Qualcomm Inc. (QCOM, Financial) is facing a fine of $865 million for alleged antitrust violations made by the Korea Fair Trade Commission.
The commission made the announcement Wednesday after a three-year investigation of the San Diego-based chip manufacturer’s patent-licensing business. The investigation found Qualcomm violated antitrust laws by limiting its competitors’ access to its patents. The commission also claims the company forced mobile phone manufacturers into unfair license agreements by refusing to supply phone chips if they did not agree to the terms and used market position as leverage.
The commission said in its decision that the company’s royalty model is unfair to handset makers because it requires them to buy wireless-technology licenses that they do not use. Additionally, Qualcomm requires handset makers to provide their patents free of charge. Due to this, the commission called on the company to change its business model.
These allegations follow a $975 million fine last year by Chinese antitrust authorities that also required the company to alter its business practices. In addition, in 2009, the South Korean commission fined Qualcomm $225.6 million for abusing its dominant patent position by charging lower royalties to companies using its chips for handsets which discouraged these companies from buying from competitors. Qualcomm appealed that ruling, but the final decision is pending.
Qualcomm said it would fight the charges and denied it had interfered with its competitors’ ability to compete. Executive Vice President and General Counsel Don Rosenberg argued the decision is inconsistent with the facts and the law, reflects a flawed system and is a violation of due process rights owed to American companies under the Korea-U.S. Free Trade Agreement.
“Importantly, this decision does not take issue with the value of Qualcomm’s patent portfolio,” Rosenberg continued. “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.”
In addition, Qualcomm claimed its licensing practices had existed for years and had never been questioned about them before.
Qualcomm’s business is largely split between its chip-making segment and patent-licensing segment. In 2016, 34% of the company’s total revenue of $23 billion came from patent licensing. Of that, less than 3% came from royalties of Korean handset makers.
The decision is not yet final as it will take some time for a written order to be drawn up. When it is made official, the company will have 60 days in which to pay the fine. However, Qualcomm will be able to appeal to Seoul’s High Court to contest the fine at that time.
Among the gurus invested in Qualcomm, Barrow, Hanley, Mewhinney & Strauss holds the largest position with 1.4% of outstanding shares. This represents 2.2% of its total assets managed. In all, 31 gurus hold positions in the company.
The stock was trading at $66.42 on Wednesday.
Disclosure: I do not own stock in any companies mentioned in the article.
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