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Something is afoot at the Circle Koh: FTC v. Qualcomm just went off the rails, but there is no reason to panic.
by Olivier Blanchard | May 27, 2019

I don’t usually reference Bill and Ted’s Excellent Adventure in the titles of articles I write about serious matters, but today’s topic is so bizarre and beyond judicial norms that it warrants an exception. I am referring to, as the title suggests, Judge Koh’s inexplicable decision to side with the Federal Trade Commission (FTC) against intellectual property (IP) holders (specifically Qualcomm in this instance) this past week, despite the FTC’s case 1) being fraught with thoroughly debunked economic theories that we already know don’t hold water in the real world, 2) relying on a absurdly incorrect interpretation of antitrust law, 3) failing to show that consumers suffered any harm whatsoever – economic or otherwise, 4) failing to show that Qualcomm used its “market power” to hinder competition (companies like Apple, Samsung, Intel, and Huawei aren’t exactly powerless little startups, are they?), and 5) curiously reliant on testimony and theories brought forth by Huawei (Qualcomm’s 5G rival) and Huawei-funded “expert” witnesses. (Yes, the same Huawei that was just all-but-banned from doing business in the US as it is believed to present a clear and present danger to US 5G infrastructure.) Just as Bill and Ted quickly realize that “something is afoot at the Circle K,” I cannot help but notice that something is also very much afoot with Judge Koh’s decision in this case; and not just with her decision but with her behavior as well.

If you are just now stumbling on this topic, it might help to spend a few minutes browsing through my coverage of the case itself: (1), (2), (3). These articles didn’t include the last few days of testimony. There was no need. The FTC’s case was clearly deficient.

1. Fear and Loathing in San Jose: 

Before we get to my analysis of Judge Koh’s decision, let me point out a singular procedural detail about the sorts of decisions she made before and during the trial – decisions that may come back to haunt her when the case invariably ends up before an appellate court: What jumps out at me is how she structured some of her direct-examination and cross-examination: Generally, when a witness takes the stand, or is questioned on video, One of the two parties in a dispute begins with a direct examination of that witness. The opposing party then gets a chance to cross-examine the witness. The original party then gets a chance to question that witness again, and the second party gets a rebuttal as well. This model of direct and cross examination is fair, simple, and gives both parties an equal chance to examine a witness and make their point to the Court. Inexplicably, Judge Koh structured some of the direct and cross of certain key witnesses more than a week apart, allowing the FTC to question their witness with no cross or rebuttal from Qualcomm lawyers for nearly two weeks. By the time Qualcomm’s lawyers were finally allowed to cross-examine the witness, so much time had passed that their cross came absent context. I cannot imagine any reason why a judge would deviate from a fair witness examination model unless that judge’s intent was to put his or her finger on the scales, and give one party an advantage over the other.

I bring up this procedural detail because it hints at a fundamental question regarding Judge Koh’s behaviors and motives with regard to this case – and perhaps other cases as well. A judge is supposed to be objective and impartial. That neutrality is a fundamental cornerstone of our judicial system. If and when judges go rogue, and, for instance, go out of their way to help one party gain an advantage over another in their courtroom, we have bigger problems than a dispute over technology licensing in mobile phone modems.

The above detail wouldn’t be as concerning to me had Judge Koh issued an objective ruling. It would certainly raise eyebrows, as well it should, but in the end, we could say that despite that questionable decision, justice was ultimately served. I don’t believe we can say that, however. Judge Koh’s 233-page decision reads more like a grievance manifesto against the San Diego chipmaker than any ruling I have ever read. One of the more peculiar aspects of the ruling – and I have never seen a federal judge do this – is the care that Judge Koh took to discredit every single Qualcomm witness, one by one, and impugn their character. In fact, Koh seemed more interested in personally discrediting and criticizing Qualcomm’s witnesses than she was about actually getting the facts of the case right (which should have taken precedence over her inexplicable, unwarranted, unprofessional, and unnecessary campaign of character assassination). For instance, she incorrectly stated that Qualcomm had invented the IP licensing model she took umbrage with in this case, when, if memory serves right, it was in fact Motorola that first adopted it in the eighties, followed by Nokia, then Ericsson, and only then by Qualcomm.

Speaking of strange behaviors, Judge Koh spent much of her time focusing on what she didn’t like about Qualcomm’s witnesses, at the expense of focusing on even the most basic facts of the case. For instance, she somehow failed to mention the FTC’s principal witness – the architect, if you will, of the FTC’s theory of the case – a single time in her 233-page ruling. Unless I missed the single, very well-hidden mention of Mr. Shapiro in her opus, he doesn’t appear to be mentioned once.

