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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 continued.

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.”

Qualcomm’s statements 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.

Qualcomm’s earnings 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.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.