Case 3:17-md-02773-JSC Document 914 Filed 01/06/23 Page 1 of 37
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`UNITED STATES DISTRICT COURT
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`NORTHERN DISTRICT OF CALIFORNIA
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`IN RE: QUALCOMM ANTITRUST
`LITIGATION
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`Case No. 17-md-02773-JSC
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`ORDER REGARDING MOTION TO
`DISMISS
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`Re: Dkt. No. 895
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`Cellphones and tablets connect us to one another. To do so, devices rely on hardware
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`(known as modem chips) and critical patented technologies. Qualcomm is a successful company
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`in these two distinct, yet related fields: modem chip manufacturing and cellular patent licensing.
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`Six years ago, the Federal Trade Commission brought an antitrust action against Qualcomm. Not
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`long after, Plaintiffs—a series of consumers—sued Qualcomm as well. These separate suits raised
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`similar objections. Each alleged Qualcomm uses its position at the confluence between chip
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`manufacturing and patent licensing to stifle competition. Plaintiffs sought to represent millions of
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`cellular device consumers who, they allege, overpaid due to Qualcomm’s conduct.
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`The FTC action led the way. After a bench trial, the district court found Qualcomm
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`violated federal antitrust law. The Ninth Circuit reversed that decision in FTC v. Qualcomm Inc.,
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`969 F.3d 974 (9th Cir. 2020), and remanded Plaintiffs’ parallel consumer action to this Court.
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`Stromberg v. Qualcomm Inc., 14 F.4th 1059, 1075 (9th Cir. 2021). After remand, Plaintiffs filed
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`an amended complaint, asserting only violations of California law and on behalf of only California
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`consumers. Qualcomm moves to dismiss. The question before this Court is whether Plaintiffs’
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`complaint survives FTC v. Qualcomm and states a claim under California law.
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`The answer is no, but only in part. Plaintiffs’ tying theory is not viable under current
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`California law. But California law and stare decisis do not require the Court to dismiss the
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`exclusive dealing theory on a 12(b)(6) motion. Plaintiffs’ derivative unfair competition claim also
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`survives in part. So, the Court GRANTS in part and DENIES in part Defendant’s motion to
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`dismiss.
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`Case 3:17-md-02773-JSC Document 914 Filed 01/06/23 Page 2 of 37
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`I.
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`Complaint Allegations
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`A. Industry Background
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`1.
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`Modem Chips
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`BACKGROUND
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`Every smartphone, tablet, and other cellular device contains a piece of equipment called a
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`modem chip. (Dkt. No. 899 ¶ 8.)1 The modem chip allows a device to connect and communicate
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`with wireless cellular networks—such as those controlled by AT&T, Verizon and Sprint in the
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`United States. (Id.) A device without a modem chip would be unable to make calls and could not
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`send or receive data outside the presence of a Wi-Fi access point. (Id. ¶ 32.) In other words, a
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`smartphone without a modem chip is not much of a phone at all. (Id. ¶ 8.)
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`2.
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`Cellular Network Standards and Standard Setting Organizations
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`Cellular network “standards” govern how data moves from device to device across the
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`network. To make those vital connections—between a device and a network—the device’s
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`modem chip must be compatible with a cellular network’s particular technical standard. (Id. ¶ 33.)
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`a.
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`Standard Setting Organizations
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`For decades, telecommunications industry participants and government agencies have
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`negotiated, adopted, and implemented common “communications standards.” (Id. ¶ 9.) By
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`sharing common blueprints, the industry allowed device and network interoperability. (Id.) Thus,
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`an average consumer can buy a phone from their preferred device manufacturer (like Apple or
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`Samsung) and use the phone with their chosen network carrier (such as Verizon or Sprint) because
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`many network carriers use a common communications standard and the device contains a modem
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`chip that can communicate with the common standard. (Id.)