Question: Why would a judge go through the trouble of drafting a 233-page decision predicated upon the testimony of one expert, but then deliberately omit any mention of that expert whose arguments she sided with? Was it because Mr. Shapiro’s arguments and theories were so damaged in cross examination that she felt it preferable not to mention him at all? IBut if that is true, then why accept his flawed and questionable theory of the case over Qualcomm’s fact-based arguments in the first place?

Something is very much afoot here. None of this makes any sense.

2. Why is Huawei all over this case, and why is the FTC continuing to carry water for a blacklisted Chinese company engaged in a global effort to undermine its principal US rival in 5G?

While Mr. Shapiro finds himself peculiarly absent from Judge Koh’s decision, Huawei is mentioned over 130 times. On the one hand, this factoid makes her decision to exclude Mr. Shapiro’s name from her decision all the more bizarre, but on the other, it also highlights the extent to which Huawei drove the FTC’s case against Qualcomm. And here, we run into a point that has bothered me for months.

As you are probably aware, Huawei is credibly suspected of being an economic and technological instrument of China, and therefore an economic and technological instrument of the Chinese military. While I don’t believe that Huawei’s phones, laptops, and other consumer products pose a significant threat to the general public (if you fear being spied on, Huawei is hardly the only technology company you need to worry about), their more infrastructure-focused products are considered by many (myself included) to open countries and organizations to a slew of security vulnerabilities that could be exploited, at will, by China and China-friendly actors. I won’t speculate here on whether those vulnerabilities are deliberate or accidental, or what the ratio of both might be. That part isn’t important. What is important is that Huawei is believed to pose a security threat to the US (and the EU’s) technology infrastructure, particularly with regard to 5G. This threat has been recognized by a growing number of countries, and validated by national security agencies across the globe.

If you are a regular reader of Futurum Insights, you will also be aware that Huawei has been engaged in a campaign to undermine US technology leadership, much of which has focused on 5G in recent years. While not as insidious as the national security threat Huawei may pose, it is nonetheless VERY relevant to today’s topic: Huawei’s principal rival in 5G is Qualcomm. While Huawei is partly sponsored by Chinese government funds, Qualcomm receives no such assistance from the US government. Therefore, one exploitable feature of Qualcomm’s business model (one that Huawei is generally more insulated from) is its reliance on revenue. Still with me so far? Good. Qualcomm, as you know, relies heavily on revenue from technology licensing. And this case, which aims to harm Qualcomm’s ability to generate revenue from technology licensing, magically hinges on testimony from Huawei and Huawei-linked “expert witnesses.” How about that.

That Judge Koh would somehow miss the context of Huawei’s involvement in this case three months ago is one thing. I don’t fault her for not being up to date on the minutiae of technology geostrategy and underhanded Chinese schemes to undermine the US technology sector. But… the White House just issued a Presidential Executive Order just days ago about this matter. The DOJ had just intervened in April. The threat posed by Huawei has been front page news for some time now. How, in the last three months, could Judge Koh have possibly failed to notice that the Chinese company she mentions 130+ more times than the FTC’s main witness in her decision also happens to be a bad actor, working for a hostile power, and actively engaged in a campaign to undermine US technology companies by, among other means,going after their revenue channels? I find it difficult to believe that any federal judge would be that completely insulated from the outside world, particularly with regard to items so directly relevant to this case.

Perhaps more problematic is the FTC’s decision to allow Huawei to carve such a massive nest for itself inside of its questionable fishing expedition in the first place, then gain control over such a significant portion of its case. Did the FTC’s attorneys fail to realize that they were being weaponized by Huawei against its principal 5G rival? Did they know but didn’t care, as long as colluding with agents of a foreign power helped them win their case? Was this matter of abject negligence or just deliberate recklessness? It’s hard to say. When even the DOJ got involved, the FTC’s response read more like a tantrum than a carefully considered argument.

The final question I have about this matter is this: Can anyone at the FTC look the American people in the eye and say that it was working in the public interest when it sided with Huawei, knowing full well what Huawei’s motives and methods are, to ultimately undermine a critical US technology company? All of this over a few dollars of licensing per phone, and with a bucket of alternative facts that never actually gelled with the real world. At what point in any of that litigation was the FTC ever acting in the public interest? In what way were consumers protected here? I still can’t see it.

What I do see is a daisy chain of very serious mistakes and/or questionable decisions here that demand answers.

