SAN FRANCISCO -- A federal appeals court threw out an antitrust verdict against Qualcomm on Tuesday, overturning a ruling that had threatened the chipmaker's business model.
A three-judge panel of the 9th U.S. Circuit Court of Appeals reversed a 2019 ruling by a federal judge who found that Qualcomm had abused its monopoly position in wireless chips and overcharged mobile-phone makers for its patents. The Federal Trade Commission had sued Qualcomm in 2017 over the issue.
"Anticompetitive behavior is illegal under federal antitrust law," the judges wrote. "Hypercompetitive behavior is not."
The appeals court also vacated an order that the company redo licensing accords with smartphone-makers such as Apple Inc. and Samsung Electronics Co. Such licenses generated $4.6 billion in revenue for Qualcomm last year.
Disagreements about Qualcomm prompted a split between the FTC and other government agencies, including the Department of Justice, which contended that the District Court ruling could undermine Qualcomm's position in technologies such as 5G that are essential for national security.
Both the appeals court ruling and a patent licensing deal with China's Huawei Technologies Co. last month are boons to Qualcomm's business. The company's shares rose 2.3% Tuesday.
In July, Qualcomm announced that Huawei has signed a licensing deal and paid up on withheld patent fees. That agreement has brought Huawei, the last major holdout, into the list of Qualcomm's customers.
Qualcomm is the largest maker of chips that run the computer functions in smartphones and connect them to cellular networks. That business provides it with the bulk of its revenue. The majority of profit comes from licensing patents that underpin how all modern phone systems work. It charges royalties that are calculated as a percentage of the selling price of handsets and paid by the phone-makers.
The company has long faced regulatory scrutiny in Asia and Europe for its business practices, as well as a fierce legal battle with Apple that was settled in 2019. The FTC had argued that Qualcomm's near-exclusive position in two kinds of chips allowed it to charge excessive royalty rates for its patents. The agency also said phone-makers that objected faced the threat that Qualcomm could cut off shipments of chips they needed.
The District Court judge, Lucy Koh, sided with the FTC in May 2019, issuing a 233-page decision that could have forced Qualcomm to renegotiate its licensing contracts with phone-makers and license its technology to rival chip-makers.
Qualcomm argued on appeal that its licensing business benefits the whole industry by speeding up improvements to smartphones and the services they support. The company emphasized that it doesn't stop rival chip-makers from accessing its technology. Instead, fees are charged to phone- makers who pay a percentage of the selling price of each handset.
The appeals court said in its 56-page ruling that in making her decision, Koh "went beyond the scope" of antitrust law.
Qualcomm's licensing practices aren't anticompetitive because "Qualcomm is under no antitrust duty to license rival chip suppliers," the court ruled. If Qualcomm was breaching its obligation to license patents on fair and reasonable terms, that issue belongs with contract and patent law, not antitrust law.
The panel also said that Qualcomm's "no license, no chips" policy does "not impose an anticompetitive surcharge on rivals' modem chip sales," nor does it undermine competition in the market.
The FTC staff could ask a full panel of circuit judges to review the ruling or, failing that, try to persuade the trade commission to appeal to the Supreme Court, said Florian Mueller, a legal consultant and blogger who has closely tracked the case. But neither route is likely to succeed, he said.
Ian Conner, director of the FTC's bureau of competition, said, "The court's ruling is disappointing, and we will be considering our options."
"The court of appeals unanimous reversal, entirely vacating the district court decision, validates our business model and patent licensing program and underscores the tremendous contributions that Qualcomm has made to the industry," Don Rosenberg, executive vice president and general counsel for Qualcomm, said in an email.
Information for this article was contributed by Don Clark of The New York Times and by Susan Decker, Malathi Nayak and Ian King of Bloomberg News.