Broadcom gets what it wants--but not 3G or 4G

On Sunday, Qualcomm and Broadcom announced settlement of their patent disputes in identical press releases from San Diego and Irvine. So far this morning, Qualcomm stock is up 6% and Broadcom stock is up 0.8%.

As with Qualcomm’s settlement last summer with Nokia, the agreement settles all existing disputes and lets Qualcomm and Broadcom get on with their business:

The agreement will result in the dismissal with prejudice of all litigation between the companies, including all patent infringement claims in the International Trade Commission and U.S. District Court in Santa Ana, as well as the withdrawal by Broadcom of its complaints to the European Commission and the Korea Fair Trade Commission. Under the agreement, the companies have granted certain rights to each other under their respective patent portfolios.

The press has emphasized the financial terms — Qualcomm paying $891 million over the next 4 years, including $200 million this quarter — which is clearly a lopsided settlement to allocate patent usage rights between the two companies.

TradingMarkets summarizes the numerous complex cases. However, the core issue was simple: Broadcom prefers royalty-free cross-licenses and has sought to coerce Qualcomm into providing same, using its various developed (and acquired) patents to win infringement judgements against Qualcomm.

Qualcomm sought at all cost (as it always does) to avoid setting a precedent that would undercut its core business model and revenue streams from the entire 3G (soon to be 4G) industry. It’s clear that Qualcomm paid dearly to settle the infringement claims without setting that dangerous precedent.

What seems to be under-reported is how the summary of the terms defines a clear partition of the industry:

• Qualcomm’s customers get use of Broadcom’s patents for Qualcomm’s ICs in cellular products, but not for non-cellular products.
• Broadcom’s customers get use of Qualcomm’s patents for Broadcom’s ICs in non-cellular products, but not for cellular products.

The only interpretation I have is that each firm is ceding key turf to the other: Qualcomm will stay focused (naturally) on cellular-related products, while Broadcom appears as though they will be avoiding cellular products that require Qualcomm’s patents.

At Qualcomm’s instigation, the first paragraph asserts

The terms of this agreement will not result in any change to Qualcomm's 3G (e.g., CDMA2000®, WCDMA and TD-SCDMA) and 4G (e.g., LTE and WiMAX) licensing revenue model.

The wording implies that Qualcomm changed its non-3G, non-4G revenue models. In other words, Broadcom got what it wanted — a royalty-free cross license — but not in cellular. This precedent seems to be the narrowest that Qualcomm could offer to satisfy Broadcom without hurting its core business.

On the analyst call, I would want to ask Qualcomm if the rights it granted Broadcom for non-cellular products will force it to renegotiate or otherwise change the terms of any other existing royalty agreements. My guess is that this is a small part of Qualcomm’s business, but as an analyst I wouldn’t want to guess.

However, the questions for Broadcom are more fundamental. It’s not clear what this means for Broadcom’s future, since it’s hard to see how they could ship a 3G or 4G product without a cellular patent license from Qualcomm. Had they already decided to give up on cellular and stay more in PCs and consumer electronics? Are they foreclosing cellular growth to avoid fighting Qualcomm? Or are they going to come back for a royalty-bearing agreement later on?

Broadcom misfires -- this time

When Broadcom filed suit against Qualcomm last October, it was the latest attempt by the Orange County low cost chip producer to force Qualcomm to change its business model.

Qualcomm announced last week that the suit was dismissed by the US District Court. However, if I were still a Qualcomm shareholder, I’d still be a little worried.

The suit was an opportunistic effort to use the SCOTUS decision in Quanta v. LG as a cudgel. As USD Law Prof. David McGowan analyzed the Broadcom complaint in this blog last November

The complaint alleges Qualcomm double-dips by charging handset manufacturers a royalty on both chipsets and handsets. Qualcomm may earn chipset royalties through sales to handset manufacturers or from licenses to competing chipset manufacturers such as Broadcom. It also charges a royalty directly on handsets.

Broadcom claims the Quanta case holds that a patentee may not charge downstream royalties beyond the first sale of its technology. This claim implies Qualcomm may either charge handset manufacturers a royalty for the handset or for a chipset (directly from Qualcomm or indirectly from Broadcom) but not both. Broadcom is asking the court to declare that it need not pay royalties to Qualcomm when Broadcom sells chipsets to handset manufacturers who pay Qualcomm royalties on handsets.

Even for a law professor (who are generally cautious about predicting court outcomes), McGowan saw the case as too close to call:

It is hard to say what is likely to happen. Quanta dealt with an unconditional license and Qualcomm has said its licenses are expressly conditional. The Court did not rule on such licenses. The district court therefore is not bound to rule for Broadcom. If one read the Supreme Court as sending the signal that patentees should only be able to engage in one transaction per product, though, one could extend Quanta to reach the result Broadcom seeks.

