Qualcomm’s royalty is an order of magnitude more than royalties charged by any other patent-holder, Apple alleges, and five times more than those charged by all other cellular pioneers—including Nokia, Ericsson, Interdigital, Samsung, Alcatel-Lucent, and LG Electronics—combined.

“They do some really great work around [cellular] patents,” Apple CEO Tim Cook said last May about Qualcomm during Apple’s earnings call, “but it’s one small part of what an iPhone is. It has nothing do with the display or the Touch ID or a gazillion other innovations that Apple has done.” He was referring to such features—unrelated to connectivity—as cameras, applications, graphics processors, sophisticated operating systems, memory, and more.

The relative size of Qualcomm’s royalty is a “red herring,” asserts Rosenberg. Other cellular innovators have “different business models,” he argues. “We’ve been in the business for a long time and have amassed . . . an extraordinarily strong portfolio of very critical patents,” he continues.

One bone of contention is that Qualcomm’s royalty is based on the price of an entire phone, rather than just the components that provide connectivity. Today, iPhones range in cost from about $400 to almost $1,000, while a stripped-down Kyocera smartphone may go for less than $100. The consumer value of connectivity is about the same for each, Apple argues, so why should Qualcomm collect four to 10 times more in royalties for the iPhone? Similarly, it asks, if a customer pays $200 extra to get an iPhone with a 256-gigabyte memory instead of 16 gigabytes, why should Qualcomm get a piece of that, when its patents have nothing to do with memory?

Qualcomm responds that the bulk royalty it charges actually gives access to patents that extend far beyond connectivity, implicating power management, GPS, app-store operations, video, audio, graphics, and more. In any case, many of the iPhone’s most appealing apps, like Uber, Spotify, Apple Music, Skype, Google Maps, and Pokèmon Go, hinge on the top-tier cellular connectivity enabled by Qualcomm inventions.

Be that as it may, Apple has decided that now is the time to force what it regards as a long-overdue reappraisal of Qualcomm’s royalty slice—a percentage that Qualcomm has managed to hold constant for more than a decade, even as the world has radically changed. In the mid-1990s, Qualcomm contributed more than 90% of the patents incorporated into the second-generation network standard called CDMA. But Qualcomm’s contributions to 3G and 4G standards, phased in since the late 1990s, have dropped to about 27% and 16%, respectively, according to a ruling issued by the Korea Fair Trade Commission in January. When one focuses on the most innovative patents contributed to the 4G standard, known as LTE (for Long Term Evolution), Nokia is actually now the leader, at 19%, while Qualcomm’s contributions (13%) are about equal to those of Samsung and Ericsson (12% each), according to the FTC complaint.

So that’s the rub in the patent dispute. The antitrust question is: How has Qualcomm managed to impose such a high royalty so broadly and so consistently for so many years?

130,000 patents plus two chipset monopolies

Founded in 1985, Qualcomm pioneered early cellular networks and once manufactured cellphones and infrastructure equipment. It withdrew from those businesses in the late 1990s, however, and has, since then, focused on two others: licensing its vast portfolio of patents and marketing cellular semiconductors—especially modem chipsets (also known as baseband processors). Modem chipsets enable phones, tablets, watches, and more to connect to cellular networks. As we transition to a 5G world, and the Internet of Things, modem chipsets will assume increasing importance in automobiles, appliances, and security systems as well. (The Justice Department approved Qualcomm’s proposed $47 billion acquisition of NXP Semiconductors, a leading chip maker in those realms, in April, but the European Commission is still scrutinizing the deal.)

Today, Qualcomm owns about 130,000 patents worldwide, employs about 20,000 engineers, and devotes about 20% of its budget to research and development, continually devising new inventions—and writing new patents. The company’s licensing division accounts for about one third of its revenue, but about two-thirds of its profit, according to a spokesperson.

To ensure that industry participants can design compatible and interoperable equipment for any given cellular network, leading companies form consortiums to agree upon technical standards. It’s long been recognized, however, that incorporation of any patented invention into a standard will greatly magnify that patent-holder’s ordinary coercive powers, since industry participants thereafter will have no choice but to license that technology. For that reason, standard setting organizations, like TIA (the Telecommunications Industry Association) and ETSI (the European Telecommunications Standards Institute), will incorporate a patented invention into a standard only if the patent holder commits, in advance, to licensing that patent on a “fair, reasonable and nondiscriminatory” (FRAND) basis—i.e., a much cheaper and more freely available basis than usual.

