FTC arguments against Qualcomm fail to impress 9th Circuit Court
Last Thursday, the 9th Circuit Court heard arguments from the FTC, Qualcomm, and the Department of Justice, in what was the latest chapter of the controversial FTC v. Qualcomm, Inc “antitrust” case – a case which you may recall from our coverage and analysis here last year.
Arguments, which were intended to last roughly an hour, drew a flurry of questions and observations from the three-judge panel. The attorneys representing Qualcomm and the FTC were given 25 minutes each to make their case and answer questions, while the DOJ slid into Qualcomm’s time with 5 very brief minutes to make its case.
A quick synopsis of what everyone seemed to be there to do:
The FTC: During the hearing, the FTC sought to reiterate its initial assertion that District Court Judge Koh’s controversial ruling against Qualcomm last year was valid, even though the agency has already slithered away from the most legally questionable aspects of that ruling (and of its own dubious case) since then. Its objective was presumably to defend whatever remaining portions of Judge Koh’s decision still make sense to hold on to.
Qualcomm: Qualcomm, for its part, reminded the Court that the FTC had utterly failed to show that the chipmaker had engaged in anti-competitive behavior in Judge Koh’s Court (or at all for that matter), aptly outlined the most obvious fallacies in the surviving portions of FTC’s theory of the case, and presented a compelling argument for why Judge Koh’s overly broad ruling would, ironically, cause more harm to the cellular industry than it seeks to undo. Qualcomm’s objective was presumably, within the scope of its appeal, to pave the way towards convincing the Court to either reverse or negate judge Koh’s ruling, and ultimately protect its successful (and legal) technology licensing business. (Click here for a thorough recap of Judge Koh’s ruling and of the bizarre circumstances of the case.)
The DOJ: The Department of Justice, for its part, briefly argued that Koh’s ruling, which failed to adequately consider its impact in the real world, would cause harm to National security, and joined Qualcomm in its efforts to have Judge Koh’s ruling reversed, or at the very least muted, to address national security concerns. The DOJ, you may recall, became involved with the case last May, when it became clear that an overly broad or generally reckless ruling against Qualcomm would be likely to jeopardize National Security.
We have previously outlined the most obvious flaws in the FTC’s case, so I invite you to browse them here, here, and here. A few key areas of focus appeared to lead the hearing’s discussions however, so let’s go through them one at a time.
As I see them:
Item #1: The Question of Excessive Royalties:
The FTC opened its salvo against Qualcomm with an assertion that Qualcomm, as a monopolist, charges excessive royalties, and that this combination somehow represents anti-competitive behavior. When asked by the panel of judges if case law supports that theory, however, the FTC seemed hard pressed to do so. In fact, the panel of judges reminded the FTC that patent holders have the right to charge what they want to their customers. When asked by the panel how any part of of Qualcomm’s technology licensing model was somehow not merely standard business practice, the FTC launched into a confusing and self-contradictory argument which, at times, argued that excessive royalties were not the issue, and at others, that excessive royalties were at the heart of the case. (I still cannot quite put my finger on what the FTC’s legal argument here wanted to be, and I doubt that the panel of judges did either.
The FTC did attempt to argue that this case was different from other cases in which patent holders charge marginally higher prices for their patents (which is not illegal or anti-competitive). Qualcomm, the FTC argued, allegedly abused its market power to force customers into an anti-competitive “no-license, no chip” scheme… but the panel of judges was quick to point out that the FTC was mistaking “no license, no chip” (legal and perfectly normal) with “no chip, no license” (which would be a problematic behavior indeed). This, in my view, has always been one of the most obvious problems with the FTC’s case.
The panel reminded the FTC that it is not unusual, let alone illegal or anti-competitive, for an IP holder to require its customers to purchase licenses in order to be able to use its IP. A “no license, no chip” scenario is essentially standard practice and not anywhere near the orbit of illegality. A “no chip, no license” scheme, however, would be a different situation altogether, as a company engaged in that kind of scheme would use its market power to force other companies to buy its chips in order to license its IP. The long and short of it is that the FTC still seems to be confusing the two, and the panel of judges doesn’t appear to be making the same mistake.
