By Tripp Mickle 

SAN DIEGO -- Apple Inc. accused Qualcomm Inc. of forcing customers to pay twice to gain access to its chips, as trial arguments got under way in a long-brewing legal battle between the tech giants over how royalties are collected on innovations in smartphone technology.

During opening remarks in front of a nine-person jury about 15 miles from Qualcomm headquarters, Apple's lawyers sought to portray the chip company as a monopolist that has used its patent portfolio to charge onerous licensing fees of 5% of the sales price of iPhones sold world-wide, capped at $400. They also have said the chip company blocked Apple for years from using another supplier of modem chips.

"Qualcomm has used their market power to set unfair prices to stifle competition and to dictate terms to some of the most powerful companies in the world," said attorney Ruffin Cordell of Fish & Richardson, which is representing Apple. "This case is about things we all know are wrong."

To press his case, he turned to the business of fried chicken. He compared Qualcomm's licensing practices to someone showing up at a KFC restaurant to order chicken but being told to get an "eating license" from the fast-food chain first, because the chicken includes Colonel Sanders's secret recipe. Imagine, he said, the license cost $17 and the bucket of chicken costs $17.

Mr. Cordell said Apple paid $16.1 billion for chips from 2010 to 2016, but that the "eating-fee license" it also had to pay to get any chips was $7.23 billion.

"Apple was having to double pay for these chips over and over and over again," he said.

Qualcomm's opening arguments will follow. Its attorneys are likely to paint Apple as a bully responding to a slowdown in its core iPhone business by forcing Qualcomm to accept less money than it deserves for its contributions to the smartphone era.

Apple Chief Executive Tim Cook and Qualcomm CEO Steve Mollenkopf are expected to amplify those messages when they take the stand in coming weeks, a testament to the chasm between the companies' competing viewpoints on the value of smartphone innovations.

At stake is the future of Qualcomm's business. An unfavorable ruling could force it to overhaul a licensing business that once accounted for half of its profit.

Meanwhile, Apple's legal challenge has left it without access to Qualcomm's market-leading 5G modem chips, putting its most important product, the iPhone, a step behind Android competitors in the race to the next big advance in wireless.

Billions of dollars in damages are up for grabs. Apple's contract manufacturers, who paid the disputed royalties under the Apple-Qualcomm licensing agreement, are seeking $9 billion in alleged overpayments to Qualcomm -- a sum that could soar to $27 billion under U.S. antitrust law that allows a jury to increase damages in cases involving anticompetitive behavior.

A lawyer representing four contract manufacturers that make iPads and iPhones -- Foxconn Technology Group (formally known as Hon Hai Precision Industry Co.), Pegatron Corp., Wistron Corp. and Compal Electronics Inc. -- produced a copy of a contract he said showed a patent license was required before Qualcomm chips could be purchased or software could be used.

Qualcomm has countered by seeking $7 billion in royalties that those Apple manufacturers started withholding as the legal battle commenced more than two years ago. Qualcomm could also argue that Apple, which it says encouraged the manufacturers to violate their contractual obligations, should pay a penalty of as much as $14 billion.

Attorneys in the Apple-Qualcomm case must simplify their clients' complex dispute and make it accessible to jurors unfamiliar with intellectual-property law, said Michael Salzman, an attorney with Hughes, Hubbard & Reed who specializes in antitrust law related to intellectual property.

"This is up front and personal between the two parties," Mr. Salzman said. "The jury is trying to figure out between the two who has the white hat and who has the black hat."

The two-year feud started as global smartphone sales slowed, pressuring both companies' businesses. Apple had paid Qualcomm $7.50 in royalties on every iPhone it sold since 2007 -- a price the parties reached with complex agreements that lowered Qualcomm's standard royalty rate through rebate and incentive payments. Apple also agreed to make Qualcomm the exclusive provider of modem chips for iPhones from 2011 to 2016.

Apple added chips from Intel Corp. to some iPhone models in 2016, as its most recent contract with Qualcomm concluded. It then slapped Qualcomm with a lawsuit in January 2017.

The companies were expected to settle their dispute long before the trial began. However, they have been so at odds over royalties that it has been difficult to make headway, people familiar with the situation said.

Other issues have heightened the distrust. For example, Qualcomm executives suspected Apple of supporting a hostile takeover bid by Broadcom Inc., and Apple executives were angered that Qualcomm hired an opposition-research firm with ties to a news outlet that published articles calling the iPhone maker Silicon Valley's biggest bully.

The companies are awaiting a ruling from a federal judge in an antitrust case brought by the Federal Trade Commission against Qualcomm that could weaken or strengthen Qualcomm's position -- by deciding whether Qualcomm's pricing policy for chips stifled competition.

Write to Tripp Mickle at Tripp.Mickle@wsj.com

 

(END) Dow Jones Newswires

April 16, 2019 15:02 ET (19:02 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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