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