The FTC v. Qualcomm trial in San Jose just ended about three weeks ago, and we're already approaching the Apple & contract manufacturers v. Qualcomm trial in San Diego. On Saturday, Apple, its four contract manufacturers (Foxconn, Pegatron, Wistron, Compal) and Qualcomm filed a joint pretrial brief on disputed contract provisions. The 76-page document serves as a preview of various issues. There are so many issues that I wouldn't even know where to begin if one of them didn't stand out because it's
extraordinarily absurd and
one of the best examples of hidden costs that we--the consumers--don't know about until they surface in litigation. But whether or not we know about them, we're the ones to foot the bill at the end of the day.
Qualcomm wants a 5% patent royalty (with a $400 cap for the royalty base) on smartphones. 3.25% of that relates to standard-essential patents, though I haven't seen Qualcomm successfully enforce even one of those SEPs in all those years. The related dollar amount will be illusory the moment its wireless SEPs must be licensed at the chipset level. Another 1.75% relates to non-standard-essential patents, and after almost two years of non-SEP infringement litigaton against Apple, Qualcomm has no real leverage. News cycles aren't leverage.
So there's a problem with what they charge, but until I read this pretrial brief, I was unaware of there being another problem with the wide net they cast when actually collecting their royalties.
Apple and its contract manufacturers complain that when Qualcomm performs audits, it insists on getting its 5% on whatever Apple pays to a company like Foxconn: not only the device, but also any services, including repairs. I'll use Foxconn as the example here because I've been able to find articles on its iPhone repair capacity. Quite often, devices are repaired right at an Apple Store (such as an iPhone 7 Plus I took there a few months ago to get a new screen and battery). In that case, Qualcomm probably can't charge patent royalties because it doesn't have a direct agreement with Apple. But some devices are sent to China to be repaired there at a lower cost. And in that case, Qualcomm collects 5% of whatever a company like Foxconn charges Apple (click on the image to enlarge; this post continues below the image with the related text passage and further commentary):
Here's the text again:
"For example, assume Apple paid a [contract manufacturer like Foxconn] an extra $20 per iPhone to repair it should it break, or an extra $10 per phone to disassemble it for recycling at the end of its life. While these would be collateral transactions 'related to' the phone sale, they would not constitute 'consideration … for each Subscriber Unit'—the extra charges would be consideration for repair or recycling services that are not royalty bearing under the [Subscriber User License Agreement] definition of 'Selling Price.' Yet, Qualcomm would charge a royalty on these transactions notwithstanding that they are unrelated to Qualcomm's patents." (emphases added)
The last point--"unrelated to Qualcomm's patents"--is the issue here:
If Qualcomm held one or more patents on a machine used by Foxconn when repairing iPhones, and if the agreement between them and Foxconn was about revenue-sharing instead of a per-machine license fee, then it would be OK. There might be an argument then about whether those patents are valid or actually infringed, but at least the patents would be logically connected to a repair service.
In this case, however, we're talking about wireless communications patents, general circuitry patents, and software patents. None of that justifies another patent license fee only because a broken device is repaired.
If you repaired iPhones and an average patent troll tried to shake you down, arguing that you owe him a royalty on your income from repair services even though his patents are entirely unrelated to the activity of repairing those devices, you would decline to pay. If the troll insisted, you'd ask him which part of "no" he doesn't understand or, if all else fails, some might even flip him the bird. But you definitely wouldn't pay up!
So how can Qualcomm get away with this (and some other things)? How can they impose such contract terms when they actually have a FRAND (fair, reasonable and non-discriminatory) licensing obligation with respect to their SEPs, meaning that all terms must be FRAND, not just one or two?
They've clearly been extremely effective at leveraging their patents and their chipset business. As the example of a $1 royalty on a $20 iPhone repair shows, "extremely effective" is a euphemism for the situation. Qualcomm's leverage has created an absurd situations, and both the FTC lawsuit in San Jose and the San Diego action by Apple and its contract manufacturers are key parts of what's needed to fix the problem. It will presumably take more than those two cases, but in the short term those lawsuits are most likely to help--not just in the sense of helping those companies, but the industry at large, and consumers.
Finally, here's the long document:
19-02-16 Apple-Qualcomm Joi... by on Scribd
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