Just prior to opening statements in a San Diego federal trial between Apple and Qualcomm last week, lawyers for both companies huddled out of earshot of a nine-person jury.
The two tech heavyweights were deep into settlement negotiations to end their bitter, two-year fight over Qualcomm’s patent licensing fees. The discussion centered on whether to ask for a delay in opening statements in hopes of finalizing a deal.
The decision was made to proceed with opening arguments. But if there was any toning down of rhetoric because of settlement talks, it was not apparent in the courtroom.
Lawyers for Apple and contract manufacturers that make iPhones lashed out at Qualcomm for breaking promises to the mobile industry. Qualcomm, they alleged, also used a “Bermuda triangle” of contracts to charge twice for the same technology, abused its dominant market share in cellular chips to strong-arm smartphone makers into paying too much for patents and sought payment on dubious inventions that device makers don’t use, including wirelessly connected pants.
A Qualcomm lawyer fired back that Apple had been secretly plotting to attack the San Diego company since 2014, with internal documents laying out a scheme to cast doubt on the value of Qualcomm’s 140,000 strong patent portfolio and to withhold billions in patent royalties to hamstring the company financially — all with the goal of reducing an $11 to $15 patent fee on iPhones that often sell for more than $1,000.
As for the wireless patents, Qualcomm’s attorney said that patent is part of a family of inventions that improve Global Positioning System technology, enabling connected clothing so parents know that their children are where they’re supposed to be.
As opening statements wrapped up last Tuesday, the companies announced a sweeping settlement. It includes Apple signing a direct six-year patent license agreement with Qualcomm with an option to renew, a chip supply agreement, as well as one-time payment and other provisions.
The deal was a surprise. As the trial loomed, it didn’t look like a settlement was in the offing. Both companies were entrenched.
But 5G changed the conversation.
“5G is clearly driving the agreement,” said Ricardo Tavares, head of Techpolis, an industry research firm. “For two American companies — in the environment that we are in — to be in a fight that is so damaging to each other, this agreement brings a lot of value.”
For the most part, the deal brings to an end a turbulent two-year stretch for Qualcomm, when it fought off Broadcom’s hostile takeover, the failed NXP Semiconductor acquisition, Apple’s legal attack and myriad regulatory challenges around the world.
“From Qualcomm’s point of view, the settlement with Apple is a huge victory,” said Sravan Kundojjala, a lead analyst with industry research firm Strategy Analytics.
The settlement removes a key threat to Qualcomm’s patent licensing business model. Apple’s antitrust lawsuit argued that Qualcomm’s patent-licensing practices were illegal and anti-competitive, which potentially could have derailed profits that power research and development on faster 5G and other new wireless technologies.
For Apple, the deal creates an avenue for a 5G iPhone with Qualcomm semiconductors in 2020. A 5G iPhone looked increasingly doubtful given Intel’s time-frame for delivering 5G cellular chips.
Just hours after the settlement, Intel announced that it would no longer pursue 5G cellular processors for smartphones because there was no clear path to profitability.
One outstanding legal question is the pending decision in the U.S. Federal Trade Commission antitrust lawsuit against Qualcomm.
A trial in the case was held in January in federal court in San Jose. U.S. District Judge Lucy Koh has yet to make a ruling, although she could do so any day.
Though each case is independent, the FTC’s monopoly charges against Qualcomm mirror those that Apple brought to San Diego federal court. The lawsuits were filed within days of each other back in 2017. Apple and the FTC had a verbal common interest agreement, according to court transcripts.
Now that Apple has settled, some analysts believe it puts pressure on the Federal Trade Commission to settle the case.
“A lot of the argument for the FTC case is now gone,” said Jim McGregor, a principal with Tirias Research. “Intel isn’t even in the modem market anymore. Apple has accepted fair, reasonable and non-discriminatory terms. Judge Koh has to look at the FTC and ask, does this case still stand?”
A Wall Street Journal editorial last week likened the FTC continuing the fight to wanting to “shoot the wounded after the war is over.”
But the FTC could have solid reasons for waiting for Judge Koh’s decision, said David Reichenberg, an antitrust lawyer with Cozen O’Connor in New York.