Qualcomm has amassed a large portfolio of such standards-essential patents (SEPs) for 2G, 3G, and 4G cellular networks, and it especially dominates the 2G (CDMA) standard, which it largely invented. Qualcomm therefore requires every handset maker to pay a royalty for these SEP patents, regardless of whether they use a Qualcomm chip inside. But because it bundles the SEP patents together with tens of thousands of other, mostly non-SEP patents, it’s impossible to say whether device makers are being charged a FRAND royalty for the crucial SEP patents, and whether they really need the all the other patents they are compelled to buy with them.

At the same time, Qualcomm has been building its massive patent portfolio, it has developed a dominant market share for certain types of modem chipsets. Since about 2006, the FTC alleges, it has held a more than 80% share of the market for chipsets that permit connection to the CDMA infrastructure. Though 2G is no longer state-of-the-art, phones that run on the Verizon and Sprint networks must be back-compatible to that standard, in order to connect to cell towers in certain rural areas of the U.S. and foreign countries. (AT&T and T-Mobile rely on a different 2G standard, known as GSM.)

In addition, the FTC says, since about 2010 Qualcomm has built a similarly dominant share in the market for premium LTE chipsets—required by the most profitable, top-tier smartphones, like the iPhone and Samsung Galaxy-S line—that are able to exploit the most advanced features of that 4G network.

No licenses, no chips

A key focus of antitrust scrutiny is Qualcomm’s long-running “no license, no chips” policy, which the FTC says is unique in the industry. Unless a handset maker agrees to pay its roughly 5% bulk royalty, it will not sell them modem chipsets. The FTC contends that device makers are so dependent on Qualcomm for chipsets, that they do not dare protest the royalty—by, say, asking a court to set a fair rate—for fear of interrupting their supply.

Qualcomm acknowledges the “no licenses, no chips” policy, but characterizes it as simply the common-sense practice of “not selling to infringers.”

“Such infringers do not pay for their use of technologies that Qualcomm invested considerable resources to develop,” its lawyers wrote in April in the company’s motion to dismiss the FTC case, “and Qualcomm does not assist them in their infringement by selling them modem chips.”

The FTC also alleges that, since about 2008, Qualcomm has refused to license competitor chipset manufacturers at all, allegedly in violation of the “nondiscriminatory” portion of its FRAND pledge to standard-setting organizations.

Qualcomm contends that its business choice of licensing only “at the handset level,” and not the chipset level, does not violate either FRAND or the antitrust laws, and they argue that their practices have not prevented the likes of MediaTek, Samsung, or Intel from plying meaningful modem chipset businesses.

The “rebates”

Apple’s first iPhone, which launched in 2007, ran on the AT&T network. Accordingly, it did not need CDMA compatibility, and employed a modem chipset made by the German semiconductor company Infineon. (Infineon sold its modem chipset business to Intel in 2011.) Apple did, however, effectively pay Qualcomm’s 5% royalty, which was passed through to it by its Taiwanese contract manufacturers, who had a pre-existing, long-term royalty agreement with Qualcomm.

To alleviate that royalty burden, the FTC claims, it negotiated with Qualcomm a cap on its royalties in exchange for agreeing not to support the WiMax technology, which was championed by Intel and disfavored by Qualcomm. (Qualcomm denies this allegation.)

In 2011, when Apple launched its first iPhone for Verizon, which needed CDMA compatibility, it began using Qualcomm’s modem chipsets in all its phones. It then negotiated a quarterly rebate, it claims—this time conditioned on exclusively sourcing its modem chipsets from Qualcomm. (Qualcomm acknowledges making payments to Apple for technology and business cooperation, but denies ever paying royalty “rebates” or paying for exclusivity.) In 2013 it signed another contract with Qualcomm, allegedly adding another tier of rebate. This one, according to the FTC, was conditioned on, among other things, Apple’s commitment to “neither initiate nor induce others to initiate litigation claiming that Qualcomm had failed to offer a license on FRAND terms.” The provision permitted Apple to passively respond to regulatory inquiries, but not to proactively reach out to regulators.

The exhaustion doctrine and double-dipping

Apple always objected to Qualcomm’s 5% royalty, according to Noreen Krall, an Apple vice president and its chief litigation counsel. Part of the objection relates to a patent doctrine known as “exhaustion,” which Apple felt Qualcomm’s “no license, no chips” policy violated. Under that doctrine—which the U.S. Supreme Court just re-enforced in May, in its ruling in Impression Products, Inc. v. Lexmark International, Inc.—when a patent holder sells a product, he impliedly sells along with it the rights to all of the patents necessary to use it. Once Apple started buying Qualcomm’s modem chipsets in 2011, Krall contends, all the standard-essential patents necessary to use the chipsets automatically went to Apple under that doctrine, so Qualcomm was “double-dipping” by forcing it pay a 5% patent royalty on top.