There isn’t much coverage of the ruling online, of which the Telephony Online explanation is the most incomplete:

US District Court Judge William Hayes, however, rejected Broadcom’s reasoning, ruling that Broadcom provided no specific of exhausted patents and that the purported damages Qualcomm has wrecked upon the industry were too speculative.

So I’m no law professor and in fact never went to law school, but the case was clearly dismissed on procedural grounds, not on a question of law; Broadcom’s legal claim was never tested. To me this suggests that the Broadcom case was rushed to court, without bothering to document specific patents and to find a putative victim. Obviously we don’t know what happens within Broadcom’s legal team, but this seems like the sort of weakness that a first year associate could have spotted before the case was filed.

I don’t know the specifics of the ruling, so it’s not clear whether the complaint was dismissed with prejudice, and if so, whether it prevents Broadcom from ever filing another patent exhaustion claim again. Even if so, one of Qualcomm other rivals might want to pick up the cudgel.

Telephony Online noted that Nokia filed a similar complaint that was thrown out (but that was pre-Quanta.) Nokia and Qualcomm now claim to be friends, so perhaps for now Nokia will train its legal guns on InterDigital rather than Qualcomm.

But Qualcomm’s business model and market share leave no shortage of enemies. If not Broadcom or Nokia, another possibility is TI — which was the world’s largest supplier of wireless communications chips until Qualcomm passed it last year. Finally, there are the Koreans, who never stop complaining about CDMA royalties and (like Broadcom) have been looking for any possibility to reduce the checks they send to San Diego.

Latest Broadcom/Qualcomm Skirmish

This morning, the IP SIG of the telecom council had one of its occasional meetings to review major developments in IP law. IP is obviously very important to the local industry, whether it be Qualcomm’s patent licensing business model or Ron Katznelson’s current efforts to promote patent reform.

I couldn’t make the IP SIG, but on the agenda were three cases. One case was Broadcom v. Qualcomm. Which one? you ask — after all, there are so many. In this case, the lawyers talked about the case that brought findings of legal misconduct and forced Lou Lupin to fall on his sword. Another case scheduled for the IP SIG meeting was the ruling in Quanta v. LG, where the SCOTUS set new standards for doctrine of “patent exhaustion.”

As it turns out, the Quanta ruling plays a prominent role in Broadcom’s latest lawsuit against Qualcomm, filed October 8 in federal court. This filing is just the latest in itsongoing series of litigation intended to force Qualcomm to license its patents on terms that Broadcom finds acceptable: a royalty-free cross license.

When I saw the latest Broadcom v.Qualcomm case, I asked one of San Diego’s leading IP lawyers, USD professor David McGowan, if he would be willing to comment for this blog. I thought of David because he had analyzed the Quanta case for the leading patent blog. I already knew him because we’d met at an open source research conference, and we share a common interest (particularly in IP law) at the intersection of law and economics.

As a special guest commentary, here is Prof. McGowan’s analysis of the original Broadcom complaint. Paragraph numbers refer to the original complaint as filed in the Pacer database system.

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Inexhaustible: The Latest Broadcom / Qualcomm Skirmish
By David McGowan
Lyle L. Jones Professor of Competition and Innovation Law
University of San Diego School of Law

Broadcom recently sued Qualcomm for a declaration that certain of Qualcomm’s alleged licensing practices misuse Qualcomm’s patents. The suit is both predictable and plausible in light of the Supreme Court’s recent Quanta opinion.

Based on Qualcomm’s description of its licensing practices, the district court’s decision will likely turn on how it resolves a question left open in Quanta. From an economic point of view I hope the court reads Quanta narrowly. Such a reading would tend to favor Qualcomm. There is a plausible formal case for Broadcom’s claims, however, so the case must be taken seriously.

The complaint alleges Qualcomm double-dips by charging handset manufacturers a royalty on both chipsets and handsets. Qualcomm may earn chipset royalties through sales to handset manufacturers or from licenses to competing chipset manufacturers such as Broadcom. It also charges a royalty directly on handsets.

