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Apple vs Qualcomm. It Is More Than Money

Gabe Moretti, Senior Editor

On the surface the various legal actions by the Korean and US governments as well as Apple against Qualcomm appear to be about money, or how to split revenue from product that uses a standard that Qualcomm helped to develop.  But there is more to the suit.

The Background

I t would be impossible to grow an industry without standards that make it possible for various portion of the industry to cooperate and allow tools and methods to work together.  To this end that are organizations that develop, distribute, and manage such standards.  The IEEE is the one most familiar in the US.  Qualcomm and Apple are both members of ETSI, an SSO based in Sofia Antipolis, France, which includes more than 800 members from countries across five continents. ETSI produces globally accepted standards for the telecommunications industry. For example, ETSI created or helped to create numerous telecommunication standards, including the 2G/GSM, 3G/UMTS, and4G/LTE cellular communication standards.

Developing a standard requires the contribution of Intellectual Property (IP) by entities, usually corporate entities, universities, or other research organizations.  Offering IP without restrictions would, almost always, hurt the offering entity financially, so a legal tool that protects it has been developed.    For patents that companies have declared “essential” to the standard, patent law is reinforced by contractual obligations to license such patents on Fair, Reasonable, And non-Discriminatory commitments.  The legal wording of the tool is called a FRAND (or RAND) commitment.  The entire issue revolves around the definition of the term “Reasonable”.  In a meeting on February 2015 the IEEE defined the term as follows:

“Reasonable Rate” shall mean appropriate compensation to the patent holder for the practice of an Essential Patent Claim excluding the value, if any, resulting from the inclusion of that Essential Patent Claim’s technology in the IEEE Standard. In addition, determination of such Reasonable Rates should include, but need not be limited to, the consideration of:

  • The value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim.
  • The value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices that claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation.
  • Existing licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting licenses are otherwise sufficiently comparable to the circumstances of the contemplated license.

The licensing assurance shall be either:

  • a) A general disclaimer to the effect that the Submitter without conditions will not enforce any present or future Essential Patent Claims against any person or entity making, having made, using, selling, offering to sell, or importing any Compliant Implementation that practices the Essential Patent Claims for use in conforming with the IEEE Standard; or,
  • b) A statement that the Submitter will make available a license for Essential Patent Claims to an unrestricted number of Applicants on a worldwide basis without compensation or under Reasonable Rates, with other reasonable terms and conditions that are demonstrably free of any unfair discrimination to make, have made, use, sell, offer to sell, or import any Compliant Implementation that practices the Essential Patent Claims for use in conforming with the IEEE Standard. An Accepted LOA that contains such a statement signifies that reasonable terms and conditions, including without compensation or under Reasonable Rates, are sufficient compensation for a license to use those Essential Patent Claims and precludes seeking, or seeking to enforce, a Prohibitive Order except as provided in this policy.

The ETSI interpretation of “reasonable” is essentially the same as that of the IEEE.

The Apple Claim

Apple filed a claim in the US District Court in Southern California against Qualcomm.  The entire claim is exactly 100 pages long, so I am reporting only the key elements of it.  It is a fact that Qualcomm produces and licenses to semiconductor companies designs that implement connectivity between a device and the network that uses 3G or 4G standards.  Intellectual property of Qualcomm that is protected by patents was offered to ETSI in the development of both standards under the Essential Patent Claims and therefore it falls within the FRAND rules.  Apple’s claim states:

The description of the FRAND arrangement in the official claim is worth reading even if some of the terminology is slightly different from the usual ones used in our industry.

“Like other SSOs, ETSI requires participants to commit to abide by its Intellectual Property Rights (“IPR”) Policy, which sets forth the rights and obligations of its members. Pursuant to the IPR Policy, members are required to disclose standard-essential and potentially standard-essential patents and patent applications in a timely fashion. [ETSI Rules of Procedure, Annex 6, Clause 4.

The IPR Policy further requires that SEP owners submit a written commitment that they are prepared to grant irrevocable licenses on FRAND terms. If no FRAND commitment is made, the IPR Policy provides for ETSI to investigate alternative technology options for the standard to avoid the patent in question.

