20 Mar FTC Once Again Failed To Make Its Case Against Qualcomm On Appeal

Tom Goldstein, representing Qualcomm, delivers remarks to the three judges overseeing the appeal. 
FEDERAL 9TH CIRCUIT COURT OF APPEALS

One of the more interesting behind-the-scenes sagas of the past several years has been that of Qualcomm versus the FTC, in which the latter has attempted to make the, in my opinion, flimsy case that the former is a monopolist who suppressed competitors in the wireless chip market. Specifically, the FTC sought to prove that Qualcomm wielded its influence to force Apple, the company’s biggest customer, and others to exclusively use its chips in exchange for lower licensing fees. I think the FTC was trying to show this (during Koh’s trial), but its main anti-trust argument, was that Qualcomm used its market power to force others to pay higher royalties than they wanted to, and Qualcomm used this extra revenue to keep others from effectively competing with Qualcomm.

From the start, I’ve seen this case as a very significant one, with potential long-term ramifications in terms of the U.S. government essentially acting as an IP price-fixer. Additionally, I believe it could potentially hurt U.S. competitiveness in 5G, autonomous cars, smart cities, and impact its national security and more.

Background

I’ve argued since the beginning that the filing was essentially a clown show—a “midnight” filing made right before the inauguration of the Trump administration, which only had the support of two of the five FTC commissioners. Only three were present for the vote, as the other two were already leaving the administration. For that matter, the third voting member voiced a strong dissent. Last May, a US District Court Judge, Lucy Koh, ruled in the FTC’s favor and found Qualcomm guilty. Qualcomm successfully petitioned the appeals court to allow it to hold off on making changes to its business and licensing until the case had fully made its way through the appeals process. A temporary stay was issued, to that effect, by the Ninth Circuit court in August.

Qualcomm presented its key arguments to the Ninth Circuit Court of Appeals several weeks ago on February 13th. I am not a lawyer, but I’ve seen a lot of technology antitrust activity and feel experienced enough with the topic to speak on it. Today I wanted to talk a little bit about that appeal and how I felt it did not go well for the FTC.

A rocky start with confused judges

If the case all sounds very confusing, it’s because it is. There were a lot of bizarre contradictions within the initial filing (read more here). These include the citing of previous global FTC rulings against Qualcomm that had subsequently been overturned, the fact that competition in 4G and 5G was/is actually booming, the lack of actual demonstrable harm done by Qualcomm’s licensing practices to competition among chip vendors, to smartphone handset makers such as Apple, to consumers, the utilization of Huawei as a “star witness” when they, perhaps more than anyone else, would benefit from a weakened Qualcomm, and more.

What struck me at the outset of the hearing, was that even the judges were confused about the case! One of the three judges presiding over the case, Stephen Murphy III, said out loud that he was having difficulty keeping up with the FTC’s arguments. He went on to say that it was a “challenging” case that could take some time to rule on. In what I’ve seen previously, confused judges are never a good sign for the prosecution. Perhaps even worse for the FTC than the confusion, though, was that the judges seemed skeptical of the case at large.

DOJ a non-event

One thing that is extremely notable is that, in an unprecedented move, the Department of Justice appears to be openly going against the FTC in the case. This never happens and could ultimately help Qualcomm. Lawyers with the DOJ argued that if Justice Koh’s decision was upheld, it would potentially harm U.S. national security interests, given the importance of communications chips and Qualcomm’s position as the biggest modem chipmaker in America given its chief rivals, Samsung, Mediatek, and Huawei are based in in Asia.

The judges appeared skeptical of the DOJ’s position, however, requesting more specific evidence from the DOJ’s attorney to substantiate the assertions. Brian Fletcher, the attorney representing the FTC, made the counterargument, that it was Qualcomm’s supposedly anticompetitive practices that nudged Intel out of the market and made Qualcomm the dominant force in the U.S.

Capitalistic or anti-competitive?

The crux of the question being litigated is whether or not Qualcomm’s tactics are anticompetitive or simply capitalistic and profitable. If the judges seemed skeptical of the DOJ’s assertions that the ruling would affect national security, they seemed even more suspicious of the FTC’s case for Qualcomm’s anticompetitive behavior. One presiding judge, Judge Conseulo M. Callahan asked if there was “a conflating of profitable and anticompetitive,” perhaps “over-capitalistic, but not necessarily anti-competitive?” Judge Murphy threw in his two cents, saying, “Anticompetitive behavior is prohibited under the Sherman Act. Hyper-competitive behavior is not.” The third presiding judge, Judge Johnnie Rawlingson, asked the prosecution, “Doesn’t the Supreme Court say that patent holders have the right to price their patents? What would be anticompetitive about that?”

To sum up, all three judges seemingly cast doubt on the FTC’s case through their line of questioning. My personal read on this was that the judges were very focused on case law and trying to avoid a scenario where they were creating a new precedent. While Qualcomm’s attorneys were certainly also questioned by the judges, it seemed to me as though there was not the same level of skepticism underpinning these lines of questioning.  

So, what’s really going on here?

