Agency Bans Qualcomm Chips in New U.S. Cell Phones
{{#rendered}} {{/rendered}}A U.S. trade agency on Thursday banned imports of future advanced cell phone models using Qualcomm Inc. (QCOM) chips, potentially hurting the country's biggest wireless services.
The International Trade Commission's ban, which is being appealed, exempts models already being sold. The ITC said the Qualcomm chips infringed a patent owned by Broadcom (BRCM) Corp.
Qualcomm and Verizon Wireless, the second-biggest U.S. mobile service provider, said they planned to ask the Bush administration to invalidate the order and Qualcomm said it would seek an emergency stay from the U.S. Federal Circuit Court of Appeals, which specializes in patent cases.
{{#rendered}} {{/rendered}}Shares of Qualcomm rose as much as 2.4 percent after the news as some investors had feared an even tougher ban that would include existing as well as future phones.
Paul Jacobs, chief executive of Qualcomm, said the ITC had overstepped its authority with a ban he said would stop the sale of "tens of millions" of phones in the future.
"This remedy decision by the ITC was wrong," Jacobs said on a conference call with analysts. "While there is no short-term disruption to Qualcomm, this decision immediately affects third parties," he said, referring to consumers, service providers and phone manufacturers.
{{#rendered}} {{/rendered}}Qualcomm executives said they would look at ways to create designs that would avoid infringing the Broadcom patents but said this would take time as manufacturers and service providers would have to approve the changes.
Besides Qualcomm, the ban on new phone models with its chips would hurt Sprint Nextel (S) Corp, the No. 3. mobile provider, as well as Verizon Wireless (VZ). The carriers depend on having the latest phones to keep customers and win new ones.
Oppenheimer analysts Lawrence Harris said the ban would hurt Samsung Electronics Co Ltd and LG Electronics, both big users of Qualcomm chips. Sales at Motorola Inc, the No. 1 cell phone maker for the U.S. market, could also be reduced, he said.
{{#rendered}} {{/rendered}}Investors may not understand the full implications of the decision, according to Stifel Nicolaus analyst Cody Acree.
"It's a bigger deal than the market is making it out to be," he said. "We think it's a significant hit to Qualcomm and the carriers."
INNOVATION FREEZE
{{#rendered}} {{/rendered}}The ITC said banning all devices containing the infringing chips would "adversely affect the public interest" and be too burdensome on operators and other third parties. But it also said a remedy not affecting any of them would be inadequate.
The ITC is an independent federal agency that determines whether imported products infringe U.S. patents, trademarks or copyrights.
Four out of six ITC commissioners voted for the remedy, with two arguing for a less stringent penalty.
{{#rendered}} {{/rendered}}Under U.S. law, the White House can invalidate an ITC order within 60 days if it sees the order as bad public policy.
A spokeswoman for the U.S. Trade Representative said the administration "will be engaging in our normal internal and inter-agency procedures governing policy review of the order."
The Broadcom patent at issue covers technology used to extend the battery life of cell phones when they are outside network coverage. Broadcom said it was pleased with the ruling and was open to discussing possible licensing of the patent.
{{#rendered}} {{/rendered}}Verizon Wireless, owned by Verizon Communications and Vodafone Group Plc, criticized the ruling.
"It's a bad order that essentially attempts to freeze innovation in cell phones, and it obviously won't stand through the process," said spokesman James Gerace.
Sprint said it expects sales in 2007 of phones carrying the patent-infringing Qualcomm chips to be 5 million despite the ban. Sprint said it will work with suppliers to avoid disruptions.
{{#rendered}} {{/rendered}}The case involves phones based on two types of high-speed wireless technology, EV-DO — for which Qualcomm is the dominant chip supplier — and W- CDMA.
Sprint and Verizon Wireless, the No. 2 U.S. mobile service, base their most advanced services on EV-DO.
The ban would have a smaller impact on W-CDMA user AT&T Inc., the biggest U.S. mobile provider.
{{#rendered}} {{/rendered}}Qualcomm supplies chips and technology licenses for W-CDMA phones but does not have a majority chip share in this market, led by Texas Instruments Inc.
Former ITC attorney Lyle Vander Schaaf said it is extremely rare for a president to invalidate an ITC order but more conceivable in a case where two commissioners had dissented.
He said it was rare for the appeals court to stay an ITC order while an appeal is pending.