Qualcomm Hustles to Counteract Broadcom Court Victory

Qualcomm (Nasdaq: QCOM) began the new year by scrambling to deal with an old problem. The mobile chip maker will appeal a judge's injunction barring it from selling products found to infringe on patents held by rival Broadcom (Nasdaq: BRCM).

San Diego-based Qualcomm intends to push hard to finalize development of work-around alternatives to the disputed technology, but it acknowledged the ruling will have "an immediate short-term impact" if it cannot "obtain further relief and clarity" from the court.

Qualcomm did not issue new financial guidance, but said it would update investors later this month.

Sunset Provision

The order, handed down Monday by Federal District Judge James V. Selna, bars Qualcomm from selling products that were found to infringe any of three patents held by Broadcom. The judge included a sunset provision that allows Qualcomm to continue selling until January of 2009 some products -- in its QChat and 1x/EV-DO lines -- that were already on the market as of last June.

Those products will be subject to a royalty payment. The judge set a 4.5 percent royalty rate for one of the patents, a 6 percent rate for another and ordered the two companies to negotiate a rate for the third patent.

Qualcomm is "evaluating all options," it said, including seeking appropriate stays and appeals. It also noted that the U.S. Patent Office has instituted a re-examination of the validity of one of the three patents.

Qualcomm shares were down 1.75 percent in morning trading Wednesday to US$38.66. Broadcom shares were up about 1 percent to $26.39.

Working on Work-Around

Qualcomm has developed new chipsets that do not include the disputed technology, it said, noting that those products will take time to reach the market due to the need to have the chips certified by carriers and handset makers and to make production changes.

A new chipset that eliminates a video encoding patent claimed by Broadcom has already been sent to customers for testing and should be available commercially by the end of the first quarter.

The injunction is the second Qualcomm has faced in recent months. The first was issued by the U.S. International Trade Commission, which barred the import into the United States of mobile phones containing chipsets with technology Broadcom claimed was its own. That order was modified later by an appeals court at the behest of handset makers who said they were being unduly harmed by the injunction.

Qualcomm may have a strong argument for a stay of the injunction, if it can demonstrate the order will irreparably harm the business of key customers such as AT&T (NYSE: T), JPMorgan analyst Ehud Gelblum said in a research note.

Alternatives Sought

Repeated legal battles take their toll on a company such as Qualcomm, American Technology Research analyst Mark McKechnie told the E-Commerce Times, not only as a distraction, but because the disputes can prompt customers to look elsewhere for products.

"The pressure is on Qualcomm to wrap these matters up with a settlement that puts their customers' minds at ease," McKechnie said. For instance, key customer Motorola (NYSE: MOT) was said to be weighing a switch to Texas Instruments (NYSE: TXN) chips for some next-generation handsets at one point in 2007.

Qualcomm has for years been lauded as a prime example of how a patent portfolio can be a path to profits, but has seen its business model come under pressure recently as rivals' products have gained traction in the market and as some of its own patents have come under fire, said Gartner (NYSE: IT) analyst Alan Brown.

"There's many more alternatives out there now than just a couple years ago," Brown told the E-Commerce Times. "As mobile technology evolves and customers find alternatives, the value of Qualcomm's portfolio becomes less clear, but it remains a formidable patent collection."