Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 1 of 32 1 2 3 4 5 6 7 8 9 10 11 12 13 Geoffrey M Green D C Bar No 428392 Mark J Woodward D C Bar No 479537 J Alexander Ansaldo Va Bar No 75870 Dana F Abrahamsen D C Bar No 357934 Joseph R Baker D C Bar No 490802 Wesley G Carson D C Bar No 1009899 Kent E Cox Ill Bar No 6188944 Rajesh S James N Y Bar No 4209367 Philip J Kehl D C Bar No 1010284 Jennifer Milici D C Bar No 987096 Federal Trade Commission 600 Pennsylvania Avenue N W Washington D C 20580 202 326-3695 202 326-3496 fax jansaldo@ftc gov dabrahamsen@ftc gov jbaker1@ftc gov wcarson@ftc gov ggreen@ftc gov kcox@ftc gov rjames@ftc gov pkehl@ftc gov mwoodward@ftc gov jmilici@ftc gov Lin W Kahn Cal Bar No 261387 Federal Trade Commission 901 Market Street Suite 570 San Francisco CA 94103 415 848-5115 415 848-5184 fax lkahn@ftc gov 14 Attorneys for Plaintiff Federal Trade Commission 15 16 UNITED STATES DISTRICT COURT 17 NORTHERN DISTRICT OF CALIFORNIA 18 SAN JOSE DIVISION 19 20 Case No FEDERAL TRADE COMMISSION 21 22 23 24 Plaintiff v QUALCOMM INCORPORATED a Delaware corporation Defendant FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF REDACTED VERSION OF DOCUMENT SOUGHT TO BE SEALED 25 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 2 of 32 1 Plaintiff the Federal Trade Commission by its designated attorneys petitions this Court 2 pursuant to Section 13 b of the Federal Trade Commission Act “FTC Act” 15 U S C § 53 b 3 for a permanent injunction against defendant Qualcomm Incorporated to undo and prevent its 4 unfair methods of competition in or affecting commerce in violation of Section 5 a of the 5 Federal Trade Commission Act 15 U S C § 45 a I 6 7 1 NATURE OF THE CASE This enforcement action challenges Qualcomm’s unlawful maintenance of a 8 monopoly in baseband processors semiconductor devices that enable cellular communications in 9 cell phones and other products Qualcomm has engaged in exclusionary conduct that taxes its 10 competitors’ baseband processor sales reduces competitors’ ability and incentive to innovate 11 and raises prices paid by consumers for cell phones and tablets 12 2 Qualcomm is both a dominant supplier of baseband processors and a licensor of 13 patents that Qualcomm has declared essential to widely adopted cellular standards Cell phones 14 and tablets sold by Qualcomm’s customers must comply with these standards even when they 15 incorporate baseband processors supplied by Qualcomm’s competitors Qualcomm has 16 committed to standard-setting organizations to license standard-essential patents to all applicants 17 on fair reasonable and non-discriminatory “FRAND” terms 18 19 20 3 Qualcomm has excluded competitors and harmed competition through a set of interrelated policies and practices a Qualcomm withholds its baseband processors unless a customer accepts a 21 license to standard-essential patents on terms preferred by Qualcomm including elevated 22 royalties that the customer must pay when using competitors’ processors “no license-no 23 chips” 24 b In some instances 25 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 2 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 3 of 32 c 1 2 Qualcomm has consistently refused to license its cellular standard- essential patents to its competitors in violation of Qualcomm’s FRAND commitments d 3 Qualcomm entered into exclusive dealing arrangements with Apple Inc a 4 particularly important cell phone manufacturer 5 4 Qualcomm’s “no license-no chips” policy dramatically increases customers’ costs 6 of challenging Qualcomm’s preferred license terms before a court or other neutral arbiter— 7 including on the basis that those terms are non-FRAND—or to negotiate royalties in the shadow 8 of such a challenge This leaves Qualcomm’s customers in a markedly different position than 9 they would be in a typical patent licensing negotiation As a result Qualcomm’s customers have 10 accepted elevated royalties and other license terms that do not reflect an assessment of terms that 11 a court or other neutral arbiter would determine to be fair and reasonable 12 5 13 14 6 Qualcomm’s refusal to license its competitors bolsters its ability to maintain 15 elevated royalties and other unreasonable license terms Qualcomm’s competitors unlike its 16 customers do not depend on Qualcomm for baseband processor supply and would be better 17 positioned than customers to negotiate licenses on FRAND terms 18 7 By using its monopoly power to obtain elevated royalties that apply to baseband 19 processors supplied by its competitors Qualcomm in effect collects a “tax” on cell phone 20 manufacturers when they use non-Qualcomm processors This tax weakens Qualcomm’s 21 competitors including by reducing demand for their processors and serves to maintain 22 Qualcomm’s monopoly in baseband processor markets 23 8 When Apple sought relief from Qualcomm’s excessive royalty burden 24 Qualcomm conditioned partial relief on Apple’s exclusive use of Qualcomm baseband 25 processors from 2011 to 2016 Qualcomm’s exclusive supply arrangement with Apple denied 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 3 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 4 of 32 1 other baseband processor suppliers the benefits of working with a particularly important cell 2 phone manufacturer and hampered their development into effective competitors 3 9 Qualcomm’s conduct has harmed competition and the competitive process At a 4 time when cellular technologies are expanding to new and varied applications Qualcomm’s 5 practices threaten further consumer harm in an industry in which competition and innovation are 6 vitally important II 7 JURISDICTIONAL STATEMENT 8 A Jurisdiction 9 10 This Court has subject matter jurisdiction over this action pursuant to 10 Sections 5 a and 13 b of the FTC Act 15 U S C §§ 45 a and 53 b and 28 U S C §§ 1331 11 1337 a and 1345 This is a civil action arising under Acts of Congress protecting trade and 12 commerce against restraints and monopolies and is brought by an agency of the United States 13 authorized by an Act of Congress to bring this action 14 15 16 11 This Court has personal jurisdiction over Qualcomm because Qualcomm has the requisite constitutional contacts with the United States of America 12 Qualcomm’s general business practices and the unfair methods of competition 17 alleged herein are activities in or affecting “commerce” within the meaning of Section 4 of the 18 FTC Act 15 U S C § 44 19 20 13 Qualcomm is and at all times relevant herein has been a corporation as “corporation” is defined in Section 4 of the FTC Act 15 U S C § 44 21 B Venue 22 14 Venue in the Northern District of California is proper under 15 U S C § 22 23 Section 13 b of the FTC Act 15 U S C § 53 b and 28 U S C §§ 1391 b c and d 24 Qualcomm is found resides transacts business and has agents in this state and district and a 25 substantial portion of the affected commerce described herein has been carried out in this state 26 and district FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 4 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 5 of 32 1 C Intradistrict Assignment 2 15 Assignment to the San Jose Division is proper This action arises in Santa Clara 3 County because a substantial part of the events giving rise to these claims occurred in Santa 4 Clara County Qualcomm has offices in Santa Clara and San Jose Third parties that have 5 information relevant to this action including leading cell phone manufacturers also known as 6 “original equipment manufacturers” or “OEMs” and Qualcomm competitors also have offices 7 in Santa Clara County III 8 16 9 THE PARTIES Plaintiff the Federal Trade Commission is an administrative agency of the 10 United States government established organized and existing pursuant to the FTC Act 15 11 U S C §§ 41 et seq with its principal offices at 600 Pennsylvania Avenue N W Washington 12 D C The Commission is vested with authority and responsibility for enforcing inter alia 13 Section 5 of the FTC Act 15 U S C § 45 and is authorized under Section 13 b of the FTC Act 14 15 U S C § 53 b to initiate court proceedings to enjoin violations of any law the FTC