Wednesday, July 17, 2019

DOJ, DOE, Pentagon, Ericsson support Qualcomm's Ninth Circuit motion for stay of FTC's antitrust remedies

As the longest-standing and staunchest Donald Trump supporter among IP bloggers, I must admit I'm more than a little bit disappointed at three very recent events, two of which are related to the mobile industry. I keep my fingers crossed for Four More Years no matter what, but

  • the "go back" suggestion had a factual basis with respect to only one "Squad" member (Ilhan Omar);

  • it wasn't a good idea to conflate security and trade issues with respect to Huawei, so I honestly don't know what to think of that new bipartisan Lex Huawei proposal (was there a security issue in the first place, or was it more of a pretext? either way, the Administration's approach to Huawei doesn't look principled at this stage); and

  • yesterday the Department of Justice tripled down on its pro-Qualcomm advocacy I already criticized on previous occasions (as recently as last month), with declarations by the Department of Defense (Scribd link) and Department of Energy (Scribd link) attached (this post continues below the document):

19-07-16 DOJ Statement of I... by Florian Mueller on Scribd

Antitrust Assistant Attorney General Makan Delrahim's subordinates made a bizarre filing in early May when they asked Judge Lucy H. Koh of the United States District Court for the Northern District of California to hold a special remedies hearing. I said "bizarre" because of the substance of the brief, the timing (more than three months after the San Jose bench trial), and the way the DOJ antagonized the FTC. That was the first time they were in the tank for Qualcomm (not counting public comments by Mr. Delrahim, a former Qualcomm outside counsel). The second time, in connection with Qualcomm's appeal of Judge Koh's certification of a consumer class, their intervention was infinitely more reasonable. But yesterday's Statement of Interest (of the United States, as the DOJ is authorized to speak on behalf of the federal government regardless of whether an independent government agency like the FTC agrees) is closer in (un)reasonableness to the DOJ's first pro-Qualcomm filing than to the second.

The district court's well-reasoned ruling is the FTC's biggest success in a long time. The DOJ should have more respect for the independent Federal Trade Commission and for the independent judiciary. Instead, the brief, filed yesterday with the United States Court of Appeals for the Ninth Circuit, arrogantly asserts that the FTC and Judge Koh failed to figure out the law.

The DOJ attacks Judge Koh's decision from three angles: merits (liability), remedies, and the public interest. As for the public-interest part, the DOJ mostly relies on the aforementioned declarations by two other departments, and Reuters' Stephen Nellis accurately described the gist of those statements as follows:

While the public-interest part is the most appropriate aspect for a Statement of Interest, the accuracy and relevance of a public-interest argument is not a function of how many sister departments say essentially the same thing. This case is about patent licensing. It's not about Qualcomm's ability to develop and sell great 5G chips being hamstrung. By contrast, there have been antitrust cases that impacted product design, such as the Media Player part of the first EU case against Microsoft (though Microsoft ultimately managed to comply with the decision in a way that minimized its effects). In the Qualcomm case, we're talking about one company raking in roughly 25% of the industry's total patent licensing revenues, and collecting 80% or 90% of the totality of what some device makers such as Huawei spend on patent royalties. And this is a company that has just spent tens of billions of dollars on stock buybacks in recent years. It's not like Qualcomm would have to, or would want to, cut back on R&D as a result of this antitrust case.

If Qualcomm's supporters in the Administration really wanted to make a compelling case, then we'd find some financial analysis, even if based on only rough estimates of inherently limited reliability, in the DOJ's filing and/or the supporting declarations. They'd be talking about how many billions they believe Qualcomm would not make as a result of the immediate enforcement of the FTC's remedies, and what impact this would have on Qualcomm's R&D strength and its influence on the evolution of the 5G standard. Instead, they just posit that anything of substantial impact would automatically pose a threat to national security.

Qualcomm's dilemma is that numbers, whether provided by Qualcomm itself or by its governmental allies, would potentially impact future negotiations, in which they'll try to defend their royalty demands to the greatest extent possible. And in order to have a chance to persuade the Ninth Circuit, the numbers (right or wrong) would have to be dramatic, which would also scare investors. But without numbers, the public-interest argument here is a non sequitur. Even a non-starter. With numbers, one could at least perform a plausibility check.

On the merits (liability) side, the DOJ's filing is perfectly consistent with Mr. Delrahim's philosophy that patents are sacrosanct rights that antitrust law shouldn't interfere with. That philosophy, which one might even call a religion, is not the law, however. Nor should it be.

