Qualcomm sues Chinese phone maker over patents

Qualcomm is suing Chinese smartphone maker Meizu for allegedly using the San Diego company’s intellectual property without a patent license.

The lawsuit, announced Friday, is Qualcomm’s first legal battle to enforce its intellectual property rights in China following a settlement of an anti-monopoly investigation with the Chinese government’s National Development and Reform Commission.

As part of the February 2015 settlement, Qualcomm paid a $975 million fine and lowered its patent royalty rates for certain devices sold within China’s borders. But it retained the right to collect patent royalties in China under terms laid out in the NDRC deal.

Qualcomm, which relies on patent royalties for the bulk of its profits, has made progress getting paid for its patents in China. More than 100 Chinese device makers have signed licensing agreements, including top brands Huawei, Lenovo, Xiaomi and ZTE.

Meizu, the eight-largest smartphone maker in China, is one of a handful of remaining holdouts. Online shopping giant Alibaba is an investor in Meizu, which also sells smartphones outside of China.

“They have been very difficult in terms of being cooperative,” said Don Rosenberg, executive vice president and general counsel for Qualcomm. “We have tried to engage them for quite some time, both before and after the agreement with the NDRC.”

This is the first time that Qualcomm has initiated a patent licensing lawsuit in Rosenberg’s nearly nine years as the company’s top lawyer, he said. The company has filed counter-suits when others have taken it to court over patents.

“It is very rare that we bring a lawsuit to enforce our intellectual property rights,” said Rosenberg. “It is largely because the world has accepted the obvious — that we have fundamental technology that we created, developed and patented, not only in (third generation) CDMA but also in current generation 4G LTE.”

The Wall Street Journal reported that Meizu responded to the lawsuit in a post on the WeChat messaging app.

“Meizu has always been staying in close communication with Qualcomm on the patent issue, and has conducted several in-depth discussions with them. We respect Qualcomm’s right to take legal action if they’re not satisfied with the business negotiation,” wrote Meizu Vice President Li Nan.

Tim Arcuri, an analyst with Cowen & Co., said the more aggressive action by Qualcomm was needed.

“We have previously highlighted that we believe that Meizu was the largest holdout and think that this is the right move as Qualcomm needs to demonstrate a willingness to take legal action to prevent interminable negotiations and stalling tactics,” Arcuri wrote in a research note.

He believes Qualcomm will likely prevail, “which should lead to long overdue catch-up payments from Meizu and a quicker setting of terms with the few smaller holdouts.”

Qualcomm’s stock slipped 3.4 percent Friday to close at $52.12 on the Nasdaq exchange. The market overall was down sharply over concerns that England could vote to exit the European Union.