During the roughly two years Apple was locked in a legal battle with one of its suppliers, Qualcomm, the iPhone maker publicly argued that the chip maker’s technology was worthless.
The sealed documents, obtained by Qualcomm through the discovery phase ahead of the trial, offer a rare window into the decision-making process of one of the most secretive and powerful companies on the planet, and how Apple’s internal discussions about Qualcomm differed from what it said publicly. Apple’s criticism of Qualcomm underpinned more than 80 lawsuits around the world and influenced governments to change laws and regulations in Apple’s favor. The emails and slide-show presentation, seen by a Washington Post reporter in court, could soon be made available in the docket for all to see, since they were shown at trial. The two sides settled their dispute Tuesday, shortly after the trial began.
The documents also raise questions about the methods Apple used to inflict pain on Qualcomm and whether Apple really believed its own arguments to lawmakers, regulators, judges and juries when it tried to change not just its long-standing business agreement with Qualcomm but the very laws and practices that have allowed inventors to profit from their work and investments. Apple has argued that Qualcomm’s patents were no more valuable than those of competitors like Ericsson and Huawei, but Qualcomm argued in court that the documents show otherwise.
“While it’s very common for companies who are engaged in legal disputes to play hardball, the disclosure of these documents is very unsettling,” said Adam Mossoff, a law professor at George Mason University and director of the Center for the Protection of Intellectual Property. “It potentially reveals that Apple was engaging in a bad faith argument both in front of antitrust enforcers as well as the legal courts about the actual value and nature of Qualcomm’s patented innovation.”
Qualcomm and Apple declined to comment. The settlement the two companies reached this week includes a six-year licensing agreement and a multiyear supply agreement. Apple will also make a payment of an unspecified amount to Qualcomm.
For years, Apple had been buying Qualcomm’s wireless modem chips for its iPhones and paying the chipmaker about $7.50 per device, according court documents. An internal memo from an accountant in 2009 said Qualcomm is “widely considered the owner of the strongest patent portfolio for essential and relevant patents for wireless standards,” according to a document revealed in court. In a March 2015 email that was part of the sealed documents, Apple’s vice president of hardware, Johny Srouji, wrote of Qualcomm technology, “Engineering wise, they have been the best.”
But Apple began seeding plans to undermine Qualcomm, according to the sealed documents. An internal report obtained during the discovery process and cited by Qualcomm on Tuesday showed Apple had been planning to sue Qualcomm as far back as 2014, but it had planned to wait until after the end of 2016, until after Qualcomm paid billions of dollars in payments to Apple as part of a business cooperation agreement. An Apple document from June 2016, called “Qualcomm Royalty Reduction,” predates Apple filing suit against Qualcomm in San Diego federal court by more than six months.
The purpose was spelled out clearly: “Goal: Reduce Apple’s net royalty to Qualcomm.” Apple said in the document it planned to accomplish this in several ways, including “Hurt Qualcomm financially” and “Put Qualcomm’s licensing model at risk.”
In the lawsuit Apple filed in 2017, it alleged that the chipmaker and wireless pioneer had a stranglehold on the market for wireless modem chips. Apple contends that Qualcomm leveraged its position to overcharge for its patent licenses.
On Tuesday, Apple lawyer Ruffin Cordell used comparatively inexpensive patent licenses Apple had signed with companies like Ericsson and Huawei to show how Qualcomm was price gouging. In court, Cordell said a group of those patents was twice the size of Qualcomm’s but had cost Apple a fraction of the cost. “Does that make any sense? Is that fair and reasonable?” he asked the jury.
There was more to the story, though. In one internal document cited by Qualcomm’s lawyers, Apple said it sought to “create evidence” by scrupulously licensing other less expensive patents to make Qualcomm’s look expensive. According to the documents, Apple said it would “selectively filter” a group of patent licenses for “the most desirable deals,” using the patents as “evidence as a comparable in disputes with others.” Qualcomm lawyer Evan Chesler alleged the “others” referred to Qualcomm. Apple declined to comment on the documents and allegation.
“So they went out to these other companies and they negotiated very cheap deals within the last couple of years to create the evidence to come in here and tell you that those guys are the good guys because they are getting less for their patents and we are the bad guys,” Chesler argued to the jury.
Because of the nature of cellphones, many of Qualcomm’s technological innovations end up becoming part of a global wireless standard, so that most cellphones can operate on any network in the world. As a result, patents that are used in wireless standards become very valuable because they’re required technology. But there’s a trade-off. Those who hold patents on parts of standards agree to license the technology to anyone for a fair, reasonable and nondiscriminatory rate, something known in the industry as FRAND.
According to internal documents revealed in court, Apple wrote that it entered into the patent licensing agreement “based on Qualcomm’s established and relatively transparent actual monetary collection of patent licenses.”
In court Tuesday, Apple took a different tone, arguing as one of its central points that Qualcomm was using monopoly power to violate its FRAND commitments. Qualcomm countered by citing a portion of the “Qualcomm Royalty Reduction” plan in which Apple set out to “reshape FRAND” to extract better terms for Apple. Qualcomm’s Chesler characterized it to the jury as a cynical effort on Apple’s part to distort the truth.
Apple made similar arguments about Qualcomm’s alleged violation of FRAND obligations during a January trial in California federal court in which the Federal Trade Commission accused Qualcomm of antitrust violations. The outcome of the FTC trial, which has yet to be decided, has the potential to set precedent not just for Apple and Qualcomm but for any inventor whose innovation becomes part of technology standards, including universities and individual researchers.
The real pain, according to Qualcomm, came when Apple instructed its contract manufacturers, which build its iPhones, computers and other products, to stop paying Qualcomm royalties for patent licensing agreements. Qualcomm argued Apple had also planned this move ahead of time and had even laid out the possible legal scenarios. “Apple will be at risk for infringement, tortious interference and full royalties (plus any interest, penalties, etc.),” Apple wrote in its royalty reduction plan.
Despite Apple’s acknowledgment of its legal risks in its royalty reduction plan, it represented little threat to the company, which last year became the first to reach a market capitalization of more than $1 trillion and has $245 billion of cash on hand.
The risks were larger for Qualcomm. The San Diego company’s stock price plummeted and it laid off 1,500 employees.
The settlement between the two companies was announced during the final minutes of Chesler’s opening statements. Qualcomm’s stock price skyrocketed more than 30 percent on the news.