The stage is set for Feb 13th, 2020, hearing of FTC vs. Qualcomm antitrust case at the United States Court of Appeals for the Ninth Circuit (Ninth Circuit). In preparation, FTC, Qualcomm, and many interested parties have filed their briefs in support and against the decision by the United States District Court for the Northern District of California (lower court).
In the briefs, FTC’s subtle change in tactic caught my eye. They seem to have changed their “hero” argument. They are now trying to make Qualcomm’s alleged breach of FRAND (Fair Reasonable and Non-Discriminatory) commitments to Standard Setting Organization (SSOs), their main argument, while treading lightly on their earlier key, albeit discredited, “surcharge on competitor” theory. Is it a sign of FTC losing confidence in its case? Also, their FRAND breach argument seems to be on shaky ground.
<<Side Note: If you would like to understand the history of this case, please refer to my earlier articles on the subject>>
I spent many hours meticulously reading through all the briefs (~1500 pages). They are complex, with lots of legal jargon, illustrations, and citations. Here is a high-level summary of the arguments and my opinions on their effectiveness.
The hypothetical “surcharge on competitors” argument
FTC and its supporters are still relying on the theory put forward by Prof. Carl Shapiro. They also have provided torturous examples and illustrations. However, this theory was rejected by the US Court of Appeals for the District of Columbia Circuit in a separate case—United States vs. AT&T. The court’s rejection, as stated, was based on the evidence of actual market performance. Interestingly, both these cases have lots of similarities. Just like AT&T’s case, FTC’s arguments are also based only on theory, without any empirical study of actual market conditions. Moreover, the developments in the market completely debunk Dr. Shapiro’s theory. Unfortunately, those developments could not be included in the trial as evidence, because they happened outside the discovery period of the trial.
According to the theory, Qualcomm allegedly abused its monopoly power to create an imaginary surcharge on the competitors, making their chipsets more expensive. In reality, around 2016, Apple, who was exclusively using Qualcomm’s chipsets, also started using Intel’s chipsets. This fact virtually nullifies the monopoly power allegation. To a large extent, it also disproves the claim that the alleged imaginary surcharge was disincentivizing competitors. Alas! None of this mattered in the trial because of a stringent discovery timeline.
FTC claims that this imaginary surcharge reduced competitors’ profit and hampered their investment in R&D. That seems like a ridiculous argument when you consider that those competitors are behemoths like Intel, and the OEMs are giants like Apple. Looking at all these contradictions, it is clear why FTC is not pushing this argument as hard as it did in the lower court.
Is “harm to competitors” the same as “harm to the competitive process?”
For claiming antitrust law violations, prosecutors must prove harm to the competitive process. FTC is arguing that Intel being late with CDMA and LTE chipsets, and players such as Broadcom and ST Ericsson exiting the market prove harm to competition. Many experts, including the US Department of Justice (DoJ), argue that such instances as well as companies making less profit show harm to competitors, but not necessarily to the competitive process.
During the trial in the lower court, there was ample evidence presented to explain the reasons behind the problems competitors faced — none instigated by Qualcomm. For example, documents presented by Intel’s strategy consultant Bain and Company attributed Intel’s delay to faulty execution; an executive from ST Ericsson opined that they couldn’t execute fast enough to keep up with Qualcomm and rapidly lost the market share, which resulted in their exit.
The reasons for competitors not faring well in CDMA and being late in LTE were pretty clear to the keen industry observers like me. Regarding CDMA, not many chipset vendors were interested in that market as they thought the opportunity was small and fast diminishing. There were only a couple of large CDMA operators (Circa 2006), and with LTE on the horizon, they thought CDMA would quickly disappear. Hence they never invested in it. Much to their chagrin, CDMA thrived for many years, allowing Qualcomm to enjoy a monopoly. Ultimately, Intel acquired a small vendor—Via Telecom—in 2015 to get CDMA expertise. On the LTE front, nobody foresaw the exponential growth of LTE smartphones. Qualcomm, because of its early investment and cellular standards leadership in LTE, surged ahead, leaving others in the perpetual catch-up mode. For example, even when the LTE market has stabilized, Qualcomm chipsets had superior performance.
Alleged practice of “license for chips” policy
FTC claims that it has factually proven Qualcomm’s alleged “license for chips” policy, where Qualcomm would only sell its highly coveted chips if the OEMs sign the license agreement. Qualcomm disagrees. In my view, FTC’s evidence is pretty scant and unconvincing. It includes a few emails with some text that alludes to such intention (license for chips). In many of these emails, the main topics of discussion seem to be something unrelated. There were a couple of testimonies from Qualcomm’s OEMs, mentioning how they “felt” the overhang of this policy during negotiations. But they didn’t have any tangible evidence. There was only one concrete instance—a mail with a veiled threat. But the evidence presented in response showed that Qualcomm top management swiftly dealt with it, and condemned any such practice by its lower cadres.
Another of FTC’s claims is regarding an agreement between Qualcomm and Apple, through which Qualcomm paid Apple for a commitment to use its chipsets in a majority of the devices. FTC alleges that this amounts to Qualcomm indirectly subsidizing licensing fees, and that violates antitrust law. This also is part of the imaginary surcharge to competitor argument. Qualcomm claims that, as stated in the contract, the payment was to compensate Apple for the expenses it would incur in modifying its designs to incorporate Qualcomm chipsets, and was a traditional volume discount. When the contract was signed, Apple was already the market leader with multiple successful iPhone models and was using a different vendor’s chipset. That would indicate Qualcomm didn’t posses any monopoly power over Apple. The contract and the payment were revocable, which Apple ultimately did. So, it is questionable whether it can be treated as a subsidy.
Is FRAND commitment “duty to deal?”
Now to the new “Hero” argument. FTC claims that Qualcomm’s FRAND commitment to the US-based SSOs binds it to license its Standard Essential Patents (SEPs) to rival chip vendors (aka duty to deal). The SSOs in question are ATIS (Alliance for Telecommunications Industry Solutions), and TIA (Telecom Industry Association). The argument is, Qualcomm’s decision to not license to rival chipmakers is a violation of antitrust law. Many of the third parties on the FTC’s side overwhelmingly support this argument as well, for obvious reasons. Well, this at the surface seems like a simple and compelling argument. But it has multiple facets.
<<Side Note: If you would like to understand SEP and the patents process, refer to this article series>>
First, do these commitments mean holders have to license the patents, or is it enough to provide access to them? Second, whether FRAND violation, if true, amounts to an antitrust violation, which is usually a much higher bar? Third, which is more interesting—Are patents practiced by the chipsets or by the end devices (e.g., smartphones)? If latter, then licensing and violation only occurs at the device level, so no real need to license to chipset vendors. Fourth, the policies and practices of the biggest SSO —ETSI (European Telecommunications Standards Institute). ETSI’s policies are considered as the gold standard for SSOs. Interestingly, in its decades of history, ETSI has never compelled its members to license to rival chipset vendors or at the chip/component level. Many of the current SEP holders, such as Nokia, Ericsson, and others, strongly supported this approach during the trial. Well, I have merely scratched the surface of this argument. Since this is now FTC’s main argument, indeed, it needs close scrutiny, which I will do in my next article.
If you have been following this case and feel that you have heard these arguments before, you are right! Both sides made these arguments in the lower court and still sticking to them, except for FTC’s subtle change. It will be interesting to see how the Ninth Circuit considers these arguments. I will be in court to witness and report it. Make sure to follow my updates on twitter @MyTechMusings.
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