The FTC also seemed to step over its own logic by asserting that Qualcomm’s excessive royalties (read: excessive pricing) had somehow harmed competition in the cellphone industry – a theory not only never proven in Judge Koh’s courtroom, but actually disproved by industry data showing that the opposite happened: Competition in the cell phone space actually increased, and Qualcomm lost (rather than gained) market share as a result. Not exactly monopolistic or anti-competitive behavior, is it?
To add to the confusion at the heart of the FTC’s theory, the only way that Qualcomm might have prevented rival chipmakers from entering certain markets would have been to undercut their pricing, but the FTC’s case argues that Qualcomm’s royalties worked as a surcharge – the exact opposite. On its face, the FTC’s theory of the case has always been nonsense, and in my opinion, that did not change in Thursday’s hearing.
Item #2: The issue of Exclusive Dealing
The FTC seemed to imply that while Qualcomm had somehow inflated its pricing through excessive royalties (see previous item), it had simultaneously lowered its pricing through exclusive discounting with existing customers, and cited rival chipmaker Intel as a “victim” of this “OEM-squeezing” scheme.
The argument presented to the panel by the FTC was that Qualcomm “held back” Intel 5 years through exclusive dealing with major OEMs and handset makers (read: Apple) designed to “foreclose entry” for rivals (read: Intel and MediaTek). That argument ought to have raised a few eyebrows, as 1) no evidence exists, to my knowledge, that supports this theory, and 2) since Apple chose to source its iPone modems from Intel rather than from Qualcomm after the alleged anti-competitive behavior was to have taken place, the notion that Intel was in any way “held back” by Qualcomm’s exclusive discounting with Apple is not aligned with real-world facts.
Additionally, I believe that the case could be made that Intel’s challenges with the cellular modem space stemmed more from a failure to invest properly in cellular connectivity R&D at the right time than from Qualcomm’s technology licensing model.
Lastly, MediaTek’s forward leap into the premium and 5G cellular modem space is too recent to be relevant to this case, and I doubt very much that anyone could successfully argue, let alone show, that Qualcomm’s royalty pricing years ago prevented MediaTek from developing premium cellular modems and taking them to market.
Even if the facts were on the FTC’s side, which they are not, here is where the FTC’s theory of the case falls apart yet again: As pointed out by the panel of judges, showing that a company has caused harm to a competitor is not sufficient to meet an antitrust threshold.
Let that sink in for a moment.
In order to successfully bring an antitrust case against a company, one must show that the company’s behavior caused harm to competition itself. In this instance, not only is the FTC unable to show that Qualcomm’s “exclusive dealing” caused harm to Intel (which would not qualify as an antitrust issue even if that were the case), but it also fails to show that competition was harmed at all. Again, market data shows that competition thrived during the time period scrutinized in the original case – the opposite of what the FTC alleges.
Focus: The Department of Justice’s five minutes, or why National Security in this case is about much more than just 5G leadership.
I feel compelled to bring up a couple of quick points from the DOJ’s brief arguments today, as they are important as well.
As I see them:
- System Failure: The DOJ’s most relevant argument, in my view, is that Judge Koh failed (or refused to) to take into consideration critical national security issues before finalizing her ruling. This topic will require a deeper dive, as the process by which the DOJ (and by extension the DOD and the DOE) might have been invited to submit comments seems to have failed. And since no new evidence can be entered because this is an appeal, the DOJ has essentially found itself mostly voiceless from the start. This is a problem.
- 5G and 5G-Adjacent Risk Factors The national security threat in question is not limited to the US’ ability to compete in the 5G space, as suggested by the Court on Thursday. It extends far beyond 5G into 5G-adjacent areas like IoT, IIoT, data security, defense hardware and software, artificial intelligence, and so on. The threat includes a matrix of interconnected technologies, both current and forward-looking, that innovation giants like Qualcomm are uniquely equipped to develop for the United States. To limit the threat to a discussion about 5G grossly misses the point. I don’t feel that the DOJ was given sufficient time to get that point across.
