The international legal battle between Qualcomm and Apple has escalated dramatically in the past few days, with Qualcomm seeking to secure a ban on iPhone imports into the US, according to a Bloomberg report. Qualcomm is preparing to ask the International Trade Commission, a quasi-judicial agency in Washington, D.C., to block iPhone shipments from Asia into the US. The popular smartphones are considered imports in spite of the fact that Apple is headquartered in California because they are largely assembled in China.
The move is in apparent retaliation for Apple’s recent decision to effectively stop paying billions of dollars in royalty payments to the San Diego-based chipmaker, which Reuters reported on Friday. Apple’s announcement forced Qualcomm to slash its quarterly profit and revenue forecasts, and encouraged it to hit back aggressively. As a result of Apple’s decision, Qualcomm has lowered its fiscal third-quarter guidance to between $4.8 billion to $5.6 billion, down $500 million from $5.3 billion to $6.1 billion.
“They have to do something,” said Kevin Cassidy, an analyst at Stifel Nicolaus, to Bloomberg. “The bigger risk is other companies or countries say we’re not going to pay, too. That’s the danger of letting Apple get away with this.”
Apple CEO Tim Cook gave the rationale for his decision to withhold royalty payments during Tuesday’s conference call with analysts: “You can’t pay something when there’s a dispute about the amount–you don’t know how much to pay,” Cook said. “I don’t believe anyone is going to decide to enjoin the iPhone based on that,” he also noted, referring to the possibility that Qualcomm might seek to have iPhone sales blocked. “I think that there’s plenty of case law around that subject, but we shall see.”
If successful, Qualcomm’s ITC appeal would have devastating consequences for Apple whose largest market is the US and primary profit driver is the iPhone. In the second quarter of fiscal 2017, the Americas generated $21.2 billion in revenue for Apple, with much of that sum likely coming from the US. 60 percent of Apple’s sales come from the iPhone.
The ongoing dispute began when Apple launched lawsuits against Qualcomm in January in both US and UK courts, accusing it of running an unfair licensing model that overcharges for chips. Toward the end of January, Apple also opened a lawsuit against the chipmaker in Beijing’s intellectual property court for $145 million, making similar accusations about Qualcomm’s business model.
Qualcomm is the largest maker of smartphone chips and holds patents covering modem chips that are necessary to connect phones to networks. Whereas the iPhone 7 relies on a combination of Intel and Qualcomm chipsets, Apple relied exclusively on Qualcomm to supply that component for past iPhone models.
Under Qualcomm’s licensing structure, Apple pays royalties to its contract manufacturers that build the iPhone, who in turn, owe licensing fees to Qualcomm. Apple has unsuccessfully tried to negotiate a direct licensing agreement with Qualcomm for years. Qualcomm accuses Apple of trying to weasel its way out of paying what it has agreed to. Earlier this year, Qualcomm CEO Steve Mollenkompf argued that his company was charging a “fair value” for its valuable intellectual property.
“Apple’s complaint contains a lot of assertions, but in the end, this is a commercial dispute over the price of intellectual property,” Mollenkopf said, according to CNET. “They want to pay less for the fair value that Qualcomm has established in the marketplace for our technology, even though Apple has generated billions in profits from using that technology.”
Qualcomm eventually countersued Apple last month, accusing the iPhone maker of interfering with its agreements with companies like Foxconn that build iPhones and iPads.
Qualcomm’s spat with Apple has hurt its highly lucrative licensing business, and the chipmaker’s shares have fallen 16 percent since the beginning of this year. On top of that, Qualcomm has been under antitrust investigations led by regulators in the US, EU, and South Korea. However, the latest development in the ongoing legal battle between Qualcomm and Apple did not have a significant impact on the stock prices of either company, according to CNBC.