Big Tech Can’t Phone it In: Consumers Get Boost in Antitrust Litigation Against Big Tech

June 7, 2019

In May 2019, the Supreme Court and the Northern District of California handed down two potentially big wins for consumers. Both decisions, Apple Inc. v. Pepper, 587 U. S. ____ , 2019 U.S. LEXIS 3397 (U.S. May 13, 2019) and FTC v. Qualcomm Inc., No. 5:17-cv-00220, 2019 U.S. Dist. LEXIS 86219 (N.D. Cal. May 21, 2019), may bolster consumers’ ability to obtain compensation for antitrust violations by technology giants.

In Pepper, the Supreme Court permitted a group of iPhone users to proceed with their antitrust claims against Apple.  iPhone users alleged that Apple used its monopoly over iPhone “app” sales to charge consumers inflated prices for apps purchased on the App Store.  Third-party developers create iPhone apps, which they sell exclusively through the App Store.  Apple then takes a 30% cut of every app sold on the App Store.  iPhone users alleged that in order to recoup Apple’s 30% commission, developers charge iPhone users marked-up prices for the apps.

The district court initially granted Apple’s motion to dismiss, finding that iPhone users lacked standing under Illinois Brick Co. v. Illinois because they are so-called “indirect purchasers.”  Illinois Brick bars indirect purchasers from suing for antitrust damages under federal law.  The Ninth Circuit subsequently reversed and Apple appealed to the Supreme Court.  

In a 5-4 decision, the Supreme Court affirmed the Ninth Circuit’s ruling against Apple.  Although 31 states and others urged the Supreme Court to overturn Illinois Brick, the Court did not decide that issue at all.  Instead, the Court found that iPhone users are direct purchasers with standing to sue under Illinois Brick.

While the case has yet to be decided on the merits, the Court’s ruling is significant for consumers.  Digital marketplaces like the App Store, including those operated by Amazon, Seamless, and Uber, are a staple of modern life.  But to the extent these companies are abusing their market dominance and harming consumers, app developers and other third-party suppliers have little incentive to sue the platforms that connect consumers with their products.  By permitting consumers to bring suits, the Supreme Court’s decision enables consumers to seek redress for their injuries and makes it more difficult for technology giants to operate with impunity.

Qualcomm involves another technology giant in the smartphone industry. Qualcomm is the dominant manufacturer of wireless modem chips, which connect cell phones to cellular networks.  The chips are essential to virtually every cell phone.

In FTC v. Qualcomm Inc., the Federal Trade Commission (“FTC”) alleged thatQualcomm abused its monopoly over two types of wireless modem chips by, among other things, employing a “no license, no chips” policy.  In order to obtain Qualcomm’s chips, Qualcomm required cell-phone manufactures like Apple and Samsung to license Qualcomm’s patents.  The FTC alleged Qualcomm charged excessive royalties on its patent licenses, entered into exclusionary contracts with Apple, and refused to license its patent technology to other chip manufacturers.  According to the FTC, Qualcomm’s conduct prevented competitors from entering the market, hampered innovation, and caused consumers to pay higher prices for their cell phones.  

Throughout the case, Qualcomm asserted that it does not maintain any such monopoly.  Instead, Qualcomm argues there is significant competition in the market for wireless modem chips and denies that it withheld chips in order to obtain unfair licensing terms.

Prior to trial, the court denied Qualcomm’s motion to dismiss and granted the FTC’s motion for partial summary judgment, finding that Qualcomm’s commitments to two standard setting organizations require Qualcomm to license its patents on “fair, reasonable, and nondiscriminatory terms.”  Subsequently, following a ten-day bench trial that included detailed testimony from experts and executives of major technology companies, the Southern District of California’s Judge Koh ruled Qualcomm abused its monopoly power causing harm to competition, phone manufacturers, and end users.

Finding that “Qualcomm’s licensing practices have strangled competition” for wireless modem chips, Judge Koh imposed numerous remedies. Qualcomm is now permanently enjoined from requiring customers to license its patents in order to obtain Qualcomm chips.  Additionally, the decision requires Qualcomm to license its patents to other chip makers on fair terms, prohibits Qualcomm from entering into de facto exclusive dealing agreements for the supply of chips, and requires Qualcomm to submit annual compliance reports to the FTC for the next seven years.

Qualcomm has appealed Judge Koh’s ruling.  Should the ruling stand, however, Qualcomm will likely be required to significantly alter its business model in order to maintain its position in the market. Moreover, the decision may aid a class of consumers who sued Qualcomm alleging that Qualcomm’s illegal licensing practices caused them to pay inflated prices for their smartphones.

Though much remains to be seen in both cases, the decisions indicate that “Big Tech,” no matter how giant, cannot hide from the antitrust laws.  It is worthwhile for both consumers and Big Tech to take note.

Excerpted in part from SCOTUS Apple App Decision Opens Door to Consumer Antitrust Actions, published June 7, 2019 on Bloomberg Law, and reproduced with permission from Copyright 2019, The Bureau of National Affairs, Inc., (800-372-1033), www.bna.com.

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