Qualcomm's Temporary Reprieve

The chipmaker got a welcome ruling from an ITC judge, but bigger legal battles remain vs. Broadcom, which also claimed victory

by Olga Kharif

So, who won? On Oct. 10, Charles Bullock, an administrative law judge at the U.S. International Trade Commission (ITC), came out with a ruling on the Qualcomm-Broadcom case, which has kept Wall Street in suspense for weeks. His initial determination wasn't a worst-case scenario for either Qualcomm or Broadcom: The judge said that while Qualcomm infringed on five parts of one Broadcom patent, it did not infringe on two other patents under review.

In a nearly 300-page opinion, only parts of which were made public (Qualcomm and Broadcom themselves may receive the full document on Oct. 11, and they're not allowed to share its contents), the judge also noted he does not recommend the full commission bar all imports of cell phones containing Qualcomm chips into the U.S.—a possibility that has kept not only Qualcomm (QCOM) but also Verizon Wireless and Motorola (MOT) investors up at night. A ban on ready-to-use phones would have been "disastrous" for Motorola because it relies heavily on Qualcomm's chips, and Verizon (VZ) could have been stopped from selling phones based on Qualcomm chips in the U.S., says Paul Sagawa, an analyst with Sanford Bernstein.

Significantly, the judge also didn't accuse Qualcomm of contributory infringement—in effect, of any knowledge that it had infringed on the Broadcom (BRCM) patent.

UP TO THE COMMISSION.

While Bullock did not make public what remedy he recommends, chances are he wants to halt imports of Qualcomm chips themselves (not the finished phones), says Smith Brittingham, an attorney at Finnegan Henderson law firm and a former ITC investigative attorney. Bullock may also be asking for a cease-and-desist order prohibiting Qualcomm from marketing the imported chips in the U.S., he says. If Broadcom and Qualcomm appeal this decision in the next 10 days, which both companies say they plan to do, the actual remedy will be determined in February, when the commission will either echo or overturn the judge's ruling.

If Qualcomm is prevented from importing the chip into the U.S., the company says that won't make much of a difference to its customers. "Our commercial shipments of chips"—to clients like Motorola, Kyocera (KYO), and others—"occur outside of the U.S.," says Alex Rogers, Qualcomm's vice-president and legal counsel. Qualcomm's baseband chips (the chips the judge ruled to have infringed on the Broadband patent) allow the processor inside a phone to talk to other parts like the antenna and to regulate power supply. The chips are made by foundries like Taiwan Semiconductor Manufacturing (TSM) in Asia and assembled into mobiles by handset makers there, too. The only chips Qualcomm imports into the U.S. today are used for internal testing, Rogers says.

As a result, Qualcomm is claiming a legal victory. "This is a very important step forward in favor of Qualcomm," Rogers says. Reassured, investors led a rally in Qualcomm's shares, pushing them up 2.29%, to $37.07, on Oct. 10 (see BusinessWeek.com, 10/3/06, "S&P Upgrades Qualcomm to Strong Buy"). The stock is still down 17% from a year ago.

BROADCOM'S TAKE.

But is this ruling really a victory for Qualcomm? Not by a long shot. In fact, Broadcom is claiming a victory. "We are gratified that the judge found a core patent infringed," says David Rosmann, an attorney for Broadcom.