San Diego Union Tribune

 June 8, 2007

 Qualcomm punished with phone import ban

By Kathryn Balint
STAFF WRITER

Virtually all new models of cell phones containing Qualcomm chips will be banned from import into the United States under a trade agency order issued yesterday that could mean far fewer new handset models for the December holidays.

The order by the U.S. International Trade Commission – intended to punish San Diego-based Qualcomm for infringing on a patent by rival Broadcom – reverberates throughout the nation's wireless industry. It affects new models of cell phones with Qualcomm chips that can surf the Internet, download music and play 3-D video games.

Banned by the order are models under development by LG Mobile Phones, Kyocera Wireless, Samsung, Motorola and other manufacturers – potentially millions of handsets.

Qualcomm chief executive Paul Jacobs said in a conference call with investors that the $7.5 billion-a-year company will not be hurt in the short term, but that the ITC order immediately affects cell-phone makers and wireless carriers that use Qualcomm technology.

“This broad, disproportionate remedy plainly is not in the public interest,” Jacobs said.

Although the commission's 4-2 decision bans new models using the chips, it allows models already on the market to continue being imported.

That order was less draconian than one option: banning the import of nearly all phone models – even current ones – with infringing Qualcomm chips.

The commission rejected that option because it “would impose great burdens” on the wireless industry, according to the ITC order.

Michael King, a San Diego-based wireless analyst with Gartner market research firm, said Qualcomm supplies 98 percent of the chips in phones used by Verizon Wireless and Sprint Nextel customers. In addition, one-third of the chips in phones used by AT&T wireless customers come from Qualcomm.

He said it would be all but impossible for other chip suppliers to meet the demand.

Qualcomm is the world's second-largest maker of cell phone chips, next to Texas Instruments. In 2006, 83 million cell phones using Qualcomm's chips were sold in the United States, according to In-Stat, a market research firm in Scottsda0le, Ariz.

Possibly as early as today, Qualcomm planned to appeal the ITC decision to President Bush and ask a federal appeals court for an emergency stay. The president has 60 days to modify or veto the order.

Verizon also planned to seek a stay of the ban and press Bush to invalidate it.

“This is a bad order for the industry, and it's a bad order for wireless consumers,” said Verizon spokeswoman Nancy Stark. “It would freeze innovation.”

Irvine-based chipmaker Broadcom saw the ITC order as another in a string of recent victories against Qualcomm.

“We think this is up to Qualcomm to resolve,” said David Rosmann, vice president of intellectual property litigation for Broadcom. “To the extent that we're unable to do that, the responsibility lies squarely on Qualcomm's shoulders.”

King said it's unlikely that Qualcomm will allow the ban to affect its customers for long. “They're either going to have to settle with Broadcom or win the case,” he said.

Qualcomm engineers are trying to come up with technology to work around the Broadcom patent. Sanjay Jha, Qualcomm's chief operating officer, said it could take time to develop the work-around and get the approval of cell-phone makers and wireless carriers.

Even then, Jha said he expects that Broadcom would challenge Qualcomm's new technology at the trade commission. He said a Bush veto or a victory on appeal are the only ways “to move forward with any certainty.”

Presidents rarely overturn an ITC order. Lyle Vander Schaaf, a former attorney with the International Trade Commission, said the fact that two commissioners to voted against the ban makes it possible that Bush would ask for modifications.

The ban is the second penalty meted out to Qualcomm in the past nine days for infringing on a Broadcom patent. Last week, a jury awarded Broadcom $19 million for Qualcomm's infringement of three patents.

Broadcom filed its patent complaint to the ITC in May 2005 after the two companies failed to reach a cross-licensing agreement to use each other's technology. Broadcom accused Qualcomm of overcharging for its technology; Qualcomm said it wouldn't jeopardize its business model by lowering its price.

Since then, the two companies have been battling in federal court, at the European Commission and at the International Trade Commission.

Last year, an administrative law judge and, later, the ITC agreed that a combination of Qualcomm's chips and its software infringed on a patent that Broadcom purchased from another company for a technology initially developed for bar code readers. In cell phones, the patented technology allows handsets to conserve power when out of range of a cellular antenna.

The patent expires in about three years, at which time the ITC order would be lifted.

Broadcom had asked the commission to ban all phones with Qualcomm chips, except those with miniature keyboards, from entering the United States. The commission had also considered banning just some of the phones with Qualcomm chips from entering the country but that solution would have affected some wireless carriers and not others.

The commission's decision to ban new models of cell phones appears to be a compromise. The two dissenting members, Chairman Daniel Pearson and Dean Pinkert, had argued for a more limited form of relief for Broadcom.

Sprint Nextel was relieved that the order allows current models to continue to be sold. The company expects to sell 5 million cell phones with the infringing Qualcomm chip in 2007.

“We'll work with our suppliers such as Qualcomm to ensure that our road map is not disrupted,” said Sprint Nextel spokesman Matt Sullivan.

San Diego cell phone maker Kyocera Wireless said it believes there is “solid evidence to merit a presidential veto of the decision based on the resultant harm to the wireless industry, the U.S. economy and the safety of U.S. citizens.”

The ITC decision was announced after the stock markets closed. Qualcomm shares fell $1.21, or 2.87 percent, to close at $41.02 on the Nasdaq. They rose 69 cents in after-hours trading. Shares of Broadcom fell 69 cents, or 2.24 percent, to close at $30.11 on the Nasdaq. In after-hours trading, they rose 34 cents.

 Paul M. Krawzak of Copley News Service contributed to this report.