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From Securities Regulation Daily, March 6, 2017
Qualcomm’s board is finally released from a derivative suit alleging the directors failed to respond to antitrust "red flags." The chancery court had dismissed the complaint for failure to adequately plead bad faith to excuse presuit demand. The Delaware Supreme Court affirmed on the basis of the chancery court opinion (Melbourne Municipal Firefighters’ Pension Trust Fund v. Jacobs, March 3, 2017, Strine, L.).
Antitrust liability. According to the complaint, Qualcomm's ownership of technologies and patents essential to wireless telecommunications has allowed it to become "a toll collector for almost every smartphone manufactured." Qualcomm had acknowledged that it must offer to license its products on fair, reasonable, and non-discriminatory (FRAND) terms but, nevertheless, allegedly leveraged its market power unfairly by charging unreasonably high licensing fees, bundling and tying patent licenses, demanding royalty-free licenses from licensees in return, and imposing unreasonable conditions on licensees and chip purchasers.
These allegations led to an $891 million settlement with Broadcom in 2009 and extra-U.S. proceedings in which Qualcomm was found to have violated South Korean and Japanese laws. Then, in 2013, the National Development and Reform Commission of the People's Republic of China (NDRC) notified Qualcomm that it was investigating violations of the country's anti-monopoly law. This investigation resulted in a 2015 settlement, where Qualcomm agreed to pay a $975 million fine.
Caremark analysis. Stacking Rales (the applicable standard for assessing demand futility) and Caremark (the basis for the theory that the defendants were liable for failure to monitor compliance with the law), the chancery court observed that demand would only be excused if the Qualcomm board acted in bad faith. The alleged red flags were not as severe as in In re Massey Energy Co. (Del.Ch. 2011), and the complaint conceded that the board continuously monitored the red flags and the NDRC decision.
The Supreme Court affirmed on the basis of and for the reasons assigned in the chancery court opinion.
The case is No. 444, 2016.
Attorneys: Joel E. Friedlander (Friedlander & Gorris, P.A.) for Melbourne Municipal Firefighters' Pension Trust Fund. Peter J. Walsh, Jr. (Potter Anderson & Corroon LLP) for Paul E. Jacobs.
Companies: Melbourne Municipal Firefighters' Pension Trust Fund
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