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Qualcomm in the Korean dock over its business model

south korean flg

via Flickr © valeuf (CC BY 2.0)

  • Qualcomm could be fined US$853 in Korea
  • Regulator claims antitrust violations
  • Qualcomm maintains decision is a violation of due process rights owed American companies under the Korea-U.S. Free Trade Agreement 

Not quite the start to 2017 Qualcomm was looking forward to. Just as 2016 was closing out and Qualcomm was preparing to wow attendees at this week’s CES with its powerful new Snapdragon chips, came news that the South Korean regulator was ready to fine the US radio technology specialist around US$853 million for antitrust violations - the biggest fine ever dished out to a company in Korea and an echo of last year’s fiscal assault on Apple by the EU’s competition commission.

It’s not tax this time, but Qualcomm’s patent-based business model which has challenged the Korean authorities. After a three year investigation, Korea’s Fair Trade Commission has concluded that the way Qualcomm monetises its intellectual property via patent licensing, amounts to abusive business behaviour. Specifically, the regulator found that Qualcomm had breached Korea’s antitrust law by blocking access to its patents for some competing chip makers and, at the other end of its business model, forcing mobile phone manufacturers into one-sided license agreements by threatening to cut off the supply of critical phone chips to those that resisted its terms.

Another bugbear for the South Korean regulator is Qualcomm’s royalty model which, it claims, requires handset makers to buy big tranches of wireless-technology licenses, including many they don’t use. The commission also says Qualcomm requires phone vendors to provide their patents to Qualcomm free of charge.

In effect the commission is asking that Qualcomm change its business model because it is using its (increasingly dominant) market position to strong-arm mobile-phone makers into accepting ‘unfair’ conditions, according to the Korean commission’s head, Shin Young-son. To which you can almost hear Qualcomm’s lawyers saying “And your point is? Why have a dominant market position and a huge stash of patents if you can’t use them to gain an advantage in the market?”

Of course Qualcomm doesn’t say that, but the fact is that it has a long history of annoying regulators and competing tech companies with its aggressive stance over its intellectual property and its patent licensing policies, which tend to rake in around a third of its income.

Furthermore other jurisdictions may be keen to take on Qualcomm if the Korean regulator’s decision stands, perhaps opening the floodgates for more assaults on the San Diego-based giant.

Qualcomm not about to come quietly

Qualcomm says it will contest the decision and maintains that its licensing practices are long-standing in Asia and elsewhere and that the Korean regulator hadn’t questioned them in the past.  

It says it strongly disagrees with the Korean commission’s announced decision. Interestingly, as we enter a year which looks like it will throw a spotlight on international free trade deals and the terms and conditions which have become part and parcel of them,  Qualcomm believes the outcome is the result of a  flawed legal process and is “a violation of due process rights owed American companies under the Korea-U.S. Free Trade Agreement (KORUS).

“Qualcomm strongly believes that the KFTC findings are inconsistent with the facts, disregard the economic realities of the marketplace, and misapply fundamental tenets of competition law,” said Don Rosenberg, executive vice president and general counsel, Qualcomm Incorporated.

“Importantly, this decision does not take issue with the value of Qualcomm’s patent portfolio. Qualcomm’s enormous R&D investments in fundamental mobile technologies and its broad-based licensing of those technologies to mobile phone suppliers and others have facilitated the explosive growth of the mobile communications industry in Korea and worldwide, brought immense benefits to consumers and fostered competition at all levels of the mobile ecosystem.”

Qualcomm maintains that the royalties it’s received for sales of handsets into Korea accounted for less than three per cent of total Qualcomm licensing revenue during  fiscal 2016. On that basis the extent of fine, if not the overall finding, is flawed.

As usual, the legal wheels will turn slowly. The Korean commission has to issue a formal written order which might take months and at that point Qualcomm can - and will, it says - appeal to Seoul’s High Court.

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