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`“Standard setting organizations” or “SSOs” develop these standards. (Id. ¶ 10.) SSOs
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`include telecommunications technology companies, device suppliers and manufacturers, and
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`government agencies. (Id. ¶ 38.) The Telecommunications Industry Association is the primary
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`standard setting organization for wireless communications in the United States. (Id.) The
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`1 Record citations are to material in the Electronic Case File (“ECF”); pinpoint citations are to the
`ECF-generated page numbers at the top of the documents.
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`Case 3:17-md-02773-JSC Document 914 Filed 01/06/23 Page 3 of 37
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`European Telecommunications Standards Institute, an organization based in France, focuses on
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`producing global communication standards. (Id.) Over the past four decades, these and other
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`SSOs developed three broad “generations” of communications standards relevant here—second-
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`generation (“2G”), third-generation (“3G”), and fourth-generation (“4G”) standards. (Id.)
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`b.
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`Particular Communications Standards
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`A “generation” can comprise multiple specific standards with similar capabilities. (Id.)
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`For example, the industry developed 2G cellular standards in the early 1990s. (Id. ¶ 39.) 2G
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`communications standards support digital transmission of voice calls. The leading 2G standards
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`are the Global System for Mobile Communications (“GSM”) and Code Division Multiple Access
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`(“2G-CDMA”). (Id.) AT&T and T-Mobile chose to operate GSM networks. By contrast,
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`Verizon and Sprint operated 2G-CDMA networks. (Id.)
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`The 3G series, developed in the late 1990s, had two leading standards as well. (Id. ¶ 40.)
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`GSM 2G networks like AT&T and T-Mobile implemented the Universal Mobile
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`Telecommunications System (“UMTS”), which incorporated a technology known as wideband
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`CDMA (“WCDMA”). (Id.) The 2G-CDMA operators, such as Verizon and Sprint, migrated to
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`the third-generation CDMA standard (“3G-CDMA”). (Id.) Between 2000 and 2010, Verizon and
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`Sprint invested over $57 billion in their CDMA-based networks. (Id. ¶ 176.)
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`The 4G series of standards were first introduced in 2009. (Id. ¶ 41.) 4G standards allow
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`for higher data-transmission speeds than 3G standards. (Id.) Most major operators chose a 4G
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`standard known as Long-Term-Evolution (“LTE”). (Id.) When initially deployed, 4G-LTE
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`covered data services in urban markets. (Id. ¶ 178.) But customers still required a chip
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`compatible with 3G-CDMA or 3G-WCDMA to make voice calls. (Id.) Some individual chips,
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`known as “multi-mode chips,” operate with multiple standards to solve this dilemma. (Id. ¶ 33.)
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`3.
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`Standard Essential Patents
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`A “standard” is a collection of technologies. Some technologies in the standard are
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`patented, others are not. As the discussion above illustrates, each standard “generation” lasts for
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`about a decade. When a standard setting organization incorporates a new technology into a new
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`standard, access to the technology becomes vital to the domestic and international
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`Case 3:17-md-02773-JSC Document 914 Filed 01/06/23 Page 4 of 37
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`telecommunications infrastructure. (Id. ¶ 11.) Thus, by creating a set of technologies to comprise
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`a “standard,” the standard setters effectively pick market winners and losers for a generation of
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`cellular technology. (Id. ¶ 10.) The winners—patents protecting technologies vital to a
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`communications standard—are known as standard essential patents (“SEPs”). (Id. ¶ 11.)
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`Standard essential patent holders reap large financial benefits because industry participants
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`selling devices or technologies compliant with the relevant standard must pay the essential patent
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`holder licensing and royalty fees—or risk suit for patent infringement. (Id.) If unchecked, a
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`standard essential patent holder could demand excessive licensing and royalty fees once their
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`protected technology is locked into the communications standard. (Id.) This maneuver is known
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`as a “patent hold up.” (Id. ¶ 43.)
