Will the Apple lawsuit against Qualcomm really signal the end of the intellectual property licensing norms which have, by and large, governed the cellular industry since the dawn of GSM?
Qualcomm epitomizes that system, and has been one of its chief beneficiaries since it pushed CDMA into a mobile phone and established its technology as the bedrock of 3G. It has been criticized and cajoled throughout its period of dominance, accused of anti-competitive business practices and excessive licensing fees. Until recently, these complaints rarely came to court, but in the past two years, the chip giant has been investigated by antitrust authorities around the world. It made a settlement with China in 2015, is appealing a fine from South Korea, and is engaged in legal battles with the European Union, US Federal Trade Commission and Taiwan.
These national actions have often been at the instigation of Qualcomm customers or rivals (many firms are both, of course), but the Apple suit, initiated last week, is the first time a major customer has taken direct action. Generally, companies have been unwilling to come out of the shadows, no doubt deterred by the ferocious secrecy that surrounds Qualcomm contracts; by the weight of its market size and formidable legal teams; and by the limited choices of top-class chips elsewhere.
But Apple has market weight, wealth and legal activism to match Qualcomm’s, and it has even been diversifying its sources of modems for the iDevices, introducing Intel to its mix.
It is accusing its primary modem supplier of a long list of abuses. It claims the chip giant is withholding over $1 billion in licensing rebates which are owing to Apple, in retaliation for Apple cooperating with the South Korean antitrust authorities; and that it is operating an “illegal scheme” to monopolize the smartphone chip market.
It claims, in its filings with the court in Qualcomm’s San Diego hometown, that the chip giant is illegally controlling the market. Its submissions state: “Qualcomm built its business on older, legacy, standards but reinforces its dominance through exclusionary tactics and excessive royalties. Despite being just one of over a dozen companies who contributed to basic cellular standards, Qualcomm insists on charging Apple at least five times more in payments than all the other cellular patent licensors we have agreements with combined.”
It is worth noting, on that point, that Apple has, in the past, fallen foul of many of those “dozen companies” for resisting licensing fees for standards-essential patents (SEP). It settled a lawsuit with Ericsson at the end of 2015. It had earlier lost a battle with Nokia, which resulted in a settlement in 2011, but the companies hurled new suits at one another at the end of last year. Apple accused the Finnish firm of anti-competitive behavior in transferring essential patents to third party “patent assertion entities” in order to pursue revenue more aggressively and outside of its existing FRAND licensing terms (FRAND – fair reasonable and non-discriminatory – terms are supposed to govern all SEP, but the interpretation and process related to FRAND are frequently disputed in lawsuits and antitrust probes).
Apple has been very active in asserting its design and software patents, but it has very little SEP to trade, so despite its market strength, it can end up paying higher IPR fees for iPhones than a cellular patent major like Samsung does. And the more those SEP giants offload their handset businesses, as Ericsson and Nokia have done, the more they are looking to generate direct revenues from their patents, rather than just trading to reduce overall device costs.
So as the margins and the growth in the smartphone business decline, Apple will be increasingly eager to reduce its costs, and is also attacking the complex systems of agreements with third parties along the handset supply chain, which it believes can result in “double dipping” by patent holders.
These are important issues – the level of patent royalties that is sustainable in a commoditizing business, and of potential double dipping in a complex supply chain. But they have been debated and legally disputed for almost as long as the smartphone has existed. One of the key objectives of the introduction of LTE was that the patents payments would fall, and the control of the IPR be shared among more players, as the industry shifted from CDMA-based technology to OFDM.
In reality, nothing changed, and Apple’s tussles with the major mobile patent giants can be seen as just a continuation of the same fight.
Broader issues
But with 5G looming, there is even more at stake. More companies are getting involved in the evolution of new mobile platforms, many of them with their heritage in the open, commoditized platforms of Wi-Fi or IP, or in open source. For the economics of a new mobile generation to work, there will have to be a fundamental rethink of how patents are granted, shared and charged for.
So Apple’s suit, while reflecting its own narrow objectives as a smartphone maker under pressure, is also very significant because it brings broader issues to the table, and could act as a rallying cry for other companies to put pressure on Qualcomm, and by extension, the whole traditional cellular licensing model.
For handset makers, the most crucial issue is to try to reduce the costs of making their products as the smartphone market becomes severely squeezed. So a recurrent claim in many actions is that royalties should be calculated as a percentage of the price of the handset components which Qualcomm actually supplies, not of the total price of the device. The campaign for the basis of handset IPR charges to be changed has been spearheaded by Apple for several years, though not just in relation to Qualcomm.
