Apple, Inc. Brings Its Fight With Qualcomm to China

By Evan Niu, CFA Markets Fool.com

Image source: Apple.

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Earlier this month, Apple (NASDAQ: AAPL) filed a blockbuster lawsuit against its most important supplier,Qualcomm (NASDAQ: QCOM), alleging a wide range of transgressions that were all intended to enhance Qualcomm's monopoly power over the baseband processor market. That suit came just days after the U.S. Federal Trade Commission filed a similar regulatory antitrust complaint against the mobile chip giant.

Apple isn't stopping there; the Mac maker is now taking its grievances to the Middle Kingdom.

There's more where that came from

Apple has filed not one, but two suits against Qualcomm in Beijing, Reuters reports. The first is seeking 1 billion yuan (approximately $145 million) in damages, accusing Qualcomm of abusing its monopoly power in the baseband market. The second alleges that Qualcomm has not fulfilled its obligations to license its standards-essential patents under fair, reasonable, and non-discriminatory (FRAND) levels.

The fact that Apple is suing Qualcomm in China is notable for a few reasons, the most obvious being that the scope of Apple's complaints reaches beyond just the U.S. itself. Apple's lawsuit in the U.S. was filed in the U.S. District Court of Southern California. China also doesn't have a particularly good reputation for enforcing intellectual property (IP) laws, although the country has been making progress on improving its legal frameworks. The discrepancy in IP enforcement is one reason why many Chinese smartphone manufacturers, most notably Xiaomi, are unable to expand operations into countries with stricter enforcement.

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China is also where the vast majority of Apple's contract manufacturers are located, including its most prolific iPhone assembler, Foxconn. These contract manufacturers are partially responsible for Apple's predicament with Qualcomm. As noted in Apple's U.S. complaint, Qualcomm refuses to license its IP directly to Apple, instead preferring to ink deals with Apple contract manufacturers that pass along both the IP rights indirectly as well as the royalty costs in full. Apple's manufacturing partners simply accept Qualcomm's terms and do not negotiate, leaving Apple with massive royalty bills.

Apple has long attempted to review the agreements between Qualcomm and its contract manufacturers, but Qualcomm must consent -- and it won't. I'm neither an American or Chinese lawyer, but it seems possible that Apple is seeking legal assistance in China so that it may gain access or somehow restructure these agreements, although legal discovery in China is significantly more restricted than here in the U.S. Even if that's not the goal, it wouldn't hurt to collect more in monetary damages by filing suit in multiple relevant jurisdictions, as Apple says it's been overcharged by billions of dollars over the past five years.

This serves as additional evidence that Apple has absolutely no intention of settling with Qualcomm. The company feels as if it has been wronged all these years, being coerced into quietly overpaying Qualcomm for half a decade. And now that Qualcomm's exclusivity has ended, the time for reckoning has come.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.