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Indirect Purchasers Cannot Sue Qualcomm Under Federal Law, But State Law Claims Survive

A federal judge in California has refused to allow indirect purchasers of semiconductor chips—i.e., cell phone consumers—to bring claims against Qualcomm under federal antitrust law.

Plaintiffs allege Qualcomm’s patent licensing practices are anticompetitive and constitute an abuse of Qualcomm’s dominant position in the supply of semiconductor chips. As a result of these practices, plaintiffs say, Apple is forced to pay improper royalties to Qualcomm, and these costs are passed on to consumers of Apple’s products. Plaintiffs brought claims under both California and federal antitrust laws.

Unfortunately for plaintiffs, the U.S. Supreme Court long ago ruled in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) that downstream purchasers cannot bring federal antitrust claims. There are several exceptions to the Illinois Brick rule in the Ninth Circuit—none of which plaintiffs raised. First, an indirect purchaser may have standing where it obtained goods from a direct purchaser pursuant to a preexisting “cost-plus contract.” Second, such a buyer can sue if the direct purchaser is owned or controlled by the indirect purchaser or the seller. Third, a downstream consumer can sue where there is a price-fixing conspiracy between the manufacturer and the middleman.

Plaintiffs instead hung their hats on a hazier exception: Under Freeman v. San Diego Ass’n of Realtors, 322 F.3d 1133, 1145–46 (9th Cir. 2003), plaintiffs argued, indirect purchasers may sue under federal law where “there is no realistic possibility that the direct purchaser will sue its supplier over the antitrust violation.” The Ninth Circuit has acknowledged, however, that the existence of this exception is unclear. The judge in this case went further, concluding that Freeman does not purport to create a new exception. Rather, standing existed in Freeman based on the “owned or controlled” or “co-conspirator” exceptions listed above. The judge added that, even assuming such an exception existed, it would not apply here. In fact, she wrote, Apple has already sued Qualcomm for largely the same conduct, including a claim under § 2 of the Sherman Act.

Plaintiffs’ state law claims, however, survived Qualcomm’s motion to dismiss. The judge ruled that Qualcomm’s alleged coercion of phone makers into signing unlawful contracts qualified as an illegal combination under the state’s Cartwright Act, which proscribes “a combination of capital, skill or acts by two or more persons” for an unlawful purpose. She noted that the Cartwright Act is intended to cover a “broad class of persons and injuries.”

The dispute is part of multidistrict litigation that followed the Federal Trade Commission’s January decision to seek an injunction to stop Qualcomm’s licensing practices.