Abuse of Power
Samsung Electronics has suffered from an abuse of power at the hands of Broadcom, a U.S.-based semiconductor company, after a similar incident involving Qualcomm. Broadcom had proposed to the Korea Fair Trade Commission (KFTC) to pay 20 billion won (US$15 million) in stimulus funds as a voluntary correction plan. However, Samsung Electronics took issue with the plan, so it remains to be seen what judgment the KFTC will make in the future.
According to industry sources on May 4, Samsung Electronics will soon submit an official letter to the KFTC stating that it is concerned about Broadcom’s consent resolution plan for a voluntary correction. In the letter, Samsung Electronics demands the consent resolution plan include compensation for Samsung Electronics’ damage or the KFTC to determine whether Broadcom violated the law through a formal deliberation instead of a consent resolution.
The KFTC will deliberate on the consent resolution plan prepared by KFTC officials and Broadcom representatives in a plenary meeting on June 7.
Broadcom is a supplier of core components for smart devices such as smartphones and tablet PCs. In the fiscal year 2020 it posted net sales of approximately US$23.9 billion (approximately 28.764 trillion won).
According to the KFTC, Broadcom is accused of forcing Korean smart device manufacturers such as Samsung Electronics to sign long-term three-year exclusive contracts on unfavorable terms in order to exclude its competitors. The period ran from March 27, 2020, to July 2, 2021, during which Samsung Electronics was forced to purchase more than US$750 million in parts for smart devices annually. In effect, it limited Samsung’s contractual options and prevented competitors from entering the market.
Samsung Electronics had no choice but to comply with Broadcom’s demands, as it would have been unable to make finished products if the supply of the components was suddenly cut off. As a result, not only did Samsung Electronics overbuy components to meet its quota, but it also was unable to use components from other companies for a long period of time, and unused parts became malicious inventory. Samsung Electronics’ damages were estimated to be in the hundreds of billions of won.
This goes against Korea’s Monopoly Regulation and Fair Trade Act, which prohibits the exclusion of competitors and trade with exclusive conditions.
Because the damage was so substantial, industry insiders predicted that the KFTC will fine Broadcom an amount comparable to the fine of 1 trillion won (US$759 million) that the KFTC imposed on Qualcomm in 2016. However, while the KFTC was examining the case, Broadcom filed a consent resolution in July last year and the KFTC accepted it. Since then things have changed.
A consent resolution is a system that allows the KFTC to quickly close a case without determining whether a law was violated, even if the case is still under probe, if corrective measures proposed by the accused party are deemed appropriate. Previously, the KFTC confirmed a consent resolution in a case involving Apple’s unfair business practices against Korean mobile carriers in 2021. The consent resolution included the establishment of a 10-billion-won (US$7.6 million) fund to improve trade order, enhance consumer welfare, and support small and medium-sized enterprises.
However, industry insiders pointed out that even though Apple and Broadcom caused hundreds of billions of won in damage to companies, they only got a slap on the wrist –- paying a small amount of money without substantial compensation to the companies that suffered damages. In particular, the 20 billion won offered by Broadcom is far from being enough, they say.
However, as Broadcom’s consent resolution process is in its final stage, industry insiders expect that it will be difficult for the KFTC to overturn its original decision. Therefore, if the final decision is made for a consent resolution without adding compensation measures demanded by the companies that suffered damages, the case is highly likely to lead to a high-stakes lawsuit.
Before Broadcom, Samsung Electronics had also suffered from an abuse of power by U.S.-based semiconductor company Qualcomm. Qualcomm abused its dominant market position to force mobile manufacturers, including Samsung Electronics, to ink unfair contracts.
Qualcomm is well known as the maker of Snapdragon, a mobile application processor (AP) that powers Samsung’s smartphones. The company’s U.S.-based headquarters, Qualcomm Incorporated, is engaging in the patent business, while its two sister companies are in the modem chip set business for mobile communications.
In 2016, the KFTC fined Qualcomm one trillion won and issued a corrective order. This is because the KFTC judged that Qualcomm had abused its power and monopolized patent rights by linking the supply of modem chipsets to patent rights.
Qualcomm holds standard essential patents (SEPs) on mobile communications, which hold the key to the production of mobile phones. It was recognized as an SEP holder because it made a reasonable and nondiscriminatory licensing (FRAND) commitment to provide its SEPs on a nondiscriminatory basis to business operators who wanted to use the patents. FRAND obligations require SEP holders to license their patents on fair, reasonable, and non-discriminatory terms.
However, Qualcomm allegedly restricted the actual use of its patents by refusing to sign contracts with chipmakers such as Samsung Electronics and Intel or limiting their customers. In addition, Qualcomm allegedly forced mobile phone manufacturers that buy chip sets from Qualcomm to sign patent rights agreements. This enabled Qualcomm to strengthen its control over the chipset market and sign patent rights agreements with mobile phone manufacturers on unilateral terms that favored Qualcomm. In addition, the company allegedly took over patent rights from cell phone manufacturers.
The KFTC concluded that these allegations were true and imposed a severe punishment on Qualcomm. Qualcomm paid all of its fines within three months of the KFTC’s verdict, but the following year it filed a lawsuit to revoke the order. However, the Seoul High Court ruled in 2019 that eight of the KFTC’s ten corrective orders were lawful, justifying the fines.
Qualcomm did not accept the court ruling and subsequently appealed the decision, but the Korean Supreme Court recently upheld the original ruling. The case was closed eight years and eight months after the KFTC became aware of the allegations and launched a full-scale investigation. The fine imposed by the KFTC on Qualcomm is approximately 1.0311 trillion won (US$782.07 million), the highest ever imposed by the KFTC.