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The Qualcomm court case could damage U.S. national security

January 9, 2019

ANALYSIS/OPINION:

Nearly 25 years after the Los Angeles prosecution of O.J. Simpson, the last “Trial of the Century,” another vitally important, potentially epoch-defining legal battle is being waged a couple of hundred miles to the north of Judge Lance Ito’s courtroom. At stake in this case is not just the fate of a washed-up former football player, but the future of American national security.

In San Jose, the heart of Silicon Valley, the Federal Trade Commission has brought charges against Qualcomm, the San Diego semiconductor and telecom equipment giant. Qualcomm is the world’s largest manufacturer of mobile chips, the essential hardware that allows smartphones to operate. The company also happens to own nearly 50,000 patents, including more than 6,000 related to wireless technologies.

The FTC charges that Qualcomm has abused its market dominance in wireless chipmaking, using its monopoly to extract overpriced licensing fees from phone manufacturers such as Apple. The agency also says the company operated a “no license, no chips” policy that punished phone manufacturers that bought chips from other companies by forcing them to pay higher licensing fees to use its patents than phone manufacturers that bought Qualcomm chips.

The FTC voted 2-1 in the final days of the Obama administration to bring the charges, and on Monday, the case finally reached court. It is scheduled to last for 10 days and will be ruled on by a judge, not a jury.

The charges were controversial from the start. In her dissent in January 2017, then-FTC Commissioner Maureen Ohlhausen argued that the suit, “by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide.” Ms. Ohlhausen noted that the FTC failed to establish that Qualcomm charges higher rates to companies that don’t buy its chips. That would seem to undercut the FTC’s case entirely. “If Qualcomm charges reasonable royalties for its patents, then there is no anticompetitive ‘tax,’” Ms. Ohlhausen wrote. Yet this supposed “tax” is what lies at the heart of the government’s case.

Even if the charges look suspect, Qualcomm lost a similar case last year brought by Apple. Apple said Qualcomm’s licensing fees were beggaring it a tough claim to swallow for anyone who has glanced at Apple’s balance sheet. Moreover, Apple’s much smaller, less profitable competitors paid Qualcomm’s fees without complaint.

Of course, it’s not easy to feel pity for a tech giant with a market capitalization of some $80 billion, even if the FTC does appear to be going after it unjustly. But the consequences of what comes out of that San Jose courtroom could be felt far beyond the leafy confines of the Qualcomm campus.

That’s because, should the legs be cut out from under Qualcomm’s licensing business, the company may have to abandon its hefty investment in 5G. The U.S., through Qualcomm, and China, through Huawei, are locked in a battle to determine who will develop and control the standard for this rapidly developing and vitally important technology. (Sweden’s Ericsson and Finland’s Nokia are also players in 5G, but they are less geopolitically significant.)

The technology is extraordinarily expensive. Qualcomm’s extremely profitable licensing business its profit margins are reportedly in the 85 percent range is what is funding its hefty 5G research and development budget.

The 5G technology doesn’t just mean a faster data network for Instagram and Tinder. It’s also the network that will allow for the widespread use of autonomous vehicles and robo-surgeries, of “smart cities” and drone flying. In the hands of a nefarious actor, 5G could prove extraordinarily dangerous.

Unfortunately, Huawei is one such actor. The ostensibly privately held company has deep links to the People’s Liberation Army and the Chinese Communist Party, The U.S. government recently banned its employees from using Huawei’s smartphones because it is widely understood that the PLA and CCP can access them through so-called back doors. Qualcomm is the only U.S. company investing in 5G. Should it be undercut, the path will be clear for Huawei, an agent of the U.S.’s most profound geopolitical rival, to dominate this vital technology.

So, the-little followed Qualcomm case may, in its own way, prove to be the next “Trial of the Century.” At least until Nicole Brown and Ron Goldman’s real killer is put on trial, that is.

Ethan Epstein is deputy opinion editor of The Washington Times. Contact him at eepstein@washingtontimes.com or on Twitter @ethanepstiiiine.

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