“Perhaps Qualcomm is now using this to enter into further settlement negotiations with the FTC,” he said. “They can say, “We have alleviated your concerns. Let’s move on.
“And perhaps the FTC says, ‘We bring cases because they are important to the law,’” he continued. “So they might say we are going to see how the law comes out on this because we need to know what the standard is for showing anti-competitive effect in a growing technology market.”
With the emergence of China’s Huawei as a strong player in the 5G technologies globally, however, there may be added pressure on the FTC to avoid harming Qualcomm’s patent licensing business model that funds much of its research and development, say analysts.
The Trump administration has emphasized the need for the U.S. to be a leader in 5G technology. And the FTC’s decision to bring the lawsuit two years ago was controversial, with former Commissioner Maureen Ohlhausen writing that it was based on a flawed legal theory.
“Given that Apple is the only U.S. based smartphone maker, it wouldn’t make any sense for the FTC to force changes in Qualcomm’s licensing business now that Apple has signed, since there is no longer an aggrieved party in the U.S.,” said Chris Caso, an analyst with Raymond James.
Whatever happens with the FTC, Qualcomm’s settlement with Apple cannot be renegotiated by either party, said Mike Walkley, an analyst with Canaccord Genuity.
“The terms of this settlement are binding no matter the outcome,” said Walkley. “We also note that the licensing deal with Apple is a device level licensing deal, and therefore we believe this protects Qualcomm’s long-term licensing business model.”
There’s a bit of deja vu in the Apple-Qualcomm settlement, said Kundojjala, the Strategy Analytics analyst.
In 2007, Qualcomm and Nokia were entangled in a similar legal battle. Like Apple today, Nokia was a mobile phone leader at the time.
And also like today when Apple’s key modem chip supplier, Intel, announced its exit from the 5G mobile market, Nokia’s cellular modem provider at the time — Texas Instruments — also quit when a settlement with Qualcomm was inked in 2008 on courthouse steps.
Back in 2017, the cellular industry — Qualcomm included — began pushing to accelerate the rollout of 5G networks by a year. They hope faster speeds and unlimited data plans will convince consumers to upgrade to new smartphones in the saturated mobile market.
5G networks from Verizon, AT&T and other mobile carriers globally have begun rolling out this year. Qualcomm expects to supply 5G chips to up to 30 devices by year end, most of them smartphones.
“When Qualcomm had one of the biggest challenges in our history, with all the attacks on our business model, this is where our engineering culture shined most,” said President Cristiano Amon in a recent interview. “In the middle of all this, we actually accelerated 5G by one year.”
Amid the legal feud, Apple dropped Qualcomm as a chip supplier two years ago. But given Intel’s timing for delivering a 5G chip, it increasingly looked like Apple would be late to the 5G party.
That meant potentially losing market share to Samsung, Motorola, Xiaomi, ZTE, Huawei and other Android 5G smartphone makers.
Now Apple is likely to have a 5G iPhone sometime next year.
“We believe Qualcomm’s increased semiconductor content — antenna to modem — in the first 5G iPhone could drive strong incremental revenue growth,” said Kundojjala of Strategy Analytics.
The exact terms of the settlement are unknown. Analysts’ estimates vary widely. Qualcomm is expected to supply more details on May 1 during its fiscal second quarter earnings conference call.
Since the deal was announced last Tuesday, Qualcomm’s shares have soared nearly 40 percent. They closed last week at $79.89 and traded above $91 on Monday.
UBS analyst Tim Arcuri estimated that Qualcomm could receive $6 billion in unpaid royalties from the past two years. He estimates the royalty going forward at around $8 to $9 per iPhone.
Apple reportedly is planning to build its own cellular modem in-house. The Cupertino company is opening an engineering center in San Diego, which is expected to employ 1,200 workers over the next three years. There are currently 68 jobs openings in San Diego on the company’s website, mostly in wireless.
“While (the settlement) is certainly good news for Qualcomm, we would assume that this only intensifies Apple’s efforts to develop its own modem — efforts which we think are currently targeting a product for iPhones potentially as early as the fall of 2021,” Arcuri said.