Qualcomm Steps Up Fight With Apple -- WSJ

Chip maker seeks bar on some iPhone and iPad imports, alleging patent infringement

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 7, 2017).

Qualcomm Inc. is asking federal trade authorities to block imports of some iPhones and iPads, opening a new front in its dispute with Apple Inc. and exposing both companies to further risks to their most profitable businesses.

Qualcomm said it plans to file a complaint Friday with the U.S. International Trade Commission to halt imports of Apple handsets and tablets that don't include Qualcomm chips, and to bar sales of those products already in the U.S.

Qualcomm said Apple has been infringing several of its patents on wireless technology in iPhones and iPads generally, but that it limited the scope of its request in part to avoid the broad economic impact of blocking sales of the products entirely.

Qualcomm said it separately filed similar patent-infringement claims Thursday against Apple in federal district court in Southern California.

The moves escalate a legal feud Apple initiated with a federal lawsuit in January accusing Qualcomm of using its dominance in cellular chips unfairly to thwart competitors and extract high patent royalties.

Apple in its suit complains that Qualcomm's royalty -- because it is calculated as a percentage of the handset price -- rewards the chip maker unfairly when Apple charges higher prices for capabilities that aren't based on Qualcomm patents.

An Apple spokesman said Thursday that the company stands by its previous statement that Qualcomm is seeking payments on innovations it didn't make.

Apple has launched international legal actions and supported regulatory proceedings against Qualcomm in multiple countries, threatening the San Diego, Calif., company's patent-licensing business, which in 2016 accounted for roughly 80% of its pretax profit.

Qualcomm's latest move isn't likely to disrupt iPhone sales in the near term, if ever, because the trade commission -- an independent, bipartisan federal agency -- generally takes about 16 months to reach a conclusion, according to Lyle Vander Schaaf, a former commission general counsel now with law firm Brinks Gilson & Lione. If the commission were to rule against Apple, the iPhone maker could appeal.

Still, Qualcomm's complaint represents its strongest effort to threaten Apple. It comes as Apple, the world's most profitable smartphone maker, finalizes plans for the next versions of the iPhone, which accounts for two-thirds of Apple's sales and three-quarters of its gross profit. Those plans are expected to include a new model to mark the product's 10th anniversary, investor anticipation of which has triggered a jump in Apple's stock this year.

Apple is finalizing the features and components for those new models, expected to be released in the fall. Despite the legal fight, Qualcomm is vying with Intel Corp. to supply modem chips for the next-generation iPhones. Apple started including Intel's chips in some units of the iPhone 7 launched last year. Apple accounts for as much as 30% of Qualcomm's per-share earnings, according to Macquarie Capital.

Qualcomm has two main businesses: selling chips that are used in many smartphones and licensing patents it owns on key cellular technology used in nearly all smartphones sold globally, even those that don't use its chips.

That business model has been increasingly under attack. In addition to the Apple fight, Qualcomm is under investigation by the U.S. Federal Trade Commission for anticompetitive practices, and late last year was fined by the South Korean Fair Trade Commission over similar claims. It also previously paid a fine to settle with Chinese regulators.

Complaints against Qualcomm largely have focused on its licensing practices for a category of patents that are generally acknowledged to be essential to cellular communications. Standards organizations require that holders of such patents offer licenses widely. Qualcomm's critics claim that the company evades its obligation by refusing to license those patents to rival chip makers.

In the new complaint, Qualcomm said the six patents at issue cover technologies not in that essential category and are related to boosting performance while conserving battery life. It said Apple has used the technologies without purchasing a license despite Qualcomm's efforts to negotiate one.

Accusing Apple of violating such nonessential patents reinforces Qualcomm's position that its patents cover a broad range of valuable technologies beyond its communications chips. Basing the complaint on such patents also dodges pitfalls around the ITC, which in the past has been steered away from decisions bearing on essential patents, Mr. Vander Schaaf said.

Still, Qualcomm's request to the trade commission risks muddying its arguments. By seeking to block only Apple products that don't contain Qualcomm chips, it could reinforce Apple's claim that Qualcomm wields its dominance in chips unfairly. Moreover, pressing for a ban on imports of iPhones that don't include Qualcomm chips as a punishment for patent infringement may appear to contradict Qualcomm's repeated claims that it strictly separates its chip sales and patent-licensing businesses, and that it doesn't use its ownership of technology essential to cellular standards to put competitors at a disadvantage.

Qualcomm said one reason it is seeking to block only products that don't include Qualcomm chips is that the commission is mandated to protect the public interest, and blocking all iPhone and iPad imports would affect not only Apple and Intel but telecom carriers and retailers that distribute the iPhone.

"You want to not affect in unnecessary ways competitive conditions in the U.S. economy," said Qualcomm general counsel Don Rosenberg. "We're trying to toe the line. We believe in the public interest."

Apple and Qualcomm each have come before the trade commission in other cases. The agency in 2013 ruled against Apple in a case brought by Samsung Electronics Co. but the Obama administration vetoed a ruling that would have blocked some iPhone imports. The commission in 2007 ruled against Qualcomm in a case brought by then-rival Broadcom Corp., but an appeals court later lifted a ban on imports of some Qualcomm cellphone chips.

Write to Ted Greenwald at Ted.Greenwald@wsj.com and Tripp Mickle at Tripp.Mickle@wsj.com

(END) Dow Jones Newswires

July 07, 2017 02:47 ET (06:47 GMT)