There's a lot going on in Apple's (NASDAQ:AAPL) lawsuit against Qualcomm (NASDAQ:QCOM). One of the main things Apple is seeking is nearly $1 billion it says Qualcomm owes it. Apple has been paying what it considers inflated royalties for years, which are passed along in full from its contract manufacturers that have inked licensing deals with Qualcomm. Qualcomm is supposed to license its patents at fair, reasonable, and non-discriminatory (FRAND) rates.
The two companies had previously reached a Business Cooperation and Patent Agreement (BCPA), which includes quarterly payments to Apple in exchange for other concessions, the most important being exclusivity in supplying baseband processors to Apple. But these payments are also contingent on Apple mostly keeping quiet about the two companies' business arrangements, a provision Apple believes is intended to hide Qualcomm's alleged anticompetitive behavior. However, the terms of the BCPA were never meant to preclude Apple from cooperating with government regulators if asked. At the heart of the issue is whether or not regulators approached Apple first, or if Apple voluntarily ratted Qualcomm out to the Feds.
Apple said, Qualcomm said
In Apple's complaint, it argues that Qualcomm intentionally tries to hide its behavior from regulators (emphasis in second paragraph added):
Preventing Apple from bringing its concerns to law enforcement.
As a condition of even partial relief from its non-FRAND royalties, Qualcomm sought to gag Apple and prevent it from bringing its concerns to law enforcement or challenging Qualcomm's compliance with FRAND commitments.
As described above, through the second paragraph of Section 7 of the BCPA, Qualcomm conditioned royalty relief on a provision that restricted Apple from initiating or inducing certain legal actions in three particular identified areas: (a) assertion of patents against Qualcomm; (b) claims that Qualcomm failed to offer a license to its [standards-essential patents] on FRAND terms; and (c) claims that Qualcomm's patent rights were exhausted.
The BCPA carved out, as it must, an acknowledgment that Apple has a responsibility to respond to enforcement agencies' requests for information. But in restraining Apple from initiating action or bringing concerns to law enforcement, Qualcomm conditioned billions of dollars on Apple's silence before courts and regulators about Qualcomm's business practices.
That bit on "initiating or inducing" is a key piece here. If Apple was the one initiating the regulatory investigation, then it could be in breach of the BCPA terms, and as such Qualcomm would be able to withhold payment. But Apple maintains that it did no such thing:
Apple has provided information and presentations only at the requests of the agencies. Apple has not "induced" any agency or any other third party to take action against Qualcomm on grounds that Qualcomm's licensing practices violated the FRAND promise or that Qualcomm's patents were exhausted.
Apple has complied with all other conditions and requirements of the BCPA.
Naturally, Qualcomm's perspective is different. The mobile chip giant issued a brief press release to comment on Apple's complaint last week. Here's what Qualcomm general counsel Don Rosenberg had to say (emphasis added):
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 [Korea Fair Trade Commission] decision and FTC complaint, by misrepresenting facts and withholding information.
Qualcomm's response suggests that Apple has been more active in "inducing" regulatory actions against Qualcomm. Furthermore, Qualcomm thinks Apple is misrepresenting the pair's relationship and business dealings. The Mac maker is looking for a wide range of concessions, but that $1 billion seems to be hanging in the balance of whether or not Apple instigated regulatory action, or if it was merely cooperating with regulators as required by law.
Evan Niu, CFA, owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.