An Amended Complaint: How Legal Sparring between California-based Tech Giants became an All-Out Global War

December 21, 2018

Over the past couple of years, Apple has sued semiconductor manufacturer Qualcomm in three different countries, with its United States claim seeking approximately $1 billion in damages. In its complaint, Apple alleged that Qualcomm was “withholding” that sum “as retaliation for [Apple] responding truthfully to law enforcement agencies investigating [Qualcomm].”

In a major development in the litigation just last month, Qualcomm amended its counterclaim against Apple to include allegations that Apple “stole confidential data about [Qualcomm’s] modem chips and gave it to Intel,” a Qualcomm competitor.

Apple did have access to Qualcomm’s proprietary information by virtue of a master software agreement from 2010, which was obtained when Apple “exercised its commercial leverage” and “promised to keep the information close.” Qualcomm claims that, instead of protecting this information, Apple’s engineers “provided to Intel engineers Qualcomm software and confidential information, including source code, for the purpose of improving the performance of Intel’s chipset solutions.” The implication is that Apple is using Qualcomm’s patented technologies to improve Intel’s products so that Apple can switch suppliers, thereby avoiding the very expensive licensing fees charged by Qualcomm.

The 2010 agreement also gave Apple more favorable licensing terms compared to its competitors; while the typical manufacturer might have to pay $30 per phone in royalties to Qualcomm, Apple successfully negotiated a price of only $10 per phone. As part of that deal, Apple agreed not to encourage regulators from “crack[ing] down on Qualcomm” but did not prohibit Apple from answering truthfully answer “questions in any investigation already under way.

Even for a company of its size, a ten-figure judgment in favor of Qualcomm would be crippling to Apple’s financial health.

This past Friday, Qualcomm dropped another bombshell in court,  stating that Apple is currently $7 billion (with a “B”) behind in these patent royalty payments to Qualcomm. Allegedly, the iPhone manufacturer “virtually stopped making royalty payments to Qualcomm a year ago.” The company goes as far to accuse Apple of aiming to “destroy Qualcomm’s business model.” While the latter may be nothing more than alarmist rhetoric, the former suggests that Apple is getting serious about its fight with Qualcomm. Such a sum indicates that Apple is prepared to take this fight to the bitter end; after all, $7 billion constitutes roughly 15% of Apple’s net income in 2017. Even for a company of its size, a ten-figure judgment in favor of Qualcomm would be crippling to Apple’s financial health.

There is no question that Qualcomm has exercised outsize authority in the mobile phone industry through its aggressive patent strategy; but should they be punished for doing so? After all, this is just the sort of protection patents are aimed at providing, regardless of whether such protections may ultimately stifle short-term competition in the market. Apple and other smartphone manufacturers may find Qualcomm’s practices extortionary and “unfair,” but there is little doubt that Qualcomm is acting beyond the privileges granted by virtue of such patent protection. And we all know how unreliable an argument predicated on the concept of “unfairness” is in a contract dispute between two sophisticated industry giants.

The Constitution of the United States empowers Congress to offer patent protection as a means to promote innovation via “progress of science and useful arts.” Under current industry standards, it seems that Qualcomm has a firm grip on many technologies essential to constructing modern mobile phones. In the short term, this is bad news for manufacturers; but in the long run, these industry players are incentivized to produce disruptive new technologies to avoid Qualcomm’s patents and bring even greater value to consumers.

While Apple and its competitors bemoan the unfairness of Qualcomm’s patent licensing strategy, it seems they ignore the potential unfairness of depriving Qualcomm of patent protection and the benefit of its licensing agreements. Apple claims it “believes deeply in innovation,” yet seeking to devalue the bargained-for benefits of another entity’s innovative strategy suggests that Apple believes far more in doing whatever it takes to bolster its bottom line.