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Lorenzo v. Qualcomm Inc.

March 3, 2009


The opinion of the court was delivered by: Hayes, Judge


The matter before the Court is the Motion to Dismiss Plaintiff's Complaint (Doc. # 14) filed by Defendant Qualcomm Incorporated.

Factual Allegations in the Complaint

A. The Parties

On November 18, 2008, Plaintiff Christopher Lorenzo initiated this action by filing the Complaint (Doc. # 1). Plaintiff is a resident of Los Angeles County, CA. Complaint, ¶ 9. Plaintiff purchased a Palm Treo 700Wx and a Blackberry Curve from Verizon and receives cellular service from Verizon. Id., ¶ 10. Defendant Qualcomm Incorporated ("Qualcomm") is a Delaware corporation with its principal place of business in San Diego, CA. Id., ¶ 11. Qualcomm "is the second-biggest maker of mobile-phone chips and holds more than 1,400 patents which it licenses to more than 130 companies, including chip makers and cell phone manufacturers." Id.

B. The Wireless Industry

Cell phones today "principally use one of two leading wireless technologies: either the Global System for Mobility ('GSM') or the Code Division Multiple Access ('CDMA')." Id., ¶ 12. These GSM and CDMA systems "have unique features and technology, thus neither the systems, nor the phones used for each system are interchangeable or substitutes - a GSM phone will not work on a CDMA network and vice versa." Id. The "chipsets that operate cell phones must conform to the technology for the system for which the phone is being manufactured." Id., ¶ 13. As the technologies evolve, they are referred to by "generations." Id. The GSM and CDMA pathways evolve independently. Id.

C. Qualcomm's Patents and Licensing Practices

"Qualcomm holds certain patents that it asserts are 'essential' to the CDMA technology and standard and, according to Qualcomm, the CDMA standard cannot be practiced without using Qualcomm technology based on its patents." Id., ¶ 15. Standard setting organizations ("SDO's") adopted CDMA as a standard technology for a new generation of phones such that "any company that wanted to produce a CDMA compliant product had to pay licensing fees to Qualcomm for use of its CDMA intellectual property rights." Id., ¶ 29.

By virtue of its patents of certain CDMA intellectual property rights and incorporation and adoption by CDMA standards rendering such patents 'essential' to the manufacture of CDMA-complaint devices, Qualcomm had and continues to exercise market and monopoly power in the relevant CDMA patent technology market - a market separate and distinct from the CDMA-chipset market. . . .

Qualcomm has used that power over CDMA technology to obtain and protect monopoly power in the CDMA chipset market.

Id., ¶¶ 30-31.

"In at least some manufacturer licenses, Qualcomm substantially reduces royalty rates when a licensee agrees to purchase Qualcomm chipsets exclusively." Id., ¶ 31. For example, Qualcomm's "patent licensing agreements with Chinese cell phone manufacturers are expressly discriminatory and explicitly linked to those manufacturers' use of Qualcomm chipsets." Id. Qualcomm has "publicly summarized" that the royalty rates provided to certain Chinese manufacturers "are more favorable than our standard rates," partly because these manufacturers agree to use Qualcomm's chipsets. Id., ¶ 32. Qualcomm's "royalty rate discrimination furthers no legitimate competitive interest or business need," but rather "is intended to harm, and has the effect of harming, competition in the CDMA chipset market and the CDMA device market." Id., ¶ 33. Qualcomm's royalty rate discrimination also violates Qualcomm's commitments to the SDOs to license its CDMA intellectual property rights on fair, reasonable, and non-discriminatory ("FRAND") terms. Id., ¶ 35.

Qualcomm collects double royalties through insisting "on licenses at both the component and the cell phone level." Id., ¶ 39.

CDMA cell phone manufacturers pay a royalty to Qualcomm for rights including the right to make (or to have made) and use CDMA chipset[s] in CDMA-complaint cell phones to be sold by the licensee. Cell phone manufacturer licensees pay the same royalty rate per handset regardless of whether they make (or have made) their own customized CDMA chipsets or buy from a CDMA chipset manufacturer that is licensed by Qualcomm. Thus, when a CDMA chipset cell phone manufacturer buys a CDMA chipset from a Qualcomm licensee, both the handset manufacturer and the chipset manufacturer are paying a royalty to Qualcomm for the right to make the chipset.

Id., ¶41.This "royalty rate scheme enables [Qualcomm] inappropriately to charge twice for the same intellectual property right." Id., ¶ 40. Qualcomm's efforts to collect double royalties compels "each customer to negotiate with Qualcomm for a separate license, even if that customer wants to purchase chipsets from a source other than Qualcomm;" violates Qualcomm's commitments to license its CDMA intellectual property rights on FRAND terms; and violates the "patent exhaustion doctrine by collecting and requiring CDMA component and handset manufacturers to pay twice for the same license." Id., ¶¶ 42-44.

"Qualcomm has protected its interests through non-disclosure agreements that prohibit parties to its CDMA licensing agreements from disclosing confidential information, including its discriminatory royalty rate pricing structure." Id., ¶ 45. Qualcomm's "secret allowance of . . . unearned discounts is for the purpose of, and had the effect of, injuring and eliminating competition in the CDMA chipset market." Id., ¶ 47.

D. Harm to Plaintiff

Plaintiff is an end consumer of the CDMA chipset market. . . .

Plaintiff has suffered harm from Qualcomm's anticompetitive CDMA licensing practices. CDMA chipset manufacturers suffer direct anticompetitive harm from Qualcomm's CDMA licensing practices. This anticompetitive harm includes supracompetitive prices and impaired non-price competition in innovation of CDMA functionality. . . . CDMA chipset manufacturers pass CDMA licensing costs down to CDMA device manufacturers, CDMA device manufacturers pass those costs down to their vendors, and the vendors ultimately pass those costs on to end consumers, such as Plaintiff.

Id., ¶¶ 23-24.

E. Claims for Relief

Claim I: Violation of California's Cartwright Act, section 16720, et seq., of the California Business and Professions Code

Qualcomm and its licensees "formed a combination of capital, skill and/or acts by two or more persons for the purpose of creating restrictions and preventing competition in manufacturing, making, sale and/or purchase of CDMA chipsets and devices containing such chipsets." Id., ¶ 67. Qualcomm's "CDMA licensing practices constitute a trust in violation of the Cartwright Act, even if Qualcomm's commitment to FRAND licensing was not intentionally false at the time it was made and Qualcomm created a trust by simply reneging on its commitment to FRAND licensing for the CDMA patents and engaging in the discriminatory and exclusive licensing practices alleged herein." Id., ¶ 68. Qualcomm's CDMA licensing practices "have caused antitrust injury . . . and threaten additional antitrust injury if [] allowed to continue" in the form of supracompetitive prices and impaired non-price competition in the form of deterred innovation. Qualcomm's conduct constitutes a combination in restraint of trade.

Qualcomm also "has required and coerced through discriminatory royalty rates that anyone who wants favorable royalty rates on its CDMA patent technology . . . to also agree to exclusively purchase Qualcomm's CDMA chipsets." Id., ¶ 75. "The effect of Qualcomm's discriminatory pricing and tying arrangements had been to substantially harm competition in the market for CDMA chipsets." Id., ¶ 78. Plaintiff and the class "have suffered antitrust injury as downstream indirect purchasers who paid supracompetitive prices for CDMA- complaint devices and/or cellular service as a result of Qualcomm's licensing practices." Id., ¶ 80. Qualcomm's conduct constitutes discriminatory pricing and tying.

Claim II: Violation of California's Unfair Practices Act, section 17000, et seq., of the California ...

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