Speaker 1: The global legal battle between Apple and Qualcom is escalating,
Speaker 1: and with Qualcom's core business model and billions of dollars
Speaker 1: at stake, it promises to be long and nasty. Qualcom
Speaker 1: is accusing Apple of lying to regulators to push them
Speaker 1: to investigate the chip maker, and of threatening it to
Speaker 1: cover up the use of inferior parts in some iPhones.
Speaker 1: These counterclaims were filed in response to Apple's one billion
Speaker 1: dollar antitrust lawsuit accusing Qualcom of illegally trying to control
Speaker 1: the market for chips and charging at least five times
Speaker 1: more than the going rate for patent fees. Here to
Speaker 1: help us analyze these competing claims are Matt Larson, Bloomberg
Speaker 1: Intelligence litigation analyst and Andrea Mattwitian professor at Northeastern University. Matt,
Speaker 1: let's start with the basics. Explain why Qualcom is allowed
Speaker 1: to charge phonemakers like Apple, whether or not they use
Speaker 1: its chips, and what those charges are. Certainly so, Qualcom's
Speaker 1: business is fairly unique. It's it's twofold. The first art
Speaker 1: is the chip sets they sell ships that um that
Speaker 1: go into wireless devices and basically allow the phones to
Speaker 1: communicate with with radio and wireless networks. So the other
Speaker 1: half of their business um about a third of their
Speaker 1: business by revenue realistically, is patent licensing. So qual Calm
Speaker 1: invests a tremendous amount of money and doing research and
Speaker 1: development and then participates in standard setting organizations that essentially
Speaker 1: dictate what kind of technologies are going to be put
Speaker 1: into three G standards, four G lte um. You know
Speaker 1: there are groups talking about five G. So Qualcom participates
Speaker 1: in these groups. It contributes the technology that it's done,
Speaker 1: that it's developed through its research programs, and then in turn,
Speaker 1: once companies start implementing those technologies, UH, Qualcom asks for
Speaker 1: compensation in the form of patent licensing. So it says,
Speaker 1: we'll let you use these technologies. Uh. In fact, you
Speaker 1: have to use them because they're required to communicate with
Speaker 1: other devices, and in return you pay us licensing fees
Speaker 1: for the use of our patented tech. So, Andrew, before
Speaker 1: we get to Qualcom's lawsuit that follows on the heels
Speaker 1: of a lot of litigation by Apple, So what what
Speaker 1: is Apple suing Qualcom about? Andrea voiced their repeated frustrations
Speaker 1: about their allegedly not getting a stream of payments back
Speaker 1: from Qualcom in accordance with what were the previously stipulated
Speaker 1: deal terms pursuant to their agreements, which the court will
Speaker 1: undoubtedly dig into the minutia of those contracts and will
Speaker 1: learn a lot about the nature of this relationship as
Speaker 1: the case moves forward. And so this relationship between Apple
Speaker 1: and Qualcom also was part of the concerns that are
Speaker 1: reflected in the Federal Trade Commission's recent activity filing UH
Speaker 1: against Qualcom in California accusing Qualcom of anti competitive practice
Speaker 1: and violation of Section five of the Spare Traits of
Speaker 1: the FTC Act. As well, So Matt tell us about
Speaker 1: Qualcom's claims that Apple threatened it and lied to regulators. Yeah,
Speaker 1: as a result of this two fold business UH, namely,
Speaker 1: Qualcom says you can either buy our chips or if
Speaker 1: you buy somebody else's chips, you're gonna have to pay
Speaker 1: us because those chips use our technology. UM. That rubs
Speaker 1: a lot of handset makers the wrong way. UM. And
Speaker 1: so Qualcom has been subject to UM two investigations in
Speaker 1: the EU, in the KFTC and Korea. UM there are
Speaker 1: their investigations it was subject to in China that came
Speaker 1: out with a large settlement deal with the n d
Speaker 1: r C that basically set licensing rates UM and one
Speaker 1: of the allegations that Qualcom has set forth you know,
Speaker 1: kind of in defense of itself and as at striking
Speaker 1: back at Apple in this lawsuit is saying that Apple
Speaker 1: UM participated in these investing gation specifically, the KFTC investigation
Speaker 1: UM inflated facts kind of made a made a case
Speaker 1: that wasn't based in how Calcolm's licensing and chip business worked.
Speaker 1: UM and Qualcom is basically alleging that Apple came forth
Speaker 1: UM and saw this as an opportunistic endeavor whereby it
Speaker 1: could effectively negotiate against Qualcom's high royalty demands by putting
Speaker 1: pressure on them via these the KFTC, the FTC UM
Speaker 1: and similar investigations. We've been talking about the billion dollar
Speaker 1: legal battle between Apple and Qualcom over loyalty over royalties,
Speaker 1: and just today BlackBerry announced that it was awarded nearly
Speaker 1: eight hundred fifteen million dollars after an arbitration hearing concluded
Speaker 1: that Qualcom had been overcharging for royalty payments on smartphone technology.