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`Standard setting organizations established rules to prohibit patent hold ups. (Id. ¶ 12.) To
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`participate in the standard setting process, industry participants must disclose all patents they hold
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`on technologies under consideration for incorporation into a standard. (Id. ¶ 45.) Patent holders
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`must agree—as an express condition for incorporation into the standard—to license the
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`technology to other industry participants on fair, reasonable, and non-discriminatory (“FRAND”)
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`terms. (Id.) Absent such a promise, the standard setters will design around the claimed
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`“essential” patent at issue. (Id.)
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`B. Qualcomm’s Market Position
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` Qualcomm, located in San Diego, California, develops, designs, licenses, and markets
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`digital communications products and services through two wholly owned subsidiaries—
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`Qualcomm Technology Licensing and Qualcomm CDMA Technologies. (Id. ¶ 27.) Qualcomm
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`Technology Licensing licenses patents and other intellectual property rights from Qualcomm’s
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`intellectual portfolio. (Id.) Qualcomm CDMA Technologies handles equipment sales including
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`the sale of modem chips to device manufacturers. (Id.)
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`1.
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`Qualcomm’s Patent Licensing Business
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`“As an early developer of cellular technology, Qualcomm holds patents on technologies
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`that were incorporated into virtually every relevant cellular standard adopted during the period
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`relevant to this litigation,” including the CDMA, WCDMA/UMTS, and LTE standards. (Id.
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`Case 3:17-md-02773-JSC Document 914 Filed 01/06/23 Page 5 of 37
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`¶¶ 13, 36.) In the 2G era, Qualcomm’s SEP portfolio comprised a significant portion of the
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`overall 2G-CDMA standard. (Id. ¶ 39.) Qualcomm’s SEP market-share diminished during the 3G
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`era relative to the 2G era. (Id. ¶ 40.) And Qualcomm’s share of 4G-LTE SEPs is “roughly
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`equivalent to that of other industry competitors.” (Id. ¶ 41.) “One study of declared LTE SEPs
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`found that Qualcomm had a 13% share of ‘highly novel’ essential LTE patents, compared to 19%
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`for Nokia, 12% for Ericsson, and 12% for Samsung.” (Id.)
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`Qualcomm promised standard setting organizations it would license its cellular SEPs for
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`2G, 3G, and 4G standards on FRAND terms. (Id. ¶ 50.) For example, the European
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`Telecommunications Standards Institute requires participants to declare any essential patents
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`within a proposed standard and mandates a commitment to grant irrevocable patent licenses on
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`FRAND terms. (Id. ¶ 51.) Qualcomm declared over 30,000 global assets as essential intellectual
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`property rights, and told the European Telecommunications Standards Institute it was “prepared to
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`grant irrevocable licenses” under its policies. (Id.) But, as discussed in more detail below,
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`Plaintiffs allege Qualcomm broke its promises to the various SSOs and refused to license its SEPs
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`to rival chip manufacturers. (Id. ¶ 53.)
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`Instead, Qualcomm licensed its SEP portfolio to device manufacturers—also known as
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`“original equipment manufacturers” or “OEMs.” (Id. ¶ 60.) Qualcomm charged device
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`manufacturers SEP royalties based on the price of an entire finished device. (Id. ¶ 18.) For
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`example, an iPhone’s price dictates Qualcomm’s royalty for the SEP license Qualcomm granted to
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`Apple. (Id.) Thus, Qualcomm’s royalty increased as the device price went up, even if Apple
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`charged more for an iPhone model based on features—like a superior camera or increased
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`storage—unrelated to Qualcomm’s protected technologies. (Id.)
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`These licensing agreements were lucrative. (Id. ¶ 57.) During the class period,
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`Qualcomm charged device manufactures up to a 5% royalty rate on the final device (also known
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`as “handset”) price. (Id. ¶ 194.) Thus, if Apple sold an iPhone for $600, Qualcomm received a
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`$30 payment for each sale. While license agreements comprised a smaller share of Qualcomm’s
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`gross revenue than chip sales, the licensing business accounts for most of Qualcomm’s net profits.
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`(Id.) In 2013 and 2014, Qualcomm collected licensing revenues of approximately $7.8 billion.
