By Brent Kendall and Asa Fitch 

SAN FRANCISCO -- A federal appeals court on Thursday is poised to consider Qualcomm Inc.'s appeal of a ruling that found it was illegally maintaining a monopoly in cellphone chips and extracting unreasonably high royalty rates for patents essential to the industry.

The case cuts to the heart of Qualcomm's business model and promises broad stakes for two areas of the law that are often in tension: antitrust, which is designed to promote competition, and patent law, which gives intellectual-property owners the right to exclude competitors from using their inventions.

The litigation also comes with a highly unusual twist: Two different government agencies that enforce the antitrust laws disagree on whether Qualcomm's conduct is unlawful and will argue against one another at the Ninth U.S. Circuit Court of Appeals.

San Diego-based Qualcomm designs and markets chips that facilitate cellphones' communications with cell towers. It owned about 43% of the global market for such chips, according to a Strategy Analytics report from last year's second quarter.

The company also has a licensing arm that collects royalties when others use a portfolio of more than 140,000 patents world-wide, many of which cover key telecommunications technologies. Licensing revenues are only a fraction of chip sales, but the division is a driver of Qualcomm's overall profits because its margins are much better.

The Federal Trade Commission sued Qualcomm in January 2017, while the agency was in the final days of Democratic control under the Obama administration. It focused on a central Qualcomm business policy that FTC lawyers described as "no license, no chips."

The FTC said Qualcomm enjoyed monopolies in two types of modem chips and wouldn't sell those chips to device makers unless they also paid to license a broader portfolio of Qualcomm's patents. That structure made it difficult for phone makers to challenge Qualcomm's royalty rates, and the arrangement also meant they were paying Qualcomm royalties even if they used a competitor's chips in their phones, the commission alleged.

Qualcomm's policy put competing chipmakers at a disadvantage because it was "economically and practically equivalent to a naked tax on rivals' sales," the FTC said in a court brief.

Apple Inc. sued on similar grounds, but the iPhone maker and Qualcomm settled their differences in April last year, dropping all litigation and reaching a new chip-supply agreement.

U.S. District Judge Lucy Koh in San Jose, Calif., ruled against Qualcomm last May. She agreed the chip designer improperly leveraged its market dominance and ordered Qualcomm to change the way it does business. If her ruling holds, Qualcomm would be forced to renegotiate existing patent licenses without taking into account chip-supply deals, which could dramatically lower licensing revenues.

But a few months after Judge Koh's decision, the Ninth Circuit stayed the effect of that ruling for now, allowing Qualcomm to continue business as usual while the appeals court gives full consideration to the case. The stay signaled that at least some of the chip makers' legal arguments could be successful on appeal. Judge Koh may have been on tenuous ground when she found that Qualcomm had obligations to license certain industry-essential patents to rivals, the stay order suggested.

Qualcomm says it acquired its market position through ingenuity and business acumen, and argues that its licensing practices make sense, because every cellphone invariably uses its patented technologies. Through the royalties it collects from phone manufacturers, Qualcomm "simply obtains the reward for the $60 billion it has invested over time in technology that nay-sayers said would never take hold," the company said in a court brief.

Qualcomm also noted that rival chip makers don't pay royalties on its patented technologies, and it argued those rivals aren't impaired by its practices.

The company has gained a powerful ally in the past year: the Department of Justice.

The department, with Trump administration antitrust enforcers at the helm, filed a brief saying Judge Koh made fundamental errors and imposed harsh penalties that could hurt innovation and national security. The Justice Department said Qualcomm's licensing practices weren't uncommon, and that charging high royalties wasn't necessarily harmful to competition.

Qualcomm is a leading U.S. purveyor of superfast fifth-generation cellular technology, and the U.S. sees the company's health as crucial to maintaining a 5G advantage over China, which is rapidly deploying the networks.

The Justice Department will argue alongside Qualcomm at Thursday's hearing.

The case, meanwhile, has continued at the FTC, the result of an unlikely split that has made the litigation difficult to settle.

The FTC has an entirely new cast of commissioners -- and a Republican majority -- since the suit initially was filed. But FTC Chairman Joseph Simons is recused, leaving a 2-2 split between the remaining Republican and Democratic commissioners that would require Democratic support for any negotiated resolution of the case.

 

(END) Dow Jones Newswires

February 13, 2020 12:13 ET (17:13 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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