Broadcom claims the Quanta case holds that a patentee may not charge downstream royalties beyond the first sale of its technology. This claim implies Qualcomm may either charge handset manufacturers a royalty for the handset or for a chipset (directly from Qualcomm or indirectly from Broadcom) but not both. Broadcom is asking the court to declare that it need not pay royalties to Qualcomm when Broadcom sells chipsets to handset manufacturers who pay Qualcomm royalties on handsets. (¶5)

Broadcom alleges Qualcomm’s double dipping drains from the industry money that could be used to foster innovation and competition. I find this claim implausible. Qualcomm innovates and there is no general reason to favor innovation by Broadcom or handset manufacturers over innovation by Qualcomm. This complaint raises distributional issues, not questions of dynamic efficiency.

Broadcom also alleges Qualcomm’s licenses reduce competition. It offers two theories in support of this claim. The first is that Broadcom must either take Qualcomm licenses or risk infringement action. That theory is doubly flawed. It confuses an effect on a competitor, Broadcom, with an effect on competition generally and it has nothing to do with the double dipping claim, which is the only one to which the Quanta holding might apply. If Broadcom operates under a cloud of infringement that is because Qualcomm has exclusive rights in its inventions not because of its licensing model. Only the serendipitous fact that the licenses were negotiated before Quanta was decided offers Broadcom any maneuvering room here, and that is a legal not an economic point.

The same points hold for the allegation that Qualcomm’s practices deter entry and increase costs. (¶29) That charge would be no different if Qualcomm suppressed all manufacturing other than its own and took all its royalties in chips. It seems to me a charge against the patent system rather than tiered licensing.

The second theory is that Qualcomm licenses favor its products over competitors’ products. Little is said about this claim so it is hard to know what to make of it. At one level it is not clear why Qualcomm would want to do this. Its patents mean it can obtain revenue by royalty from Broadcom or sale to handset manufacturers. Economically it should be indifferent between the two revenues streams. Indeed, if Broadcom is a lower-cost producer than Qualcomm, the latter would maximize profits by charging a high royalty rather than producing itself.

The complaint also refers to Qualcomm using its patents to leverage royalties, and leverage may be what the second theory has in mind. (¶24) It is not clear what Broadcom means by this reference. The facts alleged do not support the typical leverage claim, which is that a firm with market power in one market will use it to extend the duration of power in that market or to extend its power to another market. Rather, this appears to be a case in which single monopoly rent theory has a lot of force.

If handset manufacturers must practice Qualcomm inventions they must deal with Qualcomm, which implies some royalty. It does not imply an infinite royalty, however (Qualcomm wants handset sales so it is in its interest to set a royalty that allows handset manufacturers competitive returns on their investments). Still less does it imply that Qualcomm would earn less charging a single handset royalty than charging a royalty on both handsets and chipsets.

Chipsets and phones are close complements used in a fixed ratio. Basic rational actor assumptions imply Qualcomm will get as much money as it can; they also imply Qualcomm can get that amount at any level of production (either chips or handsets) and cannot get more by charging x at one level and y at another.

Here is a simplified illustration supporting the latter point. Suppose it is the dominant strategy for handset manufacturers to set prices at the average reservation price consumers place on the handset (given the cost of a contract with a carrier). Let’s say the average reservation price is $10, handset manufacturers need to earn $6 per handset, and the only input cost is chipset royalties. In theory QC could charge $4 as a handset royalty or charge $3 for a chipset and $1 as a handset royalty (or $2 and $2, of course). What it could not do is charge $3 for a handset royalty and $2 for a chipset royalty. (There are various qualifications to this logic in the antitrust literature but BC’s complaint does not seem to implicate any of them.)

No doubt this analysis is too crude to capture all the facts of the case. One would need to know the deal structures better than I do to offer more precise analysis. The analysis does raise significant questions, however, which the complaint does not answer.

It is hard to say what is likely to happen. Quanta dealt with an unconditional license and Qualcomm has said its licenses are expressly conditional. The Court did not rule on such licenses. The district court therefore is not bound to rule for Broadcom. If one read the Supreme Court as sending the signal that patentees should only be able to engage in one transaction per product, though, one could extend Quanta to reach the result Broadcom seeks.

As I mentioned I favor the narrow reading. I approach the problem this way. First, as a default matter, do we expect parties or courts reach more socially efficient bargains for the exploitation of inventions? In my view, both economic theory and experience favor parties as the default bargainers. Living markets as they do, they have much better information and much keener incentives to get things right than a generalist judge faced with unfamiliar information spun vigorously by competing advocates.

Second, should courts deviate from that default? The answer may be yes but only if there is a good reason. Absent such a reason the arguments favoring the default rule carry through. In some cases (price fixing for example) there will be an economic reason to abandon the default but there seem to be no such reason here. In other cases precedent might compel a court to abandon a default. Here it does not because the licenses at issue seem to be materially different from those at issue in Quanta. (Nothing in Quanta calls the default itself into question.)

