Apple and Imagination clash again, Qualcomm seeks iPhone ban

A deal to supply a major iPhone component can be the making of a vendor, but over-reliance on Apple certainly comes with huge risk if the company goes cold. Imagination Technologies and Qualcomm have both seen Apple looking for alternatives to their products – Imagination’s graphics processor unit (GPU) cores and Qualcomm’s smartphone modems – and are now also embroiled in disputes.

In both cases, Apple has been hitting back vociferously. It piled on more troubles for Imagination by claiming the UK firm was warned about the ending of their contract long before it informed the markets. And its lawsuits against Qualcomm threaten to undermine the basis of the chip giant’s business model, provoking an escalated response last week when Qualcomm petitioned to have imports of several iPhones to be banned in the US.

UK-based Imagination has been, to some extent, a creation of Apple, which is a shareholder in the company as well as a long-time user of its graphics technology. They have worked together since the original iPhone and Apple accounts for about 50% of the smaller firm’s business despite its recent diversification into CPUs and connectivity (with the acquisition of MIPS and Ensigma, now up for sale).

But in April, Apple said it was going to develop its own GPU inhouse, which led to Imagination – already struggling with falling profits and the attempt to diversify its business – putting itself up for sale. Imagination’s share price has fallen by over 40% since March 31, the last trading day before the announcement. In May, the smaller company initiated a dispute resolution procedure having failed to make “alternative commercial agreements” with Apple.

This stops short of the full legal action some had expected, though Imagination said in its initial filing that it had “reserved all its rights in respect of Apple’s unauthorised use of Imagination’s confidential information and Imagination’s intellectual property rights”. The company has questioned whether Apple will be able to design its own GPU technology without recourse to Imagination’s IPR, though full patent litigation is clearly impossible until Apple has a product – and by then the GPU specialist may be part of a larger group with deeper pockets, even perhaps Intel (one of the firms tipped to be interested, though Intel would not be keen to antagonize Apple, having secured a deal to supply modems for some of the iPhones, at the expense of Qualcomm).

But now Apple has added to Imagination’s woes, saying that the company had known of the impending end to the deal for almost two years before the announcement was made. It told Bloomberg that it first informed its supplier in late 2015, and by 2016, had notified Imagination that it was pulling back on their relationship further, by initiating a clause in their contact that would allow Apple to pay a lower royalty rate for using a smaller amount of Imagination IPR.

By February 2017, Apple said it told Imagination it was ending the relationship altogether and would no longer be making any royalty payments from as early as 2018.

“We began working with Imagination in 2007 and stopped accepting new IP from them in 2015,” Apple said. “After lengthy discussions we advised them on February 9 that we expected to wind down our licensing agreement since we need unique and differentiating IP for our products. We valued our past relationship and wanted to give them as much notice as possible to adapt their future plans.”

Imagination CEO Andrew Heath gave a different version of events on a conference call with investors last week. He said Apple had told his firm only at the end of March 2017 that the iPhone maker was “certain” that it would not include Imagination IPR in products to be released in 2018 or 2019. Before that, there was insufficient clarity to disclose any change to the relationship to shareholders, he said, adding that Imagination had signed a multiyear licensing agreement with Apple in February 2014 that carried confidentiality clauses preventing it from commenting.

However, Imagination’s shares slipped on the news, and on speculation that the UK Financial Conduct Authority might investigate whether the company could have warned investors at an earlier stage.

On the investor call, Heath repeated Imagination’s assertions that Apple would struggle to go it alone in GPUs, saying “we don’t accept Apple’s position” that it can build its own system. He called Apple’s decision to stop making royalty payments “unsubstantiated”.

Apple retorted that it has been using steadily less of Imagination’s technology in recent years. “We’re disappointed in their response, which has been inaccurate and misleading,” the firm said in a statement.

Meanwhile, Qualcomm is fighting for its business model, since Apple is a supplier with the power to move the needle for the whole industry if it succeeds in its wide-ranging legal claims against the modem maker. Last month, in its latest salvo, it argued in a court filing in the US that the licensing deals which provide Qualcomm with a fee for every iPhone are invalid. If accepted by the court, that argument would undermine Qualcomm’s licensing model, which provides the largest share of its profits. According to Reuters, Apple is claiming its antagonist’s business model is “illegal” and “burdens innovation”, that some of its patents are invalid or do not belong to it, and that it has failed to fulfill its obligation to charge for patents under Frand (fair reasonable and non-discriminatory) guidelines.

Such dangerous claims provoke strong reactions, and Qualcomm has initiated a patent infringement suit, and is asking the US International Trade Commission (ITC) to bar imports of iPhones models which contain these six patents.

While risking an accelerated defection to Intel or other modem makers in future iPhones, Qualcomm needs to crank up the pressure on Apple to pay royalties (payments are currently suspended), and more importantly, to back down on its key challenges to its supplier’s licensing models, which include an antitrust lawsuit. ITC suits will also help demonstrate that Qualcomm is still making leading edge technology which merits patent royalties, not recycling old inventions, as Apple has been alleging in some cases.

“They’re taking advantage of these new technologies and they’re not paying for them,” Qualcomm’s general counsel Don Rosenberg said. “We are current, we are new and we will continue to enhance the value of the experience.”

An Apple spokesman said the company has always been willing to pay a fair rate for standards-based technology and has tried to negotiate “fair” licensing terms with Qualcomm for years without reaching agreement. In May, CEO Tim Cook told investors that he does not believe any court would issue an injunction against the iPhone in the absence of an offer of fair terms from Qualcomm.

Qualcomm filed its patent infringement complaint in federal court in San Diego, the same one where Apple filed its antitrust suit and Qualcomm has already sued some manufacturers, which were instructed by Apple to withhold payments too (many of Apple’s IPR fees are paid via its iPhone manufacturers). The new case is likely to be put on hold pending the outcome of the ITC complaint, which is likely to be addressed more quickly than a federal court case (in 12-18 months, as opposed to several years).

Significantly, the six patents – which relate to battery-efficient smartphone performance, especially in video transmission – are not standards-essential, which means Qualcomm will not have to address issues of Frand (fair reasonable and non-discriminatory) licensing charges, one area where Apple is alleging misconduct. There is no limit to the amount of royalties an inventor can charge if the patent is not essential to a standard.

Rosenberg compared Qualcomm’s suit against Apple to Apple’s battles with Samsung.
“They believe they have the right to get paid when someone takes their technology and uses it,” Rosenberg said. “And so do we.”

Qualcomm said the six patents are US Patent Nos. 8,633,936, 8,698,558, 8,487,658, 8,838,949, 9,535,490 and 9,608,675. They “enable high performance in a smartphone while extending battery life.  Each of the patents does so in a different way for different popular smartphone features. While the technologies covered by the patents are central to the performance of the iPhone, the six asserted patents are not essential to practice any standards in a mobile device or subject to a commitment to offer to license such patents.”