Broadcom’s (BRCM) Court Victory over Qualcomm (QCOM)

A court ruling could force Qualcomm Inc. (QCOM) to pay patent royalties to rival Broadcom Corp. (BRCM) for the next 13 months to keep selling chips for cell phones that infringe three Broadcom patents.

U.S. District Judge James Selna granted Broadcom’s request for a permanent injunction against the Qualcomm products at issue in a patent battle between the two Southern California chipmakers. The judge also added a “sunset provision” to his order, which allows Qualcomm to keep selling the chips through January 2009 if it pays royalties to Broadcom.

The sunset provision is designed to minimize disruptions to U.S. cell phone carriers. Judge Selna noted that Sprint Nextel Corp. (S), for example, has spent more than $2 billion to upgrade its network, partially to introduce Qualcomm chips and associated software – known as QChat – that adds a convenient communications capability known as push-to-talk to cell phones. The sunset provision also gives Qualcomm time to modify its products to stop infringing the Broadcom patents, the judge wrote in a memorandum accompanying his order.

Unless Qualcomm successfully appeals the ruling, the company faces hefty royalty payments to Broadcom. For Broadcom’s digital-video patent, the judge set a royalty rate of 6% of the revenue Qualcomm receives from those products. The rate associated with the patent on using two networks was set at 4.5%. Qualcomm and Broadcom were ordered to negotiate a royalty rate for products that infringe the push-to-talk patent.

Qualcomm said that it is reviewing the court ruling and expects it will require further clarification from the judge on various parts of the ruling. One such aspect involves the ruling’s effect on Verizon Wireless (VZ), one of Qualcomm’s biggest customers, which made a separate licensing arrangement with Broadcom in July 2007. Under the agreement, Verizon Wireless is allowed to sell new handsets and other wireless devices to consumers and businesses. In return, Verizon Wireless will pay $6 to Broadcom for each handset or data card sold to a maximum payment of $40 million per calendar quarter and a lifetime maximum payment of $200 million.

Qualcomm said in a news release that the ruling would have “an immediate, short-term impact” on handset makers that use WCDMA technology. It did not elaborate on the potential financial impact. The injunction could affect handset-makers such as LG Electronics and Samsung, which import phones with Qualcomm chips, as well as Motorola (MOT), its main US customer.

Qualcomm shares fell 96 cents, or 2.4 percent, to $38.39 on the Nasdaq Stock Market. Broadcom’s Nasdaq-traded shares rose 18 cents, or 0.69 percent, to $26.32.

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