Apple, Qualcomm make opening arguments just before settlement is unveiled
A battle that could have changed the mobile industry is over.
Shara TibkenFormer managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Lawyers for Apple, its contract manufacturers and Qualcomm made their pitches Tuesday morning to a jury about why their side was right in the licensing dispute. But before the opening arguments even finished, the parties had reached a settlement.
So marked the end of a battle that had the potential to change the mobile industry. Apple had accused Qualcomm of anticompetitive practices that have raised chip prices, restricted competition and hurt customer choice. Qualcomm had countered that Apple's iPhone wouldn't be possible without its technology, and it deserved to be paid for its innovation.
Apple and its contract manufacturers have paid Qualcomm billions of dollars for chips and licensing, but the bill should have been much lower, their attorneys said Tuesday in opening arguments at the trial that was to determine the future of Qualcomm's licensing business.
Watch this: Apple, Qualcomm go head-to-head -- with billions at stake
Qualcomm's no license, no chips policy -- in which it wouldn't provide processors to a phone maker until the company signed a licensing agreement -- meant it effectively charged Apple twice for its patents, said Ruffin Cordell, an attorney with Fish & Richardson who's representing Apple.
"No license, no chips allows them to double dip," he said during opening arguments. "They get paid twice for the same product. ... The other thing it does is allow them to charge patent royalties that are far in excess of that fair and reasonable level."
Qualcomm's lawyer, meanwhile, argued during his opening statement that the chipmaker was the one harmed in the situation and that it commanded higher royalty fees because its technology was more valuable than its peers.
"The reason they pay us more is because what we created is worth more," said Evan Chesler of the firm Cravath, Swaine & Moore.
Monday marked the start of the five-week, $27 billion trial that was expected to determine whether Qualcomm operates a smartphone modem chip monopoly that charges too much in licensing fees. The jury trial was being argued before US District Court Judge Gonzalo P. Curiel of the Southern District of California in San Diego. The outcome could've affected what wireless networks your phone taps into.
But Qualcomm attorney Chesler hadn't yet finished his opening arguments when news broke that the two companies had reached a settlement. (Check out our full report on that here.)
Qualcomm engaged in four anticompetitive acts, Cordell said Tuesday. It had a policy of not licensing patents to competitors, which he said broke Qualcomm's vow to the standards body. Qualcomm's no license, no chips strategy made customers pay twice, Cordell said, while its exclusivity agreements locked out competition. Qualcomm's agreements with companies also included obstruction/gag clauses that reinforced Qualcomm's "illegal scheme."
"This case is about the fact that Qualcomm has used its monopoly ... to set unfair prices and stifle competition and dictate terms to some of the biggest, most powerful companies in the world, that rational companies would never agree to in a million years," Cordell said.
From 2010 to 2016, the iPhone maker paid Qualcomm $16.1 billion for chips and $7.23 billion for licensing fees. But the amount should have been much lower, Apple said.
Cordell noted that 20% of mobile standard essentials patents come from Qualcomm, while 40% come from Ericsson, Nokia, LG, Huawei and InterDigital combined. Those companies together get paid royalties of $3.34 per iPhone, he said. Qualcomm demands $13, Cordell said.
"Does that make any sense?" Cordell says. "Is that fair and reasonable?"
While Cordell said Qualcomm asked for royalties of $13 per iPhone, Apple testimony during an FTC trial against Qualcomm in January revealed that discounts lowered the Qualcomm licensing fee to $7.50 per iPhone. During the trial, Apple said it should pay only $1.50 per device, a 5% fee for the cost of each $30 modem used in an iPhone.
Chesler, meanwhile, argued that Apple's contract manufacturers were fine with its licensing terms for about 20 years before Apple instructed them to stop payments to Qualcomm.
"After all that time, almost 20 years, in April of 2017, all four of the contract manufacturers stopped paying anything for our technology," he said. At the end of 2018, they owed Qualcomm about $8 billion. "In fact, they have not paid us a dime in the two years since then. Literally billions of dollars."
He noted that because of the battle, Qualcomm's "stock has plummeted. People have been laid off. Research and development to develop new technology have been canceled."
Duking it out
Apple has long made the processors that act as the brains of its iPhones, but the company has relied on Qualcomm's modems to connect its devices to cell networks. From the iPhone 4S in 2011 to the iPhone X in 2017, Qualcomm was the sole provider of 4G chips that helped Apple's devices access Verizon, AT&T and other wireless services.
Qualcomm is the world's biggest provider of mobile chips, and it created technology that's essential for connecting phones to cellular networks. The company derives a significant portion of its revenue from licensing those inventions to more than 300 device makers, mostly handset companies. Some patent holders license their intellectual property on an individual basis; Qualcomm licenses all its patents as a group. For a set fee, a device maker gets to use all of Qualcomm's technology.
Because Qualcomm owns patents related to 3G, 4G and 5G phones -- as well as other features like software -- any handset makers building a device that connects to a network must pay it a licensing fee, even if they don't use Qualcomm's chips. Apple licenses Qualcomm's technology through its manufacturers, like Foxconn, rather than purchasing a license of its own.
Apple, which initially filed suit against Qualcomm in January 2017, argued that it essentially pays Qualcomm twice, first by purchasing processors and then by paying royalty fees. The tech giant said it should pay fees based only on the cost of the wireless chip inside its iPhones. Apple partners Foxconn and Pegatron, which assemble its devices, agree and have joined the lawsuit. Qualcomm countered that it isn't a monopoly and said its technology is more than modems so it should be compensated based on the selling price of the phone itself.
"In the summer of 2016, Qualcomm went too far," Cordell said during Tuesday's opening arguments. "Apple was asked questions by the government. Apple answered the questions, and that enraged Qualcomm." Then Apple "had the audacity to buy products" from another company, which also "enraged Qualcomm," he said.
At stake in the case are tens of billions of dollars. Apple's manufacturing partners want a refund of $9 billion for allegedly overpaying royalties since 2013. Under antitrust law, that amount could be tripled. Qualcomm wants damages of its own for breach of contract, though it hasn't detailed the amount. An even bigger concern for Qualcomm: whether it will have to change its entire business model, collecting far lower royalties based on the price of its chips, not the phones they're in.
The contract manufacturers paid Qualcomm $31 billion for chips from 2010 to 2016 and overpaid $7 billion to $9 billion, Richard Doren of Gibson Dunn said Tuesday during opening arguments on behalf of Foxconn, Pegatron, Wistron and Compal. The overpayment is what could have been tripled under antitrust law.
"Why didn't the contract manufacturers step up?" Doren said. "The reality is they didn't dare. They are literally between a rock and a hard place" -- between their customers and Qualcomm demands. "It's a delicate and difficult balance. But if you don't maintain it, you will not survive, and so they stayed quiet," he said.
For consumers, the battle could have resulted in iPhone connectivity speeds that can't match up to those of Android devices. Apple's current modem supplier, Intel, doesn't yet have a 5G chip ready. Qualcomm is the only option for handset makers that want to tap into the ultrafast wireless network this year. We may not see a 5G iPhone until 2020 or even 2021. And if Qualcomm and Apple didn't resolve their problems, it was unlikely Apple would have Qualcomm modems in its iPhones again anytime soon.
Originally published at 10:39 a.m. PT Update at 11:11 a.m.: Adds comments from contract manufacturers' attorney Update at 3:45 p.m.: Adds details about Qualcomm opening argument and settlement.