Case3:10-cv-03098-JSW Document105 Filed09/16/11 Page1 of 60 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 SECOND AMENDED COMPLAINT Case No. 10-3098 JSW Case3:10-cv-03098-JSW Document105 Filed09/16/11 Page2 of 60 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 - 1 - SECOND AMENDED COMPLAINT Case No. 10-3098 JSW Case3:10-cv-03098-JSW Document105 Filed09/16/11 Page3 of 60 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 - 2 - SECOND AMENDED COMPLAINT Case No. 10-3098 JSW Case3:10-cv-03098-JSW Document105 Filed09/16/11 Page4 of 60 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 - 3 - SECOND AMENDED COMPLAINT Case No. 10-3098 JSW Case3:10-cv-03098-JSW Document105 Filed09/16/11 Page5 of 60 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.