In the U.S. Federal Trade Commission's antitrust trial for monopolistic trade practices, QUALCOMM Incorporated (NASDAQ:QCOM) recently tried to defend itself using the ‘intellectual property (IP) rights’ card. As lawyers from both the government and the company put forth their arguments before the U.S. District Judge Lucy Koh, the 10- day non-jury trial appears to be in a critical stage. The verdict of this California courtroom trial is likely to have a cascading effect on the smartphone industry across the globe and has thus attracted massive interests from all stakeholders, including Apple Inc. (NASDAQ:AAPL) .
In its appeal, the government pleaded that Qualcomm used anti-competitive policies to drive sales of its smartphone chips. It alleged that the company followed “no license, no chips” trade policy, under which chips were only sold to those manufacturers that agreed to inflated patent licensing terms. The government agency further accused Qualcomm of using unfair trade practices and offering financial rebates to the iPhone maker for buying chips only from it, undermining competitive offers from rival Intel Corporation (NASDAQ:INTC) .
From the onset, Qualcomm had refuted all the charges and pointed out that its licensing business was started decades ago before it began selling chips. The company stressed that it assumed technology leadership through continued R&D efforts and hard bargaining with smartphone manufacturers throughout the world. Moreover, the licensing rates were mostly kept unchanged once it started selling chips and had been market driven, contrary to the allegations.
Recently, Qualcomm CEO Steve Mollenkopf testified before the court that purchasing a license was necessary for phone manufacturers as merely buying a chip did not cover all its IP rights. Consequently, he urged the judge not to view the licensing agreement, which manufacturers needed to comply with, in isolation and that the entire security structure was required to make the whole system work.
Despite the claims and counter claims, the unwanted scrutiny by the antitrust regulators of the licensing business, from which Qualcomm garners a huge profit, is likely to affect its credentials. The outcome of the trial will have a ripple effect on any settlement discussions between Qualcomm and Apple. Furthermore, Qualcomm’s business practices are also being investigated by regulators in several other countries like South Korea, China, Taiwan and Europe, allegedly instigated by Apple.
Qualcomm has been entangled in a bitter legal battle with Apple for quite some time now, related to alleged patent infringements. In this context, it is worth noting that Qualcomm had posted the required security bonds in the District Court of Munich to enforce ban on some iPhone models of Apple in Germany. This was preceded by some favorable verdicts from across the globe. In early December, the Fuzhou Intermediate People's Court in China held Apple guilty of twin patent infringement and ordered an immediate ban on sales of older iPhone models, from the 6S through the X in the country (read more: Qualcomm Wins Twin Patent Battle in China Against Apple). A few days later, the District Court of Munich held Apple guilty of patent infringement and ordered a permanent injunction to the sale of some iPhone models in Germany.
The infringed models were found to violate Qualcomm's IP rights for power savings in smartphones. The bone of contention was a third-party violation of Qualcomm's patents around envelope tracking — a feature that helps phones preserve battery while sending and receiving wireless transmissions. Apple has allegedly used products from Qorvo, Inc. (NASDAQ:QRVO) to bypass the patent in some of its iPhone models.
It remains to be seen how the verdict of the California trial pans out for Qualcomm now, as it could redefine the sector dynamics and affect its business model.
This Zacks Rank #3 (Hold) stock has underperformed the industry in the past year with an average decline of 12% compared with a fall of 4.5% for the latter. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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