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`Case 3:17-md-02773-JSC Document 914 Filed 01/06/23 Page 6 of 37
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`(Id. ¶ 196.) Four companies with similar SEP portfolios—Alcatel-Lucent, Ericsson, InterDigital,
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`and Nokia—combined for a total of $2.7 billion in licensing revenue over the same period. (Id.)
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`2.
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`Qualcomm’s Chip Business
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`Qualcomm’s chip business manufactures modem chips compliant with 2G-CDMA, 3G-
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`CDMA, UMTS, and LTE standards. (Id. ¶ 54.) During the class period, Qualcomm had
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`monopoly power in two types of chips—CDMA chips and premium LTE chips. (Id.)
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`a.
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`CDMA Chips
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`According to the complaint, Qualcomm controlled over 90% market share for CDMA chip
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`sales between 2011 and 2018. (Id. ¶ 185.) By the end of the class period in 2018, Qualcomm held
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`99% CDMA chip market share. (Id.) As discussed above, carriers like Verizon and Sprint
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`invested billions of dollars in CDMA networks between 2000 and 2010. (Id. ¶ 176.) But CDMA
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`networks remain relevant even today—when the primary data service used is 4G-LTE—because
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`customers require backwards compatible devices. (Id. ¶ 180.)
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`b.
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`Premium LTE Chips
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`Qualcomm also has monopoly power in the manufacturing and sale of 4G-LTE chips. (Id.
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`¶ 191.) LTE chips are used in premium devices—those sold for over $300 through 2012 and over
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`$400 from 2013 onwards. (Id.) From 2011 to 2015, Qualcomm had 90% or more of the market
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`share in “Premium LTE.” (Id.) From 2016 to 2018, “Intel slowly began to gain market share, but
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`Qualcomm continued to hold a significant majority of the Premium LTE market share.” (Id.)
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`c.
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`Modem Chip Competitors
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`Though Plaintiffs often refer to “competitors” or “rival chipmakers,” the SAC never
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`explicitly defines Qualcomm’s chip-manufacturing competitors. Intel is the primary chip-
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`manufacturing competitor referenced in the SAC. In 2017, Intel began supplying a portion of the
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`chips Apple incorporates in the iPhone 7. (Id. ¶ 145.) To bolster its CDMA capabilities for the
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`iPhone 7 deal, Intel acquired VIA Telecom—which, presumably had some CDMA capabilities.
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`(Id. ¶ 165.) Intel announced it would no longer manufacture modem chipsets in 2019—after the
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`class period ended. (Id. ¶ 145.) The SAC also references MediaTek, Samsung Electronics, and
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`Broadcom. (Id. ¶¶ 98, 101, 121.)
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`Case 3:17-md-02773-JSC Document 914 Filed 01/06/23 Page 7 of 37
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`C. Qualcomm’s Business Practices
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`The interplay between Qualcomm’s patent licensing business and Qualcomm’s chip sale
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`business is the crux of this case. Plaintiffs allege Qualcomm engaged in three connected business
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`practices: (1) Qualcomm refused to license its cellular SEPs to other chip manufacturers; (2)
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`Qualcomm’s “no license, no chips” policy denied OEMs access to chips unless the OEMs
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`purchased Qualcomm’s cellular SEP license for an unreasonably high price and gave up the right
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`to challenge Qualcomm’s SEPs; and (3) Qualcomm made “exclusive dealing” arrangements with
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`OEMs to maintain its chip market monopoly.
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`1.
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`Qualcomm and Other Chip Manufacturers (Competitors)
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`Qualcomm refused to sell “exhaustive”2 SEP licenses to competing modem chip
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`manufacturers. (Id. ¶ 120.) Instead of licensing to rival chip manufacturers,3 Qualcomm only
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`licensed its SEPs at the OEM level (e.g., to companies like Apple) or to OEMs’ contract
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`manufacturers (e.g., Foxconn). (Id. ¶¶ 68, 132.) Plaintiffs argue Qualcomm’s policy violated
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`Qualcomm’s FRAND obligations, which required Qualcomm to license its cellular SEPs to OEMs
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`as well as competing chip suppliers on FRAND terms.4 (Id. ¶ 97.)
