Qualcomm vs. Apple – Pressure cooker

Chinese injunction will increase pressure on Apple.

• Qualcomm has won a good victory in China with an injunction on the sale of a good number of Apple’s products which will serve to increase pressure on Apple to negotiate with its foe.
• The Fuzhou Intermediate People’s Court has issued a preliminary injunction against the sale of the iPhone 6S, 6S+, 7, 7+,8,8+ and the X in China which it deems to be infringing two user experience-based patents related to photos and managing apps using touch.
• The injunction is effective immediately, but Apple has already filed a request for reconsideration which is likely to hold up the implementation of the injunction.
• Consequently, this injunction is unlikely to affect Apple’s financial performance for the next couple of quarters but what it will do is increase the pressure on Apple to negotiate which is what I think Qualcomm really wants.
• Apple has obviously cast doubts over the validity of this injunction, but I find that its comments do not make sense.
• This is particularly relevant to Apple’s claim that the injunction does not affect devices that are running iOS 12.
• The patents that Qualcomm has asserted are not standard essential patents (SEPs) but are implementation patents.
• SEPs are very powerful because they make up part of a technology standard (such as 4G) and if that technology is in the device then it is almost certain to infringe the SEP in question and there will be no workaround possible.
• However, in order to be part of the standard one must agree to make fair, reasonable and non-discriminatory (FRAND) licensing terms available to everyone and one should not seek injunctions.
• Implementation patents can be worked around and as a result, there is no requirement to licence patents, no limit to the chargeable price and one may seek injunctive relief.
• I am sure that this is why Qualcomm chose to assert these user experience patents in particular as they are not SEPs and therefore there are no restrictions to the remedies that can be sought.
• Furthermore, I am also pretty certain that these patents are also being infringed in iOS12 contrary to Apple’s claims.
• This is for two reasons:
  • First, simple workaround: If Qualcomm’s patents were not infringed in iOS 12 like Apple is claiming, then this injunction would be completely useless.
  • This is because it would be a relatively trivial matter to ensure that all of Apple’s older products ship with iOS 12 rather than older versions.
  • This would, in effect, be a perfect workaround.
  • The fact that Apple is relying on the tortuous legal process to get around this injunction rather than this simple fix strongly implies that Apple’s claim is false.
  • Second, Xs, Max, XR infringe: I suspect that the reason that the Xs, Xmax and XR are not part of this injunction has nothing to do with iOS 12 and everything to do with the timing of the complaint that Qualcomm made.
  • Qualcomm would have filed this complaint long before the Xs, Xmax and XR were shipping in the market and it is not possible to file a complaint against products that have not been launched and are shipping.
  • This is because Qualcomm would not have had the opportunity to take the devices to pieces, check for infringement and provide evidence to the court.
  • Hence, I suspect that Qualcomm will now update its complaint to include these devices which given the current injunction, I would expect it to be granted in time.
• The net result is that while this will have no immediate effect on Apple’s financial performance, it increases pressure on Apple to negotiate.
• China is a big market for Apple and it cannot afford to have its products banned from shipping into this market.
• These sorts of disputes typically play out as a series of smaller skirmishes where each side wins one or two victories.
• These victories have no real impact other than to affect the willingness of each side to negotiate.
• At some point, an event will occur (probably non-public) that will materially bring the two parties closer together and a deal will be done very quickly.
• It could happen at any time and so it is just a question of waiting for the press release to be issued and then digging through the changes in expectations to deduce what has been agreed.
• Apple has the upper hand as it can wait for much longer than Qualcomm can, but I think this event in China tips the balance back in Qualcomm’s favour.
• Qualcomm’s shares have sold off pretty hard this year and this uncertainty is likely to keep a lid on a recovery.
• However, for anyone willing to take the risk of the legal uncertainty, the shares are a bargain.