“The intellectual property rights policies of the cellular standards organizations do not require licensing at the component level, and the FTC does not have the authority to rewrite industry policy,” argued Qualcomm’s general counsel, Dan Rosenberg. “That is for the industry, not a regulator, to decide.”
For rival chipmakers, actions often center on claims that Qualcomm ties its patent licensing and its product sales too tightly together, pressurizing companies into buying its chips in order to gain full access to its essential IPR (something the company has always denied).
This is at the heart of the FTC probe, which also alleges that Qualcomm maintains a “no licence, no chips” policy that requires handset makers to agree to Qualcomm’s licensing terms in order to get supplies of its baseband chips; and that it refuses to license SEP to competitors, including Intel.
In its complaint, the FTC says: “Qualcomm is unique in requiring an OEM, as a condition of sale, to secure a separate patent license requiring royalty payments for handsets that use a competitor’s components.”
Qualcomm said it will appeal. Rosenberg said: “Qualcomm has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms.
Qualcomm said the FTC’s complaints were based on “flawed legal theory, a lack of economic support and significant misconceptions about the mobile technology industry.”
That view was echoed by FTC Commissioner Maureen Ohlhausen, who voted against the filing, which passed in a 2-1 decision. In dissenting comments, she said the decision was “based on a flawed legal theory…that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine US intellectual property rights in Asia and worldwide.”
Her comments reflect how high-profile patent disputes will get entangled with international trade politics – a protectionist climate which seems to be building in the US, and China’s determination to lead the next generation of technologies and patents.
They also hint at the fundamental tension that underlies any patents row – the need to encourage innovation by protecting inventors’ rights; balanced against the push to promote fair competition and lower barriers to entry to a market by making core technologies openly and fairly available. Whatever the view of Qualcomm’s business practices, nobody can deny that the company has been an enormous contributor to mobile technology. It is consistently at the cutting edge of every new cellular technology, and all the brains and dollars which challengers like MediaTek throw at the issue have not enabled them to catch up.
Qualcomm is no patent troll – the skill of its engineers and its investments in R&D have resulted in a stream of technologies which underpin its products as well as its licensing, and also help to advance the industry. There was widespread speculation that, with 4G, it would lose its power because of the shift away from CDMA-based standards, but it invested heavily in engineering and acquisitions in order to keep a pre-eminent position in technologies for LTE, Wi-FI and emerging 5G. It lost the iron control it had over the CDMA ecosystem but it retained a powerful place through its engineering efforts.
Supply-chain diversity
Ironically, then, it is far harder to argue complete market dominance than it was in CDMA, but this is the time that Qualcomm is coming under pressure. Apple is even going as far as to challenge the validity of some of Qualcomm’s patents – this is an unusual tactic, for the reasons outlined above, though Apple seems to be hedging its bets on this point, saying that, if the patents are upheld, the royalties should still be lower than they are now.
“It is quite clear that Apple’s claims are baseless,” Qualcomm’s Rosenberg said in a statement. “Apple has intentionally mischaracterized our agreements and negotiations, as well as the enormity and value of the technology we have invented, contributed and shared with all mobile device makers through our licensing program.”
Qualcomm also accused Apple of encouraging regulators in “various jurisdictions around the world” to attack it, by “misrepresenting facts and withholding information”. But Apple’s argument is that Qualcomm withheld royalty rebates, on the basis that Apple had violated its agreement with its modem supplier when it cooperated with Korean antitrust investigators. That agreement, according to Apple filings, bars companies from taking any steps to challenge Qualcomm’s business model. It added that Qualcomm offered to pay the money “if Apple retracted and corrected its statements to government agencies,” according to the complaint.
The FTC’s move came only a few weeks after the Korea Fair Trade Commission (KFTC) imposed its fine on Qualcomm, citing similar charges of unfair patent licensing practices; failing to license SEP to competitors; and forcing customers to agree to unfair terms including “making them provide [the customer’s] patents for free”.
In February 2015, Qualcomm paid $975 million and agreed to changes in its royalty rates and some licensing practices, following an investigation by the Chinese antitrust authorities.
These legal actions reflect the rising competitive pressures on handset and chip suppliers in the smartphone world, as well as the rising influence of companies which have come from an open source background, or from the more open ecosystems of Wi-Fi and PCs.
So while the cellular traditionalists cling to their old closed, bilateral patent licensing arrangements, others want a new approach which will reduce costs and barriers to entry for many players. Complaints to regulators and law courts are one way to push for this; other organizations are working through standards bodies like ETSI; through patent pools; and through open source.
Collectively, such actions, and the diversification of the supply chain in 5G, will drive a change at last. Whatever the outcome of specific vendor arguments, Qualcomm, Apple and others will be dealing with new patent norms, and new competitors and customers, as they move into the 5G era.
This article first appeared on Rethink Wireless
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