Wednesday, January 2, 2019

Final trial briefs filed in FTC v. Qualcomm: harm to consumers is key to Qualcomm's defense

The most important antitrust matter in the history of wireless communication devices is about to go trial--the day after tomorrow, Friday, to be precise, continuing on all Mondays, Tuesdays and Fridays until (including) January 28, with the sole and obvious exception of Martin Luther King Day on the 21st. If you're interested in real-time information on this trial, please don't forget to follow me on Twitter.

About a month ago, the parties filed their proposed findings of fact and conclusions of law, which already constituted a preview of what we're going to see and, especially, hear this month. Shortly before the turn of the year, the parties also filed their final pretrial briefs (this post continues below the two documents):

18-12-28 FTC Trial Brief by on Scribd

18-12-31 Qualcomm Trial Brief by on Scribd

The most remarkable aspect of the FTC's trial brief is that, regardless of how significant this case is, it comes across as rather unremarkable: it explains the FTC's allegations of uncompetitive conduct, and its effects, in plain terms and sports a simple syntax. Private-party trial briefs are often characterized by extensive, heavy rhetoric. The FTC's brief actually uses an understatement where it says that one of the agency's experts compared other wireless SEP license agreements in the industry to Qualcomm's deals and found that "Qualcomm's rates significantly exceed the range of potential FRAND royalties." Given that Qualcomm allegedly charges more than about a handful of other major SEP holders combined, a private-party plaintiff would not have settled for "significantly," but would normally have portrayed Qualcomm's royalty demand as being a multiple of FRAND.

In my previous post (the one on LG Electronics having joined the Korean antitrust action) I promised to keep an eye on MediaTek's role. The FTC's trial brief says "MediaTek [...] began supplying CDMA modem chips for use in handsets sold in China in 2015 and for use in handsets sold in the United States in 2016." While Intel is presumably going to play a far bigger role in the weeks ahead, it will be interesting to see what MediaTek told the FTC.

The FTC's brief is self-explanatory, but now that this case goes to trial, the FTC has to prove its allegations--and under the rule of reason it will have to counter any Qualcomm theory according to which its criticized conduct was actually justified by ultimate consumer benefits. That's why Qualcomm's trial brief denies each of the FTC's accusations and additionally seeks to pave the way for a finding of evidentiary failure.

There's more rhetoric in Qualcomm's brief than the FTC's, but within reason. Presumably both filings will help Judge Lucy H. Koh to focus on the outcome-determinative issues, and Qualcomm's defenses are also very fact-centric, just that they have a major credibility problem: over the years, practically every major industry player (even including those whose testimony and amicus briefs Qualcomm relies on now) complained over Qualcomm's conduct. It's been almost 13 years since I first heard about this from the BlackBerry (then named Research in Motion) people. And now there have been findings and holdings by competition authorities in multipe major jurisdictions on three continents. It's practically impossible to believe that there should be absolutely nothing substantive there. But regulatory and industry consensus, while important to those of us who are watching this case, is not the legal standard. The FTC, whose legal theories Qualcomm characterized as deficient but Judge Koh declined to throw out last year, will now have to present stronger evidence than whatever Qualcomm can defend itself with.

Qualcomm has, and will, put the question of antitrust harm front and center. In Qualcomm's pretrial brief, the word "harm" occurs almost three dozen times. And harm, or simply anticompetitive effects, are at the heart of Qualcomm's assertion that the FTC misstates the law by saying the standard is "that the restraint or conduct challenged has or reasonably appears capable of having anticompetitive effects" (emphasis in Qualcomm's filing). According to Qualcomm, "[t]hat suggests per se illegality and is wrong as a matter of law" because the FTC must prove "that the challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market." For now I believe the FTC actually intends to satisfy the standard outlined by Qualcomm, but would like to make things easier by means of the lower hurdle of something "reasonably appear[ing] capable of having anticompetitive effects." We'll see soon.

Like the proposed findings of fact, Qualcomm's trial brief places a lot of emphasis on how Qualcomm's success is based on superior technology and the willingness to take enormous risks when, early on, basically swimming against what appeared to be the tide. Let there be no doubt that Qualcomm's corporate history is in some very important ways impressive, inspiring, and absolutely admirable. However, there's not only the entrepreneurial Qualcomm of the early days but also the Qualcomm that did the things that have been held anticompetitive around the globe. There's light and shadow, yin and yang, Dr. Jekill and Mr. Hyde--or at least one can say that the presence of one doesn't disprove the existence of the other.

The fact finder will not be a jury of potentially impressionable laypeople, but Judge Koh, a high-profile, high-power judge who thanks to being based in Silicon Valley simply knows a lot about this industry and its dynamics. And in Silicon Valley you can find awe-inspiring entrepreneurial stories everywhere. There's no shortage of famous garages in which some of the world's largest corporations started; there are many stories of entrepreneurial risk-taking; and of companies that faced tremendous obstacles and dire straits at some point. Qualcomm's founders were a group of geniuses. But all of that also applies to such companies as Intel and Apple, to name the two Silicon Valley companies most directly affected by Qualcomm's conduct. And just like I didn't agree with Apple that the amazing story of how Apple created the iPhone justified its damages claims against Samsung, I don't believe Qualcomm can explain away the serious competition issues in this case by a theory of having succeeded on a purely meritocratic basis at all times.

One passage of Qualcomm's trial brief claims that its patent royalty rate must be deemed FRAND because it was accepted by companies before Qualcomm was in a position to leverage its "no license-no chips" policy and/or capture some of the value of standard-setting:

"For example, AT&T and Motorola—two of the most powerful companies in the cellular industry at the time—licensed CDMA patents in 1990 for an up-front fee and a reduced 4% royalty rate, five years before a single Qualcomm chip had left the foundry, and before CDMA had even been standardized. The same is true for Nokia, which signed a CDMA license in 1992 at a more typical 5% rate. This pattern repeated over a dozen times, with OEMs taking licenses before Qualcomm sold a single CDMA chip."

I take issue with that argument in at least two ways:

  • Royalties that companies pay for patents that are not subject to a FRAND licensing pledge are quite often above a FRAND level. Otherwise standard-setting organizations wouldn't even need anyone to make a FRAND licensing commitment in the first place.

  • If a license deal signed in 1992 also included unpublished patent applications, then the last ones of the patents that existed at the time of the deal would have expired by 2012. But realistically, many of those patents must have expired well before. And technology moved on (that's why new cellular communications standards were defined and, especially, adopted thereafter). As a result, Qualcomm's royalty rates would normally have had to go down. But they didn't. And the primary reason may just be the combination of Qualcomm's aggressive leveraging of SEPs and its "no license-no chips" policy.

My feeling is that the FTC has a very strong case. There's every indication that Judge Koh agrees, at least in principle, with the FTC's legal theories. Qualcomm points to Assistant Attorney General Makan Delrahim's positions on SEPs, but Mr. Delrahim can't do away with all of the case law that already exists in this area. That means Qualcomm now needs to prevail on the facts, but those same facts actually persuaded antitrust enforcers in different countries and cultures to deem some of Qualcomm's practices anticompetitive. Come Friday, we'll learn a lot more.

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