Qualcomm's big patent setback

Olga Kharif
08 Jan 2008

Qualcomm officials had little cause for celebration on New Year's Eve. Late on Dec. 31, a judge in U.S. District Court in California handed down a decision that may crimp Qualcomm (QCOM) sales and force the chipmaker to begin paying royalties to a competitor for the first time.

Judge James Selna ordered Qualcomm to cease marketing chips that, according to an earlier court decision, infringe on patents held by Broadcom (BRCM). As a result, U.S. customers who don't currently use the offending chips won't be able to buy them. Handset makers such as Motorola (MOT) and LG that had bought the semiconductors prior to May 29, when a jury found Qualcomm guilty of infringement, can continue purchases through January, 2009, provided Qualcomm pays royalties to Broadcom. After that date, even existing customers won't be able to get the chips.

Because the decision covers not only chips but also products made from those chips, it's more comprehensive than an earlier injunction, issued by the International Trade Commission (ITC) last year (BusinessWeek.com, 6/08/07), which governed the chips alone, says Lyle Vander Schaaf, partner at law firm Bryan Cave in Washington, D.C. Sanford C. Bernstein analyst Paul Sagawa says the ruling could cost Qualcomm $500 million over time. Qualcomm had indicated during court proceedings that the decision could cost more than $200 million in revenue. Shares of Qualcomm, which had $8.87 billion in sales in fiscal 2007, dipped 2.4%, to $38.39, on Jan. 2, the first day of trading since the decision was made public.

Ripple Effects on Cell-Phone Makers

Qualcomm will release a fresh estimate of the financial impact on Jan. 23, when it reports fiscal first-quarter results. The company will have to account not only for lost sales but also for royalty rates of 4.5% and 6%, respectively, on two of the three patents. Selna gave Qualcomm and Broadcom until Feb. 29 to come to terms over royalties on the third patent.

Cell-phone makers will also feel the impact. Analyst Richard Windsor of Nomura Securities speculates that cell-phone makers Nokia (NOK) and Sony Ericsson could grab market share in the U.S. from LG and Samsung in early 2008 as a result of a transition to noninfringing chips. And many Qualcomm customers could experience delays in releasing new phone designs. 'Motorola is currently reviewing the recent Federal District Court ruling,' Motorola spokeswoman Jennifer Weyrauch-Erickson wrote in an e-mail. She said the company had no further comment.

Mobile-phone service providers may need to make adjustments as well. Verizon Wireless, a joint venture of Verizon Communications (VZ) and Vodafone (VOD), may be insulated because it already has a comprehensive licensing agreement with Broadcom. Sprint Nextel (S) has invested more than $2 billion to upgrade its wireless network related in part to plans to introduce QChat, a type of walkie-talkie service based on Qualcomm technology, in early 2008.

Workaround or More Hassle‾

But QChat infringes on one of Broadcom's patents. Sprint spokesman Matt Sullivan says the company doesn't anticipate 'any delays in Qchat deployment.' He didn't explain why the company is so sanguine. It's possible Sprint expects Qualcomm to come up with what's known as a workaround, a method for replicating the technology in question that doesn't infringe on patents.

Qualcomm claims it has already developed an alternative technology for one of the patents; this workaround will appear in handsets that are due out in the first three months of 2008. But Broadcom could yet contest the workaround. And even if one is approved, it will mean additional certification hassles for carrier and handset customers.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.

Copyright 2000-2008 by The McGraw-Hill Companies Inc. All rights reserved.

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