First of all, be still your beating heart. Your favorite (or most hated) smartphone is not going anywhere…not yet anyway. While the war rages on between fans of iOS and Android (or more specifically, Apple and Samsung), the beloved smartphones powered by those operating systems happen to share some of the same internal components, specifically key semiconductors. These essential semiconductors are what manage cellular communication in a majority of mobile products. Qualcomm, Inc. is credited, via a patent, with creating and developing the important internal component. While Qualcomm licenses use of its technology to smartphone makers for a fee, Apple has halted all royalty payments, effectively launching a war that could change the game for patent owners and license users. However, before we go into what this could mean for us mortals, let’s back up a bit.
While the common definition for a patent is that it grants someone credit for an invention, that is not the entire story. When someone is granted a patent, they become the property owner of that invention. With this power granted by the United States Patent and Trademark Office, the owner can exclude or allow others to se the invention, like excluding people from or inviting people to your home. Licenses are granted by the patent owner to those who wish to utilize the patent for a fee. Licensing out use of its patents is a large money-maker for Qualcomm. The company made approximately $8 billion just on licensing fees last year, which was roughly one-third of its revenue for 2016. Because of the required use of the semiconductors, Qualcomm gets a percentage of the sale anytime a cellular device is sold. Prior to refusing to make royalty payments, Apple indicated that Qualcomm was forcing the company to pay five times more for use of its patent than any of the other smartphone companies.
The reason that Apple did not rebel earlier is because Qualcomm used to have the power to simply go to a court and seek an injunction for any companies that refused to pay the agreed upon licensing fee. Therefore, most of the companies simply paid, while grumbling. However, this all changed in 2015 when policy changes gave smartphone makers a bit more power in licensing agreements. Patent fees would be paid based on the percentage of the component used in the smartphone, rather than as a percentage of the entire price of the device. As Apple was slowly phasing out use of Qualcomm chips and technology with each generation of the iPhone, and is using Intel chips in many the recent iPhone 7 devices, this was a huge drop in price for Apple. Further, Qualcomm lost the ability to seek an injunction if licensing payments were not made.
Due to these changes, Qualcomm allegedly made changes to its licensing agreements, putting into effect a “no license, no chips” policy. Essentially, this new policy simply made it so no smartphone company could use the required patented parts without entering into a Qualcomm-favored licensing agreement. While the existence of this new policy is not confirmed, the Federal Trade Commission has launched an investigation into this anticompetitive policy. Further, earlier this year Apple filed a $1 billion suit against Qualcomm with that same allegation. Last month, Qualcomm counter-sued Apple with a breach of contract claim and allegations of efforts to harm Qualcomm’s business. Even though the chips came from Intel, Qualcomm claimed that parts of its patents are used in every smartphone regardless.
To up the ante, Qualcomm may be considering the “nuclear” option, i.e. request that the International Trade Commission block iPhones from entering the country. The ITC has the power to restrict the importation of goods whenever they violate intellectual property rights. This is not unheard of as Apple pulled a similar move against Samsung a few years back, and succeeded, at the height of their patent disputes regarding their smartphones.
Once this battle between Apple and Qualcomm is over, the patent and licensing game will not be the same. On the one hand, if Apple wins it could weaken patent owners’ rights over their intellectual property. On the other hand, if Qualcomm wins it is very likely that patent owning companies will feel very confident in enforcing their licensing agreements and seldom be challenged in the future.
More importantly (arguably), if Qualcomm initiates the nuclear option and succeeds, iPhones could be banned from entering our country until Apple agrees to pay its dues, which at this point is well over $1 billion.
Copyright © 2018 Kevin Peek