Anti-Trust Violation:
Qualcomm Commits to Direct Investments
in Lieu of Fines
Qualcomm’s anti-trust violation case in Taiwan took a sharp turn in August 2018. About one year ago, Taiwan’s Fair Trade Commission (TFTC) issued administrative order FairAction-No.106094, imposing a record fine of NTD 23.4 billion, in an approximate equivalence of USD 780 million, after being found to leverage market power over communication standard technology. As the case developed, Qualcomm filed for administrative litigation, seeking the cancellation of TFTC’s order and a preliminary injunction to halt the same. The court mediated between the two parties. On August 10, 2018, Qualcomm reached a settlement agreement with the agency in which Qualcomm agreed to pay a reduced fine of NTD 2.73 billion and to fulfil several commitments for fairer future transactions. In exchange, Qualcomm has promised to invest in Taiwan for 5G technology in a five-year term. The settlement agreement is widely deemed to be an extraordinary compromise for TFTC.
As TFTC reasoned earlier in its order, Qualcomm possessed monopoly dominance over mobile “system on a chip (SoC)” of CDMA, WCDMA, and LTE modem standards and had strong market power by vertical integration in the entire industrial chain. However, Qualcomm refused to license standard patents to chip competitors. That Qualcomm’s patent rights did not exhaust among chip competitors resulted in royalty payments being incurred downstream and being calculated based on the sale price of a complete piece of cellphone device. Qualcomm also compelled cellphone manufacturers to agree to restrictive terms of patent licenses before obtaining modem chips. Qualcomm further offered discounts in royalty payment to buyers who agreed to exclusively transact with Qualcomm, thereby causing lost or decreased business opportunities for competitors. Therefore, in addition to fine, TFTC further ordered Qualcomm to renounce all restrictive and unfair terms and conditions in contracting with chip competitors or cellphone manufacturers.
According to the settlement deal, Qualcomm will renegotiate license terms which the licensee previously had disputed but was forced to accept. Renegotiation may involve the participation of an independent dispute resolution mechanism such as the court or an arbitration facility, if necessary. Supply of the chips shall continue as is so that the supply will not be a bargaining counter during renegotiation with cellphone manufacturers. Also, Qualcomm promised that in licensing its mobile communication SEP, it would not discriminate against cellphone manufacturers with similar business conditions by offering different licensing packages. Furthermore, Qualcomm made a FRAND commitment that it would not sue against any potential licensee if that licensee fails to offer a fair, reasonable, and non-discriminatory license for its SEPs to Taiwanese chip suppliers. As one of the emphases, Qualcomm promised to abolish any terms requiring that its chip clients exclusively use Qualcomm’s modem chip products or that if a chip clients’ volume of procurement reaches a specific threshold, before obtaining a royalty discount or allowance. In order to truthfully carry out the above commitments, Qualcomm promised to report, for every six months, to the TFTC information regarding the implementation of the same and to report any new license agreement within 30 days of it being made.
Qualcomm’s new technology investment is by all means another important factor in the furtherance of the settlement deal. In addition to the reduced NTD 2.73 billion fine, which had been paid fully, Qualcomm will invest in a cooperative program with Taiwanese innovative firms and universities for the pioneering 5G technology and market expansion. With intensive aid from the TFTC, the Ministry of Economy Affairs and the Ministry of Science and Technology, Qualcomm aims to establish an engineering center for the operation and manufacture of its products.
TFTC believes that such a settlement will eventually benefit all parties involved. Qualcomm’s investment is expected to enhance Taiwan’s technological development in semiconductor and 5G mobile communication. With Qualcomm’s promise to cease unfair competitive practices, prospectively the settlement would remove abuse of monopoly power and restore a competitive order. It will create a robust and vigorous competitive environment which will lead to an overall improvement of economic and public interests.
Nevertheless, it must be noted that TFTC’s decision to quickly settle with Qualcomm also drew criticism. After the decision was made, two commissioners resigned in protest, accusing TFTC of overstepping its legal authority. TFTC is an independent agency whose mission it is to maintain market competitiveness. The goal of “promoting industrial and economic development” is not within TFTC’s purview and thus is not a justifiable reason to settle. As the commissioners emphasized, the court system should be the arbiter in instances in which administrative actions are not inappropriate. Besides, from the viewpoints of Qualcomm’s competitors, the settlement will fail to protect the market. Taiwan-headquartered OEM giant MediaTek argued that in the settlement, TFTC did not demand Qualcomm to license the SEP of component “elements” in a chip that a competitor truly needs. Furthermore, the royalty calculation being based on the sale of a complete device is believed by many to be exorbitant (notably in China, the authorities ordered that the basis was to be reduced to 65% of the device sale).
Those who support TFTC’s decision, on the other hand, claimed that resolving the dispute now would move the industry forward. Firstly, an administrative litigation can take years to complete. If the court revoked TFTC’s order, an appeal would be inevitable and that could cost more in time and resources in investigations, not to mention that the previous order lacked compelling arguments and solid evidence. Moreover, enforcing the order could irreversibly harm Taiwan’s semiconductor makers and the networking and communication industry.
Different comments emerged from the settlement. Taking reference to the US law, some legal academics suggest that the role of a court should be emphasized during the settlement. The US Department of Justice in antitrust cases is required by law to report to the court regarding how a negotiation is proceeding and what the effect on competition would be expected before finalizing an antitrust settlement. Under Taiwanese administrative procedure, statutorily the court is also vested with authority to review whether an anti-competitive settlement harms the public interest. Having the court in place may render the settlement more accurate and credible. Secondly, in the US the interested parties of an antitrust settlement negotiation may be partially involved in the proceeding. This has been put in place because the interested party who is directly affected by the result of settlement has more incentive and drive to present evidence and information than it otherwise would have. So long as information is sufficient and the sources thereof are diverse, settlements can be protected against criticism and negative impacts.
It is perhaps too early to predict whether or not this unprecedented antitrust settlement will lead to a good or bad outcome. But at least this case may serve as an opportunity to review Taiwan competition law system. Topics including TFTC’s proactive role in specific industrial development, the study of legal-economic evaluation, and the involvement of the court and competitors are all very valuable which can serve to improve the present antitrust settlement mechanism.
for any questions relating to this topic, please contact us at cjchen@tsailee.com.tw |