Broadcom’s role as Nokia’s stalking horse against Qualcomm became clearer last week as the Finnish company, no doubt encouraged by its new chip partner’s recent legal successes, launched copycat actions against the CDMA giant with the US International Trade Commission (ITC). Qualcomm is exploring its final routes of appeal against an injunction on handset imports granted to Broadcom by the ITC, and against a ban on its chips awarded to the same company by a federal court in Santa Ana, California.
In the penalty phase of the latter case, Qualcomm chairman Irwin Jacobs testified that the threatened ban on making chips that include certain Broadcom patents could cost his company $2.4 billion over five years, presenting a significantly more downbeat view than his son, CEO Paul Jacobs, has been doing recently. A similar injunction in favor of Nokia could be an even greater blow, making it even harder for Qualcomm to come up with workarounds that would enable it to re-enter the US 3G handset space on which so many of its growth plans focus.
Like Broadcom, Nokia is seeking an injunction against US import of handsets containing Qualcomm chips that allegedly infringe its patents. Victory in this could have a profound effect on the ongoing IPR licensing negotiations between the two giants, and on potential antitrust investigations in Europe. In Nokia’s complaint, it claims Qualcomm is infringing five of its patents in its CDMA and W-CDMA/GSM chipsets, which ‘improve the performance and efficiency of cellphones, as well as enable lower manufacturing costs, smaller product size and increased battery life’. Qualcomm has previously filed its own patent infringement charges against Nokia with the ITC, and which is scheduled to go to trial next month. During the course of the dispute, Nokia has extended its complaints against its enemy beyond handset chips to the Brew software platform and MediaFLO mobile TV technology, while Qualcomm has filed 11 different patent suits against Nokia.
There now seems to be a real prospect that the Nokia-Broadcom axis will succeed in putting so much pressure on Qualcomm that it will be forced either to license their patents and/or put its own IPR business at arm’s length, an option that has already been discussed by Jacobs junior. Either move would fundamentally change the balance of Qualcomm’s business model and would spark a period of painful adjustment that would weaken its overall competitive position, despite the strength of its actual products in W-CDMA, HSPA and multimode platforms.
Qualcomm is arguing, in the Santa Ana trial, that this lies at the root of why the award to Broadcom is unjust. It says that it stands to lose almost half a billion dollars of revenue per year, and suffer a significant blow to a business in which it has worked hard to excel, and has invested huge amounts of R&D funds. Meanwhile, Broadcom gains the automatic weakening of the competitor that stands most firmly in the way of its 3G ambitions, through legal actions rather than fair competition, even though it would suffer ‘no financial hardship’ from the reversal of the injunction.
The California court already ruled in May that Qualcomm infringed the patents, including one related to a push to talk technology that Sprint plans to put in phones in the first quarter of 2008. Last week, Judge James Selna doubled the amount the jury awarded against Qualcomm to $39.3 million and told it to pay Broadcom attorneys’ fees, citing willful patent infringement. Now the hearing has entered the penalty phase, with Broadcom asking for an injunction to ban Qualcomm from making chips including the three patents permanently, after an 18-month phase-out period. Qualcomm says this ‘may or may not’ be long enough for it to find a workaround, and is instead asking for a compulsory license to be awarded, in return for royalties, while it appeals.
In the hearing, as well as pointing to the effect on its own business, Qualcomm is claiming that Sprint Nextel ‘ the largest CDMA operator that still supports its legal claims, rather than making a deal with Broadcom as Verizon has ‘ stands to lose a $2 billion investment in the Qchat push to talk handset feature, which it intends to introduce in the first quarter of 2008, if Qualcomm is banned from making the chips. This is consistent with previous Qualcomm arguments, seeking to focus on potential blows to US cellcos and therefore consumer services and the whole mobile industry. However, this tack was greatly weakened when Verizon Wireless agreed to license Broadcom’s disputed patents directly, protecting itself from the risk of handset bans.
The Qchat feature, which was codeveloped with Sprint, is an important element in Qualcomm’s product strategy, and one of its weapons for keeping its platforms differentiated, and extending into new markets on the basis of hot carrier applications. Qchat is particularly vital to Sprint Nextel, because push to talk has been the secret of Nextel’s success, and the operator badly needs to provide a migration path for those customers and stem the recent tide of defections from the network.
Qualcomm said that it should gain the compulsory license as it had no workaround in the Qchat case, and that Sprint has no ‘fallback’ if the injunction is granted, forcing the two companies ‘back to the drawing board’ and affecting 20 million Sprint push to talk users. The cellco refused to confirm the $2 billion estimate cited by Qualcomm, and CEO Gary Forsee said: “We have lots of options to work with both companies on the Santa Ana litigation. We’ll use all the options we need to use.’
Qualcomm says it has found a “technical solution” to one disputed patent and is working on “two or three paths” on the other two, but cannot say these might be included in commercial chips, according to CTO Roberto Padovani.
Broadcom said a compulsory license would be ‘controversial and grossly unfair,’ partly because it would extend to Qualcomm customers, which would not pay Broadcom separately (an argument that seems to weaken the latter’s own complaints about its rival’s ‘double dipping’). Broadcom also argued that such a license would expose it to patent claims whenever it launches a product, and competing against its own technology if and when it enters the US cellphone market.
On the second day of the penalty phase hearing, Irwin Jacobs said he believed Qualcomm General Counsel Lou Lupin was “not correct” when he told the news media in May that the verdict would have “little effect” on the company. “Qualcomm would be harmed very substantially,” he said.
In place of an injunction, Qualcomm said in a document filed on August 2 that it offered to pay Broadcom three times a royalty rate model that the jury used in May to calculate damages. As a result Broadcom would suffer “no hardship” for lack of an injunction, whereas a ban would cost Qualcomm $2.4 billion in revenue over five years, it said. “Given that utterly lopsided balance, whether Qualcomm can absorb the substantial cost without going bankrupt is besides the point,” the document said.
August has been a bleak month for Qualcomm so far. The Bush administration upheld the ITC import ban after a 60-day review, although Qualcomm has now filed court documents accusing Broadcom of destroying evidence related to the case, notably drafts of an agreement with Verizon Wireless. In the same week, a federal judge ruled that Qualcomm had waived its rights to enforce two patents asserted against Broadcom because it had concealed documents and patents.
Qualcomm’s general counsel, Lou Lupin, resigned his position last week, a step widely supposed to be linked to the company’s recent string of defeats in court. However, the chipmaker later claimed the move was purely down to undisclosed ‘personal reasons’ and that Lupin had not left the company and ‘could come back after his leave in some kind of role’.
A spokesperson said: ‘We do not blame him for these recent court defeats. Lou is an outstanding attorney and leader. He played a major role in building Qualcomm’s legal department, the oversight of several successful litigation matters, the formation of a successful technology licensing program and the negotiation of major licensing agreements. The timing of this decision was Lou’s and the reasons were personal to Lou.’
Lupin became general counsel in 2000 and now Carol Lam, former US Attorney for the Southern District of California, will fill the role of acting general counsel as it conducts a search for Lupin’s replacement. Lam was one of several US Attorneys fired last year by the Bush administration’s Department of Justice in actions now under investigation by Congress.
Despite the protestations about Lupin’s reasons for stepping down, Qualcomm’s shares rose over 3% on the news amid speculation that this would be the trigger for a shift in the chip company’s legal strategy. President Steve Altman said: ‘Carol is highly regarded as a top prosecutor who has litigated complex cases with national impact.’