It would probably really be to Qualcomm’s disadvantage to ever find its patents processes ever held up to the light of day in a courtroom, given the questionable basis for some of its licensing. Especially a non-US courtroom, which may not adhere to the exact same legal tenets that has seen Qualcomm win out in prior legal engagements.
But after a week of twists and turns in the intellectual property war with both Nokia and Broadcom, it’s unlikely that this is going to happen any time soon, and while Broadcom has won a major legal battle with Qualcomm without a shot being fired, Nokia has approached German and Dutch courts to bail it out of its approaching deadline for settlement with Qualcomm.
Nokia’s latest filing has the look of a negotiating tactic all over it. It has asked courts in the Netherlands and Germany to declare that Qualcomm patents are exhausted in respect of wireless technologies in those countries.
What it means by exhausted is that it wants to see if in those countries, whether or not the act of a chip maker like Texas Instruments paying royalty on the technology in a chip, means that there is no further royalty to pay for anyone that uses the chip.
It is, of course, a bit of a nonsense. TI pays something for using Qualcomm technology, even if it pays mostly by cross licensing its technologies with Qualcomm. It does this on the basis that it is only paying the part of the royalty that US law says is attracted to the making of a chip, not the part that is aimed at the use of that chip in a handset. Nokia thinks that German and Dutch law might find that once any royalty is paid on a technology once, it cannot attract a second layer of payments.
If Nokia managed this it would only serve to change the chain of royalty payments. Texas would have to pay Qualcomm more for the manufacture of those chips where they are for those countries, and would in turn charge Nokia more for them. Qualcomm and TI are both based in the US, and as Qualcomm points out this week, it has already tested this principle of charging twice for patents in the Delaware Supreme Court.
The truth is that in a multilayered set of technologies such as those used in mobile telephony, it makes sense to charge royalties to as many steps in the Intellectual property chain as possible, in order to spread the cost around. What is really at stake, and what Qualcomm never wants discussed in any court is why its ‘essential’ technologies are charged out at significantly more that the ‘essential’ technologies of companies like Ericsson and Nokia. They have spent more money on R&D than Qualcomm and could argue that their patents are therefore worth more, not the other way around.
Qualcomm has always taken the view that its breakthroughs are more significant therefore ‘more’ essential, which is of course illogical because they are either essential to making a phone work or they’re not.
The other issue with Qualcomm licensing is the way it does things like bundle MediaFLO licensing into its CDMA licensing, so that any company that wants to buy just a MediaFLO license cannot, or at least it can, but it will have to pay a ‘negotiated’ price that is nowhere public, and far higher than any other similar mobile TV technology.
This bundling process effectively means that some of its licensees pay differing amounts for the same technology, and that is likely to be frowned upon in any court, but especially one that is not based in the US and which has not got the history of precedent in these types of cases to lean on. A judge would have to make up his own mind based upon existing laws in the country concerned.
All laws are differently worded in each country, even where they are based on an internationally agreed treaty for making laws uniform, and local interpretation is notoriously tricky.
But still we don’t think Nokia is expecting anything other than a delay in the European courts where it is being pursued by Qualcomm for patent infringement, while it waits for rulings on whether or not German and Dutch law allows for second layers of royalty on an invention.
In the end Nokia needs to get into a court room and instead of arguing that it is innocent of patent infringement, be in a position instead to argue about ‘degrees of essentiality’ and the Qualcomm habit of charging different amounts for the same technology.
The Nokia complaints were filed in the Regional Court of Mannheim (Germany) and in the Hague District Court (the Netherlands). Both courts have substantial experience in patent matters within the EU and Nokia will argue from there that the entire EU is technically unified on these laws, and claim that a successful decision would threaten an EU royalty blackout from handset makers. That would certainly, if achieved, knock a huge hole in Qualcomm royalty streams, and drive the Qualcomm share price down and force its executives to be more receptive in negotiations.
The bid to have the European courts look at the patent situation comes just weeks before the expiration of agreements licensing Nokia’s use of Qualcomm’s technology and looks to us to be about moving the negotiation deadline.
Qualcomm responded immediately saying that the complaints are meritless, that Nokia has been paying royalties on this basis for years and the agreement with TI specifically states that the license only allows them to make the chip and doesn’t transfer the any company using the chips.
Qualcomm has sued for patent infringement in the United States, the UK, Germany, France, Italy and China, and in the US International Trade Commission for GSM/GPRS and EDGE technologies. Nokia naturally argues that it has contributed as much technology as Qualcomm to these technologies so why should it pay any royalty at all.
Delay obviously suits Nokia, and non-payment of royalties for any period of time will show adversely in the Qualcomm figures.
But the decision a few days earlier to settle out of court with Broadcom shows how in the end Qualcomm is keen not to see any of these issues aired in court.
Qualcomm and Broadcom have just agreed to dismiss all their patent and trades secrets lawsuits, averting five jury trials, once scheduled for this week. The agreement does not affect an International Trade Commission judgment scheduled for May, nor ongoing European antitrust complaints, in which Broadcom is involved, but we expect Broadcom to either withdraw or pursue these less keenly. The sudden settlement does suggest that both companies are seeing the wisdom of backing away from their habitual intransigent legal approaches.