Third, if there is no substantive reason to abandon a sensible default position and precedent does not require abandonment should a court abandon it? To me the question answers itself. Once you get the default right, in my view, you need a reason to move away from it, and there is no such reason here.

Broadcom to Qualcomm: say uncle

This week I’m at the meeting of the University-Industry Development Partnership, a two-day conference up at UCI that’s trying to focus on university-industry collaboration. Because of our location, there has been some local color (besides the weather).

Interestingly, UCSD Connect is prominent here — everyone acknowledging (at least in its heyday) it as the global model of university-industry cooperation for tech startups. For example, one of the sessions was a discussion of how UCI is making a two-day conferencea second attempt to replicate Connect: this second attempt appears both to be more successful, and also to have improved on the Connect model in a couple of ways.

Another local speaker was Dr. Henry Samueli, a former UCLA and UCI engineering professor who co-founded Orange County’s largest and most successful electronics company: Broadcom. From his Broadcom billions, Samueli donated money to name the UCLA and UCI engineering schools and buy the Anaheim Ducks.

Samueli was chairman of the board of Broadcom until he stepped down May 15 due to accusations of stock option backdating. (He resolved the accusations last week with a plea bargain leading to a fine and probation).

Samueli talked about the company’s growth from its founding in 1991, its IPO in 1998 and its current run rate of nearly $4 billion/year. The engineering professor described an attitude towards corporate culture and engineers sounded very similar to that of Jacob and Viterbi’s two companies:

Hiring the best and brightest engineers is what it’s all about. If I had to pick one thing about being a successful technological innovator, it’s hiring the best and brightest technologists.

His discussion of an open communication, achievement-motivating culture also sounds exactly what we heard about Linkabit.

Its R&D intensity is about 20%, or $800 million year in R&D. As I speculated earlier, it’s far more D than R:

It’s almost all product development in the near to mid term. Almost no basic research can be afforded in that budget — only a tiny bit.

Despite this focus on development rather than research, Broadcom has aggressively patented its technologies. The number of granted patents rose from 456 in 2003, to 824, 1627, 2625 and now 3300 in 2007. He proudly pointed to an IEEE Spectrum article on patent impact using statistics compiled by the consulting firm 1790 Analytics.

For San Diego readers, the biggest interest in Broadcom is its patent infringement suit against Qualcomm that it won 18 months ago. Frankly, I thought inappropriate (and off topic) to ask about the lawsuit, but someone else did.

When asked about the issue of patent cross-licensing, Samueli said that it had many cross-license agreements. Earlier, he had noted that Broadcom would prefer to have a situation where patents were not a factor — that Broadcom could race to be first without regards to patents.

Cross-licenses thus fit Broadcom’s goal: as Samueli said, “You go do your thing and we go do our thing and leave each other alone — and rely on innovation to keep you ahead in the marketplace.”

Cross-licensing does not (of course) include Qualcomm: “We’re having these issues with Qualcomm — we’re trying to get to that point.” Obviously, Qualcomm issuing a royalty-free cross license would destroy their business model, so there is no way to reconcile to fully satisfy both sides.

Photo credit: 2006 photo of Samueli from the Los Angeles Times.

Schadenfreude

Last month, the SEC sued Broadcom’s two founders, Henry Samueli and Henry Nicholas, alleging phony accounting in connection with incentive stock options. Today, the feds unsealed an indictment of Nicholas — charging stock price manipulation, using and distributing drugs and hiring prostitutes for his employees and customers. (Of course, Nicholas denies the charges).

The stock option accusations are not unusual for tech executives, and there are even a few that seriously argue that this is mostly an accounting issue not worthy of felony prosecution. But the sex-and-drugs accusations (stemming from a disgruntled ex-employee’s complaint) are just plain weird, more suitable for a pro athlete than a tech executive. This is complete with the report that (since April) Nicholas has been at a celebrity rehab center in Malibu. No such accusations have been leveled at Dr. Samueli, Nicholas’ former UCI professor who used his Broadcom wealth to endow two engineering schools, UCI and UCLA.

Clearly the course cases will be a major distraction for the company’s founders if not its management. Given all the problems Broadcom has created for Qualcomm, such a distraction would be welcomed by at least some Qualcomm employees and shareholders.

The German word for this is Shadenfreude, although I think the original Qualcomm executive team would have too much class to even hint at it in private. As for the current CEO, I’ve had no direct contact from which to judge; perhaps the best indicator would be how many elbows he throws in his notoriously competitive basketball games.

