It surprised few on Aug. 6 when President George W. Bush opted not to get involved in a messy patent battle between Qualcomm (QCOM) and Broadcom (BRCM), declining to veto a decision by the International Trade Commission that bans imports of new cell phones containing certain Qualcomm chips.
Unexpected, though, was Qualcomm's announcement as the deadline for a Presidential veto passed that it has completed a software workaround to avoid any infringement on the Broadcom technology in question. This workaround, Qualcomm says, was distributed months ago to phonemakers and should avert any potential disruption in holiday shopping for next-generation handsets.
"The handset manufacturers have had many, many months to incorporate the new software," Alex Rogers, Qualcomm's legal counsel, told BusinessWeek.com in an interview. In fact, Rogers says, Qualcomm believes handset makers have completed testing and should be ready by now to import their phones into the U.S. while the case is appealed. He declined to say whether his comments apply to specific Qualcomm customers such as industry giants Motorola (MOT), Samsung, and LG.
At first glance, the workaround would appear to remove a major uncertainty hanging over the U.S. wireless market. With the ban in place, wireless service providers such as Verizon Wireless (VZ, VOD) and Sprint Nextel (S) would have had a harder time competing with cutting-edge devices like the Apple (AAPL) iPhone, introduced in June by AT&T (T).
It was amid such concerns that Verizon cut its own licensing deal directly with Broadcom, agreeing to pay up to $200 million in royalties to avoid any disruptions in its handset lineup (see BusinessWeek.com, 7/23/07, "Sidestepping the Qualcomm Ban"). Sprint, also intent on bypassing the legal fray, was rumored to be working on its own workaround.
But the Verizon deal raises questions about whether Qualcomm's customers are truly reassured by the workaround claims. Since the workaround technology was distributed to handset makers months ago, Verizon might not have felt the urgency to cut a separate deal if it were hearing more positive feedback from its handset suppliers.
The fact is, even Qualcomm doesn't believe the workaround solves all of its legal problems. With the ITC order still in effect, U.S. customs will still be inspecting all shipments of phones coming into the country (see BusinessWeek.com, 6/8/07, "Banned: New Phones with Qualcomm Chips"). Since the workaround entails internal software, it will be a struggle to prove that phones containing the technology don't violate the ITC ban. Qualcomm's Rogers says U.S. customs officials have been briefed. "Customs and the ITC will need to implement processes to approve these new handsets," he cautions.
Secondly—and most important—Broadcom is likely to claim that the Qualcomm workaround also infringes on its patent. "We have not seen their workaround" and "we are going to move to enforce our remedies," says David Rosmann, Broadcom's vice-president for intellectual property litigation. Qualcomm "Chairman [Irwin Jacobs] recently told the ITC it would take a year to 18 months to come up with a workaround," Rosmann adds. "What they are saying now is contradictory to what they've been saying."
Mark McKechnie, an analyst at American Technology Research, says that because the workaround still needs to pass muster, "I don't feel I can change my [estimates for Qualcomm's financial performance] right now." McKechnie expects Qualcomm to see the import ban produce a 2% to 3% earnings reduction in the current quarter and a 5% hit in the quarter ending in December.
With the workaround's prospects uncertain, Qualcomm isn't standing still. It plans to ask the federal circuit court for an emergency stay of the ITC import ban. It's also appealing the ITC ruling that Qualcomm's chips infringed on a Broadcom patent relating to battery-power management in phones with high-speed wireless Internet capabilities. Sprint plans to appeal the decision, too. But even an expedited appeal will take a minimum of nine months, says Rogers. That means U.S. carriers still risk being unable to introduce new models in time for the holiday season.
The situation is especially dire for Sprint, which next year plans to migrate some 20 million-plus customers from its acquired Nextel business onto a new network to improve their quality of service. To do so, Sprint needs new phone models—with push-to-talk features familiar to every Nextel user—for the move to be effective.
"Verizon Wireless just decided to eliminate the risk," says Lawrence Harris, an analyst at Oppenheimer & Co. "With the holiday season near, they couldn't afford to wait."