Apple, Qualcomm head into newest legal fight, with billions at stake

When it pertains to Apple vs. Qualcomm, the Federal Trade Commission trial in January was simply a gown practice session. Now it’s time for the genuine program.

The 2 innovation giants satisfy on Monday in a San Diego courtroom to begin a five-week, $27 billion trial that’ll identify whether Qualcomm runs a mobile phone modem chip monopoly and charges excessive in licensing costs. Apple has actually implicated Qualcomm of anticompetitive practices that have actually raised chip rates, limited competitors and hurt consumer option.

Apple, which at first submitted fit versus Qualcomm in January 2017, argues that it basically pays Qualcomm two times, initially by acquiring processors and after that by paying royalty costs. The tech giant states it needs to pay costs based just on the expense of the cordless chip inside its iPhones. Apple partners Foxconn and Pegatron, which assemble its gadgets, concur and signed up with the claim. Qualcomm counters that it isn’t a monopoly and states its innovation is more than modems so it ought to be compensated based upon the asking price of the phone itself.

The parties can’t come to an agreement, so it’s up to a court to decide. The jury trial will be argued before US District Court Judge Gonzalo P. Curiel of the Southern District of California in San Diego.The outcome could affect what wireless networks your phone taps into.   

The trial will begin Monday with jury selection. On Tuesday, both sides present opening arguments, and Apple calls its first witnesses. The list could even include Apple CEO Tim Cook, who’s likely to appear during the first week. Other big witnesses include Apple’s operating chief, Jeff Williams; its head of marketing, Phil Schiller; Qualcomm CEO Steve Mollenkopf; and Qualcomm President Cristiano Amon. After the first week, court will be in session Mondays to Wednesdays, and closing arguments and jury deliberation are expected the week of May 13.

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.

For consumers, this ongoing battle could result 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 who 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 can’t resolve their problems, it’s unlikely Apple will have Qualcomm modems in its iPhones again anytime soon.

Apple referred CNET to comments it made when it filed its initial complaint. “Qualcomm’s illegal business practices are harming Apple and the entire industry. They supply us with a single connectivity component, but for years have been demanding a percentage of the total cost of our products — effectively taxing Apple’s innovation,” the comments read. “We believe deeply in the value of intellectual property but we shouldn’t have to pay them for technology breakthroughs they have nothing to do with.”

Foxconn declined to comment. In a brief, the company and other contract manufacturers said their and Apple’s “antitrust claims against Qualcomm are an attempt to put a stop to Qualcomm’s unfair and monopolistic practices.”

Qualcomm reiterated a statement made by CEO Mollenkopf during the company’s earnings report in January: “We are one of the main architects of the wireless ecosystem, and our leading investments in R&D have positioned the company at the forefront of 2G, 3G, 4G and now 5G leadership,” he said. “We have one of the largest patent portfolios in the industry, with more than 130,000 patents and pending patent applications worldwide. And it is critical that we protect our [intellectual property] and guarantee that we are properly made up for our innovations and financial investments.”

Battle of the frenemies

Apple has actually long made the processors that serve as the brains of its iPhones, however the business has actually counted on Qualcomm’s modems to link its gadgets to cell networks. From the iPhone FOUR in 2011 to the iPhone X in 2017, Qualcomm was the sole company of 4G chips that assisted Apple’s gadgets gain access to Verizon, AT&T and other cordless services.

The close relationship broke down. Apple began purchasing modems from Intel, start with the iPhone 7 in 2016. That sustained a budding argument over licensing costs. The current iPhone XS, XS Max and XR consist of just Intel modems.

Qualcomm is the world’s most significant company of mobile chips, and it developed innovation that’s vital for linking phones to cellular networks. The business obtains a considerable part of its earnings from licensing those innovations to more than 300 gadget makers, mainly handset business. Some patent holders certify their copyright on a private basis; Qualcomm accredits all its patents as a group. For a set cost, a gadget maker gets to utilize all of Qualcomm’s innovation.

Because Qualcomm owns patents associated with 3G, 4G and 5G phones — in addition to other functions like software application — any handset makers constructing a gadget that links to a network need to pay it a licensing cost, even if they do not utilize Qualcomm’s chips. The business will not certify its patents to competing chipmakers, however, which the United States and other federal governments have actually disagreed with. Qualcomm argues that chipmakers do not require licenses since the handset makers currently cover the expense of utilizing its innovation.

Apple licenses Qualcomm’s innovation through its producers, like Foxconn, instead of acquiring a license of its own. During the January trial, Apple stated it had actually pursued 5 years to work out a direct license with Qualcomm however that the terms provided, like cross-licensing Apple’s innovation, weren’t reasonable. The agreement producers pay Qualcomm billions in royalties each year, a quantity Apple then repays. As long as Apple does not battle Qualcomm in court or assistance regulators, Qualcomm offers it refunds on the licensing costs.

Qualcomm computes its royalty costs on the worth of the phone, not the parts in it. Apple, the FTC and other regulative bodies have actually challenged that practice. Apple argues Qualcomm should not be spent for worth Apple develops with its iPhone brand name.

Qualcomm likewise caps the asking price of the phone, the basis for its royalty, at $400, even if a gadget cost triple that. The chipmaker states that implies it isn’t charging for contributions Apple makes, such as including more flash storage. Apple’s ultrapremium iPhone XS Max expenses from $1,099 to $1,449, depending upon just how much storage it has. But with Qualcomm’s cap, Apple would pay a royalty rate comparable to that of a $400 phone.

