Apple and its contract manufacturers have paid Qualcomm billions of dollars for chips and licensing, but the bill should have been much lower, their attorneys said Tuesday in opening arguments at the trial that will determine the future of Qualcomm's licensing business. 

Qualcomm's no license, no chips policy -- in which it wouldn't provide processors to a phone maker until the company signed a licensing agreement -- meant it effectively charged Apple twice for its patents, said Ruffin Cordell, an attorney with Fish & Richardson who's representing Apple.

"No license, no chips allows them to double dip," he said during opening arguments. "They get paid twice for the same product. ... The other thing it does is allow them to charge patent royalties that are far in excess of that fair and reasonable level."

Monday marked the start of the five-week, $27 billion trial that will determine whether Qualcomm operates a smartphone modem chip monopoly that charges too much in licensing fees. The jury trial is being argued before US District Court Judge Gonzalo P. Curiel of the Southern District of California in San Diego. The outcome could affect what wireless networks your phone taps into.   

Apple has accused Qualcomm of anticompetitive practices that have raised chip prices, restricted competition and hurt customer choice. Qualcomm has countered that Apple's iPhone wouldn't be possible without its technology, and it deserves to be paid for its innovation. 

Qualcomm engaged in four anticompetitive acts, Cordell said Tuesday. It had a policy of not licensing patents to competitors, which he said broke Qualcomm's vow to the standards body. Qualcomm's no license, no chips strategy made customers pay twice, Cordell said, while its exclusivity agreements locked out competition. Qualcomm's agreements with companies also included obstruction/gag clauses that reinforced Qualcomm's "illegal scheme."

"This case is about the fact that Qualcomm has used its monopoly ... to set unfair prices and stifle competition and dictate terms to some of the biggest, most powerful companies in the world, that rational companies would never agree to in a million years," Cordell said. 

From 2010 to 2016, the iPhone maker paid Qualcomm $16.1 billion for chips and $7.23 billion for licensing fees. But the amount should have been much lower, Apple says. 

Cordell noted that 20% of mobile standard essentials patents come from Qualcomm, while 40% come from Ericsson, Nokia, LG, Huawei and InterDigital combined. Those companies together get paid royalties of $3.34 per iPhone, he said. Qualcomm demands $13, Cordell said. 

"Does that make any sense?" Cordell says. "Is that fair and reasonable?"

While Cordell said Qualcomm asked for royalties of $13 per iPhone, Apple testimony during an FTC trial against Qualcomm in January revealed that discounts lowered the Qualcomm licensing fee to $7.50 per iPhone. During the trial, Apple said it should pay only $1.50 per device, a 5 percent fee for the cost of each $30 modem used in an iPhone. 

Apple has long made the processors that act as the brains of its iPhones, but the company has relied on Qualcomm's modems to connect its devices to cell networks. From the iPhone 4S in 2011 to the iPhone X in 2017, Qualcomm was the sole provider of 4G chips that helped Apple's devices access Verizon, AT&T and other wireless services.

Qualcomm is the world's biggest provider of mobile chips, and it created technology that's essential for connecting phones to cellular networks. The company derives a significant portion of its revenue from licensing those inventions to more than 300 device makers, mostly handset companies. Some patent holders license their intellectual property on an individual basis; Qualcomm licenses all its patents as a group. For a set fee, a device maker gets to use all of Qualcomm's technology.

Because Qualcomm owns patents related to 3G, 4G and 5G phones -- as well as other features like software -- any handset makers building a device that connects to a network must pay it a licensing fee, even if they don't use Qualcomm's chips. Apple licenses Qualcomm's technology through its manufacturers, like Foxconn, rather than purchasing a license of its own.

Apple, which initially filed suit against Qualcomm in January 2017, argues that it essentially pays Qualcomm twice, first by purchasing processors and then by paying royalty fees. The tech giant says it should pay fees based only on the cost of the wireless chip inside its iPhones. Apple partners Foxconn and Pegatron, which assemble its devices, agree and have joined the lawsuit. Qualcomm counters that it isn't a monopoly and says its technology is more than modems so it should be compensated based on the selling price of the phone itself.

"In the summer of 2016, Qualcomm went too far," Cordell said during Tuesday's opening arguments. "Apple was asked questions by the government. Apple answered the questions, and that enraged Qualcomm." Then Apple "had the audacity to buy products" from another company, which also "enraged Qualcomm," he said. 

At stake in the case are tens of billions of dollars. Apple's manufacturing partners want a refund of $9 billion for allegedly overpaying royalties since 2013. Under antitrust law, that amount could be tripled. Qualcomm wants damages of its own for breach of contract, though it hasn't detailed the amount. An even bigger concern for Qualcomm: whether it will have to change its entire business model, collecting far lower royalties based on the price of its chips, not the phones they're in.

The contract manufacturers paid Qualcomm $31 billion for chips from 2010 to 2016 and overpaid $7 billion to $9 billion, Richard Doren of Gibson Dunn said Tuesday during opening arguments on behalf of Foxconn, Pegatron, Wistron and Compal. The overpayment is what could be tripled under antitrust law. 

"Why didn't the contract manufacturers step up?" Doren said. "The reality is they didn't dare. They are literally between a rock and a hard place" -- between their customers and Qualcomm demands. "It's a delicate and difficult balance. But if you don't maintain it, you will not survive, and so they stayed quiet," he said. 

For consumers, this ongoing battle could result in iPhone connectivity speeds that can't match up to those of Android devices. Apple's current modem supplier, Intel, doesn't yet have a 5G chip ready. Qualcomm is the only option for handset makers that want to tap into the ultrafast wireless network this year. We may not see a 5G iPhone until 2020 or even 2021. And if Qualcomm and Apple can't resolve their problems, it's unlikely Apple will have Qualcomm modems in its iPhones again anytime soon. Even if Apple succeeds in its quest to lower Qualcomm's licensing fees, it's highly unlikely that Apple will cut its iPhone prices and pass the savings to consumers. 

Originally published at 10:39 a.m. PTUpdate at 11:11 a.m.: Adds comments from contract manufacturers' attorney

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