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Qualcomm's biggest threat to their current level of profitability is that they could be forced to stop seeking a percentage of the retail price of a cellular de

Qualcomm's biggest threat to their current level of profitability is that they could be forced to stop seeking a percentage of the retail price of a cellular device directly from the device makers. Qualcomm's strategy has been to refuse to license their standards essential patents to their cellular modem competitors, and instead go after device makers. Judge Koh in the Qualcomm vs. FTC antitrust trial has already issued a ruling that Qualcomm may not continue to refuse to license it's standards essential patents to it's competitors. https://jolt.law.harvard.edu/digest/ftc-v-qualcomm-standard-essential-patent-holders-must-license-to-competitors https://jolt.law.harvard.edu/digest/ftc-v-qualcomm-standard-... Apple sought a ruling in this case that once Qualcomm's rival modem makers received a license to Qualcomm's standard essential patents on FRAND terms, Qualcomm's patents would be exhausted, and they could not continue to seek additional fees (a percentage of the retail price of the entire device) from the device maker. This has a huge effect on profitability because the courts have already shut down Google's attempt to price gouge Microsoft for a percentage of the retail price of Microsoft's XBox over standards essential FRAND encumbered patents back when Google owned Motorola. >In a closely watched case, a federal judge has determined that Motorola is entitled to millions -- not billions -- of dollars in compensation for Microsoft's use of certain standard-essential patents. U.S. District Judge James Robart ruled Thursday that Microsoft should pay Google's Motorola Mobility unit $1.8 million a year in royalties for use of wireless and video coding patents it used in the Xbox and its smartphones. Motorola had demanded Microsoft pay royalties of $4 billion for use of patents that are part of the H.264 video and 802.11 wireless standards, which is baked into Windows and the Xbox video game console. Microsoft was willing to pay a royalty, but not at the 2.25 percent of the product price that Motorola has sought. https://www.cnet.com/news/court-sides-with-microsoft-over-motorola-patents-used-in-xbox/ https://www.cnet.com/news/court-sides-with-microsoft-over-mo... Given the percentage of Qualcomm's bottom line that comes in as licensing fees, getting paid a FRAND appropriate licensing fee set by the courts instead of a percentage of the retail price of the whole device would have been absolutely disastrous for Qualcomm's bottom line.

