The FTC vs Qualcomm Trial began on Friday with Huawei as Star Witness, with more Fireworks to Follow in the days ahead
In late December 2016 Patently Apple posted a report titled Korea's Antitrust Agency Hits Qualcomm with Record $865 Million Fine for Excessive Licensing Fees to Phone Makers. The report noted that the Korean agency accused Qualcomm of coercing mobile phone makers, including South Korea's Samsung Electronics and LG Electronics as well as Apple of U.S., to pay excessive licensing fees under unfair conditions set by the company. Korea's FTC said that Samsung, LG, Apple, Intel, MediaTek, China's Huawei Technologies, and Ericsson of Sweden, participated in its investigation of Qualcomm. Once that was established, the U.S. FTC sued Qualcomm for forcing Apple to use its chips in iDevices on January 17, 2017.
That's the basic background of the Apple Qualcomm dispute through FTC Korea and US. Many additional lawsuits have since been filed by Apple since that time independently against Qualcomm. But the U.S. FTC is critical in breaking Qualcomm's "no license-no chips" tactic and all eyes are on the case that may be halted next week if the US government shutdown doesn't stop the trial dead in its heels.
Some of the largest phone makers in the world have had Qualcomm's licensing gun put to their head. It's akin to the tatic used in the movie "The Godfather" when Marlo Brando's Character Vito Corleon says: "I made him an offer he couldn't refuse." The deal was either to put his signature on the line or his brains. What is a company like Apple, Huawai or Samsung to do at the last minute when Qualcomm put the gun to their head and said no license-no chips.
While the US FTC started their lawsuit against Qualcomm with Apple as their key witness, it's now China's Huawei and Lenovo that are the star witnesses in the trial that began this week in California.
Huawei was a key witness in Korea's FTC case and the first key witness to claim that Qualcomm is harming competition for smartphone components. Bloomberg reported on Friday that "Huawei Technologies Co. and Lenovo Group Ltd. provided testimony that the FTC argues proves that Qualcomm threatened to withhold chip supply unless they continued to pay technology licensing fees. The non-jury trial that started Friday is scheduled to run before U.S. District Judge Lucy Koh through Jan. 28 in San Jose, California.
In 2013 negotiations over new chip-sets, Qualcomm allegedly informed Huawei that if it didn’t extend the code division multiple access, or CDMA, license agreement, “they would stop supplying the chips,” Huawei General Counsel Nanfen Yu said in a video deposition played for the court. 'Everyone in the industry knows” how Qualcomm operates. They “make it very clear that we have to sign a license agreement in some form. We had no choice.'"
In a video deposition played for the court, Ira Blumberg, vice president of intellectual property at Lenovo testified that 'Qualcomm has in the past retaliated against customers who have attempted to challenge its legal terms by either delaying, or cutting off supply of chips. We don’t know if Qualcomm would follow through on their threat to cut off supply, but we can’t take that risk.'" You could read more of the Bloomberg report here.
The US FTC's First Wave of Testimony
The FTC's statement in Friday's trial opening listed the brands that would be testifying in the coming days (beyond Huawei and Lenovo covered earlier). Here are just a few:
Apple: One of the four types of behavior the FTC seeks to address is the exclusive deal Qualcomm used to have in place with the iPhone maker. Apple, too, is one of the companies the FTC says will testify that Qualcomm extracted supra-FRAND license fees. We learned on Friday that Apple allegedly referred to Qualcomm by the code name of "Eureka" in some internal documents and that Qualcomm was worried about Apple "whittling away" at its business model, potentially through seeking a judicial FRAND rate determination.
Intel: According to Qualcomm's lead counsel, it would be "nuts" to think that companies like Intel at any point in time lacked the resources to compete with Qualcomm in the baseband chipset market. Qualcomm intends to present some evidence according to which Intel thought they were spending about the same amount of money on baseband chipset development as Qualcomm, but making less headway. Mr. van Nest claims Intel dropped out of the CDMA chipset business for that reason, and as a result wasn't ready to supply such chips when Apple needed them in 2013. Intel has filed amicus briefs, public interest statements etc. in various cases, and its representations about why it couldn't compete with Qualcomm more effectively sooner sound different. We'll need to hear both sides, as always.
Samsung: Interestingly, both opening statements announced testimony from Samsung that would support their positions. The FTC named Samsung among roughly half a dozen companies whose testimony would prove that Qualcomm received supra-FRAND royalties by exercising its "no license-no chips" leverage. But Qualcomm's counsel said Samsung would confirm that licensing negotiations resulting in last year's new agreement between the two companies "were fair." I saw media reports before the trial that said the FTC had Samsung's support, a claim based on a (really great) amicus curiae brief submitted by Samsung in 2017 in support of the FTC's opposition to Qualcomm's motion to dismiss the complaint. However, at the time Samsung was also an active party to the Korean antitrust investigation, from which it withdrew after the aforementioned new deal (LG just joined instead). The relationship between Samsung and Qualcomm is complex and multifaceted (see this infographic). So let's wait and hear from them.
MediaTek: Step by step the relevance of that company to the FTC case becomes clearer. On Friday, it was actually Lenovo's testimony that shed some more light on it. Apparently Lenovo does, or at least in 2013 did, buy chips from Qualcomm for high-end devices but from MediaTek for mid-range and lower-end devices. MediaTek had an agreement in place with Qualcomm, and Lenovo originally thought it was a license agreement that would also benefit MediaTek's customers, but under that contract MediaTek was "not authorized" to sell its chipsets to device makers that didn't have a license agreement with Qualcomm. Therefore, the worst-case scnario for Lenovo was that, after terminating or not renewing its license agreement with Qualcomm, it would neither get any more chips from Qualcomm for higher-end phones nor any from MediaTek, given that Qualcomm would have been in a position to enjoin MediaTek from supplying chips to an unlicensed Lenovo.
Interestingly this is likely why MediaTek isn't a viable alternative chip supplier for Apple's iPhones.
While the high stakes case is being reported on by many sources, Florian Mueller of FOSS Patents is reporting on the trial live on Twitter that resumes Monday at hashtag #ftcqcom. Although the case just got underway, Mueller's first impression of the first day of he trial was that the FTC gained initial control over the center of the chessboard. By following the live tweets (whenevery you have time), you'll be able to pick up on little details that most in the press won't bother reporting on.
One example is learning that Qualcomm's Finance Executive David Wise revealed that Qualcomm's licensing accounts for two-thirds of their total value. It's now easier to understand why Qualcomm is willing to fight any company or government agency to the death that threatens its core business model.
We also learned that under the gun during his testimony at the trial, David Wise refused to confirm Qualcomm's no-license-no deal policy. If he would have acknowledged that Qualcomm uses this tactic he's out of job and if he openly denies it, the FTC will catch him on perjury. Silence was his only option.