About a month ago I shared the observation that Qualcomm's approach to its FTC and Apple litigations was in part driven by investor relations (IR) considerations. That same day, Qualcomm delivered another piece of that particular puzzle by filing two German patent infringement lawsuits against Apple just before a quarterly earnings report--they can file lawsuits whenever they want, but that was hardly a coincidence.
In the wake of last Friday's San Diego hearing(s), the call related to that July earnings report was mentioned in a letter by Qualcomm's lead counsel, Cravath chairman Evan Chesler, to United States District Judge Gonzalo P. Curiel, referring to something Mr. Chesler said as part of his irreparable-harm argument relating to Qualcomm's preliminary-injunction request:
"Your Honor, we write to provide one clarification regarding statements made during oral argument today on the preliminary injunction motion in Qualcomm's action against the Contract Manufacturers. While I correctly stated that the other licensee (as referenced in Mr. Rogers' reply declaration) had not yet stopped paying all royalties at the time of the April 2017 earnings statement shown during oral argument (Contract Manufacturers' slide 20), I may have misstated that the other licensee had not stopped paying before the July 2017 earnings call, in which Mr. Aberle made other remarks shown during argument (slides 29-30); it in fact had stopped paying prior to Mr. Aberle's remarks in July."
Retractions of that kind are not a routine follow-up to court hearings, and especially not when a litigant is clearly ready, willing and able to spend enormous resources to defend itself on multiple fronts and when the lawyer in question has been in this business for more than four decades and is regarded as one of the best trial lawyers in the United States.
Apple's contract manufacturers appear to have shared their slides with a number of people at and after the hearing. It has, however, taken me a while to obtain all of the information about the hearing that I needed. So here are the key quotes from Qualcomm president Derek Aberle's statements on that July 19 earnings conference call:
"[...] I don't think, as we sit here, we have any indication that this is somehow going to result in a bunch of other licensees deciding not to report and pay royalties."
"As we've had disputes, we've been able to work through and resolve them without other licensees necessarily just deciding they're not going to comply with their agreement."
Then, in response to an analyst question's whether that kind of contagion was actually happening:
"No. That's not what's happening. We have a dispute with Apple and their contract manufacturers, and we have a dispute with one other licensee." (emphasis added)
I'd still like to know who that other licensee is, especially since I still sometimes talk to Wall Street professionals over the phone (who obviously don't want to receive, and could never receive from a litigation watcher like me, material non-public information). What I've been able to find out is that Qualcomm describes that unnamed company as "one of the largest handset manufacturers in the world" and that, as a result of that company's and Apple's decisions, about 25% of all mobile phones are now made by companies rejecting Qualcomm's royalty rates. Samsung and Huawei have the volume that would fit that description; some others would, too, but if they're mostly or exclusively focused on Asia, the FTC and Apple cases wouldn't matter to them (Qualcomm says Apple's lawsuit triggered the other company's decision to withhold payments).
Since Qualcomm's counsel said at the hearing that everything was going great for his client in China despite an antitrust investigation of a couple of years ago, I would then consider Huawei less likely to be the one than Samsung. But--and this is a really big "but"--if Qualcomm misrepresented the timing of the decision to withhold payments, can we really believe them that there's no problem in China?
Can investors still trust Qualcomm's representations? Obviously, Qualcomm has every right to take the position it deems most advantageous in each context. In litigation, Qualcomm wants to argue that Apple is causing enormous harm. It wants to portray Apple as the bad guy and bully and itself as the innocent victim of undeserved injustice (which Judge Curiel, who pointed to international antitrust rulings, doesn't really appear to buy). In investor relations, Qualcomm wants everyone to feel good about its prospects. Within reason, Qualcomm can optimize its message for each audience: judges and the court of public opinion in one context, investors in the other. But this is a constant threading-the-needle kind of challenge, and the Friday letter suggests it's not working out well.
The Sanford Bernstein analyst who asked the question about contagion on that July 19 earnings call, and everyone she effectively spoke for, deserved a more specific answer. If Qualcomm can tell Judge Curiel how big the other non-royalty-paying device maker is and how much this impacts its business (one in four devices), why can't it--or one might say "why doesn't it have an obligation to"--tell the same to investors on an earnings call?
At the hearing, Qualcomm made stock market fluctuations part of its irreparable-harm argument, pointing Judge Curiel to the fact that Apple's market cap has increased by $200 billion since the beginning of the year while Qualcomm's declined by 16-18%.
Interestingly, Qualcomm tried to leverage statements on an earnings call against Apple. Apple CEO Tim Cook had said in early May that Apple "needed the courts to decide" how much it should (directly or through its contract manufacturers) pay Qualcomm in patent royalties. In connection with a request for an anti-suit injunction that would prevent Apple from pursuing antitrust litigation in other jurisdictions, Qualcomm tried to interpret Mr. Cook's statement as a desire to have one court determine a worldwide royalty rate. Apple's counsel disagreed, and Judge Curiel explained that the parties could obviously point to what each other's executives say on earnings calls but ultimately he was going to focus on court filings and hard facts.
Qualcomm's litigation/IR conundrum appears to be exacerbating, and I feel that there may be more situations, as those different FRAND-related cases unfold, in which Qualcomm won't be able to have its cake and eat it. For Apple the risk of inconsistencies, and especially the impact of any hypothetical inconsistencies, should be much less of an issue, though one can never know what might happen during multi-year litigation.
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