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December 11, 2007

Overplay

Qualcomm was the product of the vision and determination of founder Irwin Jacobs. Jacobs furthered a technology derived from torpedo guidance systems used during World War II into a global wireless standard. Jacobs also forged a business model with patents at the core: manufacturing via outsourcing, Qualcomm became, in essence, a patent licensing company. Facing a relentless squeeze, resentment built among licensees and competitors, igniting courtroom warfare, with the Big Q lighting the match.

Andrew Longstreth wrote an excellent case study of Qualcomm in the December issue of The American Lawyer. Herein, excerpts that sketch the saga; if you're up for the full story, head to the link and don't bother with what's below -

Nearly 20 years ago, Qualcomm Incorporated's founder, Irwin Jacobs, made one hell of a bet. Jacobs believed that a technique invented for guiding torpedoes during World War II-a highly complex but efficient way of directing traffic in the airwaves-would someday become the basis for a worldwide standard in digital wireless communication. It was a risky bet. Most of the major wireless carriers had committed to a different technology. The system championed by Jacobs was widely seen as too complicated and commercially unworkable. But Jacobs, a former professor of electrical engineering at the Massachusetts Institute of Technology, wouldn't let the idea die. As Qualcomm developed and patented wireless technology, Jacobs campaigned for the system he favored, known as code division multiple access (CDMA). Slowly, the rest of the world bought in. By the late 1990s, it had become the fastest-growing global wireless standard.

As Qualcomm pushed for CDMA, Jacobs made an equally fateful decision about how his company would make money. Instead of manufacturing its own cell phones, Qualcomm would license the patents it had stockpiled. Phone makers... would have to forge licensing deals with Qualcomm in order to produce phones that operated with CDMA technology.

For a long time, Qualcomm's business plan worked beautifully. In 1999-the year CDMA was included as standard technology for a new generation of phones that had previously used a competing system - licensing deals generated more than $454 million, 12 percent of Qualcomm's revenue (Qualcomm also sells its own chips and software). This year Qualcomm's licensing business has generated $2.77 billion-31 percent of the company's total revenue.

Every phone maker marketing to the regions that rely on CDMA technology needs to license Qualcomm patents, and from each of them, Qualcomm has always demanded big fees.... The Big Q intended to rake in as much as it possibly could, and for as long as it possibly could.

As standards bodies adopted systems that relied on Qualcomm patents, the Big Q could act like a toll collector: Any company that wanted to produce a product compliant with wireless standards had to pay Qualcomm a licensing fee. Over the years, Qualcomm began also to hit phone manufacturers for an estimated 5 percent royalty on the sale of every phone that used its technology.

Such tactics didn't make the Big Q many friends in the industry. "Qualcomm used to stick it to others for years," says wireless technology analyst Craig Mathias of Farpoint Group.

Beginning in 2005, the Big Q's licensees decided they'd had enough of Qualcomm's bullying and mounted a concerted, worldwide attack.

The Big Q has responded with all the vigor one would expect of a company whose multibillion-dollar business model is under siege, filing a raft of claims and counterclaims of its own. The company expects to spend more than $200 million on litigation next year.

Throughout the 2005 negotiations between Broadcom and Qualcomm, Broadcom tried to sway Qualcomm with its intellectual property portfolio, which included patents relevant to Qualcomm's businesses, in the hopes of securing a favorable cross-licensing deal... Denied a licensing deal, Broadcom attacked Qualcomm whereever it considered the company's patents vulnerable... Qualcomm's battle with Broadcom has been public and bloody.

A lot of patent litigation is for show, mere posturing for leverage in licensing negotiations. Not these cases. In Qualcomm's patent litigation with Broadcom, the conflict was real and the parties were willing to endure the consequences. Within a span of 15 months in 2006 and 2007, the two went to trial three times. By the end of the third trial, Qualcomm was not only still looking for a win-it was reeling with embarrassment.

Qualcomm's fundamental plight hasn't changed, though. "Qualcomm obtained a dominant market position in CDMA by promoting the CDMA standards and by obtaining patents in CDMA," says Broadcom lead counsel Lee. "Qualcomm is trying to hold on to that. And that's very difficult work."

But with billions of dollars at stake, the Big Q has no choice.

Posted by Patent Hawk at December 11, 2007 2:05 AM | Patents In Business

Comments

Remember that at pages 35-37 of the book Innovation and Its Discontents, Jaffe and Lerner identify both Qualcomm and Biogen as companies that use patents in appropriate manners. Jaffe and Lerner didn't mention any of the above material on patenthawk. Jaffe and Lerner also didn't mention the case of NOELLE v. LEDERMAN, 355 F.3d 1343, 69 U.S.P.Q.2D 1508 (CAFC 2004), wherein Biogen and Idec were fighting over discoveries made with federal funding.
Did Jaffe and Lerner shade what they wrote to reach pre-determined conclusions?

See also post on IPBiz: Qualcomm loses to Broadcom in jury verdict

Posted by: Lawrence B. Ebert at December 11, 2007 5:31 AM