Qualcomm walks narrow path to reconcile statements in Apple antitrust dispute

29 August 2017 1:13pm
iPhone with Glasses

23 August 2017. By Mike Swift.

In claiming that its patent licensing business is "a house on fire" due to Apple's interference, while reassuring investors that the long-term outlook for that same patent licensing business is bright, Qualcomm is attempting to traverse an especially treacherous high wire. It remains unclear whether the company will safely reach the parapet on the far side of the drop.

As the antitrust litigation between the two California technology companies gains momentum, it is the job of the legal team of Apple and its contract manufacturers to jerk that tightrope enough so that, in the view of US District Judge Gonzalo Curiel, Qualcomm and its delicately balanced argument come tumbling down.

At their first big courtroom showdown between last week in San Diego, Apple and its allies gave Qualcomm's tightrope a significant — and potentially fatal — shake.

Curiel's decision is pending on Qualcomm's motion for an injunction that would force Apple to resume making payments to Qualcomm of about $4 billion a year through Foxconn and three other Taiwanese companies that assemble iPhones and iPads.

To find for Qualcomm, however, Curiel would have to find that the company suffered irreparable harm from Apple's actions.

Deep into last Friday's three-hour hearing, Curiel signaled that irreparable harm would be the central focus of his legal analysis on the injunction motion.

At one point, Curiel broke in on the argument of Qualcomm lawyer Evan Chesler, saying: "So, let's talk about irreparable harm." The judge never asked about the other elements of the injunction analysis, such as whether there is a public interest in granting Qualcomm's motion.

Thanks to Apple's decision to stop paying royalties to license Qualcomm's patents, Chesler told the judge, a second, unnamed smartphone maker has stopped making royalty payments as well.

"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,'" Chesler told Curiel. "It ought not to be the case that the house must burn down before we can restore the status quo."

July earnings call

But that ominous tone did not track with what senior Qualcomm management told analysts on the company's third quarter earnings call on July 19. Noting past patent royalty spats with Nokia and LG Electronics that were ultimately settled, Qualcomm President Derek Aberle told analysts that he expected the company could continue to grow its patent licensing business "once we resolve these disputes" against Apple and the other licensee.

The dispute with the unnamed licensee has nothing to do with the Apple dispute, Aberle said.

"It's a contract dispute under [the unnamed licenee's] agreement," he said.

One analyst asked Aberle whether the situation could have created "a contagion" that would spread to other smartphone makers who would also stop making royalty payments.

"On the question of contagion, we are working very hard across a number of fronts to really stabilize the regulatory environment. That remains a priority for us," Aberle told the analyst, adding, "I don't think as we sit here we have any indication that this is somehow going to result in a bunch of other licensees deciding not to report and pay royalties."

Qualcomm CEO Steve Mollenkopf, at the start of the earnings call, told analysts that "the long-term outlook for our licensing business continues to remain strong."

Not exactly a house on fire.

Apple counter attack

Qualcomm may argue that there is a valid distinction to be made between its short-term legal dispute with Apple and the long-term health of a market driven by the strong underlying global growth of wireless connectivity for the emerging Internet of Things, not just for smartphones.

That is a fine distinction to draw, however, and there was scant evidence Friday that Curiel will be willing to make it.

Qualcomm will also argue that because it is a critical player in forthcoming 5G wireless standard, that Apple's antitrust litigation is not only a blow against the San Diego chipmaker, but against a generation of consumers that will benefit from those 5G devices.

The development of 5G is at a "critical juncture," on the "cusp" of happening, Chesler told the judge Friday, right at the time when Apple's self-serving litigation is sapping the research and development money Qualcomm needs.

"What Apple is doing, by controlling the actions of its contract manufacturers, has put that in jeopardy, not only for the industry, but for the people who will use those products," he said.

The lawyer for the four contract iPhone and iPad manufacturers — Foxconn, Compal Electronics, Wistron and Pegatron — lost no time in attempting to point out that the inconsistency between the earnings statements of Qualcomm's senior management and the statements of its lawyer in court on Friday.

Their attorney Nicola Hanna dismissed Chesler's irreparable harm claim, walking Curiel through the reassuring statements Qualcomm officials made on the earnings call.

"That's just lawyer hyperbole, because what they're telling the investing public is that things are fine," Hanna said.

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