3) Seven reasons why Judge Koh’s decision is almost certain to be overturned (or at least partly overturned) on appeal.

Reason #1: The standard of “harm” that Judge Koh invokes in her decision is very much a judicial outlier. The short of it: In the real world, actual, substantial, and measurable harm to consumers (or to competition) must be proven in a case like this, in order for the plaintiff to prevail (i.e. Ohio v. American Express). Judge Koh applied a very different standard here. In her alternate universe, the mere possibility of harm, unproven, not measurable, and nowhere near substantial, is enough for the plaintiff (the FTC in this case) to prevail. As the FTC failed to prove any harm at all, let alone substantial harm, I doubt very much that an appellate court will uphold that aspect of her ruling.

Reason #2: The FTC utterly failed to show that Qualcomm had abused its market power to hinder competition. For starters, it is laughable to suggest that global technology giants like Apple, Samsung, Intel, and Huawei were somehow bullied by Qualcomm, or that they don’t themselves have tremendous (if not greater) market power than Qualcomm. Positioning Qualcomm as having greater market power than Apple and Samsung is absurd on its face, and that argument ought to have been laughed right out of court. But beyond that, no evidence surfaced at trial that Qualcomm had engaged, successfully or not, in the type of abuse of market power alleged by the FTC. In fact, the opposite was true. A review of the facts of the case will certainly lead an appellate court towards a conclusion very different from the one Judge Koh lazily copy-pasted from the FTC’s opening arguments.

Reason #3: Circling back to the notion of harm, both with regard to consumers and with regard to competition, factual evidence showed not only that Mr. Shapiro’s theoretical economic models of high IP licensing prices and strained competition did not reflect reality (licensing prices did not increase, and competition both accelerated and improved), he also was also confronted in the final week of trial by the fact that his theories had failed to materialize in the real world. This is important, as 1) it invalidates the theory that Qualcomm’s licensing model was anti-competitive or harmful, 2) it empirically shows that no harm was caused, and 3) this therefore shuts the book on the FTC’s entire antitrust case. Not only was the FTC’s theory of the case not reflected by real world facts, the FTC failed to meet its burden of proof.  While Judge Koh inexplicably decided to ignore those facts wholesale, I don’t expect that a clear-minded 3-judge panel will.

Reason #4: The reason why Qualcomm assumed a leadership position in the mobile chip market turned out to be perfectly legitimate. While the FTC’s theory of the case painted Qualcomm as a bully that resorted to dirty tactics to keep rivals from competing against them in the mobile chipset arena, evidence shown at trial strongly pointed towards a very different reason: On the one hand, Qualcomm was just better at it than its rivals, much in the same way that Apple has traditionally been better at product design and marketing than other device-makers. That’s just how competition works. On the other hand, both evidence and testimony also showed that the two principal reasons why other chipmakers fell behind Qualcomm were mismanagement and failures of execution. These facts were not disputed by Qualcomm’s rivals during their testimony. An appellate court will have access to the same evidence and testimony as Judge Koh, and I again doubt that her mistakes or decisions will be repeated there.

Reason #5: As I mentioned before, some of the structural and procedural irregularities in Judge Koh’s courtroom, which seemed designed to favor the FTC’s case, will most certainly come up on appeal. Without fairness and objectivity, there can be no justice. I expect this aspect of the case to play a part in the appellate court’s decision. The tone and tenor of her decision, particularly the zeal with which she engaged in personally attempting to discredit every Qualcomm witness, should also come under review.

Reason #6: Judge Koh somehow failed to understand that while no chip, no license would absolutely be anti-competitive, no license, no chip most certainly is not. Recap: In a no chip, no license scheme, a hypothetical chipmaker could essentially force a company like Apple to buy a certain amount of chips in order to have access to its SEPs. That would be extremely unethical, probably illegal, and it is NOT what happened here. In contrast, no license, no chip recognizes that chips are not just blank hardware. They are packed with proprietary software and IP. Any company dumb enough to buy chips without also buying licenses for that built-in software and IP exposes itself to a multitude of lawsuits by the IP owners. Therefore, no license, no chip is the means by which a chipmaker and/or IP owner grants a chip buyer the right to actually use those chips in devices, which is usually the point. That is how chip “users” become licensees. The only reason anyone would ever want to buy Qualcomm chips without their associated licensing would be if they had no intention of ever actually using them or any of their IP. Like, for instance, if someone wanted to build a giant yard statue made of computer chips, or tile the bottom of their pool with a mosaic of cellular modems. (Please don’t try it. It is a terrible idea.) If Judge Koh was thinking about arts and crafts and decorative uses for cellular modems, I can understand part of her decision, but if she was thinking about legitimate technology and business uses for cellular modems, her failure to understand this elementary, standard licensing model is difficult for me to wrap my head around. Fact: no license, no chip is the simplest and most legally sound way to ensure proper and effective technology transfers between chipmakers and their customers. It is NOT an anti-competitive practice. I expect that this point, which ought to be simple enough to understand, will likely not confuse any other federal judges.

