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1 SIMON J. FRANKEL (Bar No. 171552) EVAN R. COX (Bar No. 133229) 2 COVINGTON & BURLING LLP One Front Street, 35th Floor 3 San Francisco, California 94111 Telephone: (415) 591-6000 4 Facsimile: (415) 591-6091 Email: [email protected] 5 [email protected]
6 TIMOTHY C. HESTER* DEREK LUDWIN* 7 JONATHAN GIMBLETT* J. MAREN SCHMIDT** 8 COVINGTON & BURLING LLP 1201 Pennsylvania Avenue, N.W. 9 Washington, D.C. 20004-2401 Telephone: (202) 662-6000 10 Facsimile: (202) 662-6291 Email: [email protected] 11 * admitted pro hac vice ** pro hac vice application pending 12 Attorneys for Plaintiff SAMSUNG ELECTRONICS CO., LTD 13
14 UNITED STATES DISTRICT COURT 15 FOR THE NORTHERN DISTRICT OF CALIFORNIA 16 SAN FRANCISCO DIVISION 17
18 SAMSUNG ELECTRONICS CO., LTD., Case No. 10-3098 JSW 19 a Korean corporation,
20 Plaintiff, SECOND AMENDED COMPLAINT
21 v. DEMAND FOR JURY TRIAL
22 PANASONIC CORPORATION, a Japanese corporation; PANASONIC 23 CORPORATION OF NORTH AMERICA, a Delaware corporation; and SD-3C LLC, a 24 Delaware limited liability company.
25 Defendants.
26 27 28
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1 Plaintiff Samsung Electronics Co., Ltd. (“Samsung”), by its attorneys, brings this 2 action for damages, declaratory judgment and injunctive relief, against Defendants Panasonic 3 Corporation, Panasonic Corporation of North America (collectively “Panasonic”) and SD-3C 4 LLC (“SD-3C”) (together with Panasonic, “Defendants”). 5 This Second Amended Complaint is filed in response to the Court’s Order of 6 August 25, 2011, dismissing the First Amended Complaint with leave to amend. As directed in 7 that Order, this Second Amendment provides significantly more detailed allegations in relation 8 to Defendants’ new and independent anticompetitive acts during the limitations period, 9 inflicting upon Samsung new and accumulating injury. Those allegations are set forth at
10 paragraphs 4-9, 21-25 and 79-107. Also in response to the Order, additional allegations are 11 included at paragraphs 198-99 relevant to the claim under California Business and Professions 12 Code § 17200. 13 Samsung alleges as follows:
14 INTRODUCTION 15 1. Since late 2006, Secure Digital Memory Cards (“SD Cards”) have 16 become the dominant flash memory card format in use in the United States and worldwide. SD 17 Cards are widely used in mobile phones, digital cameras, and other consumer electronics 18 products. In the United States alone, industry revenue from sales of SD Cards in 2009 was $1.5 19 billion. With annual sales volumes continuing to increase, that figure was predicted to reach 20 approximately $3.5 billion by 2016. Despite the highly commoditized and low-margin nature of 21 the flash memory card business, the SD Card market has been dominated from the beginning by 22 three companies: Panasonic and Toshiba of Japan and SanDisk of the United States 23 (collectively, the “SD Group”). 24 2. Panasonic, Toshiba, and SanDisk have been able to retain a firm grip over 25 the SD Card market, and to use that control since 2006 to dominate the flash memory card 26 market as a whole, because they have conspired to share a cost advantage over all other 27 manufacturers of SD Cards. Through a series of anticompetitive agreements and actions 28 undertaken by these competitors, other manufacturers must pay them a six percent royalty on all
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1 SD Cards they sell, whereas they pay nothing. Having manipulated the original SD Card 2 specification, these companies claim to own essential SD Card technology and have developed a 3 joint licensing scheme administered by their jointly-owned licensing entity, SD-3C, to coerce 4 other industry participants into paying this royalty. 5 3. By and through their original 2003 SD Card License, the SD Group 6 required every entrant into the SD Card market to pay a 6 percent royalty on sales of the first 7 generation SD Cards covered by the SD Card specification in force at that time, namely full-size 8 SD Cards with capacities up to 2 GB. The 2003 license applied only to SD Cards that met these 9 specifications. But although the first generation SD Cards fared well in the marketplace, the SD
10 Card standard did not come to dominate the flash memory market until the introduction and 11 subsequent widespread adoption of two new types of SD Cards: the high capacity SD Card 12 (“SDHC”)—a full-size SD Card with a capacity of 4 GB or above—and the microSD Card. The 13 specifications for these cards were first released in 2005, and are different from and 14 incompatible with the first generation specifications incorporated into the 2003 license. By 15 2009, approximately 60 percent of SD Cards sold worldwide were SDHC or microSD Cards, 16 with first generation accounting for only about 40 percent of sales. Adoption of the new types 17 of SD Cards is continuing apace. Analysts predict that by 2016, first generation SD Cards will 18 have virtually no remaining share of the SD Card market. 19 4. As microSD and SDHC Cards rapidly penetrated the flash memory 20 market in late 2006 and early 2007, the SD Group and SD-3C for the first time moved to impose 21 their 6 percent royalty requirement on sales of these new types of SD Cards. By exercising its 22 market power in the SD Card market in this way, the SD Group was able to consolidate its 23 control over that market and, as the new types of SD Cards tipped the flash memory card market 24 towards the newer SD Cards, to gain dominance in that wider market too. 25 5. Because the original license agreement they had imposed on other 26 industry participants in 2003 and thereafter did not cover microSD or SDHC Cards, the SD 27 Group met in August 2006 to agree on a new, non-negotiable license requiring a 6 percent 28 royalty on the sales of these new card types. In September 2006, SD-3C commenced a
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1 concerted campaign on behalf of the SD Group members to force all existing licensees to 2 execute the new, broader license on these cards that were outside the scope of their original 3 2003 license. SD-3C ultimately coerced other industry participants into paying the 6 percent 4 royalty on all sales of these new cards, with or without executing the new license. All of this 5 new activity, applying the Defendants’ anticompetitive scheme to products not included in their 6 earlier 2003 agreements, occurred within four years of the filing of the original complaint in this 7 matter. 8 6. Samsung began selling microSD, SDHC, and first generation SD Cards in 9 the third quarter of 2006. As such, Samsung was first injured by Defendants’ anticompetitive
10 actions when it was subjected to the SD Group’s royalties after it entered the market. Samsung 11 received its first invoice for royalties on November 17, 2006, after reporting its sales to SD-3C 12 on the form prescribed by the 2006 license (because the 2003 license and its royalty form did 13 not apply to sales of the newer microSD and SDHC Cards). SD-3C sent the invoice to Samsung 14 from its offices in California. That first injury occurred within four years of the filing of the 15 original complaint in this matter. 16 7. Since November 2006, Samsung has been repeatedly injured by its and its 17 customers’ ongoing inability to avoid the anticompetitive terms of the SD-3C licensing regime 18 and the adverse effects of the illegal combination with respect to both first generation SD Cards 19 and the new types of SD Cards that were not covered by the original 2003 license. The efforts 20 by SD-3C and the SD Group members, including the new and affirmative steps taken from 21 August 2006 onwards to apply their anticompetitive scheme to the new microSD and SDHC 22 Cards, undermines the ability of Samsung and its customers to compete on an ongoing basis. 23 Samsung continues to suffer injury as a result of Defendants’ anticompetitive actions and 24 scheme. 25 8. Although the adverse effects of the SD Group’s conduct reached their 26 current levels only after the market shifted to the new types of SD Cards in late 2006, the origins 27 of the SD Group’s licensing scheme can be traced back to 1999. That is when Panasonic, 28 Toshiba and SanDisk, three major competitors in critical markets for flash memory products and
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1 technology, first entered into an illegal and ongoing combination in restraint of trade. They 2 usurped the work of an open standard-setting organization in order to establish their own 3 proprietary standard that forces other industry participants to use technology owned by them. 4 Through their combination, they now exploit control of this manipulated standard to raise their 5 competitors’ costs and to discourage competing innovations. While claiming to have engaged 6 in legitimate standard-setting and licensing activities, they are, in effect, a disguised cartel. 7 9. By means of the licenses for the various types of SD Cards, and on terms 8 agreed between Defendants, SanDisk and Toshiba, the SD Group members continue to impose 9 on new and prospective manufacturers and sellers of SD Cards what amounts to an “entry fee”
10 that raises the costs of competing SD Card manufacturers, disadvantages new and current sellers 11 and manufacturers of SD Cards, and ultimately raises prices in the SD Card markets. By 12 applying their scheme to the new types of SD Cards, including through their actions from 13 August 2006 onwards to impose a royalty requirement on microSD and SDHC Cards that were 14 admittedly outside the scope of their original licensing arrangements, the SD Group members 15 have reduced competition in the relevant markets by achieving, through an unlawful conspiracy, 16 an ongoing and significant cost advantage over other manufacturers and suppliers of licensed 17 SD Cards. 18 10. All versions of the SD Card License also contain unequal grantback 19 provisions that reduce the incentives for competitors to develop their own alternative SD Card 20 technologies. And as the SD Card standard has gained broader market acceptance, Panasonic 21 and the other SD Group members, working through SD-3C, have exercised their market power 22 by imposing increasingly onerous and anticompetitive terms on potential licensees, including— 23 through active efforts by SD-3C in 2007 and more recently—terms that, if enforced, would give 24 the SD Group the ability to place a floor on SD Card prices. 25 11. Although purporting to operate like a patent pool, the licensing 26 arrangements among Defendants and the other SD Group members generate none of the 27 procompetitive benefits that might otherwise justify an agreement among horizontal competitors 28 to combine their patent rights and license them out at a single price. Because Panasonic,
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1 SanDisk and Toshiba have withheld critical patent rights from the pool, neither the 2003 nor the 2 2006 versions of the SD Card License offer licensees the efficiency of being able to obtain all 3 the rights owned by the SD Group members needed to manufacture SD Cards. Moreover, 4 notwithstanding illusory disclaimers to the contrary in recent versions of the SD Card License, 5 Panasonic and the other SD Group members do not offer industry participants any alternative to 6 executing the SD Card License—with its built-in “entry fee”—in order to manufacture SD 7 Cards. 8 12. Nor are Defendants and the other SD Group members engaged in a 9 legitimate form of standard setting. The agreements among three major competitors to replace
10 an existing open standard format with the SD Card and then to jointly license their rights to that 11 card at a single price have never been justifiable on efficiency grounds because they generate no 12 procompetitive benefits. The anticompetitive impact of these agreements, however, has 13 increased significantly since late 2006 as the tipping of the market towards the new types of SD 14 Cards has given the SD Group and SD-3C dominance over the broader flasher memory card 15 market. 16 13. The agreements between Defendants, SanDisk and Toshiba violate 17 Sections 1 and 2 of the Sherman Act. They violate Section 1 because they are agreements 18 between competitors that suppress competition and that create anticompetitive effects that are 19 not outweighed by countervailing procompetitive benefits. They violate Section 2 of the 20 Sherman Act because the agreements constitute a conspiracy to monopolize the market for SD 21 Card technology. That conspiracy has resulted in the unlawful acquisition and maintenance by 22 SD-3C, acting on behalf of the members of the SD Group, of a monopoly in the market for SD 23 Card technology—a further violation of Section 2. Defendants also have violated both the 24 Cartwright Act and Section 17200 of the California Business and Professions Code.
25 THE PARTIES 26 14. Plaintiff Samsung Electronics Co., Ltd. is a corporation organized under 27 the laws of the Republic of Korea with its principal place of business at 416 Maetan-dong, 28 Youngtong-gu, Suwon, Kyunggi-Do, 443-742, Korea.
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1 15. Defendant Panasonic Corporation is a Japanese corporation, with its 2 headquarters at 1006, Oaza Kadoma, Kadoma-shi, Osaka 571-8501, Japan. Prior to October 3 2008, Panasonic Corporation was known as Matsushita Electric Industrial Co., Ltd. 4 16. Defendant Panasonic Corporation of North America (“PNA”), a 5 Delaware corporation, is, upon information and belief, a wholly owned subsidiary of Panasonic 6 Corporation, with its principal place of business at One Panasonic Way, Seacacus, New Jersey 7 07094, and is doing business in this district. 8 17. Defendant SD-3C LLC is a Delaware limited liability company with its 9 principal place of business at 180 Montgomery Street, Suite 1840, San Francisco, California
10 94104. On information and belief, SD-3C has conducted licensing activities through its agent, 11 Miller, Kaplan, Arase & Co. LLP, at that address.
12 JURISDICTION AND VENUE 13 18. This Court has subject matter jurisdiction over this action under 28 14 U.S.C. §§ 1331, 1337(a), and 1367, insofar as Samsung seeks declaratory relief addressing 15 issues arising under federal antitrust law and asserts claims of violations of the Sherman Act. 16 The Court also has jurisdiction under 28 U.S.C. § 1332, in that the matter in controversy is 17 between a citizen of a foreign state and citizens of a state, and the amount in controversy, 18 exclusive of interest and costs, exceeds $75,000. The Court may grant declaratory relief in this 19 action pursuant to 28 U.S.C. §§ 2201 and 2202. 20 19. A substantial part of the events or omissions giving rise to this Complaint 21 occurred in this District. Upon information and belief, SD-3C transacts business in this District, 22 both directly and through its agent, and is subject to personal jurisdiction in this District. 23 Furthermore, SD-3C has consented to venue in this District. As such, venue is proper in this 24 Court pursuant to 28 U.S.C. §§ 1391 and 1400 and 15 U.S.C. § 22.
25 INTRA-DISTRICT ASSIGNMENT 26 20. The SD Group members established SD-3C with its principal place of 27 business in San Francisco County, where a substantial part of the events or omissions giving rise 28 to this action occurred. Pursuant to Local Rule 3-2(d), “all civil actions which arise in the
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1 count[y] of . . San Francisco . . . shall be assigned to the San Francisco Division or the Oakland 2 Division.” Therefore, assignment to the San Francisco Division of this Court is appropriate.