Speaker 1: Our guests are Bloomberg Intelligence litigation analyst Matt Lawson and
Speaker 1: Professor Andrew Mtwittion of Northeastern University. Matt is the BlackBerry
Speaker 1: award a good sign for Apple and its legal fight
Speaker 1: with Qualcom, or are the circumstances different. Apple will certainly
Speaker 1: parade this decision in its dispute with Qualcom UM. Apple's
Speaker 1: main contention, you know, despite all the the antitrust concerns,
Speaker 1: the the key behind the Apple Qualcom dispute in my
Speaker 1: view is the royalty payments. UM. Apple would love to
Speaker 1: negotiate a very low direct license where it pays Apple
Speaker 1: Qualcom directly for the use of its patents UM, and
Speaker 1: in doing that, it's going to need to show comparable
Speaker 1: licenses that have low roll royalty rates, and so by
Speaker 1: BlackBerry UM apparently in its arbitration securing a lower cap
Speaker 1: on Qualcom royalties UM. That's something that will will certainly
Speaker 1: be highlighted by Apple and UH and will be front
Speaker 1: and center in its UH and its contentions as the
Speaker 1: Qualcom dispute moves forward. But again, you know that dispute
Speaker 1: is going to be a long time in the making
Speaker 1: apps and some kind of settlements, so it'll be lurking
Speaker 1: in the background and we may we may see this
Speaker 1: again in a in a year, a couple of years, Andrea,
Speaker 1: A lot of the time, actually probably almost all the
Speaker 1: time that you see this kind of litigation and counter
Speaker 1: litigation between companies that have had long standing relationships as
Speaker 1: a business matter, it's really a breakdown of the relationship
Speaker 1: that's going on. And so if if uh, if, as
Speaker 1: Matt says, Apple's motivation here is to try to lower
Speaker 1: the fees it's paying, what does you know kind of say,
Speaker 1: you know, if you look at the legal claims of
Speaker 1: qualcom is making, what are there? What's their position in
Speaker 1: terms of why they're really right here? So I think
Speaker 1: you're right that it is a flag that the relationship
Speaker 1: is struggling, particularly since Tim Cook made a statement that
Speaker 1: this was a move of last resort to bring litigation
Speaker 1: reviewing Qualcom's reply to the Apple pleadings. What we're talking
Speaker 1: about here is not simply a single con tract. Even
Speaker 1: though portions are redacted, we can deduce that we're talking
Speaker 1: about at least seven different, undoubtedly extensively negotiated agreements, and
Speaker 1: they'll all come to play when we try to reconstruct
Speaker 1: this relationship. And as the court seeks to evaluate the
Speaker 1: different dynamics that were present in this um set of
Speaker 1: exchanges and in these contracts, and the allegations are everything
Speaker 1: from Apple seeking to UH wind up regulators to bring
Speaker 1: charges and claims against Qualcom versus Apple alleging the Qualcom
Speaker 1: UH sanctioned Apple for cooperating with regulators by withholding the
Speaker 1: stream of payments that the subject of of Apple suit.
Speaker 1: This is a very complicated set of business dynamics, and
Speaker 1: the reply brief from Qualcom reminded me a little bit
Speaker 1: of my first year law students contracts class because they
Speaker 1: raised a whole most of defenses that are very classic
Speaker 1: contract law defenses. So it will be interesting to see
Speaker 1: how this all plays out, Matt, Qualcom's core business model
Speaker 1: is part of this whole lawsuit. Would it be if
Speaker 1: Apple did win way down the line, would that business
Speaker 1: model be in jeopardy? That's the concern that a lot
Speaker 1: of a lot of people who are watching Qualcom have. Um.
Speaker 1: As I mentioned earlier, you know, roughly a third of
Speaker 1: Qualcom's revenue comes from very high margin patent licensing dollars.
Speaker 1: You know that you're not making products, there's very low
Speaker 1: cost um and so as royalty rates go down, you
Speaker 1: eat into that high margin business, and I think that's
Speaker 1: what um that's what people are concerned about is is
Speaker 1: looking at at Apple pushing back kind of testing, the testing,
Speaker 1: the waters and patent licensing. Generally, a lot of the
Speaker 1: handset makers are are being a little bit more defensive
Speaker 1: of their margins, especially as we've moved from the earlier
Speaker 1: iterations of cell phones that really just acted as phones
Speaker 1: that connected to radio networks, whereas now we've got basically
Speaker 1: handheld computers that we're carrying around, and we're looking at
Speaker 1: the advent of of five G where pretty much every
Speaker 1: device is going to be connected to the Internet, and
Speaker 1: so people who are making those products are saying, well,
Speaker 1: you know, the licensing that we're paying for some of
Speaker 1: these technologies should be a lower percentage of the overall
Speaker 1: device or capped at some set limit. And so when
Speaker 1: you're looking at Qualcom, that's a concern is how much
Speaker 1: do those trends start to eat into its licensing business. Andrea,
Speaker 1: one of the interesting parts of all this is that
Speaker 1: the licensing from Qualcom to Apple actually runs through Apple's subcontractors.
Speaker 1: Is it possible that this litigation is sort of the
Speaker 1: prelude to negotiating a more direct licensing deal between the
Speaker 1: two companies. That certainly will be one of the operative
Speaker 1: moving pieces here. So Qualcom and its reply alleges that
Speaker 1: Apple has had opportunities negotiate a direct license or set
Speaker 1: of licenses with Qualcom, and that Apple has not previously
Speaker 1: been interested in doing that kind of direct licensing. That's
Speaker 1: a question of fact that the Court will need to
Speaker 1: decide whether they the Court believes that that is in
Speaker 1: fact the case. But certainly this may end up as
Speaker 1: the first volley across the court to trigger a renegotiation
Speaker 1: of this relationship. And that's something that courts sometimes do
Speaker 1: in terms of handling complex litigation like this. Sometimes courts
Speaker 1: say to the parties, look, we're going to pause things here.
Speaker 1: You need to talk to each other about this and
Speaker 1: uh come back when you've resolved this piece and more
Speaker 1: that piece or uh try to work things out between yourselves,
Speaker 1: and the Court will get involved if it needs to,
Speaker 1: but to provide a nudge for a renegotiation of sorts
Speaker 1: when the court feels that there's room for that kind
Speaker 1: of a renegotiation. I want to thank you both for
Speaker 1: being on Bloomberg Law. I'm sure we're going to be
Speaker 1: coming back to you with more chapters in this a
Speaker 1: long legal battle between Apple and Qualcom