QualComm: Legal Battles Galore

By Vijay Nagarajan, Guest Author

The wireless industry witnessed a revolution named iPhone this summer. It has also been in the news constantly for another reason: The QualComm-BroadCom legal battle. Over the next few posts, I wish to discuss this story as it unfolds and provide some insights on its impact on QualComm (QCOM).

A quick re-cap

On June 7th this year, the US International Trade Commision (ITC) banned the import of phones having QualComm EV-DO (the evolution path for CDMA 1xRTT pioneered by QualComm) chipsets into the US. These chipsets were found to infringe upon BroadCom patents dealing with conservation of battery power in the absence of network signals as per an ITC ruling last fall. Subsequently, President Bush declined to veto the ITC ruling despite heavy lobbying from QualComm (which spent $740000 in the first half of 2007) and support from most carriers and phone manufacturers who were using the disputed chipsets. Besides, QualComm suffered a series of other set-backs preceding and following the ban –

• Jan 26, 2007: A US District court jury in San Diego ruled that BroadCom did not violate two of QualComm’s patents on digital compression.
• March 22, 2007: A federal district court ruled that QualComm failed to disclose the two patents and thereby waived its rights to enforce them. In August, the court ruled that QualComm engaged in aggravated litigation misconduct while the witnesses and counsels were chided for their misconduct.
• May 29, 2007: A US district court in Santa Ana ruled that QualComm violated three of BroadCom’s patents and awarded the latter $19.64 million. On August 13th, the judge found the violation “willful” and ordered QualComm to pay BroadCom double damages plus legal fees.
• Sept 4, 2007: An appeals court reversed a lower court’s dismissal of BroadCom’s anti-trust suit against QualComm dating back to July 2005. The court allowed 2 out of 4 claims made by BroadCom thereby giving the company room to make their case against the San-Diego based company.

Genesis

Before we investigate the impact of these losses, it is important to understand the genesis of the conflict. It is my belief that QualComm’s aggressive protection of its intellectual property (IP) portfolio is the primary factor. The chip-makers and the phone vendors engage in cross-licensing agreements wherein they allow unlimited and exhaustive usage of each other’s patents in order to minimize their costs.

QualComm, on the other hand, seeks an aggregate licensing fee, typically less than 5% of the hand-set selling price, for non-exhaustive use of its patents. This is important for its business model and its position as the technology leader. The company spent $1.01 billion for R&D in 2005, a staggering 17.8% of its revenue. A reduction in its IP value and licensing revenue would have a direct impact on this model.

Now, companies such as Nokia and BroadCom have started being aggressive about the valuation of their patents as a means to counter QualComm and force it to come to the licensing tables for relative IP valuation. Beyond a point, every unresolved valuation was taken to court.

So, from BroadCom’s perspective, these suits are means to reduce the IP value of QualComm leading to a reduction in the royalty paid and an increase in its margins. For the latter, it is a fight to save the very business model it has thrived on. In the sequel, we will discuss the impact of these events on QualComm.

This segment is a part in the series : QualComm