3 FACTUAL ALLEGATIONS
4 A. The SD Group and SD-3C Engaged in New and Independent Anticompetitive Acts Within Four Years of the Original Filing of this 5 Complaint, Causing New and Accumulating Injury to Samsung 6 21. In August 2006 and thereafter, the SD Group and SD-3C engaged in new 7 and independent anticompetitive acts that inflicted new and accumulating injury on Samsung. 8 Those acts and the injury they caused are set forth only in summary form in this section. A 9 significantly more detailed account of Defendants’ anticompetitive acts within the limitations
10 period and resulting injury to Samsung may be found in paragraphs 79 to 107 below. 11 22. At a meeting in Osaka in the week of August 28, 2006, the SD Group and 12 SD-3C agreed to extend their 6 percent royalty requirement to microSD and SDHC Cards 13 (¶¶ 96-98). Subsequently, SD-3C, acting on the SD Group’s behalf, actively enforced this new 14 royalty requirement on Samsung and other industry participants (¶¶ 99-107). By SD-3C’s own 15 admission, the 2003 SD Card License did not cover these new types of SD Cards (¶ 106). The 16 agreement among the SD Group and SD-3C to impose the royalty requirement on these new 17 cards, admittedly not covered by the original 2003 SD Card License, and SD-3C’s active 18 enforcement of the new 2006 agreement were therefore new acts, independent of the 2003 19 License. 20 23. Samsung was injured by these acts because the new royalty requirement 21 raised its costs for microSD and SDHC Cards, as well as those of its reseller customers. Given 22 the low margins in this commoditized business, the addition of the 6 percent royalty to the costs 23 of Samsung and/or its customers for these new cards was sufficient to significantly impede their 24 ability to compete with SD Group members (¶ 153). Samsung was injured as a seller of finished 25 SD Cards in competition with SD Group members because the addition to its costs caused it to 26 lose sales to those members (¶ 157). Samsung was also injured as a supplier of SD Cards to 27 other industry participants that resell those cards under their own brands in competition with SD 28 Group members. The addition of the royalty requirement to the costs of Samsung and/or its
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1 customers caused Samsung customers to lose sales to SD Group members and therefore to buy 2 fewer cards from Samsung (¶ 158). 3 24. Samsung’s injury resulting from this conduct within the limitations period 4 is new because, absent the steps taken by the SD Group and SD-3C from August 2006 onwards 5 to impose their royalty requirement on microSD and SDHC Cards, neither Samsung nor its 6 reseller customers would have paid royalties on those cards, which SD-3C admitted were not 7 covered by the original 2003 License. Neither of those card types was subject to royalties under 8 the Defendants’ earlier standard license, and it was only by additional steps taken by Defendants 9 in 2006 that those types became subject to the royalty structure that has adversely affected
10 competition in the relevant markets. The new injury is accumulating because Samsung and its 11 customers will continue to lose additional sales to SD Group members for as long as they are 12 required to pay a 6 percent royalty from which the SD Group has exempted itself. 13 25. Samsung did not begin manufacturing and selling SD Cards of any type 14 until the third quarter of 2006 (¶¶ 92-95). Samsung manufactured and sold SDHC Cards no 15 earlier than August 2006 and microSD Cards no earlier than September 2006. It did not receive 16 its first invoice for royalties on any type of SD Cards—whether arising under the 2003 SD Card 17 License or as a result of the new requirement to pay royalties on microSD and SDHC Cards— 18 until November 17, 2006 (¶ 95). Samsung incurred no damages and its claims did not accrue 19 until it received that first invoice. Samsung’s original complaint in this action was filed on July 20 15, 2010, less than four years after receipt of that invoice.
21 B. Background on the Technologies and Products at Issue in this Case 22 1. Flash Memory 23 26. Flash memory was developed in the early 1980s by Toshiba and is now 24 widely used in consumer electronics devices, either as embedded memory within devices or in 25 the form of flash memory cards that can be slotted into and communicate with those devices. 26 27. One of the distinctive features of flash memory is that it is non-volatile, 27 meaning that it can retain data without a continuous power source, unlike the Dynamic Random 28 Access Memory (“DRAM”) traditionally used in computer hard drives. Flash memory is also
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1 solid state, meaning that it contains no moving parts and is therefore shock-resistant. An 2 additional advantage of flash memory is that it can be read and programmed faster than many 3 other types of memory. 4 28. These qualities have helped flash memory become the dominant 5 technology for storing data in numerous types of consumer electronic devices, including digital 6 cameras, digital audio players and cellular telephones. Flash memory is a critical component in 7 such commercially successful products as the iPod and the iPhone. It is also increasingly used 8 in solid state hard drives for personal computers. 9 29. The two main types of flash memory are NOR and NAND. In NOR flash
10 memory, the memory cells are arranged in parallel. Because this architecture permits random 11 access to data, NOR flash is well-suited for programming applications, such as code storage and 12 execution. In NAND flash memory, the cells are arranged in series. While this architecture 13 prevents random access to data, it allows for significantly faster write and erase operations and a 14 higher storage density than NOR. These characteristics make NAND the preferred form of flash 15 memory for use in data storage applications. Accordingly, the flash memory used in consumer 16 electronic devices is almost exclusively NAND. 17 30. Panasonic, Toshiba and SanDisk each claim patent rights bearing on 18 NAND flash memory technology. Each of them also demands royalties from other 19 manufacturers of NAND flash memory based on these rights.
20 2. Flash Memory Cards 21 31. A significant proportion of NAND flash memory reaches consumers 22 already built into (or “embedded” in) digital devices. Approximately 40-50 percent of NAND 23 flash memory output, however, is sold in the form of flash memory cards. Flash memory cards 24 are portable data storage media that can be inserted directly into compatible slots on host 25 devices such as laptop computers, digital cameras, and mobile phones. Flash memory cards 26 typically combine a flash memory chip with a “controller” (a chip that manages read, write and 27 erase instructions received from the host device), packaged together in a plastic casing. Because 28 of its higher density, NAND flash memory is particularly well-suited for use in flash memory
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1 cards, and the vast majority of flash memory cards in use today incorporate NAND flash 2 memory chips. 3 32. Flash memory chips, the key component of SD Cards, are made in large, 4 specialized manufacturing facilities (commonly known as “fabs”) by manufacturers that include 5 Toshiba, SanDisk (through a joint venture with Toshiba) and Samsung. The chips are combined 6 with other components to form SD Cards in a separate manufacturing process, either by the 7 memory manufacturer itself, or by a manufacturer or an assembler to which the memory 8 manufacturer sells its chips. Panasonic, Toshiba, SanDisk and Samsung all manufacture flash 9 memory cards. Examples of smaller manufacturers and assemblers include Lexar, A-Data,
10 Apacer, Corsair Microsystems, Dane-Elec, Kingston, PNY, PQI, Transcend, TSR, Buffalo and 11 Phison Electronics. 12 33. Samsung sells flash memory chips to assemblers who combine the chips 13 with other components to form SD Cards. Samsung sells, or has sold, flash memory chips to a 14 variety of manufacturers and assemblers, including Kingston, PQI, Transcend and A-Data. 15 Since the fall of 2006, Samsung also incorporates the flash memory chips into finished SD 16 Cards that Samsung then sells to third parties, which include or have included companies such 17 as Lexar, PNY and Memorex, to sell under their own brand name. Samsung also sells SD Cards 18 directly to device manufacturers, such as Nokia and RIM, for use in their devices. 19 34. A given flash memory card can be used only in host devices that have a 20 compatible slot corresponding to that card’s “form factor” (the size and shape of the card) and 21 appropriate “driver” software (also called host interface software) to allow the host device to 22 communicate with the memory card. Without the appropriate driver software, an otherwise 23 physically compatible card (i.e., a card that physically fits into a slot in the host device) may not 24 work properly in that device. 25 26 27 28
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1 C. Background on the Means By Which Panasonic, SanDisk and Toshiba Gained the Dominant Position That They Now Seek to Maintain and 2 Exploit.
3 1. Competition in the Flash Memory Card Industry in the 1990s 4 35. The development of flash memory cards since they first appeared in the 5 late 1980s has been affected by two overarching factors. First, flash memory card 6 manufacturers have had to innovate constantly to achieve the smaller form factors, faster 7 processing times, and increased data storage capacities required by design improvements in host 8 devices (for example, the development of smaller, higher resolution digital cameras). Second, 9 because consumers value the convenience of being able to use the same flash memory card
10 format in different host devices, flash memory card manufacturers have an incentive to promote 11 broad acceptance of their own formats. During the 1990s, these two factors fostered vigorous 12 technological competition among flash memory card manufacturers, reflected in the release of 13 numerous competing card formats, accompanied by efforts by individual manufacturers to 14 promote industry-wide adoption of their own formats as open standards. 15 36. The first flash memory cards were generally proprietary designs, such 16 that each one worked only with that manufacturer’s products. By the late 1980s, the industry 17 recognized that in order to advance the acceptance and use of flash memory cards it was 18 necessary to standardize the flash card formats. Accordingly, in 1989, 25 vendors joined 19 together to form a non-profit, open standards organization called PCMCIA (Personal Computer 20 Memory Card International Association) to develop a universal memory card format for laptop 21 computers. 22 37. The PCMCIA developed a set of protocols describing the form factor and 23 operating characteristics of a NOR-based flash memory card format called the PC Card. The 24 first PC Card specification was published in 1990. The PC Card was an open standard. As an 25 open standard, no company controlled the PC Card format and multiple vendors competed to 26 supply the market with interoperable memory cards that complied with the format. 27 38. During the mid-1990s, the major flash memory card manufacturers 28 competed to develop smaller memory card formats and to have those formats adopted as open
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1 standards by other manufacturers. Panasonic, Toshiba and SanDisk were prominent horizontal 2 competitors at this time, each developing and promoting new formats of their own. 3 39. In 1994, SanDisk developed the CompactFlash format, a NOR-based 4 flash memory card with a smaller form factor than the PC Card but that could be used in a PC 5 Card slot by means of an adapter. To promote the card as a standard, SanDisk agreed to transfer 6 its Compact Flash trademark and technical specifications to the CompactFlash Association, an 7 open standard-setting body, which made the specifications available under a royalty-free license 8 to other third-party manufacturers that committed to develop, manufacture and supply 9 CompactFlash products.
10 40. In 1995, Toshiba launched the SmartMedia format, a small NAND-based 11 flash memory card format with no on-board controller, which it proposed as a standard. The 12 SmartMedia Format was promoted as an open, royalty-free standard by the SSFDC (Solid State 13 Floppy Disk Card) Forum. 14 41. In 1997, Panasonic announced its own NAND-based flash memory card, 15 the Mega Storage Device, previously known in Japan as the SmallPC Card, to target digital 16 cameras, personal digital assistants, and other portable devices. 17 42. Also in 1997, Siemens and SanDisk jointly developed and introduced the 18 MultiMediaCard (“MMC Card”) specification, a high-density NAND-based flash memory card 19 format, with a form factor about the size of a postage stamp. The development of the MMC 20 Card was encouraged by Nokia, which wanted a smaller form factor memory card for use in 21 cellular telephones. Nokia encouraged the MMC Card as an open standard. 22 43. In 1998, Siemens, SanDisk and twelve other companies announced the 23 establishment of the MultiMediaCard Association (“MMCA”) “to make the MultiMediaCard a 24 broadly supported new industry standard.” The MMCA had two types of members, executive 25 and affiliate. At its inception, executive members were asked to pay a modest fee of $5,000 to 26 join—and to have full voting rights—while affiliate members were asked to pay only $2,500. 27 All MMCA members were entitled to access and use the MultiMediaCard specification to 28 develop, manufacture and supply MultiMediaCard products on a royalty-free basis. All
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1 executive members were entitled to participate on an equal basis in the development of 2 specifications and standards. Samsung joined the MMCA in 2002 as an executive member and 3 began manufacturing MMC cards at that time. Samsung ceased taking orders for MMC cards in 4 2006 when it transitioned to manufacturing SD Cards. 5 44. SanDisk’s 1998 SEC Annual Report commented on the “intense 6 competition, rapid technological change [and] evolving industry standards” that characterized 7 the flash memory card market at that time. The report identified both Toshiba and Panasonic as 8 horizontal competitors in the development of flash memory cards and flash memory card 9 technology, observing that:
10 Competing products promoting industry standards that are different from SanDisk’s have been introduced, including Intel’s 11 Miniature Card, Toshiba’s Smart Media (Solid-State Floppy Disk Card), Sony Corporation’s Memory Stick, and Panasonic’s 12 recently introduced Mega Storage cards . . . . 13 45. SanDisk’s annual report specifically noted that “our MultiMediaCard 14 products are expected to face stiff competition from Toshiba’s SmartMedia flash cards” together 15 with Sony’s Memory Stick. 16 46. But by the time SanDisk released its next annual report, covering the 17 1999 calendar year, the company had embarked on a course of action in concert with Panasonic 18 and Toshiba that was to alter and fundamentally reduce competition in the flash memory card 19 industry.
