Qualcomm Inc. filed a breach of contract lawsuit late Tuesday against four Taiwanese contract manufacturers that build iPhones and iPads for Apple Inc. — the latest salvo in an escalating war between two tech giants over patent royalties.
Qualcomm’s court action is in response to Apple’s steps last month to block its contract manufacturers from paying Qualcomm for use of its cellular patents in iPhones and iPads.
“Apple is definitely behind this, and certainly what the contract manufacturers would say is the reason they are not paying,” said Don Rosenberg, Qualcomm’s general counsel. “Our response to that is: You are big, sophisticated companies. You have contractual obligations. You have license agreements with us that don’t involve Apple. You are responsible for paying that.”
The San Diego company’s lawsuit names iPhone/iPad assemblers Hon Hai Precision Industry Co. Ltd., known as Foxconn; Pegatron Corp.; Wistron Corp.; and Compal Electronics — all of which are based in Taiwan and have manufacturing operations in China and elsewhere.
All have long-standing patent license agreements with Qualcomm and continue to pay patent royalties to Qualcomm on smartphones and tablets that they make for other companies besides Apple, said Rosenberg.
The lawsuit seeks unpaid royalties of at least $1 billion and damages, as well as attorney fees and other costs.
“What they are saying is, ‘Apple is not paying us, so we are not paying you, and Apple has told us not to pay you,’ ” said Rosenberg. “And we said, ‘That is interesting, but that is between you and Apple.’ ”
Over the last eight months, Qualcomm’s patent licensing business has been under fierce attack by anti-monopoly regulators and technology giants including Apple, Samsung and Intel.
The Korea Fair Trade Commission fined Qualcomm more than $850 million and seeks to dismantle the way it licenses its patents. The U.S. Federal Trade Commission sued Qualcomm in January on similar grounds, and Samsung and Intel have filed friend of the court briefs supporting the FTC’s case.
It is a complicated dispute. Apple — based in Cupertino, Calif. — reimburses Foxconn and the other contract manufacturers for patent royalties owed to Qualcomm.
Early this year, it withheld $1 billion in reimbursements on the grounds that Qualcomm had reneged on a separate royalty “rebate” agreement with Apple in retaliation for Apple’s cooperation with antitrust regulators.
Then, last month, Apple quit reimbursing Foxconn and the others altogether for Qualcomm patent royalties — saying it couldn’t pay until the dispute was resolved.
As a result, Qualcomm slashed its financial forecast for the year.
Qualcomm pioneered a good portion of 3G/4G cellular radio technology and holds thousands of patents on its inventions. Its technology is inside nearly every smartphone.
The company licenses patents based on the price of the entire device, and it has agreed to provide certain patents under “fair, reasonable and non-discriminatory” terms because they are included in wireless industry standards.
Qualcomm’s royalties top out at 5% of the device price, but they typically come in lower depending on each licensing agreement negotiated with handset makers.
Apple and regulators allege Qualcomm abuses its market power to overcharge for “standard-essential patents” and block competition. They are pushing for patent royalties based on the cost of the cellular modem chip instead of the entire phone, and they want Qualcomm to agree to license not only smartphone makers but also rival chip outfits such as Intel and Samsung.
Asked about Qualcomm’s latest lawsuits, Apple referred to comments that Apple Chief Executive Tim Cook made this month during the company’s earnings call.
“The reason that we're pursuing this is that Qualcomm's trying to charge Apple a percentage of the total iPhone value,” Cook said in the call. “And they do some really great work around standards-essential patents, but it's one small part of what an iPhone is. It's not — it has nothing do with the display or the Touch ID or a gazillion other innovations that Apple has done. And so we don't think that's right, and so we're taking a principled stand on it."
Qualcomm has countersued Apple, is appealing the Korea Fair Trade Commission decision and has asked a Northern California federal judge to dismiss the FTC case. A hearing on the dismissal motion is slated for mid-June.
Qualcomm’s stock fell 1.1% to $55.36 a share Wednesday. Apple shares sank 3.4% to $150.25.
The lawsuit filed this week falls short of more drastic moves that media outlets speculated Qualcomm might pursue against Apple — including seeking to ban imports of iPhones and iPads into the U.S.
Last week, Bloomberg, citing unnamed sources, reported that Qualcomm would ask the U.S. International Trade Commission to issue an injunction prohibiting iPhone imports.
Rosenberg declined to comment on why Qualcomm chose instead to file a lawsuit in San Diego Federal Court.
"We don’t like suing our licensees,” said Rosenberg, adding that in the last decade Qualcomm has brought just one patent infringement case against a smartphone maker. “And we won’t unless we are really put in a corner and forced to do that, and we are forced to do that here.”