enforces 17 15 Defendant Qualcomm is a publicly traded for-profit company incorporated in 16 Delaware and with its principal place of business located in San Diego California Qualcomm’s 17 principal businesses are the development design and sale of baseband processors and other 18 semiconductor devices used in cell phones and other mobile consumer products collectively 19 “handsets” and the licensing of intellectual property related to cellular technology Qualcomm 20 sells cellular baseband processors through a business unit called “Qualcomm CDMA 21 Technologies” or “QCT ” Qualcomm licenses its intellectual property rights through a business 22 unit called “Qualcomm Technology Licensing” or “QTL ” In the fiscal year ending in September 23 2016 Qualcomm reported that QCT had over $15 4 billion in revenues and earnings before taxes 24 of $1 8 billion and that QTL had over $7 6 billion in revenues and earnings before taxes of $6 5 25 billion 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 5 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 6 of 32 IV 1 INDUSTRY BACKGROUND 2 A Cellular Technology 3 18 Cellular communications depend on widely distributed networks implementing 4 standardized protocols Network operators such as Verizon AT T T-Mobile and Sprint make 5 substantial investments to build networks that comply with these standardized protocols 6 7 8 9 10 19 Since the introduction of commercial cellular handsets there have been four “generations” of cellular communication standards a First-generation “1G” standards introduced in the 1980s support analog transmission of voice calls b Second-generation “2G” standards first deployed in the early 1990s 11 support digital transmission of voice calls The leading 2G standards families are the 12 Global System for Mobile communications “GSM” and second-generation Code 13 Division Multiple Access “2G-CDMA” In the United States AT T and T-Mobile 14 operate legacy GSM networks while Verizon and Sprint operate legacy 2G-CDMA 15 networks 16 c Third-generation “3G” standards first deployed in the late 1990s and 17 early 2000s support higher data-transmission speeds The leading 3G standards families 18 are the Universal Mobile Telecommunications System “UMTS” and third-generation 19 CDMA “3G-CDMA” UMTS allowed GSM-network operators to transition 20 economically to a 3G standard 3G-CDMA did the same for 2G-CDMA-network 21 operators 22 d Fourth-generation “4G” standards first deployed in late 2009 and the 23 early 2010s support substantially higher data-transmission speeds than 3G standards can 24 support The leading 4G standard is Long-Term Evolution “LTE” Most major network 25 operators worldwide have deployed LTE 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 6 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 7 of 32 1 B Baseband Processors 2 20 Baseband processors are semiconductor devices sometimes referred to as 3 “chips ” “chipsets ” or “modems” within handsets Baseband processors allow handsets to 4 communicate with an operator’s cellular network by performing functions such as signal 5 generation modulation and encoding 6 21 To communicate with an operator’s network a handset must contain a baseband 7 processor that complies with cellular communications standards that the network supports A 8 handset containing a baseband processor that complies only with UMTS standards cannot 9 communicate with a 3G-CDMA network 10 22 Baseband processors that comply with more than one standard are known as 11 “multi-mode” processors A handset that contains a multi-mode baseband processor is capable 12 of communicating with networks that deploy more than one standard or with multiple networks 13 deploying different standards 14 23 To be used on a network deploying LTE a handset must ordinarily contain a 15 multi-mode baseband processor that complies with both LTE and older 2G and 3G standards for 16 two reasons First LTE network infrastructure generally supports data rather than voice traffic 17 Therefore to transmit voice calls a baseband processor must comply with 2G and 3G standards 18 Second because the process of upgrading and replacing network infrastructure takes years a 19 baseband processor must comply with 2G and 3G standards to communicate with the network in 20 areas where the operator has not yet replaced or upgraded infrastructure equipment 21 24 Thus to be sold for use on a given carrier’s network a multi-mode processor 22 must comply with the legacy 2G and 3G standards deployed by that network A handset that 23 contains a baseband processor that complies with GSM UMTS and LTE standards but not 24 CDMA standards for example cannot be sold for use on a CDMA network such as Verizon’s 25 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 7 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 8 of 32 1 C Cellular Handsets 2 25 In the late 2000s smartphones that provide advanced computing capability began 3 to emerge as alternatives to simple feature phones with voice and text-messaging capability The 4 launch of Apple’s iPhone in 2007 marked an important point in this transition as did the release 5 by HTC of the first phone using Google’s Android operating system in 2008 6 26 Smartphones include many features in addition to the cellular connectivity and 7 associated voice and text capabilities provided by early feature phones Smartphones offer 8 cameras high-resolution touch-screen displays powerful applications and graphics processors 9 and enhanced memory and storage among other features Many consumers today use their 10 smartphone as their principal camera for example Smartphones typically offer consumers 11 connectivity over both cellular networks such as 4G-LTE or 3G-CDMA and WiFi networks 12 27 Over time competition among OEMs has developed across several handset tiers 13 including premium sometimes further divided into “premium” and “high” mid and low tiers 14 Premium-tier smartphones including flagship brands like Apple’s iPhone and Samsung’s 15 Galaxy-S line typically include advanced features and technologies 16 28 Premium smartphones have become increasingly important for OEMs Premium 17 smartphones tend to have higher prices and margins than lower-tier products and are important 18 for branding 19 20 21 29 The United States where average selling prices for handsets are significantly higher than the global average is a particularly important market for a number of leading OEMs 30 Among cellular standards LTE functionality is particularly important for modern 22 smartphones as consumers increasingly use smartphones to transmit large volumes of data 23 Cellular data traffic has grown exponentially in recent years while the volume of cellular voice 24 traffic has remained nearly flat 25 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 8 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 9 of 32 1 D Qualcomm’s Dominance in Baseband Processor Supply 2 31 Qualcomm has long been the leading supplier of baseband processors worldwide 3 Qualcomm has been particularly dominant in the supply of two types of baseband processors 4 i baseband processors that comply with CDMA standards and ii premium baseband 5 processors which comply with advanced LTE standards CDMA Processors 6 7 32 A number of major carriers worldwide have deployed CDMA networks including 8 Verizon and Sprint in the United States For most leading OEMs leaving CDMA-compatible 9 handsets out of their product lines has not been a realistic option To manufacture and sell 10 handsets that operate on these networks OEMs have therefore had to use baseband processors 11 that comply with CDMA standards “CDMA processors” 12 33 Qualcomm has long been the dominant supplier of CDMA processors Each year 13 from at least 2006 through September 2015 the end of Qualcomm’s fiscal year Qualcomm’s 14 worldwide share of CDMA baseband processor sales exceeded 15 34 Qualcomm has faced limited competition for the supply of CDMA processors 16 For most of the past ten years the only supplier of CDMA processors other than Qualcomm has 17 been Via Technologies a Taiwan-based semiconductor company Via’s CDMA processor sales 18 have focused