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`According to Qualcomm’s rivals, Qualcomm’s refusal to sell an exhaustive license for
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`Qualcomm’s SEPs put other industry players at a competitive disadvantage. (Id. ¶ 97.) For
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`2 An “exhaustive” license refers to patent exhaustion. If Qualcomm granted an “exhaustive”
`cellular SEP license to a competitor—for example, Intel—Intel could then sell a chip with that
`technology to Apple. (Id. ¶ 119.) That sale might “exhaust” Qualcomm’s rights in the SEP,
`meaning Qualcomm could not sue Apple for patent infringement when Apple uses the Intel chip
`(and Qualcomm’s SEP technology) in an Apple device. (Id.) In that world, Apple would have no
`incentive to purchase an SEP license from Qualcomm or pay Qualcomm a royalty.
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` 3
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` While Qualcomm refused to grant its rivals exhaustive licenses, Qualcomm did allow its rivals to
`practice some of its SEPs. See F.T.C. v. Qualcomm Inc., 969 F.3d 974, 984 (9th Cir. 2020). These
`deals with competitors were known as “CDMA ASIC Agreements.” Id. In short, Qualcomm
`promised not to assert its patents against its rivals. Id. In exchange, rivals agreed to sell chips
`only to OEMs that buy Qualcomm SEP licenses. Id. Thus, competitors could practice
`Qualcomm’s patents royalty free but were forced to report details of chip supply agreements with
`OEMs. Id. at 985.
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` 4
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` For example, if a chip a rival can sell a chip for $5.00, Qualcomm “couldn’t charge a $10.00
`royalty” for the SEP rights because it might be difficult to convince a court $10.00 is a fair
`royalty. But, if the SEP license is sold only to OEMs for a 5% royalty on the entire price of the
`finished device, Qualcomm can obtain $30.00 on a $600 device. (Dkt. No. 899 ¶ 120.)
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`Case 3:17-md-02773-JSC Document 914 Filed 01/06/23 Page 8 of 37
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`example, a Samsung employee stated “[i]f we didn’t get the license I believe there would be the
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`IP-related risk, meaning that Qualcomm could make an assertion relating to their IP to Samsung
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`Electronics as well as customers of modem chips of Samsung Electronics.” (Id. ¶ 98.) A
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`MediaTek employee testified customers “were telling us that we needed a license from Qualcomm
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`. . . Because I think there was this belief in the industry, that if they didn’t – if we didn’t have a
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`license from Qualcomm, they wouldn’t be able to procure and sell products with our chips in
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`them.” (Id. ¶ 101.)
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`2.
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`Qualcomm and OEMs (Customers)
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` Plaintiffs allege Qualcomm engaged in two related business practices with OEMs. First,
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`Qualcomm maintained a “no license, no chips” policy towards OEMs. Second, Qualcomm
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`offered OEMs vast financial “rebates” if OEMs agreed to purchase Qualcomm chips on an
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`exclusive basis.
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`a.
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`“No License, No Chips”
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`Qualcomm’s FRAND commitments required Qualcomm to license its cellular SEPs to
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`OEMs on FRAND terms. (Id. ¶ 52.) But Plaintiffs allege Qualcomm violated this promise too.
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`(Id. ¶ 60.) Instead, Qualcomm “refused to supply cellular handset OEMs with CDMA and
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`Premium LTE chips unless the OEM agrees to take out a separate license to all of Qualcomm’s
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`cellular SEPs on Qualcomm’s preferred terms.” (Id. ¶ 59.) According to Plaintiffs, those terms
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`were highly prejudicial to licensees and inconsistent with Qualcomm’s FRAND promises. (Id.)
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`As discussed above, the SEP licenses were very profitable for Qualcomm. OEMs paid a
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`royalty based on the price of the entire finished device, rather than the price of the chip. (Id. ¶ 60.)
