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How Serious Can A Business Dispute Be?

The Qualcomm vs. Apple case is more than just another lawsuit

16Feb

As far as collaborations can allow for faster strategy execution and significantly contribute to product development and innovation, each party involved in a partnership has their own vision of how to achieve set goals. Often, this difference in views can lead to disagreements and disputes, where strategic deals may break, or worse, lead to legal proceedings.

Amongst recent scandals is a dispute between Apple and Qualcomm. Here the former filed a lawsuit against the chip maker, claiming that Qualcomm had been overcharging licensing fees for their products, adding: 'Qualcomm used their 'monopolist power' to flout FRAND (fair, reasonable and non-discriminatory) patent commitments by charging hefty royalty rates on standard-essential patents relating to CDMA standards.’ Apple is now seeking $1 billion in damages, but they are fighting back, with Qualcomm's CEO Steve Mollenkopf claiming: 'They want to pay less than 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.'

Patent licensing fees are common when it comes to technologies with high commercial potential, where tech giants (Apple included) register hundreds of utilities annually to protect the exclusivity of their products and features to drive revenue. There are two types of patents - standard-essential patents (SEP) and non-SEP's, knowing the difference between them is critical.

Non-SEPs are things like the 'slide to unlock' feature, which is used on Apple devices. What makes the feature a non-SEP is the fact that it is not essential for the functionality of other manufacturers' devices, where competitors can design alternative solutions, without infringing the patent. So consequently, if someone were to use 'slide to unlock' outside Apple without purchasing the relevant licensing from the company, they would violate IP law.

With SEP's the situation is less straightforward. Under an SEP, for inventions to be used, they must comply with a certain technical standard. Considering that it's prohibited to design generic versions of inventions without following the standard, standard agencies like the Standard Setting Organization (SSO) often require companies holding SEP patents to grant licenses to these patents. If this happens, the SEP holders must ensure that licences are granted on fair, reasonable, and non-discriminatory (FRAND) terms.

So, in the Qualcomm case, the chipmaker makes the profit from selling the actual product (CDMA standard chipsets), but before that, they charge the SEP license fee, which Apple claims to be 'extraordinarily expensive', which violates FRAND principles, and that it's too vague to say whether chipsets are the SEP.

The problem is more complex than determining the right or wrong party, it's the determination of what is 'truly essential' for the industry.

With a handful of tech companies enjoying dominance in the market and the increasing number of patents they register, it's likely that in the future, we may see more disputes like the Apple-Qualcomm case. Technology is constantly evolving and as new products occur, it's inevitable that new standards would need to be set for future innovations. It's no secret that any electronic device consists of multiple components, which are not necessarily invented by the end manufacturer. Aside from signature design features, some of these components are vital for devices' functionality across the entire industry. If tech companies continue to collaborate with each other for the sake of innovation and revenue, FRAND terms must be more specifically defined, there must be a clear definition of essentiality, and it would be useful to review the actual procedure of the licencing fee - otherwise, there will be bloodshed.

In the official Apple v. Qualcomm Lawsuit document issued by the United States District Court, Southern District of California, the allegation section states that: 'Many SSOs expressly declare that they do not test declarations of essentiality or validity for accuracy. For example, the European Telecommunications Standards Institute (ETSI), affirmatively states that it has 'No involvement' in 'the assessment of the validity and essentiality of patents declared as SEP.' So, in some cases, patent holders may start practising 'patent hold-ups'. This leads us to the point where not only Qualcomm, but other major patent holders may request the SEP fee based on the essentiality of their inventions, whilst it's hard to prove 'the level of essentiality' under which the licensing fee originates.

If the issue is not tackled by relevant neutral bodies or authorities, confusion on that matter is likely to worsen in the future. Moreover, the victims of such gaps in the IP legislation won't be companies who own patents or those who pay licensing fees, but customers.

During the R&D stage, if expenses for the product development increase based on the increased percentage paid as a licensing fee, in the end, the price tag may skyrocket too. Consequently, consumers will face another price hike for already expensive devices, with the further possibility that sales of these devices would fall due to their unaffordability.

So, instead of having another lawsuit between multi-billion dollar companies, we may see a set of complex problems that cannot be tackled by a single court ruling. A monopoly among service and product manufacturers is not a healthy phenomenon as in the business world, competition is a vital component which keeps the engine humming and free from corruption. So, as much as many want to have a reliable provider of essential goods, once someone becomes one, it is difficult for the monopolist to distribute essential products on fair terms, because foremost, any product is a revenue generator.

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