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?

British standards for essential 3G patents

As decided last December, the ruling by the High Court of Justice for England and Wales on Nokia v Interdigital Technology Corp (2007) will have a major impact on how patents are licensed (and enforced) in mobile phone standards. Although the ruling is technically only binding in the UK, I believe the findings will impact the various patent lawsuits involving InterDigital (IDCC), Qualcomm (QCOM), Nokia (NOK), Broadcom (BCOM) and others holding (or seeking to avoid paying royalties on) mobile phone patents.

InterDigital declared to ETSI that various patents were essential for implementing the W-CDMA standard, but (as with all ETSI declarations) this self-determined essentiality was not independently verified. My interest here is not the SD telecom book, but a series of papers I’m doing with Rudi Bekkers on W-CDMA (aka UMTS) patents.

In this case, Nokia sued to have 29 InterDigital patents declared not-essential to W-CDMA. Nokia had previously won in English courts in an earlier case involving InterDigital’s GSM patents. This is all part of a larger strategy by Nokia to get out of paying any royalties to InterDigital.

Of the 29 “essential” patents, Nokia dropped its challenge to one patent, InterDigital conceded that 21 were not essential, did not defend three more, leaving four patents contested at trial. The judge, Sir Nicholas Pumfrey, ultimately ruled that only one patent was partially essential.

When the ruling by Sir Nicholas Pumfrey was released Dec. 21, 2007, InterDigital spun the ruling as a victory, but clearly InterDigital ended up telling the world (including current and potential licensees) that 27 of 28 patents patents declared essential to W-CDMA actually aren’t.

The findings are all covered in the ruling by Lord Justice Pumfrey, but I learned what it really meant from a forthcoming law review article:

Myles Jelf and Michael Stevenson, “Nokia v IDC: an essentially English judgment,” Journal of Intellectual Property Law & Practice, 2008, Vol. 3, No. 7, pp. 457-460. doi: 10.1093/jiplp/jpn084

The authors are not a party to the case, but attorneys at Bristows in London; they do a commendable job of explaining the findings in a style accessible to an IP-knowledgeable engineer or businessperson. A preprint copy of their article was posted May 21 to the journal website.

The article notes the contribution of the decision in deciding essentiality, providing a process for its evaluation, and even procedural precedents about to run such litigation. To quote the authors:

The overall approach adopted by the Courts appears to be as follows:

• Start out with the patent in one hand and the relevant standards in the other.
• Consider the correct construction of the patent, entirely independently of the standards, through the eyes of the skilled person.
• ...
• Consider to what extent the claim construction put forward corresponds with what is specified in the standards ...
• ...[D]ecide whether what is properly required by the standards falls within the language of the claim, as understood by the skilled person.

But (the authors argue) the contribution of the ruling goes beyond the process of determining essentiality to setting a standard for essentiality and providing procedural precedents about to run such litigation. I defer to the article for a more complete discussion of the ruling’s interpretation and implications.

Before he was promoted to become Lord Justice of Appeal last November, Pumfrey gained a reputation for handling complex patent cases. He drew from degrees in both physics and law that he earned before becoming a barrister in 1975, as well as three years as junior counsel in the UK patent office. But he was known more broadly for his expertise in IP law, ruling (for example) last year on a trademark case involving a transvestite beauty pageant.

Tragically, Pumfrey died three days after the ruling was published of a massive stroke he suffered on Christmas Eve. The judge, aged 56, apparently had a weight problem. Pumfrey was well-regarded for his specialized expertise and will be missed by his peers.

Photo credit: Sir Nicholas Pumfrey, from the Times of London January 3, 2008 obituary.

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