Qualcomm has recently demonstrated willingness to make compromises in its intellectual property business in order to reassure shareholders and minimize disruption to its chip activities – forecasts for which the company once again upgraded last week. It has even hinted that it would spin off its IPR operations if it felt that was required to avert a lengthy and damaging battle with the EU, highlighting the inevitable shift that it will have to make in its business model anyway, as the mobile world moves towards standards Qualcomm does not control.
For its part, Broadcom may have recognized that legal defeats may injure Qualcomm but they will not remove it from the scene as a competitor. Indeed, the battles of the past year have convinced many of us that Qualcomm minus the advantages of its patents remains an impressive player, and have made Qualcomm itself more aggressive about entering markets where it does not hold critical IPR, but where it can bring some of its key skills, such as integration, to bear. Broadcom, as Texas Instruments has long acknowledged, needs to ensure it can compete with Qualcomm on technology, process, carrier influence and execution – wins in the law courts would merely be bonuses, and expensive ones at that.
Both chipmakers will now avoid a lot of expense and distraction by backing away from their lawsuits. The settlement, of cases brought in San Diego, covers six Broadcom patents and four Qualcomm patents, covering various aspects of power control circuits used in CDMA and W-CDMA handsets. The two companies settled four earlier patent claims on February 23, which were also being considered in a San Diego federal court.
As the truism goes, nobody needs legal action when business is good. And both companies are currently flourishing. Broadcom has scored points for its increasing focus on Bluetooth, and a Wedbush Morgan Securities analyst last week upgraded the chipmaker to a ‘strong buy’, largely because Nokia has adopted its new Bluetooth chips, boosting their anticipated revenue contribution significantly.
The Wedbush Morgan analyst, Craig Berger, said Broadcom’s development of 65 nanometer chips is also a clear positive that will start to have an impact as early as next year. “The firm’s goal is to have 20 chips on 65nm soon, which should extend its product lead against many smaller or less aggressive competitors,” wrote Berger in a research note. “Aggressive transition to 65nm chips could pay off in 2008, making Broadcom a core semiconductor holding for investors with a one to two-year investment horizon.”
And last week also saw Qualcomm raising its guidance for this quarter by nearly 10%, forecasting shipments of 60 to 61 million MSM chipsets (previously 55 to 57 million) and 91 million CDMA chipsets (up from 82-86 million), with revenues forecast at $2.1-2.2 billion, slightly up. Qualcomm is strongly positioned in the market for W-CDMA chipsets, serving mainly Asian vendors at present, but is also raising estimates for CDMA, despite talk of market contraction, and says itself that it has been genuinely surprised by the recent strength of growth in this area.
By contrast, Texas Instruments narrowed its guidance earlier in the week, expecting revenues of $3.07 to 3.22 billion.
Despite its rosy short term outlook, Qualcomm has many other legal matters to attend to, most importantly its ongoing fight with Nokia over renewal of their cross-licensing pacts, which expire next month, potentially leaving the Finnish giant selling handsets with unlicensed CDMA-related technologies included. The stakes in this battle, as in the European Commission complaint brought by Nokia, Ericsson, Broadcom and others, are far higher than in the Broadcom patent trials, which were almost run of the mill for an IPR-driven company like Qualcomm. Indeed, there is more than half a suspicion that Broadcom was used by the mobile giants, Nokia and Ericsson in particular, as a stalking horse to put the issue of Qualcomm’s royalties policies and alleged anti-competitive bundling of IPR and sales on to the map, as a prelude for more far reaching action.
Qualcomm’s president, Steve Altman, said at a recent investor meeting that Nokia has publicly stated it will not continue to pursue a cross-licensing agreement with Qualcomm, yet will continue to sell its handsets with Qualcomm IPR without paying Qualcomm royalties (Nokia denies this, saying it “continues to negotiate in good faith, with the intention of reaching a mutually agreeable, cross-licensing agreement on a timely basis”.)
Altman said there is ‘a distinct possibility’ of additional litigation with Nokia over CDMA and W-CDMA technology. ‘We’ve geared up for that possibility,’ he said. ‘One hundred and forty companies pay us royalties on our patents. Come April, one company will not respect our patents. We’ve done a lot of work to prepare for that.’ The chipmaker has set aside $200m for legal matters this year.
Most immediately, though, Qualcomm faces a two-day public hearing in Washington DC, beginning on Wednesday. The ITC is considering what penalties to impose on Qualcomm for violating a Broadcom patent on technology that helps cellphones conserve battery power when out of range. The ITC expects to reach a decision around May 8. The agreement also does not affect a Broadcom claim in federal court in Santa Ana that Qualcomm violated six more of its patents, nor an antitrust claim in the 3rd US Circuit Court of Appeals. In September, a federal judge in New Jersey dismissed this complaint.