Qualcomm faces possible fine from South Korean antitrust authorities over licensing practices

Qualcomm (NASDAQ:QCOM) said South Korean antitrust authorities have accused the chipset giant of violating South Korean law through its licensing practices and proposes to fine the company. The disclosure about the investigation, which was first launched earlier this year, is the latest in a series of tussles the company has had with antitrust regulators worldwide over its licensing business, which is how Qualcomm derives the majority of its profit.  

In a statement, Qualcomm said it recently received the Korea Fair Trade Commission's (KFTC) staff-generated Case Examiner's Report (ER), which starts a process that affords Qualcomm the ability to respond to allegations and defend itself. The report alleges, among other things, that Qualcomm does not properly negotiate aspects of its licenses, and that its practice of licensing patents only at the device level and requiring that its chipset customers be licensed to its intellectual property violate South Korean competition law.

The report proposes remedies, including that Qualcomm change certain business practices and face a fine.

"The allegations and conclusions contained in the ER are not supported by the facts and are a serious misapplication of law," Qualcomm said in its statement. "Our patent licensing practices, which we and other patent owners have maintained for almost two decades, and which have facilitated the growth of the mobile communications industry in Korea and elsewhere, are lawful and pro-competitive. Device level licensing is the worldwide industry norm, and Korean companies have long enjoyed the benefits and protections of access to our patents, which cover essentially the entire device."

Qualcomm said it plans to "vigorously defend" itself at KFTC hearings and that it remains hopeful that the commission will reject the conclusions of the report. "We expect the process to take some time. Until then, we intend to continue to invest in leading technologies that drive the industry forward and share those innovations through its licensing program."

A spokesman for KFTC said they can't comment on ongoing investigations, according to the Wall Street Journal.

The new stage of the South Korean probe is the latest example of the pressure Qualcomm is facing around the globe from regulators. In July the European Commission opened two formal antitrust investigations into Qualcomm's sales practices in the baseband chipset market. The first is looking at whether Qualcomm has violated the European Union's antitrust rules that prohibit the abuse of a dominant market position by offering financial incentives to customers on condition that they buy the baseband chipsets exclusively or almost exclusively from Qualcomm. The second is exploring whether Qualcomm engaged in "predatory pricing" by charging prices below costs to push competition out of the market. Qualcomm has said it is cooperating with the EC but believes "that any concerns are without merit."

In February Qualcomm agreed to pay a $975 million fine and change its licensing practices to settle a Chinese antitrust investigation. Under the terms of the settlement, Qualcomm agreed to offer licenses tied to its current 3G and 4G essential Chinese patents separately from licenses to its other patents. Qualcomm also agreed to charge a 5 percent royalty rate for most 3G devices in China and 3.5 percent for most 4G devices.

And in November 2014 Qualcomm disclosed that the U.S. Federal Trade Commission had been looking into licensing business since September 2014, including into potential breaches in commitments to license standards-essential patents on fair, reasonable, and non-discriminatory terms. Qualcomm has said it continues to cooperate with the FTC as it conducts its investigation.

Earlier this month Qualcomm reported quarterly earnings that beat analysts' expectations, even as its sales and profit fell sharply from a year ago. However, Qualcomm's expectations for its current quarter fell below analysts' forecasts, as the chipset giant is facing headwinds in negotiating new patent licensing deals with Chinese smartphone makers. In a bright spot, Qualcomm CEO Steve Mollenkopf said the firm is seeing strong customer interest in its high-end Snapdragon 820 "among leading OEMs with more than 60 designs overall."

For more:
- see this release
- see this Bloomberg article
- see this Wall Street Journal article (sub. req.)
- see this San Diego Union-Tribune article

Related articles:
Qualcomm beats analysts' expectations in Q3, but struggles to ink Chinese licensing deals
Qualcomm slashes 1,314 jobs in San Diego as part of restructuring
Qualcomm's new Snapdragon 820 chipset will enable LTE-U in phones starting in 2016
Qualcomm to review whether to split up chipset and licensing units, will slash up to 15% of workforce

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