In re Qualcomm Antitrust Litig.

292 F.Supp.3d 948

IN RE: QUALCOMM ANTITRUST LITIGATION

Case No. 17–MD–02773–LHK

United States District Court, N.D. California, San Jose Division.

Signed November 10, 2017

Carel Ale, Susman Godfrey L.L.P., Los Angeles, CA, Lesley Elizabeth Weaver, Bleichmar Fonti & Auld LLP, Oakland, CA, Bonny E. Sweeney, Bruce J. Wecker, Christopher L. Lebsock, Hausfeld LLP, San Francisco, CA, Daniel B. Rehns, Hach Rose Schirripa & Cheverie, LLP, New York, NY, Michael D. Hausfeld, Hausfeld LLP, Washington, DC, Michael Paul Lehmann, Samantha J. Stein, Hausfeld LLP, San Francisco, CA, for In re: Qualcomm Antitrust Litigation.

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS AND/OR STRIKE

Re: Dkt. No. 110

LUCY H. KOH, United States District Judge

Plaintiffs Sarah Key, Andrew Westley, Terese Russell, and Carra Abernathy (collectively, "Plaintiffs") bring a putative class action against Defendant Qualcomm Incorporated ("Qualcomm"). Before the Court is Qualcomm's motion to dismiss and/or strike Plaintiffs' Consolidated Class Action Complaint ("CCAC"). ECF No. 110 ("Mot."). Having considered the parties' submissions, the relevant law, and the record in this case, the Court hereby GRANTS in part and DENIES in part the motion to dismiss and/or strike.

I. BACKGROUND

A. Factual Background

This case involves allegations similar to those made in FTC v. Qualcomm Inc. , No. 17–CV–00220–LHK, and requires understanding the complicated interaction between cellular communications standards, standard essential patents ("SEPs"), and the market for baseband processors, or "modem chips." The Court begins by discussing cellular communications standards and modem chips generally. Then, the Court discusses Qualcomm's cellular communications SEPs and Qualcomm's participation in the markets for modem chips. Next, the Court discusses Plaintiffs' allegations that Qualcomm has used its SEPs and its modem chips monopoly to harm competition in certain modem chips markets. Finally, the Court discusses Plaintiffs' allegations that Qualcomm's conduct has caused them harm by raising the prices paid for products containing modem chips.

1. Cellular Technology and the Baseband Processor Industry Generally

i. Cellphone Networks

Cellular communications depend on widely distributed networks that implement cellular communications standards. ECF No. 94 (Consolidated Class Action Complaint or "CCAC") ¶ 32. Cellular communications standards have evolved over four "generations." Id. ¶ 34. "First-generation cellular communications standards were developed in the 1980s. These standards support analog transmissions of voice calls." FTC v. Qualcomm Inc. , No. 17-CV-00220-LHK, 2017 WL 2774406, at *1 (N.D. Cal. June 26, 2017).

Second-generation ("2G") cellular communications were developed in the early 1990s. CCAC ¶ 35. 2G cellular communications standards support digital transmissions of voice calls. Id. The leading 2G standards are the Global System for Mobile Communications standard ("GSM") and second generation Code Division Multiple Access standard ("2G–CDMA"). Id. AT & T and T–Mobile chose to operate GSM networks. By contrast, Verizon and Sprint operate 2G–CDMA networks. Id.

In the late 1990s, third-generation ("3G") cellular communications standards were introduced. Id. ¶ 36. The leading 3G standards are the Universal Mobile Telecommunications System ("UMTS") and third-generation CDMA ("3G–CDMA") standards. Id. Network operators that deployed 2G GSM networks, such as AT & T and T–Mobile, transitioned to 3G UMTS networks. By contrast, network operators that deployed 2G–CDMA networks, such as Verizon and Sprint, transitioned to 3G–CDMA networks. Id.

In late 2009, fourth-generation ("4G") cellular communications standards were introduced. Id. ¶ 37. These standards support substantially higher data-transmission speeds than 3G standards. Id. The leading 4G standard is Long–Term Evolution ("LTE"). Id. Most major network operators worldwide have deployed LTE. Id.

ii. Standard Essential Patents

Cellular communications standards, such as CDMA and LTE standards, are adopted by standards setting organizations ("SSOs"). Id. ¶ 33. SSOs that adopt cellular telecommunications standards include the European Telecommunication Standards Institute ("ETSI"), the Telecommunications Industry Association ("TIA"), and the International Telecommunications Union ("ITU"). Id. ¶ 34.

In setting a cellular communications standard, SSOs often include technology in the cellular communications standard that is patented. Patents that cover technology that is incorporated into a standard are known as "standard essential patents" ("SEPs"). Id. ¶ 33.