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`Thus, even if an OEM sold a device with a non-Qualcomm-manufactured chip, Qualcomm still
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`collects a royalty payment for the SEP rights based on the price of the entire finished handset. (Id.)
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`OEMs also agreed to forgo litigation regarding Qualcomm’s patents or license terms. (Id.)
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`This condition—known as “no license, no chips”—is “unique” in the industry. (Id. ¶ 89.)
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`According to Plaintiffs, OEMs faced a Hobson’s choice. OEMs need chips to sell mobile phones.
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`(Id. ¶¶ 80–81.) And Qualcomm has monopoly power in the vital CDMA and Premium LTE chip
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`markets. (Id.) If OEMs refused to pay Qualcomm’s SEP royalty rates—which exceeded the
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`Case 3:17-md-02773-JSC Document 914 Filed 01/06/23 Page 9 of 37
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`FRAND rates—Qualcomm would put the OEMs chip supply in “peril.” (Id. ¶ 81.) Thus,
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`Qualcomm had OEMs “over a barrel.” (Id. ¶¶ 80–81.) No license, no chips. No chips, no
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`business. So, the OEMs acquiesced to SEP licensing rates they considered unfair. (Id.) And the
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`OEMs agreed not to challenge those above-FRAND rates (or the SEPs validity) through litigation.
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`(Id. ¶ 60.) Plaintiffs call the difference between a FRAND SEP royalty rate and Qualcomm’s
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`royalty rate “an added surcharge” which the OEM must pay to ensure continued access to modem
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`chips. (Id. ¶ 199.) Thus, Qualcomm’s power in the chipset market protected its ability to charge
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`above-FRAND rates on the SEP licenses.
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`Qualcomm explicitly acknowledged that its chip business monopoly protected its licensing
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`profits. (Id. ¶ 85.) For example, Qualcomm’s Vice President of Finance wrote that “there is a
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`high correlation between our modem (chip) share and licensing compliance and royalty
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`sustainability.” (Id.) He called it “CRITICAL” that Qualcomm maintain its high market share in
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`the modem chip business to protect the high-profit licensing business. (Id.)
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`b.
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`Exclusive Chip-Supply Deals
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`Qualcomm’s efforts to protect that modem chip market share are the final piece of the
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`puzzle. Aside from refusing to grant competitors exhaustive licenses to cellular SEPs, Qualcomm
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`also offered exclusive dealing arrangements to key OEM customers. The SAC lists numerous
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`OEMs that bought between 85% and 100% of their chipsets from Qualcomm in exchange for
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`“incentives” or “reduced royalties.” (Id. ¶ 72.) But the exclusive dealing allegations largely focus
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`on Qualcomm’s relationship with Apple. (See id. ¶¶ 129–169.)
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`Apple sells multiple devices that use modem chips, such as iPhones and iPads. (Id. ¶ 129.)
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`According to the complaint, Apple is one of the largest purchasers of modem chips in the world.
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`(Id.) “Apple is a particularly important OEM from the perspective of a nascent [chip] supplier”
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`because working with Apple makes that supplier more competitive with other OEMs. (Id. ¶ 143.)
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`Apple employs contract manufacturers to assemble the iPhones and iPads. (Id. ¶ 131.) The
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`contract manufacturers pay the SEP license royalties to Qualcomm and then pass that cost along to
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`Apple. (Id.)
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`In 2007, Qualcomm and Apple entered a “Marketing Incentive Agreement.” (Id. ¶ 134.)
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`Under that agreement, Qualcomm paid Apple “marketing incentives” and Apple agreed not to
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`incorporate a proposed 4G WiMax Cellular standard that Intel advocated and Qualcomm opposed.
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`(Id.) This led to widespread adoption of 4G LTE, which contains a higher percentage of
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`Qualcomm’s patents and a lower percentage of Intel’s patents than 4G WiMax. (Id.)