20 2. Panasonic, SanDisk and Toshiba Launch Their Initial Joint Activities. 21 22 47. Prior to 1999, Panasonic, SanDisk and Toshiba were major horizontal 23 competitors in the flash memory card technology and product markets. Each of these 24 companies had supported open standard-setting as a means of gaining a competitive edge for 25 their formats. Prior to 1999, open standard-setting was the norm in the flash memory card 26 industry for manufacturers that wished to promote broader adoption of a particular format 27 among different host manufacturers. While some single-company proprietary formats, such as 28
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1 Sony’s Memory Stick, had enjoyed limited commercial success, competitor collaborations to 2 promote a jointly-owned proprietary standard were highly unusual. 3 48. On August 25, 1999, Panasonic revealed that it was working with 4 SanDisk and Toshiba pursuant to an agreement that marked a radical departure from the 5 competitive norms underpinning the development of the industry over the previous decade. 6 Under this agreement, the three major competitors agreed to develop a modified version of the 7 MMC Card in a closed process from which other industry participants were excluded. 8 49. As described in SanDisk’s 1999 SEC Annual Report, the agreement 9 announced in August 1999 was:
10 [A] memorandum of understanding under which we, [Panasonic] and Toshiba will jointly develop and promote a next generation 11 flash memory card called the Secure Digital Memory Card. The Secure Digital Memory Card is an enhanced version of our 12 MultiMediaCard that will incorporate advanced security and copyright protection features . . . . 13 SanDisk further stated that it had: 14 joined forces with [Panasonic] . . . and Toshiba to jointly develop, 15 specify, and promote the Secure Digital Memory Card [and] [a]s part of this collaboration, all three companies [would] foster the 16 development of application products using the Secure Digital Memory Card. 17 50. SanDisk was a founding member of the MMCA, an open standard-setting 18 organization that had as its mission “to encourage all interested members of industry to join in 19 the development and marketing of MultiMediaCard-based technologies.” As such, the MMCA 20 was the natural forum for any development work on an enhanced version of the 21 MultiMediaCard. There was nothing about the additional functionality that the SD Group 22 members incorporated into the SD Card that would have prevented the MMCA from achieving 23 the same result under its open standard-setting rules. The combination of Panasonic, SanDisk 24 and Toshiba—three major horizontal competitors—did not create efficiencies that could not 25 have been achieved in a manner that preserved competition among these companies. Instead, 26 this combination of competitors, created in secret, stymied the existing standard-setting process, 27 and has permitted Panasonic, SanDisk and Toshiba, with SD-3C, to suppress competition to 28 their benefit and without the procompetitive efficiencies that flow from legitimate standard- - 14 -
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1 setting activities. There are significant ongoing anticompetitive effects caused by this conduct, 2 and by the more recent activities of these three horizontal competitors. 3 51. Indeed, SanDisk’s 1999 SEC Annual Report expressly acknowledged that 4 Panasonic, SanDisk and Toshiba were not uniquely qualified to bring this additional 5 functionality to the marketplace. The annual report observed that “Hitachi, Infineon, Sanyo and 6 Fujitsu have proposed their Secure MultiMediaCard which provides the copy protection 7 function that is included on our Secure Digital Memory Card.” 8 52. On information and belief, Panasonic encouraged SanDisk to join with it 9 and Toshiba in developing the SD Card outside of the MMCA structure. In addition to being a
10 significant horizontal competitor of SanDisk and Toshiba, as a manufacturer of flash memory 11 cards, Panasonic was (like Toshiba) also a major manufacturer (through Panasonic Corporation) 12 and seller (through PNA) of host devices, and was therefore well-placed to push for adoption of 13 the new format by the consumer electronics industry. 14 53. The SD Group members successfully induced other manufacturers of host 15 devices to adopt the SD Card format by offering them royalty-free licenses to incorporate SD 16 Card functionality into their products (in contrast to the anticompetitive entry fee later charged 17 to SD Card manufacturers, as described below) and by promising to make SD Cards backwardly 18 compatible with the MMC format. 19 54. As further described below, by combining their respective market weights 20 and inducing further industry adoption through its royalty-free license for device manufacturers, 21 Panasonic, SanDisk and Toshiba could thus achieve critical mass for the new format under rules 22 of their own choosing, without having to resort to open standard-setting. As an official of 23 SanDisk, then the largest manufacturer of flash memory cards in the world, stated at the time: 24 “The combination of these three firms gives strength. That’s why they came to SanDisk.”
25 3. Panasonic, SanDisk and Toshiba Agree to Evade the Even-Handed Protections of Open Standard-Setting. 26 27 55. If Panasonic, SanDisk and Toshiba had chosen to proceed within the 28 MMCA, their standard-setting activity would have been subject to the MMCA Policies and
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1 Procedures (the “MMCA Policies”). Under the MMCA Policies, the SD Group members would 2 have been required to circulate to other members a request for approval to proceed with a 3 change to the MMCA Standard, and the change would then have been considered and approved 4 by the relevant technical committee of the MMCA and subsequently by the MMCA Board of 5 Directors. In furtherance of their long-term anticompetitive goals, the SD Group members 6 deliberately evaded such an open process. 7 56. In addition, the SD Group members would have been subject to the 8 MMCA’s disclosure and licensing policy on intellectual property. That policy would have 9 required disclosure to the group of any patent rights covered by the SD Group members’
10 proposal. The MMCA’s rules provided:
11 When considering whether proprietary technology should be included, the Association balances the benefits of such technology 12 with the burden of compliance with licensing requirements. As such, it is essential to the Association’s success that it be fully 13 informed of the existence of proprietary technology in any proposal for inclusion in the specification, at the first showing of 14 that proposal in an Association meeting. 15 Any party submitting a proposal for inclusion in the specification will be required to disclose, at the time of submittal, all known 16 proprietary technology included in the submission. . . . The Association expects that the proposal sponsor will use reasonable 17 diligence to determine if proprietary technology is included in the proposal. Failure to use reasonable diligence or make this 18 disclosure is grounds for expulsion from the Association. 19 57. Such disclosure would have allowed the MMCA members to assess the 20 potential licensing costs associated with the new proposal, secure non-discriminatory licensing 21 commitments, and take into account their policy preference for technologies that can be licensed 22 royalty free or on reasonable terms, according to which:
23 [T]he Association will only include a member company’s proprietary technology in it’s [sic] specification if the owner of 24 that technology agrees to reasonable and nondiscriminatory licensing terms set forth below. 25 58. Rather than work within these constraints and submit the development of 26 the SD Card to the MMCA, however, Panasonic, SanDisk and Toshiba agreed to combine 27 among themselves outside of the standard-setting process. The effect and necessary purpose of 28 the steps taken by these three major competitors to subvert and bypass the open standard-setting - 16 -
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1 work of the MMCA was to establish a proprietary standard that they themselves could 2 dominate. Freed from the MMCA’s even-handed rules and patent disclosure and licensing 3 policies, and working instead as a combination of competitors, the SD Group members have put 4 in place and (with SD-3C) continue to enforce a regime for the SD Card that is designed to 5 maintain and exploit that dominance.
6 4. The SD Group Members’ Manipulation of the SD Card Specification 7 59. Panasonic, SanDisk and Toshiba issued the first version of the SD Card 8 specification (the “Specification”) in March 2000. 9 60. The SD Group members’ approach to the Specification represented a
10 radical departure from the previous practice in the flash memory card industry, reflected by such 11 open standards organizations as the CompactFlash Association and MMCA. During the 1990s, 12 SanDisk and other manufacturers had encouraged industry-wide adoption of formats they had 13 already developed by allowing competitors to implement the corresponding specification on a 14 royalty-free basis. The August 1999 agreement among Panasonic, SanDisk and Toshiba, by 15 contrast, implemented arbitrary amendments to the existing MMC specification that the three 16 companies subsequently would share only with memory card manufacturers that promised to 17 pay a hefty royalty and subject themselves to the other restrictions imposed by the SD Group 18 members. 19 61. By choosing to agree among themselves on the Specification without 20 inviting input from or making disclosure to other parties, the SD Group members ignored 21 guidance addressed to, among others, Panasonic and Toshiba by the U.S. Department of Justice 22 (“the DOJ”) in a business review letter of June 10, 1999 related to DVD licensing practices. 23 That letter described the potential anticompetitive nature of the inclusion in patent pools of non- 24 essential patents. In view of the economic incentive that collaborating licensors have “to 25 combine in the pool their competing . . . patents and to foreclose others’ competing patents,” the 26 DOJ stressed the importance of engaging a genuinely independent expert “to undertake a 27 disinterested review of the ‘essentiality’ of the patent rights put forward.” The DOJ’s letter also 28
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1 warned that inclusion in a pool of one of several competing non-essential patents could 2 “unreasonably foreclose the non-included competing patents from use by manufacturers.” 3 62. Defendants failed to comply with the DOJ guidance in several ways. By 4 excluding other companies from their deliberations, and by failing to engage an independent 5 expert, the SD Group members were able to craft a Specification that, to this day, favors their 6 own intellectual property rights and fails to ensure a “pool” limited to essential patents. The SD 7 Group members did this by drafting the Specification to mandate particular technological 8 solutions for certain new features that could have been left to the discretion of the manufacturer 9 without affecting the core functionality of the card. Members of the SD Group then filed patent
10 applications to cover the mandated solutions. 11 63. For example, SD-3C asserts that the Specification cannot be implemented 12 without infringing two Panasonic patents covering a mechanical write protect switch that 13 prevents consumers from accidentally overwriting the card and destroying data, images or 14 audio. Those patents derive from applications first filed by Panasonic on August 6 and 24, 15 1999—contemporaneously with Panasonic’s agreement with the SD Group members and 16 immediately before the SD Group members’ first public announcement on August 25, 1999, that 17 they were collaborating on the creation of an SD Card. There was no sound reason to require 18 the practice of Panasonic’s technology in this way. To the contrary, the SD Group members 19 could have written the Specification so as to allow mechanical write protection to be 20 implemented by a variety of means. By unnecessarily including in its “pool” a write protection 21 technology owned by one of its members, the SD Group members unreasonably foreclosed 22 choice in the use of alternatives by manufacturers. 23 64. As a result of the arbitrary and self-interested way in which Panasonic 24 and the other SD Group members created a Specification that requires the practice of their own 25 patents to implement non-essential features, alternative technologies for implementing such 26 features in a more cost-effective manner have been restrained. By writing a Specification that 27 artificially rendered their own patents “essential,” the SD Group members also created the basis 28 for a licensing scheme that now effectively insulates the SD Group members from competition.
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1 5. The Unequal Rules Imposed by the SD Group Members on the SD Association 2 3 65. The SD Group members announced the establishment of the SD 4 Association (“SDA”) on January 6, 2000, at a joint press conference at the Consumer 5 Electronics Show in Las Vegas. The SD Group members required, as a condition of 6 membership in the SDA, that companies agree to observe association rules designed by the SD 7 Group members. The SDA was created, and has been controlled and supported by the SD 8 Group members, in furtherance of their proprietary standard and ongoing combination. PNA, 9 for example, hosted the SDA website without charge until 2007 as part of this combination.
10 66. As described below, these rules had the effect of entrenching the SD 11 Group members’ own dominant position within the organization, and supporting its ability to 12 maintain a dominant position in the SD Card and related markets. In particular, the SD Group 13 members set up, and have maintained through their control and support, an Intellectual Property 14 Policy (the “IP Policy”) structure for the SDA that now assists them in hiding the nature of the 15 putative “essential” patents and furthers their ability to license these patents only through SD-3C 16 and at a single price. 17 67. The IP Policy created by the SD Group members is unlike the policy of 18 the MMCA or those of other legitimate standard-setting bodies. The SDA IP Policy requires 19 disclosure of relevant intellectual property rights by some, but not all, of the members. 20 Members who are subject to the disclosure requirements must identify, for example, the name 21 and title of an issued patent, as well as the patent number, the date of filing, the date of issuance, 22 the jurisdiction of issuance, and the patent holder’s name and address. SD-3C and the members 23 of the SD Group, however, are exempted from this detailed disclosure. Instead, the IP Policy 24 provides for a general notice that the SD Specifications contain “intellectual property held by 25 the SD-3C, LLC and/or [the SD Group members] licensed by the SD-3C, LLC through . . . the 26 SD Memory Card License Agreement,” and further states that this vague notice “shall be a 27 sufficient disclosure for purposes of th[e] IP Policy.” 28
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1 68. The IP Policy thus allows SD-3C and the members of the SD Group to 2 avoid disclosing the specific patents owned by Panasonic, SanDisk and Toshiba that they 3 unilaterally contend are essential for implementation of the Specification. SD-3C explicitly has 4 confirmed that it does not disclose all of the purportedly essential patents included in its license. 5 Instead, to date, SD-3C has disclosed on its website only nine patents owned by the members of 6 the SD Group that “are necessarily and unavoidably infringed by a product that implements the 7 secure digital technology in compliance with the SD Group Specifications.” According to SD- 8 3C, the list of patents “is for information purposes only, it is offered by way of example and 9 may not be exhaustive.” As described later in this Complaint, individual members of the SD
10 Group similarly have refused to provide definitive accounts of the patents owned by them that 11 they claim to be essential for the implementation of the Specification. 12 69. In a business review letter of November 12, 2002 concerning 3G wireless 13 communications technology, the DOJ indicated that the pooling of patents among competitors 14 might be justified where there was “the potential for efficiencies with respect to the generation 15 and dissemination of information about essential . . . patents, and the identification and 16 evaluation of which patents are actually essential” to the technology in question. The agreement 17 among Panasonic, SanDisk and Toshiba to combine their SD Card patents cannot be justified on 18 this ground. The members of the SD Group make affirmative efforts, directly and through the 19 use of their faulty SDA rules and otherwise, to bypass the prior MMCA rules and similar 20 standard-setting protections that would stimulate the “generation and dissemination of 21 information” about their patents, and would permit an evaluation as to whether their patents 22 were in fact essential (e.g., if the pool helps to clear blocking patents). Instead, the members of 23 the SD Group have avoided the disclosure of patents claimed by them to be essential to 24 implementation of the Specification and have not demonstrated that these patents are otherwise 25 blocking or essential. By creating doubt among other industry participants as to the actual scope 26 of their patents bearing on SD Cards, the SD Group members’ non-disclosure policy 27 discourages third party innovation in SD Card technologies and thereby harms competition. 28 This conduct is not consistent with the activities of a legitimate standard-setting body.
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1 70. Even if the creation of the SD “standard” could have been justified on the 2 basis of potential efficiencies, the rules imposed on the SDA, and now maintained, by the SD 3 Group members were not necessary to achieve those efficiencies, and had the effect of 4 suppressing innovation and competition. But the combination among the SD Group members 5 was not justified 10 years ago when the SD Card was first introduced because it failed to 6 produce efficiencies that could outweigh the combination’s anticompetitive effects. Indeed, 7 these agreements have only become more damaging to competition since 2006 as microSD and 8 SDHC Cards have made the SD Card the dominant flash memory card format, giving the SD 9 Group and SD-3C the ability to abuse their market power in the broader flash memory market.
10 6. The SD Group Members’ and SD-3C’s Anticompetitive Licensing Agreements 11 12 71. Panasonic, SanDisk, Toshiba and SD-3C require all current and new 13 manufacturers of SD Cards to accept and execute an SD Card License. The SD Card License 14 purports to grant licensees rights to some of the ostensibly essential patent claims of the SD 15 Group members, the Specification, and the SD logo and trademark. In contrast to the royalty- 16 free terms on which rights to CompactFlash, the MMC Card and other formats had previously 17 been offered, the SD Card License requires licensees to pay a 6 percent royalty on their net sales 18 of SD Cards, with fixed adjustments only for sales volume. SD-3C has promulgated two 19 versions of the SD Card License, one in March 2003 (the “2003 License”), and another in 20 September 2006 (the “2006 License”). 21 72. The 2003 License reflected the SD Group’s initial means to coerce 22 royalty payments from other manufacturers of SD Cards, and thereby effectuate the imposition 23 of an “entry fee” on those manufacturers. As described below, the 2003 License covered only 24 first generation SD Cards, and forced manufacturers of those SD Cards to accept 25 anticompetitive royalty and other licensing terms. 26 73. As described below, the SD Card markets shifted to new types of SD 27 Card, created after the SD Group had promulgated the 2003 License. These new types of SD 28 Cards were not covered by the terms of the 2003 License and were not subject to royalties under
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1 the 2003 License. The SD Group accordingly undertook new actions that applied their 2 anticompetitive scheme to these new types of SD Cards. This involved an agreement reached 3 among the SD Group in August 2006 to impose a similar fee on those new types of SD Card, so 4 as to extend their cost advantage to these new types of SD Cards that were not covered by the 5 2003 License. The new agreement and conduct to enforce it caused injury and damages to the 6 SD Group’s competitors, and harmed competition generally. 7 74. In addition, several aspects of the SD Group’s licensing scheme 8 inherently increased the anticompetitive effects of the SD Group’s activities. As described in 9 Section E below, the members of the SD Group, jointly with SD-3C, provide no alternative to
10 the SD Card Licenses. And those licenses, although varying in some respects, each contain key 11 anticompetitive provisions, and neither provides an effective means by which to obtain licenses 12 from the SD Group members to the rights granted in the SD Card License. An SD Card License 13 remains for all practical purposes the exclusive means by which the SD Group members license 14 their SD Card technology.
