Nokia and Qualcomm Spar over Royalties

In the midst of a licensing negotiation, the two companies are at odds over fees for use of patented technology. Nokia wants the European courts to decide

Just when Qualcomm's lengthy legal docket began clearing up, Nokia stepped in with a sizable addition. On Mar. 19, the world's largest cell-phone maker filed complaints against Qualcomm in Germany and the Netherlands. The aim: barring Qualcomm from enforcing patents concerning some Nokia (NOK) phones sold in the European Union.

The filings came just days after cell-phone chipmakers Qualcomm (QCOM) and Broadcom (BRCM) on Mar. 16 agreed to dismiss a flurry of claims and counterclaims alleging infringement of six Broadcom patents and four Qualcomm patents, as well as misappropriation of trade secrets. One of the cases was due to go to trial on Mar. 19.

Just as Qualcomm shows its willingness to set aside patent disputes with one competitor, Nokia wants to keep up pressure amid its own licensing negotiations with Qualcomm. A part of the companies' agreement is due to expire on Apr. 9, and Nokia could choose to extend it through 2008.

Long Fight Ahead

Nokia's beef is that Qualcomm's royalty rates—in the neighborhood of 5%—are too high. Indeed, many other companies charge half as much. "These agreements tend to last a decade or more," says Lawrence Harris, an analyst with Oppenheimer & Co. "This is [Nokia's] time to make a stand." Qualcomm says its wireless technologies, already used in some 25% of the world's cell phones, are worth every penny.

The two companies are well down the patent dispute path. In October, 2005, Nokia and four other companies, including Broadcom and chipmaker Texas Instruments (TXN), called on the European Commission to investigate what they say are anticompetitive practices by Qualcomm. The commission has yet to decide whether to undertake an in-depth investigation. Nokia and Qualcomm also have several ongoing patent-infringement and -licensing disputes in the U.S. and Europe. The newest complaints "are a confirmation that we should not expect a settlement between Nokia and Qualcomm before the April deadline," says Cody Acree, an analyst with Stifel Nicolaus. "They really are at an impasse."

And the legal battles between Qualcomm and Nokia may only be beginning. "When a licensing agreement expires, it would be common to see a lot of lawsuits filed soon after," says Smith Brittingham, an attorney specializing in intellectual property at Finnegan Henderson. "There's often a rush to the courthouse. Parties will often keep piling suits on one another in order to make it worth while for them to settle." Essentially, when the agreement expires, both parties could claim that the other is infringing on their intellectual property.

Divided Royalties

The stakes are high for both parties. Nokia is the leader in cell phones based on GSM (global system for mobile telecommunications) technology, which is dominant in Europe and used by Cingular/AT&T (T), the biggest U.S. mobile-phone-service provider. Qualcomm holds patents on a rival technology.

The problem for Nokia is that GSM is gradually giving way to a more advanced technology, known as wideband CDMA, or WCDMA—on which Qualcomm does hold patents. As Nokia makes more WCDMA phones and needs to cough up bigger royalty payments, the healthy operating margins in its handset business, now around 18%, are likely to narrow by several percentage points, Harris says.

Enter the lawyers. Nokia wants the Regional Court of Mannheim in Germany and The Hague District Court in the Netherlands to declare Qualcomm's European patents "exhausted" with respect to products on the European Union market. It argues that it shouldn't have to pay royalties for using chips it buys from vendor Texas Instruments, because TI already pays royalties to Qualcomm (the two companies entered into a cross-licensing agreement in 2000). Nokia's case rides on the terms of the Qualcomm-TI deal, details of which are not public.

Costly Disputes

If Nokia wins, Qualcomm could lose lots of revenue. Indeed, should Nokia opt to play hardball by not renewing its contract, the impact would be felt much sooner, analysts say. In that event, quarterly earnings in the period that ends in September could fall by 4¢ to 6¢ a share. On Mar. 13, Qualcomm forecast profit of 42¢ to 44¢ a share in the second quarter.

For Qualcomm, legal bills are another cause for concern. In December, Qualcomm cautioned that profit wouldn't meet its previous forecast in part due to mounting legal bills (see, 12/22/06, "Legal Costs Hit Qualcomm's Bottom Line").

Nokia's not the only legal thorn in Qualcomm's side either. Though Broadcom and Qualcomm set aside some differences, plenty of other disputes rage on. The International Trade Commission, which in December found Qualcomm guilty of infringing one Broadcom patent, will hold a hearing Mar. 21 and 22 to determine what the remedy should be (see, 10/11/06, "Qualcomm's Temporary Reprieve"). Other battles with Broadcom include an allegation that Qualcomm infringes on patents for baseband chips, which enable connectivity within mobile phones. That case is due to go to trial on May 1.

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