Tantra Analyst

The fate of FTC’s case after Qualcomm’s settlement with Apple

While the final decision on the FTC vs. Qualcomm case is still pending from the last two months, the new developments have put the very premise of FTC’s case in question. The details revealed during the Apple vs. Qualcomm trial and the ensuing settlement are making the pillars of the FTC case crumble. Everybody is eagerly waiting for the FTC’s next move, and wondering how all of this will affect Judge Koh’s final decision, if she eventually has to give one.

One might ask, “What is the relevance of the Apple vs. Qualcomm litigation on the FTC case?” Well, Apple was one of the key witnesses and a major force behind the FTC case. The underlying principles, claims, and counterclaims are same between the two, so much so that Apple’s main arguments presented during the case with Qualcomm were almost verbatim to what was put forward in the FTC trial. So, both cases are undeniably intertwined, and the result of one will affect the other.

FTC’s claims are in serious jeopardy

At a very high-level, the majority of FTC’s allegation can be combined into three claims:

1. Qualcomm’s licensing practices are not compliant with FRAND (Fair Reasonable and Non-Discriminatory) terms, and that has harmed the cellular industry, including Apple

2. Licensing at the device level is not justified

3. Qualcomm’s alleged market power combined with its licensing policies have harmed competitors such as Intel

Let’s evaluate the merits of each of these claims, especially in the wake of the settlement and the new information it has brought to light.   

Apple was one of the strongest forces behind FTC’s case against Qualcomm. The documents revealed during the Apple vs. Qualcomm case show that the ultimate reason behind Apple’s litigation (including  FTC case) was to reduce its royalty cost. There was no alleged harm. Even during the trial, the FTC failed to produce any concrete evidence to show the harm to the industry caused by Qualcomm’s licensing practices. Now, Apple signing a long-term licensing contract as part of the settlement clearly shows that Qualcomm’s licensing practices are indeed fair and market driven. Furthermore, the other over one hundred licensing contracts Qualcomm has signed with many OEMs including majors such as Samsung, and LG proves this point as well.  All of this debunks FTC’s first claim.

As it became very apparent during the trial, licensing at the device level is a decades-old industry norm. All the Intelectual Property (IP) holders practice this because it is the most efficient and practical way to capture the value of IP. Stipulating a cap on the maximum device price for license fee calculations makes the practice even more meaningful and fair. As disclosed during the trial, Qualcomm’s licensing fees are up to 5 percent of the wholesale price of the phone, with a device price cap of $400. This license includes a portfolio of more than 130,000 Standard Essential Patents (SEPs) and non-Standard Essential Patents (non-SEPs). For reference, in another related case between Apple and Qualcomm in San Diego, the jury awarded $1.41 per device to Qualcomm for just three non-SEPs. That is a far cry when compared to the $7.5 for every iPhone that Apple was paying before the dispute started. So again, FTC’s second claim has no merit. On a side note, If you would like to know more about patents and licensing, check out my explainer articles here: Part-1 and Part-2.

There was no dearth of drama on the day Apple and Qualcomm settled the dispute. The settlement news broke while the opening statements were still being presented in the court. The Qualcomm’s stock shot up by record levels immediately after the settlement. Mere hours after the settlement news, Intel announced their decision to exit the 5G smartphone modem business. Some might think that Intel decision to quit proves FTC’s claim of harm to competitors. However, closer scrutiny reveals a different story.  

By Intel’s own admission, the reason for their decision was Apple signing a multiyear modem supply deal with Qualcomm, as part of the settlement. As publically discussed in many forums, the most likely reason for Apple to ditch Intel in favor of Qualcomm was the realization that Intel wouldn’t be able to meet Apple’s hefty 5G modem needs. This indeed is a major miss by Intel, considering that they are currently the sole modem supplier to Apple’s latest iPhone. Their inability to deliver the right modem solution for such a large and almost guaranteed opportunity clearly shows a profound and fundamental flaw in Intel’s operations and execution strategy. By all counts, 5G was a level playing field for Intel as well as everybody else in the race including Qualcomm, and Intel failed to deliver.  In such a case, it is reasonable to argue that, this might as well be the case with 4G LTE. That means, whatever harm the FTC has claimed for Intel in 4G LTE was because of its inability to deliver, and not because of Qualcomm’s alleged market power or licensing policies. This proves that FTC’s third claim is completely flawed as well.

Who stands to benefit from FTC trial now?

With Apple and Qualcomm settling, and Intel exiting 5G smartphone modem market and mulling strategic options for its modem business, the question arises, “Who stands to benefit now from the continuation of FTC case?” The surprising answer is China’s Huawei, as it was FTC’s third collaborator along with Apple and Intel. This is such an unfortunate and disgraceful situation that an arm of the US government is directly helping a foreign entity, against a US company who is heralded as the country’s 5G leader. This is even more ironic and embarrassing, considering that the US government has virtually banned Huawei for national security reasons!

What could be the possible outcome?  

With all the major claims of the FTC discredited, its case is in serious jeopardy.  As Judge Koh noted during the closing stages of the trial, this case is very complex with a huge amount of evidence to examine. The hurried summary judgment that Judge Koh gave in the early part of the trial, the radical remedy that the FTC is seeking, and the recent developments, complicate the case even further.

The FTC didn’t make a strong case, to begin with, it looks even weaker now. That means, it is almost impossible for Judge Koh to give a judgment that might permanently alter cellular IP licensing regimen being practiced for decades. In my view, the only possible option for the FTC now is to settle with Qualcomm and save its face, especially considering that anything other than that will help Huawei. I am sure Judge Koh will be happy with that outcome as well. Any decision other than that will surely be challenged in the appellate court and most likely be overturned.