Judge insists Intel can have Standards Essential Qualcomm Patents

Qualcomm is being forced by a US district court judge, to settle FRAND terms with Intel for technologies that are contained in 4G and 5G standards. The Judge in question was none other than Judge Lucy Koh, who has been involved in some critical technology court rulings, including awarding $1 billion to Apple from Samsung, for design patent infringements.

The key thing here is that this simply sets a principle, that Qualcomm has to license other wireless modem companies like Intel on precisely the same terms as everyone else or it is trying to maintain a monopoly. But Qualcomm’s terms are pretty universal, that everyone has to sign an across the board license for ALL of its patents, of have none at all. Koh’s point is that this approach cannot include standard essential patents (SEPs) for 4G and 5G in a general license, and these must have separate and clear FRAND terms (“fair, reasonable, and nondiscriminatory”).

The case Koh is ruling on is the one brought by the Federal Trade Commission against Qualcomm that is it committing anti-trust by not letting companies like Intel license these patents separately.

There is a lot of difference in licensing a technique that is described in a patent, and helping that company work out how to go about executing on that patent. The standard may be quite straightforward, but putting that into silicon might be virtually impossible unless you are Qualcomm. This has always been Qualcomm’s “ace in the hole” and our take is that it can comply with this ruling and still chase its claim that Apple gave Intel some Qualcomm’s trade secrets, which show “how” to adhere to some of these patents and it still retains further patents on wireless and chip design which are not contained in SEPs, which Intel has no automatic right to license. Curiously it has been Apple that has pioneered the idea that a patent is not something to license, but something to use to prevent your competitors rom keeping up. Of course that cannot apply to SEPs and ostensibly goes directly against the entire principles of patents (though it didn’t stop Apple).

Qualcomm once famously successfully defended its triple dip patent license where it asked for royalties from chipmakers, equipment vendors and operators for the same patents in court, and then Ericsson foundered when it tried to build chips using those patents in without Qualcomm’s help and found it was just not up to the job.

This FTC case is still heading for trial in early 2019, but Koh was simply clarifying that Qualcomm cannot exclude Intel from receiving such patents licenses, which is an avenue which Qualcomm has been pursuing – which we agree, would essentially be anti-trust for a company with such a large market share in cellular as Qualcomm.

It turns out that the FTC and Qualcomm are on the verge of settling this suit anyway, and they had asked Koh to wait with her ruling, but it looked like Koh wanted to establish a key principle in Court, so ignored their request for a delay.

This immediately led to speculation that Apple may too be in discussion with Qualcomm on a settlement – but Apple made it clear to US news sources this week, that this was not the case.

Last year Apple sued Qualcomm in a US federal court saying that its royalty scheme is illegal, because it is based on a percentage of the end price of the devices built with its patents. This is not a rare practice, but given that north of 200 patents are likely to be in play in 5G, without counting those in iOS and other parts of the device, Apple argues that its license terms must be changed to a flat fee per device. Apple is clearly using these patent wars to try to retain its iPhone margins, and has made similar moves excluding other chip vendors from its devices, purely to retain that margin. It has signed contracts agreeing to these terms, but for Apple that’s a mere inconvenience.

Imagination technologies was one such move, and Apple appears to have been able to build its own GPUs so that it does not have to pay Imagination a penny, unless it sued Apple, which it promptly did. Another case that has yet to be resolved.

Right now Apple would be hard pressed to get a 5G modem for love nor money from the two leading global modem makers, Qualcomm and Samsung, not without settling cases like this. It had hoped that Intel could make up the distance on these two if it lent a helping hand. But we doubt that Intel can build an acceptable 5G modem within 18 months of Samsung and Qualcomm, and actually might never be able to, if it was not for this Judge saying it can license Qualcomm technology. This potentially leaves Apple waiting for 2020 for an Intel part, that right now only exists in prototype, and essentially this is what the FTC court case is about. Qualcomm has a part ready now. The only other chip firms that might be able to supply such a part are Samsung, or from China (and Trump’s trade war may get in the way) or startups.

Failure to resolve this issue is a dangerous one for Apple, which could leave it without a foothold in early 5G skirmishes and potentially see its market share crash considerably.

Similarly this is a critical issue for Qualcomm, because if it gives fresh license terms to one phone or chip maker, it will have to offer the same terms to others, and it would lose significant margins. Our belief is that Apple will lose this fight in the long run, but by getting some of Qualcomm’s patents invalidated, it weakens Qualcomm’s position and it will likely be forced to settle for less in a court.

Recently Qualcomm says that Apple alone owes $7 billion in unpaid royalties, and other companies that Apple has encouraged not to pay, owe further amounts. Damages will have to be added to those amounts if Qualcomm wins the case.

This week Apple sources told US newspapers that it was “gearing up for trial” with “no settlement in sight.” That’s not something that has troubled Apple’s share price at present, but as 5G approaches, it could bite Apple.

The Apple statement crashed a certain amount of optimism around the Qualcomm stock that had been building a head of steam, but remains low since the Apple dispute began.

Qualcomm used to be about as feared as Apple is today for its patent actions and it mostly won all of its courtroom battles until it famously took on Broadcom in 2007, and not only lost, but was admonished by the court for withholding evidence from the court and it’s legal counsel resigned soon after.  That case was one where Broadcom was being asked for significant royalties for a standards essential patent, in a tit for tat case, in which Broadcom had initially claimed Qualcomm infringed on its Power saving patents. So that case established over 11 years ago that standards essential patents MUST be offered on FRAND terms by Qualcomm, so we cannot see the point of this week’s judgement.

Qualcomm has now just announced its quarterly figures, with net income damaged severely by Qualcomm dropping out of its bid to buy NXP, which cost it $2 billion in termination clauses.

Without that it showed revenues which were 25 down on last year at $5.8 billion, and an operating loss of $700 million, which at the net income level was $500 million. Add back that $2 billion and Qualcomm blows the doors off its numbers. In fact this is Q4 the way Qualcomm does its numbers and it had to take in a $6 billion charge for the enactment of the Tax Cuts and Jobs

Act in Q1 this $2 billion in Q4, a further $1.2 billion charge from the European Union, $687 million in restructuring charges and a $676 million gain related to the settlement of the Taiwan Fair Trade Commission investigation.

And yet after all this it recorded annual revenues of $22.7 billion, 2% down and $5.6 billion in net income just 21% off  last year.

In Q4 it shipped 232 million wireless modems up 17% for the quarter and 855 million for the year, a rise of 6%. Qualcomm told investors that it was involved in every single 5G trial around the world and that it was working with 18 OEMs for 5G handsets, across North America, Europe, China, Japan, South Korea, and Australia.