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`In 2009, Apple and Qualcomm entered into a chip supply agreement. (Id. ¶ 135.) Under a
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`“Strategic Terms Agreement,” Qualcomm supplied chips and software to Apple. (Id.) Qualcomm
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`also “capped its liability for failure to supply” chips and retained a unilateral right to terminate its
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`obligations to Apple and its contract manufacturers. (Id.)
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`According to Plaintiffs, Qualcomm and Apple then entered into “de facto exclusive dealing
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`contracts” that foreclosed Qualcomm’s competitors from gaining modem chip business with
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`Apple. (Id. ¶¶ 136, 143.) For example, Apple and Qualcomm negotiated and agreed upon a
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`“Transition Agreement” in 2011. (Id. ¶ 137.) Under that agreement, Qualcomm promised
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`substantial incentive payments to Apple. (Id.) In exchange, Apple agreed to use Qualcomm chips
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`exclusively in all new iPhone and iPad models. (Id.) Apple also promised not to challenge
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`Qualcomm over intellectual property disputes. (Id.)
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`The First Amended Transition Agreement—effective 2013 to 2016—continued the
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`exclusivity arrangement and included a condition that Apple could not initiate or induce another to
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`initiate litigation based on Qualcomm’s failure to offer licenses on FRAND terms. (Id. ¶ 138.)
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`Qualcomm also agreed to make “separate substantial incentive payments to Apple so long as
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`Apple exclusively sourced chips from Qualcomm.” (Id.) But if Apple violated that exclusivity
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`and used non-Qualcomm chips in a device, Apple would forfeit past and future incentive
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`payments. (Id.) The parties also formed a “Business Cooperation and Patent Agreement
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`(“BCPA”) in 2013. (Id. ¶ 139.) In the BCPA, Qualcomm agreed to continue the “marketing
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`incentive payments” first negotiated in 2009. (Id.)
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`According to Plaintiffs, the 2011 and 2013 agreements were “intended by Qualcomm to
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`be, de facto exclusive deals that were as effective as express purchase requirements and essentially
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`foreclosed Qualcomm’s competitors from gaining chip business at Apple.” (Id. ¶ 141.) Although
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`Apple had “interest in developing and working with additional suppliers of chips,” the penalties
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`Apple would face under its agreements with Qualcomm allegedly deterred Apple from using other
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`suppliers. (Id.) According to Plaintiffs, the penalties were sufficiently large such that—if they
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`were attributed as discounts to the price of Qualcomm’s chips—the resulting price for chips would
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`be below Qualcomm’s cost to produce the chips. (Id.)
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`As a result of these agreements, Apple sourced chips exclusively from Qualcomm for all
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`new iPad and iPhone products launched between October 2011 and September 2016. (Id. ¶ 142.)
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`According to the complaint, Qualcomm’s exclusive deal with Apple “prevented Qualcomm’s
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`competitors from attaining [the benefits of working with Apple] and foreclosed a substantial share
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`of the market for Premium LTE chips.” (Id. ¶ 144.) Intel eventually won Apple’s business in 2017
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`for the iPhone 7. (Id. ¶ 145.) But Plaintiffs allege Qualcomm’s conduct “locked Intel out of
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`Apple” for the four years prior to that agreement. (Id. ¶ 145.)
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`3.
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`Summary
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`Plaintiffs’ allegations sit at the intersection of antitrust and patent law. Qualcomm had a
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`monopoly in the market for CDMA and Premium-LTE Chips. And Qualcomm had critical SEPs
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`necessary to participate in the cellular telecommunications industry. If an OEM wanted to use
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`chips, that OEM had to buy a license from Qualcomm or risk patent litigation. Typically, SSOs
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`require SEP holders to give licenses to rivals and customers at FRAND rates. But Qualcomm
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`ignored those obligations.
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`Instead, Qualcomm refused to license its chip-manufacturing competitors outright and
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`offered SEP licenses to OEMs for prices far greater than it could have charged rival chip makers.