mises 8y ago
I'm not sure I understand the rationale behind Koh's ruling. Why ought a firm be forced to license IP? The Constitution patent clause grants Congress the right to "To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." Would this ruling not, under that clause, be unconstitutional? Qualcomm is making use of its exclusive right. I agree they've got some rather bad business practices, and the FTC could try to get a ruling that they had to only charge for the chip, but I don't understand the way that ruling is worded. I feel like the media model, the whole "you only buy a license" mess, is leaking into physical stuff. You now must buy not only a chip but a license? Why would a company choose that business model? To summarize, I feel that it's not the best business practice, but don't understand why Koh ruled as she did and how she could justify the ruling's constitutionality.
- wbl 8y ago
  Because they signed agreements as parts of the standards process to do so.
  - jxdxbx 8y ago
    right. and SEPs only have value because they are included in a standard. not all of the Q patents at issue are technically SEPs though. That said, just because you have a patent, doesn’t mean you can behave anticompetitively around licensing it. it’s your car but you can’t run over pedestrians.
- dev_tty01 8y ago
  It is the law around "standard" essential patents. Company X develops technology and then works the standards process to make their technology the standard. Now anyone who wants to use the standard must license the technology from company X. Phones only work if everyone uses a published standard. In order to have something approved as the standard, company X has to agree beforehand that they will license the tech to everyone at reasonable rates. This was core to Apple's argument. Qualcomm was insisting on unreasonable licensing rates for standards essential patents. I don't know who was right or wrong, but that was the position.
  - mises 8y ago
    They made it a standard. GSM branched off years ago for this exact reason. Phones currently work with two different ones. More importantly, point me to the clause in the Constitution that says, "unless other people really really want it". If any thing, would restriction of a standard not promote a competitor? For years, h.264 licensing was necessary. Now we have AV1.
    - deleted 8y ago
      [deleted]
    - GeekyBear 8y ago
      As part of the standards setting process, Qualcomm voluntarily entered into a binding legal agreement to license those patents that are necessary to implement the standard to any competitor who wanted a license, and to license them under FRAND (Fair, Reasonsble And Non Discriminatory) terms. Should contracts only be legally binding until you no longer like the terms you have agreed to?
tooltalk 8y ago
It's a bit more nuanced than that. Under ETSI, where most of QCOM's SEPs (standard essential patents) are declared, licensing SEPs only to end-device makers is consistent with FRAND terms. It's essentially a contract law under French law. While there aren't too many case laws to precise define what is deemed FRAND, in Dec 2018, judge Gilstrap ruled in support of end-device licensing scheme in HTC vs Ericsson ("District Court Holds That FRAND Commitment Does Not Require Licensing at Chip Level"). Another thing to consider is that most SSO's (standard setting organizations, eg, ETSI) usually don't set out precise terms of licensing rates or basis, in part their fear of breaking local antitrust laws*. Instead, ETSI allows reliance on existing industry common practices and the courts have used "comparative analysis" (ie, licensing practices by similarly situated SEP holders) to determine what is "fair," "reasonable," and "non-discriminatory." So for instance, in Microsoft vs Moto, Moto's patents weren't as large in number or significant in contribution to justify Moto's demand, in addition to being completely out of whack with the common licensing practices embraced by the industry. By contrast, it's widely accepted that Qualcomm is a significant contributor to various wireless standards and holds large seminal/essential SEPs -- QCOM's case is nothing like Motorola's. Further, in the wireless business, it's a common industry practice for SEP holders to collect royalties at the end of the supply chain, ie end-device makers, for simplicity and maximum monetization; and this custom has been embraced and practiced for the past two decades. In a pre-trial decision last November, however, Apple's hometown judge Lucy Koh, sided with the FTC that under ATIS/TIA FRAND obligation (yes, there are competing SSOs with overlapping FRAND terms apparently). I'm not entirely sure why Koh's novel decision has precedence over ETSI FRAND where QCOM's SEPs are actually declared, but I'm pretty sure it would be appealed and reversed in next year or two.
- AnthonyMouse 8y ago
  > Further, in the wireless business, it's a common industry practice for SEP holders to collect royalties at the end of the supply chain, ie end-device makers, for simplicity and maximum monetization; and this custom has been embraced and practiced for the past two decades. That seems like a weak argument given how slowly courts and regulators move on things like this. By the time they get around to telling you to stop doing something you're already claiming that it's an established practice. And there is no simplicity there because there are more end device makers than chip makers, so "maximum monetization" is precisely the issue -- they're claiming more than they brought to the table using a manifestly unreasonable practice. Surely Qualcomm is not entitled to the same percentage of a $1M house that a wireless router is installed in as they are of the $100 wireless router to begin with, or the same percentage of a $100M commercial jetliner when it has in-flight wireless. They are not responsible for any of the difference in value between a $100K house and a $1M house, what reasonably entitles them to a percentage of the difference? If one iPhone is worth $300 more than another because it has a bigger screen and faster processor but the exact same wireless capability, why should Qualcomm receive any of the additional money?

mises 8y ago

I'm not sure I understand the rationale behind Koh's ruling. Why ought a firm be forced to license IP? The Constitution patent clause grants Congress the right to "To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." Would this ruling not, under that clause, be unconstitutional? Qualcomm is making use of its exclusive right. I agree they've got some rather bad business practices, and the FTC could try to get a ruling that they had to only charge for the chip, but I don't understand the way that ruling is worded. I feel like the media model, the whole "you only buy a license" mess, is leaking into physical stuff. You now must buy not only a chip but a license? Why would a company choose that business model? To summarize, I feel that it's not the best business practice, but don't understand why Koh ruled as she did and how she could justify the ruling's constitutionality.

