Saturday, November 23, 2019

FTC seeks to defend chip-level licensing part of Qualcomm antitrust ruling with right-for-the-wrong-reasons strategy

Late on Friday, the Federal Trade Commission (FTC) filed its answering brief to Qualcomm's appeal (this post continues below the document):

19-11-22 FTC Answering Brie... by Florian Mueller on Scribd

The part I'm most interested in--as always in this context--is chipset-level licensing. When I commented on Qualcomm's opening brief in the summer, I agreed with them in part. The problem with the Aspen Skiing (more recently endorsed in Trinko) logic applied by Judge Lucy H. Koh of the United States District Court for the Northern District of California is that the abandonment of a prior profitable and voluntary conduct is key--and in Qualcomm's case the problem is that they didn't really want to grant exhaustive licenses to rival chipset makers and only did so because they relied on an exhaustion theory that the Supreme Court disagreed with in Quanta. So at a minimum they can argue that they did not do knowingly and willingly what they did until the Quanta decision came out and they changed their licensing strategy.

Another--potential--problem with the Aspen Skiing logic is that the refusal to license rival chipset makers allows Qualcomm to collect more from end-product makers ("humongously more lucrative" as Qualcomm told the IRS), but there isn't a lot of time that passes between the two steps (refusal at chip level and collection at end-product level)--much less is it a strategy that works only by forcing someone else out of business in order to then turn a monopolist's profit (even with competitors around, it's more profitable).

In order to affirm the district court's ruling under the Aspen/Trinko standard, one would have to overcome some hurdles. The FTC apparently concludes it's smarter to lower the standard in order to prevail.

On pages 69 and 70, the FTC clearly spells it out. Just like at the stay stage, they're not going to try to defend Judge Koh's reasoning--but they do seek to defend the outcome:

"The FTC does not argue that Qualcomm had a duty to deal with its rivals under the Aspen/Trinko standard. But that heightened standard does not apply here, because—unlike the defendants in Aspen, Trinko, and the other duty-to-deal precedents on which it relies—Qualcomm entered into a voluntary contractual commitment to deal with its rivals as part of the SSO process, which is itself a derogation from normal market competition. And although the district court applied a different approach, this Court 'may affirm on any ground finding support in the record.' [...]"

So what does the FTC consider to be a better mouse trap?

They still appear to feel they're in a very strong position on contract law. Judge Koh's summary judgment that held Qualcomm to have a contractual obligation under its FRAND declarations to U.S. standard-setting organizations (ATIS and TIA) to license rival chipset makers is also under attack from Qualcomm (with a "more equal than others"-like argument), but it's going to be far harder for Qualcomm to get that one overturned. They couldn't even get it overturned directly--at most they could get a remand for the purpose of a trial where they could present extrinsic evidence, and even that is unlikely to happen because it's simply not necessary under California law when a contract is perfectly clear.

As for Qualcomm's "more equal than others" argument, the FTC's answering brief notes that "Qualcomm does not deny that it has received chip-level licenses from over 120 companies—including Ericsson," and recalls that Nokia, another amicus curiae supporting Qualcomm on this issue, once "argued to the European Commission 'that Qualcomm's termination of a modem chip license agreement' violated its 'duty to license on FRAND terms.'" (Ironically, Nokia itself is now the target of five automotive-industry complaints over a refusal to license component makers.)

The FTC is very likely to defend Judge Koh's sumamry judgment on contract interpretation. But that will not, in and of itself, result in an affirmance (for different reasons) of the finding that Qualcomm acted anticompetitively by refusing to license rival chipset makers. The FTC makes it clear that "[o]f course, a breach of contract, 'standing alone,' does not 'give rise to antitrust liability.'" But it can be a violation "when it satisfies traditional Section 2 standards--that is, only when it 'tends to impair the opportunities of rivals and either does not further competition on the merits or does so in an unnecessarily restrictive way.'" (citing to the Ninth Circuit's Cascade Health ruling, which does point to Aspen Skiing in that particular context, but without finding that the Aspen Skiing standard as a whole applied to Cascade Health)

Based on the record it's then not hard for the FTC to argue that the opportunities of Qualcomm's chipset rivals were impaired and that this behavior didn't advance competition on the merits. There's plenty of industry testimony to that effect.

In its efforts to avoid the Aspen/Trinko standard ("a generalized duty to deal with its rivals" as the FTC describes it), the FTC's brief distinguishes the cases because there was no equivalent of a voluntary FRAND licensing commitment in order to have one's inventions included in a standard in Aspen Skiing. The FTC argues that "the antitrust violation lies in the failure to act as agreed"--again, not just because a breach of contract would be an antitrust violation in all cases related to competition issues but because Qualcomm's FRAND commitments "are among the 'meaningful safeguards' that SSOs have adopted to mitigate this serious risk to competition":

"Courts have therefore recognized that conduct that breaches or otherwise 'side-steps' these safeguards is appropriately subject to conventional Sherman Act scrutiny, not the heightened Aspen/Trinko standard. Of particular relevance here, the Third Circuit held that a rival chipmaker had adequately alleged that Qualcomm itself violated Section 2 because it falsely promised an SSO that it would license its technology on FRAND terms, 'but then breached those agreements.' Broadcom [...]. The Third Circuit declined to apply the Aspen/Trinko test, emphasizing that the case 'd[id] not involve a refusal to deal.' [...] It would thus be inappropriate to apply the heightened Aspen/Trinko standard to a monopolist's exploitation of the SSO process to reinforce its anticompetitive conduct."

The FTC then points to a case in which the Ninth Circuit also "applied traditional antitrust standards to breaches of voluntary commitments made to mitigate antitrust concerns" (in that case, a merger remedy) and a similar approach in the District of New Jersey:

"In Mount Hood Stages, Inc. v. Greyhound Corp., [...] (9th Cir. 1977), this Court upheld a judgment holding that Greyhound violated Section 2 by refusing to interchange bus traffic with a competing bus line after voluntarily committing to do so in order to secure antitrust approval from the Interstate Commerce Commission for proposed acquisitions. [...[; see also, e.g., Biovail Corp. Int'l v. Hoechst Aktiengesellschaft, [...] (D.N.J. 1999) (breach of commitment to deal in violation of FTC merger consent decree exclusionary under Section 2).

What I like conceptually about the FTC's line of reasoning here is that FRAND commitments don't come out of nowhere: if the companies sitting at the standard-setting table didn't make those commitments, competition enforcers would have to take action against them at that stage, given that standard-setting is by definition exclusionary. The FRAND commitment is what enables the positive aspects of standardization, which no one would deny, to outweigh concerns over its potentially exclusionary effects--by making exclusion impossible (as long as each participant honors their FRAND pledge). Just like I called Greyhound's commitment in the Mount Hood Stages case a "merger remedy," the FRAND pledge a company makes to a standard-setting organization is a cartel remedy. Then, provided that non-compliance has anticompetitive effects, it constitutes an antitrust violation if the Ninth Circuit adopts the Third Circuit's application of the law.

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