Qualcomm Inc (QCOM)

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Qualcomm Fighting Legal Challenges On Several Fronts
Tuesday November 8, 7:00 pm ET
Mike Angell

http://biz.yahoo.com/ibd/051108/tech01.html?.v=1

Besides its engineers, Qualcomm's busiest employees these days are its lawyers.
The wireless chipmaker, which owns a large number of patents used in cell phone technology, is fighting legal battles on several fronts. Six other wireless companies have asked European Union regulators to investigate Qualcomm (NasdaqNM:QCOM - News) for unfair competition. And Qualcomm itself filed suit against one complainant, Nokia (NYSE:NOK - News), for patent infringement.

It doesn't end there. Qualcomm also faces an antitrust suit, as well as various patent infringement suits, brought by rival chipmaker Broadcom (NasdaqNM:BRCM - News) -- also one of the complainants to the EU -- earlier this summer. Qualcomm has responded with its own suits against Broadcom.

"It's been a hectic couple of weeks," said Qualcomm's general counsel Lou Lupin.

Thanks to its patent portfolio, Qualcomm is the most profitable company in the highly competitive wireless tech industry. Rivals say that profit has been driven by unfair business practices.

Qualcomm says its deals with the industry are above board. And it expects to prevail in its legal battles.

Most analysts agree, citing Qualcomm's past success in defeating such suits. "I can't see any of these claims progressing much further," said American Technology Research analyst Albert Lin. "Shareholders don't want to see these players ruin each other."

In October, Nokia, Broadcom, Ericsson (NasdaqNM:ERICY - News), Texas Instruments (NYSE:TXN - News), NEC (NasdaqNM:NIPNY - News) and Panasonic's cell phone unit asked the European Commission, the continent's regulators, to investigate Qualcomm for anti-competitive practices -- especially in the arena of new third-generation, or 3G, phones.

Qualcomm, however, says it has not seen the complaint or received any notice from the commission.

At its recent analysts meeting, Qualcomm pointed to 3G phone price drops as a sign that the market is competitive.

A Broadcom spokesman says the issues it brought before the commission are similar to its earlier anti-trust suit. That suit, filed in New Jersey district court, is still in the early stage of pleadings.

Essentially, Broadcom accuses Qualcomm of not being fair in licensing its patents on CDMA technology to competitors. CDMA, or code division multiple access, generates most of Qualcomm's revenue.

Broadcom accuses Qualcomm of reducing royalty payments to customers who buy Qualcomm's wireless chips. The price of Qualcomm's chips get deducted from the amount customers have to pay in royalties, Broadcom alleges.

Such incentives do exist, says Qualcomm's Lupin. But they're limited to certain countries and are not widely used in 3G phones, he says.

Broadcom and others also complain that Qualcomm charges too much for its patents -- especially since CDMA is only a part of 3G technology.

When a company licenses the CDMA patent portfolio from Qualcomm, the company pays one price whether they use just one patent or a hundred to build their product.

While a CDMA-only phone would use nearly all of Qualcomm's patents, 3G phones use patents from many other companies.

To that end, Qualcomm's royalty rates should be lowered, other wireless firms argue.

That reasoning makes sense, Lin says, though he doesn't expect Qualcomm to drop their current royalty system. "It's not like in the early days of CDMA, when they had all the patents," Lin said. "But it still feels like they have all the intellectual property considering the rates they charge."

Lupin notes that while other companies have contributed patents to the 3G standard, Qualcomm's patents are still essential to making the whole thing work. "The enabler of 3G is our technology," he said.

Qualcomm successfully defended itself in similar cases back in the mid-1990s. Given that precedent, it's likely Qualcomm can emerge from its current suits mostly intact, Lin says. "Companies may resent Qualcomm strength, but they have mostly come to live with it," he said.