15 7. Suppression of Competing Formats 16 75. In addition to exercising collective control over the SD Card format, the 17 members of the SD Group restrain competition by suppressing the emergence of new competing 18 formats. The members of the SD Group have agreed to avoid competing with the SD Card 19 format or technology, and do avoid such competition, as part of their overall agreement to create 20 and maintain a dominant market position for themselves. This restraint on competition is not 21 justified in light of the anticompetitive effects of the overall agreement among Defendants and 22 the other members of the SD Group. 23 76. Moreover, on multiple occasions, one or more members of the SD Group, 24 acting in furtherance of their unlawful purposes, have participated in anticompetitive conduct 25 designed to impede the development of MMC formats that would have competed with SD 26 Cards. For example, in March 2006, SanDisk intervened at the last minute in negotiations at the 27 European Telecommunications Standards Institute (ETSI), disclosing MMC-related patent 28 rights in order to prevent the adoption by ETSI of an MMC-based standard for high-speed SIM
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1 (Subscriber Identity Module) cards for use in mobile phones. SanDisk informed ETSI that it 2 would not provide the commitment to license other manufacturers on “fair reasonable and non- 3 discriminatory terms” that ETSI’s rules required in order to move forward with an MMC-based 4 SIM card standard. SanDisk had failed to disclose these same patents to the MMCA while it 5 was a member of the board of directors and/or an executive member of that organization. By 6 contrast, SanDisk told ETSI that it would agree to license its patents on fair, reasonable and 7 non-discriminatory terms to other vendors for a SIM card standard based on USB, rather than 8 MMC, technology. As a result of SanDisk’s intervention, ETSI’s decision on high-speed SIM 9 cards was delayed. After SanDisk had made an unsuccessful attempt to persuade ETSI to adopt
10 an SD Card-based standard, ETSI eventually opted for the USB option notwithstanding the fact 11 that, according to contemporary reports, “handsets that can run MMC-based SIMs could reach 12 the market as much as 18 months before comparable USB-based handsets.” 13 77. On information and belief, other members of the SD Group were 14 informed of and approved SanDisk’s anticompetitive actions in ETSI. By discouraging the 15 adoption of standards based on the MMC format in European and other regional standard- 16 setting organizations, SD Group members successfully sought to prevent the format from 17 achieving sufficient scale to be a commercially viable alternative to the SD Card standard 18 anywhere in the world, including the United States.
19 * * * 20 78. The anticompetitive conduct accompanying the establishment of the SD 21 Card regime served as a foundation for Defendants’ current and continuing illegal efforts, with 22 SanDisk and Toshiba, to maintain and exploit the dominant position that the SD Group 23 members have created for themselves. By creating and manipulating a specification from which 24 other industry participants were excluded, the members of the SD Group gave themselves the 25 ability to extract an “entry fee” toll from all other manufacturers and sellers of SD Cards. By 26 using their combined weight in the host device market, including through PNA, to drive 27 adoption of SD technology in consumer electronic devices, by aggressively undercutting open 28 standard alternatives such as MMC, and by their continued agreement to support only the SD
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1 Card format, the members of the SD Group have helped the SD Card to become and remain the 2 dominant flash memory card format.
3 D. The New and Independent Acts of the SD Group and SD-3C Since August 2006 to Coerce Payment of Royalties on microSD and SDHC Cards. 4 79. Since August 2006, the SD Group and SD-3C have engaged in new acts, 5 independent of the original 2003 SD Card License, that have injured Samsung specifically and 6 competition generally. As demand for cards with a smaller form-factor and/or higher storage 7 capacity cards tipped the flash memory card market towards the SD Card format in 2006 and 8 2007, the SD Group and SD-3C agreed to require other industry participants to pay royalties on 9 microSD and SDHC Cards. 10 80. By SD-3C’s own admission, neither microSD nor SDHC Cards are 11 covered by the 2003 SD Card License. The agreement to require royalties on those new types 12 of SD Cards, and the conduct flowing from that agreement, constituted a new chapter in 13 Defendants’ anticompetitive scheme that extended their anticompetitive conspiracy to new SD 14 Card types that were, by SD-3C’s own admissions, outside the scope of the 2003 License. 15 Those new activities came just at the time when SD Cards were establishing themselves as the 16 dominant choice within the market for flash memory cards, thus amplifying their 17 unambiguously anticompetitive effects. Those effects continued to be unmitigated by any 18 genuine procompetitive benefit. 19 1. The Flash Memory Card Market Tipped Towards the SD Card 20 Format in 2006. 21 81. SD Cards were first produced on a commercial scale in 2000, in 8 MB to 22 64 MB sizes. For several years thereafter, few companies other than SanDisk, Toshiba and 23 Panasonic manufactured or marketed SD Cards. The format’s initial survival and growth relied 24 in large part on the willingness of SD Group members, in particular Panasonic and Toshiba, to 25 design products with SD slots and to encourage industry partners to do the same. 26 82. Until approximately 2005, growth in the flash memory card market was 27 driven in large part by sales of digital still cameras and digital video cameras. In 2005, for 28 example, digital still cameras and digital video cameras together accounted for 60 percent of
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1 total worldwide sales of flash memory cards. Panasonic and Toshiba were both significant 2 manufacturers of digital cameras and designed new models to work exclusively with SD Cards. 3 83. For example, Panasonic launched its Lumix digital still camera line in 4 late 2001 and incorporated SD Card storage into the design. Similarly, Toshiba’s PDR digital 5 cameras originally incorporated SmartMedia storage, but Toshiba switched to SD Card storage 6 in early 2002. To further consumer penetration of SD Cards (as opposed to the then-still 7 compatible MMC card), both companies bundled SD Cards with their cameras for retail sale. 8 84. Due in part to the efforts of Panasonic and Toshiba to establish the SD 9 Card format in consumer electronics products, the SD Card became a leading flash memory card
10 format during this period. In 2005, for example, the standard SD Card format accounted for 11 approximately $2.9 billion out of total flash memory card worldwide revenue of approximately 12 $7.5 billion. 13 85. By early 2006, industry analysts were anticipating a significant shift in 14 the evolution of the flash memory card market. Demand for flash memory cards for use in 15 digital cameras was flattening out. Instead, mobile handsets were widely anticipated to be the 16 new growth area for flash memory cards, as smartphones began to integrate voice telephony 17 with email, digital photography and music. A May 2006 report by one analyst observed:
18 Flash memory card unit demand has been heavily dependent on DSC [digital still camera] demand, which represented 56% of 19 total flash card shipments in 2005. Although DSCs remained the major application in 2005, the DSC market will mature in 2006 as 20 mobile phones become the driving force for memory card demand on a unit basis. 21 The same report predicted that the share of SD Card units accounted for by mobile handsets 22 would increase from 27.2 percent in 2005 to 87.2 percent in 2010, while that for digital still 23 cameras and digital video cameras combined would fall from 60 percent to 10.4 percent over the 24 same period. 25 86. The first generation SD Card covered by the 2003 SD Card License was 26 too large to be well-suited for use in mobile phones. In anticipation of the shift in demand, 27 SanDisk created miniSD and microSD Cards with smaller form factors. The miniSD Card was 28 quickly rendered redundant by the even-smaller microSD Card, the specification for which was - 25 -
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1 first approved by the SDA on May 18, 2005. Significantly, the microSD Card’s smaller form 2 factor and its larger number of pins as compared to the standard, first generation SD Card 3 rendered it incompatible with the SD Card Specification 1.01 in force when Samsung signed the 4 2003 SD Card License. 5 87. The other main flash memory card formats also were moving toward 6 miniaturization. In 2005, the MMCA adopted a specification for a card with a smaller form 7 factor which it called MMCmicro. In February 2006, Sony released a small form factor version 8 of its proprietary format—the Memory Stick Micro. And in January 2007, the MMCA added a 9 small formfactor card; RS-MMC (“reduced-size” MMC).
10 88. Alongside the trend towards miniaturization, the flash memory card 11 industry was also focused on increasing the storage capacity of cards to provide room for users 12 of digital cameras, mobile phones and other devices to store ever larger quantities of 13 photographs, music and other data. In June 2006, the SDA adopted a specification for full-size 14 SD Cards ranging from 4 GB to 32 GB (“SDHC”). The specification was inconsistent with that 15 in force when Samsung signed the 2003 SD Card License because SDHC cards used a file 16 management system different from that specified for the first generation SD Card. 17 89. By 2007, the shift toward cards with smaller form factors and higher 18 storage capacities had helped tip the market decisively in favor of SD Cards as the flash 19 memory card format of choice. From 2006 onwards, Nokia—formerly a staunch supporter of 20 the MMC format—designed its new mobile handsets exclusively around the smaller form factor 21 SD Cards. Other mobile handset manufacturers followed suit. As described in Section C of this 22 Complaint, SanDisk encouraged these defections by engaging in anticompetitive conduct in 23 March 2006 to impede the adoption by a European standard-setting organization of an MMC- 24 based standard for high-speed SIM (Subscriber Identity Module) cards for use in mobile phones. 25 90. The SD Card’s success in the mobile handset sector in 2006 far exceeded 26 contemporary analyst expectations and proved to be a decisive development in tipping the 27 overall flash memory card market toward the SD format. In 2007, 56 percent of mobile phone 28 shipments worldwide included a microSD Card. By 2010, that figure had grown to 80 percent
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1 and was projected to reach 98 percent by 2016. Whereas sales of all SD Card types accounted 2 for 44 percent of total flash memory card sales in 2005, that share had risen to 61 percent by 3 2007. The microSD Card alone accounted for 25 percent of the flash memory card market in 4 2007. 5 91. These market developments provide context for the conduct of the SD 6 Group and SD-3C from August 2006 onwards. The anticompetitive conduct underpinning the 7 establishment of their original licensing scheme had taken place when the SD Card accounted 8 for only a small share of the overall flash memory card market. By late 2006 and early 2007, 9 however, the SD Card format’s emerging dominance was apparent to the entire industry. At
10 that moment the SD Group and SD-3C took new actions, independent of the 2003 SD Card 11 License, to impose a 6 percent royalty for the first time on sales of the new types of SD Cards 12 that were driving the format’s growing dominance.
13 2. Samsung Enters the SD Card Market in Late 2006. 14 92. As the market tipped towards the SD format, some of Samsung’s more 15 important customers requested that it supply them with SD Cards. Among the customers 16 pressing Samsung for SD Cards was Nokia, formerly a staunch supporter of the MMC format 17 and an active member of the MMCA. By the second half of 2006, Nokia had concluded that it 18 needed to transition to the SD Card format. 19 93. Samsung entered the SD Card market in the third quarter of 2006, with 20 manufacturing and sales of SDHC Cards beginning no earlier than August 2006 and 21 manufacturing and sales of microSD Cards beginning no earlier than September 2006. Given 22 Nokia’s supply requirements for smaller form factor cards, Samsung anticipated that its 23 production of SD Cards would include microSD Cards and miniSD Cards. It was Samsung’s 24 understanding that the royalty-free updated License Agreement for SDA Memory Card 25 Specifications (“LAMS”) issued by the SDA on November 8, 2005, granted rights to both 26 microSD and miniSD Cards. On August 28, 2006, Samsung emailed Michael Quackenbush, the 27 California-based licensing agent for SD-3C, seeking his assistance in obtaining and executing 28
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1 the LAMS license. The email explained that Samsung planned to produce microSD and miniSD 2 Cards and therefore needed the LAMS urgently. 3 94. Mr. Quackenbush responded to Samsung’s request on August 30, 2006. 4 He stated that the LAMS covered miniSD only and that a new SD Card License would be 5 required for Samsung to have rights to microSD Cards. The discussions about Samsung’s 6 upcoming entry into the SD Card market continued at a meeting at Samsung’s offices in 7 Hwaseong, Korea, on September 4, 2006, where Mr. Quackenbush asked Samsung to confirm 8 that it intended to begin producing royalty-bearing SD Cards soon. 9 95. Samsung submitted its first royalty report to SD-3C in North Hollywood,
10 California, on November 15, 2006. The report provided information on Samsung’s sales of full 11 form-factor SD Cards during the third quarter of 2006. Based on this report, on 12 November 17, 2006, SD-3C sent Samsung an invoice, demanding payment of $2,055,890.92 in 13 royalties. SD-3C’s licensing agent sent the invoice from its offices in California. This was the 14 first occasion on which Samsung was subjected to the anticompetitive royalty provision of the 15 SD Card License.
16 3. The SD Group and SD-3C Agree in August 2006 to Impose Their Royalty Requirement on microSD and SDHC Cards. 17 18 96. On information and belief, SD Group members recognized the pivotal 19 importance of the microSD and SDHC cards to their joint efforts to maintain and enhance their 20 control over the evolving SD Card market. During the week of August 28, 2006, the SD Group 21 members met with SD-3C in Osaka and agreed upon measures to impose a 6 percent royalty 22 requirement on the new types of SD Cards. These new types were not covered by the SD 23 Group’s earlier 2003 License, and accordingly it was necessary for the SD Group and SD-3C to 24 take new action to extend their anticompetitive scheme to cover them. 25 97. On information and belief, SD-3C was tasked at the Osaka meeting to 26 pressure other industry participants into (i) completing a new royalty reporting form capturing 27 data on sales of microSD and SDHC Cards, (ii) paying royalties on those new cards at the same 28 rate as that provided for in the 2003 SD Card License for the first generation, standard SD
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1 Cards; and (iii) signing a new, revised 2006 license agreement incorporating significantly less 2 favorable terms than those contained in the 2003 SD Card Licenses. In furtherance of those 3 objectives, SD-3C has consistently maintained since September 2006 that the 2003 SD Card 4 License does not grant rights to produce and sell microSD Cards or SDHC Cards and that 5 industry participants wishing to produce and sell such cards must execute the new 2006 6 agreement. 7 98. The Amended and Restated SD Memory Card License Agreement 8 adopted at the Osaka meeting (the “2006 License”) incorporated at Schedule F a new “Quarterly 9 Royalty Report Form” that required licensees for the first time to report sales of microSD Cards
10 and SDHC Cards. The form subjected such sales to the same royalty requirement as sales of 11 first generation SD Cards, namely a 6 percent royalty on the net sales value of the card for the 12 first 30 million of any type of SD Card sold in a given calendar year by the licensee and 4.5 13 percent thereafter. The 2006 License had an effective date of August 31, 2006.
