A Huawei Technologies Co. logo sits on display inside a Media Markt electronic goods store, operated by Ceconomy AG, in Berlin, Germany.  (Photographer: Krisztian Bocsi/Bloomberg)

The U.S.’s Star Witness in the Qualcomm Antitrust Suit: China's Huawei

(Bloomberg) -- Two of the U.S. Federal Trade Commission’s biggest witnesses in the opening day of its trial against Qualcomm Inc. for allegedly harming competition for smartphone components were Chinese companies.

That’s not surprising: the Asian country is the largest smartphone maker and most of the world’s biggest makers of those devices are based there. But their role today does show just how much has changed since the FTC originally brought its case in January 2017.

Huawei Technologies Co. and Lenovo Group Ltd. provided testimony that the FTC argues proves that Qualcomm threatened to withhold chip supply unless they continued to pay technology licensing fees. The non-jury trial that started Friday is scheduled to run before U.S. District Judge Lucy Koh through Jan. 28 in San Jose, California.

In 2013 negotiations over new chip-sets, Qualcomm allegedly informed Huawei that if it didn’t extend the code division multiple access, or CDMA, license agreement, “they would stop supplying the chips,” Huawei General Counsel Nanfen Yu said in a video deposition played for the court. “Everyone in the industry knows” how Qualcomm operates. They “make it very clear that we have to sign a license agreement in some form. We had no choice.”

The twist is that China-backed Huawei, now the second-biggest maker of smartphones and one of the biggest makers of networking equipment, is the center of focus of yet other parts of U.S. government actions trying to halt what it says is the illegal appropriation of American technology by China.

When the U.S. blocked a takeover of Qualcomm last March, scuttling a $117 billion deal that had been subject to government scrutiny on national security grounds, it cited a recommendation by the Committee on Foreign Investment in the U.S. CFIUS had said the deal would undermine Qualcomm’s leadership in 5G wireless technology, opening the door for China’s Huawei to become dominant.

The Trump administration has since ratcheted up scrutiny of Chinese influence and blocked proposed acquisitions of other U.S. technology companies. It’s accused China of stealing U.S. technology and has levied tariffs on trade with the world’s second-largest economy, which it has accused of unfairly exploiting access to the U.S. market

Huawei’s conduct is drawing renewed scrutiny after the Dec. 1 arrest in Vancouver of Chief Financial Officer Meng Wanzhou on allegations she defrauded banks to violate Iranian sanctions. The daughter of Huawei’s billionaire founder Ren Zhengfei, she now faces extradition to the U.S. in a case that’s sparked a diplomatic row.

Of course, the FTC case is about Qualcomm’s behavior. The San Diego-based company argues neither Huawei nor Lenovo ever suffered a supply disruption, even as their agreements for evolving mobile network components -- to 4G from 3G -- approached an end amid negotiations for renewal.

The licensing revenue that Qualcomm gets from patents it says underpin all modern phone systems are the central area of dispute in this legal case and in others that span the globe amid a fight with Apple Inc. They’re also crucial to funding its industry-leading research and design efforts that have put its technology and chips at the center of the introduction of third generation and fourth generation phone systems.

“Qualcomm has in the past retaliated against customers who have attempted to challenge its legal terms by either delaying, or cutting off supply of chips,” said Ira Blumberg, vice president of intellectual property at Lenovo in a video deposition played for the court. “We don’t know if Qualcomm would follow through on their threat to cut off supply, but we can’t take that risk.”

In another twist, Qualcomm tried to discredit the U.S. government’s expert, Michael Lasinski, by invoking Huawei. Qualcomm alleges he’s represented Huawei in licensing disputes and represented the company in intellectual property disputes, having testified for the Chinese giant on at least three occasions.

The case is Federal Trade Commission v. Qualcomm Inc., 17-cv-00220, U.S. District Court, Northern District of California (San Jose).

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