It appears that there is no respite for Qualcomm Incorporated QCOM as leading automakers have now joined hands to urge the U.S. Federal Trade Commission (“FTC”) to seek an appeal against the favorable antitrust ruling received by the chipmaker. To add to the woes, rivals like Intel Corporation INTC and Mediatek have joined the fray to put pressure on FTC for a re-hearing of the case by the full appeals court.

Trial Background

Notably, Qualcomm has secured a landmark judgment earlier this month when the U.S. Ninth Circuit Court of Appeals reversed a previous ruling by federal judge Lucy Koh. The favorable decision validated its patent licensing business and reinforced the fairness of the competitive marketplace. Additionally, the higher court vacated an injunction against Qualcomm that mandated the chipmaker to change its intellectual property practices and redo its licensing deals with firms like Apple Inc. and Samsung Electronics Co.

Overseeing the FTC’s litigation against Qualcomm, Lucy Koh had issued a ruling in favor of the company in May 2019 and observed that the chip manufacturer had violated anti-trust regulations through monopolistic trade practices. FTC alleged that it used anti-competitive policies to drive sales of its smartphone chips and reportedly followed “no license, no chips” trade policy, under which chips were only sold to those manufacturers that agreed to inflated patent licensing terms. In order to encourage fair competition, the ruling ordered Qualcomm to renegotiate licensing contracts with customers to ensure that both buyers and other chipmakers are not forced to pay exorbitant licensing fees on its patents. It also directed the company to end any exclusive agreement with customers, which prevented other chip makers from making a production bid.

Tilting Scales for Qualcomm

Refuting all the charges, Qualcomm reasoned that its licensing business was started decades ago before it began selling chips. The company pointed out that if the decision is put into force, it would have to rework all its patent deals and scramble its business, which would be virtually impossible to unwind if the decision is later overturned on appeal. The trial seemed to invoke mixed responses from within the government as the Department of Justice — the other primary antitrust regulator in the country — disagreed with FTC’s legal theory and viewed the decision as anti-consumer. The Pentagon and the Department of Energy also observed that the enforceability of the decision would harm national security interests.

Considering all these views, the appeals court unanimously gave the verdict that Qualcomm has not violated the antitrust laws and had not resorted to any anti-competitive trade practices. The judgment also opined that its business model was rather “chip-supplier neutral”, paving the way for the raft of new agreements, which were already in place, to continue without any legal hassles.

The Counterargument

Automotive majors like Tesla, Inc. TSLA, Honda Motor Co., Ltd. HMC, Ford Motor Company and Daimler AG have come together to throttle Qualcomm from signing the patent license agreements for using chips in vehicles to connect to the Internet. They argue that such agreements will eventually escalate costs for connected cars with improved communication capabilities with 5G standards and be burdensome for consumers, thereby hurting overall demand. The adverse impact is likely to be more pronounced due to the coronavirus-induced market turmoil and would, therefore, be antagonistic to the industry growth.

Consequently, the automakers have jointly sent a formal letter to the FTC, urging it to appeal against the decision.

Whether this will set the ball rolling for a fresh round of legal hearings for this Zacks Rank #2 (Buy) chipmaker remains to be seen. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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