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Now that Apple has blocked royalty payments to Qualcomm in an increasing fierce legal battle over patents, what is the San Diego chipmaker going to do to hit back?
The company hasn’t made a move yet. But late Wednesday, Bloomberg News reported that Qualcomm is planning to retaliate by asking a U.S. International Trade Commission to ban imports of iPhones, which are made by contract manufacturers in Asia.
The report cited “a person familiar with the company’s strategy.” Qualcomm had no comment.
Last week, Qualcomm cut its revenue and profit forecasts after Apple informed the company that it has stopped reimbursing Foxconn and other Asia contract makers of iPhones for the patent royalties that they pay to Qualcomm.
If Qualcomm doesn’t fight back, other smartphone firms may stop paying patent royalties as well, according to analysts. Already, Qualcomm announced that an unnamed company didn’t pay $150 million in patent royalties owed during the quarter ended March 30. Analysts believe the company is Samsung.
“We would not be surprised to see Qualcomm take a stand given Apple’s recent behavior,” said Bernstein Research analyst Stacy Rasgon in a research note. “Indeed, we can’t see that (Qualcomm has) much of a choice given the threat of contagion.”
Asked about the risk of Qualcomm seeking an iPhone ban, Apple Chief Executive Tim Cook said Tuesday during the company’s earnings conference call that it has not received a fair and reasonable patent licensing offer from Qualcomm.
“I don’t believe anyone is going to enjoin the iPhone based on that,” he said. “I think there is plenty of case law around that subject. But we shall see.”
Cook added that Apple decided to withhold royalties because it doesn’t know how much to pay.
“They think we owe some amount. We think we owe a different amount,” he said. “There hasn’t been a meeting of the minds there, so at this point we need a court to decide that -- unless we are able to, over time, settle between us.”
In January, Apple sued Qualcomm, saying it forces smartphone makers to pay too much for use of its 3G/4G standards essential patents, which are required to be licensed under “fair, reasonable and non-discriminatory” terms.
Qualcomm counters that its royalty rates, which top out at roughly 5 percent of the device price, have been negotiated through hundreds of agreements spanning two decades.
According to Qualcomm, its licensing business model allowed Apple to enter the smartphone market a decade ago and reap billions in profits with little or no investment in core cellular technology.
There are advantages to patent holders, particularly those with standards essential patents like Qualcomm, in seeking an injunction from the ITC – an administrative agency – rather than going through the federal district courts, said Jonathan Barnett, an intellectual property law professor at the University of Southern California.
First, the ITC moves faster – typically ruling in 15 to 18 months instead of an average of 2.5 years for federal court patent cases to reach trial, he said.
Second, some district courts have suggested that standards essential patent holders shouldn’t be entitled to injunctions that ban imports of infringing products. They should only be eligible for damages.
“The patent holder has a greater expectation of obtaining injunctive relief through the ITC, which is the only remedy it can issue,” said Barnett.
Analysts, however, think it could be a difficult task to win a ban on iPhones. In 2013, the ITC blocked imports of some older model iPhones during a long-running patent dispute with Samsung. The Obama administration overturned the ruling before it took effect.
“Apple and Samsung, in this protracted legal battle they’ve had over the last 10 years, they have tried at various points to get an injunction against each other’s products in various countries, and they have never been able to do that,” said Timothy Arcuri, an analyst with Cowen & Co.
Arcuri believes Qualcomm would have better luck in China. The company recently negotiated patent licensing terms with China’s anti- monopoly regulator. The country’s top smartphone makers are all paying patent royalties to Qualcomm.
“If I were Qualcomm, I would go to China because it is the more likely country to say (to Apple) our licensees are paying and you’re not,” he said. “The Chinese government would love any opportunity to ban the import of iPhones. That would be good for the domestic brands.”
Qualcomm also could retaliate by refusing to sell cellular modem chips to Apple’s contract manufacturers. But analysts think that is unlikely, in part because it would support Apple’s legal claim that Qualcomm uses its market dominance in cellular radios to force smartphone makers, who are afraid of losing chip supply, to pay too much for its patents.
Qualcomm’s stock ended trading Thursday up 42 cents at $54.91 on the Nasdaq exchange.