“Think about it,” she says. “If you went into a store and said, ‘I want to buy an iPhone,’ and we said, ‘Well, first you have to buy a patent license and then I’ll sell you an iPhone.” Then she adds, “Of course, a customer can choose not to buy that phone. But we don’t have a choice not to buy the chip.”

But what about the thousands of other patents, unrelated to connectivity, that Apple is getting for that 5% royalty—wouldn’t it still have to pay for those anyway?

“Show us what the patent is,” Krall says, “and we can decide whether we want to license it, or challenge it, or design around it—so we don’t have to use it. That’s the way patent law works.”

In late 2014, with Apple’s side deals with Qualcomm due to expire at the end of 2016, Apple began negotiating with Qualcomm to see if it could reach a new royalty rate (to replace the one being paid by its contract manufacturers).

At the same time, however, it began working with Intel to develop a high-end LTE modem chipset for use on its non-CDMA phones.

“We said, we’ve got to get competition started in this space,” says Krall, who adds that Apple did so understanding that it would be forfeiting hundreds of millions of dollars in exclusivity rebates from Qualcomm once the new chip started shipping.

The regulators get involved—or are instigated

By this time, international regulators had begun scrutinizing Qualcomm’s practices. In late 2013, China’s National Development and Reform Commission (NDRC) began an inquiry into whether Qualcomm was violating its anti-monopolization law, and, in 2014 the European Commission and the U.S. FTC launched inquiries, too. In early 2015, the NDRC imposed a $975 million fine and ordered changes in practices. Qualcomm paid the fine and agreed to modest royalty reductions, while admitting no wrongdoing. Later that same year the EC commenced two proceedings against Qualcomm, including one for “exclusivity arrangements with a smartphone manufacturer.” By 2016 the Korea Fair Trade Commission (KFTC) was also investigating.

As for the regulatory actions against Qualcomm, says general counsel Rosenberg, “all of that needs to be viewed in the context of a concerted effort on the part of several commercial interests—Apple being the primary—to get these agencies interested. And then for the agencies to have some self-interest,” he continued. “In some cases the agency is trying to promote the commercial interests of a native company, or to promote industrial policy, or trade policy.”

“Like many competitors and component suppliers,” recounts Apple’s Krall, “Apple was contacted by the FTC and by the KFTC.” It provided deposition testimony, turned over documents and, in August 2016, an Apple official testified publicly before the KFTC.

The next month Qualcomm abruptly cut off, without warning, one of the quarterly payments it had been making to Apple, amounting to about $1 billion. Apple later, in its lawsuit against Qualcomm, labeled that “obstruction of justice”—punishment for its having testified before the KFTC, and an effort to coerce it to retract its testimony.

Qualcomm says it cut off the payments because Apple testified falsely at the hearing, in violation of its contracts with Apple.

As it happened, September was also the month that Apple finally started shipping iPhones equipped with Intel modem chipsets—its first use of non-Qualcomm chips since October 2011.

In late December the KFTC concluded that, by “linking the chipset supply with patent licenses,” Qualcomm had violated its FRAND commitments and coerced licensees into anti-competitive concessions “to strengthen its monopolistic power.” It fined Qualcomm 1.03 trillion won (then about $850 million)—the largest fine the KFTC had ever imposed. (Qualcomm has appealed.)

The FTC sues three days before the change in administration

On January 17—just three days before the Trump administration took office—the FTC filed suit against Qualcomm in federal court in San Francisco. The shorthanded agency, with just three of the five commissioner seats filled, approved the complaint by a bare 2-1 margin. Its sole Republican appointee, Maureen Ohlhausen, published a rare dissent, both rejecting the legal theory of the case and blasting its timing. Qualcomm Executive Chairman Paul Jacobs later told Yahoo Finance that the FTC “rushed the complaint out” before Donald Trump’s inauguration.

The complaint could not win majority approval today, because former chair Edith Ramirez, a Democrat, resigned in February, leaving just two commissioners, including Ohlhausen, who is now acting chair.

