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From Antitrust Law Daily, November 9, 2017

In chip dispute, court dismisses UCL claim against Apple, declines to add nine Qualcomm patents

By Cheryl Beise, J.D.

In a consolidated antitrust and patent action involving Qualcomm, Inc., Apple, Inc., and several companies that licensed Qualcomm’s patents essential to cellular communication standards and manufactured Apple iPhones and iPads using Qualcomm’s baseband processor chips, the federal district court in San Diego has dismissed Qualcomm’s California Unfair Competition law claim against Apple for failure to state a claim and has dismissed claims by Apple and the manufacturers seeking to add nine additional Qualcomm standard essential patents (SEPs) for lack of subject matter jurisdiction (In re Qualcomm Litigation, November 8, 2017, Curiel, G.).

On January 20, 2017, Apple Inc. filed a complaint against Qualcomm, contending that the company violated federal antitrust and patent law by breaching its commitment to license certain patents that were essential to the latest cellular standards on fair, reasonable and nondiscriminatory (FRAND) terms. Apple is seeking $1 billion in damages for excessive royalty payments, declarations of non-infringement and invalidity of several patents-in-suit, and an order setting future royalties for SEPs. The suit also seeks redress for Qualcomm’s abuse of its monopoly power in the technologies used to connect to cellular networks. Apple filed a first amended complaint (FAC) on June 20, 2017, adding nine additional Qualcomm patents to the original nine patents-in-suit.

On September 7, the court denied Qualcomm’s motion for an anti-suit injunction to prevent Apple from prosecuting foreign actions that Qualcomm considered duplicative of the present dispute. Apple had filed 11 lawsuits against Qualcomm and its subsidiaries in the United Kingdom, Japan, China, and Taiwan. On September 13, 2017, the court consolidated this case with a related action Qualcomm filed against several manufacturers that license Qualcomm patents and purchase Qualcomm baseband processor chips. The manufacturers—Compal Electronics, Inc., FIH Mobile Ltd. and Hon Hai Precision Industry Co., Pegatron Corporation, and Wistron Corporation—referred to by the court as "Contract Manufacturers" or "CMs," produce iPhones and iPad devices for Apple, using Qualcomm’s baseband processor chips. The chips provide connectivity to cellular networks. Prior to consolidating the cases, the court denied Qualcomm’s preliminary injunction to force the CMs to continue to make royalty payments during the pendency of the case.

Presently before the court were (1) Apple’s motion to dismiss Qualcomm’s counterclaim for violation of California Unfair Competition Law (UCL); (2) Qualcomm’s motion to dismiss Apple’s FAC; and (3) Qualcomm’s motion for partial dismissal of the Contract Manufacturers’ counterclaims.

Qualcomm’s UCL claim. To state a UCL claim, a plaintiff must allege that the defendant committed a business act that is either fraudulent, unlawful, or unfair. Qualcomm’s UCL claim was premised on the notion that Apple intentionally downgraded its iPhones with Qualcomm chips (Verizon and Sprint versions) in an effort to make iPhone’s equipped with Intel's chips (AT&T versions) appear equally performant. Specifically, Apple allegedly decided not to utilize capabilities in the Qualcomm-based phones that could increase download speeds by 25% or 150 megabits per second. According to Qualcomm, this decision potentially impeded efficiency of other users, leading to an inefficient allocation of bandwidth across cellular networks. Apple also allegedly threatened retaliatory action if Qualcomm revealed the disparity between iPhones equipped with Qualcomm versus Intel chip sets.

Thus, Apple allegedly violated the UCL by: (1) attempting to cover up performance differences between Qualcomm and Intel-based iPhone 7’s; (2) publicly claiming there was "no discernible difference" between these models; and (3) threatening Qualcomm to prevent consumers from insisting on the superior Qualcomm-based iPhones.

Standing. The court found that the first two allegations involved misrepresentations and omissions that were premised on a fraud theory of liability. Because Qualcomm failed to plead with specificity facts indicating its own reliance (as opposed to third-party reliance) on any alleged Apple omission or misrepresentation, Qualcomm lacked standing under the UCL to bring these claims. As the third theory did not involve fraud, the court proceeded to analyze whether Qualcomm has adequately alleged statutory standing under California Business and Professions Code Section 17204.

To satisfy statutory standing, a party must allege an economic injury that was caused by the unfair business practice or false advertising. The court found that Qualcomm needed only allege an "identifiable trifle" of injury and has sufficiently done so by alleging it has lost customers, goodwill, and the loss of business relationships. Qualcomm also sufficiently alleged causation. Apple’s alleged threats to stop using Qualcomm as a supplier and to retaliate against Qualcomm with its marketing organization led Qualcomm not to reveal the iPhone 7 speed disparity to the public. As a result, consumer demand for their chipsets was lower than it would have been had the disparity been revealed.

Unfair prong. In analyzing whether Apple’s alleged threats to Qualcomm were "unfair" under the UCL, the court first noted that California law is unsettled regarding the correct standard in non-competitor consumer suits. The court nevertheless concluded that Qualcomm failed to plead a claim under any of the three tests courts have adopted for finding unfairness in consumer cases.