14 4. Starting in September 2006, SD-3C Enforces the New Royalty Requirement on Behalf of the SD Group. 15 16 99. Immediately following the meeting, the SD Group dispatched 17 representatives of SD-3C to establish and enforce the new royalty requirement. 18 100. On September 4, 2006, SD-3C, represented by its President, Richard 19 Holleman, and Mr. Quackenbush, met with Samsung in Hwaseong, Korea. After 20 acknowledging that the microSD Card originally was intended to be royalty free, Mr. 21 Quackenbush explained that the SD Group members instead had agreed the previous week to 22 require a 6 percent royalty for such cards. Mr. Quackenbush also asserted that the 2003 SD 23 Card License covered only full-sized SD Cards up to 2 GB and did not cover microSD Cards or 24 SDHC Cards. He stated that Samsung would have to sign the new 2006 agreement in order to 25 manufacture the microSD Card and SDHC cards. 26 101. Soon after the meeting, on September 19, 2006, Mr. Quackenbush 27 followed up by emailing Samsung and all other SD-3C licensees a copy of the 2006 License, 28 demanding that each of them sign the new agreement. For reasons that are explained in greater
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1 detail elsewhere in this Complaint, Samsung did not want to sign the 2006 License. Despite 2 persistent pressure to do so from SD-3C and the SD Group, Samsung consistently has declined 3 to execute the new 2006 agreement. 4 102. Due to the persistent pressure by SD-3C, and in response to the SD 5 Group’s September 2006 and subsequent demands, however, Samsung ultimately acquiesced 6 and agreed to pay royalties on the newer SD Cards not covered by the 2003 Agreement, i.e., on 7 microSD and SDHC cards. To do so, Samsung agreed to the SD Group’s demand that it use the 8 royalty reporting form appended as Schedule F to the 2006 License and that it pay royalties on 9 microSD and SDHC Cards in accordance with the instructions on that form. The SD Group and
10 SD-3C have been content to invoice Samsung and accept payment of royalties for microSD and 11 SDHC cards notwithstanding the fact that Samsung did not execute the 2006 License. 12 103. Samsung’s first royalty report to SD-3C, for the third quarter of 2006, 13 was submitted on November 15, 2006 using the royalty reporting form previously provided in 14 connection with the original 2003 License. Mr. Quackenbush immediately responded by 15 attaching the new royalty reporting form from the 2006 License and demanding that Samsung 16 use that form in the future. As noted above, due to mounting pressures from SD-3C, Samsung 17 complied with that instruction in its subsequent royalty report for the fourth quarter of 2006, 18 which was submitted to Mr. Quackenbush on February 1, 2007. As an interim measure, 19 Samsung reported miniSD and microSD Cards sales separately in a consolidated return for those 20 types of cards covering the second half of 2006. Thereafter, Samsung submitted regular 21 quarterly reports encompassing sales of all SD Cards, including miniSD, microSD and SDHC 22 Cards using the form appended to the 2006 License in compliance with SD-3C’s instructions. 23 Samsung continued to submit those reports to SD-3C’s California offices. 24 104. From its offices in California, SD-3C first presented Samsung with an 25 invoice for SD Card royalties on November 17, 2006. That invoice, which reflected Samsung’s 26 third quarter sales of full-sized SD Cards, included royalties for SDHC Cards sold by Samsung 27 during that quarter. This was the first occasion that Samsung was subjected to the 28 anticompetitive royalty provision of the SD Card licensing scheme—whether pursuant to the
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1 2003 SD Card License or resulting from the August 2006 agreement between the SD Group and 2 SD-3C—and accordingly the first occasion on which Samsung suffered damages as a result of 3 Defendants’ anticompetitive actions. 4 105. On April 18, 2007, SD-3C, again from its offices in California, sent 5 Samsung an invoice for royalties on its sales of miniSD and microSD Cards in the second half 6 of 2006. Thereafter, SD-3C presented Samsung with regular quarterly invoices, starting with 7 one dated May 10, 2007 for the first quarter of 2007, breaking out separately the royalties due 8 on full-size SD Cards (including SDHC Cards) and microSD Cards. Since its first royalty 9 payment on November 30, 2006, the large majority of the royalties paid by Samsung have been
10 on sales of SDHC Cards and microSD Cards. 11 106. Since 2006, SD-3C repeatedly has asserted that Samsung is required to 12 make royalty payments on sales of microSD and SDHC Cards, but not as a consequence of the 13 2003 SD Card License. For example, in an email of February 1, 2007 responding to Samsung’s 14 submission of its royalty report for the fourth quarter of 2006, Mr. Quackenbush stated:
15 Samsung did not have permission to manufacture and sell MicroSD or SD cards with capacities greater than 4GB under the 16 license agreement that Samsung signed. The new CLA provides the ability to manufacture and sell MicroSD cards and capacities 17 greater than 4GB. 18 107. Nevertheless, the SD Group members determined in 2007 that they would 19 invoice Samsung and accept payment of royalties for these new types of SD Cards 20 notwithstanding Samsung’s failure to execute the 2006 License. Whether this constituted an 21 implied license under the 2006 License or an amendment to the 2003 SD Card License, the 22 arrangement effectuates the SD Group’s and SD-3C’s agreement of August 2006 to extend the 23 royalty provision to new types of SD Cards not otherwise reached by the 2003 license.
24 E. The SD Group Members’ Current Efforts, With SD-3C, To Maintain and Exploit Their Dominant Position. 25 26 108. Both the 2003 and 2006 versions of the SD Card License reflect the SD 27 Group members’ current efforts, in coordination with SD-3C, to maintain and exploit the 28 dominant position they have obtained through their anticompetitive scheme, and to prevent the
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1 emergence of alternative flash memory card formats that could undermine their dominance. 2 Several aspects of the 2003 and 2006 Licenses are specifically designed to support these goals. 3 109. Notwithstanding boilerplate language introduced in the most recent 4 versions of the SD Card License, the SD Group members require each existing and potential 5 manufacturer of SD Cards to execute an SD Card License through SD-3C that has the effect of 6 restricting competition and discouraging innovation. The royalty payments required under the 7 SD Card License have the effect of raising the costs of every competing manufacturer of SD 8 Cards. The license’s unequal grantback requirement provides competitors with a strong 9 disincentive to develop their own technology. The members of the SD Group have sought
10 further to undermine the pricing freedom of their competitors by attempting to impose new 11 license conditions designed to give the SD Group members the ability to set a “floor price” and 12 to enforce that pricing through the threat of immediate termination (thereby putting at risk a 13 licensee manufacturer’s substantial sunk costs). 14 110. As described in more detail below, Defendants’ ongoing anticompetitive 15 conduct has injured and continues to injure both Samsung specifically and competition 16 generally.
17 1. The SD Group Members Have Refused to Negotiate Over the Terms of the SD Card License. 18 19 111. The SD Group members, acting through SD-3C and in furtherance of 20 their agreement to impose controls over competing SD Card manufacturers, consistently have 21 refused to negotiate over the terms of the SD Card License. 22 112. In early 2003, Samsung sought to obtain an SD Card License at the 23 request of a customer that wished to sell SD Cards assembled by Samsung using Samsung 24 memory components. Samsung first communicated with an employee of Panasonic and Mr. 25 Hiro Miyauchi of Toshiba Corp. Samsung tried to negotiate a license directly with Panasonic, 26 but Panasonic refused and referred Samsung to SD-3C. Toshiba directed Samsung to Mr. 27 Quackenbush, who was acting as SD-3C’s licensing agent. Mr. Miyauchi of Toshiba provided 28 Samsung with Mr. Quackenbush’s contact information at the San Ramon, California, office of
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1 Lindquist LLP. Samsung approached Mr. Quackenbush to secure a license to produce SD 2 Cards. 3 113. Mr. Quackenbush refused, on behalf of the SD Group members, to 4 engage in any negotiations of license terms with Samsung. For example, Samsung asked early 5 in this discussion that Mr. Quackenbush send a Word version of the SD Memory Card License 6 proposed by the SD Group members to facilitate the exchange of counter-proposals. After 7 initially indicating his assent to this proposal, Mr. Quackenbush subsequently communicated to 8 Samsung that: “I have been asked to not provide the license agreement in a word file to any 9 company. The SD-3C managers are concerned about anyone making changes to the
10 agreement.” The SD Card License therefore was offered to Samsung without any opportunity 11 for modification or negotiation of its terms. 12 114. On September 24, 2003, Samsung signed the agreement in the form 13 offered by SD-3C, without being given any ability to modify or negotiate the contract. The 14 agreement subsequently was signed by officials of Panasonic, SanDisk and Toshiba on behalf of 15 SD-3C. The effective date of the agreement was November 11, 2003. The agreement had an 16 initial three-year term due to expire on November 11, 2006. 17 115. The 2006 License was similarly presented to potential licensees as a non- 18 negotiable requirement. As previously alleged, following SD-3C’s September 4, 2006, meeting 19 with Samsung in Korea, Mr. Quackenbush emailed Samsung and other SD-3C licensees on 20 September 19, 2006, attaching the 2006 License and demanding that the licensees sign the new 21 agreement. Once again, SD-3C provided no opportunity to negotiate the terms of the 2006 22 License, which was offered on a take-it-or-leave-it basis. Samsung decided not to sign the new 23 agreement and instead to allow the annual renewal provision of its existing SD Card License to 24 take effect. 25 116. As described in Section D, SD-3C continued to insist that the renewed 26 2003 License did not cover microSD and SDHC Cards. Following the renewal, SD-3C, acting 27 on behalf of Panasonic and the other SD Group members, repeatedly demanded that Samsung 28 execute the 2006 License, including through correspondence on February 1 and 3, 2007, but did
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1 not engage in any negotiations over its terms. Samsung again refused to sign the 2006 License. 2 On information and belief, other manufacturers and/or assemblers of SD Cards have executed 3 the 2006 License.
4 2. The SD Card Group Provided No Alternative to the SD Card License and Its Provisions. 5 6 117. The refusal of Defendants, Toshiba, and SanDisk to negotiate over the 7 terms of the SD Card License ensured that their competitors—competing manufacturers and 8 sellers of SD Card components and finished SD Cards—would be subjected to the royalty and 9 other provisions of the SD Card License. In furtherance of this agreement, the SD Group
10 members also agreed to provide no mechanism by which to separately license their own claimed 11 essential patents. 12 118. The 2003 Agreement contains no provision permitting separate licenses 13 of the Essential Patents or other intellectual property from the SD Group members or otherwise. 14 It is, by its terms, the sole vehicle for securing the SD Card rights. 15 119. Pursuant to Section 2.1 of the 2003 Agreement, Samsung (and other 16 licensees) received a “non-exclusive license, on a worldwide basis during the term hereof, to 17 make, design, have made, use, offer for sale, sell, import, export or otherwise dispose of SD 18 Memory Cards . . . under the Essential Patent Claims Licensable by Licensor.” The fact that the 19 license was “non-exclusive” did not mean that it was available from other sources. Instead, the 20 ordinary meaning of “non-exclusive” in this context is that the license did not grant Samsung 21 exclusive rights to the SD Card technologies licensed under the agreement. In fact, pursuant to 22 this provision, other licensees, such as A-Data, Delkin Devices and Phison Electronics, have 23 obtained licenses from SD-3C. 24 120. The 2006 License also did not realistically permit separate licensing of 25 the rights granted by the SD Card License. The 2006 License included preambular language 26 and an Article 12.5 purporting to affirm the right of licensees “to separately negotiate a license 27 with any or all SD Group members under any and all Essential Patent Claims Licensable by 28 each such SD Group member under terms and conditions to be independently negotiated by
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1 each such member.” This is contrary to the position taken by the individual members of the SD 2 Group in their communications with Samsung, including as recently as 2010. As detailed 3 below, each of the SD Group members has represented that it lacks the authority to license the 4 essential patent claims that are jointly owned by the members of the SD Group. 5 121. The agreement of Defendants, Toshiba and SanDisk to require competing 6 manufacturers to execute an SD Card License is also confirmed by their public statements. For 7 example, the SD-3C website states explicitly that:
8 You need to execute the [SD Card License] if you are making semi-conductor memory products (e.g., flash memory cards, ROM 9 cards, SD I/O Combo Cards, miniSD Cards) which utilize SD technology (for example, cards based on the SD Group 10 Specifications (as defined in the [SD Card License])). 11 122. Even if the purported right to license independently were effective, it 12 would address only a portion of the rights—the putatively “Essential Patent Claims” owned by 13 individual members of the SD Group—granted by the SD Card License. Under either the 2003 14 or 2006 License, even if licensees could negotiate separate licenses for these Essential Patent 15 Claims from individual members of the SD Group, those licenses would be in addition to, rather 16 than a substitute for, the continuing requirement on industry participants to execute the SD Card 17 License—and thereby pay the SD Group members an “entry fee”—if they wish to manufacture 18 or sell SD Cards. As a consequence, whether or not individual rights can be obtained from 19 individual SD Group members, it is still necessary for any manufacturer or seller of SD Cards to 20 hold a license from SD-3C. 21 123. In particular, the SD Card Specification, logo and other trademarks are 22 not licensable by individual SD Group members. In communications with Samsung, Mr. 23 Quackenbush, SD-3C’s licensing agent, has taken the position that this intellectual property is 24 available only from SD-3C. For example, on April 14, 2007, Mr. Quackenbush, acting on 25 behalf of Defendants and the other members of the SD Group, refused to provide Samsung with 26 requested logo guidelines for the second generation SD Cards, explaining instead that this 27 intellectual property is “only used by licensees who have signed the [2006 License].” By 28 conditioning the use of this intellectual property on Samsung’s willingness to accept the terms
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1 of the 2006 License, SD-3C confirmed both that this intellectual property is available only from 2 SD-3C and that the royalty requirement on these SD Cards arises independently of the 2003 3 License. 4 124. The SD Group members also use their control over the SD Card 5 Association to further the requirement that all competing manufacturers of SD Cards execute the 6 SD Card License. As explained on the SD Association website, “the SD Association’s 7 Licensing Program operates in conjunction with SD-3C” and “SD-3C, LLC represents the 8 interests of the founding patent holders—Panasonic, SanDisk, and Toshiba—while also serving 9 as the licensing authority for all SD technology.” The SD Card Association requires SD Card
10 manufacturers and sellers to execute its license (known as the “License Agreement for SDA 11 Memory Card Specification or LAMS”), which obligates licensees to “acknowledge and agree” 12 that manufacturing or selling “SD Memory Cards requires [the] Licensee to enter into the” SD 13 Card License with SD-3C. 14 125. As described above, even if the SD Group members were willing to enter 15 into separate licenses for their “Essential Patents,” Samsung (or another licensee) would still 16 need to obtain an SD Card License. That license provides on its face for a 6 percent royalty 17 rate, and neither the 2003 Agreement nor the 2006 License provide a mechanism for reducing 18 the 6 percent royalty in the event that a party successfully obtains separate licenses from 19 individual members of the SD Group. Mr. Quackenbush confirmed in December 2006, for 20 example, that SD-3C “required a royalty to be paid to SD-3C since the [second generation SD 21 Card also] uses SD-3C technology.” In these ways, the members of the SD Group have ensured 22 that the entry fee imposed by the SD-3C license will apply to all other manufacturers and sellers 23 of SD Cards. Because any licensee is required by the terms of the 2003 and 2006 agreements to 24 pay a 6 percent royalty whether or not it separately licenses rights to certain patents from the 25 individual members of SD-3C, and because the terms of the SD-3C licenses are not negotiable, 26 the offer that a licensee could also negotiate separately for patent rights with individual 27 members of SD-3C (and thereby pay an additional royalty on top of the 6 percent fee required 28 by SD-3C) is an illusion.