Qualcomm’s temporary reprieve

Qualcomm has succeeded in re-opening the pending International Trade Commission ban on imports of Qualcomm chips that the ITC found impinged on Broadcom’s patent. It had seemingly lost the fight for good when the US trade representative refused to override the ITC on August 6.

As reported, the US Court of Appeals for the Federal Circuit agreed to hear Qualcomm’s appeal of the ITC order, and on Tuesday stayed enforcement of the ITC ban on handsets containing Qualcomm’s chips (but not the ban on Qualcomm’s chips). The surprise victory — in time for the Christmas selling season — is the first Qualcomm success since they changed legal counsel a month ago.

Reading the appeals brief (graciously provided by the UT), there were some interesting points:

• Qualcomm was joined in its appeal by five handset makers (Motorola, Samsung, LG, Kyocera, Sanyo) and two carriers (AT&T and T-Mobile). Verizon was absent because they cut a side deal, but Sprint was conspicuously absent; AFAIK most of the Sanyo phones imported into the US are sold by Sprint. That the GSM carriers are the ones supporting Qualcomm suggests how well they have done in cracking the W-CDMA market.
• The appeals court’s ruling suggests that they are leaning towards reinstating the Administrative Law Judge’s finding that banned import of Qualcomm’s chips but not phones containing those chips — since the phone makers were not parties to those proceedings and thus not found to have infringed Broadcom’s patent. Broadcom had asked that phones also be banned, and the ITC (unlike the ALJ) agreed with Broadcom.

The one thing that’s not clear from the findings is the status of the Qualcomm work-around to avoid infringing the patent that Broadcom bought in 2002. If Qualcomm were manufacturing chips today that did not infringe on the Broadcom patent, presumably it could import them. So is the work-around not yet ready to ship because (as they reportedly testified) it’s taking 18 months to develop? Or, under the exclusion order, does Qualcomm have the burden of proof to show that their new product is non-infringing?

Technorati Tags: Broadcom, patent infringement, Qualcomm

Strike three for Qualcomm

Qualcomm Monday lost its longshot appeal to overturn the ITC ban on importing QCOM chips that infringe a Broadcom power saving patent. Basically the USTR said she wasn’t going to overturn a decision reached through the normal administrative process, no matter how big the impact.

There’s no way to spin this. Qualcomm lost, it’s bad for Qualcomm, it’s bad for Qualcomm’s future market share, it’s bad for Qualcomm’s patent-based business model, and it’s bad for Qualcomm’s customers. Sure Qualcomm still hopes to appeal the patent validity but that seems even less likely to succeed.

Qualcomm pulled out all the stops, commissioning bigshot economists (The Brattle Group) to say that the ban will cost consumers billions. Now it will be interesting to see if that proves to be true (since both Brattle and Qualcomm will lose credibility if it doesn’t).

About the only good news for the home team is that (after more than a year) Qualcomm finally has a workaround to avoid infringing the patent.

Despite their huge win, it’s hard to believe much in the Broadcom press release, which seems more about threatening Qualcomm’s shareholders and customers (to increase pressure for a settlement) than actually commenting on the legal ruling. Quoting General Counsel David A. Dull, the press release proclaims:

“According to the IEEE Spectrum, Broadcom possesses one of the world’s most powerful semiconductor patent portfolios,” Mr. Dull said.

Let’s see. Since when is a magazine article an authoritative source of how important is a company’s patent portfolio? “One of” could refer to top 20. Even if it was “top 1,” what proportion of the patents relate to mobile phones? And how does this relate to the relevance of Broadcom’s portfolio to Qualcomm’s products, or the relative importance of the Broadcom and Qualcomm 3G patent portfolios?

I could go on. Broadcom still thinks it will get $6/chip from Qualcomm until patent 6,714,983 expires. Qualcomm obviously has no intention of paying — perhaps hoping to find some outside entity to put a reasonable value on the patent.

As best I can tell, the patent in question was invented by employees of Intermec Technologies of Cedar Rapids Iowa more than 12 years ago, and the patents were acquired by Broadcom as part of 150 patents it bought for $24 million from Unova in 2002. (Apparently the Wall Street Journal reported this in June, as did the Seattle Times. It took me longer to write this paragraph than it took me with Google to identify the Cedar Rapids inventor of the patent as working for Intermec and tie those patents to the Broadcom/Unova deal). Buying patents makes Broadcom a savvy investor and a clever patent troll, not an innovative company.