Reason #7: In case it wasn’t already clear, any normal, competent, reasonable judge would have sided with the facts of the case, not with the flawed and debunked theory of the case clumsily argued by the FTC. The FTC’s case was, as one of my colleagues put it, “a complete and utter shit show,” and as another put it, “a daily avalanche of ineptitude and malpractice.” I would add my own flavor to their commentary but I don’t really have anything to add. They both encapsulate the spirit of the thing perfectly without needing my help. On substance though, the FTC had no case. Despite Judge Koh’s aggression against Qualcomm, the San Diego-based innovation giant’s attorneys methodically and expertly disproved and picked apart the FTC’s case until its dead, smoking carcass had to be wheeled out on a gurney. The FTC had no case on Day One of the trial, and things only got worse from there. An appellate court is certain to recognize that. Had the FTC had the courage to choose a jury trial instead of a bench trial, we would not be here today, discussing Judge Koh’s unilateral decision to side with one of the most poorly crafted and articulated cases in IP litigation history.

4) Even Apple doesn’t seem interested in Judge Koh’s shenanigans.

Apple was originally the principal plaintiff against Qualcomm in this case. Back when this case began, I theorized that it was merely another front on which Apple was waging war against Qualcomm. While Apple’s motives weren’t entirely clear at the time, it appeared to be trying to pressure Qualcomm into granting Apple very favorable terms with regard to licensing fees (translation: Apple wanted to pay a lot less than what Qualcomm was charging.) On the one hand, this case could force Qualcomm to let Apple only purchase SEP licenses it needed, and, in theory, Apple might be able to save a few dollars per iPhone by cherry-picking through the exhaustive list of cellular SEPs it needed to make its iPhones actually function. If you can’t imagine why Apple would put itself through that massive and time-consuming endeavor just to save a dollar or two, bear in mind that it would have likely required its contract manufacturers (actual Qualcomm licensees) to do that legwork for them. On the other hand, crippling Qualcomm’s ability to generate revenue on multiple fronts, including this very narrow one, was likely part of Apple’s overall campaign to strong-arm Qualcomm into calling a timeout and agreeing to settle.

The opposite happened: Apple ultimately gave in and settled this year, and became, for the first time, a direct licensee of Qualcomm. Apple documents surfaced that showed that its strategy had been to harm Qualcomm all along, and that it believed Qualcomm modems to be superior to every other cellular modem on the market. At any rate, Apple agreed to drop all of its litigation against Qualcomm, worldwide, and signed a multi-year agreement to purchase modem chips from Qualcomm. Yes, part of the reason is likely that Intel couldn’t produce a premium 5G cellular modem, and Apple would have to source a 5G modem somewhere. Qualcomm was the obvious choice. Here is the thing though: Apple could have waited, or chosen to structure its agreement with Qualcomm in a way that would leave the door open for this decision to help it save a few bucks. Across tech and IP circles, rumors of Judge Koh’s unpredictable behavior and bias had nearly everyone convinced, including Apple executives, that she would likely rule in favor of the FTC. And yet, knowing this, Apple made no effort whatsoever to allow this potential “win” to enter into the terms of their agreement with Qualcomm. Apple made the deliberate decision to enter into an agreement that would shut the door on a favorable decision from Judge Koh.

I find this to be an extraordinary decision from Apple. As nothing in Apple’s behavior these past few years leads me to believe its attorneys have a single altruistic bone in their bodies, this decision suggests two things to me: 1) Apple never actually wanted to buy its SEPs individually. It just wanted the option to dangle as leverage in future price negotiations. 2) Apple doesn’t believe the decision will survive an appeal, and just doesn’t want to waste any more time on having to renegotiate contracts it is already happy with.

If this doesn’t make Judge Koh’s ruling mostly irrelevant, I don’t know what does.

5) All eyes on the DOJ.

If this case couldn’t get any more bizarre than it already is, the US Department of Justice has stepped in to essentially attempt to limit the damage that Judge Koh might inflict on not only Qualcomm as a company, but also on Qualcomm the cornerstone of US 5G leadership against China. That’s a bit of an oversimplification, so let me also note that the DOJ is, like the FTC, responsible for enforcing antitrust law, and this is a pretty key insight into what probably happens next.

