Saturday, January 7, 2023

Federal judge further shrinks antitrust class action against Qualcomm: 'No License, No Chips' policy is lawful, but plaintiffs can pursue exclusive-dealing claims under California state laws

The Federal Trade Commission's antitrust litigation against Qualcomm came to a definitive end almost two years ago when the FTC refrained from seeking Supreme Court review of the first-class acquittal the San Diego chipmaker had won in the United States Court of Appeals for the Ninth Circuit. It was a resounding victory for Qualcomm's counsel from multiple firms under the strategic leadership of Cravath Swaine & Moore's Gary Bornstein, whose work for Epic Games (against Apple and Google) I have mentioned many times.

Still, there is a class action pending in the Northern District of California: In Re: Qualcomm Antitrust litigation, but no longer before Judge Lucy H. Koh, who has meanwhile been promoted to the appeals court. Presiding over this case now is Judge Jaqueline Scott Corley, who is based in San Francisco. Yesterday (Friday, January 6), she granted in part and denied in part Qualcomm's motion to dismiss the class action:

In Re: Qualcomm Antitrust Litigation, Order Regarding Motion to Dismiss

In 2021, the Ninth Circuit remanded the certification of the consumer class to the district court, and without going into detail expressed the view that the failure, as a matter of law, of some of the FTC's claims would by extension also dispose of substantial parts of the class-action complaint. Also, the Ninth Circuit took issue with the application of California law to a nationwide class, especially when there are "repealer" and "non-repealer states" with respect to the Illinois Brick doctrine that bars indirect purchasers from seeking antitrust damages unless state laws open the door to such theories. Illinois Brick could have been overruled in Apple v. Pepper (App Store antitrust case), but it wasn't because a narrow Supreme Court majority determined that app downloaders directly purchase from Apple.

Upon remand, the class-action lawyers drastically narrowed their case: it's now only about California law (the Cartwright Act, which is sort of California's Sherman Act, and California Unfair Competition Law (UCL))--and the class is now limited to California consumers. Under the Cartwright Act as well as under California UCL, the class-action lawyers are suing Qualcomm over

  1. its "No License, No Chips" policy (device makers must take a standard-essential patent (SEP) license from Qualcomm as a precondition for getting to buy Qualcomm's baseband chips);

  2. an allegedly exclusive agreement with Apple (to be precise, there were certain rebates that Apple was eligible for as long as it largely relied on Qualcomm's baseband processors); and

  3. allegedly having defrauded the standard-setting process by making FRAND promises without the intent to honor them (such as by granting exhaustive licenses to rival chipmakers).

The doctrine that requires the district court to take into consideration the Ninth Circuit's FTC v. Qualcomm decision in its adjudication of Qualcomm's motion to dismiss the consumer class action is stare decisis (consistency with applicable precedent). The consumers are not collaterally estopped because of the FTC's defeat, nor can any of the factual questions be demeed res judicata given that the class-action lawyers are entitled to their own day in court and could--in theory (though hardly in practice)--present stronger evidence than the federal government.

It is the last point I mentioned that keeps the "exclusive dealing" technically alive. It's a zombie claim as far as I can see: unless the class-action lawyers dig up some silver bullet somewhere, the conclusion is going to be that Intel and other companies wouldn't have been able to provide an adequate replacement for Qualcomm's chips anyway. But it's a dead claim walking for the reason I explained. It will hardly survive summary judgment, though.

The "fraud" prong has been dismissed directly because the consumer plaintiffs are not Qualcomm's competitors and, therefore, can't allege reliance on Qualcomm's FRAND promise.

The claim that "No License, No Chips" constitutes anticompetitive tying has also been dismissed directly (under either state law). Its fundamental deficiency is that the allegedly tied product--licenses to Qualcomm's SEPs--is not available from a rival seller: only Qualcomm licenses its SEPs to smartphone makers.

The class-action lawyers made a legalistic argument in that context: a 2015 decision by the California Supreme Court (Cipro) involving reverse payment settlements under the Hatch-Waxman Act, which is (broadly speaking) about creating incentive for the makers of generic versions of patented drugs to challenge the relevant patents: the first one to take down a patent gets a certain exclusivity period. As a result, some pharmaceutical companies entered into settlements with the first challenger at the expense of all of their joint competitors.

In the Qualcomm case, the class-action lawyers argued that Cipro shows a greater willingness by the California state judiciary to find antitrust violations in patent holders' dealing and practices. Judge Corley declined the invitation to "strike a new path in tying jurisprudence under the Cartwright Act, just as Cipro did in the realm of horizontal restraint." She said that there is no case law at the moment that supports the "novel tying theory" against Qualcomm, and the district court won't broaden the scope of Cipro by predicting potential changes in California case law based on a philosophical interpretation of Cipro.

The class-action lawyers could now try to appeal Judge Corley's decision to the extent their claims got dismissed, and hope that someone will make new law in order for their tying claim to be revived. They can also try to argue it doesn't matter that consumers themselves never relied on any FRAND licensing promise by Qualcomm. And they can try to win the factual debate over whether there were any anticompetitive effects from the Qualcomm-Apple agreement in question.

They can try any or all of the above--but it's highly unlikely to lead to any payout to California consumers. The biggest obstacle to a settlement here may be the fact that Qualcomm is on the winning track, even if it takes another year or two (or more).