Seoul/San Francisco — South Korea’s antitrust watchdog slapped Qualcomm with a record 1.03-trillion won ($853m) fine for breaking antitrust law, the latest in a string of government actions that threaten the US chip maker’s most profitable business.
The South Korean Fair Trade Commission said on Wednesday that the company licensed its key patents only to mobile-phone makers and did not negotiate the terms of its licences properly. The agency said Qualcomm coerced customers into signing patent licence contracts when selling its chips used in mobile phones in the country, and did not pay fairly for the use of patents held by other phone makers.
The decision from the home country of Samsung Electronics adds to investor concern that the San Diego-based chip maker, which is also the subject of investigations in the US and Europe, may struggle to defend its lucrative licensing business. Qualcomm gets most of its profit — $6.5bn in its most recent financial year — from selling the right to use technology that is fundamental to all modern phone systems.
Qualcomm, calling the decision "unprecedented and insupportable", said it would appeal against the decision in a Seoul court. The KFTC ruling does not go into effect immediately, and Qualcomm will seek a stay from the court while it appeals, said Don Rosenberg, the company’s general counsel.
"The KFTC ruling will not just benefit local handset makers but other global chipset makers too, so today’s ruling from the commission seems a bit broader and stronger than that of the China’s last year," said Jung Dong-joon, a patent lawyer at SU Intellectual Property. "Qualcomm sales accounts for about 20% in the Korean market and that’s a significant market for Qualcomm."
For Samsung, the world’s biggest phone maker, and LG Electronics, the ruling opens up the possibility that they may be able to pay lower rates to Qualcomm. When Qualcomm settled an investigation by Chinese regulators last year, it accepted a lower rate charged on phones sold in that country. Samsung is Qualcomm’s second-largest customer, accounting for about 11% of its sales, according Bloomberg’s supply chain analysis. The US company also designs and sells chips that are the main component in smartphones.
"Qualcomm, a holder of standard-essential patents as well as a monopolistic service provider of modem chips from manufacturing to sales, has violated its agreement to license patents on fair reasonable and nondiscriminatory terms, known as Frand," the commission said. Qualcomm offers the rights to use all of its standard-essential patents, some of which cover the core technology behind modern wireless systems, in a combined package. Some of those inventions are used in industry standards.
Apart from the fine, the commission wants Qualcomm to let chipset makers access its key patents and refrain from imposing unfair conditions on customers when signing contracts. The Korean agency also said Qualcomm should make standard-essential patents available for separate licensing rather than bundling them with chipset sales. And the US company should accord greater value to other companies’ patents when accounting for them in cross-licensing agreements, the commission said.
Qualcomm stock was mostly unchanged in after-hours trade. Samsung was down less than 1% at the close in Seoul, while LG was up 1.2%.
As in other cases that Qualcomm had won, the company expected courts to side with it as its licensing business followed industry practices in place for decades, Rosenberg said. Profits from licensing fees were crucial to funding its industry-leading research and design efforts and maintaining Qualcomm’s competitive edge.
"We’ve seen time and again that those who actually apply the rule of law to this come to the conclusion that nothing is wrong," Rosenberg said. "We’re going to fight this the way we fought all of them. We think we’ll have a much better time with the Korean courts than we had with the Korean Fair Trade Commission. We have a lot of faith in the independence of the courts."
In 2009, the commission fined Qualcomm 260-billion won for deterring competition through discriminatory charges. KFTC ordered the chip maker to stop charging higher royalties to customers who buy chips from rivals and to cease offering rebates to handset makers who buy products mainly from Qualcomm. That case is under appeal with the Korean Supreme Court.
The US chip maker has grappled with regulatory challenges around the world. It was fined $975n last year by China, ending an inquiry that threatened the US company’s growth in the world’s biggest mobile market.
The European Commission sent antitrust objections to Qualcomm last December, saying the chipmaker had paid "significant amounts" since 2011 to an unidentified major smartphone and tablet manufacturer in return for using Qualcomm’s chipsets exclusively in its products. It may also have sold chipsets below cost from 2009 to 2011 to crush smaller competitor Icera, now owned by Nvidia, the commission said.
Resolving patent wrangles remains key to shoring up Qualcomm’s business. Last month, the chip maker delivered a sales forecast for the December quarter in line with analysts’ estimates, saying it had signed technology-licensing agreements with smartphone makers in China that previously held back payments.
Bloomberg
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