Apple suppliers withhold royalty payments to Qualcomm amid legal spat

Qualcomm in an earnings report released Wednesday revealed a select number of Apple's contract manufacturers are withholding royalty payments as the chipmaker clashes with the Cupertino tech giant over similar issues in federal court.

Noted in the firm's guidance for the coming fiscal quarter, certain unnamed suppliers are underpaying royalties equal to the amounts Qualcomm has not paid Apple as part of the ongoing legal battle. While the exact figure was left unmentioned, Apple in its lawsuit claims Qualcomm decided to withhold nearly $1 billion in licensing rebates after for cooperating with a Korea Fair Trade Commission probe into the chipmaker's business practices.

As contract manufacturers might also withhold payments in the third fiscal quarter of 2017, Qualcomm is widening earnings guidance for the three-month period to account for potential financial headwinds.

From Qualcomm's 8-K filing:

Apple's contract manufacturers reported, but underpaid, royalties in the second quarter of fiscal 2017. However, our revenues were not negatively impacted as the contract manufacturers acknowledged the amounts are due and the underpayment was equal to the amounts that Qualcomm has not paid Apple under our Cooperation Agreement that are currently in dispute. The Cooperation Agreement expired December 31, 2016. It is not clear whether Apple's contract manufacturers will underpay royalties owed under their contracts with us in the third quarter of fiscal 2017, which could have a negative impact on our financial results. Our guidance range for fiscal third quarter EPS is wider than our typical practice primarily due to this uncertainty.

Though Qualcomm does not expect an unduly negative result from supplier withholdings, the company did not calculate an earnings scenario where no payment is made by Apple's contract manufacturers licensing its technology.

Apple in January filed a $1 billion lawsuit against Qualcomm claiming the chipmaker participates in monopolistic practices, price gouging, extortion and other nefarious acts. The suit also alleges Qualcomm flouts FRAND (fair, reasonable and nondiscriminatory) patent commitments to charge customers, including suppliers, exorbitant royalty rates on standard-essential patents. Further, the chipmaker restricts sales to buyers who agreed to license its SEPs, a practice Apple refers to as "double-dipping."

Qualcomm fired back with a countersuit earlier this month, claiming Apple breached contractural agreements. Apple's goal, Qualcomm says, is to pay less than fair market value for access to Qualcomm's standard essential patents.

In addition to breach of contract, Qualcomm alleges Apple interferes with contract manufacturers and wrongly induced regulatory action in a number of jurisdictions. For example, the South Korean probe resulted in a massive $854 million fine.

Apple is also accused of throttling Qualcomm modems used in iPhone 7 models operating on Sprint and Verizon networks, then prevented Qualcomm from revealing mismatched performance metrics compared to iPhone 7 models running competing Intel components. For its part, Apple acknowledges it deactivated certain performance enhancing Qualcomm features, saying the decision was made to achieve parity across its smartphone lineup.

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8 Comments

ericthehalfbee 4489 comments · 13 Years

About 7 years ago

LOL. So now that Apple has exposed Qualcomm's unfair practices, other companies probably feel emboldened to also challenge Qualcomm.

daven 719 comments · 16 Years

Seems fair. Qualcomm withholds $1 billion in rebates so Apple withholds $1 billion in payments. How long do you think this will take to wind its way through the courts? 10 years? 15 years?

sergioz 338 comments · 12 Years

daven said:

Seems fair. Qualcomm withholds $1 billion in rebates so Apple withholds $1 billion in payments. How long do you think this will take to wind its way through the courts? 10 years? 15 years?

It won't matter when Apple places order with Intel instead of Qualcomm

carnegie 1082 comments · 10 Years

ericthehalfbee said:

LOL. So now that Apple has exposed Qualcomm's unfair practices, other companies probably feel emboldened to also challenge Qualcomm.

What you suggest is likely to be to true to some extent. But, speaking practically, in this case it is Apple that is 'underpaying' royalties to Qualcomm. The contract manufacturers are likely doing this at Apple's direction. Many of the costs of producing, e.g., iPhones are paid through Apple's contract manufacturers, not directly from Apple to the various suppliers. If you look at Foxconn's financial reporting, the revenues that it (effectively) reports from Apple amount to far more than what it effectively charges Apple for the manufacturing services that it provides. The cost and supply of various components may be negotiated and arranged (with third parties) by Apple, but some of them are paid for by Foxconn. In turn, Apple pays Foxconn enough to cover those costs as well as what amounts to the net revenue that Foxconn gets for manufacturing Apple's products.

At this point Apple apparently feels confident enough in its ability to get supply of certain modems that it needs that it's no longer willing to let Qualcomm extort (as Apple sees it) improperly high licensing royalties from it. If Qualcomm isn't going to pay it the rebates it thinks it is due (or should be due), Apple is only going to pay Qualcomm the portion of the royalties which it thinks is proper. Qualcomm can't stop Apple (or, technically, its contract manufacturers) from using modems from other suppliers which make use of Qualcomm's SEPs and, to the extent Apple still needs certain modems to be supplied by Qualcomm, it's seemingly not worried that Qualcomm will stop supplying those. What Apple should be paying Qualcomm in royalties will eventually either be agreed upon by Qualcomm and Apple or it will be settled by arbitrators or courts. In the meantime, Qualcomm isn't likely to be able to get Apple's use of those components (which incorporate Qualcomm's SEPs) halted. It seems that, from Apple's perspective, Qualcomm no longer has the leverage which it previously had and which, again from Apple's perspective, it had been using improperly.

Apple is in effect saying: Yeah, you used to have us over a barrel and we had little choice but to let you take advantage. But circumstances have changed and this is how things are gonna be now. What are you gonna do about it? There isn't much you can do about it that won't hurt you more than it will hurt us.

sergioz said:

daven said:

Seems fair. Qualcomm withholds $1 billion in rebates so Apple withholds $1 billion in payments. How long do you think this will take to wind its way through the courts? 10 years? 15 years?

It won't matter when Apple places order with Intel instead of Qualcomm

Qualcomm will still, rightfully, get royalties for its (boatloads of) SEPs. But, yeah, Qualcomm doesn't have the leverage it once did so it likely won't be collecting (what Apple considers) unfairly large royalties going forward.