Qualcomm says Apple antitrust suit creating a 'house on fire' for patent business

21 August 2017 3:26pm
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19 August 2017. By Mike Swift.

In an early read on how the multibillion-dollar antitrust litigation between Apple and Qualcomm will play out, a federal judge on Friday agreed to an aggressive trial schedule in the case, even as Qualcomm said Apple's "assault" on its business model has prompted a second major smartphone maker to stop paying patent royalties.

"The house is on fire when one the largest manufacturers in the world says I'm watching [what's happening in the Apple litigation] and I'm telling you that I'm stopping all payments as well," Qualcomm lawyer Evan Chesler said at a hearing in San Diego, California. "It ought not to be the case that the house must burn down before we can restore the status quo."

Chesler did not identify which other major smartphone maker has joined Apple in no longer making royalty payments, though his description would seem to limit the candidates to Samsung, Huawei or LG Electronics.

But his claim was central to one of the two key issues before US District Judge Gonzalo P. Curiel Friday — whether the judge should order Apple to resume billions of dollars in royalty payments through its Taiwanese manufacturers because Qualcomm has suffered irreparable harm as a result of Apple's decision to stop making most royalty payments after it filed antitrust litigation against Qualcomm in January.

The two companies also battled Friday over whether Qualcomm should be able to litigate the global dispute in a federal courthouse a few miles from its Southern California headquarters, through Qualcomm's motion asking Curiel to block Apple from pursuing antitrust litigation it has filed against Qualcomm in the United Kingdom, Japan, China and Taiwan.

Nicola Hanna, a lawyer representing Foxconn, Pegatron and two other Taiwanese companies that assemble the iPhone and iPad for Apple, dismissed Chesler's irreparable harm claim.

"That's just lawyer hyperbole, because what they're telling the investing public is that things are fine," he told Curiel, referring the judge to a recent earnings call where Derek Aberle, Qualcomm's president, said the company did not think other manufacturers would stop making payments.

"They have stopped paying us; that is irreparable injury," Chesler said, saying the second smartphone maker had stopped making paymetns after Aberle made the statement during an earnings call in July.

Following the hearing, a Qualcomm spokeswoman, Christie Thoene, declined to comment on which smartphone maker has stopping making payments to the San Diego chipmaker.

First view for judge

Curiel said he would take both motions under advisement, and will issue a written order. He also agreed to consolidate two related cases before him, the antitrust suit brought by Apple, and Qualcomm's suit against the four assemblers of Apple products for allegedly breaching their contracts to make the royalty payments.

Apple does not have a direct patent licensing agreement with Qualcomm. Rather, Apple makes the royalty payments to its manufacturers – Foxconn, Wistron, Compal Electronics and Pegatron – which do have a direct licensing relationship with Qualcomm and pass the payments

Hanna said the royalty payments Qualcomm wants Curiel to force Apple and the manfacturers to make would total about $4 billion a year, an "unprecedented" figure for a dispute where the merits have not yet been ordered in court.

"This case is not just about Apple paying less," Chesler countered. "It's about conducting an attack on our business model to force us to change it before we ever get it resolved in court."

That statement caused the judge to interrupt the Qualcomm lawyer. "As a practical matter, this business model has been under assault for a while now in a number of countries," Curiel interjected, referring to regulatory investigations against Qualcomm by the European Commission, the Korea Fair Trade Commission and other antitrust regulators.

Curiel released a case management order Friday setting a pretrial conference just over a year from now, in late September 2018, when the judge would set a trial date. While an aggressive trial schedule is a plus for Qualcomm, that statement and others by Curiel suggested that he will look at the claims of the local company — Qualcomm — critically.

During Friday's three-and-a-half-hour hearing, the judge often leaned forward in his chair, blinking rapidly as he absorbed the arguments of both sides, sometimes interrupting the lawyers on both sides with his own questions.

The detail in those questions revealed that Curiel has clearly invested significant time understanding the highly complex global dispute. He was familiar not only with the extensive briefings from Apple and Qualcomm, but of the facts behind a similar patent/antitrust dispute between Microsoft and Motorola that Qualcomm says is precedent that enables Curiel to freeze litigation Apple brought in other countries (see here).

Underscoring the stakes in the wider dispute and the issues being heard Friday, Apple's general counsel, Bruce Sewell; and Qualcomm's general counsel, Donald Rosenberg, sat in the front row of the gallery.

Gloves up

Qualcomm lawyer Chesler told Curiel that Qualcomm is the local underdog, trying to keep an equal footing with an opponent who has brought 11 lawsuits in four countries.

"We believe we are standing in a ring with our gloves up, with the biggest boxer there is punching away at us," he told Curiel.

Friday's hearing was the first extensive hearing on the claims of the case before Curiel. In the briefings leading up to the trial, both companies have used charged language to impugn the ethics and motives of the opponent.

Apple told Curiel that Qualcomm was holding the iPhone-maker up for "billions in ransom every year" to block its ability to use Intel or others as a chip supplier, and that Qualcomm is pursuing "an extortionate scheme" and an "illegal business model."

Essentially, Apple lawyer William Isaacson argued Friday, Qualcomm is asking Curiel to allow it to get paid twice, by asking Curiel to force Apple to resume making patent license payments while not requiring to Qualcomm to resume paying millions of dollars in rebates that Qualcomm had formerly returned to Apple.

The payment relationship between Apple, the Taiwanese manufacturers and Qualcomm is not linear but circular, Isaacson said, with Qualcomm rebating a significant portion — the amount has been sealed by the court — back to Apple.

"We can call it double-dipping," Isaacson said. Considering the many antitrust investigations brought in other countries and a suit filed by the US Federal Trade Commission being heard in northern California, "there is not a stitch of evidence saying their unique business model is lawful in the face of the challenges it has received."

- With assistance from Kelly Davis in San Diego, and Amy Miller in San Francisco.

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