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Closing arguments were held Tuesday, Jan. 29, 2019 in the FTC's anti-trust case against Qualcomm.

Closing arguments were held Tuesday, Jan. 29, 2019 in the FTC's anti-trust case against Qualcomm. (Qualcomm)

Qualcomm rose to become the research and development powerhouse driving the mobile industry under a business model that allowed it to get paid for its technology by licensing patents and selling chips as separate products.

The U.S. Federal Trade Commission, along with Apple, claims this "double dipping" is illegal. But to make a case that Qualcomm violated antitrust laws, the FTC must prove that Qualcomm hurt competition in the smartphone chip market and harmed consumers along the way.

On Tuesday, the FTC made its last pitch to U.S. District Judge Lucy Koh that Qualcomm's aggressive patent licensing practices did indeed hurt competition, while Qualcomm countered that massive innovation, falling prices and the rise of competitors such as Intel in the smartphone chip market prove that it didn't hurt anybody.

Final arguments were held Tuesday in the complex case, bringing an end to the 10-day bench trial over FTC allegations of anti-competitive practices that strike at the heart of Qualcomm's patent licensing business model.

Judge Koh did not issue a ruling, or give a hint of her thinking, as testimony came a close. While she typically makes rulings fairly quickly, she said the massive amount of documents and complex legal issues in this case make it likely her decision could take longer than usual.

Patent royalties have been the fuel for the San Diego company's success in the smartphone era. They've delivered on average $6.3 billion per year in revenue to Qualcomm over the past decade and that's funded a good portion of the company's profit, and research and development efforts.

The FTC's lawsuit is the first serious legal challenge to Qualcomm's patent licensing business practices in the U.S., though regulators in China, South Korea and Europe have fined Qualcomm for its business practices.

The FTC isn't seeking hefty fines. It is asking Koh, however, to order Qualcomm to stop certain business practices that it contends harm competition. Those could include that Qualcomm license its patents to rival chipmakers, which would upend the company's current practice of licensing its standard essential patents to smartphone makers based on the price of device - up to a cap of about $13 per phone under today's rates.

The FTC alleges Qualcomm leveraged its dominant market position in 3G CDMA chips and "premium" 4G LTE chips to force smartphone makers to pay too much in patent royalties.

In testimony throughout the trial, the FTC served up a steady stream of Qualcomm customers who said the San Diego company threatened to cut off chip supply to smartphone makers as part of patent license negotiations.

Smartphone makers ranging from Samsung to Apple to Lenovo to Huawei testified that they couldn't fight to lower patent fees for fear of losing chips supply.

"Qualcomm royalties don't reflect changes in the (patent) portfolio or in the law," said FTC attorney Jennifer Milici in closing arguments. "Qualcomm maintained high rates – their own expert said rates haven't changed at all in 25 years. This demonstrates chip market power."

The FTC contends that harmed competition. Because of the amount it was making in patent royalties, Qualcomm could price its chips lower than it ordinarily would had it included the cost of its intellectual property in the price of the chip.

That pressured competitors such as Intel and MediaTek to meet Qualcomm's prices - squeezing their profit margins, according to the FTC. That, in turn, put them at a competitive disadvantage and discouraged research and development needed to challenge Qualcomm.

"There is nothing wrong with a company gaining market power through better products," said Milici, the FTC lawyer. "What Qualcomm was not allowed to do is use its monopoly power to put up roadblocks" that prevented competitors from catching up.

Milici said most of the facts in the case are undisputed, and Judge Koh will have to make a "credibility" determination between the FTC's witnesses and Qualcomm's testimony.

In addition to squeezing profit margins of rivals, the FTC also alleges Qualcomm used incentive funds tied to chip sales to provide smartphone makers with a break on high royalties – a move that kept the royalty rate high, according to the FTC.

And Qualcomm entered into a de facto exclusive chip supply deal with Apple that slowed down Intel from landing high-volume deal to supply iPhones.

Milici said the same market dynamics that led to Qualcomm gaining monopoly power in 3G and 4G wireless chips is likely to play out again with new, high-speed 5G technology, which will begin rolling out this year.

The agency is asking Judge Koh to force Qualcomm to change its business practices that are deemed anti-competitive.

"There is a significant risk that what the industry saw play out in 3G and 4G will play out again in 5G," said Milici.

Qualcomm lawyer Bob Van Nest of Kiker, Van Nest and Peters, argued that the FTC has failed to prove that Qualcomm harmed competition. Instead, Van Nest said Qualcomm earned its market position through superior innovation and better products.

"The market is thriving," said Van Nest. "This is a dynamic and innovative market."

Qualcomm has been losing market share to MediaTek and Intel steadily since 2015, when they began to catch up to Qualcomm's better performing chips, said Van Nest. Intel is now the sole modem chip supplier to Apple's latest iPhone models.

The company claims that the FTC and its antitrust expert, UC Berkeley economist Carl Shapiro, have come up with a theory of competitive harm that is not borne out in the marketplace, where prices for smartphones and data are falling while devices pack on powerful new capabilities.

"Shapiro is all about theory but no empirical facts to back it up," said Van Nest. "He simply ignores what happened in the market."

Qualcomm's economic expert countered the FTC theory of harm by studying market data - though the FTC poked holes in his methodology.

Still, Qualcomm believes the FTC failed to prove under antitrust laws that Qualcomm's conduct was anti-competitive or that its negotiated royalty rates were artificially inflated because of its business practices.

Companies that testified that they felt threatened are "all big sophisticated companies with their own leverage and who no doubt want to pay less for Qualcomm's technology," said Van Nest. "The testimony was completely self-serving."

Qualcomm's licensing rates were set several years before it even began selling chips, said Don Rosenberg, general counsel for the San Diego company. He believes they "fairly reflect" the value of its patent portfolio.

"The FTC hasn't come close to meeting its burden of proof in this case," said Rosenberg in a statement. "All the real world evidence presented at trial show Qualcomm's years of research and development and innovation fostered competition and growth for the entire mobile economy to the benefit of consumers."

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