplies of modem chips to its customers unless they paid excessive licensing fees that went beyond both legal and industry norms and were disproportionate to its contributions to the marketplace.
Judge Koh said that Qualcomm “undermined rivals in every facet” and determined that Qualcomm knew its licensing practices harm competition, “yet continued anyway,” even in the face of government investigations in China, Japan, Korea, Taiwan, the European Union, and the U.S.
Qualcomm’s licensing practices have strangled competition in parts of the chip market for years, harming rivals, smartphone makers, and consumers.U.S. District Judge Lucy Koh
In short, Judge Koh echoed almost exactly what Tim Cook and other Apple executives have been saying for years. From the days when Cook was Apple’s Chief Operating Officer under then-CEO Steve Jobs, he reportedly found Qualcomm’s licensing terms “baffling,” advising Jobs that he felt that Apple was paying Qualcomm more than its fair share — “more than every other iPhone licensee combined” in fact. After Cook became CEO in 2011, however, he found himself trapped by prior agreements into continuing to use Qualcomm as an exclusive modem provider, with his new COO Jeff Williams giving testimony that “We had a gun to our head” with Qualcomm.
Indeed, the very fact that Apple had to give in to Qualcomm’s demands last month serves as the best indicator of the chip maker’s dominant position in the marketplace, and all reports suggest that Qualcomm knew this, with CEO Steve Mollenkopf having stated all along that he expected that Apple would eventually settle as it had no other choice but to do so — a tactic that Qualcomm had also used to strong-arm Nokia into submission back in 2008.
What It Means
For Qualcomm, which was still riding the high of its settlement with Apple, the U.S. court decision is undoubtedly going to make things more complicated. While Qualcomm’s shares surged more than 20 percent following the Apple settlement, they’ve now plunged 13 percent overnight after this most recent decision.
More significantly, however, Qualcomm is going to be forced to overhaul its business practices under the scrutiny of the Federal Trade Commission. In fact, Judge Koh has ordered Qualcomm to renegotiate all of its existing licensing agreements — which presumably includes the one that it just signed with Apple last month.
[Judge Koh] ordered the San Diego-based company to renegotiate licensing agreements at reasonable prices, without threatening to cut off supplies, and ordered that it be monitored for seven years to ensure its compliance.CNBC
This latest decision actually casts new light on Apple’s choice to settle with Qualcomm, suggesting that Apple had an ace up its sleeve all along. While it initially appeared that Apple was buckling under Qualcomm’s crushing demands for even more royalties — signing a six-year deal with even higher licensing fees than before — Cook was undoubtedly banking on the decision in the FTC case coming down in Apple’s favour.
Of course, Qualcomm isn’t happy about this latest decision at all, with its lawyers already working to put the decision on hold while it seeks a quick appeal to the California federal appeals court to attempt to have the ruling overturned. The U.S. Department of Justice has also asked Judge Koh for a separate hearing to discuss any possible sanctions that might be levied against Qualcomm, out of concern that they could stifle innovation in 5G technology and put the U.S. at a competitive disadvantage against other countries, putting the FTC and the Justice Department on slightly different sides in the matter.
While the case could still be tied up in appeals for quite some time, and some legal analysts suggest that there is some possibility for Qualcomm to prevail, others suggest that the credibility of Qualcomm executives who took the stand and the contradictions between their statements and internal Qualcomm emails and notes will make it “difficult for an appellate court to disturb the [lower] court’s findings regarding the truthfulness of the Qualcomm witnesses.”
Unless the case is ultimately turned over on appeal, however, it seems that Apple will end up getting the fair licensing deal from Qualcomm that it was fighting for in the first place, along with the satisfaction of being proven right in its contention that Qualcomm has been a monopolistic bully all along. Tim Cook is almost certainly smiling like the proverbial Cheshire cat right now.