Legal Diary: Qualcomm Vs. Broadcom

(RTTNews) - Rival chipmakers Qualcomm Inc. (QCOM | Quote | Chart | News | PowerRating) and Broadcom Corp. (BRCM | Quote | Chart | News | PowerRating), which have been firing legal salvos at each other since 2005, are working out a settlement in regards to their respective patent lawsuits.

JPMorgan analyst Ehud Gelblum expects Qualcomm to make a one-time settlement payment to Broadcom, and the two companies to enter a "broad cross-licensing" deal. In a research note, Gelblum wrote that the settlement payment will have "little impact to Qualcomm's future earnings aside from the loss of interest on the cash."

In light of the advanced settlement discussions with Broadcom, Qualcomm, which was scheduled to report its second quarter financial results on April 22, postponed the release of its results until Monday, April 27, 2009.

For the second fiscal quarter, Wall Street analysts have earnings estimate pegged at $0.41 per share and revenue estimate at $2.35 billion. This compares with per share earnings of $0.54 and revenue of $2.60 billion reported for the same period last year.

Qualcomm issued a statement on Wednesday that said:

"The Company is postponing its earnings release and call until Monday, April 27, 2009 due to advanced settlement discussions with Broadcom regarding a global settlement of all disputes between the parties which, if reached, would have an impact on the Company's financial results for the fiscal second quarter. No assurance can be given that the Company and Broadcom will be able to reach agreement on the terms of a global settlement."

In its statement, Qualcomm also said that revenue and operating income for the second quarter of fiscal 2009, excluding the potential impact of the Broadcom agreement, met or exceeded prior guidance. Early this year, the company forecast its second quarter revenues to range between $2.25 billion and $2.45 billion. This compares with revenue of $2.60 billion reported in the second quarter a year before.

Broadcom is not the only company with which Qualcomm has been battling in the Courts.

Last July, Qualcomm settled a high-stakes licensing dispute with the world's largest mobile phone maker, Nokia Corp. (NOK | Quote | Chart | News | PowerRating), with which it had been involved in a legal scuffle since October 2005. According to the settlement, the two companies crafted a 15-year licensing deal that gave Nokia rights to a wide portfolio of Qualcomm's patents. Nokia agreed to make an upfront payment of $2.5 billion to Qualcomm and also withdrew its antitrust complaint against Qualcomm that was pending before the European Commission. Impressed with the settlement, Qualcomm investors pushed the stock up by 23% to as high as $54.51 on July 24, 2008.

For Qualcomm, the CDMA (Code division multiple access) wireless technology that it developed is its badge of honor. The company derives revenue principally from sales of integrated circuit products, and royalties earned from licensing its CDMA technology to other chip makers and cell phone makers, including Samsung, Motorola Inc. (MOT | Quote | Chart | News | PowerRating), LG Electronics, Research In Motion Ltd. (RIMM, RIM.TO), Kyocera and Nokia Corp. (NOK | Quote | Chart | News | PowerRating).

For readers who are new to the legal tussle between Qualcomm and Broadcom, here is a timeline of the legal tiff.

In May of 2005, Broadcom filed a patent infringement suit in the U.S. District Court for the Central District of California alleging that 10 of its patents related to wired and wireless communications and multimedia processing technologies were infringed by Qualcomm.

Broadcom also filed a complaint with the U.S. International Trade Commission, or ITC, alleging that Qualcomm unfairly imported microprocessors and other products that infringed five Broadcom patents. Broadcom also sought a ban on Qualcomm importing into the United States and selling the chips and chipsets as well as products containing them, including telephone handsets.

Then in July 2005, Broadcom filed an antitrust suit against Qualcomm alleging that Qualcomm encouraged standard-setting bodies to incorporate Qualcomm patented technology into cell phone standards by promising to license those patents on fair, reasonable and non-discriminatory terms and failed to meet its commitments.

Broadcom also alleged that Qualcomm was charging discriminatory royalties, collecting double royalties, and was demanding overly broad cross-license rights from its licensees.

Qualcomm hit back the same month - in July 2005, alleging that seven of its patents involving the GSM, GPRS and EDGE cellular standards and certain interoperability standards for Wi-Fi were infringed by Broadcom. The patent dispute continued to heat up, with Qualcomm filing a second lawsuit against Broadcom in October 2005, alleging that Broadcom infringed two Qualcomm patents related to image-compression technology and video encoding and decoding.

The same month, Broadcom, along with five mobile wireless technology companies, including Nokia, Ericsson, Panasonic, NEC, and Texas Instruments, filed complaints with the European Commission alleging that Qualcomm engaged in anticompetitive conduct in the licensing of its patents related to 3G wireless technology and the sale of its chipsets for mobile wireless devices and systems.

In its continuing spat with Broadcom, Qualcomm filed a new suit in March 2006, the third suit against Broadcom, alleging that Broadcom misappropriated trade secrets and infringed Qualcomm's patents relating to the manufacture and sale of Wideband Code Division Multiple Access (WCDMA | Quote | Chart | News | PowerRating) and wireless local area network (LAN | Quote | Chart | News | PowerRating) chipsets.

The next case in the series of legal salvos between the two rival communications chip vendors was Broadcom's allegation that Qualcomm's conduct before industry standard-setting bodies consisted of fraud, breach of contract and unfair competition. The case filed by Broadcom in April 2007 also alleged that Qualcomm improperly concealed its patents and reneged on licensing obligations.

In June 2007, the ITC ruled that certain Qualcomm chips used in cellular phones infringed Broadcom patents, and should be banned from importation into the U.S.

