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Apple Qualcomm Settlement Comment IP House Apr 19 2019

COMMENT ON THE APPLE QUALCOMM SETTLEMENT

Apple began a litigation campaign against Qualcomm in January 2017 for allegedly charging unreasonable patent royalty fees for smartphone modem chips and for abuse of its monopolistic power in the cellular industry.  Apple claimed that Qualcomm’s licensing practice for its patented baseband processor chipsets was extortive because Qualcomm’s patented chipsets are essential for implementing the industry standards of CDMA and LTE wireless communication, and Qualcomm had failed to offer licenses for its standard essential patents (“SEPs”) on fair, reasonable, and non-discriminatory (“FRAND”) terms. Qualcomm counterclaimed with several claims of patent infringement and misappropriation of trade secrets.  Earlier, in February 2015, Qualcomm had agreed to pay a record fine of $975 million and to lower its patent license royalty rates in response to an investigation finding by the National Development and Reform Commission in China that Qualcomm’s licensing practices violated Chinese antitrust law.   

As the U.S. litigation grew heated over the course of two years and spread to venues all over the world, any settlement seemed highly unlikely.  That is why many were surprised when on Tuesday, April 16, 2019, in the midst of opening statements at the District Court for the Southern District of California, the first of the global suits to reach trial, Apple and Qualcomm announced that they had arrived at a settlement agreement.  Settling on the eve of trial is not uncommon in the American judicial system.  However, after negotiations between the two technology titans had seemingly come to a halt months earlier, such a deal here looked improbable.

What could have pushed Apple to accept a settlement deal after it had seemingly become entrenched in its conviction to see its lawsuits through?  The answer likely lies in an announcement made by Intel, Qualcomm’s main competitor, mere hours after the Apple/Qualcomm settlement was publicized.  Intel proclaimed that it would be exiting the 5G smartphone modem business.  This had major implications for Apple since it had exclusively been using Intel modems in its iPhone XS and was searching for other modem suppliers after its dispute with Qualcomm arose.

Intel was apparently unable to develop a satisfactory 5G solution, but it is unclear whether its dropping out of the 5G race was spurred by the Apple/Qualcomm settlement or the cause of it.  Apple is purportedly aiming to release a 5G-enabled iPhone in 2020 in order to compete with 5G-enabled handsets being released by Samsung, LG, Huawei and others later this year.  If Intel was failing to meet development deadlines or was producing chipsets of inadequate quality, Apple may have only had one option left to meet its production timeline and demand quantity for 5G chipsets: Qualcomm.  Apple’s agreement to use Qualcomm chipsets in its 5G-enabled iPhones means that Intel would no longer have an incentive to continue developing 5G smartphone modems, and so, it exited the market.  Alternatively, Intel may have made the decision to exit the 5G market prior to Apple and Qualcomm reaching their settlement agreement.  If this were the case, again, Apple would only have one suitable option left in Qualcomm in order to remain on course for its 2020 5G iPhone.

Apple and Qualcomm have largely kept the terms of the licensing deal reached by the settlement under wraps.  The companies have publicized that the settlement includes a six-year global patent licensing deal that may be extended by an additional two years, a multiyear agreement for Qualcomm to supply chipsets to Apple, and a payment by Apple to Qualcomm of an undisclosed amount.  The specifics of the agreement are likely withheld to avoid threatening Qualcomm’s business models with other clients and to avoid testing those models in court under antitrust law.  UBS, the multi-national investment bank, has theorized that Apple could have paid Qualcomm between $5 and $6 billion to settle the legal dispute as well as agreeing to pay Qualcomm between $8 and $9 per iPhone in patent royalty fees (up from the $7.50 per phone paid to Qualcomm by Apple for previous iPhone models).

Intel’s exit of the market strengthens Qualcomm’s position as the market leader for 5G smartphone modem technology. It also provides an opportunity for other chipset manufacturers in China and elsewhere to fill the void left by Qualcomm’s biggest competitor.

 

 


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