Apple, Qualcomm Hearing Hinges on 5G and National Security

(Bloomberg) -- Apple Inc. must persuade a U.S. trade judge that iPhones containing Intel Corp. chips should be allowed into the country, even if they infringe a Qualcomm Inc. patent.

That’s the challenge facing the world’s largest publicly-traded company, laid out Friday in a U.S. International Trade Commission hearing in Washington, part of a long-running legal battle between Apple and Qualcomm.

Staff lawyers with the ITC recommended that Judge Thomas Pender rule that Apple violated one of three Qualcomm patents -- for a battery-saving feature. However, the staff also said potential future Intel-based iPhones that have next-generation technology known as 5G should be allowed into the country to not cede ground to China.

Lawyers for the two tech giants squared off Friday in one of some four dozen legal cases pending worldwide, all of them linked to a licensing dispute over the technology that allows mobile devices to communicate. A victory for either side in this case could help tilt negotiating power in the others. Pender said he thought the companies were “crazy” for letting it get to this point. He will issue his findings in September and a final ruling isn’t expected until early next year.

The ITC has the authority to block products from entering the country that infringe U.S. patents, though it also has to consider the broader impact on the economy and the public. Staff lawyer Lisa Murray said that iPhones with Qualcomm chips -- which Apple already sells -- could replace those with Intel chips in the market. A bigger question, she said, was how a ban would affect the U.S.’s race to stay ahead of China in 5G and whether that would be in the nation’s best interest.

“If Intel is taken out of the 5G race, this would slow the pace of U.S. innovation,” Murray said. She recommended that future iPhones with 5G be exempt from any import ban, saying that “Apple and Intel would have continued incentive to invest in 5G.”

Pender said he tends to agree with the staff lawyers, who act as third parties in these cases.

Qualcomm has said the chipmaker was forced to take action when Apple ordered its suppliers to stop paying their licensing fees, which bring in the bulk of its profit; Apple wants to cut its costs as the global smartphone market slows.

Pender is scheduled to hear testimony next week, including from Intel executives. The commission aims to complete the investigation in January, just before a trial in an antitrust case filed by the U.S. Federal Trade Commission in California begins.

“It’s very likely there will be a violation found,” Pender said. “Whether or not the public interest will be sufficient to outweigh that, I can’t predict that. I don’t see a result here being perfect for anyone.”

While denying it infringed any of Qualcomm’s patents, Apple lawyer William Lee, of law firm WilmerHale, focused his opening arguments on the issue of public interest.

“If Intel is barred from selling to Apple in the U.S. market, there is a good chance they’ll exit,’’ Lee told the judge. “It is in the best interest of consumers, it’s in the best interest of the economy, it’s in the best interest of the country and our national security to have two robust players.’’

Apple’s contention that an import ban would “cause Intel to pick up its marbles and go home’’ is “simply not a credible proposition,’’ Qualcomm’s lawyer, David Marriott of Cravath, Swaine & Moore, said. Intel has spent billions of dollars investing in its mobile chips and is unlikely to just drop all that work, he said.

Qualcomm’s role in the U.S.’s attempts to provide the central technology in the next round of wireless technology, 5G, has already caught the eye of American politicians and regulators. The company was the subject of hostile takeover bid by rival Broadcom Inc. which was thwarted at the eleventh hour by an executive order from President Donald Trump which cited security concerns linked to China and 5G.

Qualcomm is hoping a victory at the ITC could give it leverage in negotiations with Apple over patent royalties. Apple’s devices, including the iPhone 7 that’s the main target in this case, are made in Asia.

Apple contends Qualcomm charges too much for its patents on fundamental telecommunications technology and has directed its suppliers to stop paying royalties until a better deal can be reached. The unpaid fees could total $2.5 billion to $4.5 billion, according to an analysis by Matt Larson of Bloomberg Intelligence.

The case is In the Matter of Certain Mobile Electronic Devices, 337-1065, U.S. International Trade Commission (Washington).

--With assistance from Ian King.

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net, Molly Schuetz, Alistair Barr

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