Still, Broadcom is winning under the current rules. Qualcomm was first sued by Broadcom in May 2005, and seems to have consistently underestimated the business consequences ever since. If I were a large institutional shareholder (or a customer like Verizon, Sprint or AT&T), I would ask what Qualcomm has been doing for the past two years. A smart lawyer, R&D manager (or CEO) would have ordered a full re-examination of all Qualcomm products to see if they might infringe any of the Broadcom patents claimed, to make sure that a work-around was forthcoming.

Six months ago, Qualcomm appointed a recently retired U.S. Attorney to be VP and legal counsel. If she can’t change their luck, it would seem as though some more significant management change would be due.

Technorati Tags: 3G, Broadcom, patent infringement, Qualcomm

Qualcomm: Broadcom doesn’t want to deal

A little bit more came out this week about the Qualcomm-Broadcom impasse, during the Qualcomm quarterly earnings call. Dow Jones reported:

Jacobs, speaking during a conference call to discuss its quarterly report, said Broadcom wants its customers to be exempt from paying Qualcomm licensing fees for a large chunck of its intellectual property portfolio as part of a settlement.

"That is unacceptable," Jacobs said. "We continue to believe the rulings are wrong."

President Steve Altman said that Broadcom is arguing that since it is exempt from licensing fees, it's customers should be, too.

But David Rossman, who heads of up intellectual property litigation for Broadcom, said, "a solution with Qualcomm will not eliminate their licensing program."

Obviously we’re not getting the whole picture about what’s being offered behind the scenes — but clearly Qualcomm believes that settling on the current terms would undercut its business model.

Technorati Tags: Broadcom, patent infringement, Qualcomm

Broadcom cracks CDMA front

In their fight against Qualcomm, Broadcom scored an amazing victory today. They got Verizon Wireless to pay a $6/unit royalty up to $200 million every phone Verizon sells using Qualcomm chips.

Qualcomm turned down a similar deal three weeks ago because it could cost $2 billion. Instead, Qualcomm was reportedly hoping for a $100 million fee plus a future cross-license. (The Bloomberg article claims Qualcomm offered a royalty-free cross-license, which would be dramatically out of character for either Qualcomm or the industry).

For six patents, Broadcom could be making more per CDMA phone than Qualcomm makes (~ 5% of the price) for more than 1,500 patents. Of course, Verizon gives Broadcom another $200 million with which to sue Qualcomm (or perhaps even file more patents that block Qualcomm). (We do not know whether Verizon still has to pay the royalties if Broadcom’s patent claims are somehow dismissed or settled.)

If the Americans bought 143 million new phones last year, then Verizon’s 26% share would sell the 33 million phones in about a year before royalties were paid up. (It might take a little longer because royalties are capped at $50 million/quarter).

I’m guessing that Verizon — in a neck-and-neck market share war with the iPhone-equipped AT&T (27% share) — feels this would be a bad time to let its number #1 rival gain an advantage in new handsets and thus customer additions. This shows how much Verizon is willing to pay for certainty. It also means that Verizon no longer has a reason to support Qualcomm’s appeal of the ITC decision.

This is a very dangerous time for Qualcomm: if it loses the ability to charge royalties for firms that hold any 3G or GSM IPR, then it would probably lose the majority of its patent royalties (and as much as half of its net income). Nokia, Broadcom and others are hoping this will happen, and right now Qualcomm’s enemies are more powerful than its allies. For a decade, Qualcomm’s IP business model has counted on having the facts and IP law on its side, but the last year or two has reversed that trend.

Technorati Tags: Broadcom, patent infringement, Qualcomm, Verizon

Foul tip

If Qualcomm’s count at the ITC (with Broadcom on the mound) is 0-2, then Thursday’s decision by the ITC not to override itself is the equivalent of a foul tip — the count stays unchanged.

In its clutch appeal, Qualcomm got support from the CTIA and the top four US carriers: AT&T (née Cingular), Verizon Wireless, Sprint Nextel and T-Mobile. It also said that its MediaFLO deployment for AT&T and Verizon — the preferred mobile TV solution for 53% of US cell phone subscribers — could be delayed by the ban.

The final possibility is a presidential veto, which (AFAIK) would have to come sometime in early August if it is coming at all.

Mike Dano of the industry’s oldest trade journal, RCR News, mocked the Qualcomm position:

Qualcomm is asking for a presidential veto on the ITC ban. That’s right: Rather than pay Broadcom a simple patent-licensing fee (a payment most other businesses would consider standard), Qualcomm is going to petition the world’s most powerful leader for a veto. I’m sure that President Bush has plenty of time to deal with this situation, seeing as how the immigration thing fell through and all.

