Qualcomm under fire

On May 29, Qualcomm was dealt yet another blow in its long-standing legal squabble with wireless world heavyweights, including chipmaker Broadcom and cell-phone maker Nokia. A federal jury in California found Qualcomm guilty of infringing on three Broadcom patents, awarding $19.6 million in damages.

The jury classified Qualcomm's (QCOM) infringement as willful, a distinction that means the damages could potentially be tripled (a hearing to determine the exact amount of the award won't be scheduled until June 18). Worse, Broadcom (BRCM) also could win an injunction barring Qualcomm from selling offending chips in the U.S."”and, possibly, even abroad. Qualcomm plans to appeal.

Seeking 'Certainty'

The guilty verdict comes as Qualcomm braces for what could be a more stinging legal setback. The U.S. International Trade Commission (ITC), which in late 2006 found Qualcomm guilty of infringing a different Broadcom patent, is slated to decide on June 7 whether to ban imports of cell phones containing Qualcomm's chips into the U.S. While the California case doesn't have direct bearing on the ITC review, 'this certainly doesn't help Qualcomm,'says Lyle Vander Schaaf, partner at law firm Bryan Cave and a former ITC attorney.

Neither do a new lawsuit by Nokia (NOK) against Qualcomm and another ITC patent infringement investigation involving the company, both announced in May. The new ITC probe involves a charge of patent infringement made by silicon packaging maker Tessera (TSRA) that names Qualcomm as one of multiple defendants.

With so many legal battles on so many fronts, pressure is mounting on Qualcomm to settle with Broadcom in the ITC case before June 7. '[Losing a case] tends to convince the losing party to be much more amenable to settlement terms,' Vander Schaaf says. 'The settlement would give them certainty, and give certainty to manufacturers of mobile phones. And sometimes certainty is worth more than a decision down the road.'
Risk Abounds

Qualcomm confirms that it's in talks with Broadcom. 'We've had discussions with Broadcom for a long while now, but we haven't reached an agreement,' says Alex Rogers, senior vice-president and legal counsel at Qualcomm. 'I am not expecting [a settlement], but I certainly wouldn't rule it out.'

Chances are that Qualcomm's customers, handset makers like Motorola (MOT), Samsung, and LG"”and their customers' customers, wireless operators like AT&T (T) and Sprint Nextel (S)"”are pressuring Qualcomm to do whatever is necessary to avert any such disruption to their businesses. 'It's a very, very volatile situation,' says Blair Levin, an analyst with Stifel Nicolaus & Co.. 'A lot of balls are in the air.'

Still, handset makers had better prepare for the worst: The California judge could choose to disallow the use of certain Qualcomm chips in the U.S. or abroad. The ITC, meanwhile, could ban imports into the U.S. of the actual finished product, cell phones with Qualcomm's silicon

The Broadcom case at the ITC centers on advanced wireless technologies called EVDO and W-CDMA that are now being deployed by mobile operators around the globe, spurring user demand for phones that can exploit the speedier Internet connections enabled by those networks. 'We believe there's a material risk that the ITC could issue an order that keeps out of the United States handsets containing Qualcomm's EVDO chips used by Verizon Wireless and Sprint Nextel for their 3G networks,' Levin wrote in a May 24 research note.


Nokia Stalemate

Other experts concur. Over the years, 'the commission has generally opted to protect the patent holder and issue an effective remedy,' explains Charles Schill, partner at Steptoe & Johnson. While the ITC may only prohibit importation of Qualcomm's chips into the country, that remedy wouldn't be very punitive, as Qualcomm makes and sells most of its chips abroad and just brings samples to the U.S. for testing.

In the past, the ITC has only held back on banning the importation of a finished product when the offending component within constituted a tiny fraction of the product's overall cost, or was of vital importance to the nation, says Schill. The Qualcomm chips in question, which serve as the central processor of a phone, are not a trivial cost. And since it was formed in 1916, the ITC has only cited national interests three times in deciding against a ban. One involved so-called burn beds used to prevent bed sores in burn patients. The commission found that alternative producers couldn't satisfy demand, and that making burn beds available to patients was more important than protecting the patent holder's rights. '[The Qualcomm case] does not seem to have the same kind of national import,' Schill says.

Qualcomm begs to differ. In its filings, the company and its service-provider allies claim that an import ban on phones could impede improvements in emergency-response communications. Broadcom fires back with statistics indicating that most first-responders use radios and walkie-talkies in emergencies rather than cell phones. Broadcom's filings also argue that rival producers such as Texas Instruments (TXN), Freescale, and STMicroelectronics (STM) may be able to pick up the slack.

Compounding Qualcomm's growing legal distractions is its stalemate with Nokia over a new licensing agreement to replace one that expired in April. Those talks have bogged down as the two companies trade lawsuits and public accusations. Just last week, Nokia announced a new district court lawsuit against Qualcomm in Wisconsin claiming infringement of six patents held by the Finnish company. 'In the end, it's in the interest of Nokia and Qualcomm to come to terms,' says Bruce Sunstein, who leads the patent practice of law firm Bromberg & Sunstein. 'Each one of these filings raises the stakes and makes it more difficult to settle.'

Losing Ground

No matter how strongly Qualcomm may regard its legal hand in these assorted matters, experts see particular danger in failing to settle the Broadcom case before the ITC rules: Chances of successfully appealing an ITC decision are slim, says Schill.

The potential impact of a cell-phone import ban on Qualcomm is obvious, as about 30 percent of its chips were used in North America in the most recent quarter. But it also would hurt Qualcomm's customers. Motorola, already struggling with slackened sales, can ill afford a disruption to its handset supply or the time it takes to switch chip providers. While Motorola contracted with Texas Instruments in January as an alternative supplier of W-CDMA chips, significant volumes are unlikely until late 2008, as the companies will need to engage in rigorous design and testing, figures Jagdish Rebello, an analyst with consultancy iSuppli.

With handsets in limited supply, carriers like Verizon Wireless, Sprint Nextel, and AT&T also would suffer.


An ITC ban on the import of phones containing Qualcomm's EVDO chips would hit hard at Sprint, which is banking on next-generation handsets to reverse the company's sagging fortunes. Filings suggest that Qualcomm may need as much as two years to create a replacement technology bypassing Broadcom's patent. Not even Broadcom would be able to fill the void, says AT&T: 'Handset offerings for 2007 have already been finalized for testing and launch, and none of these offerings includes handsets with Broadcom's chips,' AT&T said in its May 18 filing. 'In fact, Broadcom couldn't realistically capture any of the market until late 2008.'

Kharif is a reporter for BusinessWeek.com in Portland, Ore.

Copyright 2000-2007 by The McGraw-Hill Companies Inc. All rights reserved.