Anticompetitive or Hyper-Competitive? An Analysis of the FTC v. Qualcomm Oral Argument

“Sometimes judges ask the harder questions of the side they favor to ensure their decisions will hold up. On the other hand, it seemed to me that the judges had a lot harder time wrapping their heads around the FTC’s argument.”

U.S. Court of Appeals for the Ninth Circuit

On February 13, the Ninth Circuit heard oral argument in the FTC v. Qualcomm case. Counsel for Qualcomm and the Federal Trade Commission (FTC) argued primarily about whether Qualcomm’s behavior resulted in anticompetitive harm, while the attorney from the Department of Justice, which had been granted five minutes to argue on Qualcomm’s behalf, faced tough questions about claims that the district court’s injunction posed a threat to national security. While the DOJ’s intervention in this case is interesting, the best summation of the argument came from the bench when Judge Stephen Murphy, District Court Judge of the Eastern District of Michigan sitting by designation stated: “Anticompetitive behavior is prohibited under the Sherman Act. Hyper-competitive behavior is not. This case asks us to draw the line between the two.”

Quick Recap

The FTC filed this case against Qualcomm in the U.S. District Court for the Northern District of California in January 2017, including three claims of alleged anticompetitive behavior. First, Qualcomm required chip customers to license its patents separately before it would sell them chips, known as the “no license, no chips” policy. Second, Qualcomm declined to license its standard-essential patents (or SEPs) to rival modem chip suppliers. Third, Qualcomm engaged in de facto exclusive dealing arrangements with Apple. Each of these three behaviors, according to the FTC, allowed Qualcomm to maintain its monopoly and extract “elevated royalties and other unreasonable license terms.”

After a 10-day bench trial in January 2019, Judge Lucy Koh issued a lengthy opinion in May 2019, concluding that Qualcomm had market power in the relevant markets and, through the each of the behaviors alleged by the FTC, had caused anticompetitive harm. The court then issued a sweeping injunction, which prohibited Qualcomm from using its “no license, no chips” policy, required Qualcomm to negotiate licenses (and renegotiate existing licenses) and to make exhaustive licenses available for its SEP patents on fair, reasonable and non-discriminatory (FRAND) terms to rival chip makers as well as phone manufacturers, and prohibited Qualcomm from entering into express or de facto exclusive dealing arrangements.

Qualcomm appealed to the Ninth Circuit and sought a stay of injunction. In August 2019, the Ninth Circuit issued an order, partially staying the injunction issued by Judge Koh. According to the Ninth Circuit, “Qualcomm [had] shown, at a minimum, the presence of serious questions on the merits” of the district court’s opinion and that the appellate court would also need to decide whether Judge Koh’s “order and injunction represent a trailblazing application of  antitrust laws, or instead an improper excursion beyond the outer limits of the Sherman Act.”

With the order granting the partial stay focused primarily on the district court’s determination that Qualcomm had a duty to deal with its rivals (and with general commentary pointing out that Judge Koh’s reliance on – and extension of – Aspen Skiing Co. v. Aspen Highlands Skiing Corp to arrive at that duty to deal was a significant departure from settled antitrust precedent), the FTC stepped away from that part of the district court’s opinion during its briefing, and so the oral argument focused largely on what was deemed the “surcharge” ruling – or whether Qualcomm’s “no chips, no license” policy is anticompetitive.

The Parties Make Their Case

Oral argument at the Ninth Circuit was held before Circuit Judges Johnnie Rawlinson and Consuelo Callahan, as well as Judge Murphy. Tom Goldstein, arguing for Qualcomm, noted the FTC’s disclaimer of Judge Koh’s Aspen Skiing reasoning and, although the FTC had an alternative argument to support Qualcomm’s duty to deal, wanted to focus on the “surcharge” issue. Goldstein argued that the royalty rate that Qualcomm charges for use of its patented technology is not a surcharge because 1) it is not excessive, and 2) it does not affect from what chip manufacturer an OEM obtains their chips. Goldstein also pointed to some flaws in the district court opinion, specifically that there is no legal support for Judge Koh’s determinations and very little discussion of competitive harm at all. Rather, the district court pointed to the fact that Qualcomm made money and had a unique business model as evidence of harm. As Goldstein explained, in response to questions from the judges, the district court conflated profitability with anticompetiveness; making money causes firms to be innovative and competitive. Additionally, that Qualcomm was operating under a unique business model did not prove that it caused competitive harm. With the chip prices being higher, as the district court found, Qualcomm was not using its monopoly power to charge super-low prices to keep rivals out; other firms were able to enter and compete because the prices were high – and that demonstrates no competitive harm.

