Tantra Analyst

Another Apple vs. Qualcomm epic court battle: What you need to know

If you are not already tired of Apple vs. Qualcomm lawsuits, there is another big one coming soon to the U.S. Southern California District Court in San Diego, starting from April 15, 2019. This battle is the mother of all, with up to $27 billion by some estimates, as well as the future of cellular licensing, at stake. The dominant smartphone maker Apple along with its contract manufacturers (CM) of iPhones are fighting against the cellular technology pioneer Qualcomm. The trial also features testimonies from big wigs of both companies, including Tim Cook and Steven Mollenkopf.  If you are looking for details on what the trial entails, you have come to the right place; read on.

The background

This trial follows an earlier battle that Qualcomm decisively won. You can learn more about that in my earlier article here. During that trial, something interesting happened, which provided a window into what is in dispute during the upcoming trial. Apple’s expert witness, Frank Casanova was trying to demonstrate an AR (Augmented Reality) app on his iPhone for selecting eyeglass frames. Alas! The app wouldn’t load quickly, because, there was no Wi-Fi in the courtroom, and his iPhone didn’t have a good cellular connection (probably bad modem!). It was ironic that Apple’s effort to showcase their cool technology ended up becoming a compelling illustration of how much their innovations depend on cellular connectivity. And that’s exactly what is being decided in the trial – the value of cellular connectivity in smartphones.

The whole saga started when Apple sued Qualcomm for not paying the discounts owed for using Qualcomm’s modems in most of its phones, as part of a contract between the two. That contract is referred to as BCPA- Business Cooperation and Patent Agreement. Qualcomm claims Apple breached the contract by complaining to various antitrust agencies around the world. After that Qualcomm sued Apple’s CMs for breach of contract when they stopped paying royalties and also sued Apple for illegally directing CMs not to pay those royalties. I know it’s very confusing. Luckily, the presiding Judge, Hon. Curiel combined all of those cases into one trial.

Claims and what is at stake

In the pretrial phase, the Judge ruled the BCPA case in favor of Apple, which might result in Qualcomm paying up to $1 billion in unpaid dues. So, the case is now to decide whether Qualcomm’s licensing policies are fair, reasonable, and nondiscriminatory (FRAND) requirements or not, as well as to decide whether Apple and CMs have breached the contract or not. Qualcomm might be seeking more than $ 14 Billion from Apple and its CMs for past payments and penalty. On the other hand, Apple is asking for up to $27 Billion including overpayment and penalty. If Qualcomm loses, that might severely affect its licensing policies and even other licensing contracts.

The claims in this case can be summarized into five groups as below. Many of these are similar to the ones presented in the FTC case in San Jose, whose final decision is still awaited.

No license no chip policy – Just like the FTC claim, Apple alleges that Qualcomm’s “No license, no chip” policy combined with its monopoly in the “premium LTE thin modem market” has allowed it to charge higher than FRAND royalties.

Qualcomm claims that the “premium LTE thin modem market” is an artificial and unrealistic construct, as Apple is the only customer in such a market. Qualcomm’s strong position in the LTE market was because of its technology and product superiority and was not a monopoly because there were many able competitors in the overall modem market. Apple using Intel modems in late iPhones proves this point. Also, multiple legitimate players in the nascent 5G modems market prove that it is a vibrant and fiercely competitive space. Additionally, they claim their “no license no chip policy” protects against OEMs knowingly infringing on IPRs, and they never cut supply to any OEMs because of license issues. Further, their royalty rates comply with FRAND guidelines, as evidenced by more than 100 signed contracts with many major OEMs.

Licensing at the device level vs. chip level – This was also the argument presented at the FTC trial. Apple alleges that most of the value of Qualcomm’s IPR is limited to modems and hence the licensing fee should be based on modem price, not the device price.

Qualcomm claims that its IPR covers much more than the modem, including Applications Processor, Graphics Processor, interconnects and more, as well as the communication with the infrastructure. Moreover, they claim, the value of other features of the phone is significantly diminished without good connectivity, as illustrated by the problems with the AR demo. Historically, all the cellular IPR holders have licensed at the device level, not at a component level. Qualcomm claims it is following that decade of precedence.

A side note, if you would like to know more about cellular licensing read my article series here.

Royalty rates are higher than FRAND – Apple alleges that Qualcomm’s royalty rates are higher than FRAND, and it has not changed them from the days when the phone’s primary function was connectivity. Today’s smartphones have many other features and functions. This claim was also one of the arguments in the FTC case.

Qualcomm claims that during the same period, connectivity has significantly improved, and better connectivity is essential for all those new features and functions. A classic case is comparing the consumer appeal and prices between Apple iPhone and iPod when it existed. The only difference between the two was cellular connectivity. One could claim that because of that difference, iPhones became so popular that Apple had to discontinue iPods.

Additionally, Qualcomm contends that Apple has tried to negotiate a direct licensing contract on many occasions in the past. But it offered unreasonably low rates (as little as $1.50/phone for all patents), which might be construed as not negotiating in “good faith.” If Qualcomm can prove this, Apple could be considered as an “Unwilling licensee,” in which case, Qualcomm is not required to offer FRAND royalty rates.

Breach of contract – Qualcomm alleges that Apple’s CMs who pay license fees on behalf of Apple have breached a legally binding contract by stopping to pay the license fees, at the behest of Apple, while continuing to use Qualcomm’s IPR. Further, Qualcomm points out that its contracts with CMs have been ongoing for a long period. These contracts started when Apple was not even making phones and were present even when Apple was not buying Qualcomm modems.

Apple and CMs claim that the Qualcomm’s royalty rates are higher than FRAND, as explained before, and hence they wanted to renegotiate, but Qualcomm refuses to do so.

Interference into legally binding contracts – Qualcomm alleges that Apple has instructed its CMs to stop paying the licensing fees, and thereby illegally interfered into the contract between it and CMs. It also claims that Apple has even agreed to pay any legal fees CMs would incur for stopping the payment. Additionally, Qualcomm points out that CMs continue to pay licensing fees for OEMs other than Apple.

Apple claims that it is trying to stop CMs from paying higher royalty fees. Also, since it ultimately pays the license fees, it is legal to instruct CMs to stop the payment.

As evident, the case seems overly complicated with lots of technical details. In spite of Judge Curiel’s effort to streamline it, it will still be very challenging for the jury to comprehend. It all depends on how lawyers from each side simplify their arguments and make them easy to understand. We will know it soon.

If you would like to keep up with the proceedings, follow me on twitter @MyTechMusings and follow the hash tag #aaplqcom2.