By Brent Kendall and Ted Greenwald
WASHINGTON -- The Federal Trade Commission on Tuesday sued Qualcomm Inc., alleging the semiconductor company engaged in unlawful tactics to maintain a monopoly on a type of chip used in cellphones.
The FTC, in a suit filed in a California federal court, alleged that Qualcomm used its position as the dominant provider of baseband processors, devices that enable cellular communications, to impose onerous terms on phone manufacturers and hobble competitors.
Qualcomm won't sell its processors unless a customer agrees to the company's preferred patent-licensing terms, which forces phone makers to pay elevated royalties to Qualcomm when they use a competitor's chips, the FTC alleged.
The complaint specifically highlighted Qualcomm's dealings with Apple Inc., saying that when the iPhone maker sought relief from high royalties, Qualcomm conditioned partial relief on Apple using Qualcomm's baseband chips exclusively from 2011 to 2016.
Qualcomm said it would fight the FTC's suit, which it said is based on flawed legal theory and "significant misconceptions about the mobile technology industry." The company said it has never withheld or threatened to withhold its chips to gain unfair licensing terms, and it accused the FTC of filing the complaint before it had all the facts.
Apple declined to comment.
Qualcomm shares fell 4% in 4 p.m. trading on the Nasdaq Stock Market, though shares regained some of those losses in after-hourstrading.
The commission also alleged that Qualcomm wrongly refused to license its "standard-essential" patents to competitors despite an obligation to do so.
"Qualcomm has engaged in exclusionary conduct that taxes its competitors' baseband processor sales, reduces competitors' ability and incentive to innovate, and raises prices paid by consumers for cellphones and tablets," the FTC said in its court filing.
The suit asks a federal judge to prohibit the alleged conduct and to take actions to restore a competitive landscape. The suit also seeks "redress" for Qualcomm's alleged violations, which potentially would allow a judge to impose monetary penalties.
The FTC's action came on a 2-1 partisan vote in the waning days of a Democratic majority at the commission. Current FTC Chairwoman Edith Ramirez, an Obama appointee, announced last week that she would step down on Feb. 10.
The FTC's current lone Republican, Commissioner Maureen Ohlhausen, dissented from the filing of the lawsuit. She is likely to become acting head of the agency after President-elect Donald Trump takes office.
"This is an extremely disappointing decision to rush to file a complaint on the eve of Chairwoman Ramirez's departure and the transition to a new administration, which reflects a sharp break from FTC practice," said Don Rosenberg, Qualcomm executive vice president and general counsel.
The FTC normally has five members but has been operating with three commissioners for nearly a year. When Ms. Ramirez leaves, the FTC will have three vacancies. It could take months for the Trump Administration to fill those openings, but an eventual Republican-majority at the FTC potentially would have the ability to take a different course of action regarding Qualcomm.
In the intervening months, the lawsuit could leave Ms. Ohlhausen overseeing a case she didn't support.
In dissent, she said the lawsuit "lacks economic and evidentiary support" and would "undermine U.S. intellectual property rights in Asia and world-wide."
The FTC's probe of Qualcomm has been long-running, but commission staffers only finished their investigation recently, and that is why the lawsuit came so late in Ms. Ramirez's tenure, according to a person familiar with the matter.
The FTC action is the latest of a series of recent regulatory challenges to Qualcomm's business model. The company got about two thirds of its $23.56 billion in revenue in its latest fiscal year from selling chips, but the majority of its pretax profit comes from royalties for its technology. It typically licenses its patents to handset makers as a comprehensive package, charging a royalty of up to 5% of the wholesale price of each device, whether or not it uses a Qualcomm chip. Qualcomm typically doesn't license intellectual property to other chip makers.South Korea's antitrust authority in late December said it would fine the company about $853 million for alleged violations, the highest such penalty levied on a company in that country. Qualcomm said it would contest that decision. The South Korean authority, like the FTC, demanded that Qualcomm cease selling chips to handset makers only if they buy a license. It also demanded that the company unbundle its patent licenses and offer them to chip makers.
Last year, Qualcomm agreed to a settlement with Chinese antitrust authorities that included a $975 million fine and required the company to alter its business practices. Chinese regulators, however, didn't challenge Qualcomm's model of charging royalties to handset makers.
In addition, The European Commission in late 2015 said it had charged Qualcomm with illegally paying a major customer to exclusively use its chips and selling chips below cost to force a competitor, Icera Inc.,out of the market.
Write to Brent Kendall at email@example.com and Ted Greenwald at Ted.Greenwald@wsj.com
(END) Dow Jones Newswires
January 17, 2017 19:26 ET (00:26 GMT)
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