Recently, Qualcomm announced a staggering 40% drop in profits from its technology licensing business. The main reason? Apple and its manufacturers have refused to make payments on patent royalties they owe to Qualcomm per their licensing arrangement for the chipsets in Apple iPhone models. In January, Apple filed a lawsuit against Qualcomm seeking more than $1 billion from the chipset maker for overpaid royalties. Qualcomm is now seeking an injunction on Apple iPhones manufactured with Intel chips for patent infringement. Other manufacturers are joining Apple in litigation. Foxconn filed a lawsuit against Qualcomm, and Intel has filed a complaint against Qualcomm with the US International Trade Commission (ITC), accusing the chip maker of anti-competitive behavior through unfair licensing practices.
Antitrust issues have plagued Qualcomm for years. Yet, the latest arguments from Apple’s lawyers present an interesting debate over just how much Qualcomm may charge its customers for the use of its chipsets. Apple claims that Qualcomm overcharges their customers on chipset royalties. Meanwhile, Qualcomm claims it’s charging a reasonable royalty to use its technologies under fair licensing practices.
Apple’s Complaint – Qualcomm Overcharged on Standards Essential Patent Royalties
Apple’s complaint is over the high royalties charged on Qualcomm’s Standards Essential Patents (“SEPs”; see below) and obscure business practices that coerce their customers into paying unreasonably high licensing fees and patent royalties on chipsets. Qualcomm has used their considerable number of SEPs to corner the market on its chipsets. Apple makes the case that Qualcomm “double dips” on how royalties are paid, as illustrated in the Qualcomm royalty model below. The model shows Qualcomm charging both the manufacturer of the device and Apple royalties for its technology. In the complaint, Apple states,
“Qualcomm has been declared a monopolist by three separate governments. Qualcomm pursues its illegal practices through a secret web of agreements designed to obfuscate its conduct”.
In the past few years, such practices have been questioned by regulatory agencies in both South Korea and China. Apple claims that Qualcomm has treated the iPhone maker unfairly after complying with South Korea’s antitrust regulator’s investigation on Qualcomm. The lawsuit seeks a decision on “breach of contract claims, patent claims, and antitrust claims, as the basis for declaratory relief, injunctive relief, and damages”.
SEPs in question in Apple’s Complaint
Qualcomm’s Disputed Royalty Model
Qualcomm’s Counter-Claims: Apple breached contract; iPhone infringes on non-SEPs
In April, Qualcomm denied Apple’s allegations on all fronts. They purported that Apple breached their contract and interfered with Qualcomm’s business with other licensees. Qualcomm claims that:
“Apple cannot credibly contest the value of Qualcomm’s patent portfolio, as hundreds of licensees—including the companies that manufacture Apple’s cellular devices—have consistently paid royalties reflecting that value to Qualcomm for years.”
As laid out in Qualcomm’s press release, the company accused Apple on the grounds that they:
- Caused regulatory attacks on Qualcomm’s business outside of the US by making false statements
- Did not use the full performance capability of Qualcomm’s modem chips in the iPhone 7, misrepresenting Qualcomm’s brand
- Intimidated Qualcomm to prevent them from making public comments about the iPhone performance
For these reasons, Qualcomm is also seeking damages and declaratory judgment in the case. Further, Qualcomm has also filed another complaint with the U.S. International Trade Commission and the U.S. District Court for the Southern District of California. This one is for an injunction on the import of certain iPhones that infringe on Qualcomm’s battery-life patents. Qualcomm states that these patents are not SEPs, and are therefore not subject to FRAND licensing commitments.
The State of the Initial Dispute
Since the initial complaint in January 2017, the court has been issued counter-claims by both the plaintiff and the defendant. As of June 2017, Apple added complaints to their initial case, based on “ the continuing—and mounting—evidence of Qualcomm’s perpetuation of an illegal business model that burdens innovation”. Since January, Apple says other Qualcomm business partners have brought forth evidence alleging similar anti-competitive behavior.
The ITC is considering Qualcomm’s complaint made against Apple. As of August, the group said it would need time to consider the issue. Though the ITC may take years to consider this case, meanwhile, other companies have spoken out against Qualcomm’s licensing practices.