Broadcom Heads to Court, Maybe

There's a good chance the chipmaker's antitrust suit against market leader Qualcomm will never go before a judge

By Olga Kharif

Chipmaker Broadcom has filed an antitrust lawsuit against Qualcomm alleging that the San Diego company's licensing policies block rivals from selling competing chipsets for use in next-generation mobile phones.

The suit, filed on July 5 in the U.S. District Court for the District of New Jersey, claims that Qualcomm (QCOM ), which holds key patents for the so-called Wideband Code Division Multiple Access (WCDMA) technology used in the next generation of wireless networks, is not licensing its patents under fair, reasonable, and nondiscriminatory terms.


  Qualcomm, the suit alleges, had agreed to adhere to fair licensing terms in order to establish WCDMA as an international standard. Various international and U.S. standards bodies, like the Telecommunications Industry Assn., have adopted the WCDMA standard.

Broadcom (BRCM ) claims that Qualcomm will license its WCDMA patents only in exchange for "a wide array of terms that are aimed to cripple Broadcom as a competitor." According to the suit, a Qualcomm license would have required Broadcom to sell chipsets only to cell-phone makers that are also Qualcomm licensees.

Qualcomm denies any wrongdoing. "Qualcomm is looking into the complaint right now, and we believe it's without merit," says a company spokesperson.


  Broadcom has pulled out the big legal guns. Its 48-page filing was put together by the law firm Boies, Schiller & Flexner, whose chairman, David Boies, served as a special trial counsel in the Justice Dept.'s antitrust lawsuit against software behemoth Microsoft (MSFT ).

The latest suit follows on the heels of patent infringement and fair-trade complaints Broadcom has leveled against Qualcomm. On May 19, Broadcom filed a patent-infringement suit in the U.S. District Court for the Central District of California alleging that Qualcomm has infringed on 10 of its patents. Then, on June 20, Broadcom announced that the U.S. International Trade Commission (ITC) had begun an investigation into its allegations that Qualcomm engaged in unfair trade practices by importing products infringing on Broadcom's patents.

Legal experts say the Broadcom case hinges on a gray area of antitrust and patent law: What exactly constitutes a fair licensing deal. After all, patents are granted to give inventors a short-term monopoly on the technology. That could make it difficult for Broadcom to prove its case.


  "It's still unresolved what [fair terms of licensing] mean," says Tyler Baker, who heads the anti-trust practice of firm Fenwick & West and has counseled the likes of Coca-Cola (KO ) and Eastman Kodak (EK ). "It's unclear what exactly a company needs to do [to comply]."

What's more, if this case does go to trial, both Broadcom and Qualcomm will need to request their customers -- cell-phone manufacturers such as Nokia (NOK ) and wireless service providers like Japan's NTT DoCoMo (DCM ) -- testify. "It's very disruptive, and you end up potentially causing distress to people you are dealing with," Baker says.

Broadcom isn't worried. "We think there's a lot of concern in the industry about Qualcomm's licensing practices," says David Dull, senior vice-president and general counsel at Broadcom. "The industry welcomes this action." Broadcom claims that Qualcomm's dominance of CDMA technology has resulted in higher prices for mobile phones in the U.S. It fears that Qualcomm will be able to pull off the same dominance in the nascent high-speed wireless phone arena.


  Still, some legal experts believe both parties may have incentive to settle before the case goes to trial. Hillard Sterling, a technology attorney with law firm Freeborn & Peters, says both outfits will want to avoid dragging their customers into court and obliging them to divulge the secrets of their licensing agreements. Besides, litigation is expensive. "We are not opposed to settlement in advance of a trial," says Broadcom's Dull.

Investors don't seem too worried about the suit. Qualcomm's shares hardly moved on the news, closing at $33.59 on July 5, down a cent. Broadcom's shares were up 1.8%, to $36.74.

The suit underscores the growing importance of WCDMA to both Qualcomm and the industry. While only a few carriers in Japan and Europe have implemented the technology, it's expected to be deployed en masse, starting mid-2006, says Mike Mahoney, portfolio manager with EGM hedge funds in San Francisco.


  Analysts polled by Thomson One believe that the technology -- both licensing and outright sales of chips -- will help boost Qualcomm sales 23%, to $5.6 billion, in the current fiscal year ending in September. Qualcomm, which is twice the size of Broadcom, is one of the most profitable tech companies.

Broadcom has long been trying to get into the WCDMA market. In 2004, it acquired Zyray Wireless for $96 million. Zyray's WCDMA knowhow makes it easier to integrate the technology with older wireless standards, says Allen Nogee, an analyst with consultancy In-Stat. Broadcom is not shipping any WCDMA chips yet, though products are under development. "This lawsuit is a desperate attempt [by Broadcom] to get into the game," says Mahoney.

That may be for the courts to decide.

Kharif is a reporter for BusinessWeek Online in Portland, Ore.

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