Sunday, June 9, 2019

The winner of the 'battle royale' of FTC v. Qualcomm expert witnesses: Richard Donaldson (ex-Texas Instruments)

Credit where credit is due. This is a post I decided to write within 24 hours of Judge Lucy H. Koh's landmark FTC v. Qualcomm antitrust ruling. Then I procrastinated because of so much else going on.

For the non-gamers reading this I'll quote Wikipedia's "battle royale" definition first:

"A battle royale game is an online multiplayer video game genre that blends the survival, exploration, and scavenging elements of a survival game with last-man-standing gameplay. Battle royale games involve a large number of players, ranging from dozens to hundreds, that start with minimal equipment who then must eliminate all other opponents while avoiding being trapped outside of a shrinking 'safe area', with the winner being the last player or team alive." (emphasis in original)

The FTC v. Qualcomm trial in the Northern District of California in January was a colossal clash of expert witnesses opining on licensing terms, negotiation dynamics, component-level licensing, ultimate consumer harm, and various related issues. A recent op-ed by a notoriously 100% Qualcomm-aligned "analyst" may serve as an indication that Qualcomm's Ninth Circuit appeal will accuse Judge Koh of not having paid enough attention to Qualcomm's economic theories (I disagree because I think she was underwhelmed by that nonsense for all the right reasons).

It's not just that Qualcomm's experts failed to impress. Judge Koh also declined to subscribe to parts of FTC expert Michael Lasinski's methodology--and she didn't mention the FTC's economic expert witness, Professor Carl Shapiro (UC Berkeley), at all in her ruling. That doesn't mean that Professor Shapiro's efforts didn't contribute to the outcome. What he explained about how Qualcomm's different anticompetitive tactics resulted in supra-FRAND royalties and how those were ultimately passed on, at least in part, to consumers (and affected consumers indirectly by reducing competition at the chipset level) made a lot of sense. He also dismantled Qualcomm's experts' testimony very effectively, such as pointing out the "bankruptcy" of Professor Aviv Nevo's argument. By not mentioning Professor Shapiro at all, Judge Koh made it impossible for Qualcomm to argue on appeal that she relied on Professor Shapiro's testimony in any way (Qualcomm accused him of failing to take an empirical perspective, but whether or not his approach was too theoretical is mooted by Judge Koh's ruling). The strong parts of the evidence and testimony supporting the FTC are actual industry testimony and Qualcomm-internal communications, and that combination--not economic theories--is going to complicate matters for Qualcomm on appeal.

The single most impactful expert witness in this case was Richard Donaldson, who prior to becoming a consultant and expert witness on patent licensing spent 31 years at Texas Instrument in capacities including that of General Patent Counsel. In my trial coverage I mentioned how he got cut off by one of the attorneys representing Qualcomm. Judge Koh was also upset about that. But rudeness was no path to victory. Instead, Mr. Donaldson's testimony turned out more relevant than what any other expert witness in this case (if not even all of them combined) said.

I'll now quote and briefly comment on the passages of the ruling that mention Mr. Donaldson:

"Expert testimony was consistent with the documentary evidence and OEM testimony. Richard Donaldson, the FTC's licensing expert, explained that Qualcomm's royalty rates should decline over time because handsets are now essentially computers:

"[I]n the case of Qualcomm when rates were first established back when CDMA was used in telephones were our cell phones were – it was just a cell phone. No other capabilities. And those products have changed dramatically over the life since then and we now have smartphones with many, many features that do not infringe the cellular patents, the SEPs. So I would expect that to drive a lower royalty rate."

COMMENTARY: The term "lower royalty rate" implicitly presupposes an unchanged royalty base (and, more generally, all other things being equal). Of course, the royalty rate poses a new question once the base changes.

"Richard Donaldson, the FTC's expert, testified consistently: 'Many of Qualcomm's early patents are expiring which, in my experience in license negotiations, when your portfolio is weakened by expiring significant patents, the royalty rate would typically decrease.' [...] Yet Qualcomm's rates have not decreased, which further indicates that Qualcomm's royalty rates are unreasonably high."

COMMENTARY: This was also pointed out by current industry executives (thus the word "consistently" after "testified"). What's important here is not to just count patents because obviously Qualcomm's portfolio kept growing. It's about how important the relevant patents are/were, about how much leverage they gave or continue to give Qualcomm.

"Richard Donaldson, the FTC's licensing expert, offered expert testimony consistent with Qualcomm's documents and OEM testimony. Donaldson testified that in a typical negotiation, a licensee always has FRAND litigation as a recourse: '[I]f he is of the opinion that what is being proposed, the rates being proposed are unreasonably high, he would have an expectation that a reasonable court would lower what a reasonable – his determination of a reasonable royalty.' [...] However, Qualcomm's licensing practices removed that option: '[I]t would put the licensee at a severe disadvantage. He's basically – and as the testimony reflects – he's basically in the position, I agree to the license or basically go out of business.' [...] Consistent with the trial evidence, Donaldson opined that this dynamic 'results in a disproportionately high royalty rate.'"

COMMENTARY: The above was also explained by Professor Shapiro on the basis of general bargaining theory. But Judge Koh apparently determined that testimony from someone who had spent 31 years in the field of wireless standard-essential patent licensing was the most reliable and appeal-proof basis for her decision.

"In addition, Donaldson testified that from 2006 to 2016, Qualcomm was involved in only two patent litigation lawsuits 'unrelated to enforcing the SEP patents.' [...] By contrast, other SEP holders like Ericsson, Nokia, and InterDigital each were involved in more than twice as many patent litigations over the same period. [...] (chart comparing litigation by company). According to Donaldson, those figures undersell the effect of Qualcomm's licensing practices:

Ericsson, Nokia, and InterDigital did not have a no license, no chip policy, so their negotiations would have always included, or been negotiated in the shadow of what possible legal remedies might exist, which would have – which would suggest that they would have been more reasonable in setting what their royalty demands were and avoiding litigation in a number of cases that aren't reflected here.

[...] Because Donaldson's testimony was consistent with Qualcomm's documents and the trial evidence, the Court finds reliable his opinion that Qualcomm's monopoly chip power both sustains Qualcomm's unreasonably high royalty rates and prevents litigation to challenge those royalty rates."

COMMENTARY: When "the Court finds reliable" what someone's testimony is all about, agrees with the reasoning and bases a historic decision on it, it's "mission accomplished" for the expert.

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