Under the Cel-Tech test, a plaintiff must show that the challenged conduct "threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition." Qualcomm asserted that this test was inapplicable because it did not compete with Apple in selling consumer devices. The court disagreed, finding that the Apple-Qualcomm relationship is more akin to a direct competitor relationship than a consumer relationship. In any case, Qualcomm failed to plead that Apple’s alleged threats amounted to a violation of any antitrust laws or the spirit or policies of those laws. "Broad references to telecommunications policy and the policy of consumer choice are entirely tangential to the focal point of its UCL claim—commercial harm to Qualcomm—not the broader public or consumer good," the court said.

The "tethering test" requires that the "public policy which is a predicate to a consumer unfair competition action under the ‘unfair’ prong of the UCL must be tethered to specific constitutional, statutory, or regulatory provisions," the court explained. Qualcomm’s UCL claim was not "predicated" on the public policy of telecommunications statutes, but rather on Apple’s threats to retaliate against Qualcomm. Qualcomm’s allegations regarding the "inefficient allocation of bandwidth to iPhones" did not form the core of its complaint.

The "balancing test" examines whether the challenged business practice is "immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers" and requires the court to weigh the utility of the defendant’s conduct against the gravity of the harm to the alleged victim. Apple’s conduct could not be reasonably construed as "immoral, unethical, oppressive, unscrupulous, or substantially injurious" to Qualcomm. Apple’s alleged threats to Qualcomm’s status as a supplier were justified by Apple’s right to choose with whom it does business. Qualcomm’s claim of "unfair" competition based on vague claims of marketing retaliation was implausible and jeopardized Apple’s right of free speech, in the court’s view.

Finding that Qualcomm failed to allege a plausible claim to support its UCL claim, the court dismissed the claim with leave to amend.

Safe harbor defense. The court did not need to address Apple’s claim that it was immune from suit under Chavez v. Whirlpool Corp., 93 Cal. App. 4th 363, 375 (2001), holding that conduct is not unfair if the "conduct is deemed reasonable and condoned under the antitrust laws." Apple asserted that its choice of suppliers was expressly permitted by the Colgate doctrine, which protects the rights of manufacturers to select with whom to do business and on what terms. United States v. Colgate & Co., 250 U.S. 300, 308 (1919). Because Qualcomm failed to allege any antitrust violation in conjunction with its UCL claim, the court did not need to reach Apple’s safe harbor defense at this time.

Apple’s FAC. Qualcomm’s sought to dismiss Apple’s FAC for lack of subject matter jurisdiction over additional patents for which Apple sought a declaration of non-infringement, invalidity, and a request for the court to set a FRAND royalty. Apple’s original complaint identified nine patents (the "Original Patents-in-Suit") and its FAC added nine more (the "Additional Patents-in-Suit").

The court granted Qualcomm’s motion. Apple bore the burden to prove that declaratory judgment jurisdiction existed at the time the counterclaims were filed. The Additional Patents-in-Suit were included in claim charts Qualcomm presented during licensing discussions. However, Qualcomm had never accused Apple of infringing the Additional Patents-in-Suit and no detailed infringement analysis had been performed as to these patents. Qualcomm also did not use threatening language in its communications to indicate that it would imminently to assert its patent rights. To accept Apple’s argument would provide jurisdiction over thousands of patents Qualcomm listed as "potentially essential" in a 1,975 page list. Apple failed to allege an affirmative act to constitute a "case or controversy" sufficient to warrant declaratory judgment jurisdiction, the court determined.

Contract manufacturers’ claims. The court also granted Qualcomm’s motion to dismiss the Contract Manufacturers’ counterclaims regarding the Additional Patents-in-Suit. The Contract Manufacturers asserted an independent basis for declaratory jurisdiction—their status as licensees under their respective Licensing Agreements with Qualcomm.

The court concluded that the Contract Manufacturers did not meet their burden of showing (1) a case or controversy of sufficient immediacy and reality and (2) that a declaratory judgment as to the Additional Patents-in-Suit would affect the legal relationship between the parties. The CMs did not explain how an invalidity or noninfringement determination as to the nine Additional Patents-in-Suit would alter the legal relationship between the CMs and Qualcomm. In particular, they failed to articulate a theory as to how a declaratory judgment would finally and conclusively resolve the underlying controversy between the CMs and Qualcomm—a dispute centered on royalties, the court noted.

The case is No. 3:17-cv-00108-GPC-MDD.

Attorneys: Juanita R. Brooks (Fish and Richardson) and William A. Isaacson (Boies, Schiller & Flexner LLP) for Apple Inc. Alexander Rudis (Quinn Emanual Urquhart Oliver & Hedges) and Antony L. Ryan (Cravath Swain & Moore LLP) for Qualcomm Inc.

Companies: Apple Inc.; Qualcomm Inc.; Compal Electronics, Inc.; FIH Mobile Ltd.; Hon Hai Precision Industry Co.; Pegatron Corporation; and Wistron Corporation

MainStory: TopStory Antitrust StateUnfairTradePractices CaliforniaNews

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