Wednesday, May 17, 2017

Qualcomm's latest move: breach-of-contract suit against Apple's four contract manufacturers

Two weeks after Bloomberg reported that Qualcomm was preparing an ITC complaint against Apple (i.e., a request for a U.S. import ban), and less than a week after Samsung and Intel supported the FTC, Qualcomm has filed a breach-of-contract complaint in the Southern District of California against Apple's four contract manufacturers: Hon Hai (Foxconn), Pegatron, Wistron, and Compal Electronics (press release, redacted complaint (PDF)).

Today's press release also points to the previous filing of "a separate claim against Apple for its unlawful interference with the license agreements between Qualcomm and these manufacturers." That must be a reference to Count I of Qualcomm's counterclaims against Apple, filed as part of Qualcomm's April 10 answer to Apple's January complaint. While the complaint against contract manufacturers goes into more detail regarding those relationships, Count I of the April counterclaims already brought the same kinds of allegations: that the contract manufacturers were allegedly not meeting their obligations to calculate and pay royalties (with respect to the products they build for Apple) and to enable Qualcomm to audit their royalty statements.

I just noticed that the final paragraph of that Count I of the counterclaims against Apple argues that Qualcomm needs to go after Apple, on the basis of alleged interference, in order to (among other things) "prevent a multiplicity of judicial proceedings." But with today's complaint, the very thing is happening, not prevented. Alternatively, Qualcomm could have moved to amend its counterclaims. I'm wondering whether Qualcomm has somehow modified its litigation strategy since April 10.

Qualcomm's complaint against Apple's contract manufacturers puts injunctive relief front and center, starting with the headline of the complaint. The first prayer for relief asks the United States District Court for the Southern District of California to do the following:

"Enjoin Defendants from violating the terms and conditions of their License Agreements and/or require Defendants specifically to perform the obligations of their License Agreements, including (i) timely making full and complete payments of royalties for any and all sales of Subscriber Units, (ii) providing Qualcomm's auditors all necessary information and assistance to complete their regular audits of Defendants, and (iii) providing royalty reports that accurately state their Subscriber Unit sales information, with such information calculated and reported as required by their License Agreements;"

In my experience, litigants that focus so much on injunctive relief--such as Apple in both of its Samsung cases--are particularly likely to move for a preliminary injunction. But then they have to prove a likelihood to succeed on the merits, irreparable harm, that the balance of the equities favors them, and that it's in the public interest. Irreparable harm--which they also need to establish for a permanent injunction--is something else than reducing a quarterly forecast from $5.3-6.1 billion to $4.8 billion-$5.6 billion, which would have had far more impact on Qualcomm's stock price if the markets thought this was the end of the world. A full-text search over Qualcomm's complaint against Apple's manufacturers shows multiple occurrences of the word "harm," but no allegation of irreparable harm. The closest term to "irreparable harm" that appears in the complaint is "severe, immediate, and permanent harm," and an allegation that Apple seeks "to cause Qualcomm so much harm that Qualcomm will be forced to capitulate to the unfair licensing terms that Apple is demanding." Qualcomm's general counsel, Don Rosenberg, states that allegation in the following way in today's press release:

"As Apple continues to collect billions of dollars from consumer sales of its Qualcomm-enabled products, it is using its market power as the wealthiest company in the world to try to coerce unfair and unreasonable license terms from Qualcomm in its global attack on the company."

This is a common tactic. Pretty much every company facing antitrust charges (in this case, around the globe) tries to portray itself as a victim of undeserved injustice. Google and Samsung's lawyers and long-standing allies also argued that Samsung and Motorola's pursuit of injunctive relief over standard-essential patents (SEPs) against Apple and Microsoft was just a response to those companies' assertions of non-SEPs against them (and other Android device makers). But when companies face regulatory investigations and charges (such as a statement of objections in the EU oder an antitrust complaint in the U.S.) in multiple jurisdictions and their adversaries don't, it's obvious which side has a credibility problem.

Qualcomm's complaint refers to Apple's cash reserves. But Apple's cash reserves are unrelated to the question of (irreparable) harm. There isn't one thing that Qualcomm alleges that Apple can do only because it has (even) more money than Qualcomm. Both companies are highly profitable and have astronomic market capitalizations. Both have billions in the bank (hundreds of billions in Apple's case, but still, Qualcomm has billions and would have even more billions than it does if not for a relatively high dividend yield--more than twice, in terms of percentage of stock price, of Apple's). One doesn't even need to be wealthy to withhold payments in whole or in part (though it obviously makes it easier to deal with litigation costs and risks).

In Apple v. Samsung, one doesn't have to (and I, in many ways, don't) agree with everything Apple does. It collected half a billion dollars in 2015 on a premature basis. But that didn't represent a threat to Samsung. It was (in my view) bad stuff for all sorts of reasons, but it had nothing to do with Apple having (even) more money in the bank than Samsung. The right way to look at those clashes of titans is to ask ourselves whether the precedent that is or may be set will, in similar cases involving different parties, allow a weaker party, with law, facts and policy on its side, to overcome the strong (an adaptation of my favorite ancient quote).

As I wrote when Qualcomm announced the adjustment of its quarterly forecast, it would be unfortunate if this dispute got decided by leverage (no matter who would benefit from that extra leverage) since an entire industry is affected by the underlying problems. A top-notch analyst left the following comment on my LinkedIn profile a few days ago:

"No surprise everyone lines up vs QCOM - [...] The more disclosure we get - long overdue, given economic implications - the better!"

I'm sure this is the way a lot of companies in the industry feel. Neither company should just overcome the other through some kind of power play. The ultimate outcome should benefit not only one company, be it Qualcomm or be it Apple. It should be good for companies of different sizes. For the Samsungs and Huaweis of the world as well as the little guys. Apple is now embroiled in a particularly intense and escalating fight with Qualcomm, and there may be reasons for which they're particularly proactive, though Samsung isn't just sitting by idly. So far, the regulators and Apple haven't taken a position of the kind that benefits only the behemoths and not the midgets. If they ever do, I'll be sure to talk about what's good only for the giants.

I hope (and guess) Apple will help those contract manufacturers to the best of its ability so that they won't end up being held hostage. There is an indication of that in Qualcomm's new complaint: "Apple had instructed Foxconn's legal team to contact Apple's legal team."

In connection with its interference claim against Apple itself, Qualcomm alleges that "Apple has consciously and repeatedly disregarded Qualcomm's independent business relationships with the Contract Manufacturers, and continues to do so." But how "independent" are Qualcomm's business relationships with the likes of Foxconn if Qualcomm enters into rebate agreements with Apple, BlackBerry, and presumably others? Qualcomm itself calls the independence of those relationships into question through the structure of its multi-level dealings.

If the FTC gets its way, Qualcomm will have to extend licenses (on FRAND terms) to chipset makers such as Intel, MediaTek, and a certain Samsung division. In that case, Qualcomm can have perfectly independent business relationships with those companies, and then it won't have to deal with contract manufacturers or device makers at all. So far, Qualcomm doesn't want that at all. Qualcomm is focusing on the problems resulting from its refusal to license chipset makers, while the FTC and its supporters are focusing on what would be a terrific solution for this entire industry.

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