How Can Qualcomm Leave its Legal Troubles Behind it?

Qualcomm (NASDAQ: QCOM) is facing more legal trouble in Asia.

According to reports by the Maeil Business Newspaper from Seoul, later confirmed by Reuters, Qualcomm may be facing an investigation by the country’s Fair Trade Commission. The reports are not very specific, but it appears that regulators would be investigating whether Qualcomm is abusing its “dominant market position” in the country.

While this comes just days after Qualcomm wrapped up a similar case in China, it would not be the first time that Qualcomm earned the ire of regulators in South Korea. In 2009 regulators fined the company $207 million for charging higher royalties to phone manufacturers that decided to blend Qualcomm’s processors with a competitors baseband. At the time this was the largest fine the South Korean regulator had ever administered.

Qualcomm needs a new strategy

While there’s an argument that regulators should take a hands off, laissez-faire approach to situations such as this the reality is regulators will want to get involved to ensure that a foreign company doesn’t have a commanding control of such an important part of the mobile industry.

The vast patent library, combined with Qualcomm’s sheer size, makes it a target for regulators. In some ways it’s a victim of its own success. Qualcomm does make a number of key 3G and 4G related patents available for FRAND licensing, but it appears to be the opinion of regulators around the world that this is simply not good enough.

It isn’t Qualcomm’s fault that it is in such a dominant market position. The free market has failed to provide a worthy competitor. Taiwan’s MediaTek (TPE: 2454) shows potential, and has proven to be innovative with its work on HSA, but it has not provided a steady stream of hardware wins — even in the low-end sector — to take the momentum away from Qualcomm. Plus, it will be fighting for marketspace with up-and-coming vendors from China.

Qualcomm would be wise to consider spinning off a strategic selection of its patent library into some sort of holding company, unrelated to Qualcomm, and using that as a vehicle to engage in patent licensing. That way Qualcomm could continue to receive the funding that it earned from developing the patents, while having an unrelated company managing the respective licensing — thus reducing the ability of regulators to claim that it is “abusing its market position.”