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Companies Are Lining Up to Support Apple Against Qualcomm

Apple's (NASDAQ: AAPL) legal battle with Qualcomm (NASDAQ: QCOM) isn't going anywhere anytime soon, even though Qualcomm is confident that the two companies will be able to settle. We already know that the dispute continues to expand, with suppliers now getting caught in the middle and Qualcomm countersuing and seeking an import ban from the International Trade Commission (ITC). Just this week, Qualcomm also sued Apple in Munich and Mannheim over other patents related to energy efficiency, according to FOSS Patents.

Qualcomm expects that the ITC investigation should commence in August and the case should be tried in 2018. The ITC import ban that Qualcomm is requesting only applies to iPhones that carry Intel (NASDAQ: INTC) modems inside. Obviously, Intel's not happy about that.

Qualcomm is only trying to block iPhones with Intel modems. Image source: Apple.

Last competitor standing

Intel has now submitted a Public Interest Statement to the ITC regarding Qualcomm's proceeding. The chip giant notes that it is now Qualcomm's "only remaining competitor in the merchant market for premium LTE baseband processor modems." (Here's the chronological history of Qualcomm pushing rivals out of the market.) There are other lower-end modem manufacturers, so the "premium" distinction is important here.

Intel points out that most of the patents at the heart of Qualcomm's ITC complaint aren't related to modems or cellular technology, yet Qualcomm is seeking to block iPhones with Intel modems in what it calls a "twisted use" of the ITC's process. iPhones with Qualcomm modems may still infringe on the patents in question, but these would be allowed through under Qualcomm's request. In the statement, Intel writes (all emphasis original):

Qualcomm now seeks exclusion of allegedly infringing Apple mobile electronic products that include a modem made by Intel, so that they can be "replace[d]" by allegedly infringing Apple products that "use a Qualcomm brand baseband processor modem," Complainant's Initial Statement on the Public Interest at 4. Thus, Qualcomm did not initiate this investigation to stop the alleged infringement of its patent rights; rather, its complaint is a transparent effort to stave off lawful competition from Qualcomm's only remaining rival. This twisted use of the Commission's process is just the latest in a long line of anticompetitive strategies that Qualcomm has used to quash incipient and potential competitors and avoid competition on the merits. And although those strategies have sometimes been subtle or complex, Qualcomm's latest complaint could not be more blatant in its anticompetitive aims.

Intel continues later in its response:

The Commission should make no mistake: Qualcomm's Complaint attempts to accomplish something quite different from the ordinary vindication of patent rights. Qualcomm's goal is not to exclude supposedly infringing products from the United States. Instead, its primary goal is to exclude Intel modems from the United States, while giving free passage to allegedly infringing Apple products that incorporate a Qualcomm modem. This strategy is especially evident in Qualcomm's assertion of some patents that have nothing to do with Intel's modems -- for example, one on graphics processing that would be infringed (or not infringed) regardless of whether Apple uses an Intel or Qualcomm modem.

Intel argues that this anticompetitive behavior would harm the public interest, and is consistent with Intel's prior experience "as a target of Qualcomm's anticompetitive conduct." Qualcomm's "no license, no chips" policy comes up again here, and Intel illustrates how powerful it is:

The success of [the "no license, no chips"] policy turns on Qualcomm's powerful leverage as an incumbent chipset monopolist. Ordinarily, a prospective patent licensee that disagrees with a licensor's demands could resort to the courts or another neutral arbiter on questions of infringement, validity, and technical merit justifying a royalty rate -- or negotiate a reasonable royalty by credibly threatening such litigation. But Qualcomm's customers have no such recourse because Qualcomm answers any opposition with threats to disrupt the OEM's supply of Qualcomm modems.

...

Because technical and supply constraints prevent OEMs from completely abandoning Qualcomm, they must acquiesce in Qualcomm's license terms, lest they find themselves unable to make their products.

Qualcomm does not license its standards-essential patents (SEPs), despite its commitments to do so, according to Intel. The exclusivity that Qualcomm has extracted from Apple has directly harmed Intel, which has been trying to win modem business from the Cupertino company for years. As other licensees now emerge to also challenge Qualcomm, Intel notes, "Apple's decision to resist Qualcomm's anticompetitive behavior is the leading edge of a growing resistance to Qualcomm and its interlocking web of abusive practices -- as reflected in the significant public and private legal scrutiny that those practices are drawing."

If Qualcomm were to successfully exclude non-Qualcomm modems, it would send a "strong signal" to other licensees not to mess with Qualcomm, and Qualcomm would maintain its monopoly power. That could also affect how cellular carriers react, and carrier collaboration is critical to modem development; modem vendors and smartphone manufacturers like Apple optimize modems for carrier networks, which requires a lot of cooperation from everyone involved. If Intel modems get blocked, carriers have less incentive in working together.

You and what army?

Intel isn't the only one siding with Apple in the ITC case. The Computer & Communications Industry Association (CCIA), an industry trade group that advocates for the tech sector, also filed a Public Interest Statement yesterday opposing Qualcomm. CCIA members include the largest tech companies in the world, many of which have vested interests in the smartphone market: Amazon.com, Facebook, Microsoft, Alphabet subsidiary Google, Samsung, Sprint, and Intel, among others. Neither Apple or Qualcomm are CCIA members.

The CCIA's statement is less detailed, but overall asks the ITC to reject Qualcomm's injunction request. The common theme is that an injunction would only reinforce Qualcomm's anticompetitive conduct and strengthen its grip on the smartphone market, which the CCIA estimates provides 10% of American adults with their primary internet connection. The CCIA also argues that Qualcomm is effectively trying to use the ITC to reinforce its monopoly:

After this contract provision expired, Apple began using Intel baseband processors. Now, Qualcomm seeks to prevent Apple from using non-Qualcomm baseband chips. Effectively, Qualcomm seeks to replace their contractual exclusivity provision with an exclusion order.

Is anyone on Qualcomm's side in this dispute?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Evan Niu, CFA owns shares of Apple and FB. Evan Niu, CFA has the following options: long January 2018 $120 calls on FB. The Motley Fool owns shares of and recommends GOOG, GOOGL, AMZN, Apple, and FB. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.