Apple Inc. (NASDAQ:AAPL) made waves in the tech sector after slapping QUALCOMM, Inc. (NASDAQ:QCOM) with a $1 billion federal lawsuit on Friday.
Apple’s complaint against its chip giant supplier? Allegedly, QCOM has withheld rebate payments in backlash against Apple’s accusatory claims in Korean courts- a testimony which QCOM dismisses as groundless. BMO analyst Tim Long calls the broiling conflict the “clash of the smartphone titans.”
Long notes, “QCOM and AAPL have signed multiple agreements over the years. We had no visibility into these agreements before the filing of this complaint. Most of the deals talk about lowering effective royalty rates, chip exclusivity, and restrictions on AAPL taking legal action against QCOM. We believe the expiration of a key deal on December 31 may have helped catalyze the lawsuit in question. Attempts at a direct royalty agreement have failed.”
For Long, this is clearly only just the beginning, as he predicts, “We expect this case to get a lot of attention, and for any resolution to take a long time, whether through the courts or a private agreement. We doubt that there will be a meaningful change to QCOM royalty rates, but the mention of benefits for exclusive chip supply, denying the right to litigate, and withholding ‘rebate’ payments may cause damage otherwise.”
According to Business Insider, Apple believes QCOM has charged five times over if not more so in royalty payments than the collective group of all of Apple’s additional cellular patent licensors. To Apple, this resonates as particularly strident when the chip giant is merely “one of over a dozen companies who contributed to basic cellular standards.”
However, from Qualcomm’s perspective, this is a woeful mischaracterization of not only the arrangements they have made with Apple, but also “the enormity and value of the technology we have invented, contributed and shared with all mobile device makers through our licensing program,” the chip giant’s General Counsel Don Rosenberg defends.
The AAPL team contends these royalties are unwarranted and QCOM’s practices have been in effect for years too long- something which Apple no longer believes it should have to afford, calling these practices equal parts “exclusionary” and “excessive.”
Apple argues against this extortion, asserting, “The more Apple innovates with unique features such as TouchID, advanced displays, and cameras, to name just a few, the more money Qualcomm collects for no reason and the more expensive it becomes for Apple to fund these innovations. […] To protect this business scheme Qualcomm has taken increasingly radical steps, most recently withholding nearly $1B in payments from Apple as retaliation for responding truthfully to law enforcement agencies investigating them. Apple believes deeply in innovation and we have always been willing to pay fair and reasonable rates for patents we use. We are extremely disappointed in the way Qualcomm is conducting its business with us and unfortunately after years of disagreement over what constitutes a fair and reasonable royalty we have no choice left but to turn to the courts.”
As tech giant embarks to go to battle with its key chipmaker, big blows are coming towards QCOM’s underlying licensing business structure. When Qualcomm’s heavyweight customer goes up in arms, odds tend to be in Apple’s corner.