on processors used in lower-tier handsets This is in part because Via has not 19 offered multi-mode processors that combine CDMA functionality with UMTS or LTE 20 functionality In 2015 Intel Corporation acquired Via’s CDMA business Intel has not yet 21 commercialized a baseband processor product that integrates Via’s CDMA technology with 22 Intel’s own multi-mode processor technologies 23 35 MediaTek Inc another Taiwan-based semiconductor company licensed 24 technology from Via in late 2013 and began to offer CDMA processors in 2015 MediaTek has 25 not offered multi-mode CDMA processors suitable for use in flagship handsets however and its 26 sales of CDMA processors have been small FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 9 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 10 of 32 1 36 2 3 4 5 6 37 OEMs have had limited practical alternatives to Qualcomm for the supply of 7 CDMA processors Qualcomm has used its dominant position to obtain onerous and 8 anticompetitive supply and licensing terms from OEMs Premium LTE Processors 9 10 11 12 38 Most major network operators worldwide have deployed LTE networks including U S operators Verizon AT T T-Mobile and Sprint 39 Since the introduction of the first LTE networks around 2010 LTE functionality 13 has continually advanced and the relevant standard-setting organizations have released a series 14 of updated standards Advances have included progressively faster data speeds to allow for data- 15 intensive uses For example an early LTE release Category 1 supported download speeds of 10 16 megabits per second Mbps a later LTE release Category 6 supported download speeds of 300 17 Mbps and a more recent LTE release Category 12 supports download speeds of 600 Mbps 18 40 As LTE technology has progressed baseband processor manufacturers have had 19 to add features to keep up Today baseband processors that comply with advanced LTE 20 standards support advanced data download and upload speeds advanced carrier aggregation and 21 multiple-input multiple-output “MIMO” capabilities and advanced power-saving features 22 among other functions 23 41 OEMs typically require baseband processors with advanced LTE functionality for 24 premium-tier handsets For an OEM designing and manufacturing a premium-tier handset a 25 baseband processor that only supports earlier LTE features is not a reasonable substitute for a 26 baseband processor that supports advanced LTE standards and features FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 10 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 11 of 32 1 42 Competition among manufacturers of LTE baseband processors thus occurs in 2 tiers including premium sometimes further divided into “premium” and “high” mid and low 3 tiers A premium LTE baseband processor supports advanced LTE functionality— 4 5 in the words of a senior Qualcomm executive 43 Qualcomm recognizes that handsets and baseband processors compete in various 6 tiers Qualcomm’s 2016 annual report for example refers to both “premium-tier smartphones” 7 and Qualcomm’s “premium-tier integrated circuit products ” 8 9 10 44 Qualcomm has consistently been the dominant supplier of premium LTE 11 processors From at least 2012 through September 2015 Qualcomm’s annual worldwide share of 12 premium LTE baseband processor sales exceeded 13 45 Qualcomm has faced limited competition for the supply of premium LTE 14 processors Other manufacturers have offered baseband processors that support LTE 15 functionality but have offered only limited competition to Qualcomm in premium offerings 16 MediaTek for instance has lagged behind Qualcomm in LTE baseband processor sales and has 17 not supplied premium LTE processors for flagship handsets Intel has had even more limited 18 LTE baseband processor sales and achieved modest success in premium LTE baseband processor 19 supply only recently when it began to supply a portion of Apple’s baseband processor 20 requirements for the iPhone 7 Samsung and Huawei have recently self-supplied some premium 21 LTE baseband processors for Samsung and Huawei handsets respectively but this has not 22 provided Qualcomm with meaningful competition in the merchant market 23 46 24 25 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 11 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 12 of 32 1 2 3 4 47 OEMs have had limited practical alternatives to Qualcomm for the supply of 5 premium LTE processors Qualcomm has used its dominant position to obtain onerous and 6 anticompetitive supply and licensing terms from OEMs 7 V QUALCOMM’S FRAND-ENCUMBERED CELLULAR STANDARDESSENTIAL PATENTS 8 9 48 Standard-setting organizations “SSOs” adopt cellular communications 10 standards including CDMA and LTE standards Through SSOs industry participants that may 11 otherwise compete with each other collaborate on evaluating and selecting technologies for 12 standardization These collaborations can provide important benefits by resolving 13 interoperability problems 14 49 Standardization can also present competitive risks Standard-setting participants 15 often hold patents covering technologies that are incorporated into a standard Once a standard 16 incorporating proprietary technology is adopted the potential exists for opportunistic patent 17 holders to insist on patent licensing terms that capture not just the value of the underlying 18 technology but also the value of standardization itself To address this “hold-up” risk SSOs 19 often require patent holders to disclose their patents and commit to license standard-essential 20 patents “SEPs” on fair reasonable and non-discriminatory “FRAND” terms Absent such 21 requirements a patent holder might be able to parlay the standardization of its technology into a 22 monopoly in standard-compliant products 23 50 By making a FRAND commitment a patent holder accepts the benefits of 24 participating in standards development and of seeking incorporation of its patented technologies 25 into a standard but agrees in exchange not to exercise any market power resulting from its 26 patents’ incorporation into that standard FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 12 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 13 of 32 51 1 Most SSOs neither prescribe FRAND license terms nor offer a centralized 2 dispute-resolution mechanism in the event that a patent holder and standard implementer cannot 3 agree on such terms Instead most SSOs rely on the outcome of bilateral negotiations between 4 the parties with resort to remedies available from courts in the event of disagreement Bilateral 5 negotiations conducted in the shadow of a judicial determination of FRAND terms are therefore 6 essential to the efficacy of the FRAND commitment 52 7 SSOs that adopt cellular telecommunications standards include the European 8 Telecommunication Standards Institute “ETSI” the Telecommunications Industry Association 9 “TIA” and the Alliance for Telecommunications Industry Solutions “ATIS” In some 10 instances telecommunications standards have been developed through partnerships among 11 SSOs For example the Third Generation Partnership Project “3GPP” focuses on the evolution 12 of GSM UMTS and LTE technology and the Third Generation Partnership Project 2 13 “3GPP2” focuses on the development of CDMA technology 53 14 ETSI TIA and ATIS require each party that participates in the standards- 15 development process to commit to license its SEPs to firms that implement the standard on 16 FRAND terms 54 17 Qualcomm has participated in cellular standard setting processes through ETSI 18 TIA and ATIS and has participated in 3GPP and 3GPP2 Qualcomm was a leading developer 19 and proponent of 2G-CDMA standards and held a correspondingly high share of all patents 20 declared essential to 2G-CDMA standards 55 21 Qualcomm also participated in 3G-standard setting though its share of all patents 22 declared essential to 3G-UMTS and 3G-CDMA standards is smaller than its share of 2G-CDMA 23 SEPs 24 56 Qualcomm initially advocated a 4G standard known as Ultra-Mobile Broadband 25 but its advocacy was unsuccessful Qualcomm later supported LTE standards which other 26 industry