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1 3. The SD Group Members Refuse to Negotiate Separate Licenses for Their Essential Patents 2 3 126. In communications with the individual members of the SD Group, 4 including Mr. Richard Chernicoff from SanDisk, Mr. Hiroshi Miyauchi from Toshiba, and Mr. 5 Tetsyuki Watanabe from Panasonic, Samsung repeatedly stated that it does not wish to pay the 6 SD-3C royalties and sought information directly from the SD Group members about their 7 claimed essential patent rights. No member of the SD Group has indicated a willingness to 8 negotiate a separate license with Samsung for SD rights pursuant to Article 12.5 of the 2006 9 License. Instead, all three members of the SD Group have taken the position that the jointly
10 owned Essential Patents can be licensed only through SD-3C. Moreover, two members of the 11 SD Group have taken actions to preclude such negotiations or such a license. 12 127. Critically, Defendants, Toshiba, and SanDisk have refused to disclose 13 purportedly “essential patents” that would, in the absence of the license, be infringed by a 14 product that implements the SD Specification. As described earlier in the Complaint, through 15 their control and support of SDA, the SD Group members have developed and maintain SDA 16 rules that excuse the SD Group members from disclosing this information under the IP Policy. 17 Defendants, Toshiba and SanDisk also did not provide this information in the 2003 Agreement 18 or the 2006 License. They also have not provided this information through SD-3C, which 19 similarly failed to identify all of the purportedly essential patents, and instead lists on its website 20 only 9 patents “for information purposes only” and “by way of example” and further notes that 21 the list “may not be exhaustive.” The SD Group members also have refused to disclose this 22 information in bilateral discussions with Samsung. By denying licensees information about 23 their individual patent holdings, the SD Group members have effectively impeded any effort to 24 negotiate separate licenses with individual members of the SD Group. 25 128. For example, Samsung asked Panasonic during discussions in 2009 to 26 identify the patents owned by Panasonic that are essential to the manufacture of SD Cards and 27 therefore conveyed as part of the SD Card License. Pressed on this point by Samsung, 28 Panasonic identified its five illustrative essential patents as listed on the SD-3C website and
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1 eventually showed Samsung a list of 29 patents Panasonic “believe[d] are SD essential patents 2 although they ha[d] not yet been evaluated by a third party evaluator.” Panasonic, however, 3 refused to allow Samsung to retain a copy of the list or to confirm that the list was a definitive 4 and comprehensive description of Panasonic’s essential SD Card patents. 5 129. Similarly, in 2007, Samsung asked SanDisk to identify the patents owned 6 by SanDisk that are essential to the manufacture of SD Cards and therefore conveyed as part of 7 the SD Card License. SanDisk refused to provide Samsung with this information. 8 130. By declining to provide the requested information on their putative 9 essential patents, Panasonic and SanDisk eliminated any ability on the part of Samsung to
10 negotiate a separate license for these patents. In so doing, Panasonic and SanDisk acted in 11 furtherance of the ongoing and renewed anticompetitive agreement between the members of the 12 SD Group and SD-3C to require industry participants wishing to manufacture or sell SD Cards 13 to execute an SD Card License. 14 131. Moreover, as recently as last year, Panasonic has insisted that Samsung 15 deal directly with SD-3C in matters involving licensing of rights to manufacture SD Cards, in 16 lieu of expressing a willingness to engage in separate licensing discussions. For example, in a 17 letter of January 18, 2010, responding to Samsung’s concerns about the scope of the claimed 18 “essential patents” and whether they included certain of Panasonic’s claimed patents, Mr. 19 Tetsuyuki Watanabe, Director of Panasonic’s Licensing Center stated:
20 [Y]our primary grievance appears to stem from your interpretation of the [SD Card License] to cover flash memory patent claims as 21 Essential Patent Claims. Although we believe there is no ambiguity about it, and that the flash memory claims are clearly 22 excluded, you are kindly requested to contact SD-3C, LLC, should you have any questions. 23 4. The SD Group Members Have Exercised Their Market Power by 24 Coercing Licensees to Agree to a Price Stabilization Provision. 25 132. The 2006 License also contains two provisions that, if enforced, would 26 provide Defendants, Toshiba, and SanDisk with the ability to stabilize SD Card prices by setting 27 a “floor price,” as well as the ability to monitor and enforce this floor price. 28
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1 133. First, Article 7.3 of the Amended and Restated Memory Card License 2 (“2006 License”) gives SD-3C the power to determine a “fair market price” for SD Cards that 3 would serve as a minimum reference price for the calculation of licensees’ royalty obligations. 4 Under this provision, if a licensee sells at a retail price below the “fair market price” set by SD- 5 3C, it will be penalized directly by having to pay a higher percentage of its actual retail price as 6 a royalty to SD-3C. For example, if the SD-3C determined that the “fair market price” was $50, 7 and the licensee actually charged only $40, it would still need to pay SD-3C a 6 percent royalty 8 based on $50 (or $3), thus effectively charging the licensee a 7.5 percent royalty ($3 royalty on 9 a $40 price).
10 134. The effect of the “floor price” provision, if enforced, would be to 11 constrain the ability of licensees to sell SD Cards at prices below a level determined by 12 Panasonic, SanDisk and Toshiba. By agreeing to include this provision in the 2006 License and 13 to coerce licensees into accepting it, Defendants, SanDisk and Toshiba sought to exploit their 14 market power by ensuring that the price of SD Cards is set at a level of their choosing. 15 135. Second, Panasonic and the other SD Group members included in the 2006 16 License a provision that would permit them to enforce the “floor price” by giving them power 17 over the licensee’s continued ability to produce SD Cards. The 2003 SD Card License provided 18 a three-year license that was renewable at the licensee’s option for up to 10 years. Under this 19 version of the SD Card License, SD-3C could terminate the agreement only in the event of a 20 material breach or a failure to perform any material obligation on the part of the licensee. That 21 provision gave the licensee protection for the significant sunk cost investments in infrastructure 22 and other capital requirements necessary to produce SD Cards. 23 136. By contrast, Article 14.1 of the 2006 License gave SD-3C (and, through 24 it, the SD Group members) the ability to terminate the agreement each year on the anniversary 25 of the effective date, until the maximum 10-year term of the agreement. This new term 26 increased the SD Group members’ leverage over licensees, whose sunk cost investments would 27 now be at the mercy of their competitors, and would greatly increase the pressure to conform to 28 floor pricing levels set by members of the SD Group.
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1 137. On information and belief, the SD Group has not enforced the price 2 stabilization provision since 2006—perhaps because Samsung’s refusal to execute the 2006 3 License undermined its potential effectiveness, by leaving a major competitor free to price at a 4 level of its choosing.
5 5. The SD Group Members Seek to Maintain Their Dominance Over SD Card Technology Through Improper Grantback Requirements. 6 7 138. The SD Card License also includes a grantback provision that has the 8 effect of entrenching the SD Group members’ control over SD Card technology. Article 2.4 of 9 the SD Card License requires licensees to grant to each member of the SD Group:
10 under the Essential Patent Claims Licensable by Licensee, a non- exclusive, non-transferable, royalty-free license to and release 11 from any and all claims of infringement, on a worldwide basis, to make, design, have made, use, offer to sell, sell, import, export or 12 otherwise dispose of SD Memory Cards . . . . 13 139. The requirement that licensees give SD Group members royalty-free 14 access to any new essential technology they might develop contrasts with the 6 percent royalty 15 demanded by SD Group members for their own essential patent claims. This provision ensures 16 that licensees can expect to receive no financial reward for developing technology for use in SD 17 Cards and submitting the technology for inclusion in the Specification. This provision 18 necessarily has the effect of limiting licensees’ development and contribution of technology that 19 would reduce the share of SD Card technology owned by the SD Group members and SD-3C. 20 140. The grantback provision of the SD Card License fails to protect against 21 the threat of anticompetitive harm associated with such provisions. In its 1999 business review 22 letter related to DVD licensing practices, the DOJ recognized the potential for grantback 23 provisions to result in “significant discouragement of research and development.” The letter 24 indicated that this potential can be alleviated by arrangements that ensure that licensees subject 25 to a grantback provision benefit from introducing new essential patents into the pool. 26 141. The SD Card License grantback provision lacks the critical redeeming 27 feature highlighted by DOJ—that is, the ability of a licensee to benefit from its innovation 28
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1 efforts. Instead, innovation on the part of a licensee will support royalties earned by the SD 2 Group members, which undermines or eliminates the incentive for innovation. 3 142. Moreover, the anticompetitive effect of the grantback provision is 4 magnified because licensees do not have access to the SD Group members’ claimed essential 5 patent portfolios. That failure to disclose further impedes the ability of the licensees to design 6 improvements or otherwise take into account the claimed essential patents, and impairs the 7 ability of licensees to identify intellectual property (even their own) that might be subject to the 8 grantback provision. In contrast to a legitimate patent pool, which is based on transparency, the 9 secretive operation of the SD Group members’ combination increases its anticompetitive
10 effects. 11 143. For these reasons, the grantback provision’s significant potential to harm 12 competition among technologies outweighs any potential procompetitive benefit.
13 6. The SD Card License Does Not Convey All of the Rights to Make an SD Card From the SD Group Members. 14 15 144. Panasonic, SanDisk and Toshiba claim substantially all of the flash 16 memory technology rights needed to manufacture an SD Card. Instead of including all of these 17 rights within the scope of the SD Card License, however, these companies have agreed to hold 18 back their flash memory rights from the SD Card License. Panasonic, SanDisk and Toshiba 19 each require competing manufacturers of SD Cards to license their respective flash memory 20 rights in separate bilateral license agreements. 21 145. Consistent with these requirements, the SD Card License requires 22 licensees to pay a 6 percent royalty, but by its terms does not provide licensees with all the 23 rights needed to manufacture an SD Card. Article 2.3 of the SD Card License provides:
24 “IT IS EXPRESSLY UNDERSTOOD THAT THE RIGHTS AND LICENSES GRANTED PURSUANT TO THIS AGREEMENT DO NOT EXTEND TO ANY 25 SEMICONDUCTOR MEMORY TECHNOLOGY OR SEMICONDUCTOR 26 PROCESS/PACKAGING TECHNOLOGY.”
27 146. By requiring SD Card licensees to enter into separate bilateral 28 transactions for their memory technology, the SD Group members have eliminated any
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1 efficiency benefit stemming from the pooling of their putative essential SD Card patents in the 2 SD Card License. To the contrary, the need to license the SD Group members’ intellectual 3 property both from SD-3C and from the members themselves increases the transaction costs for 4 a licensee seeking to manufacture SD Cards. That increased cost and decreased efficiency is 5 particularly striking because the SD Group members simultaneously require licensees to 6 negotiate memory licenses with them directly and refuse to offer the rights to all of their SD 7 Card-related technology during those negotiations. 8 147. The separate licensing of memory technology also provides the SD Group 9 members with an opportunity to extract additional royalties from licensees that increase the cost
10 advantage enjoyed by SD Group members in the manufacture of SD Cards. 11 148. That cost advantage is magnified by the structure of the SD Card License 12 royalty itself. Although the SD Card License purports to exclude flash memory rights from its 13 scope, and although the SD Group members charge licensees for the rights to that intellectual 14 property, the SD Card License nonetheless bases royalties on the memory portion of the SD 15 Card. 16 149. Specifically, the SD Card License provides that the 6 percent royalty is 17 payable on net sales of SD Cards, rather than on a per-card basis. The price of an SD Card, and 18 therefore the amount of royalty owed, is generally proportional to the amount of flash memory 19 contained within it. For example, the advertised price of SanDisk SD/SDHC Cards at 20 www.flash-memory-store.com on July 15, 2010, was $9.95 for 2 GB, $14.95 for 4 GB, $21.95 21 for 8 GB, $34.95 for 16 GB and $73.95 for 32 GB. The cost of non-memory components in SD 22 Cards does not vary significantly, regardless of the memory capacity of the card in which they 23 are incorporated. By requiring royalties to be calculated based on net sales, the SD Card 24 License therefore effectively requires that licensees pay a royalty with respect to the quantity of 25 memory included in an SD Card, even though that memory is expressly excluded from the 26 scope of the license grant. 27 28
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1 7. Panasonic, SanDisk and Toshiba Continue to Renew and Reaffirm Their Unlawful Agreement With SD-3C. 2 3 150. Defendants, SanDisk and Toshiba actively continue to take new and 4 independent action in furtherance of their anticompetitive combination, and repeatedly have 5 expanded the anticompetitive agreements among themselves to maintain their monopoly of SD 6 Card technology and their dominance of the SD Card markets. In November 2007, for example, 7 the members of the SD Group and SD-3C executed a Second Amended and Restated Master 8 Licensing Agreement codifying the updated and expanded agreements among the SD Group 9 members to collectively license their SD Card technology only through SD-3C and at a single
10 price. 11 151. In furtherance of these renewed and ongoing agreements, the SD Group 12 members have taken the position in their bilateral negotiations with Samsung that they lack the 13 authority to negotiate separate licenses with SD Card manufacturers for any jointly owned SD- 14 3C intellectual property. Similarly, the SD Group members prevent SD-3C from varying the 15 terms of its license, thereby rendering ineffective any potential separate license of essential 16 patents. By these means, the SD Group members and SD-3C continue to ensure that any 17 licenses granted by individual SD Group members would still require payment of an additional 18 “entry fee,” not paid by members of the SD Group, that the SD Card License imposes on rival 19 manufacturers of SD Cards.
