Union Tribune

August 7, 2007

Bush administration upholds ban on phones with Qualcomm chips

By Jennifer Davies and

Paul Krawzak
Copley News Service

The Bush administration Monday upheld the ban on new cell phones that use Qualcomm chips, putting further pressure on the San Diego wireless giant's business.

U.S. Trade Representative Susan C. Schwab said that the potential impact on such companies as Qualcomm and concerns that the ban would thwart innovation and effect public safety were not compelling enough for her to veto it.

In June, the U.S. International Trade Commission banned the importation of all new phone models that use Qualcomm chips as punishment for the company infringing on a patent held by rival Broadcom that helps conserve battery power.

While current phone models are not affected by the ban, the inability to import new models could not only hurt Qualcomm but also wireless phone companies such as Samsung and Motorola and service providers such as Sprint Nextel because they rely on Qualcomm chips to power their phones. In the competitive wireless phone market, offering the latest technology and styling is critical to success.

“The American consumer is going to lose access to some innovative products in the second half of the year,” said Mark McKechnie, an analyst for American Technology Research in San Francisco.

In 2006, 83 million cell phones using Qualcomm chips were sold in theUnited States, according to market research firm In-Stat of Scottsdale,Ariz. Qualcomm said it was disappointed in Monday's decision and plans to ask the U.S. Court of Appeals for the Federal Circuit for a stay of the ban while it appeals the matter. Qualcomm argues that it was not infringing on the patent controlled by Irvine-based Broadcom.

The company also revealed that it had come up with new software that would allow it to eliminate Broadcom's patented technology from its chips.

“We will pursue all legal and technical options available to us to minimize the impact of the ITC order on consumers, our customers and the entire wireless industry,” said Qualcomm chief executive Paul Jacobs in a written statement.

Broadcom, for its part, applauded the decision, calling it a victory for all U.S. patent holders.

David Rosmann, vice president of intellectual property litigation for Broadcom, said he was amazed that Qualcomm refuses to accept the ITC ruling.

“It is interesting that Qualcomm is still in denial after they have been found multiple times to be a serial infringer,” he said.

The two companies have been embroiled in a multi-front legal battle over patent rights and business practices as Broadcom attempts to enter the wireless chip business dominated by Texas Instruments and Qualcomm.

Verizon Wireless, the No. 2 cell phone service company in the U.S., will not be affected by the cell phone ban as it recently entered into a deal with Broadcom in which it will pay up to $200 million to continue to import new phones with the offending chips.

In her decision, Schwab referenced an unnamed second company that made a similar deal. Broadcom refused to comment on the issue.

Sprint Nextel said it had not entered into a deal. AT&T would not comment on the matter. McKechnie said the trade representatives' decision was not unexpected, especially after Verizon Wireless and Broadcom struck their deal, which limited the ban's potential impact on customers and ended Verizon's intense lobbying on the issue.

“People didn't expect a veto,” he said. “It would have been a great, big blue bird.”

Patent law experts said Qualcomm faces an uphill battle to try to get the ITC order suspended or repealed by the U.S. Court of Appeals.

“The ITC has a very good track record on appeal,” said Lyle Vander Schaaf, a former ITC attorney. “Once you lose at the ITC, it's an uphill battle to reverse them at the courts.”

Smith R. Brittingham IV, an intellectual property expert and former attorney for the ITC, added it's “very rare” for the court to issue a stay for an ITC order.

Unless a stay is granted, he added, appealing the case could achieve little since it could take up to two years for the appeals court to resolve the dispute – too long for a wireless industry eager to develop and sell improved products.

“If there's no stay – it's very difficult to see how manufacturers and service providers can wait for any possible reversal,” Brittingham said.

Qualcomm said that its software workaround, which it only recently has made available, is being well-received by customers. Sprint said that it was already importing phones using Qualcomm's new software.

Alex Rogers, Qualcomm's senior vice president of legal counsel, said his company is wary that Broadcom might challenge the new software, making it difficult for phone makers to import phones.

“Even though we have new software available, the process still has significant uncertainty,” Rogers said.

Broadcom's Rosmann said that Qualcomm has been disingenuous about the software workaround, downplaying its significance as it angled for a veto of the ITC ban.

“They are talking out of both sides of their mouth,” he said.

He pointed out that in her order, Schwab urged U.S. Customs to develop procedures to “minimize the burden” on importers of products that do not contain the infringing chips.

Some companies that import cell phones and similar products fear the order will cause their merchandise to be bottled up in Customs even if it doesn't contain the chips.

“I've ... heard people are freaking out,” Vander Schaaf said.

One way Customs could speed up the process is to allow importers to certify that their products do not contain the infringing chips, avoiding the need for an inspection. The concerns of phone makers and phone companies will place further pressure on Qualcomm to solve the problem.

“They are rapidly approaching the spot between the rock and the hard place,” said Ed Snyder, an analyst who covers Qualcomm for Charter Equity Research.

He said Qualcomm is running out of options and the ban could have a real impact on the company's performance.

“It's not a good thing,” he said.

But McKechnie said the ban comes as Qualcomm's global sales continue to grow, with the United States accounting for about a quarter of its total business. He said the Verizon Wireless deal also limits some of the potential harm to Qualcomm's bottom line.

“It's just an overhang Qualcomm needs to work through one way or another,” he said.

Rosmann, the Broadcom executive, said that Qualcomm faces other hurdles, such a case in Santa Ana in which the company has already been found to infringe on three other Broadcom patents and fined $19 million. The judge in that case could also impose a ban on those patents, he said. Proceedings on the matter begin next week.

“They have four patents to worry about – not just one,” Rosmann said.

The announcement of the trade representative's decision was made after the markets closed.

Shares in Qualcomm rose $1.01 to close at $41.78 on the Nasdaq. They lost 28 cents in after-hours trading. The stock's 52-week range is $34.35-$47.72.

Broadcom shares gained 48 cents to close at $33.44, also on the Nasdaq. They rose 21 cents after hours. Their 52-week range is $26.80-$37.50.

 Reuters and Associated Press contributed to this report.