By Brent Kendall and Asa Fitch
A federal appeals court on Tuesday threw out a sweeping antitrust judgment against Qualcomm Inc., ruling the federal government didn't prove the dominant cellphone chip maker engaged in illegal monopolization.
The San Francisco-based Ninth U.S. Circuit Court of Appeals ruled unanimously that the Federal Trade Commission hadn't shown that Qualcomm's core business practices related to its cellphone chips and patents were anything more than lawful attempts at profit maximization.
San Diego-based Qualcomm "has asserted its economic muscle with vigor, imagination, devotion, and ingenuity. It has also acted with sharp elbows -- as businesses often do," Judge Consuelo Callahan wrote for a three-judge panel.
Judge Callahan said it wasn't the court's job "to condone or punish Qualcomm for its success, but rather to assess whether the FTC has met its burden...to show that Qualcomm's practices have crossed the line to conduct which unfairly tends to destroy competition itself. We conclude that the FTC has not met its burden."
The decision served as a major victory for Qualcomm after years of litigation, and its shares initially jumped more than 4%, then ceded some of those gains during a broader market decline.
Don Rosenberg, Qualcomm's general counsel, called the decision a validation of the company's business model that underscored the contributions the company had made to the industry.
Ian Conner, director of the FTC's bureau of competition, said the ruling "is disappointing and we will be considering our options." The commission could ask for a rehearing of the case with the full court participating, or potentially seek Supreme Court review. But the FTC's strategic options are complicated because the commission itself has been divided over the lawsuit, and the Justice Department, which shares antitrust authority, has opposed it.
The case dates back to the final days of the Obama administration, when the FTC sued Qualcomm and challenged a central company practice the commission described as "no license, no chips."
The FTC said Qualcomm enjoyed monopolies in two types of modem chips and adopted a framework in which phone makers couldn't purchase those chips for their devices unless they also paid to license Qualcomm patents covering a range of its intellectual property. That structure made it difficult for phone makers to challenge Qualcomm's royalty rates, and the arrangement also meant those manufacturers were paying Qualcomm royalties even if they used a competitor's chips in their phones.
Qualcomm said it achieved its market position lawfully, developing and investing in breakthrough technologies, an argument accepted by the appeals court. The company argued its licensing practices were well-grounded because every cellphone invariably uses its patented innovations.
Tuesday's ruling tossed out a decision issued last year by U.S. District Judge Lucy Koh in San Jose, Calif., who ordered Qualcomm to change its business practices after concluding the chip designer improperly leveraged its dominance to keep tight reins on the industry.
Qualcomm has been able to maintain business as usual during the litigation because the Ninth Circuit previously put Judge Koh's ruling on hold while it considered the company's appeal.
The appeals court rejected all of Judge Koh's central conclusions that Qualcomm's tactics unlawfully harmed rival chip makers and phone manufacturers, and it cast doubt on using antitrust laws to challenge how a company wields its patents, which give intellectual-property owners the right to exclude competitors from using their inventions unless they pay licensing fees.
"The opinion goes a long way toward saying that antitrust has no role to play in reviewing patent use and misuse," said Wayne State University law professor Stephen Calkins. But the ruling, he said, also adopted a flawed analysis of how to evaluate alleged harms to customers, which could give the FTC an opening to ask for the case to be reconsidered.
The ruling highlighted the reluctance of some courts to intervene in fast-moving tech markets. "We decline to ascribe antitrust liability in these dynamic and rapidly changing technology markets without clearer proof of anticompetitive effect," Judge Callahan wrote.
The case has unfolded amid unusual circumstances. FTC leadership changed after President Trump took office, but the commission's current chairman, Joseph Simons, has been recused in the case and the other four commissioners, two Republicans and two Democrats, have been deadlocked, leaving a potential legal settlement with the company out of reach.
Adding to the drama, the Justice Department, which shares antitrust enforcement authority with the FTC, last year waded into the litigation -- in support of Qualcomm. A DOJ spokeswoman declined to comment.
For Qualcomm, the decision is a long-awaited vindication. The case had threatened to force the company to restructure its business and renegotiate licensing deals with its customers, denting a highly profitable patent royalty division.
The company earns most of its revenue from selling chips, but the licensing division has much higher margins and accounted for more than half of its earnings before taxes in its latest quarter.
While the company is still facing an investigation from European antitrust authorities, the decision removes one of the last major hurdles after several years of monumental business and legal challenges.
Qualcomm was the subject of a $117 billion hostile takeover bid by Broadcom Inc. that Mr. Trump blocked in 2018 on national-security grounds. Qualcomm is a leading developer of technologies that underpin superfast 5G communications technology and has come to be seen as a national champion during growing technological competition with China.
In recent years, the company has also faced pressure from an activist investor and prominent disputes with customers, including Apple Inc., which filed suit over the company's licensing practices at around the same time the FTC challenged them. Qualcomm and Apple settled their differences out of court last May. The company's other major remaining licensing dispute, with Chinese telecom giant Huawei Technologies Co., was settled in July.
"Over the last five years it's been one thing after the other," said Stacy Rasgon, an analyst at Sanford Bernstein & Co. The FTC case, he said, had threatened to be especially damaging because it went to the heart of the company's business model.
Write to Brent Kendall at firstname.lastname@example.org