participants had initially proposed Qualcomm’s share of patents declared essential to FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 13 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 14 of 32 1 LTE standards is much lower than its share of CDMA SEPs and is roughly equal to the shares of 2 other industry participants One study of declared LTE SEPs found that Qualcomm had a 13% 3 share of “highly novel” essential LTE patents compared to 19% for Nokia and 12% for each of 4 Ericsson and Samsung 57 5 6 Qualcomm has committed to ETSI TIA ATIS and other SSOs that it will license its cellular SEPs covering 2G 3G and 4G technologies on FRAND terms 58 7 Qualcomm has licensed its cellular SEPs to many OEMs Qualcomm has 8 historically offered licenses to OEMs at a base royalty rate of about 9 a handset This rate is significantly higher than those of other licensors of cellular SEPs 59 10 11 of the net selling price of Qualcomm refuses to license FRAND-encumbered cellular SEPs to competing suppliers of baseband processors despite its FRAND commitments 60 12 Among SEP holders Qualcomm garners an outsized share of licensing revenues 13 paid by OEMs OEMs pay Qualcomm far more in royalties than they pay other SEP licensors 14 even those with comparable portfolios of cellular SEPs 15 16 17 18 VI QUALCOMM USES ITS DOMINANT POSITION IN BASEBAND PROCESSORS 19 TO PRECLUDE OEMS FROM CHALLENGING ITS PREFERRED LICENSE 20 TERMS 21 61 Qualcomm conditions OEMs’ access to its baseband processors on OEMs’ 22 acceptance of a license to Qualcomm’s cellular SEPs on Qualcomm’s preferred terms “no 23 license-no chips” —including the payment of substantial royalties to Qualcomm on sales of 24 handsets using a baseband processor purchased from Qualcomm’s competitors 25 62 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 14 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 15 of 32 1 2 3 4 63 As alleged below Qualcomm’s “no license-no chips” policy is exclusionary The 5 policy skews Qualcomm’s license negotiations with OEMs toward outcomes that raise the all-in 6 prices that OEMs must pay on both Qualcomm baseband processors and those supplied by 7 Qualcomm’s competitors These higher all-in prices reduce demand for competitors’ processors 8 and raise handset prices paid by consumers 9 A Component Suppliers 10 11 12 13 Qualcomm’s “No License-No Chips” Policy Is Anomalous Among 64 Qualcomm’s “no license-no chips” policy sets Qualcomm apart from other suppliers of semiconductor and cellular-equipment components 65 Other component suppliers rely on component sales rather than separate patent 14 licenses to convey to their OEM customers the intellectual property rights that those customers 15 need in order to use or resell the components they have purchased 16 66 When a supplier sells a component such as a baseband processor to an OEM 17 that sale under the doctrine of patent exhaustion ordinarily terminates any right of the supplier 18 under patent law to control any further use or sale of the component 19 67 Thus when one of Qualcomm’s competitors sells a baseband processor to an 20 OEM the OEM can use or resell the processor without obtaining a separate patent license from 21 the competitor—just as a consumer buying a smartphone does not have to obtain a separate 22 patent license from the seller of the smartphone 23 68 More generally OEMs purchase components from hundreds of suppliers Among 24 these suppliers Qualcomm is unique in requiring an OEM as a condition of sale to secure a 25 separate patent license requiring royalty payments for handsets that use a competitor’s 26 components FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 15 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 16 of 32 1 B Qualcomm’s “No License-No Chips” Policy Is Anomalous Among SEP Licensors 2 3 69 Qualcomm’s “no license-no chips” policy also sets Qualcomm apart from other 4 licensors of SEPs 5 70 Ordinarily if a SEP holder and a potential licensee can neither agree on license 6 terms nor agree to submit those terms to binding arbitration the SEP holder initiates a patent- 7 infringement suit in which a court resolves issues of patent validity and infringement and if the 8 court deems a patent valid and infringed determines and awards reasonable royalties In some 9 instances a potential licensee may seek a declaratory judgment addressing the same issues 10 71 These suits when litigated to judgment have resulted in royalties well below 11 those that SEP holders offered prior to litigation In one leading case a SEP holder demanded 12 royalties of between $6 and $8 per gaming console The district court ultimately determined that 13 the FRAND rate for the SEPs was $0 04 per console Microsoft Corp v Motorola Inc No 14 C10-1823 2013 WL 2111217 at 99–101 W D Wash Apr 25 2013 In another case a SEP 15 holder demanded royalties that exceeded the selling price of the standard-compliant products 16 The district court ultimately determined that the cumulative FRAND royalty for the patents at 17 issue was 0 19% of the selling price Realtek Semiconductor Corp v LSI Corp No C-12-3451 18 2014 WL 2738226 at 6 N D Cal June 16 2014 19 72 A potential licensee’s ability to secure a FRAND determination from a court 20 affects SEP-license negotiations If the potential licensee’s costs of going to court are low 21 relative to the value of the royalties and other terms that the parties are negotiating both parties 22 to the negotiation know that the potential licensee if offered unreasonable terms can choose to 23 decline the offer and go to court to seek better terms 24 73 Thus the parties’ expectations about the probable outcome of litigation determine 25 the negotiated terms In this sense bargaining over royalties and other licensing terms occurs “in 26 the shadow of the law ” FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 16 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 17 of 32 1 74 Negotiated royalties will approximate judicially determined reasonable royalties 2 however only if the costs to the prospective licensee of challenging the licensor’s royalty 3 demands are low relative to the royalties demanded 4 75 As the costs to the potential licensee of going to court rise this becomes a less 5 attractive option and thus provides less protection to the potential licensee against unreasonable 6 royalty demands 7 C Qualcomm’s “No License-No Chips” Policy Denies OEMs the Opportunity to 8 Challenge Qualcomm’s License Terms in Court or to Negotiate Royalties 9 Against the Backdrop of a Potential Challenge 10 76 Many OEMs regard Qualcomm’s royalties as non-FRAND and absent 11 Qualcomm’s “no license-no chips” policy OEMs would have the ability and incentive to 12 challenge Qualcomm’s royalty demands in court 13 14 15 77 Before a court OEMs could challenge Qualcomm’s royalty demands on several grounds including by citing evidence that a Qualcomm’s royalties are disproportionately high relative to the value 16 contributed by its patented inventions and often are several times higher than the 17 royalties of other SEP licensors that have made similar technical contributions 18 b Qualcomm has continued to calculate royalties as a percentage of a 19 handset’s price even though handsets today offer a number of features—including 20 cameras high-resolution touch-screen displays powerful applications and graphics 21 processors—other than cellular connectivity 22 23 24 25 c Qualcomm’s standard royalty rate has not fallen even though many of Qualcomm’s patents related to CDMA technology have expired and d Qualcomm has required OEMs to grant Qualcomm cross-licenses in some cases to both SEPs and non-SEPs often with pass-through rights to other OEMs 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 17 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 18 of 32 1 and has failed to adjust its royalty rate to account for the value of OEMs’ cross-licensed 2 patents 3 78 Qualcomm’s “no license-no chips” policy effectively denies OEMs the 4 opportunity to challenge Qualcomm’s royalty demands on these and other grounds by 5 dramatically increasing OEMs’ costs of going to court 6 79 As a result