SAN FRANCISCO -- For the past two years, Apple and Qualcomm have dueled on three continents over the division of billions of dollars of smartphone profits and even how much consumers pay for their phones.
On Tuesday, just as a trial had begun in a federal courtroom in San Diego over a suit Apple had filed against Qualcomm, the two companies said they had essentially made up.
The companies, one the maker of iPhones and the other one of the largest providers of mobile chips, said they had agreed to dismiss all litigation between them worldwide. They added that they had reached a six-year agreement for Apple to pay royalties on Qualcomm's patents, which was effective as of April 1.
That deal included a two-year option to extend, plus a multiyear chip supply agreement. In addition, Apple will make an undisclosed one-time payment to Qualcomm and pay unspecified patent royalties to the chipmaker.
Qualcomm's stock gained 23.2 percent Tuesday, the most in a single day since 1999. Apple shares rose 0.01 percent.
At the heart of the disputes was a disagreement over how Qualcomm charges royalties on patents it holds on mobile chips. The company, based in San Diego, had pioneered a type of cellular communications in the 1990s that later became a mainstay of mobile devices. It charged the royalties on nearly every smartphone sold -- even if the phone did not actually use Qualcomm chips. Apple eventually objected to that arrangement.
The provisions of the deal announced Tuesday suggest at least a partial victory for Qualcomm's patent-driven business model, which has also attracted harsh scrutiny from regulators like the Federal Trade Commission in a separate case awaiting a federal judge's ruling.
Separately, Qualcomm faces a class action on behalf of as many as 250 million consumers seeking as much as $5 billion in damages over claims that they suffered from inflated retail prices. The company has said it's probably the largest class action in history and is asking an appeals court to block the consumers from proceeding as a group.
A victory for Apple in San Diego would have hampered Qualcomm's ability to collect fees on the technology that powers mobile phones. But Apple had an incentive to settle, too. The arrangement helps keep the company from falling behind in fifth generation, or 5G, technologies designed to provide blanket wireless coverage and propel faster and more versatile mobile services. Apple's current modem supplier, Intel Corp., won't have its 5G chip in phones until next year -- about the time Qualcomm expects to have an updated 5G modem available.
Apple's biggest rival, Samsung Electronics Co., already has a phone in the market that will support that new technology based on a Qualcomm chip.
"There were worries that this was going to be a nasty court battle, and I think that Apple realized, despite wanting to make a statement, that it was in their best interest, based on 5G and licensing issues, to settle," said Dan Ives, an analyst at Wedbush Securities. "Apple and Qualcomm both had more to lose in trial than if they just settled."
In agreeing to settle the case, Apple tacitly acknowledged that it was able to live with Qualcomm's business model -- assuming the price of Qualcomm's royalties is more to Apple's liking. The parties disclosed no financial details.
An Apple spokesman and a Qualcomm spokesman said no further details of the settlement were immediately available. Qualcomm said more information might be disclosed when it releases financial results on May 1. Apple is to report its quarterly results on April 30.
The FTC, in its case filed in early 2017, alleged that Qualcomm was able to charge unfairly large royalties because handset makers had no leverage to negotiate, especially because Qualcomm supplied two key types of chips and could cut off shipments if they balked at paying royalties. A nonjury trial in San Jose, Calif., was held in January.
Apple, which sued Qualcomm shortly after the FTC's action in early 2017, objected particularly to basing royalties on a phone's total price. That formula, Apple argued, meant that Qualcomm earns more money as handset makers add innovations like displays, touch sensors and data storage unrelated to wireless technology.
The case dragged on with four Asia-based contract manufacturers that assemble iPhones and iPads, whose suits against Qualcomm were merged with Apple's. They argued that they collectively overpaid Qualcomm roughly $9 billion in royalties over the years -- a figure that could have been tripled under antitrust laws to $27 billion. Apple had said Qualcomm should also repay $3.1 billion associated with patents whose rights Apple says have exhausted.
On Monday morning just before the agreement, Qualcomm lawyer Evan Chesler was wrapping up his opening statement, telling jurors that Apple had been planning the legal assault of the chipmaker's business model for years.
"It was all planned in advance, every bit of it," Chesler said. He cited an internal Apple document indicating that it would be beneficial for the iPhone maker to wait to provoke a patent fight with Qualcomm until after 2016, when the companies' previous deal would expire.
Apple's lawyer Ruffin Cordell told the jury that Qualcomm had broken a commitment to license technology to competing chipmakers, driving them out of the market for modems and using the resulting market dominance to dictate licensing terms to phone manufacturers who had no choice but to agree.
The settlement between Qualcomm and Apple caught the technology industry by surprise. In the past, Apple had refused to settle an intellectual property fight with Samsung Electronics, pursuing the case for seven years all the way to the Supreme Court before eventually calling a truce last year. The case with Qualcomm had gotten so ugly and so personal that observers thought Apple would be even less likely to settle quickly.
"I'm floored," said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, a technology analysis firm. "Qualcomm got the bigger win because it had the most to lose and the most to gain. And it ended today."
Moorhead said both sides had incentive to wrap up the proceedings. For Apple, this deal seems to open the door for future iPhones to be able to use Qualcomm's wireless chips with faster 5G connectivity -- something that competitors are expected to start introducing this year. For Qualcomm, it no longer has the industry's biggest brand threatening to upend how it makes money.
Information for this article was contributed by Don Clark and Daisuke Wakabayashi of The New York Times; by Ian King and Mark Gurman of Bloomberg News; and by Michael Liedtke of The Associated Press.
A Section on 04/17/2019