Apple, Qualcomm to get their day in court in hotly anticipated antitrust trial

12 April 2019 00:00 by Mike Swift

A rapacious Qualcomm has held the smartphone industry hostage, using its monopoly power over cellular modem chips to extract unreasonable patent fees from Apple and the rest of the market.

Or …

A greedy Apple is trying to unfairly exploit billions of dollars of the Qualcomm research that created the chips that connect smartphones efficiently to wireless networks.

A federal jury will grapple with those two vastly different narratives starting next week in San Diego, California, in the most momentous technology trial in years. Tens of billions of dollars are on the line, including as much as $27 billion in trebled antitrust damages.

The four-week trial — which also includes Taiwanese companies Foxconn, Wistron, Compal Electronics and Pegatron — will have plenty of star power. Apple CEO Tim Cook is scheduled to testify at the head of a parade of Apple brass, taking the witness stand as soon as next week. Jeff Williams, Apple’s chief operating officer, and Phil Schiller, its marketing chief, are also on the witness list.

Qualcomm will have to take Apple’s punches as the iPhone-maker puts on its case over the first two weeks of the trial. But it will fight back with its own top executives at around week three, including CEO Steve Mollenkopf and company co-founder Irwin Jacobs.

They will tell Qualcomm’s creation story, about how a plucky startup overcame a chorus of industry doubters in the 1980s by introducing a different way for mobile phones to connect to a cellular networks called code-division multiple access, or CDMA. That technology allows a device to broadcast data simultaneously over a single communication channel.

The jury will see historical photos of Jacobs and other mustachioed Qualcomm engineers riding around in a battered van in San Diego and other downtowns with CDMA prototypes to prove that their invention would be a good choice for dense city centers.

Apple, on the other hand, will seek to portray Qualcomm as a kind of extortionist, an amoral company that betrayed its legal commitment to license its patents on fair and reasonable terms. Count on Apple playing for the jury the same audio clip that lawyers for the Federal Trade Commission played for US District Judge Lucy Koh during a trial in January: Qualcomm executives explaining that its license payments are based on the value of the device, not the component, because it is “humongously” more lucrative.

Local dynamics

For Apple this will be a road game, unlike its court battle in San Jose, California seven years ago against Samsung over copying of the iPhone. As it tries to win over a San Diego jury, Apple will face off against a corporation that put its name on the local football stadium and is a powerful source of local pride.

US District Judge Gonzalo P. Curiel, who will preside over the trial, recognized this as a potential issue early on and began the jury selection process weeks ago by sending out preliminary questionnaires to weed out jurors with conflicts of interest.

Underscoring the stakes for Apple, Cook will take the stand. Neither Cook nor his predecessor as Apple CEO, Steve Jobs, ever testified in the company’s long legal battle against Samsung. With Cook in the hot seat, Qualcomm lawyers will get their shot to cross-examine him.

The San Diego antitrust trial is just one dimension of the global legal conflict between Apple and Qualcomm. That battle — spanning courtrooms from China to Germany to Washington, DC, to California—  reflects the wreckage of a corporate marriage that generated billions of dollars in revenue in the years after Apple began putting Qualcomm chips in the iPhone and iPad starting in 2011.

It is now an ugly divorce that will play out publicly between now and mid-May before Curiel, a judge who was briefly a household name when he was blasted by President Donald Trump in the first days of his administration. Curiel has a very clear picture of the lens he wants the jury to view the case through.

“Here, there is not one scintilla of a doubt that the primary dispute relates to the claim that Qualcomm has designated a business model for chipsets that has allowed it to create and maintain a monopoly,” the judge said at a March 28 hearing. “This is an anticompetitive conduct case, first and foremost.”

One thing the San Diego jury won’t hear is about the January trial between the FTC and Qualcomm in San Jose, California.

While there is significant overlap in the theories and facts — Apple executives were key FTC witnesses — Judge Koh has not yet issued a ruling in that case. Curiel has decided that the FTC trial and other investigations and penalties against Qualcomm from antitrust regulators around the world are outside the boundaries of evidence presented in this trial.

It’s complicated

One of the first mental chores for the jury will be learning the cast of characters. Besides Apple and Qualcomm, the trial will feature the four companies that assemble iPhones and iPads for Apple, known in this case as the “contract manufacturers,” or CMs: Compal, Pegatron, Wistron, and Foxconn, whose formal name is Hon Hai Precision Industry.

Executives from a host of chip and device makers including Intel, MediaTek, Huawei, Samsung, and LG Electronics are also expected to testify.

Complicating the picture is that Apple does not directly license Qualcomm’s patents. In fact, Apple’s lawsuit is part of its response to failed patent negotiations between the two companies.

Instead, Apple relies on the license agreements that the CMs have with Qualcomm, and then reimburses them for their royalty payments to Qualcomm.

The CMs as a group are seeking up to $9 billion in antitrust damages from Qualcomm, claiming that it violated US antitrust law when it failed to offer licenses to its standard-essential patents on fair, reasonable and nondiscriminatory, or Frand, terms. Those damages could be trebled by Curiel to $27 billion. That money includes royalties on devices made for companies other than Apple.

In the months leading up to Apple’s lawsuit against Qualcomm in January 2019, Apple stopped reimbursing the CMs for the royalties. The CMs in turn stopped paying Qualcomm.

Qualcomm accuses Apple of interfering with the contracts it has with the CMs and is seeking billions in damages. As evidence, Qualcomm points to the CMs continuing to make royalty payments for non-Apple devices, even though they are now contesting those payments.

Apple, meanwhile, mainly wants injunctive relief, including a finding that Qualcomm violated state and federal antitrust law through its practice of tying the sale of its modem chips to a requirement that companies license its full portfolio of standard-essential patents.

Apple is also pursuing patent exhaustion claims against Qualcomm, arguing that because it bought chips from Qualcomm it should not also have to pay royalties to license patents on the technology in those chips. Apple will argue that Qualcomm’s patent rights were exhausted through the sale of its chips for the iPhone and iPad.

Judge Curiel is aware of the difficult decisions the jurors will be tasked with and is mindful of easing their burden when possible.

At a March 14 hearing he said: "In my career as a judge, I'd have to put patents and antitrust right at the top in terms of most difficult issues.”

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