According to ETSI’s self-reporting portal, Qualcomm has declared over 30,000 global assets to be “ESSENTIAL IPR.” No objective party has tested the actual essentiality or validity of these assets.

Qualcomm has submitted IPR undertakings to ETSI with regard to each of the patents at issue in this matter. By submitting those declarations, Qualcomm promised that “[t]o the extent that the IPR(s) . . . are or become, and remain ESSENTIAL in respect of the ETSI Work Item, STANDARD and/or TECHNICALSPECIFICATION,” Qualcomm is “prepared to grant irrevocable licenses under this/these IPR(s) on terms and conditions which are in accordance with Clause 6.1of the ETSI IPR Policy.

Qualcomm, therefore, is contractually obligated to grant licenses on FRAND terms to these patents to Apple and other manufacturers of products that, through the baseband processor chipsets they use, conform to ETSI standards, as well as to third-party suppliers of baseband processor chipsets. Qualcomm made similar promises to other SSOs as well.

Because Apple is a third party that wishes, through the baseband processor chipsets it uses, to implement 3G/UMTS and 4G/LTE standard-compliant technology in the products it sells, Apple is a third-party beneficiary of the contracts between Qualcomm and ETSI.

Apple relied on Qualcomm’s promises to ETSI. Specifically, Apple and other wireless device manufacturers made a conscious choice to develop and sell products compatible with 3G/UMTS and 4G/LTE, relying on Qualcomm’s promise hat any third-party supplier of baseband processor chipsets or products using them could avoid patent litigation and obtain a license to any patents that Qualcomm has declared essential to the 3G/UMTS and 4G/LTE standards.

Qualcomm’s breach of its FRAND commitments, described insignificant detail below, is a foundation of its scheme to acquire and abuse monopoly power in the cellular industry.”

The claim also describes how the FRAND rule is to be implemented.

“FRAND royalties must start with the proper royalty base and a proper royalty rate, as required by the patent laws, but also must meet additional criteria designed to prevent misuse of the monopoly power conferred by adoption of a standard. In particular, FRAND royalties must be limited by the actual technical contribution of the patented technology to the standard, rather than (a) the “lock-in” value that arises from standardization of technologies, i.e., the value gained simply because companies are forced to use the technology mandated in the standard,(b) the value of all the technologies incorporated in an entire standard, or (c) the competing value of the many technologies, and many other standards that make up the actual device.”

Later the claim states:

“Qualcomm broke its promise and has breached its FRAND commitments. Qualcomm illegally double-dips by selling chipsets that allow mobile telephones to connect to cellular networks and then separately licensing (but never to competitors) the purportedly necessary intellectual property. By tying together the markets for chipsets and licenses to technology in cellular standards, Qualcomm illegally enhances and strengthens its monopoly in each market and eliminates competition. Then, Qualcomm leverages its market power to extract exorbitant royalties, later agreeing to reduce those somewhat only in exchange for additional anticompetitive advantages and restrictions on challenging Qualcomm’s power, further solidifying its stranglehold on the industry.”

Issues to Consider

The first thing to be realized is that this claim is about how to share revenue, not about standard making processes.  Apple wants a larger share of revenue from the sale of its product, while Qualcomm wants to protect what it gets right now by re-defining how royalties are computed.  Yet, there are other issues raised that may impact the electronics industry and EDA vendors.

Should royalties be fixed at a certain amount regardless of the sale price of the unit that use the licensed IP?  Or, as Qualcomm contends, should royalties be a percentage of the price charged to the customer?

I do not think that an IP more valuable when used to control the temperature in a passenger cabin of an airplane or in a home.

What is the intrinsic value of an IP?

The IP should have a value that is independent of the sale price of a system in which it is used.  The value of an IP, I think, is the result of three components: the cost of developing the IP, the profit margin desired by its implementer, and the market demand for it.  The IP has an intrinsic value that is independent of the value of the product in which it is used.

How many times can he owner of the IP charge for its use in the same system to the same customer?

Qualcomm charges a royalty for every chipset used in the system and another royalty for the use of the same IP as a functionality of the system.

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