of Qualcomm’s policy the costs that an OEM must incur to challenge 7 Qualcomm’s royalties are not simply attorney’s fees and other litigation costs but also include 8 loss of access to Qualcomm’s baseband processors 9 80 Loss of access to Qualcomm’s processors imposes substantial costs on OEMs 10 Given the dominant position that Qualcomm has had in the supply of CDMA and premium LTE 11 processors an OEM unable to purchase such processors from Qualcomm would be severely 12 hampered in efforts to design and sell critically important premium-tier phones and phones for 13 use on CDMA networks 14 81 Qualcomm has also used its dominant position to negotiate supply terms that 15 leave OEMs vulnerable to a supply disruption in the event of a license dispute Once an OEM 16 begins testing a handset with a Qualcomm baseband processor the OEM is effectively “locked 17 in” to that processor and remains so over the commercial life of the handset 18 82 Absent Qualcomm’s dominance in CDMA and premium LTE baseband 19 processors an OEM could protect itself against a supply disruption either i by substituting non- 20 Qualcomm processors in new handset designs or ii by using the prospect of substitution to 21 negotiate supply terms with Qualcomm that protect the OEM from such a disruption Qualcomm 22 has used its dominance however to obtain 23 24 25 83 These supply terms leave an OEM vulnerable to supply disruptions with serious consequences for its business To avoid these consequences OEMs have acceded to royalties 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 18 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 19 of 32 1 and other licensing terms that Qualcomm demanded even when they believed those terms to be 2 non-FRAND 3 D Qualcomm’s Preferred License Terms 4 5 6 7 Qualcomm’s “No License-No Chips” Policy Compels OEMs to Accept 84 Qualcomm’s “no license-no chips” policy has significantly influenced the course of license negotiations with a number of OEMs over the last decade 85 8 9 10 11 12 13 86 To maintain access to Qualcomm’s baseband processors OEMs have accepted 14 royalty and other license terms that they would not otherwise accept Specifically as a result of 15 Qualcomm’s “no license-no chips” policy the royalties that OEMs pay Qualcomm on handsets 16 using non-Qualcomm baseband processors do not reflect OEMs’ assessments of patent royalties 17 that a court or neutral arbiter would deem reasonable including in light of Qualcomm’s FRAND 18 commitments Instead the royalties that OEMs pay also reflect Qualcomm’s dominant position 19 in baseband processors and include an added increment that OEMs pay Qualcomm to avoid 20 disruption of processor supply 21 E Qualcomm’s “No License-No Chips” Policy Has Harmed Competition 22 87 The incremental royalty that OEMs pay to Qualcomm operates as a “tax” that 23 raises OEMs’ costs of using baseband processors supplied by Qualcomm’s competitors reduces 24 demand for competitors’ processors and reduces the ability and incentive of competitors to 25 invest and innovate The tax thereby maintains Qualcomm’s monopoly power and raises handset 26 prices paid by consumers FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 19 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 20 of 32 1 88 When evaluating handset designs OEMs consider the all-in cost of a baseband 2 processor consisting of both i the nominal price of the processor and ii any patent royalties 3 that the OEM must pay to use that processor in a handset 4 89 Qualcomm’s tax by raising the latter cost component increases the all-in cost to 5 an OEM of using a competitor’s baseband processor and thus weakens the competitive 6 constraint on Qualcomm’s own all-in baseband processor price 7 8 9 90 By raising OEMs’ all-in costs of using competitors’ baseband processors the tax diminishes OEMs’ demand for those processors and reduces competitors’ sales and margins 91 A supplier of CDMA and premium LTE baseband processors must ship 10 substantial volumes of processors and earn significant margins on those shipments to sustain the 11 research and development required to maintain a viable business Reduced sales and margins 12 resulting from Qualcomm’s tax diminish competitors’ abilities and incentives to invest and 13 innovate 14 92 15 16 17 18 93 Qualcomm’s “no license-no chips” policy thereby entrenches Qualcomm’s 19 monopoly power in the sale of CDMA and premium LTE baseband processors The policy also 20 reduces competitors’ abilities to invest and innovate in next-generation technologies 21 94 By using its baseband processor dominance to tax its competitors Qualcomm has 22 also limited competitors’ ability to discipline the all-in prices that Qualcomm charges for 23 baseband processors If Qualcomm used its dominance solely to raise the nominal prices of its 24 own processors those price increases would spur OEMs to seek substitutes and would attract 25 entry and competitive pricing from baseband processor competitors By contrast imposing a 26 tax—which OEMs must pay regardless of whether they use baseband processors supplied by FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 20 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 21 of 32 1 Qualcomm or a Qualcomm competitor—enables Qualcomm to raise the all-in prices of 2 processors without spurring substitution or attracting entry 3 4 5 95 OEMs likely pass some portion of these higher prices on to consumers in the form of higher handset prices or reduced handset features F 6 7 96 8 9 97 10 11 12 98 13 14 15 16 17 99 Separately in 2015 Qualcomm engaged in an intensive high-level review of 18 whether to divide Qualcomm’s chip and licensing divisions into separate companies as activist 19 investors wanted 20 100 21 22 23 24 25 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 21 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 22 of 32 1 2 3 101 In December 2015 Qualcomm’s board decided not to break up the company 4 G Qualcomm Has 102 On some occasions Qualcomm has induced certain OEMs to accept its preferred 5 6 7 license terms using both the “stick” of threatened supply disruption and 8 103 9 10 11 104 12 13 14 105 15 16 17 106 18 19 20 21 22 23 VII QUALCOMM REFUSES TO LICENSE FRAND-ENCUMBERED SEPS TO ITS COMPETITORS 24 25 26 107 The intellectual property rights policies of relevant SSOs do not restrict who is eligible to receive a FRAND license from a holder of a FRAND-encumbered patent For FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 22 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 23 of 32 1 instance the ETSI intellectual property rights “IPR” policy requires standard-setting 2 participants to commit to provide “irrevocable licenses on fair reasonable and non- 3 discriminatory ‘FRAND’ terms and conditions ” The TIA policy requires any SEP holder that 4 wishes to monetize its essential patents to commit to license SEPs “to all applicants under terms 5 and conditions that are reasonable and non-discriminatory to the extent necessary for the 6 practice of the Standard ” The ATIS policy requires SEP holders to license SEPs “under 7 reasonable terms and conditions that are demonstrably free of any unfair discrimination” to 8 “applicants desiring to utilize the license for the purpose of implementing the standard ” 9 10 11 108 Qualcomm’s FRAND commitments require it to license its competitors to make and sell baseband processors using Qualcomm’s SEPs 109 Qualcomm itself recognizes that FRAND commitments are designed to ensure 12 open access to standardized technologies It argued in a past litigation filing that FRAND 13 commitments “ensure that all industry participants will be able to develop manufacture and 14 sell products compliant with the relevant standard without incurring the risk that patent holders 15 will be able to shut down those operations ” 16 110 Similarly in its 2016 annual report Qualcomm stated “The mobile 17 communications industry generally recognizes that a company seeking to develop manufacture 18 and or sell products that use CDMA- and or LTE-based standards will require a patent license 19 from us ” 20 21 22 111 Qualcomm has also insisted on