Let’s just get this out there: It hasn’t been a good year for tech giant Qualcomm Inc. (“Qualcomm”), litigiously speaking anyway. While your humble authors here at the High-Tech Blog are not ones for schadenfreude, we can’t help but look on at the multi-front litigation quagmire that Qualcomm has found itself in since the Federal Trade Commission (“FTC”) first filed an antitrust complaint against the company in the beginning of the year. Since then, the list of people suing Qualcomm for antitrust-related claims has grown to include the FTC, numerous private antitrust and security class-action plaintiffs, and its old frenemy, Apple Inc. (“Apple”). In a stroke of genius, and so that Qualcomm needn’t suffer in vain, we have decided to justify our rubbernecking by monitoring the on-going morass for you (you’re welcome), and do what we can to tease some legal insight from what we see. Today’s lesson: Where the government enforcers go, private plaintiffs follow.
By way of background, in January, the FTC filed a complaint in federal district court against Qualcomm, alleging the company unlawfully maintained a monopoly in baseband processors, the semiconductor devices that enable cellular communications in cellphones. See Complaint, FTC v. Qualcomm Inc., No. 5:17-cv-00220 (N.D. Cal. Jan. 17, 2017). Specifically, the FTC argues that Qualcomm’s practices of (1) requiring customers to pay a royalty based on the use of competing baseband processors (the “no license-no chips policy”), (2) refusing to license to competitors, and (3) entering into an exclusive license with Apple for baseband processors, were anticompetitive in violation of Section 5 of the FTC Act. Id. ¶¶ 4, 6-8.
Soon after the FTC filed its complaint, numerous civil antitrust class-action lawsuits were filed on behalf of cellphone consumers, claiming Qualcomm’s anticompetitive practices raised the prices of phones. See, e.g., Complaint, Housenick v. Qualcomm Inc., No. 5:17-cv-00675 (N.D. Cal. Feb. 9, 2017). Not to be left out, Qualcomm shareholders also filed several securities class-action lawsuits, claiming the company had deficient internal controls and misled investors by not disclosing its “anti-competitive” conduct. See, e.g., Complaint, Shah v. Qualcomm Inc., No. 3:17-cv-00121 (S.D. Cal. Jan. 23, 2017). And, finally, to add insult to injury, Apple filed its own suit seeking $1 billion in unpaid rebates it alleges Qualcomm agreed to pay the company to offset its anticompetitive practices but withheld in retaliation for Apple tattling to foreign antitrust authorities. See Complaint, Apple Inc. v. Qualcomm Inc., No. 17-cv-0108-GPC-MDD (S.D. Cal. Jan. 20, 2017).
In April, the Judicial Panel on Multidistrict Litigation consolidated the various class actions in the Northern District of California. See Transfer Order, In re Qualcomm Antitrust Litig., MDL No. 2773, at 3 (J.P.M.L. Apr. 5, 2017). However, the panel allowed Apple’s suit to remain in the Southern District of California. Id.
For their part, the nearly identical antitrust class-action complaints, which closely track the FTC’s complaint, allege violations of federal and state antitrust laws, state unfair competition laws, and common law unjust enrichment. If these suits survive Qualcomm’s likely motions to dismiss and to deny class certification, the potential class of harmed plaintiffs could include millions of cellphone purchasers throughout the United States. Moreover, since antitrust class plaintiffs allege treble damages under the Sherman Act, the potential financial consequences to Qualcomm may be staggering, and will impose great settlement pressure on the company.
Specifically, the antitrust complaints accuse Qualcomm of using its dominant market share in the cellphone semiconductor market to extract unlawfully high royalty rates and anticompetitive licensing terms from device manufacturers. The plaintiffs argue that this conduct directly harmed cellphone purchasers because it “resulted in them paying higher prices for their cellular devices than they would have in the absence of Qualcomm’s conduct.” Housenick Complaint ¶ 70. Modeling the FTC’s allegations, the plaintiffs cite Qualcomm’s “no license-no chips” policy, see id. ¶ 47; FTC Complaint ¶¶ 69-75, and refusal to license to competitors as anticompetitive conduct that drove up the price of cellphones, Housenick Complaint ¶ 72. Because consumers typically purchase their cellphones either directly from the manufacturer or from their network provider, which both face “vigorous price competition,” those sellers had no choice but to “pass along some, or all, of the excessive royalty to consumers.” Id.
Similarly, the various securities complaints are all nearly identical, and all also reference the FTC’s complaint. They allege that Qualcomm: (1) misled its investors by failing to disclose it was engaged in anticompetitive conduct designed to maintain a monopoly for semiconductors used in mobile phones, in violation of the FTC Act; and (2) lacked effective internal controls over financial reporting, which led to its materially false and misleading public statements. Shah Complaint ¶ 39. As a result, these plaintiffs allege that the price of Qualcomm’s securities was artificially inflated between February 1, 2012 and January 17, 2017, the period during which they purportedly purchased shares in the company. Id. ¶¶ 1, 58.
Since it’s packed with extra legal issues, we are going to update you separately about Apple’s case. (First maxim of blog writing: Always leave them wanting more.)
So, what have we learned? Where the FTC went, the private antitrust and securities class-action bars followed. And at breakneck speed. Companies should be alert to the fact that enforcement action is very often only the beginning of their troubles. For this reason, it is important for companies to be proactive at the first sign of government enforcement interest, and to work with counsel on establishing a strategy for addressing potential follow-on private litigation.
We will continue to watch these cases in order to keep you entertained informed. With the Court set to rule on motions to dismiss in the FTC’s case soon, we should be seeing exciting developments in the near future.