Apple aims to upend royalty setup

• Court case is a challenge to the way Qualcomm calculates its licensing fees

Apple has sued Qualcomm, accusing it of monopolising the market for chips for wireless devices and for withholding $1bn in retaliation for Apple’s cooperation with South Korean antitrust authorities.

Apple is demanding Qualcomm hand over the money, which was supposed to be a rebate for licensing fees, according to the complaint filed in San Diego, where Qualcomm is based. Apple also wants back some of the billions of dollars it claims it was overcharged in “Qualcomm’s illegal scheme” to control the market for mobile phone chips.

It wants a court to change how Qualcomm charges for its technology in the future.

Qualcomm, the largest maker of cellphone chips, has been under fire by regulators the across the world for its patent licensing practices.

The lawsuit, filed on Friday, is the first direct challenge by one of its biggest customers and threatens to upend how royalties are calculated by any owner of a patent on technology that underlies modern electronics.

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Qualcomm shares fell 2.4% to close at $63 in New York. Apple rose less than 1% to $120.

At the heart of the dispute between Apple and Qualcomm is a push by phone makers with the support of regulators to reduce the patent royalties Qualcomm charges.

Qualcomm gets the bulk of its revenue from selling chips, but more than half of its profit from the separate licensing business. Its patents cover the fundamentals of cellular technology, allowing it to rake in billions in licensing fees.

The chip maker gets paid regardless of whether its chips are used in cellphones or not.

The contention is that royalty rates should be calculated as a percentage of the price of the components in the phone, which are measured in tens of dollars. At present, licensing is a percentage of the price of the entire phone, which is usually in the hundreds of dollars.

Qualcomm general counsel Don Rosenberg said: “Apple has intentionally mischaracterised our agreements and negotiations, as well as the enormity and value of the technology we have invented, contributed and shared with all mobile device makers through our licensing programme.”

Qualcomm also accused Apple of encouraging regulators to attack Qualcomm in “various jurisdictions around the world”.

“Qualcomm built its business on older, legacy standards but reinforces its dominance through exclusionary tactics and excessive royalties. Qualcomm insists on charging Apple at least five times more in payments than all the other cellular patent licensors we have agreements with combined,” Apple said.

The complaint challenges the validity of some key Qualcomm patents for wireless technologies. Apple asks the court to rule that, if the patents are upheld, that the royalty amount is significantly lower than Qualcomm charges now.

In December, South Korea, home to two of Qualcomm’s largest customers, fined the company 1.03-trillion won ($875m) and described its practices as monopolistic. Qualcomm has said it would appeal against the decision. Under the agreement with Qualcomm, Apple said it was forced to refrain from taking any steps to challenge Qualcomm’s business model. Apple complied with investigation demands from Korean regulators, an action Qualcomm claimed was in violation of the agreement. In retaliation,