20 8. The SD Card License is Part of the SD Group Members’ Broader Effort to Jointly Create and Maintain a Permanent Cost Advantage 21 Over Competitors. 22 152. The effect and necessary purpose of the agreements among Panasonic, 23 SanDisk, Toshiba and SD-3C has been to impose and maintain costs on competitors that the 24 members of the SD Group do not themselves bear. To this end, in parallel with their agreement 25 to license their SD Card patents through SD-3C at a single price, the members of the SD Group 26 have entered into cross-licensing arrangements that granted them royalty-free access to the 27 patents for which they charge others an entry fee. In its annual report for 1999, for example, 28 SanDisk disclosed:
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1 While other flash card manufacturers will be required to pay the SD Association license fees and royalties which will be shared 2 between [Panasonic], Toshiba and SanDisk, there will be no royalties or license fees payable among the three companies for 3 their respective sales of the Secure Digital Memory Card. 4 153. On information and belief, the SD Group members continue to abide by 5 these cross-licensing arrangements. In conjunction with the other elements of their licensing 6 arrangements, including the agreement to license SD Card technology only through SD-3C and 7 at a single price, to withhold critical memory technology from the SD Card license, to impose 8 an entry fee on competitors, and to impose an unequal grantback provision on licensees, this 9 cross-licensing agreement allows three major competitors to enjoy a permanent cost advantage
10 over other competing manufacturers and sellers of royalty-bearing SD Cards. Given the low- 11 margin, commoditized nature of the SD Card business, this cost advantage is sufficient to 12 significantly impede the ability of other industry participants to compete with SD Group 13 members. This combination does not provide efficiencies that outweigh its significant 14 anticompetitive effects.
15 F. The Effects of Defendants’ Conduct on Competition and on Plaintiff’s Business 16 17 154. The illegal and ongoing combination among Defendants and the other 18 members of the SD Group has suppressed competition in the markets for SD Cards and related 19 technologies and products. That combination has caused, and continues to cause, injury to 20 Samsung and other current and new entrants into these markets. The SD Card is now the 21 dominant format in the flash memory card market, due in large part to the widespread adoption 22 of microSD and SDHC Cards from 2006 onwards. The SDA states that it is “the de-facto 23 industry standard” and that “SD technology is used by more than 400 brands across dozens of 24 product categories and in more than 8,000 models.” SD Cards accounted for more than 80 25 percent of all flash memory cards sold worldwide in 2009. MMC cards, by contrast, now 26 represent only a negligible portion of the flash memory cards sold and used by consumers. 27 Defendants are perpetuating their illegal combination to maintain the dominance of this format 28
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1 and their control over it, and to restrain competition from other SD Card manufacturers and 2 other products and technologies. 3 155. The conspiracy between Defendants and the other members of the SD 4 Group has suppressed the emergence of new and different flash memory card formats. In 5 contrast to the profusion of new formats entering the market during the 1990s, no significant 6 alternative to the SD Card format has been introduced since the SD Card was launched in 2000. 7 SD Group members have reduced competition in flash memory card technology, including by 8 agreeing among themselves not to compete with the SD Card format, by imposing grantback 9 provisions on SD Card manufacturers that inhibit the emergence of new and improved
10 technologies, and by actively impeding the emergence of competing new formats. Consumers 11 have been harmed by the resulting diminution in choice between flash memory card formats, by 12 the decreased innovation in SD Card and flash memory technologies, and by the restraints 13 imposed on the SD Card and related markets by Defendants, Toshiba and SanDisk. 14 156. Starting when it received its first invoice from SD-3C on November 17, 15 2006, Samsung has been and continues to be injured by the agreement among and between the 16 SD Group and SD-3C to impose a royalty requirement on first generation SD Cards pursuant to 17 the non-negotiable 2003 SD Card License. Samsung also has been and continues to be injured 18 by the new and independent actions of the SD Group and SD-3C from August 2006 onwards to 19 impose a similar royalty requirement on microSD and SDHC Cards. In 2010, approximately 85 20 percent of the SD Cards sold by Samsung were microSD Cards. In the same year, 21 approximately 55 percent of Samsung’s sales of full-sized SD Cards were SDHC cards. 22 157. The illegal combination among Defendants, Toshiba and SanDisk has 23 injured and continues to injure Samsung in three ways. First, the illegal combination has injured 24 and continues to injure Samsung by causing it to lose significant sales where it competes with 25 SD Group members. Samsung manufactures and supplies finished SD Cards in competition 26 with the SD Group members, including to such companies as Nokia and RIM. The ongoing 6 27 percent royalty imposed by the illegal combination places Samsung at a sustained cost 28 disadvantage to the SD Group members that it would not face in a competitive market. This
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1 sustained cost disadvantage results in a significant loss of sales opportunities to the SD Group 2 members. 3 158. Second, the illegal combination has injured and continues to injure 4 Samsung by reducing its volume of sales to customers that compete with the SD Group 5 members. Samsung sells finished SD Cards to other manufacturers and assemblers, who then 6 sell those cards under their own brand names in competition with the products of SD Group 7 members. Because these sales are subject to SD-3C’s royalties and the cards are more 8 expensive as a result, the resellers are placed at a sustained cost disadvantage to SD Group 9 members. This cost disadvantage causes Samsung’s manufacturer and assembler customers to
10 lose sales to SD Group members, and causes those customers in turn to buy fewer finished SD 11 Cards from Samsung. Since late 2006, Samsung’s sales of finished SD Cards to reseller 12 customers have progressively diminished as the additional costs imposed by the illegal 13 combination have hindered both sales of SD Cards by those customers and Samsung’s sales to 14 those customers. 15 159. Third, Samsung is injured by the SD Group’s and SD-3C’s imposition of 16 a 6% royalty on the sales of all SD Cards sold by Samsung, whether under the 2003 SD Card 17 License or pursuant to the actions of the SD Group and SD-3C from August 2006 onwards to 18 apply the royalty requirement to new types of SD Cards. As a manufacturer of SD Cards, 19 Samsung has been required to abide by the 2003 SD Card License without any opportunity to 20 renegotiate its anticompetitive terms, or to separately license the intellectual property rights 21 from the SD Group members. Pursuant to the license, Samsung has been required to pay an 22 ongoing 6 percent royalty to SD-3C, a significant proportion of which relates to purportedly 23 unlicensed memory contained in SD Cards sold by Samsung. By the end of the first quarter of 24 2011, Samsung had paid more than $165 million to SD-3C in royalties on its sales of all SD 25 Cards — including both those subject to and not subject to the 2003 License. Moreover, the 26 artificial exclusion of memory technology rights from the scope of either the 2003 SD Card 27 License and/or 2006 revised agreement has forced Samsung to enter into additional royalty- 28 bearing license agreements covering such memory rights with each member of the SD Group.
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1 For example, Samsung continues to pay royalties to Panasonic on the memory component of SD 2 Cards. This effectively amounts to a double royalty on SD Cards, increasing transaction and 3 royalty costs, and again negating any licensing efficiencies that could have flowed from the 4 activities of SD-3C, acting on behalf of Panasonic and other SD Group members. 5 160. The individual members of the SD Group have benefited, and continue to 6 benefit, handsomely from their anticompetitive conduct. This conduct has allowed the members 7 of the SD Group to extract hundreds of millions of dollars in royalty flows each year from 8 numerous competing SD Card manufacturers, as well as to enjoy the fruits of their dominant 9 share of the SD Card market. The burden of the royalties and other anticompetitive restraints
10 has handicapped the ability of rival manufacturers to compete with SD Group members in the 11 sale of SD Cards. Panasonic, SanDisk and Toshiba have been able collectively to dominate the 12 SD Card product market. Together they account for at least 65 percent of the worldwide market 13 for SD Cards (including cards manufactured by an SD Group member and sold by a third party 14 under its own brand name). The SD Group members collectively account for a dominant share 15 of both standard SD Cards (even allowing for the negligible sales volume of MMC cards that 16 can be operated in some cases in SD Card slots) and second generation SD Cards, such as 17 miniSD and microSD Cards. The SD Group members’ collective share of the total U.S. market 18 for SD Cards, including both retail and sales to original equipment manufacturers such as 19 Motorola, is greater than 70 percent. Consumers have paid higher prices for SD Cards, and 20 have enjoyed diminished choice and innovation, than would have been the case if SD Group 21 members had been required to compete on an even playing field with other manufacturers.
22 RELEVANT MARKETS 23 161. There is a relevant antitrust market in the sale of finished SD Cards to 24 third parties for use with devices that contain slots made for full-size SD Cards, including 25 versions of such cards with a storage capacity of 4 GB and above (the “Full-Size SD Card 26 market”). Such finished SD Cards are broadly used in interstate commerce for a range of 27 applications, including particularly for data storage in digital cameras, PDAs, digital audio 28 players, and other electronic devices equipped with an SD Card slot. Millions of such devices
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1 have been sold, and continue to be sold, in the United States. Consumers with devices equipped 2 with a full-size SD card slot generally would regard an SD Card as the only option for use in the 3 devices. Most consumers who operate a device that has a full-size SD Card slot would not 4 regard any memory card other than an SD Card as reasonably interchangeable for the memory 5 card required by that device. Even if an MMC Card could be used in a full-size SD Card slot in 6 some devices, this is not true for all devices with full-size SD Card slots. Even for devices with 7 a full-size SD Card slot that could technically accept an MMC Card, most consumers would in 8 any event not be aware of that technical substitutability. Those customers would not regard an 9 MMC Card as interchangeable in use even for devices that technically might be able to use an
10 MMC Card in lieu of a full-size SD Card. 11 162. There is a relevant antitrust market in the sale of finished SD Cards to 12 third parties for use with devices that contain slots for reduced-size SD Cards, such as miniSD 13 and microSD Cards (the “Reduced-Size SD Card Market”; collectively with the “Full-Size SD 14 Card Market” the “SD Card Market”). In such devices, the Reduced-Size SD Cards will be the 15 only available option for operating the device in conjunction with a flash memory card. Such 16 finished Reduced-Size SD Cards are broadly used in interstate commerce for a range of 17 applications, including particularly for data storage in smaller-sized electronic devices, such as 18 mobile telephones, equipped with a Reduced-Size SD Card slot. Millions of such devices have 19 been sold, and continue to be sold, in the United States. Consumers with devices equipped only 20 with a Reduced-Size SD card slot would not regard any other kind of flash memory card as a 21 reasonably interchangeable alternative to a Reduced-Size SD Card. 22 163. There is a separate relevant antitrust market in the technology used in the 23 production of SD Cards, consisting of technology developed for this end-use or that might be 24 applied toward this end-use (the “SD Card Technology market”). The SD Card Specification 25 requires that certain SD Card functions be implemented either by a specific technology or by a 26 particular solution for which the technological options are limited. The technologies required 27 by the Specification or capable of providing a solution required by the Specification are not 28 reasonably interchangeable with other technologies.
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1 164. There is a separate relevant antitrust market in the technology used in the 2 production of flash memory cards (the “Flash Memory Card Technology market”). This 3 includes not only technology used in the production of SD Cards but also technology used in the 4 production of other flash memory card formats. The technologies included in the Flash Memory 5 Card Technology market are not reasonably interchangeable with other technologies that are not 6 suitable for use in flash memory cards. 7 165. There are no barriers to the interstate sale or exchange of SD Cards, SD 8 Card Technology or Flash Memory Card Technology. Accordingly, in each case above, the 9 relevant geographic market is the United States and its territories, or, alternatively, the world.
10 Competition among SD Cards and technology occurs on a uniform basis throughout the United 11 States and throughout the world.
