By Tripp Mickle, Brent Kendall and Asa Fitch 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 23, 2019).

A federal judge's ruling that Qualcomm Inc. unlawfully stifled competition in the market for wireless chips cast a new cloud over the tech giant and set the stage for further upheaval in its dealings with the world's smartphone makers.

The decision by U.S. District Judge Lucy Koh, who sided with the Federal Trade Commission in its antitrust suit against Qualcomm, delivered a major blow to a company that has been held up by the Trump administration as a keystone in U.S. technological competition with China.

The ruling directly targets the patent-licensing business that has been the San Diego-based company's biggest source of profit. It could lower costs for Apple Inc. and other smartphone makers that have complained Qualcomm's pricing tactics allowed it to profit off innovations, such as new displays or cameras, unrelated to its patents.

Those companies and Qualcomm have been battling over the costs of its technology at a time when the smartphone market has slowed, pressuring their profits.

The reversal comes a little more than a month after Qualcomm celebrated one of its largest triumphs: a deal with Apple that ended years of bitter litigation and positioned it to supply critical chips for future iPhones running on next-generation wireless networks.

Qualcomm's shares sank nearly 11% Wednesday on the ruling, shearing off another chunk of the chip maker's more than 50% run-up in the weeks after the Apple deal.

Qualcomm has weathered thorny royalty disputes before. But Judge Koh's ruling could be far-reaching, undercutting Qualcomm's business while at the same time affecting U.S. national competitiveness in next-generation wireless technologies.

As one of only a handful of companies capable of making cutting-edge versions of phone connectivity chips called modems, Qualcomm could be forced to negotiate less lucrative deals with existing customers and extend its intellectual property at less favorable terms, gutting a business that historically represented most of the company's value.

"If you were to hold them to the letter of the law and what Koh has put forth, it's devastating to their [licensing] business," Susquehanna International Group analyst Christopher Rolland said.

The ruling's practical effect remains to be seen, however, as Qualcomm pursues an appeal. Analysts said the scale of the loss of revenues, should the decision stand, was hard to gauge, given the complexity of Qualcomm's contracts and uncertainty about how much they would have to be discounted.

Despite the FTC ruling, Qualcomm executives believe the settlement terms preserve the agreement with Apple, people familiar with the matter said. An Apple spokesman declined to comment.

The judge's ruling clouds the outlook for Qualcomm, which long has generated more profit from patent licensing than the sale of its chips.

Judge Koh's ruling that Qualcomm must license some of its industry-essential patents to rival chip suppliers -- something it previously refused to do -- means Qualcomm may have to forgo royalties of 5% of the sales price up to $400 on handsets and instead assess fees based on the $15 to $20 cost of modem chips.

Bruce Hoffman, who heads the FTC's bureau of competition, called the decision "an important win for competition in a key segment of the economy."

The case was brought by agency Democrats over Republican dissent at the end of the Obama administration. Though GOP appointees now hold a 3-2 majority, Republican Chairman Joseph Simons is recused, a situation that complicated potential settlement talks.

In addition to the FTC case, Qualcomm faces a class-action lawsuit from consumers asserting similar antitrust claims and seeking billions in damages.

The ruling also has U.S. policy implications. The Trump administration has regarded Qualcomm as vital in competing with China for dominance in 5G technology, which is rolling out in the world's cellular networks this year.

The Justice Department took the unusual step of wading into the FTC-Qualcomm case early this month, asking for a hearing on any penalty against Qualcomm in a bid to limit damage to 5G technology the company is developing. Judge Koh, however, said in her ruling that a hearing on remedies wasn't necessary. A Justice Department spokesman declined to comment.

The FTC case focused on Qualcomm's policy of selling its chips only to companies that agree to pay licensing fees for a group of cellular-technology patents that Qualcomm owns.

Qualcomm is by far the leading supplier of chips that connect phones to wireless networks. The FTC said that dominance gave Qualcomm the leverage to force companies to pay steeper licensing fees than what Qualcomm's patents are worth. The commission alleged that Qualcomm's licensing conditions meant that it got paid even when device makers built phones using another company's chips, a situation that made rival chips less attractive in the marketplace.

Qualcomm said that, since its early days, it has licensed its patented cellular technologies for an upfront fee and used the revenue to invest in research and development. The company said it didn't change its approach once it grew into a leading seller of chips.

The cellular market is healthy and competitive, Qualcomm argued, noting that its market share has dropped in recent years. And it said its customers -- including Apple, Samsung Electronics Co. and Huawei Technologies Co. -- were too big and powerful to be pushed around by Qualcomm.

The same issues were at the heart of the bitter, two-year legal battle between Qualcomm and Apple that nearly led to their chief executives, Steve Mollenkopf and Tim Cook, taking the stand in their trial. The iPhone maker's settlement with Qualcomm included a six-year licensing agreement that analysts estimate will pay the chip maker $8 to $9 per device in licensing fees.

The FTC decision has the potential to increase demand for modem chips sold by rivals such as MediaTek Inc. Those chips for years were less attractive, analysts said, partly because smartphone makers who bought them also had to pay Qualcomm's high patent royalties.

Intel Corp., another competitor, last month said it would halt efforts to develop 5G modem chips for smartphones because it couldn't see a path to profitability. The company has been losing more than $1 billion annually on its modem business, according to a person familiar with the operation.

Judge Koh pointed to numerous suppliers who had exited the modem market because Qualcomm made it difficult for them to win supply agreements with smartphone makers. She said rivals that remain in the market have been hobbled by Qualcomm's practices.

Write to Tripp Mickle at Tripp.Mickle@wsj.com, Brent Kendall at brent.kendall@wsj.com and Asa Fitch at asa.fitch@wsj.com

 

(END) Dow Jones Newswires

May 23, 2019 02:47 ET (06:47 GMT)

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