ITC Imposes Partial Import Ban On Qualcomm Chips

WASHINGTON -(Dow Jones)- The International Trade Commission on Thursday imposed a partial ban on the imports of 3G cellular phones using Qualcomm's microchips in a ruling over a patent dispute between the company and rival Broadcom.

The decision means that all the major cellular phone handset makers using Qualcomm's microchips in their 3G phones will no longer be able to import new models of their phones into the U.S. after June 7. New phones that are of the same model as those manufactured before June 7 will still be allowed into the country.

"We are extremely disappointed; we believe the commission has overstepped its statutory boundaries," said Paul E. Jacobs, Qualcomm's chief executive, in a conference call with analysts. "It is just plain wrong."

Jacobs added that the decision doesn't "protect the public interest or public safety."

The ban will not have an impact on Qualcomm earnings in the short term, Jacobs said.

However, the ban will affect 3G phones sold by Verizon Wireless; AT&T, Sprint Nextel and T-Mobile USA, a unit of Deutsche Telekom.

Both Qualcomm and Verizon said they would seek a veto from President Bush. The president has 60 days to do so.

Jim Gerace, a spokesman for Verizon, said the decision is a bad order that "essentially attempts to freeze innovation in cellphones."

Qualcomm filed a motion to the ITC to stay the ban, but it's unlikely to be granted, said Smith Brittingham, an attorney for law firm Finnegan Henderson.

Broadcom said in a statement that it was pleased the ITC "followed the letter and the spirit of its charter, which is the protection of American products from unfair trade practices."

According to one analyst, the ruling means that all current models of phones can continue to be imported, but with the rapid pace of development in the cellular phone marketplace, this exemption won't last long.

"In short order, the existing models that can be imported will be viewed as obsolete," said Rebecca Arbogast, a telecommunications analyst with Stifel Nicolaus. "It's a fairly serious blow to the companies."

According to a statement released on the ITC's Web site, the ban doesn't apply to devices that "are of the same model" as those that were being imported into the U.S. for sale on or before June 7.

"However, the order does bar the importation of new models of handheld wireless communications devices that contain Qualcomm's infringing chips and chipsets," the decision said. "Thus, the order 'grandfathers' models of handheld wireless communications devices being imported into the United States for sale to the general public on or before June 7, 2007."

The clock starts ticking immediately on a 60-day period in which President Bush has the right to veto the decision. President Bush delegated this authority to U.S. Trade Representative Susan Schwab in 2005.

If she doesn't act, Qualcomm can then appeal the decision through the federal circuit courts.

The ITC voted 3-2 in favor of the penalty.

The decision is something of a compromise between the total ban on imports of phones that use Qualcomm semiconductors that Broadcom was pushing for, and a ban only on the direct import of chips that Qualcomm hoped for.

The ITC, which is an independent arm of the U.S. federal government, had previously determined that Qualcomm was in violation of a patent held by Broadcom.

The patent in question is for a device that lengthens the life of cellphone batteries.

Brittingham, of law firm Finnegan Henderson, said he was surprised by the decision, since neither party or the staff attorney at the ITC had proposed a grandfather clause.

Ultimately, Broadcom wins because it impairs Qualcomm from importing new phones, which in the industry is the most important thing to maintain buzz and momentum.

The ruling suggests that if a handset maker shoves in a new memory chip or camera into an existing model, it essentially becomes a different model and is banned from importation, Brittingham said. Also, the ban on chips used for testing will interrupt the development and testing of new phones.

He said the ruling may force Qualcomm's hand and compel it to seek a settlement with its rival chip maker.

Among the carriers, Verizon Wireless and Sprint Nextel will be hurt the worst by the ban. The two carriers used a 3G standard called EV-DO, and a bulk of their phones use Qualcomm chips.

AT&T, meanwhile, uses a standard called WCDMA, but the current phone models using that technology use chips provided by other sources including Freescale Semiconductor and Texas Instruments.

In addition, Verizon Wireless and Sprint have been pushing their 3G phones more aggressively than AT&T, and stand to lose business if those new phones are restricted.

AT&T, meanwhile, is less dependent on 3G phones.

Apple's iPhone, for example, is a 2G phone unaffected by the ban.

Analysts believe AT&T may gain a competitive edge if the ban goes through.

Stifel Nicolaus' Arbogast said she thinks it could take between a year to two years for the companies to develop a "work-around," with sales of handsets affected in the meantime.

This represents the second major loss for Qualcomm in a week. Last Wednesday, Broadcom scored a legal victory when a federal jury ruled that Qualcomm should pay the company $19.6 million for infringing on patents related to EV-DO technology.

Meanwhile, Broadcom is expected to seek a ban on the use of the patents by Qualcomm. In a statement issued Thursday, Broadcom left the door open for an agreement with Qualcomm that would effectively nullify the decision.

"We have made it clear to Qualcomm that we are open to discussions regarding the potential for licensing of our patent," Broadcom General Counsel David Dull said in a statement. "The ball is in Qualcomm's court."

-By Corey Boles, Dow Jones Newswires; 202-862-6637; corey.boles@dowjones.com

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(Ben Charny contributed to this story.)

(END) Dow Jones Newswires"

Posted to the site on 8th June 2007