Qualcomm, which was planning to seek a Presidential veto of the ITC ruling, met with disappointment as the U.S. Trade Representative Susan Schwab, on August 6, 2007 declined to disapprove the ITC order, following a 60-day Presidential review process. (The ITC order is usually subject to Presidential review for a period of sixty days).

However, in September of 2007, Qualcomm got a reprieve as the U.S. Court of Appeals agreed to stay a ban on importing certain mobile phones using Qualcomm chips that was ordered by the International Trade Commission.

In May 2007, Qualcomm was ordered to pay $19.6 million in damages to Broadcom by a federal jury in the U.S. District Court in Santa Ana, California, for infringing three Broadcom patents related to video compression, push-to-talk and a technique that enables a handset to simultaneously access data and voice networks. However, in August, Qualcomm was ordered to pay $39.3 million - nearly double the damages awarded earlier, as the jury found that Qualcomm had willfully infringed on three of Broadcom patents.

Qualcomm was on the receiving end even in the patent infringement suit it had filed against Broadcom. On August 7, 2007 a federal court ruled that Qualcomm engaged in aggravated litigation misconduct and standards abuse with respect to two of its patents that relate to digital video technology as it failed to disclose those patents. The court ruled that Qualcomm has thereby waived its rights to enforce all claims of those two patents.

Following a new standard for proving willful infringement, the U.S. District Court for the Southern District of California in mid-October of 2007, overturned the $39.3 million award against Qualcomm. Broadcom, which was given the option to call for a new trial, or drop the charge that Qualcomm infringed its patents deliberately, elected the latter. In November, a federal judge vacated a jury's finding of willfulness in a patent infringement action brought by Broadcom against Qualcomm.

The next to grab the headlines in the legal saga between Qualcomm and Broadcom was the injunction issued by a Federal District Judge James Selna on December 31, 2007 against Qualcomm's continued infringement of three Broadcom patents.

According to the terms of the judgment, Qualcomm is prohibited from making, using, selling, offering for sale and importing the 3G WCDMA and EV-DO chips in its "Enhanced Multimedia" and "Convergence" platforms, and from developing new WCDMA and EV-DO chips that use Broadcom's patented video processing chip architecture.

However, the ruling allowed Qualcomm to continue to sell chips infringing the Broadcom patents until January 31, 2009 to existing customers only, provided that Qualcomm paid Broadcom a royalty of 6% of all revenues that Qualcomm received and receives for sales of infringing EV-DO chips during the period from May 29, 2007 till January 31, 2009.

In complying with a federal court order that prohibited Qualcomm from selling its chipsets for third-generation WCDMA phones, which infringed a Broadcom patent, Qualcomm in early January 2008, launched its new UMTS (universal mobile telecommunications system) chipsets as workaround chips.

Meanwhile, Qualcomm suffered another legal setback in March 2008, when a federal appeals court upheld Judge James Selna's injunction issued in December of 2007.

The following months brought a mix of good and bad news for Qualcomm. A month after Qualcomm ironed out its dispute with Nokia, it was found to be violating the 2007 injunction issued by Judge James Selna, in addition to failing to pay royalties to Broadcom on QChat walkie-talkie products that were infringed. On August 28, 2008, the court ordered Qualcomm to pay the gross profits it earned on its infringing QChat products to Broadcom. Qualcomm was also ordered to pay attorney fees to Broadcom.

Meanwhile on September 24, 2008, Qualcomm received yet other blow when a federal appeals court upheld a unanimous jury verdict that Qualcomm's cellular chips and software infringed two Broadcom patents, and upheld the injunction entered by the district court on those two patents. The appeals court also rejected Qualcomm's request for a new trial. The court ruled that a third patent was invalid.

On the strength of a couple of legal wins against its arch-nemesis, Broadcom filed a new lawsuit on October 8, 2008 alleging that Qualcomm's patents and patent licenses are unenforceable. Broadcom also sought to declare that Qualcomm's sales and licensing practices amounted to patent misuse. According to Broadcom, Qualcomm patents are "exhausted", resulting in double recovery of royalties to Qualcomm. Nokia had also leveled such an allegation against Qualcomm but failed in that lawsuit.

Qualcomm, which has been receiving "guilty" verdicts very often in the legal squabble with Broadcom, had some news to cheer up shareholders last October. A federal appeals court on October 14, 2008 vacated a finding by the ITC that Qualcomm induced infringement of a Broadcom patent related to a battery-saving feature.

However, the following month - on November 18, 2008, Qualcomm was again held in contempt of the 2007 injunction that was designed to prevent Qualcomm from continued infringement of two Broadcom patents.

In December 2008, the United States Court of Appeals for the Federal Circuit upheld Qualcomm's liability for failing to disclose its patents related to video compression technology.

Qualcomm appears to have started the year 2009 on a positive note as far as its legal tiff with Broadcom is concerned.

On March 16, 2009, the U.S. District Court for the Southern District of California dismissed Broadcom's suit filed last October, which had sought to declare that Qualcomm's patents and patent licenses were unenforceable.

The judge who presided over the case said that Broadcom had failed to identify any specific patents that were exhausted and unenforceable. The court also ruled that Broadcom's purported injuries were too speculative to support the claims alleged.

Now that the two rivals are in advanced discussions to resolve the long-standing legal disputes between them, investors and analysts eagerly await the outcome of the talks, which can be expected to impact the stock prices of the two companies. Ever since Qualcomm announced on April 22 that it is in settlement discussions with Broadcom, its stock has gained 3%, while Broadcom shares have gone up by 7%.

QCOM gained 1.55% to close Friday's trading at $41.36 on a volume of 18.9 million shares, while BRCM closed the day's trading at $24.22, up 3.73% on a volume of 15.5 million shares.

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