SAN JOSE, Calif. – Apple and Qualcomm announced they have dropped all litigation in a multi-billion-dollar patent licensing dispute that has dragged on for more than two years across courts in China, Germany and the U.S. However, the sketchy details of the settlement leaves many unanswered questions

Under the deal Apple will pay Qualcomm an undisclosed fee. Qualcomm will give Apple a six-year license to its patents with an option for a two-year extension. It also signed a multi-year chip supply agreement with Apple.

Qualcomm said it expects a $2 increase in its earnings per share as a result of the deal from a combination of royalties and chip sales. It will provide more details on its next quarterly earnings call on May 1.

For Qualcomm the settlement could translate to billions of dollars in annual royalties and product sales from Apple. For Apple, it potentially means fielding a 5G iPhone many months sooner than expected to counter rivals Samsung, Huawei, Xiaomi and others who already have such handsets. Both sides could see legal costs decline by tens of millions of dollars a year.

After the settlement was announced, Intel said it will exit the 5G modem business. Apple was believed to be the sole customer for Intel's already delayed product.

The deal came just hours into the start of one of the landmark cases in the dispute in San Diego. In separate cases, China and German courts banned some iPhones from sale in their jurisdictions due to patent infringement, but Apple minimized damages in some cases by updating software on affected handsets.

While the San Diego case will not proceed, a judge in San Jose is still expected to rule in a suit against Qualcomm brought by the Federal Trade Commission.

The FTC asked the court to prohibit Qualcomm from requiring a patent license as a condition of selling its chips. Qualcomm’s “no license, no chips” policy remains central to its licensing program that generates much of its corporate profits.

The judge’s decision in the FTC case could force Qualcomm to renegotiate some of its licensing deals and rates. It could also force it to license rival chip vendors with its standard-essential patents

The Apple dispute also spawned a consumer class action suit against Qualcomm. However, one attorney watching the cases said the suit “was an uphill climb.”

Qcomm Apple agreement

Qualcomm’s summary of its settlement deal with Apple. (Source: Qualcomm)

Dispute dates back to first iPhone design in 2005

The dispute between the two companies started in 2005 during the design phase of the first iPhone. Apple requested samples of Qualcomm chips it was considering for the landmark handset; Qualcomm sent a patent license agreement it required before sending any samples.

“In 20 years in this industry, I had never seen a letter like this … Our interpretation was ‘no license, no chips,’” said Apple supply-chain manager Tony Blevins in testimony in the San Jose case.

Qualcomm also asked for a cross-license to Apple’s IP. “We were taken aback,” Blevins said. “We knew we would not cross-license our IP back to them; we were [just] going to buy a chip.”

In the San Jose case, Apple revealed Qualcomm charges 5% of a handset’s price or $12-$20 per smartphone as a royalty for its cellular patents. Just before the first iPhone was launched, Apple struck a deal with Qualcomm in 2007 to set its royalties on iPhones at $7.50 per handset.

The “7.50 [royalty] may not sound like a lot, but it [amounted to] billions of dollars a year,” said Jeff Williams, who led the first iPhone team and is now Apple’s COO. “It is not FRAND, in our view, compared to everyone else … Qualcomm charged more than everyone else together.” (FRAND stands for fair, reasonable and non-discriminatory.)

Qualcomm CEO Steve Mollenkopf countered in his testimony in San Jose that his company paid Apple an eye-popping $1 billion to win Apple’s cellular modem business. The fee was an unusually high compensation for the non-recurring engineering costs of switching from an Infineon modem to a Qualcomm one.

The two companies struck multiple deals from 2007-2016 until Apple decided to start using Intel cellular modems as part of a search for alternatives it called Project Antique.

Project Antique

Apple’s Project Antique sought to end its reliance on Qualcomm modems after Apple became unhappy with the relationship. (Source: Apple)

Intel's 5G modem exit shows Apple's motivation to settle

Ironically, Apple declined apparently until the latest settlement to take a patent license from Qualcomm directly. Instead, Apple typically reimbursed its contract manufacturers for royalties they paid Qualcomm as part of their patent licenses.

Apple stopped reimbursing its contract manufacturers in early 2017 and the royalties for iPhones stopped. At the time, Qualcomm said the payments were in the neighborhood of $500 million per quarter.

By 2015, disputes over Qualcomm’s royalties were already attracting the attention of regulators in China who struck a deal with the company. In other actions, regulators in Korea and the U.S. International Trade Commission also weighed in on Qualcomm’s patent licensing practices.

With a settlement and chip supply deal in place, Apple is expected to start using Qualcomm silicon in its iPhones. But what chips, and when, are open questions. The most likely candidate is a 5G modem.

Qualcomm already has announced two generations of 5G modems while rival Intel delayed its first 5G chip until later this year. Smartphone rivals Samsung and Huawei also have 5G modems; merchant supplier Mediatek has one in the works.

Apple started hiring 5G modem specialists in San Diego earlier this year. But a design project could take many months and even then would attract patent infringement suits from Qualcomm.

Intel's announcement that it will exit the 5G modem business suggests rumors it was having trouble producing silicon profitably were true. Intel made the announcement strategically just after after the Apple/Qualcomm settlement. Apple likely saw the problems early on, motivating it to settle with Qualcomm as the best supplier of leading-edge 5G chips.

With court cases closing, the industry is left to guess whether Apple struck a significantly better deal on per-handset royalties this time around.