A second trial between Qualcomm (NASDAQ: QCOM) and Apple (NASDAQ: AAPL) is now before the U.S. International Trade Commission (ITC) in Washington, D.C. The chipmaker is trying to block Apple from selling iPhones that use Intel's (NASDAQ: INTC) modems in the United States. Qualcomm claims that Apple and Intel are infringing on its patents.
The first ITC trial concluded in June, with a U.S. staff attorney recommending that the court rule that Apple infringed on at least one of Qualcomm's battery-saving patents and that certain Intel-powered iPhones should be blocked in the U.S. market.
However, the attorney also argued that next-gen 5G devices using Intel chips should be allowed in the U.S. to maintain healthy competition between 5G chipmakers. The second trial covers three patents -- two of them related to how Intel's modems handle radio signals, and another concerning how Apple's CPUs put its iPhones to sleep.
The ITC acts as a third party in trade cases, but judges usually follow the agency's recommendations. If Apple is banned from selling Intel-powered iPhones in the U.S., it can still appeal the ruling multiple times and request an intervention by President Trump. Back in 2013, President Obama vetoed a ban on sales of certain iPhones and iPads after Apple's patent litigation loss to Samsung.
In other words, Qualcomm's attempt to ban iPhone sales in the U.S. is a long shot. However, it clearly indicates that Qualcomm's legal battles with Apple -- which throttled Qualcomm's growth over the past year -- won't end anytime soon.
Previously on Qualcomm vs. Apple...
Apple was once one of Qualcomm's top customers. Qualcomm was Apple's exclusive supplier of baseband modems for iPhones between 2011 and 2016, a relationship that the chipmaker maintained with controversial "rebate" payments to Apple. Qualcomm's massive patent portfolio also entitled it to a cut of the wholesale price of each iPhone sold worldwide.
But in 2016, Apple split its baseband modem orders between Qualcomm and Intel, which had been seeking a way back into the smartphone market after Qualcomm crushed its mobile chip business. Apple then assisted the South Korean FTC in the agency's probe into Qualcomm's license fees -- which critics claim should be calculated based on the price of wireless components instead of the price of the entire phone.
In an apparent retaliation, Qualcomm suspended its final rebate payments to Apple, which caused the latter to sue Qualcomm for $1 billion in unpaid rebates in a U.S. court. Apple also argued that Qualcomm's license fees were illegal, sued the chipmaker in China and the U.K. for similar reasons, and instructed its suppliers to halt all licensing payments to Qualcomm.
Qualcomm struck back by suing Apple's suppliers and filing another lawsuit in China to block all manufacturing and sales of iPhones in China. Earlier this year, the European Union fined Qualcomm $1.2 billion over the aforementioned exclusivity rebates, which were considered anticompetitive.
Last November, Apple and Qualcomm hit each other with patent infringement lawsuits. Apple claimed that Qualcomm infringed on eight of its patents by adding battery management functions to certain Snapdragon chips. Qualcomm then filed three separate patent infringement cases against Apple, claiming that Apple infringed on 16 of its patents, while seeking bans on certain iPhones.
That led to Qualcomm bringing the case to the ITC. Meanwhile, Apple started removing Qualcomm's modems from its iPhones -- the new 2018 models exclusively using Intel's modems. That's also probably why Apple abruptly discontinued the iPhone X, which uses both Qualcomm and Intel modems. This equals a lot of lost revenue for Qualcomm -- analysts expect its sales to drop 4% this year and its earnings to slide 15%.
Could Qualcomm possibly win?
Qualcomm's pleas to the ITC reek of desperation and indicate that the chipmaker is running out of options in its battle against Apple. Qualcomm hopes that it can block iPhone sales in the U.S. by targeting Intel chips, but these legal battles will likely drag on for a long time, and Apple will probably launch two or three more generations of Intel-powered iPhones in the meantime -- just as it did during its legal clashes with Samsung.
The real loser here is Qualcomm, which should have simply accepted Apple's decision to split its modem orders with Intel and paid the outstanding rebates owed. Instead, Qualcomm kicked the hornet's nest and is trying to appease investors with buybacks (a consolation prize for its failed bid for NXP) and convoluted efforts to block iPhone sales in the U.S. and China.
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Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.