Melbourne Municipal Firefighters’ Pension Trust Fund v. Jacobs, et. al. (Qualcomm Derivative Litigation)
|Court:||Court of Chancery of the State of Delaware|
|Case Number:||10872 -VCMR|
|Case Contacts:||Mark Lebovitch, David Wales, Christopher J. Orrico|
Following an extensive investigation, including a Section 220 Demand to obtain books and records of Qualcomm, Inc., on April 3, 2015, BLB&G filed a complaint in the Delaware Court of Chancery (the “Complaint”) on behalf of Melbourne Municipal Firefighters’ Pension Trust Fund (“Plaintiff”) and derivatively on behalf of Qualcomm, Inc. (“Qualcomm” or the “Company”) against certain current and former members of the Company’s board of directors (the “Board”) and senior officers (collectively, “Defendants”). The Complaint seeks to hold Defendants accountable and liable for refusing to perform their core and most basic job: ensuring that the means by which the Company operates complies with applicable laws and regulations. Plaintiff alleges that for many years, dating back to at least 2009, the Board consciously permitted Qualcomm to engage in business practices that run afoul of antitrust laws across many jurisdictions. In 2015, the Board’s bad faith disregard for the Company’s sustained anti-competitive conduct culminated in a $975 million fine by the People’s Republic of China’s antitrust regulator, the National Development and Reform Commission (“NDRC”).
The NDRC fine was neither sudden nor a first offense. Qualcomm has been (and continues to be) the subject of repeated anti-competition investigations, lawsuits, and regulatory actions around the world. By leaving the Company’s business practices in place despite ever-increasing legal problems, the Board knowingly disregarded its fiduciary obligation to adopt and implement effective legal compliance controls. Specifically, the Board was aware that Qualcomm’s business model makes it especially susceptible to violating antitrust laws because of the way the Company manages the thousands of patents it owns that are necessary for cellular communication worldwide. When a corporation attains such a dominant global position, its board of directors must pay particular attention to ensure that management’s efforts to increase revenues and profits do not unlawfully abuse monopolistic power.
Maximizing the benefits of competitive advantage is, of course, a proper role of both corporate boards and officers. But ensuring that a company uses its market position lawfully is a board’s paramount charge. The Complaint alleges that for years, Qualcomm’s Board has permitted management to abuse its dominant position to strong-arm counterparties by, among other things:
- demanding that licensing counterparties pay for other products that they do not need;
- tying the sale of its patent licenses and chipsets together along with unreasonable conditions; and
- forcing customers to give up right to their own intellectual property.
The Company’s wrongful conduct was magnified for the Board in China because the licensing revenue from Qualcomm’s patent portfolio accounts for a majority of the Company’s global income, and China is, by far, Qualcomm’s largest market.
The Complaint further alleges that the Board was well aware of the pervasiveness and duration of this anti-competitive behavior based on numerous “red flags,” including investigations, lawsuits, and regulatory findings in other countries based on strikingly similar misconduct. Prior to the NDRC’s fine, Qualcomm was the subject of:
- at least three European Commission actions concerning the Company’s anticompetitive behavior;
- antitrust claims by Broadcom that resulted in Qualcomm paying $891 million;
- findings by the Japan Fair Trade Commission that Qualcomm abused its dominant market position; and
- adverse findings by the Korean Fair Trade Commission that resulted in Qualcomm paying over $200 million.
As a result of Defendants’ breaches of fiduciary duties, Plaintiff filed the Complaint on behalf of the Company on April 3, 2015. Defendants subsequently moved to dismiss the action on June 15, 2015 under Court of Chancery Rules 23.1 and 12(b)(6). Plaintiff filed its opposition to the motion to dismiss on August 12, 2015, and the Court held oral argument on the motion to dismiss on April 5, 2016.