Meyer v. Qualcomm, Inc., Case No. 08cv655 WQH (LSP) (S.D. Cal., March 9, 2009)

On March 3, 2009, the District Court for the Southern District of California granted for lack of standing Qualcomm’s motion to dismiss federal and state antitrust and unfair competition law claims brought against Qualcomm by an end consumer alleging that Qualcomm’s anticompetitive licensing practices resulted in higher prices of a particular type of GSM-based cellular device technology that plaintiff purchased. GSM stands for “global system for mobility” and is one of “two technology paths or families of standards [that] are in widespread use today” in wireless communication. Id. at 2. The other is CDMA or “code division multiple access.” Id.

Plaintiff alleged that Qualcomm was a technology licensor who owned patents related to “some” of the technology essential to a third-generation GSM-based system, Opinion at 11, which would be implemented through the Universal Mobile Telecommunications System (“UMTS”) standard that was designed to allow transition from a second generation GSM-based systems to a third generation standard. Id at 2.

Plaintiff further alleged that, because interoperability is key in the telecommunications industry to ensure that “each cell phone [is] capable of interfacing with all of the other components in a carrier’s wireless system[,]” telecommunications standards determining organizations (“SDOs”) have created global industry standards for wireless carriers, cell phone makers and component manufacturers. Id. However, before standardizing a technology that is the subject of patents owned by any SDO member, SDOs “typically require that their members declare whether they believe they hold patents necessary for compliance with a particular standard, and if so whether they are willing to license such patents on fair, reasonable, and non-discriminatory (FRAND) terms.” Id. at 3. This is true, plaintiff alleged, with respect to patents “essential” to implementing a particular standard such as that owned by Qualcomm. Id.

According to Plaintiff, “[e]ach SDO relevant to th[e] action require[d] that owners of essential patents agree to FRAND licensing. Id. (first modification in original) Moreover, “[b]efore the relevant SDOs included Qualcomm’s technology and intellectual property in the UMTS standard, ‘Qualcomm made repeated and express written representations to SDOs… that Qualcomm would license any of its essential [] patents on FRAND terms prior to the adoption of the UMTS standard.’” Id. (internal citation omitted) However, after the SDOs incorporated Qualcomm’s technology into the UMTS standards in reliance on Qualcomm’s representations, Qualcomm purportedly reneged on its assurances and instead used its “monopoly power” to force the industry participants into accepting its unreasonable licensing terms. Id. at 3-4. Plaintiff also alleged that Qualcomm’s anticompetitive licensing practices and terms resulted in supra-competitive prices of UMTS chipsets and further undermined innovation in “enhanced functionality.” Id. at 4.

As a result, plaintiff alleged, cellular service providers pay higher prices for the UMTS compliant devices, and pass those higher prices through to the end consumers like plaintiff. Id. Based on these allegations, plaintiff alleged four causes of action for violations of sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2; the Cartwright Act, Cal. Bus. & Prof. Code §§ 16720, 16726; and the California Unfair Competition Law, Bus. & Prof. Code § 17200 (“UCL”). Id. at 5-6. Plaintiff sought injunctive relief under the Sherman Act, both an injunction as well as treble damages under the Cartwright Act, and equitable relief, including restitution, under the UCL. Id.

The Court dismissed the complaint for lack of standing. The Court initially noted that both federal and state standards for assessing the legal sufficiency of antitrust claims require that courts insist on some level of “specificity” and “particularity” in the pleadings, and that the complaint “may not evade [antitrust] requirements by merely alleging a bare legal conclusion.” Id. at 7 – 8 (internal citation omitted; modification in original).

