Two months after asking the United States District Court for the Northern District of California to dismiss the FTC's antitrust complaint, and three weeks after the FTC argued (with support from Intel, Samsung and others) that its complaint met the requirements so the case can proceed, Qualcomm replied on Friday in support of its motion to dismiss (this post continues below the document):
One of the alleged insufficiencies of the FTC's complaint is that the FTC's complaint refers to "elevated" royalties instead of using the term "above FRAND" (as Qualcomm suggests). Qualcomm says that the FTC must allege supra-FRAND royalties, and even that would not be enough since anticompetitive harm resulting from such royalties would have to be shown as well. In this context, Qualcomm also writes the following:
"[The FTC] never identifies a single licensee whose specific rate is allegedly above FRAND."
However, I have reread the FTC's original complaint, and its paragraph 118 says this:
"Apple, like other OEMs, regards Qualcomm's license terms, including the effective royalties charged by Qualcomm under its licenses with Apple's contract manufacturers, as inconsistent with Qualcomm's FRAND commitments."
Right before that paragraph, the FTC notes that "Apple is not a direct Qualcomm licensee" but, instead, used to reimburse its contract manufacturers for the royalties they pay to Qualcomm. If one interprets the word "licensee" in economic terms, then the FTC actually did identify at least one de facto licensee that paid a supra-FRAND rate.
It's good that Qualcomm says in the first paragraph of its latest brief: "[T]he key question is not a semantic one about taxes and royalties. It is the substance that matters." But if substance matters, then Qualcomm should recognize that a device maker paying royalties through a contract manufacturer is a licensee.
"Substance matters" also means, or in my view should mean, that the anticompetitive effect of supra-FRAND royalties on devices that use Intel (or other Qualcomm rivals') chips must be analyzed on an "all-in" basis. In paragraph 88 of its complaint, the FTC defined the "all-in cost of a baseband processor" as "consisting of both (i) the nominal price of the processor; and (ii) any patent royalties that the OEM must pay to use that processor in a handset." While that passage doesn't say so, it's obvious that any rebates or discounts from such royalties must be considered as well. "All-in" means "bottom line."
Even if we believe Qualcomm that its patent royalty rates don't discriminate at first sight between devices using Qualcomm chips and other devices, rebates and discount can lead to a decisive difference. The way Qualcomm redacted its reply brief indicates that the rebate/discount question is a highly sensitive issue here. On pages 11 and 12, there are four redactions of single words, but the context makes it clear that the redacted word, in each case, was either "rebate" or "discount." The same section of the brief points to footnote 20, which cites to other cases and mentions either term:
"[...] imposed rules that restricted dental dealers from carrying competing lines of artificial teeth, but it did not offer those dealers any rebates." (emphasis added)
"Microsoft [...] granted discounts only 'as compensation for the work required' to comply with the restrictions, not to win over resisting OEMs." (emphasis added)
Rebates are also mentioned in the FTC's complaint. In paragraph 120:
"Under a 2007 agreement, Qualcomm agreed to rebate to Apple royalties that Qualcomm received from Apple's contract manufacturers in excess of a specified per-handset cap."
Four paragraphs later:
"In all, Qualcomm's 2011 and 2013 agreements with Apple provided for billions of dollars in conditional rebates from Qualcomm to Apple for baseband processor sales from 2011 to 2016. These conditional rebates effectively penalized Apple's use of any baseband processors supplied by Qualcomm's competitors." (emphasis added)
So, if substance matters, the FTC complaint isn't anywhere as lacking and wanting as Qualcomm claims. The FTC definitely tried to keep the complaint very focused. Qualcomm quotes the dissenting FTC commissioner (Mrs. Ohlhausen) as saying that "[r]ather than allege that Qualcomm charges above-FRAND royalties, the complaint dances around that essential element." What I think the FTC complaint does dance around is the need for a FRAND rate-setting decision as part of this case. Whether Judge Koh views that as a deficiency requiring an amended complaint remains to be seen. I've written in one or two earlier posts that Qualcomm's criticism of the FTC's approach may succeed to the extent of a dismissal without prejudice.
Just one last point on substance that matters. Qualcomm argues that there is no "cognizable theory" of harm in place with respect to the FTC's allegation that rival baseband processor makers felt forced to lower their prices in order to offset at least some of the higher patent licensing cost that device makers allegedly have when using non-Qualcomm chips. In other words: competition law should protect (and should particularly protect consumers) against inflated prices, not against price reductions. However, if chipset makers have to lower prices under a kind of pressure (patent royalties paid by device makers) that has nothing to do with the competing products themselves, then it adversely affects their commercial viability for no good reason, and as a result, companies will then be less competitive, which in the worst case means they'll go out of business, and that will lead to higher prices in the long run.
If Judge Koh understands all the market dynamics involved, and even more so if she takes a consumer perspective (since we're the ones who pay for all of this in the end), Qualcomm will have to defend itself either against the existing complaint or against a minimally-amended one.
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