Irrespective of outcome, legal risks are about as serious as they get, and litigation often requires protracted periods of time to resolve. For Qualcomm (NASDAQ:QCOM), this year started off with a potent combination of the U.S. Federal Trade Commission and major customer Apple (NASDAQ:AAPL) both lodging legal complaints against the mobile chip giant just days apart. Apple's legal battle has expanded to numerous jurisdictions around the world, and the FTC's case is now moving forward following an attempt by Qualcomm to get the lawsuit dismissed.
At least one Street analyst thinks it's all too much for investors to take.
Even if Qualcomm wins against Apple
Northland Capital Markets analyst Tom Sepenzis has now downgraded shares of Qualcomm from outperform to market perform, according to Tech Trader Daily, and dropped his price target from $75 to $62.50. Despite the fact that Sepenzis thinks Qualcomm will end up coming out on top against Apple, prolonged litigation risks being an overhang on the stock for the foreseeable future. Whether or not Qualcomm is guilty of anti-competitive behavior, or if its contracts with Apple are inappropriately structured and violate fair, reasonable, and non-discriminatory (FRAND) commitments will be up to the courts.
Regardless of the analyst's assessment of the outcome, there is considerable financial risk. We're talking about billions of dollars on the line. FOSS Patents reports that as part of Apple's amended complaint filed this week, Apple is now essentially seeking:
- The court to declare Qualcomm's licensing agreements with Apple contract manufacturers as "unenforceable."
- Disgorgement of royalties previously paid to Qualcomm.
- Restitution of excessive licensing fees that Apple has paid.
There are some caveats regarding Apple's ability to win on all three of those items, which FOSS Patents covers in detail in the link above if you're interested.
But wait, there's more!
Beyond Apple, there is now some potential legal risk from Intel (NASDAQ:INTC) that investors need to consider. In December, Qualcomm and Microsoft (NASDAQ:MSFT) announced that the two are collaborating to bring Windows 10 to ARM-based chips like Qualcomm's Snapdragon processors. In order to do so, Qualcomm needs to emulate Intel's x86 architecture to ensure compatibility with legacy software applications. Emulating x86 isn't exactly new, but only recently has the technology improved to the point where it can be competitive in terms of performance.
Unsurprisingly, Intel wasn't all that thrilled about the announcement, as Qualcomm processors are cheaper than Intel processors, which threatens to undercut Intel's core PC segment (54% of revenue last quarter). Just this month, Intel published a blog post that was a not-so-thinly veiled threat against Qualcomm (or anyone else that might be interested in encroaching on its x86 turf):
Intel carefully protects its x86 innovations, and we do not widely license others to use them. Over the past 30 years, Intel has vigilantly enforced its intellectual property rights against infringement by third-party microprocessors.
However, there have been reports that some companies may try to emulate Intel's proprietary x86 ISA [instruction set architecture] without Intel's authorization. Emulation is not a new technology, and Transmeta was notably the last company to claim to have produced a compatible x86 processor using emulation ("code morphing") techniques. Intel enforced patents relating to SIMD instruction set enhancements against Transmeta's x86 implementation even though it used emulation. In any event, Transmeta was not commercially successful, and it exited the microprocessor business 10 years ago.
Only time will tell if new attempts to emulate Intel's x86 ISA will meet a different fate. Intel welcomes lawful competition, and we are confident that Intel's microprocessors, which have been specifically optimized to implement Intel's x86 ISA for almost four decades, will deliver amazing experiences, consistency across applications, and a full breadth of consumer offerings, full manageability and IT integration for the enterprise. However, we do not welcome unlawful infringement of our patents, and we fully expect other companies to continue to respect Intel's intellectual property rights. Strong intellectual property protections make it possible for Intel to continue to invest the enormous resources required to advance Intel's dynamic x86 ISA, and Intel will maintain its vigilance to protect its innovations and investments.
Sepenzis points to this blog post as evidence that Qualcomm could face even more legal risk from its unauthorized efforts to emulate x86. Investors "may be better off looking elsewhere in the near term," Sepenzis argues.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.