On the standing issue, the Court observed, that, under the Sherman Act, “‘a plaintiff who complain[s] of harm flowing merely from the misfortunes visited upon a third person by the defendant’s acts [is] generally said to stand at too remote a distance to recover.’” Id. at 10 (internal citation omitted; modification in original). Instead, to be actionable, an antitrust plaintiff, “must ‘have suffered injury in the market where competition is being restrained. Parties whose injuries, though flowing from that which makes the defendant’s conduct unlawful, are experienced in another market do not suffer antitrust injury.’” Id. (internal citation omitted) The only “narrow exception” to the “market participant” requirement, the Court noted, applies to “parties whose injuries are ‘inextricably intertwined’ with the injuries of market participants” or with “the injury the conspirators sought to inflict.” Id. at 10-11 (internal quotation marks and citation omitted). The Court explained that the exception applies when the plaintiff is either “the ‘direct victim’ of a conspiracy or the ‘necessary means’ by which the conspiracy was carried out.” Id. at 11. (internal citation omitted) The Court concluded that Plaintiff failed to satisfy either the “market participant” requirement or the “narrow exception.”

With respect to the “market participant” requirement, the Court found that plaintiff’s alleged injury occurred in a different market than the allegedly restrained market. Id. at 12. (restrained market was the “market for WCDMA-related patent and technology” whereas plaintiff “is an end consumer who suffered injury in the form of anticompetitive prices in the market for cell phone and cellular service”) (emphasis added). The Court further reasoned that “[p]laintiff’s end-consumer injury is traced through three levels of the supply chain.” Id. at 11. According to Plaintiff, Qualcomm’s licensing practices “cause direct anticompetitive harm to UMTS chipset manufacturers” in the form of higher prices and impaired functionality. Id. In turn, the UMTS chipset manufactures allegedly pass on the higher licensing costs to UMTS device manufacturers, who in turn pass those costs to their vendors, who in turn pass those costs to consumers, such as the indirect purchaser plaintiffs. Id. The Court also noted that, the technology that Qualcomm licensed to chipset manufacturers is only “a component of the technology” that is ultimately used to create the chipset, “which is then passed on through the supply chain such that Plaintiff’s injury also must be disaggregated from a multitude of other manufacturing and component factors.” Id. Accordingly, although plaintiffs’ status as an indirect purchaser did not in itself defeat standing, these considerations demonstrated that plaintiff’s alleged injury was too remote to satisfy standing requirements.

As to the applicability of the “narrow exception,” the Court noted that the complaint had no allegations to support a finding that plaintiff and Qualcomm “had a direct relationship, that Qualcomm’s anticompetitive conduct proximately caused Plaintiff’s injury, that Plaintiff is a direct victim of Qualcomm’s anticompetitive conduct, or that Plaintiff is the ‘necessary means’ by which Qualcomm carried out its anticompetitive licensing scheme.” Id. at 12. (internal citation omitted)

Although recognizing that the Cartwright Act confers broader standing insofar as it permits indirect purchaser actions, the Court nonetheless concluded that plaintiff’s Cartwright Act claim also failed because California law nonetheless denies antitrust standing to plaintiffs whose injuries are “secondary, consequential, or remote,” and plaintiff’s claims were too remote based on essentially the same analysis as under the Sherman Act. Id. at 13-14.

Finally, the Court concluded that plaintiff’s UCL claims failed because UCL “imposes a ‘causation’ requirement. The phrase ‘as a result of’[in the statute] in its plain and ordinary sense means ‘caused by’ and requires a showing of causal connection or reliance on the alleged misrepresentation.” Id. at 15 (internal quotation marks omitted) (quoting Hall v. Time, Inc., 158 Cal.App.4th 847, 852 (2008) (“We use the word ‘causation’ to refer both to the causation element of a negligence cause of action . . . and to the justifiable reliance element of a fraud cause of action”)). The Court explained that the complaint alleged that Qualcomm made misrepresentations to the SDOs that in turn relied on Qualcomm’s misrepresentations in incorporating Qualcomm’s technology into the UMTS standard, but it did not allege that “plaintiff relied on representations made by Qualcomm when he purchased his cell phone or when he selected his cellular service.” Id. at 15-16. Nor did the Complaint allege that plaintiff would not have bought his cell phone incorporating the technology “had Plaintiff been aware of Qualcomm’s misrepresentation.” Id. at 16. Accordingly, plaintiff also failed the standing requirements under the UCL.