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Apple sues Qualcomm over unfair licensing terms

The iPhone maker also says Qualcomm punished it for helping a South Korean probe into the chipmaker's licensing practices by withholding a $1 billion rebate.

Sarah Tew/CNET

Apple's latest lawsuit target? Qualcomm.

The iPhone maker on Friday filed suit against Qualcomm, alleging the wireless chipmaker didn't give fair licensing terms for its processor technology. Apple also said Qualcomm sought to punish it for cooperating in a South Korean investigation into Qualcomm's licensing practices by withholding a $1 billion rebate.

Apple wants a court to lower the amount it pays Qualcomm in licensing fees, as well as order the return of the $1 billion. The company said in its suit that Qualcomm should be paid royalties based on the value of its particular contribution, not for contributions from other patent holders. Currently, Qualcomm's royalties are based off the selling price of a phone, rather than what portion Qualcomm's technology enabled.

"For many years Qualcomm has unfairly insisted on charging royalties for technologies they have nothing to do with," Apple said in a statement. "The more Apple innovates with unique features such as TouchID, advanced displays, and cameras, to name just a few, the more money Qualcomm collects for no reason and the more expensive it becomes for Apple to fund these innovations."

Qualcomm, meanwhile, fired back at Apple's allegations, calling them "baseless." Don Rosenberg, Qualcomm executive vice president and general counsel, 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. Apple has been actively encouraging regulatory attacks on Qualcomm's business in various jurisdictions around the world, as reflected in the recent [South Korean Fair Trade Commission] decision and FTC complaint, by misrepresenting facts and withholding information. We welcome the opportunity to have these meritless claims heard in court where we will be entitled to full discovery of Apple's practices and a robust examination of the merits.

Qualcomm is the world's biggest provider of mobile chips, and it created some of the essential standards for connecting phones to cellular networks. The company derives a significant portion of its revenue from licensing that technology to other chipmakers. Apple designs the processors in its iPhones and iPads, but it buys chips from Qualcomm to connect to 4G LTE and other cellular networks. Under Qualcomm's licensing structure, Apple pays it a fee for its chips and another fee for the intellectual property included in those chips. Most components suppliers bundle the IP cost in with the chip sales price.

For the iPhone 7 and 7 Plus introduced this year, Apple also started buying 4G LTE chips from another supplier, Intel. Because Intel's chips use some of Qualcomm's essential technology, Apple pays Qualcomm a licensing fee for those processors, as well, which is based off the total value of the iPhone ($650) versus the value of the Intel chip (closer to $20).

Apple says Qualcomm's practices are unfair, as are the clauses in Qualcomm's licensing terms that prevent Apple from seeking out other suppliers or participating in government inquiries into Qualcomm's practices.

"This will likely be troublesome for Qualcomm who, by virtue of being so far ahead technologically with so much market share, has a painted target on its back," Moor Insights & Strategy analyst Patrick Moorhead said.


Qualcomm has come under scrutiny in recent years for alleged monopolistic practices. Two years ago, it paid China nearly $1 billion to end a 14-month antitrust investigation in that country. Then, in December, South Korea hit Qualcomm with a $850 million fine following a three-year investigation. The South Korean Fair Trade Commission accused the chipset maker of having an "unfair business model" and creating a monopoly with its practices.

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Earlier this week, the US jumped into the fray, with the US Federal Trade Commission filing a lawsuit that accused Qualcomm of forcing Apple to use its chips exclusively in exchange for lower licensing fees, excluding competitors and harming competition.

In its heavily redacted complaint (PDF), the FTC said the patents Qualcomm held are standard-essential patents -- technology that is essential to the industry and must be licensed to competitors under fair, reasonable and nondiscriminatory terms (FRAND). But the complaint alleges that Qualcomm consistently refused to license some standard-essential patents to rival chipmakers, in violation of its FRAND commitments.

Qualcomm said in response to the FTC complaint earlier this week that it "has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms."

Apple, meanwhile, has been involved in plenty of litigation of its own. The company faced off against Samsung at the Supreme Court in October over a design patent case. Ironically, at issue in that suit was whether Samsung had to pay damages based on the entire value of its infringing phones or only on the portion that infringed. The Supreme Court ultimately decided that damages don't have to be based on an entire device and sent the case back to the lower court.

Apple on Friday said Qualcomm charges it "at least five times more in payments than all the other cellular patent licensors we have agreements with combined." The company added that Qualcomm recently withheld nearly $1 billion in payments from Apple "as retaliation for responding truthfully to law enforcement agencies investigating them."

"Apple believes deeply in innovation and we have always been willing to pay fair and reasonable rates for patents we use," the company said in its statement. "We are extremely disappointed in the way Qualcomm is conducting its business with us and unfortunately after years of disagreement over what constitutes a fair and reasonable royalty we have no choice left but to turn to the courts."

Apple filed the lawsuit in federal district court in the Southern District of California, Qualcomm's backyard instead of Apple's home in Northern California. The company has asked for a jury trial.

Updated at 1:15 p.m. PT with additional details and Apple's comment.

Updated at 2:30 p.m. PT with additional background and analyst comment.

Updated at 4:40 p.m. PT with Qualcomm's comment.