Anyway, I guess I can sort of understand Qualcomm’s position: In the interest of its shareholders, the company feels the need to exhaust all options possible. No word yet on whether Qualcomm is going to secede from the United States and form its own independent government where the only valid patents are those developed by Qualcomm—which, to me, is the next logical step if a presidential veto doesn’t work.

I’m sure they will call it “The Confederate States of Qualcomm,” and Paul Jacobs will rule with a gentle, kind hand, much like Aragorn, crowned as King Elessar, ruler of Gondor.

I agree with Dano that it would take some significant prompting for president Bush to intervene. Is he likely to listen to Qualcomm and its allies?

CEO Paul Jacobs’ former bosses — dad Irwin M. Jacobs and co-founder Andrew Viterbi — were known as donors to Democrats, at more than $300k and $50,000 respectively. Irwin Jacobs got his National Medal of Technology from Bill Clinton in 1994.

At this point, Pres. Bush is not running for re-election and his ties to the GOP party machinery weaken by the minute. However, his party and campaigns have strong ties to home state telephone monopoly SBC (er, AT&T), and according the left-leaning Center for Public Integrity, the phone companies and SBC in particular were among the largest Bush donors.

Irwin Jacobs’ counterpart, Broadcom chairman and co-founder Henry Samueli (and his wife Susan) seem to mainly spend their political money on state races, in addition to $75 million spent buying the Stanley Cup.

If Bush backs Qualcomm and most of the industry over Broadcom, is that politics or good policy? Would Clinton have done any different (I think Clinton clearly would have favored Jacobs, particularly as a lame duck). Conversely, if the European Commission backs most of its telecom manufacturers — and Broadcom — over Qualcomm, is that politics or good policy?)

Technorati Tags: Broadcom, patent infringement, Qualcomm

Qualcomm’s Hail Mary

I know Paul Jacobs didn’t go to Boston College, he’s taller than Doug Flutie, and it’s the wrong religious metaphor. Still, Qualcomm’s strategy for dealing with the ITC decision seems like a “Hail Mary” play.

Thursday’s press release responding to the decisions was posted after business hours. It begins:

Although all of the Commissioners agreed that a disruption in the supply of EV-DO and WCDMA handsets would negatively impact the public interest and public safety, the remedy fashioned by the majority does not protect the public interest or public safety. QUALCOMM will ask the Federal Circuit Court of Appeals to stay enforcement of the ITC's order and ask the President to veto the ITC's decision. QUALCOMM maintains that Broadcom's patent is invalid and not infringed.

Hmmm... If the patent is invalid and not infringed, shouldn’t there be an action in a court of law to win a determination to that effect?

The press release continued:

Having chosen not to develop an EV-DO solution and having failed in the marketplace to generate interest in its WCDMA products, Broadcom brought this litigation against QUALCOMM but has used it as a vehicle to attack the U.S. cellular industry, even though Broadcom has never accused any wireless manufacturers or operators of infringement or any other wrongdoing. The public injury that would result from the remedy imposed by the Commission is grossly disproportionate to any benefit flowing to Broadcom from such broad enforcement of a recently-purchased patent. Broadcom does not make or sell EV-DO chips, and Broadcom's claims that it can supply WCDMA products for the United States have been rebuffed by WCDMA operators in submissions the operators made to the ITC.

Qualcomm lost by a 4-2 vote — 2 commissioners did not favor a ban. Last October, when the ITC administrative law judge ruled against Qualcomm, it praised the judge for not recommending a “downstream” remedy; I can’t verify this, because the judge’s report does not appear to be on the ITC website. Still, the ITC enforces its orders via an import ban, unlike a Federal court that imposes fines or other remedies.

Its press release continues:

QUALCOMM and the U.S. wireless industry will seek an emergency stay from the Federal Circuit and a Presidential veto of the ITC's ruling on several grounds, including that Broadcom's ITC action will harm U.S. consumers, impact public safety and national security and harm the U.S. economy by stunting mobile broadband deployment. By punishing completely innocent cellphone manufacturers and wireless operators that were given no opportunity to contest Broadcom's infringement claims, the ruling also raises serious issues of due process and fairness.

The Verizon and Sprint websites are silent, although CTIA (representing all the carriers) says:

CTIA-The Wireless Association® believes today’s decision by the International Trade Commission will cause enormous undue harm to tens of millions of American wireless consumers, and urges President Bush to veto the ITC importation ban. The ITC decision unnecessarily decreases competition, and denies millions of consumer’s access to innovative wireless broadband products. This decision flies in the face of public policy that encourages the availability of broadband services and products, and could have the unintended effect of impairing the wireless industry’s efforts to improve communications in areas such as public safety. Consumers should not have to pay the price for a legal debate that could be settled by other means.