I’m not a lawyer and don’t pretend to be one, but I do have 30 years of tech industry experience as an OEM, chipmaker and now a technology industry analyst. I have also served as a “key witness” (legal term) in one of the largest antitrust cases between Intel and AMD. So, I’d like to think I have a pretty good idea how the tech industry really works and how interactions between companies relate to antitrust. Net-net, I believe the FTC failed and continues to fail to make its case against Qualcomm.  

What’s clear to me in this case is that Qualcomm invested billions in very risky research to get ahead in wireless innovations. It’s important not to confuse “research” and “development”. Research describes expenditures that develop core IP and standards, which very few companies invest in. Development denotes expenditures to productize that research, which many companies invest in. In a recent article here, I wrote that two independent IP analyst firms give Qualcomm the highest value wireless portfolio.   

I believe Qualcomm’s advantage and investment simply made it more difficult for competitors to keep up. This surfaced many times in the initial FTC trial, where evidence showed that Qualcomm’s customers stated in emails that it was light years ahead of the competition with its modems. Other evidence in an internal Bain report commissioned by Qualcomm’s competitor that showed that Qualcomm was twice as efficient in R&D as its next-best competitor. 

There’s also the point to be made about Qualcomm’s competitors, that there are a lot of reasons why chip companies succeed and fail. A good example is Broadcom, who made several poor wireless investments and acquisitions. Then, there are leadership stumbles, problems with execution, problems with architecture. The FTC had to prove that Qualcomm’s royalty rates were the dominant factor keeping these other companies down, and I just didn’t see a convincing argument, especially when some of these companies had significantly more money than Qualcomm. 

The other laughable idea was that Qualcomm took advantage of Apple. Knowing what I know about Apple CEO Tim Cook (we worked at Compaq at the same time, for a very short period of time) there is no possible way that any vendor could push this trillion-dollar company around. People scoffed at me early on when I suggested that Apple was trying to destroy Qualcomm at the beginning of the suit, but unfortunately, I believe I was proven right.

Last April, I believe Apple proved me right when an internal Apple document from 2016 called “Qualcomm Royalty Reduction” was presented in the San Diego ODM trial. Just check out this Washington Post article. Here are some choice quotes from that article I believe illustrate what was really going on: 

  • Apple’s vice president of hardware, Johny Srouji, wrote of Qualcomm technology, “Engineering wise, they have been the best.” 
  • Apple said in the document it planned to accomplish this in several ways, including “Hurt Qualcomm financially” and “Put Qualcomm’s licensing model at risk.” 
  • Apple said it sought to “create evidence” by scrupulously licensing other less expensive patents to make Qualcomm’s look expensive. 
  • Apple said it would “selectively filter” a group of patent licenses for “the most desirable deals,” using the patents as “evidence as a comparable in disputes with others.” 

Please read the full Washington Post article and the presentation so that you get the full perspective.

Why would Qualcomm benefit from destroying Qualcomm? I believe that by destroying Qualcomm, it thought it could kill two birds with one stone.  One was to remove the profits from wireless IP and modems which would lower its cost and make it easier to make its own modems and the second, a bit darker, was to hamstring the Android community. If you look at most Android handsets on the planet, they contain Qualcomm silicon and IP. If you take out the snake’s head, you take out the snake, which is Android.  I believe one of the tactics to reach its objective was to bring a complaint and manufacture evidence to the FTC to trigger this suit. I’m sorry, folks, Apple was never the victim.    

Apple would beg to differ. Apple believed what Qualcomm was charging was above and beyond what was fair, and that when it couldn’t agree to a fee, it had to let the court decide and held payments until that time because the company didn’t know what to pay. Tim Cook illustrates this position in a CNBC interview here and forward to the 17-minute mark.

I will let you make the choice- Apple the victim or the victimizer?

Where things stand now: likely a Qualcomm win

Now that both sides have presented their arguments, it’s a bit of a waiting game. The Court could issue a ruling anywhere from 3 to 15 months from now. There are several scenarios that could play out after a ruling is issued. Even if the Court accepts everything the FTC presented to be fact, it could still decide that no antitrust violation happened, at which point the case would be over, though the FTC could then appeal to the Supreme Court. There could also be a sort of mixed ruling where the judges side with Qualcomm on one aspect, likely “duty to deal”, but kick the case back down to Judge Koh to have a second go at the FTC’s assertion that Qualcomm’s practices are anticompetitive. Obviously, Qualcomm would prefer the whole matter to be settled by the 9th Circuit, given the seemingly receptive audience it’s found in the Court.

Time will tell, but I think the appeal hearing signals at least a partial win for Qualcomm. Overall, the tenor of the judges’ questions seemed to indicate a significant skepticism of the FTC’s arguments and the merits of its case against the semiconductor company—particularly in the question of whether or not the company’s practices go beyond hyper-competition into something that could be considered anti-competitive. I’m not all that surprised to see the original ruling coming under more scrutiny given the clown show we’ve seen so far. I’ll continue to keep an eye on this as things develop, but if I were Qualcomm, I’d be feeling pretty good right now.