If we break down the DOJ’s interest in this case… and Judge Koh’s decision… and Qualcomm’s appeal, into two objectives, they are:

    1. Homeland Security: Protect the integrity of the US’ ability to compete against (and protect itself against) China in 5G. Why? Critical infrastructure will depend on 5G, and weakening US leadership in the technology creates an unacceptable US national security risk. The DOJ has a very great interest in these matters.
    2. Turf Wars: The DOJ doesn’t want or need an agency to step all over its antitrust enforcement responsibilities. It isn’t a stretch to see how the DOJ might even look upon the FTC as an unnecessary body. (Why have two separate government entities doing the exact same thing?) To highlight the extent to which the DOJ might have a point, not only does the FTC unnecessarily duplicate a mission already under the DOJ’s purview, the FTC also has near-zero accountability to anyone, and is showing signs of being motivated more by politics than by the public interest.

Given the critical importance of not breaking companies and industries that form the foundations of US national security, and the need for antitrust enforcement to be predictable, steady, and rational, I predict that the DOJ will make every effort at its disposal to assert itself over the FTC in the coming months. And this case right here, this crazy decision, seems like the perfect vehicle for the DOJ to point at the FTC’s nonsensical interpretation of antitrust statutes AND its reckless behavior, to push the FTC aside in matters it considers itself rightfully in charge of.

What this will look like is yet uncertain, but I suspect that we may begin to see amicus briefs filed by the DOJ on behalf of Qualcomm, and perhaps more active involvement from the DOJ during the appeals process. Keep an eye on this.

6) Additional reasons why this ruling annoys me but doesn’t worry me (and why it probably shouldn’t worry you either).

This decision only applies to cellular Standard Essential Patents (SEPs). These constitute only a small percentage of Qualcomm’s patent portfolio, and does not require Qualcomm to make any changes to its overall business model. The vast majority of Qualcomm’s other patents will not be unaffected by this order, including WiFi SEPs, Bluetooth SEPs, and non-Standard Essential Patents, which are the source of premium features in smartphones. In other words, should the decision somehow survive an appeal, which I doubt, Qualcomm’s business model would still be looking extremely good.

Another point I probably need to make here is that the decision focuses mainly on requiring Qualcomm to make individual SEPs available to other (rival) chipmakers upon request. I can’t, for the life of me, imagine a legitimate business scenario in which a chipmaker would ever make such a request. I suppose Huawei could, hypothetically, decide to commit resources to something like this, and assign dozens, if not hundreds of engineers to identifying and testing individual patents for each chip, and cherry-pick only the hundreds of patents they need, but the only reason any company would do this, in my mind, would be to waste Qualcomm’s time, and force them to also commit resources to the effort. That sort of petty war of attrition, while plausible, would be more of an annoyance than a cause actual harm. In an interesting twist of fate, the US government’s blacklisting of Huawei may end up insulating Qualcomm from such a tactic.

Lastly, the FTC did not impose a fine or any sort of monetary penalty against Qualcomm. While foregoing any attempt to fine Qualcomm allowed the FTC the benefit of a bench trial rather than a jury trial (which would have likely spelled doom for them from the onset), this decision leaves Qualcomm’s balance sheet untouched. With regulators often seeking billions in fines from tech companies they take umbrage with, seeing this decision divorced from any kind of fine whatsoever should also make investors and technology industry observers feeling positive about the limited damage caused by this ill-advised ruling.

7. What happens now: A timeline of what comes next.

Stay 1: Now that Judge Koh has issued her ruling, which is applicable immediately, Qualcomm will file for a stay. They must go to Judge Koh first, so my assumption, given her evident hatred for Qualcomm, is that she will deny the request.

Stay 2: The next step will be for Qualcomm to go to the 9th Circuit and file for a stay there, which, given the practical impossibility and threat of harmful disruption to Qualcomm’s business and the technology sector as a whole, will very likely be granted. This process could be expedited, but I expect it to take up to two to three weeks. It is possible that the DOJ might file an amicus brief or intervene on Qualcomm’s behalf to facilitate or expedite a hypothetical stay.

Appeal: Qualcomm will appeal Judge Koh’s decision. The 9th Circuit will pick it up. As I understand it, a 3-Judge Panel will be assigned to examine the case. That process could take up to 18 months before we will know if Judge Koh’s decision is upheld or overturned in some way.

Stay tuned as we continue to keep a very close eye on this case.

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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