A US trade agency on Thursday banned imports of future advanced cellphone models using Qualcomm chips, potentially hurting the country's biggest wireless services.
The International Trade Commission's ban, which is being appealed, exempts models already being sold. The ITC said the Qualcomm chips infringed a patent owned by Broadcom.
Qualcomm and Verizon Wireless, the number two US mobile service provider, said they planned to ask the Bush administration to invalidate the order, and Qualcomm said it would seek an emergency stay from the US Federal Circuit Court of Appeals, which specialises in patent cases.
Shares of Qualcomm rose as much as 2.4% after the news as some investors had feared an even tougher ban that would include existing, as well as future, phones.
Paul Jacobs, chief executive of Qualcomm, said the ITC had overstepped its authority with a ban he said would stop the sale of "tens of millions" of phones in the future.
"This remedy decision by the ITC was wrong," Jacobs said on a conference call with analysts. "While there is no short-term disruption to Qualcomm, this decision immediately affects third parties," he said, referring to consumers, service providers and phone manufacturers.
Qualcomm executives said they would look at ways to create designs that would avoid infringing the Broadcom patents, but said this would take time as manufacturers and service providers would have to approve the changes.
Besides Qualcomm, the ban on new phone models with its chips would hurt Sprint Nextel, the number three mobile provider, as well as Verizon Wireless. The carriers depend on having the latest phones to keep customers and win new ones.
Oppenheimer analyst Lawrence Harris said the ban would hurt Samsung Electronics and LG Electronics, both big users of Qualcomm chips. Sales at Motorola, the number one cellphone maker for the US market, could also be reduced, he said.
For example, the ban may prevent phone makers from importing advanced new phone models in time to compete with the iPhone, Apple's widely anticipated first mobile phone, expected to go on sale at AT&T on 29 June.
Investors may not understand the full implications of the decision, according to Stifel Nicolaus analyst, Cody Acree.
"It's a bigger deal than the market is making it out to be," he said. "We think it's a significant hit to Qualcomm and the carriers."
Innovation freeze
The ITC said banning all devices containing the infringing chips would "adversely affect the public interest" and be too burdensome on operators and other third parties. But it also said a remedy not affecting any of them would be inadequate.
The ITC is an independent federal agency that determines whether imported products infringe US patents, trademarks or copyrights.
Four out of six ITC commissioners voted for the remedy, with two arguing for a less stringent penalty.
Under US law, the White House can invalidate an ITC order within 60 days if it sees the order as bad public policy.
A spokeswoman for the US Trade Representative said the administration "will be engaging in our normal internal and inter-agency procedures governing policy review of the order".
The Broadcom patent issue covers technology used to extend the battery life of cellphones when they are outside network coverage. Broadcom said it was pleased with the ruling and was open to discussing possible licensing of the patent.
Verizon Wireless, owned by Verizon Communications and Vodafone Group, criticised the ruling.
"It's a bad order that essentially attempts to freeze innovation in cellphones, and it obviously won't stand through the process," said spokesman, James Gerace.
Sprint said it expects sales in 2007 of phones carrying the patent-infringing Qualcomm chips to be five million despite the ban. Sprint said it will work with suppliers to avoid disruptions.
The case involves phones based on two types of high-speed wireless technology, EV-DO - for which Qualcomm is the dominant chip supplier - and W-CDMA.
Sprint and Verizon Wireless base their most advanced services on EV-DO.
The ban would have a smaller impact on W-CDMA user AT&T, the biggest US mobile provider.
Qualcomm supplies chips and technology licences for W-CDMA phones, but does not have a majority chip share in this market, led by Texas Instruments.
Former ITC attorney Lyle Vander Schaaf said it is extremely rare for a president to invalidate an ITC order, but more conceivable in a case where two commissioners had dissented.
He said it was rare for the appeals court to stay an ITC order while an appeal is pending.
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