Saturday, November 30, 2019

Former Secretary of Homeland Security, former FTC chairman, and conservative think tank dismiss Qualcomm's and DOJ's "national security" arguments

In its answering brief to Qualcomm's Ninth Circuit antitrust appeal, the FTC says Qualcomm simply "abandoned" its national security argument before the district court and can't revive it now. Nevertheless, many of the (by now) 14 amicus curiae briefs supporting the FTC address the topic to some extent--and the one filed by the R Street Institute (a think tank close to the GOP) even focuses entirely on why any "national security" concerns over Judge Lucy H. Koh's ruling are unfounded because, if anything, Qualcomm's monopoly poses a threat to national security (this post continues below the document):

19-11-28 R Street Institute... by Florian Mueller on Scribd

The author, Charles Duan, is a well-known amicus brief writer. He always writes persuasively and comes up with interesting thoughts. In the past I agreed with his views in some cases and disagreed in others. With respect to FTC v. Qualcomm, I find parts of his brief a bit far-fetched, but in principle I agree with most of what he wrote.

The R Street Institute argues that "patents and even market concentration can also foster innovation, but only to a degree." Healthy competition is still required: "[S]trong patent protection is complementary to strong competition; the former does not promote innovation without the latter."

The brief gives examples of cases in which there was either hard evidence or at least some indication that patent holders who enforced their monopolies too aggressively or sought to charge unreasonably high royalties imperiled U.S. national security. Those examples include the Wright Brothers' patent enforcement against competitors, which had a chilling effect on the U.S. aviation industry (compared to European counterparts) in the early 19th century, a temporary shortage of torpedoes (which forced the U.S. to buy them from a power that was on the verge of becoming an enemy), or the problems the U.S. government faced when chemical company Bayer wanted to charge a rather high per-unit price for Cipro, its anthrax drug, at a time when the U.S. (after 9/11) had to fear a large-scale anthrax attack. Mr. Duan describes those situations in a balanced way, also pointing to criticism of certain views.

What doesn't convince me is his "monoculture" argument. That's a strong point with respect to software (operating systems and key applications) that can be infected by viruses. I can't imagine a virus could take control of a Qualcomm baseband chip.

But he does have a point that competition fosters innovation and, ultimately, is the best recipe for U.S. technological superiority. The notion that Qualcomm should now be afforded special protection because it drove various U.S. competitors out of business (which is basically what Qualcomm and its friends at the DOJ suggest) is truly absurd.

The R Street Institute's brief points to a recent op-ed by former Secretary of Homeland Security (under President George W. Bush) Michael Certoff in the Wall Street Journal, arguing that it's actually Qualcomm's monopoly that poses a threat to national security.

Another official who served in Republican administrations, Professor Timothy Muris, filed an amicus curiae brief this week (this post continues below the document):

19-11-29 Timothy Muris Acb by Florian Mueller on Scribd

Professor Muris was a senior FTC official under President Reagan, and FTC chairman under President George W. Bush. His brief is mostly about general principles of sound competition enforcement. This is a Republican, not a statist. More than anything else Professor Muris's brief is a response to Antitrust Assistant Attorney General Makan (I tend to call him "Macomm" because of his constant support of Qualcomm and his Qualcomm past) Delrahim's filing(s) in support of Qualcomm against the FTC--just a "historical anomaly" as Professor Muris explains.

Professor Muris recalls how somewhat similar concerns were raised almost 50 years ago in connection with the "MaBell" (AT&T) breakup, but ultimately competition had huge benefits for everyone and actually made the U.S. even more secure.

He shares a concern I also had immediately when I saw the Ninth Circuit motion panel's order granting Qualcomm a stay of the enforcement of two parts of the FTC's injunction: the order says that Judge Koh's ruling may be affirmed, but in that case it would be a "trailblazing application of the antitrust laws." Professor Muris contradicts and says the decision "fits squarely within traditional antitrust law." With respect to Qualcomm's "No License--No Chips" policy, Professor Muris notes that "[c]onditioning purchase of a monopoly product on taking a patent license is standard antitrust fare, ripe for examination under well-accepted antitrust principles."

Macomm Delrahim has a position that, according to the brief, "departs sharply from historical practices" and "abandoned the consensus among policymakers, SSOs, and courts concerning patent holdup in favor of an unprecedented position that impermissibly treats patents like natural rights—all of which underlie its position in this case." It's a widespread fallacy to consider patents a type of property like real estate with respect to the right to exclude (or to deny licenses). It's a problem in other jurisdictions as well.

Toward the end, Professor Muris also addresses "national security." He, too, points to former Secretary of Homeland Security Michael Chertoff's op-ed and argues that "[t]he better view is that the loss of innovation from Qualcomm's anticompetitive conduct, giving Qualcomm monopoly protection, is as much, if not more, a national security issue. Some reduction in SEP royalties that Qualcomm may receive going forward doesn't pose a fundamental threat to a company that "is extremely well capitalized with over $12 billion in cash, cash equivalents, and marketable securities on its balance sheet at the end of its last fiscal year—more than half of its annual revenues," and "[since 2015] has authorized double that amount in stock buybacks."

In light of all of that, Professor Muris rejects the idea of givign Qualcomm "special treatment" and instead wants the company to "play by the rules and focus on contributing to American innovation without illegally excluding its rivals."

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