Friday, February 22, 2019

Qualcomm demands an extra $1.3 billion from Foxconn, Pegatron, Wistron: exorbitant late "processing" charge

Qualcomm's collection of a 5% patent royalty on iPhone repairs performed by Foxconn is not the only absurdity that Apple, its contract manufacturers and Qualcomm's joint pretrial brief revealed last week. How about a potentially record-setting administrative charge of more than $1.3 billion for the "processing and handling" of late payments?

You can find the PDF in the previous post (which I just linked to). Here's a passage related to the late "processing" charge:

"Qualcomm agreed these late charges were 'administrative' to 'defray' 'costs in processing and handling.' Thus, the intent and scope of the provision expressly excludes compensating for any time-value of money and disclaims using fees to encourage (or coerce) timely performance.

"Yet Qualcomm has demanded that Foxconn, Pegatron, and Wistron pay $1.3 billion in late charges, a number disconnected from any 'processing and handling' expense Qualcomm could have incurred (much less foreseen) as a result of any possible late payment. Qualcomm's late 'processing' charge--1.5%/month of any disputed amount, compounding--increases dramatically with the amount of the tardy payment and with the passage of time." (emphasis in original)

On the same page, attorneys for Apple and its contract manufacturers argue that "[t]his is an illegal, unenforceable liquidated damages penalty barred by Cal. Civ. Code § 1671(b)." (again, emphasis in original)

What Qualcomm is charging here is colloquially called "interest on interest" related to the contract manufacturer's cessation of royalty payments on the products they make for Apple in the spring of 2017. We know Qualcomm recently claimed that $7 billion in royalties that Qualcomm wants have not been paid. Apple and its contract manufacturers claim that they actually overpaid in the past because Qualcomm extracted supra-FRAND royalties. But even if we assumed, just for the sake of the argument, that Qualcomm had indeed been owed another $7 billion since the spring of 2017, a $1.3 billion surcharge on a $7 billion amount is huge. It's almost 20% of the amount allegedly owed!

It's obviously not the kind of amount that Qualcomm could realistically claim it incurred in administrative costs. Processing a few royalty payments that come in late is not a lot of work. If that truly resulted in a billion-dollar cost, Qualcomm would be the most expensive bureaucracy in the world, and couldn't exist because, in that case, any employee's travel expense report would also cost a billion or so to process.

The effect of "interest on interest" is huge if new interest is added every month. And if this dispute, including appeals, took several more years, then the ultimate claim on that basis would dwarf the current demand of more than $1.3 billion.

Including the potential of treble damages, the Apple & contract manufacturers v. Qualcomm trial will roughly be about either side seeking approximately $30 billion from the other, the differential between the two extreme scenarios therefore being on the order of $60 billion. That's the proverbial high-stakes trial, and relative to that amount, the $1.3 billion late "processing and handling" charge is just a limited part of the overall dispute. However, just like those patent royalties charged on iPhone repairs (which probably represent a very small amount of the overall royalty demand), it's the utter unreasonableness of the underlying "logic" that is so striking here.

The biggest problem with that unreasonableness is not that Qualcomm wants this. The problem is that Qualcomm has been able to impose contract terms that it can interpret that way in the first place. Those terms are very unusual, and that's also what we heard last month at the FTC v. Qualcomm antitrust trial.

Of course, Qualcomm can and does pay expert witnesses who testify that such terms and conditions are simply a "market outcome" and claim that their "you can't argue with success" logic is stronger than what, for an example, Professor Carl Shapiro (Berkeley) told us about bargaining power and the normal splitting of gains from engaging in a transaction. But when some contract terms are so far out of the ordinary in business, something must have gone terribly wrong. Better late than never to fix the issue.

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