Michael Murray argued for the Department of Justice. He advocated for vacating Judge Koh’s opinion for two reasons – first, that the district court’s expansive remedy did not consider the public’s interest, specifically in national security, and second, that the district court’s opinion disserves competition and innovation. The bench, however, was primarily interested in the national security issue. The judges queried Murray about whether there had been any analysis that the injunction would harm national security, the relationship between 5G development and national security, and whether an injunction could be more narrowly tailored so it would not expand into 5G space.

Brian Fletcher argued for the FTC. From the beginning, he faced tough questions about exactly what was wrong with Qualcomm’s behavior. He pointed back to Judge Koh’s opinion, noting that the district court had found this to be an anticompetitive surcharge. Additionally, he claimed that the excessive rates were driven by the fact that Qualcomm had a monopoly and were not based on the presence of a patent. In support of this point, he stated that multiple OEM witnesses testified at trial that they agreed to pay Qualcomm’s license fees, not because it was a patent license but because they were afraid if they did not they would not get the chips they needed to produce their products. The judges and Fletcher had a vigorous discussion about what it meant to be anticompetitive, where the judges posed questions about whether the district court and the FTC were conflating “profitable” and anticompetitive, “successful” and anticompetitive, “overly capitalistic” and anticompetitive, and “unique” and anticompetitive. With each turn, Fletcher replied that Qualcomm was not competing on the merits and therefore it was behaving in an anticompetitive way. Fletcher then stated that having a unique business model should be a red flag and raise serious concerns that the unique firm is acting anticompetitively; when pressed, Fletcher said that being unique is not illegal, but Qualcomm was acting in an illegal fashion because Judge Koh said so.

On rebuttal, Goldstein reiterated that Qualcomm was just behaving like any business would and that in business sometimes, your rival does not make as much money as they would like to. There was no evidence that Qualcomm engaged in predatory pricing; in fact, the district court found Qualcomm’s pricing to be “unreasonably high.” Beyond that, there were pro-competitive justifications: we want companies to license their patents to spread technology widely; we want companies to charge rates for licensing their patents that allow the companies to fund future innovation; and we want customers to have choices about prices and providers of goods and services. These are all good things, and Qualcomm’s behavior facilitated, and did not hinder, any of them. Beyond that, Qualcomm did not engage in this behavior only in technology areas where the district court found Qualcomm to have a monopoly; it was applying the same license rate across all fields, even where it did not hold a monopoly. This, too, demonstrates that Qualcomm was not leveraging its monopoly in an anticompetitive way.

Author’s Take

I had thought, after the language the Ninth Circuit used when staying the district court’s injunction, that Qualcomm was likely to see some level of reversal of Judge Koh’s opinion. But since even the FTC has walked back from the district court’s extension of Aspen Skiing, I am not quite as hopeful as I had been. (That being said, I’m thrilled that everyone – except the district court, maybe – realized what a big mistake extending Aspen Skiing would have been). As far as the tenor of the argument, it appeared that the FTC got the worst end of it.

Of course, I do not have a crystal ball and sometimes judges ask the harder questions of the side they favor to ensure their decisions will hold up. On the other hand, it seemed to me that the judges had a lot harder time wrapping their heads around the FTC’s argument. The bench was repeatedly asking FTC’s counsel about legal support for Judge Koh’s decision and the FTC’s position. By repeatedly framing the questions around whether Qualcomm was just really good at competing versus acting anti-competitively, the court seemed to be trying to understand exactly what Judge Koh found to be the problem. Additionally, although the FTC framed its position as Qualcomm interfered with rivals and was not competing on the merits, the bench did not (at least to me) seem to see it the same way.

Image Source: Deposit Photos
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Copyright: ericbvd 


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