By Tripp Mickle and Asa Fitch
SAN DIEGO -- Apple Inc. and Qualcomm Inc. agreed to dismiss all
litigation between the two companies world-wide and forged a new
license agreement, ending a long-brewing legal battle over how
royalties are collected on innovations in smartphone
technology.
The settlement, which came hours after opening arguments in a
trial between the companies started, includes an undisclosed
payment from Apple to Qualcomm. The companies also said in a joint
statement that they had reached a six-year license agreement and a
multiyear deal for Qualcomm to supply Apple with modem chips.
Qualcomm had claimed Apple was violating its patents by
withholding royalties, while Apple argued Qualcomm had been
overcharging for those patents for years, abusing its dominant
position in the market. At stake was the future of Qualcomm's
licensing model and billions of dollars in royalties that Apple has
either paid or kept. Until the settlement was struck, Qualcomm had
lost more than $25 billion in market value amid the looming
threat.
The emergence of fifth-generation wireless speeds as a key
component of coming devices likely drove the two companies to the
table. Apple's most recent iPhones have been using modem chips from
Intel Corp., which has lagged behind Qualcomm in providing wireless
features. Apple also faced falling behind rivals such as Samsung
Electronics Co. in offering speedier wireless devices.
Determining exactly who benefits by how much is difficult
because the companies didn't divulge pricing or other terms of the
licensing and supply deals. Qualcomm said the agreement will add
about $2 in annual earnings per share as modem-chip shipments
begin.
More important for Qualcomm, though, the deal also removes a
significant threat to its core licensing business, which has
accounted for about half of the company's profit in recent years.
Apple through its contract manufacturing had been withholding about
$8 billion in royalties owed to Qualcomm.
"This is an enormous win for Qualcomm because the suit and
related suits were life-threatening to the company," said Roger
Kay, an analyst with Endpoint Technologies Associates. "For Apple,
a loss would have been financially punishing, but for Qualcomm,
this would have destroyed the business. This is like a new lease on
life."
Qualcomm's stock skyrocketed in afternoon trading following the
announcement, jumping 23% to $70.45, its highest point since last
October. Apple investors reacted more modestly, with its stock
closing up just 0.01% at $199.25.
For Apple, the deal enables it to deploy Qualcomm's 5G chips in
its phones -- a crucial step in order for the iPhone maker to keep
pace with competitors running Android software. Until this point,
Apple's legal challenge had left it without access to those
market-leading 5G modem chips, putting its most important product,
the iPhone, a step behind Android competitors in the race to the
next big advance in wireless.
Apple and Qualcomm spokeswomen declined to comment beyond the
companies' joint statement.
The legal battle over how royalties are collected on
smartphone-technology innovations spanned more than two years
across three continents, costing the companies millions of dollars
in legal fees. The discord was fueled by two chief executives --
Tim Cook of Apple and Steve Mollenkopf of Qualcomm -- who had a
distant relationship and were entrenched in their competing
positions. Both CEOs were expected to testify in the coming
weeks.
As Apple escalated its fight and began withholding royalties
about two years ago, Mr. Mollenkopf made a bet to accelerate more
than $500 million in spending on 5G technology, people close to
Qualcomm said. The move helped Qualcomm begin delivering 5G modem
chips to Samsung and others early this year, increasing pressure on
Apple as its Android rivals moved to the next generation of
wireless, these people said.
Apple's primary modem-chip supplier, Intel, was at least a year
behind Qualcomm in developing a 5G modem chip. Hours after
Tuesday's settlement announcement, Intel said it would abandon
efforts to develop 5G chips for smartphones, citing "no clear path
to profitability."
Qualcomm's board pushed Mr. Mollenkopf for months to get on the
same page as Apple and resolve the dispute, another person close to
the company said.
The two companies remained in contact throughout the dispute,
people close to Qualcomm said. However, serious talks didn't start
until just before the trial began on Monday, according to these
people and others close to the events.
Qualcomm and Apple executives then began shuttling back and
forth between the companies' respective headquarters in San Diego
and Cupertino, Calif., they said.
The parties aimed to announce a deal prior to jury selection on
Monday but negotiations spilled into Tuesday morning, after opening
arguments began, they said.
Attorneys for Apple and Qualcomm were kept at arm's length from
the negotiations so they could continue to prepare for the trial,
according to attorneys working on the case.
The dramatic turn of events on Tuesday came as the two sides
traded barbs during opening remarks in front of a nine-person jury
at a federal court in San Diego, about 15 miles from Qualcomm's
headquarters.
Prior to Qualcomm's opening arguments, Apple's lawyers sought to
portray the chip company as a monopolist that had used its patent
portfolio to charge onerous licensing fees of 5% of the sales price
of iPhones sold world-wide, with the fee amounts capped at $400 a
phone.
To press that case, attorney Ruffin Cordell of Fish &
Richardson, which represented Apple, turned to the business of
fried chicken. He compared Qualcomm's licensing practices to
someone showing up at a KFC restaurant to order chicken but being
told to get an "eating license" from the fast-food chain first,
because the chicken includes Colonel Sanders's secret recipe.
Imagine, he said, the license costs $17 and the bucket of chicken
costs $17.
Qualcomm's lawyer, Evan Chesler, disputed that notion, saying
that Qualcomm's business practices were more akin to a KFC that
charged one price for a bucket of fried chicken and another price
for a side of potatoes.
Mr. Chesler had about 15 minutes left in his closing remarks
when CNBC reported that the parties had reached an agreement to
settle their dispute. Mr. Chesler finished his comments and then
the lawyers held a conference with the judge. A news release
declaring the truce soon followed.
The agreement will "allow these tech companies to get back to
business and you to return to your everyday affairs," Judge Gonzalo
Curiel told the jurors.
The KFC analogy became a running joke between the parties as
soon as the trial ended. Apple's head of litigation, Noreen Krall,
and Mr. Chesler, Qualcomm's lead attorney, shared an elevator after
the trial. "We're going to go get some Kentucky Fried Chicken," Ms.
Krall said, grinning.
"And potatoes!" Mr. Chesler said.
Write to Tripp Mickle at Tripp.Mickle@wsj.com and Asa Fitch at
asa.fitch@wsj.com
(END) Dow Jones Newswires
April 16, 2019 20:30 ET (00:30 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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