On July 2, 2021, Broadcom agreed to settle the Federal Trade Commission's (FTC's) charges that Broadcom illegally monopolized markets for semiconductor chips through exclusive-dealing and volume-discounting practices. The consent agreement follows Broadcom's October 2020 agreement with the European Commission resolving similar antitrust allegations. Under the FTC's consent order, Broadcom must stop requiring customers to buy more than 50 percent of their chip requirements from Broadcom, and must stop conditioning discounts or rebates on a customer buying more than 50 percent of its chip requirements from Broadcom.
The FTC alleged that Broadcom's behavior began as early as 2016, when it faced competitive threats from "low-priced, nascent rivals."1 Broadcom was the dominant supplier of semiconductor chips for set-top cable boxes and broadband modems. Broadcom allegedly maintained its monopoly position through exclusive long-term supply agreements with at least 10 major original equipment manufacturers (OEMs) and service providers, such as AT&T, Charter, Comcast, DISH, and Verizon.2 The OEMs and service providers allegedly targeted by Broadcom "were among the largest, most advanced, and most innovative Service Providers in the world" and were best positioned to enable Broadcom's nascent competitors.3
The FTC further alleged that Broadcom used its monopoly power to extract exclusivity and loyalty commitments from customers through "ad hoc threats and retaliation."4 Broadcom's alleged "coercive leveraging tactics" detailed by the FTC included threats of loss of favorable terms across numerous product lines for a customer's disloyalty for even a single bid, and threats to implement large support fee increases if service providers did not limit their purchases from Broadcom's rivals.5
The FTC contended that Broadcom's exclusive conduct foreclosed competitors and raised rivals' costs by forcing rivals to compensate customers for the penalties that Broadcom threated, such as increased prices and degraded terms. Broadcom's conduct also allegedly impeded rivals' ability to obtain scale and improve their products by depriving them of the opportunity to work with "competitively important" OEMs and service providers.6
The consent order prevents Broadcom from requiring a customer to purchase more than 50 percent of its requirements for a given product from Broadcom (a "majority share requirement") and prohibits Broadcom from retaliating against customers who purchase products from competitors.7 The FTC unanimously voted 4-0 to issue the complaint, with the newly appointed FTC Chair Lina Khan not participating.
Key Takeaways
Requirements Thresholds Treated as Exclusive Contracts
The consent order centers around the concept of a "majority share requirement,"8 defined as "a requirement that a customer purchase more than 50% of the customer's requirements of a given product" from one company.9 The decision and order prohibit Broadcom from:
- conditioning sales of a relevant product on a majority share requirement; and
- conditioning discounts or rebates, or preferential non-price terms, on a majority share requirement.10
The FTC's focus on the majority share concept suggests that, to avoid antitrust scrutiny, businesses with a significant market position should consider reducing (or eliminating) share thresholds in sales contracts. The FTC may look unfavorably upon a dominant company's efforts to secure more than 50 percent of any customer's volume. Additionally, the consent agreement indicates that the FTC will apply particular scrutiny to coercive tactics, such as threats and retaliation, used to secure exclusivity.
Retroactive Discounts Scrutinized
The consent agreement highlights continuing regulatory scrutiny of the way that volume discounts are structured. The FTC distinguished between so-called "retroactive" discounts, in which a discount is applied to all units once the customer reaches a certain purchase threshold, and forward-looking discounts that are applied to the units above the purchase threshold. The consent agreement bars Broadcom from offering retroactive discounts or rebates conditioned on a majority share requirement, but allows Broadcom to offer discounts on purchases in excess of a 50 percent threshold. The FTC essentially treated retroactive discounts and rebates as equivalent to a penalty for disloyalty; the customer loses favorable terms if it fails to meet the minimum share requirement.11
The agreement also bars Broadcom from threatening to increase prices or withdrawing discounts if the customer considers other suppliers or will not agree to a majority share requirement.
The FTC argued that Broadcom retroactively raised prices after granting a volume discount, indicating that volume discount agreements may become exclusive dealing where a seller has the power to raise prices in retaliation for "disloyalty" by its customers. Companies should carefully consider their discounting and rebate structures to avoid the accusation that contracts force exclusivity. They should also avoid adjusting or threatening to adjust sales terms if a customer considers competitors' products.
For more information, please contact Justina Sessions or any other member of Wilson Sonsini's antitrust and competition practice.
Justina Sessions, Alexander Poonai, John Ceccio, and Alexandra Keck contributed to the preparation of this alert.
[1] Analysis of Agreement Containing Consent Order to Aid Public Comment at 2, In the Matter of Broadcom Incorporated, FTC File No. 181-0205 (July 2, 2021), https://www.ftc.gov/system/files/documents/cases/10._2021.04.29_-_broadcom_aapc.pdf [hereinafter, “FTC Analysis”].
[2] Complaint at ¶ 10, In the Matter of Broadcom Incorporated, FTC File No. 181-0205 (July 2, 2021) [hereinafter, “Complaint”].
[10] Decision and Order at 6, In the Matter of Broadcom Incorporated, FTC File No. 181-0205 (July 2, 2021), https://www.ftc.gov/system/files/documents/cases/1810205broadcomorder.pdf.