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`Then, under its “no license, no chips” policy, Qualcomm refused to sell OEMs chips unless the
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`OEMs bought a separate (but related) product—the SEP license—at the inflated rate and agreed
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`not to challenge those rates or patents via litigation.
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`OEMs faced a predicament—if they refused to pay what Qualcomm wanted, they could
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`not buy chips—from Qualcomm (or, for practical purposes, from a competitor). To maintain chip
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`supply and stay in business, OEMs paid Qualcomm what Qualcomm wanted for SEP rights and
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`agreed not to sue Qualcomm over its intellectual property portfolio. This policy was chip-supplier
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`neutral, meaning Qualcomm did not officially mandate that OEMs buy chips from Qualcomm.
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`Case 3:17-md-02773-JSC Document 914 Filed 01/06/23 Page 12 of 37
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`
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`But Qualcomm then offered OEMs a large rebate for exclusive chip-buying arrangements.
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`Plaintiffs argue this rebate was a coercive disloyalty penalty, not a “discount.” In other words,
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`Plaintiffs allege that the combination of these practices inflated the “all-in” cost of modem chips
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`for OEMs because OEMs paid for the modem chip itself, a FRAND royalty to access the SEP, and
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`an added “surcharge” above that FRAND rate to ensure continued access to chips. (Id. ¶ 199.)
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`Plaintiffs offer the following hypothetical to illustrate the harm to consumers and
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`competitors. (Id. ¶ 74.) In this imagined scenario, a FRAND royalty for Qualcomm’s SEP license
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`amounts to $5/chip. Qualcomm violates its FRAND obligations, and charges OEMs $15/chip for
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`the SEP license. OEMs still have a choice to purchase chips from either Qualcomm or “Chip
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`Competitor”—the policy is chip supplier neutral. Chip Competitor offers the OEM a $16/chip
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`price. Qualcomm offers a $25/chip price and Qualcomm offers what amounts to $10/chip in
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`“incentives” or “rebates” if the OEM buys 100% of its chips from Qualcomm. The OEM thus has
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`two offers on the table:
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`• Option 1: Buy from Chip Competitor for $31/chip “all in”
`o SEP Price: $15 to Qualcomm per SEP license per chip
`o Chip Price: $16 to Chip Competitor per chip
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`
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`• Option 2: Buy 100% of chips from Qualcomm for $30/chip “all in”
`o SEP Price: $15 to Qualcomm per SEP license per chip
`o Chip Price: $25 to Qualcomm per chip
`o Exclusivity Rebate: $10 from Qualcomm to OEM
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`
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`The rational OEM would, of course, buy from Qualcomm. If, however, Qualcomm abided by its
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`FRAND commitments ($5/SEP license/chip), the following scenarios would be available:
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`• Option 1: Buy from Chip Competitor for $21/chip “all in”
`o SEP Price: $5 to Qualcomm per SEP license per chip
`o Chip Price: $16 to Chip Competitor per chip
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`• Option 2: Buy from Qualcomm for $30/chip “all in”
`o SEP Price: $5 to Qualcomm per SEP license per chip
`o Chip Price: $25 to Qualcomm per chip
`o Exclusivity Rebate: (Non-existent because Qualcomm does not have the
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`Case 3:17-md-02773-JSC Document 914 Filed 01/06/23 Page 13 of 37
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`supra-FRAND $10/SEP license to rebate)5
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`In that scenario, the OEM would choose the $21/chip from Chip Competitor rather than the
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`$30/chip to Qualcomm.
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`Plaintiffs allege the first scenario occurred. As a result, (1) chip competitors could not
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`break into the market because Qualcomm used the combination of SEP patent hold up, “no
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`license, no chips,” and exclusive dealing to lock out competition, (2) OEMs overpaid because chip
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`competitors could not compete, and (3) OEMs passed along those harms to individual consumers.
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`D.
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`Plaintiffs’ Alleged Injury and the Putative Class
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`Plaintiffs Sarah Key, Andrew Westley, Terese Russell, and Carra Abernathy reside in
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`California. (Id. ¶¶ 23–26.) Th