Whilte the UT reports Sprint Nextel as being focuced on a work-around, it quotes Kyocera Wireless (Qualcomm’s former handset division) as supporting the veto, as does Verizon:

“This is a bad order for the industry, and it's a bad order for wireless consumers,” said Verizon spokeswoman Nancy Stark. “It would freeze innovation.”

Still, this seems like a longshot effort; as one lawyer’s site says, “a presidential veto is extremely rare.”

The UT and others note that Qualcomm is working on a work-around, but it will take time. Since they lost before the judge almost eight months ago, I don’t know why they didn’t start a crash project back then. The UT also says the patent expires in three years, suggesting Qualcomm would like to stall until then.

Meanwhile, Broadcom is just waiting for Qualcomm to settle — presumably one that would give it access to Qualcomm’s portfolio:

We simply want to be adequately compensated for the use of our intellectual property. To that end, we have made it clear to Qualcomm that we are open to discussions regarding the potential for licensing of our patent. The ball is in Qualcomm's court.

Technorati Tags: Broadcom, patent infringement, Qualcomm

Broadcom 3, Qualcomm 0

6/7/7 is Broadcom’s lucky day. After winning a December case over one patent before America’s International Trade Commission, Broadcom today convinced the ITC to ban the import of any new cell phones with Qualcomm chips.

Yes, existing models are grandfathered in, but the impact of the ruling is still dire for Qualcomm. The ban will not only prevent LG and Samsung from introducing new CDMA phones in the US, but it will also cause AT&T (or T-Mobile) to rule out any W-CDMA phones with Qualcomm chips.

Needless to say, Broadcom was quite pleased with the ruling, and used it to spin its position that the commodity chip producer was wronged by the company that invented CDMA:

In this case, Qualcomm and its customers have been importing products that use Broadcom's valuable intellectual property without permission. As Broadcom continues to develop cutting edge wired and wireless communications and multimedia products that enable the convergence and communications trends that are touching consumers in their daily lives, we are gratified to know that the results of our investments and hard work will be protected from infringers like Qualcomm.

With a gun to Qualcomm’s head, Reuters reports that “Broadcom Corp. said on Thursday it is open to discussions for Qualcomm Inc. to license its technology patent.” Broadcom’s goal has always been to break Qualcomm’s business model — to get it to budge on its full-royalty-for-all policy. The ITC victory is its best shot ever to do so.

No word on how hard it would be for Qualcomm to invent around the one patent (6,714,983), i.e. produce a non-infringing chip. Last month, Qualcomm also lost a Federal case (litigated on Broadcom’s home turf) over three other patents (6,847,686; 6,389,010; and 5,657,317).

Qualcomm must comply with the ITC order while appealing the original verdict, so now it faces the dilemma of solving the immediate problem vs. continuing to fight in hopes of an eventual win.

No word on what Qualcomm said at its 3:30 p.m press conference, but the stock lost about $2 billion in market cap today. Overall, the stock is down about 9% since its peak last month at slightly over $46.

Technorati Tags: Broadcom, patent infringement, Qualcomm

Broadcom 2, Qualcomm 0

In January, Qualcomm lost a key patent infringement case to Broadcom. Last Friday — seven weeks later — most of the outstanding U.S. lawsuits between the two companies were settled out. Broadcom seems a lot more excited about the outcome than is Qualcomm, and two Broadcom complaints have not been dismissed.

As the UT’s Kathryn Balint notes, at one point the two companies were reasonably friendly. For that matter, the four major engineering schools in Southern California — at USC, UCSD, UCLA and UCI — are respectively named for Qualcomm founders Andrew Viterbi and Irwin Jacobs and Broadcom founder Henry Samueli (and Samueli). But then Broadcom went from being a Qualcomm licensee to a direct Qualcomm competitor.

The main thing is Broadcom is one of many companies that don’t want to pay Qualcomm’s royalties — one of six who asked the EU to cut the royalties they have to pay. This action remains unaffected.

There is no question that Broadcom’s 2007 successes will embolden other competitors to contest both the validity and price of Qualcomm’s IPR. Broadcom is less than a quarter the size of Qualcomm, but enemies (and legal warchests) like those of Nokia and Matsushita are more daunting. Qualcomm needs to win a major case or the rate of litigation will only increase.

Update: On Monday, Nokia filed a pre-emptive strike against Qualcomm’s European royalties, arguing that it shouldn’t have to pay royalties on phones with TI chips due to the 2000 cross-license between Qualcomm and TI.

Technorati Tags: intellectual property, patent infringement, Broadcom, Qualcomm