12 CAUSES OF ACTION 13 CLAIM I Agreement in Restraint of Trade in Violation of Section 1 of the Sherman Act against 14 Panasonic and SD-3C LLC 15 (in the SD Card Market) 16 166. Plaintiff hereby incorporates by reference Paragraphs 1 through 165 of 17 this Complaint, as though fully set forth herein. 18 167. Panasonic, SD-3C and the other members of the SD Group entered into a 19 continuing contract, combination, agreement, and/or conspiracy to unreasonably restrain trade 20 and commerce in the markets for SD Cards. 21 168. By agreeing to require industry participants wishing to manufacture SD 22 Cards to execute an SD Memory Card License and at a single price, Panasonic, the other 23 members of the SD Group and SD-3C have raised the costs of other manufacturers of SD Cards, 24 thereby reducing competition in the SD Card markets. The 2003 SD Card License and the 2006 25 License together require SD Card manufacturers to pay a royalty of 6 percent on net sales of all 26 SD Cards, but the SD Group members have exempted themselves from this fee. The entry fee 27 required by the SD Card License insulates SD Group members from competition in the SD Card 28 market by giving them a permanent cost advantage over rival manufacturers. The adverse effect
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1 of this cost advantage on competition in the SD Card market is exacerbated by the additional 2 royalties that SD Group members separately demand from competitors for licenses to their flash 3 memory patents. As a result of their strategy of raising the costs of rival manufacturers, the SD 4 Group members have been able to establish and maintain a dominant position in the SD Card 5 market. Through their dominant position the members of the SD Group have sought to impose 6 increasingly onerous and anticompetitive terms on potential licensees, including—since 7 September 2006—terms that would have the effect of stabilizing SD Card prices. These 8 agreements to restrain competition are ongoing and continuing. 9 169. The anticompetitive effects of the agreement between Panasonic, SD-3C
10 and the other members of the SD Group are not offset by any countervailing benefits. Absent 11 the agreement between the members of the SD Group, other industry participants were ready 12 and willing to develop a flash memory card with substantially the same functionality of an SD 13 Card. Panasonic, SanDisk and Toshiba have made no showing that their agreement to jointly 14 develop and jointly license flash memory card technology has cleared blocking patent positions 15 held by those companies. The single, pooled license offered by SD-3C does not enhance 16 licensing efficiency by eliminating the need for multiple licenses. On information and belief, 17 the key patent rights covering flash memory used in SD Memory Cards are claimed by the SD 18 Group members. By its terms, however, the SD Card License excludes these rights, thereby 19 requiring that companies that wish to manufacture SD Cards seek separate licenses for flash 20 memory technology from each of Panasonic, SanDisk and Toshiba. 21 170. The unreasonable restraint of trade created by Defendants’ agreement, 22 and the effects thereof, continue. As a result of Defendants’ agreement and acts in furtherance 23 thereof, Samsung has suffered and will continue to suffer irreparable injury to its business and 24 property. 25 171. An actual, justiciable controversy appropriate for damages and 26 declaratory relief exists among the parties. 27 28
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1 CLAIM II Agreement in Restraint of Trade in Violation of Section 1 of the Sherman Act 2 against Panasonic and SD-3C LLC 3 (in the SD Card Technology Market) 4 172. Plaintiff hereby incorporates by reference Paragraphs 1 through 171 of 5 this Complaint, as though fully set forth herein. 6 173. Panasonic, SD-3C and the other members of the SD Group entered into a 7 continuing contract, combination, agreement, and/or conspiracy to unreasonably restrain trade 8 and commerce in the SD Card Technology market. 9 174. Panasonic conspired with SanDisk and Toshiba to manipulate the SD
10 Card Specification by arbitrarily requiring the use of patent rights owned by SD Group members 11 to implement non-central features of the card. The SD Group members, through SD 3-C, also 12 required all other industry participants wishing to manufacture SD Cards to execute an SD 13 Memory Card License. By this means, the SD Group members have agreed on a single price 14 that all three SD Group members will charge for their technology related to SD Cards. By the 15 same means, the SD Group members have foreclosed competition from alternative technologies 16 that, absent the SD Group members’ manipulation of the SD Specification, could be used to 17 implement aspects of that Specification. In addition, Panasonic and SD-3C have agreed with 18 the other members of the SD Group to include in the SD Card License a discriminatory 19 grantback provision that has the purpose and effect of discouraging licensees from developing 20 SD Card technologies that might compete with the technologies owned by SD Group members. 21 As the SD Card standard has gained broader market acceptance, the SD Group members, 22 working through SD-3C, have sought to exploit their control of purportedly essential technology 23 to impose increasingly onerous and anticompetitive terms—since September 2006—on current 24 licensees, such as Samsung, and potential licensees. 25 175. For the reasons set forth above, including in paragraph 169, the 26 anticompetitive effects of the agreement between Panasonic, SD-3C and the other members of 27 the SD Group are not offset by any countervailing benefits. 28
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1 176. The unreasonable restraint of trade created by Defendants’ agreement, 2 and the effects thereof, continue. As a result of Defendants’ agreement and acts in furtherance 3 thereof, Samsung has suffered and will continue to suffer irreparable injury to its business and 4 property. 5 177. An actual, justiciable controversy appropriate for damages and 6 declaratory relief exists among the parties.
7 CLAIM III Agreement in Restraint of Trade in Violation of Section 1 of the Sherman Act against 8 Panasonic and SD-3C LLC 9 (in the Flash Memory Card Technology Market) 10 178. Plaintiff hereby incorporates by reference Paragraphs 1 through 177 of 11 this Complaint, as though fully set forth herein. 12 179. Panasonic and SD-3C entered into a continuing contract, combination, 13 and/or conspiracy with the other members of the SD Group to unreasonably restrain trade and 14 commerce in the market for Flash Memory Card Technology. 15 180. Panasonic, SanDisk and Toshiba were significant horizontal competitors 16 in the Flash Memory Card Technology market. Prior to their agreement to form the SD Group, 17 the three companies developed competing flash memory card technologies and reached 18 independent decisions on whether and at what price to license those technologies to other 19 industry participants. Following their independent business judgment, each company supported 20 open standard-setting initiatives as a means of encouraging industry adoption of the flash 21 memory card technologies they had developed. 22 181. Panasonic’s agreement with the other SD Group members and SD-3C has 23 caused anticompetitive effects in the Flash Memory Card Technology market. Acting in 24 furtherance of their agreement designed to achieve control over the SD Card and to make that 25 card the dominant industry standard, Panasonic, SanDisk and Toshiba have agreed not to 26 support the development of formats that could compete with the SD Card, thereby discouraging 27 the development of new flash memory card technologies. Panasonic’s participation in this 28 agreement has denied the potential sponsors of new flash memory card technologies the
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1 cooperation of an important manufacturer (Panasonic Corp.) and distributor (PNA) of host 2 devices, creating a significant barrier to the propagation of new formats. By agreeing to include 3 a discriminatory grantback provision in the SD Card License, and by continuing efforts to 4 require current and potential manufacturers of SD cards to execute this license, the SD Group 5 members have reduced the incentive of other industry participants to develop alternative flash 6 memory card technologies. Individual members of the SD Group have sought to impair the 7 ability of other formats, in particular the MMC card, to compete effectively. On information 8 and belief, the relevant conduct of these SD Group members was known and approved by the 9 Group’s other members. These agreements to restrain competition are ongoing and continuing.
10 182. For the reasons set forth above, including in paragraph 169, the 11 anticompetitive effects of the agreement between Panasonic, SD-3C and the other members of 12 the SD Group are not offset by any countervailing benefits. 13 183. The unreasonable restraint of trade created by Defendants’ agreement, 14 and the effects thereof, continue. As a result of Defendants’ agreement and acts in furtherance 15 thereof, Samsung has suffered and will continue to suffer irreparable injury to its business and 16 property. 17 184. An actual, justiciable controversy appropriate for damages and 18 declaratory relief exists among the parties.
19 CLAIM IV Monopolization in Violation of Section 2 of the Sherman Act 20 against SD-3C LLC 21 (SD Card Technology Market) 22 185. Plaintiff hereby incorporates by reference Paragraphs 1 through 184 of 23 this Complaint, as though fully set forth herein. 24 186. SD-3C holds monopoly power in the market for SD Card Technology. 25 SD-3C licenses substantially all of the purportedly essential patent claims covering SD Cards 26 under the Specification developed by the SD Group members. On information and belief, other 27 members of the SDA have not identified any patent rights owned by them that are essential for 28 manufacture of SD Cards under the Specification.
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1 187. SD-3C has engaged in exclusionary conduct in order to acquire and 2 maintain this monopoly power. It has collaborated in the manipulation of the Specification by 3 the members of the SD Group, by representing patent rights owned by SD Group members as 4 essential for implementation of the Specification and collecting royalties on that basis. It has 5 failed to disclose fully all the patents owned by SD Group members that the SD Group members 6 and SD-3C claim to be essential for implementation of the Specification. It has coerced 7 industry participants into taking an SD Card License that imposes a supra-competitive royalty 8 fee on companies other than the members of the SD Group and incorporates a discriminatory 9 grantback provision, requiring licensees to give SD Group members royalty-free access to any
10 essential patent claims the licensees may themselves develop covering SD Cards. This 11 grantback provision has the purpose and effect of depriving competitors of the incentive to 12 develop competing SD Card technologies. Using its monopoly power, SD-3C has sought to 13 impose increasingly onerous and anticompetitive terms on potential licensees, including—since 14 September 2006—terms that would have the effect of stabilizing SD Card prices. 15 188. Defendant’s unlawful monopoly in the SD Card Technology market and 16 the effects thereof continue. 17 189. An actual, justiciable controversy appropriate for damages and 18 declaratory relief exists among the parties.
19 CLAIM V Conspiracy to Monopolize in Violation of Section 2 of the Sherman Act 20 against Panasonic and SD-3C LLC 21 (SD Card Technology Market) 22 190. Plaintiff hereby incorporates by reference Paragraphs 1 through 189 of 23 this Complaint, as though fully set forth herein. 24 191. Panasonic and SD-3C conspired with the other members of the SD Group 25 unlawfully to acquire monopoly power in the market for SD Card Technology, in violation of 26 Section 2 of the Sherman Act, 15 U.S.C. § 2. Defendants entered into this conspiracy with the 27 specific intent of obtaining by unlawful means a monopoly in this market. 28
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1 192. Defendants have each committed one or more overt acts in furtherance of 2 the conspiracy to monopolize the SD Card Technology market. Panasonic has joined with 3 SanDisk and Toshiba to exclude and disadvantage rivals by, among other things, (1) agreeing to 4 jointly replace an existing open standard format with the SD Card and then to jointly license 5 their rights to that card at a single price; (2) manipulating the SD Specification to arbitrarily 6 require the use of their own patents and foreclose other potential competing formats; (3) 7 requiring companies that want to manufacture or sell SD Cards to enter into the SD Card 8 License with SD-3C; (4) requiring users of SD Card Technology, other than themselves, to pay 9 an anticompetitive entry fee under the SD Card License; and (5) imposing on licensees a
10 discriminatory grantback provision that discourages the development of competing SD Card 11 technologies. SD-3C has enforced the SD Group members’ anticompetitive scheme, including 12 its unequal licensing and grantback provisions, in furtherance of the objectives of the 13 conspiracy. 14 193. Panasonic and the SD Group members’ unlawful conspiracy to 15 monopolize and the effects thereof continue. 16 194. An actual, justiciable controversy appropriate for damages and 17 declaratory relief exists among the parties.
18 CLAIM VI Unfair Competition Under California Business and Professions Code Section 17200 et seq. 19 against Panasonic and SD-3C 20 195. Plaintiff hereby incorporates by reference Paragraphs 1 through 194 of 21 this Complaint, as though fully set forth herein. 22 196. The acts and conduct of Panasonic and SD-3C as alleged above in this 23 Complaint constitute methods of unlawful, unfair, and/or fraudulent business practice as defined 24 by California Business & Professions Code Section 17200. 25 197. Panasonic and SD-3C’s acts and practices, as described above, amount to 26 an unlawful business act or practice under Section 17200 in at least the following respects. 27 Panasonic and SD-3C (1) entered into a continuing contract, combination, and/or conspiracy to 28 unreasonably restrain trade and commerce; (2) manipulated the standard-setting process to raise
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1 costs to rivals and significantly threaten or harm competition; (3) required non-negotiable and 2 discriminatory grantback requirements on SD Card licensees; and (4) thereby foreclosed the 3 development of other flash memory card technologies, all in violation of the Sherman and 4 Cartwright Acts. 5 198. Under the Cartwright Act, Panasonic and SD-3C owed a duty to Samsung 6 not to conspire to restrain trade. Both Panasonic and SD-3C are liable for breaching that duty. 7 199. Under California Business & Professions Code Section 17200, 8 conspiratorial liability for SD-3C’s anticompetitive conduct in California attaches to Panasonic, 9 because Panasonic breached its duty to Samsung under California’s Cartwright Act by
10 conspiring with SD-3C to restrain trade.
11 CLAIM VIII Violation of the Cartwright Act, 12 California Business and Professions Code Section 16700 et seq. against Panasonic and SD-3C 13 14 200. Plaintiff hereby incorporates by reference Paragraphs 1 through 199 of 15 this Complaint, as though fully set forth herein. 16 201. Panasonic and SD-3C have, through the acts and conduct described 17 herein, entered into an unlawful trust as defined by California Business & Professions Code 18 Sections 16720 and 16726. 19 202. Panasonic, SD-3C, and the other SD Group members entered into a 20 combination with the purpose of restraining competition by, among other things: (1) limiting or 21 reducing the production of and/or increasing the price of flash memory card technology, SD 22 Card technology and SD Cards; (2) preventing competition in the sale of flash memory card 23 technology and SD Cards; and (3) fixing the price of SD Card technology. 24 203. As a result of Panasonic and SD-3C’s actions, trade and commerce have 25 been restrained in the following markets: (1) the Flash Memory Card Technology Market; (2) 26 the SD Card Technology Market; and (3) the SD Card Market. 27 204. Plaintiff has been harmed by Panasonic and SD-3C’s unlawful conduct, 28 by being required to pay higher royalties for the production of SD Cards than it would have in a
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1 free and competitive market, and through foreclosure of its ability to sell SD Cards and 2 components to its customers. 3 205. Such effects are continuing and will continue until injunctive relief is 4 granted.
5 PRAYER FOR RELIEF 6 WHEREFORE, Plaintiff seeks the following relief: 7 1. Pursuant to 28 U.S.C. § 2201, a declaration that Panasonic and SD-3C 8 have unreasonably restrained trade in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1; 9 2. Pursuant to 28 U.S.C. § 2201, a declaration that the SD Card License is
10 an unreasonable restraint of trade that violates Section 1 of the Sherman Act, 15 U.S.C. § 1; 11 3. Pursuant to 28 U.S.C. § 2201, a declaration that SD-3C has monopolized 12 the market for SD Card Technology in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2; 13 4. Pursuant to 28 U.S.C. § 2201, a declaration that Panasonic and SD-3C 14 have engaged in a conspiracy to monopolize the SD Card Technology market in violation of 15 Section 2 of the Sherman Act, 15 U.S.C. § 2; 16 5. Restitution of all sums paid as royalties by Samsung under the SD Card 17 License since the execution thereof; 18 6. Pursuant to 28 U.S.C. § 2202, such further relief as may be necessary or 19 proper based upon the Court’s declaratory judgment; 20 7. Pursuant to 15 U.S.C. § 15, trebled damages resulting from Panasonic’s 21 and SD-3C’s violations of the Sherman Act; 22 8. Injunctive relief preventing and restraining Defendants from collecting 23 royalties on SD Cards manufactured by third parties; 24 9. Pursuant to California Business & Professions Code Sections 16750 and 25 17203, restitution of royalties paid by Samsung under the SD Card License since the date of 26 execution and an injunction to prevent Panasonic and SD-3C’s continued acts of unfair 27 competition; 28 10. Pre-judgment and post-judgment interest at the maximum legal rate;
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1 11. Plaintiff’s costs, expenses, and reasonable attorneys’ fees in bringing this 2 action; and 3 12. Such other relief as the Court may deem just and proper. 4 Dated: September 16, 2011 COVINGTON & BURLING LLP 5 6 By: /s/ Simon J. Frankel 7 Simon J. Frankel Attorneys for Plaintiff 8 SAMSUNG ELECTRONICS CO., LTD. 9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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1 DEMAND FOR JURY TRIAL 2 Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Plaintiff demands 3 a trial by jury. 4 Dated: September 16, 2011 COVINGTON & BURLING LLP 5 6 By: /s/ Simon J. Frankel 7 Simon J. Frankel 8 Attorneys for Plaintiff SAMSUNG ELECTRONICS CO., LTD. 9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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