Importantly, before incorporating a technology into a standard, SSOs "require participants to publicly disclose any claimed SEPs and promise to license [SEPs] to anyone who practices the standard on a royalty-free or [fair, reasonable, and non-discriminatory (‘FRAND’) ] basis." Id. ¶ 44. "Absent [such] safeguards, SEP holders could abuse the standard-setting process via ‘patent hold-up,’ which happens ‘when the holder of a[n] [SEP] demands excessive royalties after companies are locked into using a standard.’ " Id. ¶ 42 (citation omitted).

iii. Baseband Processors

In order to communicate with a cellular communications network, a cellphone handset ("handset") must contain a semiconductor device known as a baseband processor, or "modem chip." Id. ¶ 32. More specifically, in order to communicate with a particular cellphone network, the handset must contain a modem chip that complies with the cellular communications standards that the particular cellphone network supports. Id. For example, a handset that contains a modem chip that complies only with UMTS standards cannot communicate with a cellular network that uses 3G–CDMA standards. "Multi-mode" modem chips can comply with more than one cellular communications standard. Id.

To be used on a network that deploys LTE—the leading 4G standard used by major cellular network operators—the handset must ordinarily contain a modem chip that complies with LTE standards and is also "backward compatible" with 2G and 3G standards. Id. ¶ 40. This is because network operators have "continued to use the prior standards" and "have not yet replaced their 2G and 3G infrastructure with the new 4G infrastructure." Id. Accordingly, most manufacturers "must purchase multimode chips in order to make [handsets] that can function on the major U.S. wireless networks." Id.

iv. Cellular Handset Tiers and Smartphones

Cellular handsets are produced by original equipment manufacturers ("OEMs") such as Apple and Samsung. Id. ¶¶ 1–2, 38. Since the late 2000s, the market for handsets with advanced computing capability, such as smartphones and tablets, has "grown tremendously." Id. ¶¶ 2–3.

Competition in the manufacturing and sale of handsets has developed over time into "tiers": premium, mid, and low. Id. ¶ 38. "Premium"-tier smartphones include brands such as Apple's iPhone and Samsung's Galaxy–S. Id. Premium smartphones are of particular importance to OEMs because they "tend to have higher prices and margins than lower-tier products and are important for branding." Id.

Among the cellular communications standards discussed above, "LTE functionality, including its high data transmission speed, is central to modern [handsets], as consumers increasingly use them to transmit large volumes of data." Id. ¶ 39. Specifically, LTE allows for the transmission of large volumes of data, which has grown increasingly more important than cellular voice traffic. Id.

2. Qualcomm's Participation in the Modem Chip Market

Qualcomm is the leading supplier of modem chips worldwide. Id. ¶ 7. In particular, Qualcomm is dominant in the supply of two types of modem chips: (1) modem chips that comply with CDMA standards ("CDMA modem chips"); and (2) modem chips for use in premium tier handsets, which comply with advanced LTE standards ("premium-LTE modem chips"). Id.

i. CDMA Chips

First, Qualcomm has been particularly dominant in the supply of CDMA modem chips. Id. ¶¶ 56–57. As set forth above, major carriers such as Verizon and Sprint have deployed CDMA networks. Id. ¶ 35. OEMs that wish to manufacture handsets to operate on CDMA networks such as Verizon and Sprint must use modem chips that comply with CDMA standards.

Qualcomm is the dominant supplier of CDMA modem chips. From 2001 through 2015, Qualcomm's worldwide share of CDMA modem chips exceeded 80%. Id. ¶ 56. At the time of the CCAC, it was also estimated that "Qualcomm's worldwide share of the CDMA [modem] chip market for 2016 [was] likely to exceed or at least meet its historically greater than 80% share of the market." Id.

Qualcomm faces "limited competition for the supply of CDMA" modem chips. Id. ¶ 57. In the past ten years, "the only supplier of CDMA [modem chips] other than Qualcomm was Via Technologies," a Taiwanese company. Id. However, Via Technologies has focused its sales on the lower-tier handset market, rather than the premium market. Id. This is partly because Via Technologies has not offered multi-mode modem chips "that combine CDMA functionality with UMTS or LTE functionality." Id. In 2015, Intel Corporation ("Intel") acquired Via Technology's CDMA modem chip business. Id. However, Intel "has not yet commercialized a [modem] chip that integrates Via [Technology]'s CDMA technology" with "Intel's [own] multi-mode [modem chip] technologies." Id.

Another Taiwanese company, MediaTek Inc. ("MediaTek"), licensed technology from Via Technologies in late 2013 and began to offer CDMA modem chips in 2015. Id. However, MediaTek has not offered multi-mode CDMA modem chips that are "suitable for use in flagship handsets." Id. Overall, MediaTek's sale of CDMA modem processors has been small. Id.

ii. Premium–LTE Modem Chips

As discussed above, most cellular network operators have deployed LTE networks. Id. ¶ 58. This includes major U.S. cellular network operators such as Verizon, AT & T, T–Mobile, and Sprint. Id.

LTE functionality has...