- Why is Huawei so involved with this case? Thursday’s hearing might have been a good time for the DOJ to remind the Court that one of the FTC’s principal witnesses against Qualcomm during the original case has deep connections to Huawei – the same blacklisted Chinese company that would be the primary beneficiary of a ruling against Qualcomm. We have outlined just how much influence Huawei has had on this case already, which should have raised red flags a lot earlier than it eventually did. Again, because of the very short amount of time allowed for arguments, this point did not surface at all.
- The DOJ did manage to make two critical points on the substance of the case – besides procedural failures and National Security concerns – and they are that judge Koh’s overly broad ruling disserves competition and innovation 1) by erroneously imposing a duty to deal where none exists, and 2) by misequating high prices with harm to competition. I think that the DOJ could have used its time to focus exclusively on points 1, 2, and 3 above, but I was glad to hear these points articulated by the DOJ all the same.
One last topic: “Duty to Deal” and the unresolved issue of “Access To All” vs. “License To All.”
At the heart of this case is the question of “Duty To Deal.” Basically, the question is this: should Qualcomm (and every other IP holder in tech, automotive, pharma, etc.) be required by the US government to license its standard essential patents to its rivals? Or more specifically in this case, should Qualcomm be required to license its standard essential patents to rivals against its will? Both Qualcomm and the DOJ argue that no, IP holders should not be required to do so, and I will explain why in a moment.
In this particular case, the FTC seems to have presented a solution in search of a problem, as Qualcomm does not prevent to keep rival chipmakers from accessing and using its SEPs. In fact, unless I am mistaken, Qualcomm makes its cellular SEPs available to fellow chipmakers for free. So if at any time during the trial and this subsequent appeal, you were under the impression that Qualcomm was engaged in keeping rival chipmakers from accessing its standard essential patents, you may now disabuse yourself of that notion. And here is where we run into the question of “access to all” vs. “license to all.”
“Access to all” just means that an IP holder chooses to make its patents (and in this case SEPs) available to competitors and partners for free. This falls squarely within the framework of a patent holder’s rights. In this instance, since Qualcomm’s cellular SEPs appear to be made available to the Intels and MediaTeks of the world for free, no license is required. In other words, if there is no exclusion problem to resolve, no remedy is needed.
Judge Koh’s ruling, however, seeks to require Qualcomm to license its cellular SEPs to rival chipmakers instead of just making them available for free (and presumably charge them a fee, which we will address in a moment). That is what “license to all” essentially means.
On a fundamental level, this stands in opposition of IP holders rights to manage their IP as they see fit, but on a more practical level, that requirement doesn’t solve a problem, let alone address anti-competitive behavior, as none exists in the first place.
So the question begs asking: Why did judge Koh seek to force Qualcomm into a “license to all” scheme when “access to all,” a more open and competition-friendly model, already appears to be in effect?
While most of us who have taken an interest in the case are still puzzled by that question, I suspect the answer may have something to do with two factors: 1) Huawei’s involvement in the case, and 2) OEMs hoping to find a way to pay less (or, ideally, nothing at all) for a significant portion of Qualcomm’s IP portfolio.
That second point requires a quick explanation: Partly because Qualcomm’s cellular SEPs are designed to be system-wide, not just limited to what happens inside of a single microchip, 1) OEMs, unlike rival chipmakers, are required to be Qualcomm licensees to implement them in their devices, and 2) cellular SEP royalties are traditionally calculated based on a percentage of a device’s price rather than on a percentage of a chip’s price. (Again, because the IP being licensed is designed to be system-wide, not just chip-centric.) This is accepted industry practice, and OEMs enter voluntarily into these fair, FRAND-friendly, mutually-beneficial licensing agreements all the time.
This is how Qualcomm manages to keep its royalty pricing fair and reasonable, how the company also finances much of the R&D that produces so many useful patents, including those submitted to standards bodies, and why the cellular industry has been growing in the last decade.
Should Judge Koh’s order to require Qualcomm to sell SEP licenses to chipmakers stand (“license to all”), Qualcomm could be required to charge said chipmakers for that IP based on the price of each chip rather than on the price of the device.
In other words, Qualcomm would be required by a US Court to only make pennies on the dollar for some of its most valuable IP.
