Commission fines Qualcomm €997 million for abuse of dominance

Written on 28 Feb 2018

The world’s largest supplier of LTE baseband chipsets has been fined €997 million by the European Commission for abusive exclusivity practices, comprising exclusivity payments and predatory pricing. Not only is this decision of interest as the first Commission decision on an abuse of dominance since the important Intel judgment last September, but it also serves as a reminder that the Commission will levy significant fines on abusive behaviour that denies choice to consumers and companies alike, particularly in a sector where innovation is key.

Background

Qualcomm is a supplier of baseband chipsets, which enable smartphones, tablets and other mobile broadband devices to connect to cellular networks, used for both voice and data transmission. The company is the largest supplier of chipsets which comply with the 4G Long-Term Evolution (“LTE”) Standard.

Following an announcement in July 2015 that it had opened two formal investigations to investigate suspicions that Qualcomm had engaged in abusive behaviour, the Commission sent two separate statements of objections to Qualcomm in December of that year:

  1. the exclusivity payment Statement of Objections asserts that Qualcomm had paid significant amounts to a major smartphone and tablet manufacturer (Apple) on the condition that it exclusively used Qualcomm based chipsets in its smartphones and tablets; and
  2. the predatory pricing Statement of Objections asserts that between 2009 and 2011 Qualcomm had engaged in ‘predatory pricing’ by selling certain baseband chipsets at prices below costs, with the intention of hindering competition in the market.

While the predatory pricing investigation remains on-going, the Commission has now reached a decision on the exclusivity payments investigation

Exclusivity payments investigation

Apple, as one of the largest makers of smartphones and tablets in the world, is a key customer for LTE baseband chipsets. When, in 2011, Qualcomm signed an agreement with Apple, the company committed to make significant payments to Apple on the condition that Apple would exclusively use Qualcomm chipsets in its iPhones and iPads. If Apple launched a device with a competitor’s chipsets, not only would the payments stop, but Apple would have to return a large amount of the payments already made

On examination of Apple’s internal documents, the Commission found that these exclusivity obligations had an impact on Apple’s considerations of whether or not to switch to another supplier for its chipsets. In particular, Intel, one of Qualcomm’s main potential rivals was trying to challenge Qualcomm in the market for chipsets used in mobile devices; and Apple had seriously considering switching to Intel at various points between 2011 and 2016.

The exclusivity condition was “a material factor” for Apple in deciding not to switch to Intel and it was only when the agreement was shortly due to expire and the cost of switching under the agreement had been lessened that Apple was able to begin to source part of its chipset requirements from Intel.

The Commission considered that this was evidence that the practices prevented Qualcomm’s rivals for competing effectively for Apple as a customer, and also therefore the business opportunities that could have followed from these rivals securing Apple as a customer.

The Commission found that:

  1. Due to its extremely high market shares (in excess of 90% for most of the period between 2011 and 2016) in a market characterised by high barriers to entry Qualcomm held a dominant position in the global market for LTE baseband chipsets; and
  2. By making significant payments to a key customer on condition that it would exclusively use Qualcomm chipsets, Qualcomm abused this market dominance by preventing rivals from competing in the market.

Significance of the Intel decision

This decision is also of interest as it is the Commission’s first decision on abuse of dominance since the Court of Justice (CJEU) ruling on the Intel case in September 2017. In a victory for Intel, the CJEU set aside the judgment of the General Court (which had dismissed Intel’s appeal against the Commission’s €1.06 billion fine for Intel’s abusive rebate scheme) for failing to assess Intel’s economic evidence that its rebates did not foreclose competition. The ECJ made it clear that where such arguments are put forward, a full market analysis is required.

The Qualcomm decision relates to exclusivity payments, rather than rebates based on volumes, as had been the case in Intel. However, the anti-competitive foreclosure effects of the behaviour is central to both cases. While it is unclear exactly what evidence the Commission based its decision on, Commissioner Vestager’s accompanying statement to the decision takes pains to state that the decision “fully complies with the guidance given by the Court”; and that a “variety of qualitative and quantitative evidence” was taken into account as part of the decision. The impact of the CJEU’s judgement is clearly keenly felt by the Commission, and this case highlights the shift away from decisions based on the form of an infringement, to decisions made on an effect-based analysis.

Conclusion

The level of the fine, although substantially lower that the Commission’s fine of € 2.42 billion imposed on Google last year for abuse of dominance in relation to internet searching, is close to the fine imposed upon Intel in relation to its rebate scheme. It is a decision which is part of a continuing narrative of the Commission imposing substantial fines upon dominant players in the tech sector found to be engaging in abusive behaviour. This is reflective of the fact that the Commission has no room for tolerance of behaviour that stifles effective competition in a sector with huge demand and the potential for innovative technologies. Players in the market should be aware that they remain firmly under the Commission’s spotlight.