Apple Inc. and Qualcomm Inc. agreed to end a two-year legal battle over billions of dollars of technology licensing fees that threatened the chipmaker’s most profitable line of business.
Apple will make a one-time payment to Qualcomm, and the two reached a multiyear agreement whereby Qualcomm will supply chips and license its technology to the iPhone maker in exchange for royalty payments, the companies said Tuesday in a statement. Litigation between the two around the world will be dismissed, but no details were disclosed about the payments or fees. Qualcomm’s stock gained the most in a single day since 1999.
A victory for Apple would have hampered Qualcomm’s ability to collect fees on the technology that powers mobile phones. But Apple had an incentive to settle, too. The arrangement helps keep the company from falling behind in fifth generation, or 5G, technologies designed to provide blanket wireless coverage and propel faster and more versatile mobile services. Apple’s current modem supplier, Intel Corp., won’t have its 5G chip in phones until next year — about the time Qualcomm expects to have an updated 5G modem available.
Apple’s biggest rival, Samsung Electronics Co., already has a phone in the market that will support that new technology based on a Qualcomm chip.
“There were worries that this was going to be a nasty court battle, and I think that Apple realized, despite wanting to make a statement, that it was in their best interest, based on 5G and licensing issues, to settle,” said Dan Ives, an analyst at Wedbush Securities. “Apple and Qualcomm both had more to lose in trial than if they just settled.”
Qualcomm said it anticipates the agreement will add $2 per share to its earnings when it begins chip shipments to Apple. While it’s not clear how much Qualcomm gave up in concessions in terms of payments and rates, the settlement lets it continue one of the most profitable businesses in the $400 billion semiconductor industry. Apple was the remaining holdout from a licensing practice that allows the San Diego-based chipmaker to charge patent royalties on its technology.
Based on that $2-dollar-per share forecast and a rough estimate of how many iPhones might be sold with Qualcomm’s modems, it doesn’t appear that the chipmaker made any major concessions to Apple in terms of the licensing rate per phone, said Kevin Cassidy, an analyst at Stifel Nicolaus & Co.
“It seems like they played chicken and won,” Cassidy said.
The companies began a jury trial Monday in San Diego that was to decide whether Apple owed unpaid royalties or the iPhone maker was right to argue that it was the victim of unfairly inflated charges. Underlining how bitter the fight had been, the two sides were still taking shots at each other in court as the settlement was announced.
Qualcomm lawyer Evan Chesler was wrapping up his opening statement, telling jurors that Apple had been planning the legal assault of the chipmaker’s business model for years.
“It was all planned in advance, every bit of it,” Chesler said. He cited an internal Apple document indicating it would be beneficial for the iPhone maker to wait to provoke a patent fight with Qualcomm until after 2016, when the companies’ previous deal would expire.
Apple’s lawyer Ruffin Cordell told the jury that Qualcomm had broken a commitment to license technology to competing chipmakers, driving them out of the market for modems and using the resulting market dominance to dictate licensing terms to phone manufacturers who had no choice but to agree.
Qualcomm’s stock, which had underperformed this year, jumped 23 per cent to $70.45 at the close in New York. Apple was little changed at $199.25. Representatives for Apple and Qualcomm declined to comment beyond the statement. Qualcomm is scheduled to report earnings May 1, when it will probably give more financial details.
The company’s licensing business generated $5.16 billion in the 2018 fiscal year, a decline of 35 percent from before Apple began withholding its payments. The unit produced 23 percent of Qualcomm’s total revenue and 54 percent of its profit in the fiscal year.
Qualcomm is still waiting for a federal judge’s ruling on claims by the US Federal Trade Commission that the company’s licensing practices are anti-competitive. The regulator accused Qualcomm in a 2017 lawsuit of using its dominance in the market to thwart competitors’ growth and force companies including Apple and Huawei Technologies Co. to pay inflated patent royalties. A nonjury trial in San Jose, California, was held in January.
Separately, Qualcomm faces a class action on behalf of as many as 250 million consumers seeking as much as $5 billion in damages over claims they suffered from inflated retail prices. The company has said it’s probably the largest class action in history and is asking an appeals court to block the consumers from proceeding as a group.