Broadly, should the 9th Circuit uphold Judge Koh’s ruling against Qualcomm, it would reverse more than two centuries of patent law in the United States, prevent the most innovative US-based companies from managing their own patent portfolios as they see fit, limit the tech sector’s ability to monetize their R&D investments, and drive a stake through the heart of investments in US tech companies – without which the US economy (and Department of Defense) in the 21st century cannot compete against China.
Applied specifically to Qualcomm:
1) Qualcomm’s technology licensing revenue, which fuels its innovation engine, could be severely impeded. (And for no conceivable reason since, again, no antitrust remedy is needed.)
2) Qualcomm’s innovation pipeline, starved of a portion of its funding, could limit Qualcomm’s ability to develop the breadth of engineering solutions that make the US technology sector as successful as it is. The IoT, connected vehicles, wireless technologies, AI, AR, VR, smartphones, 5G… the ripple effects of a weakened Qualcomm would reverberate across every layer of the world’s technology ecosystem.
3) Qualcomm’s ability to submit to standards bodies could also take a hit, and Huawei would step in to fill that void. In fact, Huawei would be the principal beneficiary of an attenuated Qualcomm, which is presumably why the blacklisted Chinese 5G giant has been zealously helping the FTC make its case against the American chipmaker.
And here we come to Huawei’s involvement in the case:
- By making Qualcomm less able to compete and lead in technologies critical to infrastructure, data security, and national security, Huawei and China hope to become the world’s dominant global technological superpower.
- The FTC, incomprehensibly, has allowed itself, in my view, to become a pawn for Huawei’s chess game against Qualcomm and the West.
- More troubling still, Judge Koh, by not taking this into consideration as seriously as she probably should have when deliberating the case, has created a very real national security problem for the United States – which is why the DOJ, the DOD, and the DOE now have an interest in siding against the FTC in this case, and why the DOJ sent an attorney to spend a few minutes addressing this issue to the the three-judge panel.
These issues require their own separate discussion, but I felt that I should include them in this review of Thursday’s arguments for context into the broader case.
So now what? Whose arguments won the day? Which party will the Court side with?
Now, we wait. A decision by the Court will likely take months to surface.
In the meantime, the stay on Judge Koh’s order remains in effect, and Qualcomm is still able to operate as it was. All is well.
As to how or when the Court will issue a ruling, I can’t prognosticate just yet. Hundreds of possible outcomes, each more intricate than the other, are possible, and it could take months for a decision to emerge. What I can say is that I don’t feel that the FTC was successful in convincing the 9th Circuit three-judge panel to rule in its favor. Based on the questions being asked, some of the comments being made, and the impressive astuteness of the judges, it seemed to me that the FTC failed in three major areas:
- The FTC failed to convince the Court that Qualcomm had ever acted inappropriately or in an anti-competitive manner. “Why is the FTC getting involved?” and “how is this different from normal competitive behavior?” seemed to be the Court’s prevailing attitude towards most of the FTC’s allegations.
- The FTC also failed to explain what antitrust behavior, if any, Judge Koh’s “remedy” sought to correct. “Harm to competitors is not sufficient to meet an antitrust threshold” was the prevailing sentiment there, and that does not bode well for the FTC either.
- The FTC, in my view, additionally failed to provide adequate legal precedent – based on actual case law – that would satisfy the Court. (US v United Shoe Machine Corp would be a stretch on a good day, and isn’t easily applicable to this case. Caldera v Microsoft also found itself on shaky ground rather quickly: “If not Caldera, what?” was actually asked by one of the judges, and the FTC seemed at a loss to provide a convincing answer.) With this final failure, not only does the FTC expose the inherent flaws in its own fantasist legal theories (and in Judge Koh’s inexplicable ruling), but also asks the Court to set entirely new precedent to support its case, which I doubt it will be eager to do.
In short, I didn’t get the impression that the FTC succeeded in its bid to sway the Court on Thursday. I believe that, 1) in the continuing absence of evidence of antitrust behavior or any Sherman Act violations on the part of Qualcomm, and 2) because the FTC’s case is still so painfully weak and self-contradictory, the Court will ultimately side with Qualcomm.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.
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