Shortly after posting bonds to pave the way for a ban in Germany on 2016 and 2017 iPhone models to be enforced, Qualcomm (QCOM) is kicking off a battle with the FTC that could have major implications for its patent-licensing business.
On Friday, nearly two years after the FTC sued Qualcomm over several of its licensing policies, opening arguments for the suit are being heard in a non-jury trial at a federal court in San Jose, Calif. The trial, which follows settlement talks that failed to yield a deal, is being overseen by Judge Lucy Koh, who industry followers might remember for presiding over some of Apple's (AAPL) legal battles with Samsung.
In its suit against Qualcomm, the FTC alleges that the chipmaker engaged in anticompetitive behavior by one, refusing to supply its baseband modem chips to phone makers that failed to agree to its licensing terms for standards-essential patents (SEPs); two, providing billions of dollars worth of licensing rebates to Apple from 2011 to 2016 in exchange for its exclusive use of Qualcomm modems; and three, refusing to license SEPs for mobile radio standards (3G, 4G, etc.) to rival modem makers such as Intel (INTC) , Samsung (SSNLF) and MediaTek.
In November, Koh granted the FTC a partial summary judgment under which Qualcomm was ordered to license its SEPs to modem rivals on fair, reasonable and non-discriminatory (FRAND) terms. If upheld -- and there's a good chance that Qualcomm will appeal this ruling following the trial -- the judgment could result in Qualcomm only being able to collect royalties on its SEPs (though not other patents it holds) based on the selling price of the modem, rather than (as it has historically done) on the selling price of the entire device the modem goes into.
A day before the start of the FTC trial, Qualcomm announced that it had posted €1.3 billion ($1.48 billion) worth of bonds to enforce injunctions placed in December by a German court on the sale and importation of the iPhone 7, iPhone 8 and iPhone X due to the infringement of non-standards essential power management patents. Soon afterwards, Apple, which plans to appeal the ruling, stopped selling the iPhone 7/7 Plus and 8/8 Plus in Germany (since the iPhone X has been discontinued, no action was needed for it).
The news comes three weeks after a Chinese court slapped a preliminary injunction against older iPhones for the infringement of non-standards essential software patents. However, the Chinese ban, which arrived shortly after Huawei's CFO was arrested in Canada, isn't currently being enforced. Apple, for its part, claims that an iOS 12 software update it recently pushed out in China puts it in compliance with the court's infringement ruling and makes a ban unnecessary.
Qualcomm and Apple are also embroiled in a number of other legal fights across three continents. Apple, which insists it owes much lower royalties than what Qualcomm has charged it to date, instructed its contract manufacturers in 2017 to stop paying royalties on the sale of iPhones and other 4G-capable Apple hardware. That, along with an ongoing dispute with Huawei, has resulted in billions of dollars of lost royalty revenue for Qualcomm.
In addition to suing Apple for infringement, Qualcomm has sued Apple's contract manufacturers for non-payment of royalties. It has also filed a suit alleging that Apple, which last year launched iPhones that solely rely on Intel modems, "engaged in a years-long campaign of false promises, stealth and subterfuge designed to steal Qualcomm's confidential information and trade secrets" in order to improve the performance of Intel's modem chips.
Though Qualcomm gets the majority of its revenue from its chip division (QCT), its licensing division (QTL) has historically delivered the majority of its profits. Back in fiscal 2016, prior to its legal battles with Apple, QTL produced pre-tax income of $6.53 billion on revenue of $7.66 billion.
In fiscal 2018, which ended last September, QTL produced pre-tax income of $3.53 billion on revenue of $5.16 billion. However, that was still larger than QCT's pre-tax income of $2.97 billion, which came via revenue of $17.28 billion.
If Qualcomm is able to resolve its legal battles without seeing drastic changes to its licensing model and phone royalty rates, QTL's profits are likely to rebound sharply. For now, however, the battles continue raging on.