Qualcomm Incorporated (NASDAQ:QCOM)
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Settlement dismisses all litigation related to the companies' battle over patent royalties
By Tripp Mickle and Asa Fitch
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 17, 2019).
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 email@example.com
(END) Dow Jones Newswires
April 17, 2019 02:47 ET (06:47 GMT)
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