Qualcomm started the new year by admitting the latest setback in its patents battle with Broadcom would hurt it ‘in the short term’, but then immediately announced a workaround for its UMTS handset baseband chips.
In the latest twist in the saga, a federal judge in California issued an injunction that bars Qualcomm from selling chips in the US that infringe three Broadcom patents, though he did permit the offending products to be sold until January 2009 subject to the larger company paying royalties. He also barred W-CDMA chips that were found to infringe Broadcom’s video encoding patent. Qualcomm shares dropped only 1.7%, even though the bar was broader than had been expected, because the CDMA giant immediately promised that new W-CDMA chips, that work around the patents, would be available by the end of March. Qualcomm also said it would examine further legal options such as an appeal against the injunctions.
The rapid availability of non-offending W-CDMA chips is more important for shareholder confidence than actual revenue. Although the 3G technology is the fastest growing area of Qualcomm’s business, it represents only a small slice of revenues in the US. The US generates about 30% of the fabless chipmaker’s revenue, but most of this still comes from CDMA, making the rulings on CDMA2000 chips far more significant. The royalties clause saves major customers such as Samsung and LG, and CDMA carriers like Sprint Nextel, from facing a severe shortage of handset silicon as Qualcomm brings out workaround products (Verizon already has a direct royalties deal with Broadcom). Sprint, which has worked closely with Qualcomm on workaround efforts, said it did not foresee a delay to chips supporting its forthcoming QChat function, which it has codeveloped with Qualcomm and which it perceives as a vital element in its recovery plan, offering a cross-platform version of its popular push to talk applications.
In response to the news, Tim Long of Bank of America said in a research note that he expects only a nominal earnings per share impact on Qualcomm. Analysts have forecast earnings of $2.11 per share, before items, on revenue of $9.84bn, for this fiscal year, and Qualcomm has successively upgraded its quarterly and annual forecasts on strong silicon sales.
Qualcomm will disclose full financial impact of the new rulings along with its quarterly results on January 23, but CEO Paul Jacobs said in immediate response that ‘while Qualcomm will attempt to obtain further relief and clarity from the court on certain aspects of its order, the inability to obtain such relief will have an immediate short term impact as handset customers transition to new designs for W-CDMA products.’
Last year, a jury ruled in Broadcom’s favor in the patents case, awarding the company $19.64m in damages. Judge Selna later reversed the jury finding that Qualcomm had willfully infringed the patents, which could have boosted the damage award to $39.3m. He concluded that Broadcom was entitled to an injunction, but ruled that ‘considerations of public interest’ ‘ particularly the carriers’ opportunity to gain a return on their investment in 3G networks – justified the ‘sunset provision’ allowing a stay until January 2009 as long as royalties are paid. For the digital video patent, the judge set a royalty rate of 6% of the revenue Qualcomm receives from those products, while the rate on another patent, connected to accessing two networks simultaneously, was set at 4.5%. The rate for a third patent, concerning push to talk (and so of critical importance to Sprint) has to be negotiated between the two parties.
Analysts were considerably cheered by the swift announcement of workarounds. In a research note, Cowan and Co predicted that shares in Qualcomm would appreciate 20% over the next year, and wrote: “We believe the introduction of new chips completely mitigates the immediate fall-out from the injunction.” Such comments show one important reason why Qualcomm has remained so robust during more than a year of legal buffeting ‘ its technological capabilities, and more importantly, its ability to adapt its products swiftly and bring updates to market decisively, minimizing the effect of nervousness on investor confidence.
For its part, Broadcom observed that Qualcomm “has either lost or withdrawn all of the patent infringement cases it brought against Broadcom.”
In a separate case, US federal magistrate Judge Barbara Major has issued sanctions against six Qualcomm attorneys for mishandling evidence in its patent case against Broadcom. Major referred the conduct of the six lawyers to the California State Bar Association for an investigation of possible ethical violations. She decided not to sanction 13 other Qualcomm attorneys involved in the case. She also issued an $8.5m judgment against Qualcomm, though that ruling will not actually cost anything, as another federal judge had already ordered Qualcomm to pay Broadcom that amount to cover legal fees, and the judge ruled that no additional monetary penalty was necessary because the original one was so large.
Qualcomm was accused of failing to produce thousands of pages of documents that had been requested by Broadcom for its defense against a suit filed by Qualcomm in October 2005 for alleged video compression patent infringement. One of Broadcom’s defenses was that Qualcomm violated an obligation to disclose its patents to an industry standards committee but Qualcomm said that it had not participated in the group. During the final days of trial, a senior Qualcomm engineer disclosed that she had emails related to the group that hadn’t been turned over to Broadcom and after Qualcomm lost the case, thousands more documents were discovered. Qualcomm’s general counsel apologized for what happened and later resigned, and the company has ordered an internal overhaul of evidence procedures.