Qualcomm, Feeling the Squeeze as Apple and iPhone Manufacturers Cut Off Royalties, Moves to the Offensive
A recent suit by
mobile phone chips giant Qualcomm shows the debilitating business effects that
can follow from a government antitrust investigation.
The Federal Trade
Commission filed suit in January 2017 against Qualcomm for alleged antitrust
violations, which set off a cascade of litigation against the company, the
world’s largest maker of baseband chips. A suit by Apple quickly followed the
FTC’s complaint, and dozens of civil cases making similar allegations came
after that. As part of its litigation strategy, Apple started withholding
royalties for Qualcomm’s technology, and instructed its iPhone manufacturers to
do the same.
In May 2017, Qualcomm
counterpunched, filing its own suit in the Southern District of California
against the iPhone manufacturers for allegedly breaching their licensing
agreements with Qualcomm when they followed Apple’s instructions to withhold
royalties. What the suit, and financial statements filed contemporaneously, reveals
is that Qualcomm’s suit is likely driven by serious concerns about its
finances. Quickly on the heels of its complaint, Qualcomm filed a motion for a
preliminary injunction against the iPhone manufacturers for withholding the
royalties, claiming that it would suffer “irreparable harm” if the withholding
In dramatic language,
Qualcomm accused Apple and the iPhone manufacturers of “commercial ransom” and
said that, “Qualcomm is in an untenable position . . . Qualcomm’s core business
operations will suffer ongoing injury, and its licensing business may be called
into question as Apple takes a free ride while other licensees watch.”
are not mere hyperbole. The impact of the withholding of royalties is having a
material impact on Qualcomm’s financials — around $1 billion
in Q2 2017 alone.
Qualcomm alleges in
its complaint that Apple will not make any royalty payments to its iPhone
manufacturers (and thus Qualcomm is unlikely to receive any payments) until the
litigation between Apple and Qualcomm is resolved. If that’s the case, Qualcomm
may be in for a long and very costly war against its biggest customers.
Observers of the antitrust and IP landscape will recall that the antitrust
battles of another technology giant — Microsoft, which possessed an industry-leading product
— lasted 21 years.
statements and recent suit demonstrate that the financial risks of IP-related
antitrust cases go far beyond litigation costs and can imperil a company’s
survival. When faced with a government antitrust investigation, companies
should be advised to account for potential costs that are far beyond those
incurred to conduct litigation.