Apple Halts Qualcomm Royalty Payments During Legal Battle

Apple has taken its fight with Qualcomm out of the courts and into the balance sheets. Qualcomm said in a press release that Apple has withheld royalty payments from manufacturers, which means those manufacturers can't pay Qualcomm the licensing fees it's owed for the first quarter of 2017. This in turn means that Qualcomm is taking a hit to one of its primary sources of income while fighting a legal battle in courts around the world.

Qualcomm said Apple has "indicated it will continue this behavior until its dispute with Qualcomm is resolved." The dispute in question is Apple's claim that Qualcomm abuses the popularity of its products to force other companies into restrictive and expensive licensing agreements. Apple took those complaints to courts in California and Beijing in January; the Federal Trade Commission also accused Qualcomm of wrongdoing that same month.

The result is a global battle wherein Apple is seeking $1 billion and 1 billion yuan in damages. Apple CEO Tim Cook said in an earnings call that this was a last resort. "I don't like litigation," he said. "And so if there's another way, then that would be great, but at this point I don't see it. I fully expect at this point in time that it will take some time, but in the end I think common sense will prevail, and the courts will see it for what it is."

Now it seems that Apple has found that other way--holding onto its money instead of making royalty payments to manufacturers to cover Qualcomm's licensing fees. Here's what Qualcomm executive vice president and general counsel Dan Rosenberg said about Apple's decision:

These license agreements remain valid and enforceable. While Apple has acknowledged that payment is owed for the use of Qualcomm's valuable intellectual property, it nevertheless continues to interfere with our contracts. Apple has now unilaterally declared the contract terms unacceptable; the same terms that have applied to iPhones and cellular-enabled iPads for a decade. Apple's continued interference with Qualcomm's agreements to which Apple is not a party is wrongful and the latest step in Apple's global attack on Qualcomm. We will continue vigorously to defend our business model, and pursue our right to protect and receive fair value for our technological contributions to the industry.

Qualcomm adjusted its earnings guidance for Q3 2017 as a result of Apple's decision. It seems the company expects to lose about $500 million because of the withheld royalty payments. It previously said it expected to have revenues between $5.3 billion and $6.1 billion; now it expects those figures to be between $4.8 billion and $5.6 billion. That's between a 7% and 21% decrease from the company's revenues in Q3 2016.

So it seems the Goliath vs. Goliath battle will continue. Qualcomm filed a counterclaim in April saying that Apple has used its "enormous market power to coerce unfair and unreasonable license terms from Qualcomm" in previous dealings. The company also suffered a loss in April when it was ordered to refund $815 million in royalty payments to BlackBerry. Things simply aren't coming up Qualcomm, at least in this stage.