Everyso often, a case comes along that screams government misuse of power. The FederalTrade Commission’s antitrust lawsuit against Qualcomm Inc. is just such a case,and thus warrants scrutiny.
The commission’saction was questionablefrom the start, based entirely on conjecture and allegations raisedby antagonistic competitors—China’s Huawei included. Even the Department ofJustice expressed misgivings aboutthe prosecution.
TheMay 21 ruling against thecompany by U.S. District Judge Lucy Koh compounded the injustice. In theabsence of evidence that Qualcomm’s business practices harmed competition, thejudge ignored real-world data to the contrary and ruled instead that Qualcomm’sactions might cause harm. Moreover, she cited Qualcomm’s success as defacto proof of monopolistic misbehavior.
Agood many antitrust experts have expressed alarm. Commissioner Christine Wilson,for example, published a commentary in the WallStreet Journal calling the opinion “bad law and bad policy.” Legal scholarRichard Epstein, in a Hoover Institution journal, characterized Koh’s take as“spectacularly misguided.”
Alas,judicial overreach and regulatory heavy-handedness are prevalent these days, reflectingthe imperiousness of the administrativestateand, in this instance, the revival of Progressive-era antitrust dogma.
Despitea fiercely competitive wireless market and robust indicators of consumerwelfare, two Obama-appointed commissioners and a federal district judge effectivelydecided that they are better equipped to manage wireless network licensing andchipset prices than those who actually produce and purchase the technology.
Somebackground: Qualcomm develops andmanufactures mobile technologies, including modems for cellular phones and theSnapdragon processors to run them. The company supplied chipsets and otherwireless network elements for hundreds of millions of Apple iPhones from 2011to 2017, among others. The companies’ association generated sizable profits forboth, as well as protracted litigation.
The Federal TradeCommission filed its antitrust complaint against Qualcomm on Jan. 17, 2017—amere three days before the end of the Obama administration. Only three of fivecommissioners were active at the time, and the vote to proceed with the casewas split 2 to 1. The single “no” vote was cast by then-Commissioner Maureen K.Ohlhausen, who denounced the lawsuit as “an enforcement action based on a flawed legaltheory that lacks economic and evidentiary support.”
Some observers contendthat the commission was “encouraged” to act by executives of Apple Inc., whichlikewise filed a lawsuit against Qualcomm on virtually the same grounds threedays after the commission’s filing. Indeed, the testimony of Apple executiveswas a central component of the commission’s case.
It is widely knownthat the commission and company signed a “common interest agreement,” whichallowed them to secretly share information and coordinate their legalstrategies. But it is largely unknown that internal Apple documents describe how, in an effort to “[r]educe Apple’s net royalty toQualcomm,” Apple planned long before filing suit to “[h]urt Qualcommfinancially” and “[p]ut Qualcomm’s licensing model at risk,” by filing lawsuitswith claims similar to those of the FederalTrade Commission. Whether the commission was an unwitting player in Apple’splans is unknown.
Ohlhausen’s objectionsto the commission’s filing were entirely validated during the 11-day benchtrial, which concluded on Jan. 29, 2019. The commission’s lawyers and witnessesproffered plenty of unsubstantiated theories about Qualcomm’s (purported) abuse of monopoly power and subsequent“strangling” of competition and innovation—but no empirical research to provethat Qualcomm’s business practices produced artificially high prices orrestricted supply.
In fact, Qualcomm’slicensing framework has been an industry standard for decades, and the commission’stheories are contradicted by real-world data.
The commission targetedwhat they called Qualcomm’s “no license-no chip policy,” claiming that thecompany threatened to withhold chips from handset manufacturers to extract undulyhigh payments for the bundle of patents necessary to operate the phones and toaccess the cellular network. Qualcomm’s (purported) chip monopoly was said tohave increased its negotiating leverage, thereby forcing phone manufacturers toaccede to the inflated royalties.
The rates were alsoimposed on handset manufacturers who sourced chips from other companies becauseQualcomm’s bundle of patents is essential to the functioning of the wireless network.According to the commission attorneys, the royalty rates demanded by Qualcommconstituted a “tax” on competing chip manufacturers by eroding their priceadvantage, if any.
The commission alsoclaimed that Qualcomm’s royalty framework forced competitors to cutcosts—including research and development investment—which supposedly reducedindustry innovation and increased the retail cost of wireless phones.