The most important aspect of the DOJ's merits-based argument is that a duty to deal must be a rare exception. In this regard, the DOJ's brief focuses very much on Judge Koh's citation to the Supreme Court's Aspen Skiing decision. I have re-read the related citations in the district court's findings of fact and conclusions of law, and nowhere does Judge Koh say or suggest that Qualcomm's obligation to extend FRAND licenses to rival chipset makers is like a photographic image of the fact pattern in Aspen. The Aspen case was about competing ski resorts in Aspen, CO. Originally, there were three resorts owned by three companies, but then one of them acquired one of the others, and created a fourth. When that consolidator owned three of the four resorts, it was no longer willing to continue a previously very popular and profitable multiarea-ticket cooperation with the sole remaining competitor on the previous--or any other reasonable--terms. The district court put the case before a jury, which identified an antitrust violation in the form of a refusal to deal, and both the Tenth Circuit and the Supreme Court affirmed.

I'm aware and, while I disagree, respect that many lawyers are very skeptical of the notion of an antitrust duty to deal with competitors. For an example, I know at least one lawyer who absolutely wants the likes of Qualcomm to be required to grant SEP licenses to rival chipset makers, but, as a matter of principle, purely on the basis of contract--not antitrust--law. Granted, Aspen is not the least controversial Supreme Court antitrust ruling in history. But its key holding--that a refusal to deal may constitute an antitrust violation under special circumstances--is still the law of the land and probably won't ever be overruled. There have been decisions like Trinko that stress the importance of not imposing a duty to deal in too many cases. But none of that makes Aspen an exclusive and extremely narrow path to the conclusion Judge Koh reached in FTC v. Qualcomm with respect to chipset licensing.

The DOJ argues that Judge Koh misapplied Aspen in two ways. First, the DOJ argues Qualcomm never voluntarily licensed other chip makers, but just "erroneously relied on its interpretation of Qualcomm’s FRAND obligations to standard-setting organizations, as required by their IP policies, as contractually compelling Qualcomm to license rival chip makers." This is at odds with the way Qualcomm portrayed (in its disputes with the FTC as well as Apple) its decision to make CDMA an industry standard, and to participate in standardization in general, as an act of generosity, or at least as a sound business decision. Second, the DOJ claims Judge Koh incorrectly held that Qualcomm discontinued (for anticompetitive reasons) something profitable by stopping at some point to license other cellular baseband chipset makers: "Qualcomm realizes greater profits by licensing at the end-device rather than the chip level." That's what Qualcomm had told the IRS as we know. But there's a wealth of evidence in the record, such as testimony by Intel and MediaTek, as to the anticompetitive effects of Qualcomm's rivals being unable to sell a licensed product to customers (and unable to control the effective bottom-line cost their customers incur). And on page 43 of the findings and conclusions, Judge Koh wrote that "the Court's focus is 'upon the effect of [the defendant's] conduct, not upon the intent behind it.'" (though anticompetitive malice is relevant, too)

Qualcomm's motion cited to some Ninth Circuit decisions, trying to argue that only a refusal to deal that is a bad business decision in the short run but a good one in the long run because of competitors being driven out of the market can be an antitrust violation. But that's not even what Aspen says. The dominant ski resort operator in Aspen presumably also had some very short-term benefits because a three-resort ticket (for all three resorts owned by that operator) was an attractive package in its own right, and nothing in Aspen says that only a long-term investment in the total annihilation of competitors constitutes an antitrust violation. What appears more important is that Qualcomm's refusal to deal had and still has anticompetitive effects on the chipset market. Qualcomm is/was not just one monopoly like the Aspen defendant, but the case is about two mutually-reinforcing monopolies (chipsets and patents, which are monopoly rights by definition, especially standard-essential patents). Qualcomm killed two birds with one stone by maximizing its patent royalties and greatly reducing the competitiveness of other cellular baseband chipset makers.

While it's unsurprising that Ericsson also supports Qualcomm's motion for a stay (Scribd link), the angle is interesting. Ericsson focuses on its use of Qualcomm chips in its base stations. However, Ericsson's motivation as a patent licensor to refuse to license chipset makers is well-documented, as is the fact that Ericsson itself once complained about such refusal to deal.

Another brief in support of Qualcomm has been filed by former Federal Circuit chief judge and pro-patent extremist Paul Michel.

Without a doubt, the Ninth Circuit will give some weight to the DOJ (plus DOD plus DOE) statement. But the FTC and its amici will now get to respond, and while the DOJ brief does contain some food for thought, I believe it can be effectively countered. However, at this stage it's about a motion to stay enforcement, so there won't be a full-blown analysis of the relevant questions. Qualcomm will be granted a stay if an analysis of limited depth results in a conclusion that there would be irreparable harm from immediate enforcement, that Qualcomm is reasonably likely to prevail on the merits, and that a stay is in the public interest. This hurdle is a lower one for Qualcomm than the actual appeal.

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