THE CLOCK IS TICKING as Qualcomm Inc. pursues legal remedies and technical alternatives to counter a decision last week by a federal agency banning future models of 3G handsets containing the vendor’s chips from entering the United States.
The U.S. International Trade Commission stunned many industry observers by ordering the partial ban. The ITC had already ruled that Qualcomm’s 3G chips infringed on a patent owned by rival Broadcom Corp. (The patent in question relates to power management as a handset outside network coverage seeks a signal.)
But the consensus appeared to be that a resolution would come before serious impacts are felt by affected parties, which include Qualcomm, its handset vendor customers and the nation’s major network operators.
The decision last Thursday had one semiconductor analyst “shocked.” In a reflection of the moment’s heat, Qualcomm presented its top executives in a hastily convened conference call, well attended by leading financial analysts.
Broadcom declared its interest in fair play and said it would use the ruling to obtain a cross-licensing agreement for Qualcomm’s IP in W-CDMA technology.
The turn of events appeared to dim the luster-if only momentarily-on Qualcomm’s reputation as an aggressive defender and bullet-proof source of intellectual property crucial to the wireless industry, which may bolster companies with outstanding complaints against the San Diego-based chip maker and IP licensing firm.
Apart from the possible psychological impact that the apparent victory for Broadcom might have, however, it was difficult to gauge whether last week’s events will actually impact the industry. Near-term impacts on Qualcomm’s business were widely judged to be negligible, though possible impacts to affected handset vendors and network operators might be substantial.
Emergency measures sought
To review the news, the ITC last week issued a ban on the importation to the U.S. of new models of 3G handsets containing Qualcomm’s EV-DO and W-CDMA chips, while allowing the continued importation of handset models already on the market. The ITC’s commissioners split 3-2 on the decision, with the dissenters saying that the remedy excluding handsets from importation had too great an impact on the public interest-a point immediately seized on by Qualcomm.
In response to the ruling, Qualcomm vowed to seek both an emergency stay of the order from the U.S. Circuit Court of Appeals and a presidential veto. Relief from the court of appeals could come within days or weeks, according to Qualcomm’s general counsel, Lou Lupin. The U.S. Trade Representative, invested by the president to intervene in such cases, has 60 days from June 7 to issue such a veto.
According to Mark McKechnie, financial analyst at American Technology Research, the ITC produced a “clever” remedy to balance the defense of IP rights with impacts to “the common good.” But, McKechnie said, the agency “missed the magnitude” of the two chip companies’ respective patent portfolios: Qualcomm holds an enormous portfolio while Broadcom is merely fighting for a bigger slice of the high-growth W-CDMA market, he said.
Sigh of relief
The consensus among analysts, and Qualcomm’s own view, was that between the chip vendor’s legal appeals, efforts at a technical work-around and a possible settlement with Broadcom, the issue would be resolved before dire predictions were realized. But a parallel process appeared to have begun to understand the precise effects of the ITC’s partial ban on new 3G handsets and to quantify the possible fallout.
The market reacted to the ITC decision by sending Qualcomm’s stock price up slightly, which Bill Davidson, head of investor relations and senior VP of global marketing at Qualcomm, characterized as “a sigh of relief” that a total ban had been avoided.
Meanwhile, both Qualcomm and Broadcom said they were open to discussion about cross-licensing. Both companies used the spotlight to press their respective cases.
“This isn’t an isolated case of infringement,” said David Rosmann, VP for IP litigation at Broadcom, referring to another infringement case it just won in federal court and others it is pursuing against Qualcomm. “Qualcomm can resolve this issue and it’s time it does the right thing.”
On the conference call immediately following the ITC decision, Qualcomm’s CEO Paul Jacobs detailed a litany of complaints and warnings. The ruling would affect more than tens of millions of handsets “accused” of infringement, he said, although the ITC already ruled on the infringement issue. The ruling would “impair disaster preparedness” and the public injury was “grossly disproportionate” to any benefits. Qualcomm vowed to have the ruling of infringement reversed and the ban discarded.
“The parade of horribles that Qualcomm and others are talking about simply aren’t going to happen,” Rosmann responded the next day.
Impact to industry
The partial handset ban, which took effect last week, will not materially impact the industry until the fourth quarter, in the view of most analysts who weighed in on the issue. Impacts to specific vendors was more difficult to gauge.
“That’s a really complex question,” said Qualcomm’s Davidson. “There’s no good answer. We haven’t seen the text of the ITC order, which we’ll examine. So, it’s hard to quantify, but this isn’t good for any vendor.”
CDMA-based carrier Verizon Wireless said it would also appeal to the White House for a veto on the decision.
Reactions among analysts also turned up some intriguing angles to the long-term impacts of last week’s turn of events.
Analyst Maynard Um at UBS weighed the cost of ongoing legal costs (as much as nine cents per share annually) to the cost of a settlement or licensing agreement with Broadcom (as little as one cent per share) in arguing that the latter is likely.
Analyst Ittai Kidron at CIBC suggested that strong patent enforcement policies by the ITC and federal courts boded well for Qualcomm’s IP licensing business in the long run-with a nod to the continuing wrangling with Nokia Corp. over an expired cross-licensing agreement, though Nokia is certain to be studying the news for any leverage. If Qualcomm’s appeals fail, its technical work-around could take time, as the solution would be subject to extensive testing by handset vendors and network operators.
Will Strauss, principal at Forward Concepts, declared himself “shocked” at the ITC decision, based on its potential to disrupt the domestic wireless industry’s transition to 3G technology, but said that a settlement is likely. “Like all things in this industry, money can solve a lot of issues,” he said.
