The U.S. federal court in San Diego, California has ruled that Qualcomm Inc. had engaged in aggravated litigation misconduct and standards abuse with respect to two of the company’s patents that relate to digital video technology. The court ruled that the handset manufacturer has, "waived its rights to enforce all claims of the two patents and any continuations, continuations-in-part, divisions, reissues or any other derivatives of those patents."

Aldo Cugnini
Analyst

In plain speak, this means that Qualcomm has essentially lost any rights to enforce the patents 5,452,104 and 5,576,767, which relate to digital video technology, and especially MPEG?4 AVC/H.264 compression. The court held that Qualcomm had deliberately concealed the patents from the standard setting body responsible for developing the H.264 standard, therefore precluding Qualcomm from enforcing the patents. The court also ordered Qualcomm to pay all of Broadcom’s reasonable attorneys’ fees, court costs, expert witness fees, travel expenses and any other litigation costs reasonably incurred by Broadcom in defending the patent infringement case that led to the rulings. In a statement issued last week, Qualcomm said it "respectfully disagrees" with the court’s ruling, and intends to file an appeal.

Citing the misconduct of Qualcomm’s employees, witnesses and counsel before, during and after trial, the court found "clear and convincing evidence based on (1) Qualcomm’s bad faith participation in the H.264 standard-setting body, the Joint Video Team; and (2) the litigation misconduct of Qualcomm through its employees, hired outside witnesses, and trial counsel during discovery, motions practice, trial and post-trial proceedings."

According to the court, "Qualcomm closely monitored and participated in the development of the H.264 standard, all the while concealing the existence of at least two patents it believed were likely to be essential to the practice of the standard, until after the development was completed and the standard was published internationally. Then, without any prior letter, email, telephone call, or even a smoke signal, let alone attempt to license Broadcom, Qualcomm filed the instant lawsuit against Broadcom for infringement of the ‘104 and ‘767 patents."

"The court’s findings indicate that this is one of the most serious and egregious cases of standards abuse and litigation misconduct that our industry has ever witnessed," said David Rosmann, Broadcom’s VP of Intellectual Property Litigation. "While we are gratified with the court’s ruling, we are also disappointed that Qualcomm chose to stoop to such tactics." Broadcom is pursuing other patent cases against Qualcomm, while the latter had either lost or withdrawn all patent lawsuits against Broadcom.

Earlier this year, the International Trade Commission (ITC) issued a ruling to ban imports into the U.S. of 3G handsets containing Qualcomm chips. The Bush administration refused a request by Qualcomm to veto the ruling. Qualcomm stated that it is working on a technical work-around solution with its customers, mainly Asian handset manufacturers.

Qualcomm said in a statement that it still maintains that Broadcom’s patents are not valid. And it said it is still working on an appeal and stay request with the Federal Circuit Court of Appeals. However, the appeals court seldom overturns ITC decisions, and there seem to be few other avenues open for Qualcomm, according to Lyle Vander Schaaf, a former ITC lawyer, as quoted in the Financial Times. "Options for Qualcomm, other than settlement [with Broadcom], are going away," he said.

Because of the potential rat’s nest of licensing agreements covering these technologies, many companies holding MPEG-related intellectual property have opted to work with the "one-stop" licensing organization MPEG-LA. Interestingly, according to information available from MPEG-LA, Qualcomm is not one of their signatories.

Companies participating in standards development are required to disclose all patents that may be pertinent to the standards. If the court decision is upheld on appeal, this would represent a serious breach of "standards ethics" and trial conduct, and will send a strong signal to patent trolls everywhere that "patent ambush" will not be tolerated.

What will this mean to Qualcomm? First, the news was greeted with a decline in the company’s stock. And, depending on their legal "war chest," Qualcomm may decide to continue the fight, but this may be a case of diminishing returns. If the company has in fact has lost the ability to defend these patents, and has technical work-arounds for the banned chips, it will have no inherent advantage with this intellectual property, either as a competitive feature or as a blocking technology. Thus, these specific units will succumb to the commodity nature of the business. On Monday, Qualcomm’s head lawyer resigned, apparently a casualty of the recent string of legal setbacks for the company. Lou Lupin, 52, had led efforts to build and defend the company’s business of licensing rights to its patented technology to other companies. Carol Lam, one of eight federal prosecutors fired by the Bush administration this year, was named his interim replacement. There comes a point where a company needs to re-evaluate its strategic balance between innovation, competitive blocking, and royalty development. It looks like that time has come.

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