Qualcomm Leans on Appeals, Trump's Help to Thwart Legal Setback





(Bloomberg) -- Qualcomm Inc., smarting from a major legal setback that could unravel its business model, will now look to an appeals process that historically has gone in its favor -- as well as to possible intervention from the Trump administration, which is eager to ensure the U.S. company remains competitive in 5G technology.

The San Diego-based chipmaker is dealing with the fallout from a decision by U.S. District Judge Lucy Koh, who sided with the Federal Trade Commission in a case brought in 2017 accusing the company of anticompetitive practices. Qualcomm is asking for a stay of Koh's decision and trying for a rapid appeal, where it may get support from other branches of the federal government, which in the past have indicated the company's importance to U.S. technology leadership and security outweigh questions about how it does business.

Koh's judgment on Tuesday, coming about a month after Qualcomm settled a worldwide legal fight with Apple Inc., is a heavy blow. She endorsed almost all of the FTC's accusations against Qualcomm and said the company will need to change the way it operates. A chief concern for shareholders is the order to renegotiate technology licensing deals with all major phone makers. Those agreements generate billions of dollars in high-margin revenue for Qualcomm each year.

If the chipmaker is forced to do that, customers such as Apple, Samsung Electronics Co. and Huawei Technologies Co. could cut what they pay to use patents underpinning how modern phone networks work. Such an action is exactly what the Trump administration's Justice Department was hoping to avoid when it recently asked the judge to limit the scope of any penalties she planned to levy against Qualcomm. Attorneys for the government had told Koh that an aggressive remedy could undermine innovation and the company's central role in commercializing 5G mobile networks.

Koh balked at the suggestion that she needed to hear more arguments three months after the 11-day trial concluded on Jan. 30. The Trump administration is now likely to support Qualcomm through its appeals process.

Qualcomm brought in more than $5 billion in licensing revenue last year, helping fuel an industry-leading research-and-design effort that makes Qualcomm's chips and inventions central to high-speed mobile data systems and devices. That leadership is seen as crucial for the U.S. by the Trump administration.

Qualcomm still exists as an independent company because of the administration's viewpoint. A hostile takeover bid from Broadcom Inc. was thwarted at the last minute by a presidential order in March 2018 that cited security concerns and fears the acquisition would lead to less investment in 5G.

Beyond any support Qualcomm gets from the administration, the company also has legal moves left to play out. Appeals and settlements are legal venues where Qualcomm has fared better than with initial decisions. The company's licensing model has been challenged for years in jurisdictions around the world.

In South Korea, home to Samsung, the U.S. chipmaker is appealing two rulings that it transgressed antitrust rules. Samsung, as part of a recent agreement with Qualcomm, won't oppose the appeal as one of rulings is re-examined. Japan's Fair Trade Commission this year reversed an almost decade old cease-and-desist order against Qualcomm related to licensing agreements. In Taiwan, home to its nearest direct rival MediaTek Inc., an initial ruling against Qualcomm's business practices was overturned. And in China, the biggest market for smartphones, the chipmaker emerged from an investigation by antitrust authorities with the right to charge licensing fees, albeit after paying a fine.

That record aside, if Koh's ruling were to stand, "it would have the potential to upend Qualcomm's licensing model, forcing them to renegotiate agreements with existing licensees, ostensibly at lower rates,'' according to Raymond James analyst Chris Caso.

The relief gained by the settlement with Apple and the hope for a future clear of costly legal entanglements, which had sent Qualcomm's stock rallying this year, is now on hold. Its stock dropped more than 11% on Wednesday.

Some still believe Qualcomm's negotiating and courtroom skills will win out.

"The ruling by Judge Koh in the FTC case versus Qualcomm may appear daunting, but in our opinion, they are unlikely to change the reality for the company or investors," according to Morgan Stanley analyst James Faucette.

--With assistance from Kartikay Mehrotra.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.

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