Nokia, Qualcomm Arguments Come to Head in Delaware Court
NEW YORK -(Dow Jones)- Nokia and Qualcomm begin a key trial on Wednesday that could bring the long-running rivals closer towards a resolution, potentially determining the fate of hundreds of millions of dollars in royalty payments and setting the tone for how technology standards bodies are created.
Both sides have expressed optimism that a decision will motivate the two into talking. But many fear that the case will up deadlocked, ending their temporary ceasefire and possibly prompting additional lawsuits. As a result, some believe the two sides could be years apart from resolving their dispute.
"Whatever the outcome is, it is going to be some time in coming," said Richard Windsor, an analyst at Nomura International, adding that a resolution could come as late as 2010.
The court will rule on two claims: Nokia's belief that Qualcomm is unfairly charging too high a fee for its patents; and Qualcomm's argument that Nokia has automatically extended their cross-licensing agreement because it continues to use the technology.
"One position will be compromised after this case," said William Davidson, senior vice president for global market at Qualcomm. "Someone will feel motivation to go foward (with a resolution)."
A resolution would add stability to Qualcomm's stock price, which has been susceptible to stock swings as a result of legal developments. The trial is expected to last eight days, and a decision around September.
Multiple Disputes
The two parties have been parrying over terms related to a 2001 patent-licensing agreement that expired in April 2007. Qualcomm's licenses are core to CDMA, and the company argues they are similarly central to the third-generation version called WCDMA.
Qualcomm licenses out its patents to cellular handset makers and typically charges less than 5% of the price of the phone. It's an important business for the company, which counted on licensing and royalty fees for more than a third of its revenue in its last quarter.
Nokia, however, argues that it has paid up for Qualcomm's older CDMA patents and that its newer WCDMA ones aren't vital enough to justify paying the same royalty rate.
In addition, Nokia believes Qualcomm is breaking principals of fair business practices agreed upon by the European Telecommunications Standards Institute - which set the standards for WCDMA - by suing for better terms.
Nokia already set an expectation for what it believes it owes Qualcomm. When the contract expired, Nokia offered to pay $20 million to cover that quarter, but Qualcomm declined. Since then, Nokia has set aside $20 million each quarter in an account. But based on Qualcomm's estimated impact from the loss of Nokia royalties this year, the money Nokia is setting aside represents 15% of what Qualcomm believes is actually owed.
Qualcomm acknowledges that the older patents have been paid off. But it contends that its newer intellectual property portfolio is just as valuable, warranting the same licensing fees. As proof, 90 companies pay for the use of Qualcomm's WCDMA patents, and all of them pay the same rate as before.
Qualcomm, meanwhile, believes Nokia's continued use of its intellectual property signals an automatic extension of their licensing agreement. Nokia, however, contends that the option had to be exercised with a written acknowledgment of the extension.
No End In Sight
A likely scenario could be Delaware Chancery Court Judge Leo Strine ruling that Qualcomm does have a right to charge its standard licensing fee rate, while also declaring that Nokia's actions don't constitute an extension of the agreement.
The result would be the two companies starting out in essentially the same spot they currently occupy.
"We expect that the arbitration will result in a 'no score' draw towards the end of the year," Windsor said.
The companies agreed to cease their various legal skirmishes and consolidate many of their cases into the Delaware trial. If the ruling doesn't favor one party over the other, those cases could restart.
If the dispute drags on until next year, Qualcomm could eventually sue Nokia for illegally using its patents.
"In early 2009, when Qualcomm is no longer fettered by the terms of the agreement, it can go and pursue Nokia for infringement," Windsor said.
In addition, Nokia is part of six companies that have filed a complaint with the European Commission against Qualcomm, claiming abusive practices in licensing out its intellectual property.
Others, however, are more hopeful for an end to the litigation. Ultimately, the Delaware trial "could ultimately provide the framework for an eventual settlement of this long-standing dispute," said Lehman Brothers analyst Tim Luke.
Open Standards Threatened?
Perhaps more important than the trial is the potential impact the dispute has on technology companies coming together to set standards.
Nokia has expressed such concerns. In a conference held in May, Chief Financial Officer Rick Simonson warned against the dangers of one company holding an industry hostage because of an unreasonable royalty rate, which would deter innovation.
"It's bigger than just (the Qualcomm dispute)," he said.
Qualcomm, meanwhile, touts its openness by offering all of its intellectual property to everyone in the industry. But standards setting bodies which set limits on how much individual companies can charge for their patents puts Qualcomm at a disadvantage, because it generates much of its revenue from its intellectual property.
Nokia and others in the wireless industry have an eye towards fourth-generation wireless technology, called long-term evolution, which could face the same licensing issues if the current disputes aren't settled.
Players in the wireless industry have aligned themselves in the name of open standards. Nokia recently acquired Symbian Plc and promised to eventually open the mobile operating system to its partners. Google started the Open Handset Alliance to rally around its free Android operating system.
"I think more and more, all the players are seeing how that's necessary," Simonson said.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com
(END) Dow Jones Newswires
Posted to the site on 17th July 2008