In reality, chipdemand expanded in the market defined (artificially) by the commission, and theaverage price of smartphones declined by more than 30% between 2010 and 2017.Qualcomm’s market share also declined (in the defined market), while companiessuch as MediaTek, Samsung, Huawei and others all gained share.
Perhaps most telling,Qualcomm did not increase royalty rates as its market share expanded, nor did it halt chip shipmentsfor negotiating leverage—both of which contravene the commission’s theory.
The burden of proof inthis type of antitrust case is supposed to be evidence of actual harm, according to Senior Circuit Judge Douglas Ginsburg of the Court ofAppeals for the District of Columbia, and Professor of Law Joshua D. Wright ofGeorge Mason University School of Law (himselfa former commissioner).
“[W]hile the risk ofanticompetitive foreclosure is real,” they wrote, “courts have sensiblyresponded by requiring plaintiffs to substantiate their claims with more thanjust theory or scant evidence that rivals have been harmed.”
The commission built its case around the theoretical assertions of Carl Shapiro, who also was the commission’s expert in its challenge to the merger of AT&T and Time Warner. In that case, however, U.S. District Judge Richard J. Leon shredded Shapiro’s pronouncements as “assumptions that are implausible and inconsistent with record evidence,” and “not sufficiently grounded in the evidence—a fact that undermine[s] my confidence in the reliability and factual credibility of his projections.”
The Federal TradeCommission lawsuit and subsequent ruling are also problematic for the commissionand Koh in light of the recent settlement of all litigation between Apple and Qualcomm.
Opening arguments inApple U.S. lawsuit had just commenced on April 16 when the settlement wasannounced. In addition to the dismissal of litigation worldwide, the deal includesa six-year patent licensing agreement, a multiyear chip supplier agreement, andan end to all patent disputes between the two companies. Apple will make a $4.5billion settlement payment to Qualcomm, as well.
Simply put, what isthe point of continuing litigation if the principle parties have alreadysettled the disputes?
Alas, the judge alsoignored a formal requestfrom the Department of Justice for a hearing “on issues related to a remedy,”further noting that “in fashioning a remedy, the court should take carefulconsideration of all relevant issues and effects of such a remedy. Thatincludes the principle that, although a proper remedy must restore anycompetition lost due to actions found to have violated the antitrust laws, aremedy should work as little injury as possible to other public policies.
By most accounts, the JusticeDepartment is referring to the effect on deployment of the 5G network. The term“5G” refers to the fifth generation of cellular wireless technology that willmove data exponentially faster and in greater volume. It will also dramaticallyreduce “latency” (the time it takes for a data message to reach its target andinitiate a response).
Qualcomm is a globalleader in 5G technologies, and the only major American company producing thenecessary network elements. It is also the principle competitor to Huawei, alsoa global provider of technology networks—with annual sales exceeding $86 billion.A reportreleased last month by the NATO Cooperative Cyber Defence Centre of Excellenceconcluded that Huawei technology is conjoined with Beijing’s intelligenceoperations.
There is, understandably, a great deal of concern that severe sanctions would handicap Qualcomm. As noted by the Justice Department:
Indeed, there is a plausible prospect that an overly broad remedy in this case could reduce competition and innovation in markets for 5G technology and downstream applications that rely on that technology. Such an outcome could exceed the appropriate scope of an equitable antitrust remedy. Moreover, it has the distinct potential to harm rather than help competition.
Alas, the JusticeDepartment’s request was summarily dismissed by both the commission and thejudge, who has ordered Qualcomm to renegotiate its contracts with customers andcompetitors worldwide—and for products and markets in which Qualcomm is not adominant player or which did not exist in the timeframe addressed in the commission’scomplaint.
Qualcomm has filed fora stayof Koh’s order and will seek an expedited appeal, company officials have said,noting that the order “threatens to upend the entire wireless communicationsindustry … and undermine incentives to contribute the foundational technologyunderlying cellular standards and systems.”
A stay of Koh’s orderis the least of what is needed to erase the judicial overreach and regulatoryheavy-handedness represented by this case. But there is potential for years ofadditional litigation unless the Federal Trade Commission refrains fromappealing an appeals court ruling in Qualcomm’s favor.
It is difficult toimagine that even the 9th Circuit Court of Appeals would allow Koh’s ruling tostand. But these are the days of the administrative state and the revival ofProgressive-era antitrust dogma.