Apple’s Massive Fight with Qualcomm Has Become Personal

Apple and Qualcomm are preparing to square off in the courtroom again today in what is shaping up to be the corporate legal battle of the century — one that The Financial Times is describing as among “the biggest U.S. corporate lawsuits” in history, with as much as $30 billion expected to be at stake.

As the relationship between the two tech giants has continued to sour, a new report in The Wall Street Journal (full article available via Apple News+) provides some interesting insight into how things got to this point, revealing that it’s now become as much a personal conflict between the two rival CEOs — Apple’s Tim Cook and Qualcomm’s Steve Mollenkopf — as anything else.

While the two companies have bickered over royalties for the past two years, with Apple calling Qualcomm’s fees excessive, monopolistic, and unfair, recent reports have suggested that royalties may only be on the surface of a deeper divide between the two companies, which appears to have been originally fuelled by Qualcomm’s belief that Apple has stolen and leaked its trade secrets to competitors such as Intel.

According to the Journal, both CEOs have continued to dig their heels in as the dispute has continued to escalate between the two companies, and have had difficulty resolving issues even at in-person meetings — when the two met last year at Apple’s headquarters, Qualcomm CEO Steve Mollenkopf initially refused to speak with Tim Cook at all, communicating only through his company’s general counsel.

In addition to Mollenkopf’s repeated accusations of Apple’s theft of Qualcomm’s intellectual property, the Qualcomm chief executive also suspects that Apple was behind Broadcom’s attempt at the hostile takeover of Qualcomm last year, a storm that Qualcomm survived, but not without incurring the wrath of many of its shareholders, a situation for which Mollenkopf appears to hold Cook personally responsible.

Cook and Mollenkopf are so entrenched in their competing positions — and have so little personal connection — that Apple’s top executives have said they don’t think it’s possible to cut a deal with Qualcomm while Mr. Mollenkopf is CEO, a person familiar with their thinking said. “It’s personal. I don’t see anybody who can bridge this gap,” this person said.

The Wall Street Journal

While sources on both sides are saying that the lines of communication are technically open between the two CEOs, they’re basically being unused as neither of them are ready to budge on their radically different positions. In fact, at the Journal notes, Apple CEO Tim Cook has been reticent about Qualcomm’s terms even since his days as Apple’s Chief Operating Officer under then-CEO Steve Jobs.

Jobs had a cordial business relationship with Qualcomm’s then-CEO, Paul Jacobs, and reportedly believed that companies should be “fairly compensated for their innovations.” When the original iPhone was launched in 2007, which pretty much required Qualcomm’s patented technology, Jobs and Jacobs worked out an agreement that would see Qualcomm receive $7.50 for each iPhone sold at a time when most other cellphone manufacturers were paying $12 to $20 per device.

According to court transcripts, however, Cook, as Apple’s COO at the time, was reportedly “baffled” by Qualcomm’s terms, and felt that Qualcomm didn’t deserve “such a big share” and had proposed paying only $1.50 per iPhone. When Cook took over as CEO in 2011, sources say that he found it “egregious” that Apple was paying Qualcomm “more than every other iPhone licensee combined.” However, due to a prior agreement that saw Qualcomm making $1 billion annual “incentive payments” to be the exclusive provider of modem chips — money that would have to be paid back if Apple added another chip supplier — Cook and his new COO, Jeff Williams, noted that they both felt trapped into using Qualcomm as an exclusive modem provider. “We had a gun to our head,” Williams is cited as saying during recent court testimony.

Of course, Mollenkopf’s perspective was somewhat different, and mentioned that Apple had come to the table asking for the exclusivity deal, promising a surge in chip sales and the competitive advantage of having Qualcomm’s chips in millions of iPhones, and “had requested $1 billion for the privilege.”

When Apple confronted Qualcomm over its licensing practices in 2016 in front of the South Korean Fair Trade Commission, Qualcomm took the “nuclear move” of withholding $1 billion in royalty rebates and incentives owed to Apple under its prior agreement, claiming that the agreement had been violated by Apple’s misleading regulators and its plans to begin using chips from Intel alongside those from Qualcomm, essentially breaching the exclusivity deal that the two companies had signed in 2011.

Apple subsequently cut off royalty payments to Qualcomm in retaliation, filing its own lawsuit against the chip supplier in 2017, to which Qualcomm responded by suing Apple for patent infringement, winning temporary sales bans in China, and Germany, while continuing to also push for a U.S. import ban.

The strategy was similar to one that Qualcomm used to force Nokia into a settlement back in 2008, and sources suggested that Mollenkopf believed that Apple would be more willing to quietly settle with Qualcomm rather than risk exposing Apple’s business practices to the scrutiny of the courts. Instead, however, Cook was doggedly determined to challenge Qualcomm’s business model, and in a rare move sat down personally for a deposition in the case last summer. While Mollenkopf continued to claim the two companies were close to a settlement, Cook has stated several times that the two companies haven’t even been talking since last September, and Apple remains intransigent in the face of pressure from Qualcomm, fighting the company on every front while working to develop its own modem chips.

Comment

This is a huge dispute. The amount of money at stake potentially dwarfs any other intellectual property or antitrust case.

Mark Lemley, law professor at Stanford University, via The Financial Times

The two tech giants will begin their latest battle in a San Diego courtroom today, with Tim Cook expected to give testimony as part of a four-week trial in Apple’s lawsuit against Qualcomm, where it’s asking for up to $27 billion in damages as repayment of overcharged royalties. Meanwhile, in a countersuit, Qualcomm is denying Apple’s allegations and seeking $7 billion in back-payments from Apple and billions in additional damages.