cross-licenses to its licensees’ SEPs for the benefit of Qualcomm’s baseband processor business and the customers of that business 112 In breach of its FRAND commitments at odds with its recognition that other 23 industry participants “will require” a license to its FRAND-encumbered SEPs and in tension 24 with its practice of securing patent licenses for the benefit of its own customers Qualcomm has 25 consistently refused to license its SEPs to competing suppliers of baseband processors Several 26 of Qualcomm’s former and current competitors including Intel FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 23 and Samsung have Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 24 of 32 1 sought SEP licenses from Qualcomm In each instance Qualcomm refused to grant a SEP 2 license 113 3 A license to Qualcomm’s cellular SEPs would provide substantial benefits to 4 other baseband processor suppliers and to their customers Because Qualcomm refuses to license 5 FRAND-encumbered SEPs to its competitors these competitors cannot offer OEMs baseband 6 processors that convey the rights to Qualcomm’s cellular SEPs 114 7 Qualcomm’s ability to tax its competitors’ sales via patent license terms with 8 OEMs would be limited if it licensed cellular SEPs to its competitors Qualcomm’s competitors 9 unlike its OEM customers do not depend on Qualcomm for baseband processor supply As a 10 result Qualcomm could not use a threatened disruption of baseband processor supply to skew 11 SEP-license negotiations with its competitors and the royalties that would emerge from those 12 negotiations would reflect the royalties that a court would deem reasonable 115 13 Qualcomm’s refusal to license competing manufacturers of baseband processors 14 in contravention of its FRAND commitments contributes to its ability to tax its competitors’ 15 sales and maintain its monopoly 16 VIII QUALCOMM EXTRACTED BASEBAND PROCESSOR EXCLUSIVITY FROM APPLE IN EXCHANGE FOR PARTIAL ROYALTY RELIEF 17 18 116 Like other OEMs Apple’s leverage in negotiations with Qualcomm has been 19 constrained by Apple’s need for access to a supply of Qualcomm’s CDMA and premium LTE 20 baseband processors 21 117 Unlike other OEMs however Apple is not a direct Qualcomm licensee Instead 22 Apple employs contract manufacturers that are licensed by Qualcomm and the contract 23 manufacturers pass on the costs of the Qualcomm royalties they pay to Apple 24 118 Despite these differences Apple like other OEMs regards Qualcomm’s license 25 terms including the effective royalties charged by Qualcomm under its licenses with Apple’s 26 contract manufacturers as inconsistent with Qualcomm’s FRAND commitments FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 24 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 25 of 32 1 119 Apple has negotiated with Qualcomm in an effort to reduce the royalty burden 2 that Apple bears through its contract manufacturers As a result of these negotiations Apple 3 entered into agreements with Qualcomm in 2007 2011 and 2013 4 120 Under a 2007 agreement Qualcomm agreed to rebate to Apple royalties that 5 Qualcomm received from Apple’s contract manufacturers in excess of a specified per-handset 6 cap Qualcomm’s payment obligations were conditioned upon among other things Apple not 7 selling or licensing a handset implementing the WiMax standard a prospective fourth-generation 8 cellular standard championed by Intel and opposed by Qualcomm 9 121 Qualcomm and Apple entered into additional agreements in 2011 and 2013 10 Under these agreements Qualcomm provided Apple large lump sum payments that constituted 11 partial relief from Qualcomm royalties Qualcomm conditioned this relief on Apple’s exclusive 12 use of Qualcomm baseband processors in new iPhone and iPad models 13 122 Under Qualcomm’s 2011 agreement with Apple Qualcomm agreed to make 14 substantial incentive payments from 2011 through 2016 explicitly conditioned upon Apple using 15 Qualcomm baseband processors exclusively in all new iPhone and iPad models If during this 16 period Apple launched a new handset with a non-Qualcomm baseband processor it would 17 forfeit all future payments and depending on when a handset launched could be required to 18 refund past payments 19 123 Qualcomm’s 2013 agreements with Apple modified and extended the exclusivity 20 arrangement set forth in the companies’ 2011 agreement Under the 2013 agreements 21 Qualcomm agreed to rebate to Apple royalties that Qualcomm collected from Apple’s contract 22 manufacturers in excess of modified per-handset caps Qualcomm’s obligation to make these 23 rebate payments was subject to among other terms a new condition—that Apple neither initiate 24 nor induce others to initiate litigation claiming that Qualcomm had failed to offer a license on 25 FRAND terms Qualcomm also agreed to make substantial incentive payments in 2013 2014 26 2015 and 2016 explicitly conditioned on Apple sourcing baseband processors for new iPad and FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 25 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 26 of 32 1 iPhone models exclusively from Qualcomm If during this period Apple launched a new 2 handset with a non-Qualcomm baseband processor it would forfeit all future incentive payments 3 and depending on when a handset launched could be required to refund past incentive 4 payments 5 124 In all Qualcomm’s 2011 and 2013 agreements with Apple provided for billions 6 of dollars in conditional rebates from Qualcomm to Apple for baseband processor sales from 7 2011 to 2016 These conditional rebates effectively penalized Apple’s use of any baseband 8 processors supplied by Qualcomm’s competitors 9 125 Qualcomm’s 2011 and 2013 agreements with Apple were and were intended by 10 Qualcomm to be de facto exclusive deals that were as effective as express purchase 11 requirements and that effectively foreclosed Qualcomm’s competitors from gaining baseband 12 processor business at Apple a 13 14 Apple had at all relevant times an interest in developing and working with additional suppliers of baseband processors b 15 The large penalties that Apple would face under its agreements with 16 Qualcomm if it sourced baseband processors from another baseband supplier prevented 17 Apple from using alternative suppliers during the effective exclusivity period under these 18 agreements c 19 Although a price-cost test is not required to assess the competitive effects 20 of Qualcomm’s agreements with Apple the penalties under these agreements are 21 sufficiently large that if they were attributed as discounts to the price of Qualcomm 22 baseband processors reasonably contestable by a Qualcomm competitor the resulting 23 price of Qualcomm processors would be below Qualcomm’s cost 24 126 As a result of the exclusivity terms in its agreements with Qualcomm Apple 25 sourced baseband processors exclusively from Qualcomm for all new iPad and iPhone products 26 that it launched over the five-year period from October 2011 until September 2016 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 26 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 27 of 32 1 127 2 3 4 5 6 7 128 Qualcomm’s exclusive deal with Apple excluded competition from other baseband processor suppliers and harmed competition 129 Apple is a particularly important OEM from the perspective of a nascent baseband 8 processor supplier and confers benefits on a nascent supplier that make the supplier a stronger 9 contender for other OEMs’ business a 10 Apple sells large volumes of premium handsets that require premium LTE 11 baseband processors These processors ordinarily command higher prices and margins 12 than lower-tier baseband processors Supplying Apple helps a nascent supplier to achieve 13 a scale of business that confers research-and-development flexibility among other things b 14 A nascent supplier learns directly from engagement with Apple’s 15 engineering teams and this engagement improves the supplier’s baseband processor 16 offerings 17 c 18 A nascent supplier achieves technical validation by demonstrating its ability to meet Apple’s demanding technical requirements d 19 A nascent supplier