Qualcomm Says Apple Suppliers are Underpaying Royalties Amid Legal Dispute

Qualcomm today reported earnings for the second fiscal quarter of 2017, and in its report, the company says Apple suppliers are withholding royalty payments amid Apple's ongoing legal dispute with Qualcomm. [PDF]

According to Qualcomm, Apple's contract manufacturers underpaid royalties in Q2 2017 in an amount equal to that which Qualcomm has not paid Apple. Qualcomm says this hasn't had a negative impact on revenue, but it could be an issue next quarter if manufacturers continue to underpay.

Apple's contract manufacturers reported, but underpaid, royalties in the second quarter of fiscal 2017. However, our revenues were not negatively impacted as the contract manufacturers acknowledged the amounts are due and the underpayment was equal to the amounts that Qualcomm has not paid Apple under our Cooperation Agreement that are currently in dispute. The Cooperation Agreement expired December 31, 2016.

It is not clear whether Apple's contract manufacturers will underpay royalties owed under their contracts with us in the third quarter of fiscal 2017, which could have a negative impact on our financial results. Our guidance range for fiscal third quarter EPS is wider than our typical practice primarily due to this uncertainty. We have considered a variety of scenarios within this range, but have not included a scenario where no payment is made by the contract manufacturers. We will update our guidance if we subsequently learn of any action that would take us outside of the announced guidance range.

Qualcomm and Apple are embroiled in an ongoing legal dispute that dates back to an FTC complaint alleging Qualcomm engaged in anticompetitive patent licensing practices. Shortly after the FTC filed its complaint, Apple levied a lawsuit against Qualcomm, accusing the company of charging unfair royalties for "technologies they have nothing to do with."

Apple claims that Qualcomm "reinforces its dominance" through exclusionary tactics and high patent licensing fees, charging Apple "at least five times more" in payments than other cellular patent licensors.

Qualcomm has separately refused to pay Apple quarterly rebates due to Apple's participation in an antitrust lawsuit against Qualcomm in South Korea, which has led Apple to seek $1 billion in rebate repayments. Qualcomm has called Apple's claims "baseless" and has accused Apple of "encouraging regulatory attacks."

Earlier this month, Qualcomm filed a countersuit against Apple, claiming Apple has breached its licensing agreements, made false statements, and encouraged regulatory attacks on Qualcomm's business in multiple countries. According to Qualcomm, Apple "could not have built the incredible iPhone franchise" without relying on Qualcomm's "fundamental cellular technologies."