Every
so often, a case comes along that screams government misuse of power. The Federal
Trade Commission’s antitrust lawsuit against Qualcomm Inc. is just such a case,
and thus warrants scrutiny.
The commission’s
action was questionable
from the start, based entirely on conjecture and allegations raised
by antagonistic competitors—China’s Huawei included. Even the Department of
Justice expressed misgivings about
the prosecution.
The
May 21 ruling against the
company by U.S. District Judge Lucy Koh compounded the injustice. In the
absence of evidence that Qualcomm’s business practices harmed competition, the
judge ignored real-world data to the contrary and ruled instead that Qualcomm’s
actions might cause harm. Moreover, she cited Qualcomm’s success as de
facto proof of monopolistic misbehavior.
A
good many antitrust experts have expressed alarm. Commissioner Christine Wilson,
for example, published a commentary in the Wall
Street Journal calling the opinion “bad law and bad policy.” Legal scholar
Richard Epstein, in a Hoover Institution journal, characterized Koh’s take as
“spectacularly misguided.”
Alas,
judicial overreach and regulatory heavy-handedness are prevalent these days, reflecting
the imperiousness of the administrative
state
and, in this instance, the revival of Progressive-era antitrust dogma.
Despite
a fiercely competitive wireless market and robust indicators of consumer
welfare, two Obama-appointed commissioners and a federal district judge effectively
decided that they are better equipped to manage wireless network licensing and
chipset prices than those who actually produce and purchase the technology.
Some
background: Qualcomm develops and
manufactures mobile technologies, including modems for cellular phones and the
Snapdragon processors to run them. The company supplied chipsets and other
wireless network elements for hundreds of millions of Apple iPhones from 2011
to 2017, among others. The companies’ association generated sizable profits for
both, as well as protracted litigation.
The Federal Trade
Commission filed its antitrust complaint against Qualcomm on Jan. 17, 2017—a
mere three days before the end of the Obama administration. Only three of five
commissioners were active at the time, and the vote to proceed with the case
was 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 legal
theory that lacks economic and evidentiary support.”
Some observers contend
that the commission was “encouraged” to act by executives of Apple Inc., which
likewise filed a lawsuit against Qualcomm on virtually the same grounds three
days after the commission’s filing. Indeed, the testimony of Apple executives
was a central component of the commission’s case.
It is widely known
that the commission and company signed a “common interest agreement,” which
allowed them to secretly share information and coordinate their legal
strategies. But it is largely unknown that internal Apple documents describe how, in an effort to “[r]educe Apple’s net royalty to
Qualcomm,” Apple planned long before filing suit to “[h]urt Qualcomm
financially” and “[p]ut Qualcomm’s licensing model at risk,” by filing lawsuits
with claims similar to those of the Federal
Trade Commission. Whether the commission was an unwitting player in Apple’s
plans is unknown.
Ohlhausen’s objections
to the commission’s filing were entirely validated during the 11-day bench
trial, which concluded on Jan. 29, 2019. The commission’s lawyers and witnesses
proffered plenty of unsubstantiated theories about Qualcomm’s (purported) abuse of monopoly power and subsequent
“strangling” of competition and innovation—but no empirical research to prove
that Qualcomm’s business practices produced artificially high prices or
restricted supply.
In fact, Qualcomm’s
licensing framework has been an industry standard for decades, and the commission’s
theories are contradicted by real-world data.
The commission targeted
what they called Qualcomm’s “no license-no chip policy,” claiming that the
company threatened to withhold chips from handset manufacturers to extract unduly
high payments for the bundle of patents necessary to operate the phones and to
access the cellular network. Qualcomm’s (purported) chip monopoly was said to
have increased its negotiating leverage, thereby forcing phone manufacturers to
accede to the inflated royalties.
The rates were also
imposed on handset manufacturers who sourced chips from other companies because
Qualcomm’s bundle of patents is essential to the functioning of the wireless network.
According to the commission attorneys, the royalty rates demanded by Qualcomm
constituted a “tax” on competing chip manufacturers by eroding their price
advantage, if any.
The commission also
claimed that Qualcomm’s royalty framework forced competitors to cut
costs—including research and development investment—which supposedly reduced
industry innovation and increased the retail cost of wireless phones.
In reality, chip
demand expanded in the market defined (artificially) by the commission, and the
average price of smartphones declined by more than 30% between 2010 and 2017.
Qualcomm’s market share also declined (in the defined market), while companies
such 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 shipments
for negotiating leverage—both of which contravene the commission’s theory.
The burden of proof in
this type of antitrust case is supposed to be evidence of actual harm, according to Senior Circuit Judge Douglas Ginsburg of the Court of
Appeals for the District of Columbia, and Professor of Law Joshua D. Wright of
George Mason University School of Law (himself
a former commissioner).
“[W]hile the risk of
anticompetitive foreclosure is real,” they wrote, “courts have sensibly
responded by requiring plaintiffs to substantiate their claims with more than
just 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 ATT 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 Trade
Commission lawsuit and subsequent ruling are also problematic for the commission
and Koh in light of the recent settlement of all litigation between Apple and Qualcomm.
Opening arguments in
Apple U.S. lawsuit had just commenced on April 16 when the settlement was
announced. In addition to the dismissal of litigation worldwide, the deal includes
a six-year patent licensing agreement, a multiyear chip supplier agreement, and
an end to all patent disputes between the two companies. Apple will make a $4.5
billion settlement payment to Qualcomm, as well.
Simply put, what is
the point of continuing litigation if the principle parties have already
settled the disputes?
Alas, the judge also
ignored a formal request
from the Department of Justice for a hearing “on issues related to a remedy,”
further noting that “in fashioning a remedy, the court should take careful
consideration of all relevant issues and effects of such a remedy. That
includes the principle that, although a proper remedy must restore any
competition lost due to actions found to have violated the antitrust laws, a
remedy should work as little injury as possible to other public policies.
By most accounts, the Justice
Department is referring to the effect on deployment of the 5G network. The term
“5G” refers to the fifth generation of cellular wireless technology that will
move data exponentially faster and in greater volume. It will also dramatically
reduce “latency” (the time it takes for a data message to reach its target and
initiate a response).
Qualcomm is a global
leader in 5G technologies, and the only major American company producing the
necessary network elements. It is also the principle competitor to Huawei, also
a global provider of technology networks—with annual sales exceeding $86 billion.
A report
released last month by the NATO Cooperative Cyber Defence Centre of Excellence
concluded that Huawei technology is conjoined with Beijing’s intelligence
operations.
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 Justice
Department’s request was summarily dismissed by both the commission and the
judge, who has ordered Qualcomm to renegotiate its contracts with customers and
competitors worldwide—and for products and markets in which Qualcomm is not a
dominant player or which did not exist in the timeframe addressed in the commission’s
complaint.
Qualcomm has filed for
a stay
of Koh’s order and will seek an expedited appeal, company officials have said,
noting that the order “threatens to upend the entire wireless communications
industry … and undermine incentives to contribute the foundational technology
underlying cellular standards and systems.”
A stay of Koh’s order
is the least of what is needed to erase the judicial overreach and regulatory
heavy-handedness represented by this case. But there is potential for years of
additional litigation unless the Federal Trade Commission refrains from
appealing an appeals court ruling in Qualcomm’s favor.
It is difficult to
imagine that even the 9th Circuit Court of Appeals would allow Koh’s ruling to
stand. But these are the days of the administrative state and the revival of
Progressive-era antitrust dogma.
Source material can be found at this site.