engaged by Apple can field-test its processors through 20 global launches that require real-world work with network operators and infrastructure 21 vendors 22 e A nascent supplier obtains a reputational halo effect from selling to Apple 23 This reputational boost may help a supplier win sales at other OEMs 24 130 Qualcomm’s exclusive agreements with Apple prevented Qualcomm’s 25 competitors from attaining these benefits during the term of the exclusivity period These 26 agreements also foreclosed a substantial share of the market for premium LTE baseband FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 27 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 28 of 32 1 processors The agreements significantly impeded the development of other baseband processor 2 suppliers into effective competitors to Qualcomm IX 3 4 131 QUALCOMM’S MONOPOLY AND MARKET POWER Qualcomm has monopoly and market power with respect to CDMA baseband 5 processors and premium LTE baseband processors Direct evidence of this power includes 6 evidence of Qualcomm’s ability to use threatened loss of access to baseband processors to raise 7 the all-in prices of baseband processors prices that include both nominal processor prices and 8 license fees 9 132 Qualcomm’s monopoly and market power is also established through 10 circumstantial evidence including dominant shares of relevant markets with substantial barriers 11 to entry The relevant markets for the purposes of assessing Qualcomm’s monopoly and market 12 power are no broader than the worldwide markets for i CDMA baseband processors and 13 ii premium LTE baseband processors Baseband processors without CDMA functionality are 14 not close enough substitutes to prevent Qualcomm from raising all-in prices for CDMA 15 processors Similarly baseband processors without premium LTE functionality are not close 16 enough substitutes to prevent Qualcomm from raising all-in prices for premium LTE processors 17 133 Qualcomm has maintained dominant shares of the CDMA and premium LTE 18 baseband processor markets Each year from at least 2006 through September 2015 Qualcomm’s 19 worldwide share of CDMA baseband processor sales exceeded 20 September 2015 Qualcomm’s annual share of worldwide premium LTE baseband processor 21 sales has also exceeded 22 134 From at least 2012 through Entry into the markets for CDMA and premium LTE baseband processors is 23 difficult costly and time-consuming Barriers to entry include the need to make substantial 24 costly and time-consuming investments in technology research and development the need to 25 develop ongoing customer relationships with leading OEMs and certification requirements 26 imposed by network operators Qualcomm’s conduct—including i the effective tax that FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 28 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 29 of 32 1 Qualcomm imposes on the baseband processor sales of competitors and potential competitors 2 and ii Qualcomm’s refusal to license to its competitors FRAND-encumbered patents essential 3 to CDMA and LTE standards—is another significant barrier to entry 4 5 6 7 8 9 10 11 135 The relevant geographic market is worldwide There are no material geographic barriers to competition for baseband processor sales X 136 HARM TO COMPETITION CAUSED BY QUALCOMM’S PRACTICES Qualcomm’s anticompetitive practices have excluded competitors increased consumer prices and suppressed innovation 137 Qualcomm’s anticompetitive conduct has relaxed the constraints that competitors’ entry and expansion would otherwise impose on all-in prices in baseband processor markets 138 By raising OEMs’ all-in costs of using competitors’ baseband processors 12 Qualcomm’s conduct has also diminished OEMs’ demand for those processors reduced 13 competitors’ sales and margins and diminished competitors’ ability and incentive to invest and 14 innovate 15 139 Developments in the cellular baseband processor industry reflect the natural 16 consequences of Qualcomm’s conduct Several former competitors of Qualcomm have sold off 17 or shuttered their baseband processor businesses unable to achieve the sales volumes and 18 margins needed to sustain a viable business While Intel and MediaTek have remained in the 19 business these firms have felt significant pressures including on baseband processor margins 20 140 If Qualcomm’s remaining competitors were to exit the business as a result of 21 Qualcomm’s anticompetitive conduct this would have a significant adverse impact on 22 competition in baseband processor markets and on innovation 23 141 Competition often drives firms to innovate in next-generation technologies and 24 products Competing firms often approach research and development efforts differently 25 increasing the likelihood of successful innovation 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 29 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 30 of 32 1 142 Enhanced innovation in mobile technologies would offer substantial consumer 2 benefits especially as these technologies expand to new applications including extending 3 mobile connectivity to consumer appliances vehicles buildings and other products the 4 “Internet of Things” By suppressing innovation Qualcomm’s anticompetitive practices 5 threaten these benefits 6 143 Qualcomm is entitled to compensation when others practice its patented 7 inventions The prospect of fair compensation induces risk taking that produces innovation and 8 economic growth Qualcomm’s anticompetitive conduct however skews its patent licensing 9 negotiations toward outcomes that reflect not only the value of its patents but also its monopoly 10 power in baseband processors Absent Qualcomm’s unlawful conduct Qualcomm’s patent 11 licenses would include fair reasonable and non-discriminatory terms and would not include 12 elevated royalties that tax Qualcomm’s competitors Absent Qualcomm’s unlawful conduct 13 Qualcomm could obtain fair compensation for its intellectual property while its competitors 14 could compete based on the merits of their respective offerings 15 144 Qualcomm’s practices have harmed competition and consumers both within the 16 markets for CDMA and premium LTE baseband processors and in other baseband processor 17 markets in which OEMs pay Qualcomm inflated royalties These include markets for UMTS- 18 compliant baseband processors and lower-tier LTE baseband processors 19 145 Qualcomm’s practices are not reasonably necessary to accomplish any significant 20 procompetitive benefits The anticompetitive harm from those practices outweighs any 21 procompetitive benefits and Qualcomm could reasonably achieve any procompetitive goals 22 through less restrictive alternatives XI 23 24 146 25 paragraphs above VIOLATION OF THE FTC ACT The FTC re-alleges and incorporates by reference the allegations in all of the 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 30 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 31 of 32 1 147 Qualcomm’s course of conduct—including i conditioning the supply of 2 baseband processors on licenses to FRAND-encumbered patents on Qualcomm’s preferred 3 terms ii iii refusing to license FRAND-encumbered patents to 4 5 baseband processor competitors and iv exclusive dealing with Apple—is anticompetitive and 6 constitutes an unfair method of competition in violation of Section 5 a of the FTC Act 15 7 U S C § 45 a a 8 Qualcomm has monopolized markets for both CDMA baseband 9 processors and premium LTE baseband processors At all times relevant to this 10 complaint Qualcomm has had monopoly power with respect to CDMA baseband 11 processors and premium LTE baseband processors Qualcomm has maintained its 12 monopoly power through its course of anticompetitive conduct b 13 Qualcomm’s license agreements with OEMs together with terms of its 14 supply and strategic market-development agreements linked to those license agreements 15 result from an exercise of Qualcomm’s monopoly and market power and are 16 unreasonable restraints of trade c 17 Qualcomm’s practices regardless of whether they constitute 18 monopolization or unreasonable restraints of trade harm competition and the