The world’s leading handset and chipset makers – Nokia Corp. and Qualcomm Inc. – head to court today to resolve disagreements over their contractual relationship in a case that may have wide repercussions for the wireless industry.
Potentially at stake is the nature of obligations parties undertake when they participate in standards-setting organizations and declare their patents essential to those standards. The case also is expected to focus on the nature of redress available to those parties. The case also may resolve the issue of whether participation in standards-setting processes bear obligations that trump other, bilateral agreements between two parties.
Specifically, the upcoming case in Delaware Chancery Court has consolidated two disputes: an original complaint filed by Nokia in 2006 against Qualcomm in Delaware over standard-setting procedures and rules under the European Telecommunications Standards Institute, or ETSI, and issues relating to arbitration between the two companies – initiated by Qualcomm – over an expired cross-licensing agreement.
The eight-day trial before Vice Chancellor Leo Strine is expected to yield a ruling by October, but it is far from clear whether that ruling will return the companies to a cross-licensing agreement. The last agreement expired in April 2007, and the two companies’ relationship has existed in legal limbo since then. Though both sides’ patent portfolios appear to lie at the heart of the Delaware case, that case is focused solely on contractual matters.
The Delaware court has a reputation for expertise and speed in adjudicating corporate contract law, thus Nokia’s original choice of that venue. Vice Chancellor Strine subsequently volunteered to consolidate the Qualcomm-initiated arbitration issues with Nokia’s original complaint.
FRAND-ly or not?
Both sides describe the upcoming case in starkly contrasting terms and allege that the other’s past behavior in similar cases undercuts their logic in the present case.
In its original complaint, Nokia charged that Qualcomm has not met its obligations to license patents declared essential to a wireless standard on fair, reasonable and non-discriminatory, or FRAND, terms. Further, Nokia seeks a court ruling on whether a party involved in a standards-setting process – specifically, Qualcomm – may use injunctions to resolve disputes over the licensing terms of essential patents.
Qualcomm, in contrast, seeks a ruling that its practices indeed are “FRAND-ly” and, further, that participation in standards-setting organizations does not limit its means of redress in a dispute. Qualcomm also argues that two Subscriber Unit License Agreements between the two parties, signed first in 1992 and amended in 2001, supersede any obligations under ETSI’s processes. Qualcomm claims that its position reflects ETSI’s own rules for parties declaring essential patents.
It remains unclear whether the court will move on after addressing those issues to weigh in on a potentially more explosive issue: whether, as Qualcomm argues, Nokia “by its actions” has elected to renew the two companies’ cross-licensing agreement that expired last April. The potential stakes in that dispute may well involve hundreds of millions of dollars and future lines of business for both companies. Ironically, but reflective of “co-opetition” between companies in the patent-heavy wireless industry, Nokia – with 40% global market share – has been one of Qualcomm’s largest customers.
Common ground
Nokia, for its part, has said that the Delaware case is unlikely to resolve the cross-licensing issue, but might lead to “common ground” upon which to continue negotiations. Meanwhile, nearly all other cases pending between the parties have been stayed and await the outcome in Delaware.
The outcome in Delaware, however, could lead to common ground – or a profusion of disparate legal cases filed throughout the world as one side or the other attempts to seek redress for alleged transgressions in various geographic locales.
The two companies’ engagement in ETSI’s standards-setting process over respective GSM and W-CDMA patents took place roughly concurrently with the two SULAs they signed. The original agreement was set to last 15 years, thus its expiration in 2007.
Nokia, through spokeswoman Laurie Armstrong, said last week that the SULA covered only Qualcomm’s “early patents” and that, upon expiration last year, Nokia’s obligation to pay Qualcomm further royalties had ended. But Nokia placed $20 million in escrow last year to cover any disputed obligations to Qualcomm. Qualcomm rejected that payment as unrelated to Qualcomm’s position on Nokia’s obligations.
According to Nokia, a new cross-licensing agreement is needed that rightly values the respective parties’ W-CDMA patent portfolios, which once cut in Qualcomm’s favor but today should roughly reflect parity.
Qualcomm has rejected that argument.
Bill Davidson, Qualcomm’s senior VP of global marketing and investor relations, contended that the SULA with Nokia is a global framework for conducting business that binds Nokia to a royalty-bearing obligation – an obligation that continued after April 2007 because Nokia continued to ship products that employed on Qualcomm patents.
Where Nokia has alleged that Qualcomm’s licensing terms are not FRAND-ly and have inhibited its business and industry growth, Qualcomm pointed to Nokia’s own expanded market presence and the overall growth of the wireless industry as evidence contrary to Nokia’s arguments.
