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Evan Chesler.


Cravath, Swaine & Moore partner Evan Chesler kicked off the first major courtroom clash between Apple Inc. and Qualcomm Inc. with a simple yet urgent message: “The house is on fire, your honor.”

He described client Qualcomm, the San Diego telecom company, as under worldwide assault from Apple, which is suing in San Diego federal court for antitrust, breach of contract and a declaration of patent noninfringement. Apple has piled on with similar actions in the U.K., China, Japan and Taiwan.

“We believe we are standing in a boxing ring with our gloves up,” Chesler said, hands aside his head, “with the biggest boxer in the world punching away at us.”

If that’s the case, Aug. 18′s hearing was the first round in what could be a whale of a prize fight. Multiple in-house counsel from each firm ringed the audience along with heavyweight partners from Boies Schiller Flexner and Fish & Richardson for Apple; Gibson, Dunn & Crutcher for Apple’s Qualcomm manufacturers; and Cravath and Jones Day for Qualcomm.

“As you can see by the number of lawyers in the room, this is a complex case,” said Gibson Dunn’s Nicola Hanna, in one of the few understatements of the day.

To put it another way: Remember when Apple’s $1 billion verdict against Samsung in 2012 was considered a big deal? Qualcomm is asking for an injunction ordering Apple’s manufacturers to pay $4 billion a year in royalties just while the parties litigate their dispute.

The Cupertino smartphone maker sued Qualcomm in January, accusing it of using its market dominance over baseband processor chips—the semiconductor units that create cellular connectivity—to leverage above-FRAND royalties on its technology. The company shouldn’t get any royalties at all under the Supreme Court’s recent Lexmark decision on patent exhaustion, Apple argues.

Qualcomm argues that its patented technology extends beyond the mere chips. It has counterclaimed for a declaration of fair, reasonable and nondiscriminatory royalties that Apple owes on its global portfolio of standard-essential patents. It’s asking U.S. District Judge Gonzalo P. Curiel of the Southern District of California for an anti-suit injunction that would put Apple’s foreign suits on hold while Curiel hashes out a FRAND rate. And it wants Curiel to order the Taiwanese contract manufacturers—Foxconn, Pegatron, Wistron Corp. and Compal Inc.—to resume royalty payments, despite Apple’s instructions that they stop.

Qualcomm has suffered about a 20 percent drop in market cap since Apple’s lawsuit, Chesler said, and another large customer recently stopped paying while waiting to see how Apple’s litigation plays out. That’s putting shareholder heat on Qualcomm executives and jeopardizing the company’s investments in research and development at a “critical juncture”for the wireless industry—the development of 5G connectivity.

Curiel sounded skeptical. He noted that the Federal Circuit long ago said lost R&D opportunities can’t give rise to irreparable harm, and that investors could also be reacting to the Federal Trade Commission’s antitrust suit against Qualcomm, filed around the same time as Apple’s.

Gibson Dunn’s Hanna noted that Qualcomm has paid out more than $1 billion in dividends and stock buybacks since Apple sued while assuring investors that the long-term outlook for its licensing business is strong. “This case is about money,” Hanna said. “They want to be paid. And I think as the court knows you don’t get money at the beginning of a breach of contract case.”

Qualcomm won’t identify the other large customer, Hanna said, or the details of its reason for withholding payments. “Maybe they read the Lexmark decision from the Supreme Court this year on patent exhaustion,” Hanna said.

Meanwhile, Boies Schiller partner William Isaacson said Apple has sued over 18 Qualcomm patents only and will not consent to the adjudication of a global FRAND license. The parties were trying to negotiate such a license last year but failed. “The fact that these negotiations broke down does not mean the court has the authority to step in and say ‘I will determine what is fair.’”

Curiel asked if Apple hadn’t made the opposite argument in its FRAND dispute a few years ago with Motorola. Isaacson admitted that the company had, but Judge Barbara Crabb of Wisconsin ruled that would result in an impermissible advisory opinion. “That’s an argument we made to Judge Crabb and we lost,” Isaacson said. “So we’ve learned from that experience.”

Apple’s position seemed to infuriate Chesler, a veteran trial lawyer who is chairman of 475-lawyer Cravath. The 18 patents Apple has put at issue won’t move the needle on negotiations over Qualcomm’s vast portfolio, he said. “These 18 patents are a flea on the tail of a dog,” he told Curiel.

Isaacson disagreed, saying the case could help move negotiations forward. “We don’t want to see the tail of the dog,” Isaacson said. “We want to see the dog.”

Curiel also sounded wary of halting Apple’s overseas suits—at least the antitrust portions of them. He probed Chesler on whether Qualcomm has brought similar worldwide actions to pressure a defendant.

Chesler referred to a state court lawsuit once brought in Delaware. But the case settled before trial “and that ended all the hostilities worldwide,” Chelser said.

“And at some point,” Curiel replied, “I expect the hostilities here will end too.”


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