Apple Sues Qualcomm Over Patent Royalties in Antitrust Case

  • Apple claims chipmaker is withholding more than $1 billion
  • IPhone maker also challenges Qualcomm’s patent royalty rate

Apple Sues Qualcomm Over Patent Royalties

Apple Inc. sued Qualcomm Inc., accusing it of monopolizing the market for chips for wireless devices and withholding $1 billion in retaliation for cooperating with South Korean antitrust authorities.

Apple is demanding Qualcomm hand over money that was supposed to be a rebate for licensing fees. Qualcomm is holding back the money as punishment for Apple cooperating with Korean antitrust regulators, according to the complaint filed in San Diego, where Qualcomm is based.

Apple also wants back some of the billions of dollars it claims it was overcharged in “Qualcomm’s illegal scheme” to control the market for mobile phone chips. It wants a court to change how Qualcomm charges for its technology in the future.

Qualcomm, the largest maker of mobile phone chips, has been under fire by regulators around the world for its patent licensing practices. The lawsuit filed Friday is the first direct challenge by one of its biggest customers and threatens to upend how royalties are calculated by any owner of a patent on technology that underlies modern electronics.

Apple is facing pressure to squeeze more profit out of every iPhone after revenue declined last year for the first time since 2001, dragged down by lower handset sales. It typically sources the same component from several suppliers, which helps secure lower prices by forcing the manufacturers to compete on price.

Qualcomm fell 2.4 percent to $63 at the close in New York. Apple rose less than 1 percent to $120.

“It is quite clear that Apple’s claims are baseless,” Qualcomm General Counsel Don Rosenberg said in a statement. “Apple has intentionally mischaracterized our agreements and negotiations, as well as the enormity and value of the technology we have invented, contributed and shared with all mobile device makers through our licensing program.”

Qualcomm also accused Apple of encouraging regulators to attack Qualcomm in “various jurisdictions around the world,” by “misrepresenting facts and withholding information.”

Legacy Standards

“Qualcomm built its business on older, legacy, standards but reinforces its dominance through exclusionary tactics and excessive royalties,” Apple said in a statement. “Despite being just one of over a dozen companies who contributed to basic cellular standards, Qualcomm insists on charging Apple at least five times more in payments than all the other cellular patent licensors we have agreements with combined.”

The complaint also challenges the validity of some key Qualcomm patents for wireless technologies. Apple asks the court to rule that, if the patents are upheld, that the royalty amount is significantly lower than what Qualcomm charges now.

In December, South Korea, home to two of Qualcomm’s largest customers, fined the company 1.03 trillion won ($890 million) and described its practices as monopolistic. Qualcomm has said it will appeal the decision.

Antitrust Investigations

Under the agreement with Qualcomm, Apple said it was forced to refrain from taking any steps to challenge Qualcomm’s business model.

Apple complied with investigation demands from Korean regulators, an action Qualcomm claimed was in violation of the agreement. In retaliation, Qualcomm withheld money that it was due to pay Apple in royalty rebates, the iPhone maker said.

Qualcomm offered to pay the money “if Apple retracted and corrected its statements to government agencies,” according to the complaint.

South Korean regulators aren’t the only authorities investigating Qualcomm.

Patent Royalties

The U.S. Federal Trade Commission on Jan. 17 filed its own antitrust suit against Qualcomm. The chipmaker is also being investigated by the European Union and Taiwanese authorities.

At the heart of the dispute between Apple and Qualcomm is a push by phone makers with the support of regulators to reduce the patent royalties Qualcomm charges.

Qualcomm gets the bulk of its revenue from selling chips, but more than half of its profit from the separate licensing business. Its patents cover the fundamentals of cellular technology, allowing it to rake in billions in licensing fees. In other words, the chipmaker gets paid regardless of whether its chips are used in mobile phones or not.

One common thread in all of the cases is the contention that royalty rates should be calculated as a percentage of the price of the components in the phone that Qualcomm invents and sells -- measured in tens of dollars. Currently licensing is a percentage of the price of the entire phone, which is usually in the hundreds of dollars.

Companies collaborate to develop industry standards so that the devices can communicate with each other. Since they have the ability to ensure their inventions get included in the standards, they pledge to license on “fair, reasonable and non-discriminatory” terms.

Qualcomm has breached that pledge by refusing to license its patents to Intel Corp., a rival chipmaker that’s been providing some chips to Apple for the past year, according to the complaint.

Bullying Accusations

Apple accused Qualcomm of bullying it, threatening to withhold chip supply, forcing it to agree not to challenge Qualcomm’s patents and using Apple innovations to help its competitors.  

Much of the money Qualcomm collects on the iPhone or iPad is paid by third-party manufacturers who pass along the cost, according to the complaint. Apple said Qualcomm can demand higher royalties because those manufacturers “have no incentive to negotiate.”

Apple said it’s not allowed to see those agreements, and believes Qualcomm gets paid multiple times on the same device. Since Qualcomm won’t give Apple a direct license, it instead agreed to give Apple a rebate -- money that it’s now withholding.

The case is Apple Inc. v. Qualcomm Inc., 17-108, U.S. District Court for the Southern District of California (San Diego).

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