Qualcomm gets $7.50 for each iPhone, Apple stated in January. Apple states it needs to pay just $1.50 per gadget, a 5 percent cost for the expense of each $30 modem utilized in an iPhone.

Battle history

When it submitted its claim 2 years earlier, Apple asked the court to decrease the quantity it pays Qualcomm in licensing costs. Apple likewise stated Qualcomm looked for to penalize it for working together in a South Korean examination into the chipmaker’s licensing practices by keeping a $1 billion refund.

In March, Judge Curiel ruled that Apple can keep the billions of dollars in refunds Qualcomm paid it as part of a 2013 agreement. And Qualcomm’s still on the hook for a refund payment about $1 billion. The chipmaker had actually stopped payment in 2016, stating Apple broke their agreement by assisting federal governments like Korea examine Qualcomm. Curiel’s choice isn’t last up until after the trial.

Judge Lucy Koh, who supervise January’s FTC fight, likewise ruled ahead of that trial that Qualcomm needs to certify its cordless chip to its rivals.

Qualcomm preserves that no contemporary handset, consisting of the iPhone, would’ve been possible “without relying upon Qualcomm’s fundamental cellular technologies.” In its action to Apple’s filing, the business made some counterclaims of its own, consisting of breach of agreement and unjust competitors.

In May 2017, Qualcomm submitted a suit versus Apple’s iPhone producers declaring breach of agreement. The fit came less than a month after Apple and its producers stopped paying patent royalties for Qualcomm innovation. In October 2018, Qualcomm stated Apple and its partners owed it $7 billion in back royalty costs.

In July 2017, the Apple subcontractors likewise submitted fit versus Qualcomm, declaring it utilized its market position to charge extreme royalties. The 4 business are Foxconn moms and dad Hon Hai Precision Industry, Wistron, Compal Electronics and Pegatron.

The United States Federal Trade Commission agreed Apple and submitted an antitrust claim 2 years earlier, implicating Qualcomm of running a monopoly, needing unique arrangements and charging extreme licensing costs for its innovation. The 2 satisfied in a San Jose, California, court in January. The judge supervising the case hasn’t yet released her decision.

Monopoly fight, take 2

The upcoming trial in numerous methods will mirror the FTC’s antitrust case versus Qualcomm. Apple will argue that Qualcomm’s “no license, no chips” policy forces handset makers to sign unjust licenses. It likewise injures Qualcomm’s processor competitors, making it costly to stay up to date with modem advancement, according to the suits versus Qualcomm.

“This trial is about Qualcomm’s illegal and self-proclaimed ‘unique’ business model that stifles competition, burdens innovation, and extorts customers and licensees,” Apple and its agreement producers stated in a trial short submitted in late March. They noted they’re fretted Qualcomm’s supremacy will continue in 5G chipsets.

Qualcomm will argue that its licensing practices are affordable which it has actually satisfied its duties when it pertains to reasonable licensing terms for basic vital patents. The business will likewise advise the judge that it isn’t presently being paid by Apple and its subcontractors. And Qualcomm will argue it isn’t suppressing competitors and hasn’t harmed Apple or its producers.

“Although this case involves a large number of claims and counterclaims, at its heart it is about Apple and its contract manufacturers’ refusal to pay what they owe for their continued use of Qualcomm’s IP,” Qualcomm stated in a March trial short. “The Qualcomm IP licensed to the contract manufacturers forms the core of modern cellular technology without which the iPhone could not exist.”

Some twists

The trial will likely provide some surprises. Apple’s agreement producers are carefully included. Some of them appeared at the earlier FTC trial through taped deposition, however numerous executives will appear in court this time. Instead of being supporting gamers, they’ll be significant stars. It’s the producers, after all, who desire almost $27 billion from Qualcomm.

Because Qualcomm has actually gone through this prior to, it’ll have the ability to modify its defense to much better attract a jury. It needs to resolve how it dealt with Apple and its agreement producers, not how it handled the whole mobile market, like in the FTC trial.

Qualcomm likely will attempt to offer a much better validation for its “no license, no chips” policy. The chipmaker will not let a handset producer purchase its modems up until that business signs a licensing contract. Qualcomm argues that the practice of providing a license prior to offering chips is finest for the market since its licenses cover more than modems.

But Apple throughout the January trial stated it felt it had no alternatives when it pertained to working out over Qualcomm’s licensing costs.

Apple, which in August ended up being the United States’ very first trillion-dollar business, needs to reveal it was damaged by Qualcomm’s service practices. Apple will do that in part by showing it pays more to Qualcomm than it pays to all other mobile patent holders integrated. Apple likewise thinks it should not need to pay Qualcomm a different licensing cost on top of the rate of the chips.

The 2 business will likewise have the ability to utilize more current proof in the present trial, consisting of information on the brand-new crop of iPhones that do not utilize Qualcomm modems. That’s something that might assist Qualcomm show competitors in the mobile chipset market, both for 4G and with the nascent 5G requirement.

One thing that will not turn up in the trial is proof from other antitrust examinations. Curiel ruled the FTC case and other regulative questions Qualcomm has actually dealt with can’t be talked about. It’s uncertain what would occur if Koh launches her judgment for January’s FTC fight prior to the Apple-Qualcomm trial ends.

No matter what takes place, the trial is going to be carefully seen by the whole mobile market.

CNET will be on hand to bring you updates from the continuous court fight. For much more details, take a look at our substantial Frequently Asked Question on the battle in between Apple and Qualcomm.