Judge's ruling is bad for Qualcomm, good for phone manufacturers

Back in May, Judge Lucy Koh ruled that Qualcomm's business practices are anti-competitive. The judge, already known for presiding over the iconic Apple v. Samsung patent trial sat through the FTC v. Qualcomm non-jury trial held earlier this year. Judge Koh found that the chipmaker's business practices violated antitrust laws. These included Qualcomm's "no license, no chips" policy and its failure to license standard-essential patents to competitors at a fair, reasonable and non-discriminatory (FRAND) manner. These are patents that companies need to license so that their products can meet technical standards. Qualcomm was also called out by Judge Koh for charging royalties based on the retail price of a phone instead of just the cost of its chips.

Of course, Qualcomm says that it will appeal the decision since it requires the company to renegotiate its contracts and licensing agreements with manufacturers. Qualcomm is also complaining that all of these negotiations can make it difficult for it to complete talks with phone producers who want to purchase Qualcomm's 5G modem chips. And the ruling would force the company to work out deals with its rivals over licensing of its standard-essential patents.

Qualcomm also is seeking a stay of the decision until it exhausts the appeals process. This way it doesn't have to go through the whole exhaustive renegotiation process and then reverse the new deals if it wins on appeal. Even though that might make sense to some, Reuters reported Wednesday that Judge Koh has denied Qualcomm's request. A spokesman for the chipmaker says that it will immediately request a stay from the 9th U.S. Circuit Court of Appeals.

The FTC v. Qualcomm trial was held in January and featured testimony from employees of several phone manufacturers. Many testified about Qualcomm's onerous terms for licensing its IP and how it bases the royalties it charges manufacturers on the entire retail price tag of a phone. So instead of paying a percentage of a $20-$40 part for each unit sold, phone manufacturers were charged a percentage of retail prices amounting to $400 and up for each phone rung up with a Qualcomm part. This is the difference between the chipmaker receiving dollars per phone or pennies per phone.

One of those who took the stand was Apple supply chain executive Tony Blevins. At the time, Apple and Qualcomm were not on speaking terms and both companies had filed multiple suits against each other. But that all changed in April after closing arguments were heard in a trial that pitted Apple against Qualcomm. A settlement was announced that resulted in Apple paying Qualcomm an undisclosed amount (believed to be as much as $4.5 billion) and in return, Apple received a licensing agreement for six years (with a two-year option) and a multi-year chip supply agreement. In addition, both sides dropped all lawsuits filed against each other.

One phone manufacturer happy with Tuesday's decision is LG. It doesn't want to see Koh's decision stayed because it is currently negotiating a licensing and chip supply deal with Qualcomm and is worried that it might be forced to sign another "unfair" deal with the company. And needless to say, the FTC was also against a ruling that would stay the decision.

Unless the decision is stayed, LG and other phone manufacturers will probably be working out new deals with Qualcomm while the appeals process goes on. It could take more than a year before a final decision is rendered by an appellate court. Wall Street weighed in with its decision and in after-hours trading on Wednesday (the market closed regular trading early for the July 4th holiday), the stock dropped by $2.49 or 3.25% to $76.63.