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From Antitrust Law Daily, November 13, 2017

Consumer monopolization claims against Qualcomm proceed

By Linda O’Brien, J.D., LL.M.

A group of consumers could pursue Sherman Act and state law antitrust claims against telecommunications equipment maker Qualcomm for allegedly abusing its dominance in the modem chip market by consistently refusing to license standard-essential patents on fair, reasonable, and non-discriminatory, (FRAND) terms to competitors. The consumers adequately alleged that they suffered an antitrust injury by paying supra-competitive prices for cellphone handsets and that Qualcomm’s exclusive dealing arrangements with handset manufacturers led to the imposition of surcharges on handsets that were ultimately paid by consumers, the federal district court in San Jose, California has decided. However, the plaintiffs could not seek damages for their Sherman Act claims since they were indirect purchasers (In re Qualcomm Antitrust Litigation, November 10, 2017, Koh, L.).

Cellular communications depend on widely distributed networks that implement cellular communications standards, and network operators "build networks that comply with these standardized protocols." The cellular communications standards are adopted by standards setting organizations (SSOs). Patents that cover technology that is incorporated into a cellular communication standard are known as "standard essential patents" (SEPs). SSOs often require patent holders to disclose their patents and to commit to the licensing of SEPs on fair, reasonable, and non-discriminatory (FRAND) terms.

In order to communicate with a particular cellphone network, a cellular handset, produced by original equipment manufacturers (OEMs), must contain a modem chip that complies with the cellular communications standards that the particular cellphone network supports. Qualcomm is the leading supplier of modem chips worldwide, and the dominant supplier of modem chips that comply with CDMA standards and modem chips for use in premium tier handsets, which comply with advanced LTE standards. Qualcomm also participated in the cellular standard-setting process through SSOs and holds several patents that have been declared essential to cellular communications standards.

In January 2017, the FTC sued Qualcomm, alleging that Qualcomm used its dominance in the modem chip market to skew SEP licensing negotiations to benefit Qualcomm and harm competitors through its "no license-no chips" policy, its refusal to license its SEPs to competing manufacturers, and its exclusive dealing arrangements with Apple. Subsequently, a group of consumers filed a series of lawsuits, asserting similar allegations as the FTC action as well as claiming that OEMs must pay a surcharge to Qualcomm to ensure continued access to its modem chips supply which inflates the cost to consumers for handsets that use those chips. The suits were centralized in the district and the plaintiffs filed a Consolidated Class Action Complaint (CCAC). The CCAC asserts claims under Section 1 of the Sherman Act and California’s Cartwright Act and Unfair Competition Law (UCL). Before the court was Qualcomm’s motion to dismiss and/or strike the CCAC.

Antitrust injury. The court found that the plaintiffs adequately alleged an antitrust injury in the form of paying supra-competitive prices for handsets. The plaintiffs’ status as indirect purchasers was not determinative as to whether they established antitrust injury since they established a close connection between the alleged anticompetitive conduct and the claimed injury which was of the type that the antitrust laws were designed to prevent. Here, the CCAC asserted that the combined effect of three specific circumstances showed that the market for handset products, in which the plaintiffs participated, was "inextricably intertwined" with the market for CDMA and premium LTE modem chips. Under Qualcomm’s "no license-no chips" policy, OEMs must buy chips from Qualcomm as the dominant supplier and pay a surcharge to avoid disruption in the chip supply. Qualcomm’s refusal to license to competitors and exclusive dealing arrangements with Apple allows Qualcomm to continue to leverage a surcharge from OEMs. Further, Qualcomm’s royalty rate is directly tied to the handset market since it is calculated on the wholesale price for handsets rather than the modem chip. Thus, Qualcomm’s surcharge affected the ultimate price paid by consumers since the cost of the chips substantially influenced the retail price set b OEMs, distributors, and retailers.

Standing. The plaintiffs had standing to pursue claims based on Qualcomm’s agreements with Apple. According to the court, Article III standing requires that a plaintiff suffer an injury in fact which is concrete and particularized, and actual and imminent, that is fairly traceable to the challenged conduct and likely to redressed by a favorable decision. Qualcomm’s argument that its agreements with Apple included rebates to Apple which would lower prices for finished handsets and therefore benefit consumers was rejected. The court noted that the CCAC claimed that the rebates lowered but did not eliminate Apple’s overpayment of above-FRAND royalties to Qualcomm. The offer of rebates did not negate the plaintiffs’ theory that the exclusive dealing arrangement with Apple led to a surcharge that was borne by consumers like the plaintiffs. In addition, the rebates were conditioned on Apple’s agreement to exclusively buy chips from Qualcomm and not challenge Qualcomm’s failure to offer licenses on FRAND terms. Therefore, Qualcomm’s rebates to Apple constituted a piece of the overall alleged unlawful behavior, the court explained.

Cartwright Act. The court also found that the plaintiffs sufficiently pleaded a state antitrust claim under the Cartwright Act. The CCAC asserted that Qualcomm coerced Apple and other OEMs to enter unlawful agreements and set forth a concrete example that Apple’s agreement provided penalties if Apple wanted to work with other suppliers and prohibited Apple from challenging Qualcomm’s failure to offer licenses on FRAND terms. Those facts demonstrated that Qualcomm’s actions led to effectively shutting Qualcomm’s competitors out of the market. Similarly, the plaintiffs’ allegations that Qualcomm coerced other OEMs to adhere to unreasonable and supra-competitive licensing terms by threatening to withhold the chip supply were sufficient to show that Qualcomm’s agreements had an anticompetitive effect on the market, the court noted.

Damages. However, the plaintiffs’ Sherman Act claims for damages could not proceed under Section 4 of the Clayton Act since the plaintiffs were indirect purchasers. The court noted that it was undisputed that the plaintiffs were indirect purchasers as they did not purchase modem chips directly from Qualcomm rather they purchased handsets containing modem chips. The exception to the Illinois Brick rule set for in Freeman v. San Diego Ass’n of Realtors, 322 F.3d 1133 (9th Cir. 2002)—indirect purchasers can sue for damages if there is no realistic possibility that the direct purchaser will sue its supplier over an antitrust violation—did not apply. Apple has already filed suit against Qualcomm for antitrust violations, which was contrary to the plaintiffs’ unsupported argument, the court found.

The case is No. 5:17-md-02773-LHK.

Attorneys: Carel Ale (Susman Godfrey LLP) for Karen Stromberg. Richard J. Stark (Cravath, Swaine and Moore LLP) and Robert Addy Van Nest (Keker, Van Nest & Peters LLP) for Qualcomm Inc.

Companies: Qualcomm Inc.

MainStory: TopStory Antitrust StateUnfairTradePractices CaliforniaNews

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