wbl 8y ago
Because they signed agreements as parts of the standards process to do so.
- jxdxbx 8y ago
  right. and SEPs only have value because they are included in a standard. not all of the Q patents at issue are technically SEPs though. That said, just because you have a patent, doesn’t mean you can behave anticompetitively around licensing it. it’s your car but you can’t run over pedestrians.
dev_tty01 8y ago
It is the law around "standard" essential patents. Company X develops technology and then works the standards process to make their technology the standard. Now anyone who wants to use the standard must license the technology from company X. Phones only work if everyone uses a published standard. In order to have something approved as the standard, company X has to agree beforehand that they will license the tech to everyone at reasonable rates. This was core to Apple's argument. Qualcomm was insisting on unreasonable licensing rates for standards essential patents. I don't know who was right or wrong, but that was the position.
- mises 8y ago
  They made it a standard. GSM branched off years ago for this exact reason. Phones currently work with two different ones. More importantly, point me to the clause in the Constitution that says, "unless other people really really want it". If any thing, would restriction of a standard not promote a competitor? For years, h.264 licensing was necessary. Now we have AV1.
  - deleted 8y ago
    [deleted]
  - GeekyBear 8y ago
    As part of the standards setting process, Qualcomm voluntarily entered into a binding legal agreement to license those patents that are necessary to implement the standard to any competitor who wanted a license, and to license them under FRAND (Fair, Reasonsble And Non Discriminatory) terms. Should contracts only be legally binding until you no longer like the terms you have agreed to?

tooltalk 8y ago

It's a bit more nuanced than that. Under ETSI, where most of QCOM's SEPs (standard essential patents) are declared, licensing SEPs only to end-device makers is consistent with FRAND terms. It's essentially a contract law under French law. While there aren't too many case laws to precise define what is deemed FRAND, in Dec 2018, judge Gilstrap ruled in support of end-device licensing scheme in HTC vs Ericsson ("District Court Holds That FRAND Commitment Does Not Require Licensing at Chip Level"). Another thing to consider is that most SSO's (standard setting organizations, eg, ETSI) usually don't set out precise terms of licensing rates or basis, in part their fear of breaking local antitrust laws*. Instead, ETSI allows reliance on existing industry common practices and the courts have used "comparative analysis" (ie, licensing practices by similarly situated SEP holders) to determine what is "fair," "reasonable," and "non-discriminatory." So for instance, in Microsoft vs Moto, Moto's patents weren't as large in number or significant in contribution to justify Moto's demand, in addition to being completely out of whack with the common licensing practices embraced by the industry. By contrast, it's widely accepted that Qualcomm is a significant contributor to various wireless standards and holds large seminal/essential SEPs -- QCOM's case is nothing like Motorola's. Further, in the wireless business, it's a common industry practice for SEP holders to collect royalties at the end of the supply chain, ie end-device makers, for simplicity and maximum monetization; and this custom has been embraced and practiced for the past two decades. In a pre-trial decision last November, however, Apple's hometown judge Lucy Koh, sided with the FTC that under ATIS/TIA FRAND obligation (yes, there are competing SSOs with overlapping FRAND terms apparently). I'm not entirely sure why Koh's novel decision has precedence over ETSI FRAND where QCOM's SEPs are actually declared, but I'm pretty sure it would be appealed and reversed in next year or two.

AnthonyMouse 8y ago
> Further, in the wireless business, it's a common industry practice for SEP holders to collect royalties at the end of the supply chain, ie end-device makers, for simplicity and maximum monetization; and this custom has been embraced and practiced for the past two decades. That seems like a weak argument given how slowly courts and regulators move on things like this. By the time they get around to telling you to stop doing something you're already claiming that it's an established practice. And there is no simplicity there because there are more end device makers than chip makers, so "maximum monetization" is precisely the issue -- they're claiming more than they brought to the table using a manifestly unreasonable practice. Surely Qualcomm is not entitled to the same percentage of a $1M house that a wireless router is installed in as they are of the $100 wireless router to begin with, or the same percentage of a $100M commercial jetliner when it has in-flight wireless. They are not responsible for any of the difference in value between a $100K house and a $1M house, what reasonably entitles them to a percentage of the difference? If one iPhone is worth $300 more than another because it has a bigger screen and faster processor but the exact same wireless capability, why should Qualcomm receive any of the additional money?