Three days after the FTC filed suit, Apple sued Qualcomm in federal court in San Diego, where Qualcomm is based. The suit seeks recovery of its rebates, a court determination of a fair royalty rate for Qualcomm’s standard-essential patents, and damages for antitrust violations. (The case has been assigned to Judge Gonzalo Curiel, the Indiana-born judge who became nationally famous last fall when then-candidate Donald Trump pronounced him unfit to hear a fraud case against Trump University, because he was “Mexican.”)

Soon thereafter, more than 25 private consumer and securities suits were filed against Qualcomm, seeking class-action status, and they have now been consolidated in San Francisco before the same judge who is hearing the FTC case, U.S. District Judge Lucy Koh. (Since 2011 Koh has been presiding over a celebrated case in which Apple is seeking damages from Samsung for infringement of design patents. A $400 million jury verdict, reached in 2014, was just sent back for reconsideration by the Supreme Court in December, and the case is now before Koh again.)

In April Qualcomm counterclaimed, alleging multiple contract breaches and demanding royalty payments. In an apparent public relations move, it also crafted a legal claim that enabled it to broadcast its contention that Apple had turned off some of the most advanced features of its Qualcomm chipsets so that iPhones equipped with them wouldn’t outshine those equipped with Intel chipsets. (Apple has said its testing shows “no discernible difference” in performance.) An Intel spokesperson declined comment.

Later that month Apple notified Qualcomm that it had instructed its Taiwanese contract manufacturers to stop paying any further royalties to Qualcomm until their disputes were resolved. Three days later, and as a consequence, Qualcomm revised its financial guidance for the quarter, reducing anticipated revenue by about $500 million, or about 8%.

Qualcomm struck back in May, suing Apple’s Taiwanese contract manufacturers in federal court in San Diego, asking for a preliminary injunction ordering immediate restoration of royalty payments. (Apple has since voluntarily joined that suit, as a co-defendant.)

Judge Koh backs the FTC’s theory of the case

In June, Qualcomm suffered a setback as Judge Koh denied its motion to dismiss the FTC’s case. The fact that Qualcomm had been collecting the 5% royalty for more than a decade, she wrote, actually “supports, rather than contradicts, the FTC’s allegations.” She explained: “That Qualcomm collects the same 5% royalty on the total value of a 2017 smartphone as Qualcomm collected on the total value of a 2006 phone, despite the fact that both handset technology and Qualcomm’s [standards-essential patent] portfolio has changed dramatically over the past decade, supports the FTC’s allegations that Qualcomm’s [standard-essential patent] royalty rates are above [fair and reasonable levels].”

Qualcomm’s Rosenberg says he believes Koh will change her views after she sees the evidence and “we enlighten [her] as to how many facts the FTC got wrong.” (A trial in the FTC case will not take place before 2019.)

Earlier this month, Qualcomm upped the ante again. It filed its petition with the International Trade Commission in Washington, D.C., seeking an order to halt importation and sale of certain new iPhones for nonpayment of royalties—but only those equipped with Intel modem chipsets.

“It’s an absolutely brazen move in furtherance of their anticompetitive scheme,” comments Apple’s Krall. “They’re trying to force us back to being an exclusive Qualcomm shop in the U.S.”

In an apparent effort to bolster its argument that it holds many important non-SEP patents that have nothing to do with connectivity, Qualcomm’s ITC case relies solely on six such patents, relating mainly to battery and memory efficiency. (The ITC inquiry is expected to begin next month, and to be tried next year.)

On August 15, Judge Curiel, in Qualcomm’s case against the contract manufacturers, will hold a hearing to decide whether to issue a preliminary injunction forcing them (and Apple) to resume royalty payments.

Earlier this week, at a Fortune conference, Qualcomm CEO Steve Mollenkopf said of his company’s dispute with Apple: “Those things tend to get resolved out of court and there’s no reason why I wouldn’t expect that to be the case here.”

Certainly, for companies so mutually dependent, that’s a possibility. iPhone sales, unquestionably dependent on some Qualcomm patents, accounted for about 60% of Apple’s 2016 revenue, while royalty and technology payments from Apple and Samsung—which has submitted an amicus brief supporting the FTC’s complaint against Qualcomm—together accounted for 40% of Qualcomm’s revenue last fiscal year.

Still, as Qualcomm acknowledged in its motion to dismiss the FTC complaint, the commission is challenging “practices that are fundamental to the structure of Qualcomm’s business.”

It’s hard to see a resolution that won’t draw some Qualcomm blood.

Roger Parloff writes about law and business.

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