Shares of chipmaker Qualcomm soared 23% on Tuesday after announcing that it had settled a long-running legal feud with Apple over licensing fees.
Qualcomm’s shares gained $13.27 to close at $70.45 in regular trading, marking the stock’s best day since 1999.
While lifting Qualcomm’s shares, the settlement didn’t help Apple’s stock, which was largely unchanged at $199.25. The settlement, which includes an agreement by Apple to use Qualcomm’s chips, may help Apple’s plans to add high-speed 5G service to its future phones.
What was the suit about?
Apple started using Qualcomm’s chips, which allow the iPhone to connect to cellular networks, in 2011. In addition to paying for the chips, Apple was supposed to pay Qualcomm a licensing fee based on the chips’ underlying patents. To offset some of that extra cost, Qualcomm had agreed to give Apple a $1 billion annual rebate.
But two sides started bickering when Apple decided, instead, to explore working with Intel for the iPhone’s chips. At the same time, Apple also started cooperating with regulators in Korea who were looking into Qualcomm’s royalty practices.
Apple argued that the chip technology it licensed from Qualcomm was fundamental to how smartphone’s work, and that its payments should therefore be at a “reasonable rate,” under the law. In 2016, Apple refused to pay the fees while Qualcomm refused to pay Apple the $1 billion called for in its agreement.
A year later, Apple had switched to making its phones with Intel chips and filed a suit against Qualcomm asking for that $1 billion and a lower royalty rate. Qualcomm countersued Apple for failing to paying royalties and for working with Intel.
In its suit, Apple claimed that the $7.50 royalty fee it paid per chip was unfair. It asked to pay only $1.50 per chip instead, or 5% of the chip’s sale price.
Proceedings between the two companies began Monday in federal court in San Diego. Qualcomm demanded $7 billion in royalties while Apple asked for $27 billion in compensation for unfair business practices.
Meanwhile, the Federal Trade Commission also sued Qualcomm in January 2017; that case was finally heard in January 2019. While the judge has yet to rule, she has already said that Qualcomm would have to license its patents to other chipmakers—something it had previously declined to do.
Based on the decision in the FTC suit, Apple was assumed to have the edge in its case.
In the end, Apple and Qualcomm agreed to dismiss all litigation between them worldwide. A joint press release announcing the settlement also notes that Apple has agreed to pay Qualcomm an unspecified amount.
Why did Apple settle?
Qualcomm holds key patents for technology that let phones connect to 5G networks, a faster successor to 4G LTE that is just starting to roll out. Without Qualcomm chips, it would likely take Apple significantly longer to bring 5G to future iPhones, putting it behind other smartphone manufacturers.
As part of its settlement, the two companies said that they had reached a six-year license agreement, effective April 1 of this year. It also included a multiyear agreement for Qualcomm to supply chips to Apple.
