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Qualcomm Braces for Legal Battle with US Antitrust Regulator

Supriyo Bose

It appears that there is no respite for QUALCOMM Incorporated QCOM from legal battles related to its businesses. After a prolonged courtroom saga with Apple Inc. AAPL for patent infringement issues, Qualcomm is now bracing itself for the U.S. Federal Trade Commission's antitrust case for monopolistic trade practices. The California courtroom trial is likely to have a cascading effect on the smartphone industry across the globe and has attracted massive interest from all stakeholders, including Apple.

In its appeal before the U.S. District Judge Lucy Koh, the government pleaded that Qualcomm used anti-competitive policies to drive sales of its smartphone chips. It alleged that Qualcomm followed “no license, no chips” trade policy, under which chips were only sold to those manufacturers that agreed to inflated patent licensing terms. The government agency further accused Qualcomm of using unfair trade practices and allegedly offering financial rebates to the iPhone maker for buying chips only from it, undermining competitive offers from rival Intel Corporation INTC.

Refuting all the charges, Qualcomm pointed out that its licensing business was started decades ago before it began selling chips. The company stressed that it assumed technology leadership through continued R&D efforts and hard bargaining with smartphone manufacturers throughout the world. Moreover, the licensing rates were mostly kept unchanged once it started selling chips and had been market driven, contrary to the allegations.

Despite the claims and counter claims, the unwanted scrutiny by the antitrust regulators of the licensing business, from which it garners a huge profit, is likely to affect its credentials. The outcome of the trial will have a ripple effect on any settlement discussions between Qualcomm and Apple. Furthermore, Qualcomm’s business practices are also being investigated by regulators in several other countries like South Korea, China, Taiwan and Europe, allegedly instigated by Apple.

Qualcomm has been entangled in a bitter legal battle with Apple for quite some time now, related to alleged patent infringements. In this context, it is worth noting that Qualcomm recently posted the required security bonds in the District Court of Munich to enforce ban on some iPhone models of Apple in Germany. This was preceded by some favorable verdicts from across the globe. In early December, the Fuzhou Intermediate People's Court in China held Apple guilty of twin patent infringement and ordered an immediate ban on sales of older iPhone models, from the 6S through the X in the country (read more: Qualcomm Wins Twin Patent Battle in China Against Apple). A few days later, the District Court of Munich held Apple guilty of patent infringement and ordered a permanent injunction to the sale of some iPhone models in Germany.

The infringed models were found to violate Qualcomm's intellectual property rights for power savings in smartphones. The bone of contention was a third-party violation of Qualcomm's patents around envelope tracking — a feature that helps phones preserve battery while sending and receiving wireless transmissions. Apple has allegedly used products from Qorvo, Inc. QRVO to bypass the patent in some of its iPhone models.

It remains to be seen how the verdict in the California trial pans out for Qualcomm now, as it could redefine the sector dynamics and affect its business model.

This Zacks Rank #1 (Strong Buy) stock has outperformed the industry in the past six months with an average decline of 2.5% compared with a fall of 6.1% for the latter. You can see the complete list of today’s Zacks #1 Rank stocks here.

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