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Qualcomm Countersues Apple as Global Legal Battle Escalates

By Evan Niu, CFA - Apr 11, 2017 at 2:26PM

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The mobile-chip giant fights back.

Qualcomm (QCOM -3.30%) isn't going to sit quietly while Apple (AAPL 1.62%) lodges legal complaints against the company all around the world, including the U.S., China, the U.K., and Japan at last count. The mobile chip giant has now countersued the Mac maker in response to the lawsuit that Apple filed in January. This comes about a week after Qualcomm requested a federal judge to dismiss the FTC suit.

Expectedly, Qualcomm denies "each and every allegation" within Apple's original complaint; these denials comprise the first 39 pages or so. The counterclaims are where it gets interesting.

iPad Pro and iPhone 7

Cellular iPhones and iPads are at the heart of the battle. Image source: Apple.

"Apple wants to pay far less than fair value"

Qualcomm notes that Apple is the most profitable vendor of cellular devices today, and its products have only enjoyed "enormous commercial success" thanks largely to Qualcomm's cellular technologies. Yet, Qualcomm argues that "Apple wants to pay far less than fair value" to license Qualcomm's intellectual property.

The company maintains its previous stance that Apple violated its Business Cooperation and Patent Agreement by "intentionally giving government agencies false and misleading information and testimony about Qualcomm." Apple now "continues to interfere" with arrangements that Qualcomm has made with Apple's contract manufacturers (CMs), and those CMs are now withholding a redacted amount of royalties. Apple has also withheld some other redacted sum owed to Qualcomm "under another contract relating to a high-speed feature of Qualcomm's chipset."

That "high-speed feature" is carrier aggregation

Shortly after the iPhone 7 launched last autumn, reports surfaced that Apple could be intentionally limiting the performance of Qualcomm modems in order to minimize performance differences and make cellular performance comparable with other iPhone models that used Intel modems. Apple didn't want the Qualcomm variants to be perceptibly superior in terms of cellular performance, even if they were technically capable of outperforming the Intel variants. The feature in question is carrier aggregation, and Apple is allegedly withholding payment for this feature.

Qualcomm says Apple "chose not to utilize certain high-performance features of the Qualcomm chipsets for the iPhone 7," depriving customers of the "full extent of Qualcomm's innovation." Apple had maintained that there was "no discernible difference" between the two iPhone variants, which undoubtedly offended Qualcomm since Apple was artificially limiting Qualcomm's LTE chipset speeds: "Apple's actions were intended to prevent consumers from realizing that iPhones containing Qualcomm chipsets performed far better than iPhones containing chipsets supplied by Intel."

Apple allegedly even pressured Qualcomm not to "make or sponsor any public comparisons" between the two variants that would demonstrate Qualcomm's technical superiority, threatening to "retaliate" with marketing resources.

Apple says, Qualcomm says

In Apple's original suit, it said that it had repeatedly approached Qualcomm seeking a direct license, instead of using indirect licenses through its CMs, but the two companies were unable to agree on reasonable rates. Apple argued that Qualcomm preferred to negotiate with CMs because they have no incentive to negotiate, since the costs are passed through to Apple in full. Strongly refuting this allegation, Qualcomm says (emphasis original):

Apple, for its own commercial reasons, chose not to take a direct license from Qualcomm, though Qualcomm has always been willing to negotiate a direct license with Apple.

Instead of entering into a direct license agreement with Qualcomm, Apple decided (i) to outsource manufacturing of its iPhones and iPads to other companies (the "Contract Manufacturers"); and (ii) to rely on those Contract Manufacturers' existing license agreements with Qualcomm. At the time Apple made the decision not to take a direct license, Apple's iPhones did not use any chipsets or other products purchased from Qualcomm. Thus, chipset supply could not have played any role in Apple's decision.

To that point, Qualcomm notes that Apple has used these indirect licenses before it ever used Qualcomm modems, undermining the allegations of a "no chips, no license" policy. These licenses are "generally similar" to those that Qualcomm inks with other manufacturers. Qualcomm says the royalties are "a mere fraction" of an iPhone's price, and even takes a jab: "Indeed, Qualcomm's per-device royalties for its portfolio of tens of thousands of patents are far less than what Apple charges consumers for a basic plastic phone case."

This legal battle continues to escalate with no end in sight. You could even say that it's reaching...thermonuclear proportions.

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QUALCOMM Incorporated Stock Quote
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