Ten Things to Know about the Apple – Qualcomm Dispute

The public dispute between Apple and Qualcomm has been heating up, with defenders and detractors on both sides.  At the forefront is the issue of patent licensing payments (“royalties”) which Apple has said they will not pay to Qualcomm until a court decides on what basis these payments should be made.  Some people are arguing that Apple should “pay up,” without fully understanding the issues involved.

Here are the essentials you need to know about the Apple-Qualcomm dispute:

1. Qualcomm has a near monopoly on the Intellectual Property (IP, i.e. patents) around the cellular modems used to connect mobile devices to cellular networks.  These patents are essential to the operation of cellular standards, such as 3G, 4G, and LTE.

2. As part of the adoption of the cellular standards, Qualcomm (among other patent holders) was required to license their IP/patents to those wishing to implement the standards.  The licensing terms are required to be “fair, reasonable, and non-discriminatory” (i.e. FRAND).  This is common practice for international standards; that is, those who helped to create the standard have to agree to license their IP to those wishing to implement the standard.

3. Apple has used Qualcomm’s cellular modems in its iPhones for many years and had a 5 year exclusive agreement with Qualcomm.

4. The U.S. Federal Trade Commission (FTC) earlier this year filed an anti-trust suit against Qualcomm, alleging that the company has sought to maintain a monopoly on cellular modems.

5. The South Korean Fair Trade Commission fined Qualcomm $865 million late last year for failing to license its IP “on fair and reasonable terms.”  Apple assisted the South Korean regulators in their investigation.

6. As part of the Apple-Qualcomm licensing agreement, Qualcomm was required to provide rebates to Apple.  Qualcomm is withholding payment of the $1 billion in rebates owed to Apple.  Apple alleges that Qualcomm is doing this in retaliation for its assistance to the South Korean authorities.

7. Apple has filed suit against Qualcomm for the $1 billion in rebates owed to it by Qualcomm.

8. Apple has also stated that it will pay no more license royalties to Qualcomm until a court decides what the royalties should be based on.  At issue is the basis on which the royalties are calculated, with Apple arguing that Qualcomm’s terms are not “fair, reasonable and non-discriminatory.”

9. Apple argues that since it outsources its production, royalties should be based on the price that Apple pays its suppliers.  Qualcomm argues that the royalties should be based on the final selling price to the consumer.  Apple’s counter-argument to that point is that the price of an iPhone is due to Apple’s innovation, not Qualcomm’s, and that therefore Qualcomm is not entitled to royalties derived from the market price which Apple can demand for its innovation.

10. In response, Qualcomm has asked the U.S. International Trade Commission to ban imports of iPhones into the U.S.

From the points listed above, it should be obvious that the Apple-Qualcomm dispute is much deeper than many are making it out to be.  It’s not an issue of “Apple isn’t paying its suppliers.”  It’s actually about IP/patent licensing terms for technology which is part of a widely adopted standard and essential to that standard.  It is also about the extent to which the IP/patent owners can go to leverage their contributions to maintain monopolies or grow revenue (Qualcomm’s licensing division earned $7.7 billion last year).

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Aaron Simms

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