competitive 19 process and therefore constitute unfair methods of competition in violation of 20 Section 5 a of the FTC Act XII 21 22 148 THE COURT’S POWER TO GRANT RELIEF Section 13 b of the FTC Act 15 U S C § 53 b empowers this Court to issue a 23 permanent injunction against violations of the FTC Act and in the exercise of its equitable 24 jurisdiction to order ancillary equitable relief to remedy the injury caused by Qualcomm’s 25 violations 26 FEDERAL TRADE COMMISSION’S COMPLAINT FOR EQUITABLE RELIEF 31 Case 5 17-cv-00220 Document 1 Filed 01 17 17 Page 32 of 32 PRAYER FOR RELIEF WHEREFORE the FTC requests that this Court as authorized by Section 13 b of the FTC Act 15 U S C 53 b and 15 U S C 26 and pursuant to its own equitable powers enter nal judgment against Qualcomm declaring ordering and adjudging 1 That Qualcomm s course of conduct violates Section 5 a of the FTC Act 15 U S C 45 a 2 That Qualcomm is permanently enjoined from engaging in its unlawful conduct 3 That Qualcomm is permanently enjoined from engaging in similar and related conduct in the future and 4 That the Court grant such other equitable relief as the Court nds necessary to redress and prevent recurrence of Qualcomm s violations of Section 5 a of the FTC Act 15 U S C 45 a as alleged herein Dated January 17 2017 Respectfully submitted 214 GEOFFREY M GREEN Of counsel Assistant Director DEBORAH FEINSTEIN MARK J WOODWARD Director Deputy Assistant Director Bureau of Competition 1 ALEXANDER ANSALDO DAVID C SHONKA DANA F ABRAHAMSEN Acting General Counsel JOSEPH R BAKER WESLEY G CARSON KENT E COX RAJESH S JAMES LIN W KAHN PHILIP J KEHL JENNIFER MILICI Attorneys Bureau of Competition Attorneys for Plaintiff Federal Trade Commission FEDERAL TRADE COMPLAINT FOR EQUITABLE RELIEF 32 15cm 44 Rev 07 16 Case Page 1 of 3 The JS-CAND 44 civil cover sheet and the information contained herein neither replace nor supplement the ling and service of pleadings or other papers as re ed by law quir except as provided by local rules of court This form approved in its original form by the Judicial Conference of the United States in September 1974 is required for the Clerk of Court to initiate the cum docket sheet SEE MTRUCTIONS ON NEXT PAGE OF HHS FORM I PLAINTIFFS Federal Trade Commission County of Residence of First Listed Plainti EXCEPTINUS PWF CASES DEFENDANT Qualcomm Incorporated County of Residence of First Listed Defendant THE TRACT OF LAND INVOLVED San Diego PWF CASES ONLY NOTE IN LAND CONDENINATION CASES USE THE LOCATION OF C Attorneys Firm Name Address and Telephone Number Attorneys If Known See attachment See attachment II BASIS OF JURISDICTION Place an in One Box Only CITIZENSHIP 0F PRINCIPAL PARTIES Place an in One Box for Plainrl F or Diversity Cases Only and One Boxfor Defendant Govunment 3 Federal Question DEF PTF DEF Plaintiff US Government Not a Party - - Crtizen of This State Place smegma '35 '35 CitizenorSubjectofa 3 3 ForeignNation 6 6 Foreign Country IV NATURE OF SUIT Place an in One Box Only I TORTS BANKRUPTCY 01mm 110 Insurance PERSONAL INJURY PERSONAL INJURY 625 Drug Related Seizure D422 Appeal 28 USC 158 375 False Claims Act 120 Marine 310 Airplane D365 Personal Injury ofProperty 21 USC 881 D423 Withdrawal 376QuiTam 3l USC 130 Miller Act 315 Airplane Product Product Liability 690 Other 28 USC 157 3729 3 140 Negotiable Instrument Liability D367 Health Care 400 State Reapportionmmt 150 Recovery of Overpayment 320 Assault Libel Pharmaceutical PROPERTY RIGHTS 410 Antitrust Of Veteran s Bene ts Slander Personal Injury 20 Copyrights 430 Banks and Banking 151 Mediocre Act 330 Federal Employers Product Liability 30 Patent 450 Commerce 152 Recovery of Defaulted Liability 368 Asbestos Personal Trademark 460 Deportation Studmt Loans 340 Marine Injury Product 470 Racketed In uenced and Excludes Vetuans 345 Marine Product liability Corrupt Organimtions 153 Recovery of Overpaymmt Liability PERSONAL PROPERTY 710 Fair Labor Standards 61 HIA 139511 480 Consumer Credit of Veteran s Bene ts 350 Motor Vehicle 370 Other Fraud Act 62 Black Lung 923 490 Cable Sat TV 160 Stockholders Suits 355 Motor Vehicle E371 Truth in Lending D720 Iabor Management 63 405 g 850 Securities Commodities 190 Other Contract Product Liability 380 Other Personal Relations 64 SSID Title XVI Exchange 195 Contract Product Liability 360 Other Paschal Property Damage 740 Railway Labor Act 65 RSI 405 g 890 Other Statutory Actions 196 Franchise Injury D385 Property Damage B751 Family and Medial 891 Agricultural Acts 362 Paschal Injury - Product Liability Leave Act 893 Environmental Mattas Medical Malpractice 790 Other Labor litigation 895 Freedom of Information REAL PROPERTY CIVIL RIGHTS PRISONER PETITIONS 791 Employee Retirunent Act 210 Land Condenmation 440 Other Civil Rights Habeas Corpus Income Security Act 896 Arbitration 220 Foreclosure 441 Voting 463 Alien Detainee 899 AdministrativeProeedure 23o Rent lease Ejectrnent 442 Employment 510 Motions to Vacate Act Review or Appeal of 240 Torts to Land 443 Housing Sentence 26 USC 7609 Agency Decision 245 Tort Product Liability Accommodations 530 General 950 Constitutionality of 290 All Other Real Property 445 Armr w Disabilities 535 Death Penalty MAHON State Statutes Employment Other 462 Naturalintion Application 3 446Am 540Mandamus 0ther 465 OtherImmigration Other 550 Civil Rights Actions 448 Education 555 Prison Condition 560 Civil Detainee Conditions of Con nement V ORIGIN Place an in One Box Only 1 Original 2 Removed from 3 Remanded from 4 Reinstated or 5 Transferred from 6 Multidistrict 8 Multidistrict Proceeding State Court Appellate Court Reopened Litigation Transfer Litigation Direct File spec Cite the US Civil Statute under which you are ling Do not cite jurisdictional stamtes unless VI CAUSE OF ACTION Brief description of cause 15 USC 45 Unfairmethodsofcompetition VH REQUESTED IN CHECK IF THIS IS A CLASS ACTION DEMAND 5 Injunction CHECK YES only if demanded in complaint RELATED IF AINY See instructions JUDGE DOCKET NUNIBER IX DIVISIONAL ASSIGNMENT Civil Local Rule 3-2 Place an in One Bo Only SAN ESAN JOSE EUREKA-MCKINLEYVILLE January 17 2017 SIGNATURE OF ATTORNEY OF RECORD Joseph R Baker Case 5 17-cv-00220 Document 1-1 Filed 01 17 17 Page 2 of 3 ATTACHMENT TO CIVIL COVER SHEET US DISTRICT COURT - NORTHERN DISTRICT OF CALIFORNIA Attorneys for Plaintiff FTC Geoffrey M Green Federal Trade Commission 600 Pennsylvania Ave NW Washington DC 20580 202 326-2641 ggreen@ftc gov Kent E Cox Federal Trade Commission 600 Pennsylvania Ave NW Washington DC 20580 202 326-2058 kcox@ftc gov Mark J Woodward Federal Trade Commission 600 Pennsylvania Ave NW Washington DC 20580 202 326-2754 mwoodward@ftc gov Rajesh S James Federal Trade Commission 600 Pennsylvania Ave NW Washington DC 20580 202 326-3242 rjames@ftc gov J Alexander Ansaldo Federal Trade Commission 600 Pennsylvania Ave NW Washington DC 20580 202 326-3695 jansaldo@ftc gov Lin W Kahn Federal Trade Commission 901 Market St #570 San Francisco CA 94103 415 848-5115 lkahn@ftc gov Dana F Abrahamsen Federal Trade Commission 600 Pennsylvania Ave NW Washington DC 20580 202 326-2906 dabrahamsen@ftc gov Philip J Kehl Federal Trade Commission 600 Pennsylvania Ave NW Washington DC 20580 202 326-2559 pkehl@ftc gov Joseph R Baker Federal Trade Commission 600 Pennsylvania Ave NW Washington DC 20580 202 326-2651 jbaker1@ftc gov Jennifer Milici Federal Trade Commission 600 Pennsylvania Ave NW Washington DC 20580 202 326-2912 jmilici@ftc gov Wesley G Carson Federal Trade Commission 600 Pennsylvania Ave NW Washington DC 20580 202 326-3743 wcarson@ftc gov Case 5 17-cv-00220 Document 1-1 Filed 01 17 17 Page 3 of 3 Attorneys for Defendant Qualcomm Defendant has previously been represented by the following counsel and law firms The FTC does not know who will represent Defendant in this litigation Gary A Bornstein Cravath Swaine Moore LLP 825 Eighth Avenue New York NY 10019-7475 gbornstein@cravath com 212 474-1084 Yonatan Even Cravath Swaine Moore LLP 825 Eighth Avenue New York NY 10019-7475 yeven@cravath com 212 474-3700 Willard K Tom Morgan Lewis Bockius LLP 111 Pennsylvania Ave NW Washington DC 20004-2541 willard tom@morganlewis com 202 739-5389