Apple, Qualcomm head into latest legal battle, with billions at stake
The two are fighting over licensing fees, but the outcome could affect how fast your next iPhone downloads data.
When it comes to Apple vs. Qualcomm, the Federal Trade Commission trial in January was just a dress rehearsal. Now it's time for the real show.
The two technology giants meet on Monday in a San Diego courtroom to kick off a five-week, $27 billion trial that'll determine whether Qualcomm operates a smartphone modem chip monopoly and charges too much in licensing fees. Apple has accused Qualcomm of anticompetitive practices that've raised chip prices, restricted competition and hurt customer choice.
Apple, which initially filed suit against Qualcomm in January 2017, argues that it essentially pays Qualcomm twice, first by purchasing processors and then by paying royalty fees. The tech giant says 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 joined the lawsuit. Qualcomm counters that it isn't a monopoly and says its technology is more than modems so it should be compensated based on the selling 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 ensure that we are appropriately compensated for our inventions and investments."
Battle of the frenemies
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.
The close relationship fell apart. Apple started buying modems from Intel, beginning with the iPhone 7 in 2016. That fueled a budding disagreement over licensing fees. The recent iPhone XS, XS Max and XR contain only Intel modems.
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.
Apple's operating chief, Jeff Williams, testified in the FTC trial against Qualcomm. He'll take the stand again in Apple's case against Qualcomm.
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 have to pay it a licensing fee, even if they don't use Qualcomm's chips. The company won't license its patents to rival chipmakers, though, which the US and other governments have taken issue with. Qualcomm argues that chipmakers don't need licenses because the handset makers already cover the cost of using its technology.
Apple licenses Qualcomm's technology through its manufacturers, like Foxconn, rather than purchasing a license of its own. During the January trial, Apple said it had tried for five years to negotiate a direct license with Qualcomm but that the terms offered, like cross-licensing Apple's technology, weren't fair. The contract manufacturers pay Qualcomm billions in royalties each year, an amount Apple then reimburses. As long as Apple doesn't fight Qualcomm in court or help regulators, Qualcomm gives it rebates on the licensing fees.
Qualcomm calculates its royalty fees on the value of the phone, not the components in it. Apple, the FTC and other regulatory bodies have challenged that practice. Apple argues Qualcomm shouldn't be paid for value Apple creates with its iPhone brand.
Qualcomm also caps the selling price of the phone, the basis for its royalty, at $400, even if a device sold for triple that. The chipmaker says that means it isn't charging for contributions Apple makes, such as adding more flash storage. Apple's ultrapremium iPhone XS Max costs from $1,099 to $1,449, depending on how much storage it has. But with Qualcomm's cap, Apple would pay a royalty rate equivalent to that of a $400 phone.
Qualcomm gets $7.50 for each iPhone, Apple said in January. Apple says it should pay only $1.50 per device, a 5 percent fee for the cost of each $30 modem used in an iPhone.
Battle history
When it filed its lawsuit two years ago, Apple asked the court to lower the amount it pays Qualcomm in licensing fees. Apple also said Qualcomm sought to punish it for cooperating in a South Korean investigation into the chipmaker's licensing practices by withholding a $1 billion rebate.
In March, Judge Curiel ruled that Apple can keep the billions of dollars in rebates Qualcomm paid it as part of a 2013 contract. And Qualcomm's still on the hook for a rebate payment about $1 billion. The chipmaker had ceased payment in 2016, saying Apple broke their contract by helping governments like Korea investigate Qualcomm. Curiel's decision isn't final until after the trial.
Judge Lucy Koh, who oversaw January's FTC battle, also ruled ahead of that trial that Qualcomm has to license its wireless chip to its competitors.
Qualcomm maintains that no modern handset, including the iPhone, would've been possible "without relying upon Qualcomm's fundamental cellular technologies." In its response to Apple's filing, the company made some counterclaims of its own, including breach of contract and unfair competition.
In May 2017, Qualcomm filed a lawsuit against Apple's iPhone manufacturers alleging breach of contract. The suit came less than a month after Apple and its manufacturers stopped paying patent royalties for Qualcomm technology. In October 2018, Qualcomm said Apple and its partners owed it $7 billion in back royalty fees.
In July 2017, the Apple subcontractors also filed suit against Qualcomm, alleging it used its market position to charge excessive royalties. The four companies are Foxconn parent Hon Hai Precision Industry, Wistron, Compal Electronics and Pegatron.
The US Federal Trade Commission sided with Apple and filed an antitrust lawsuit two years ago, accusing Qualcomm of operating a monopoly, requiring exclusive agreements and charging excessive licensing fees for its technology. The two met in a San Jose, California, court in January. The judge overseeing the case hasn't yet issued her verdict.
Monopoly battle, take two
The upcoming trial in many ways will mirror the FTC's antitrust case against Qualcomm. Apple will argue that Qualcomm's "no license, no chips" policy forces handset makers to sign unfair licenses. It also hurts Qualcomm's processor rivals, making it expensive to keep up with modem development, according to the lawsuits against 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 contract manufacturers said in a trial brief filed in late March. They noted they're worried Qualcomm's dominance will continue in 5G chipsets.
Qualcomm will argue that its licensing practices are reasonable and that it has fulfilled its responsibilities when it comes to fair licensing terms for standard essential patents. The company will also remind the judge that it isn't currently being paid by Apple and its subcontractors. And Qualcomm will argue it isn't stifling competition and hasn't hurt Apple or its manufacturers.
"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 said in a March trial brief. "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 offer up some surprises. Apple's contract manufacturers are closely involved. Some of them appeared at the earlier FTC trial via taped deposition, but many executives will appear in court this time. Instead of being supporting players, they'll be major actors. It's the manufacturers, after all, who want nearly $27 billion from Qualcomm.
Because Qualcomm has gone through this before, it'll be able to tweak its defense to better appeal to a jury. It has to address how it worked with Apple and its contract manufacturers, not how it dealt with the entire mobile industry, like in the FTC trial.
Irwin Jacobs, Qualcomm co-founder, took the stand in his company's defense at the FTC trial. He's on the list of witnesses for Qualcomm's defense against Apple.
Qualcomm likely will try to give a better justification for its "no license, no chips" policy. The chipmaker won't let a handset manufacturer buy its modems until that company signs a licensing agreement. Qualcomm argues that the practice of offering a license before selling chips is best for the industry because its licenses cover more than modems.
But Apple during the January trial said it felt it had no options when it came to negotiating over Qualcomm's licensing fees.
Apple, which in August became the US' first trillion-dollar company, has to show it was harmed by Qualcomm's business practices. Apple will do that in part by demonstrating it pays more to Qualcomm than it pays to all other mobile patent holders combined. Apple also believes it shouldn't have to pay Qualcomm a separate licensing fee on top of the price of the chips.
The two companies will also be able to use more up-to-date evidence in the current trial, including data on the new crop of iPhones that don't use Qualcomm modems. That's something that could help Qualcomm demonstrate competition in the mobile chipset market, both for 4G and with the nascent 5G standard.
One thing that won't come up in the trial is evidence from other antitrust investigations. Curiel ruled the FTC case and other regulatory queries Qualcomm has faced can't be discussed. It's unclear what would happen if Koh releases her ruling for January's FTC battle before the Apple-Qualcomm trial ends.
No matter what happens, the trial is going to be closely watched by the entire mobile industry.
CNET will be on hand to bring you updates from the ongoing court battle. For even more information, check out our extensive FAQ on the fight between Apple and Qualcomm.