Thursday, May 23, 2019

Thoughts on Judge Koh's Findings of Fact and Conclusions of Law in FTC v. Qualcomm

As noted yesterday, Judge Lucy Koh has now entered her 233-page Findings of Fact and Conclusions of Law in FTC v. Qualcomm, concluding that Qualcomm violated U.S. antitrust law.  Now that I've had a chance to read through the Findings of Fact and Conclusions of Law, here are my thoughts.  (For conciseness, from here on I'll call the Findings of Fact and Conclusions of Law an opinion.)

1.  Overall, I think the opinion is quite impressive.  Judge Koh's analysis of the evidence seems thorough, and she bases her legal conclusions on that evidence.  In several portions of the opinion, she indicates how contemporaneous documents contradicted what Qualcomm witnesses said at trial (e.g., about the firm not actually threatening to cut off OEMs' supply of chips).  I suspect that Judge Koh's detailed factual analysis will make it very hard for Qualcomm to prevail on appeal.  (As for the appeal, I wonder if the DOJ will weigh in again at the appellate level?  Very odd to have the two federal antitrust enforcers taking different views about the role of antitrust in policing FRAND breaches, as discussed here . . . .)

2.  Among the key factual conclusions are that Qualcomm had market power in the markets for CDMA and premium LTE modem chips; that Qualcomm imposed de facto exclusivity requirements on OEMs and on Apple (through, e.g., rebates,  threats of cutting off supply, and agreements that purchasers/licensees wouldn't challenge Qualcomm's patents or other licensing practices; see summary at pp. 113-14, 151); and that the royalties Qualcomm charged for its SEPs were above-FRAND (pp. 157 et seq.).  In reaching this last conclusion, Judge Koh finds, among other things, that Qualcomm earned $7.7 billion in licensing revenue in 2016, which "exceeded the combined 2016 licensing revenue of twelve other patent licensors, including Ericsson, Nokia, and Interdigital" (pp. 8-9)--even though other firms' patents contribute more value to the standards by which end devices operate (pp. 165-66).  Judge Koh also appears to be of the view that FRAND licenses generally must be based on the smallest saleable patent practicing unit (SSPPU), in order to conform to Federal Circuit precedent (pp. 172-73).

3.  The key legal conclusion, in my view, is that Qualcomm excluded competitors in the markets for CDMA and premium LTE chipsets by means of (1) its "no license, no chips" policy, and (2) its imposition of de facto exclusive dealing requirements on the OEMs and Apple.  In an article I published in Law360 a couple of months ago, I explained how the no license, no chips policy could lead to this result.  Since (in the short term, at least) all the OEMs care about is the "all-in" price--that is, the price Qualcomm charges for the combination of chips + license--Qualcomm can manipulate the price of the license to put its rivals at a competitive disadvantage.  E.g., if the all-in price Qualcomm charges an OEM, taking into account discounts, rebates, etc., is $20, consisting of $10 for a license and $10 for a chip, a rival could charge the OEM no more than $10 for a chip.  (These numbers I'm using are for illustrative purposes only.)  Suppose further that a FRAND royalty would be $5 and that the marginal cost of producing a comparable chip, not including the FRAND royalty, is $12.  On these hypothetical facts, however, the OEM could not charge more than $10 for its comparable chip, and thus Qualcomm's circumvention of its FRAND commitment would be a direct cause of the rival's inability to compete.  That would be the economic theory, at any rate, and I believe that is what Judge Koh has in mind at pages 153-54, 185 in her discussion of why the no license, no chips policy enables Qualcomm to maintain its chip monopolies.  Such a scheme might also involve rebating back some portion of the all-in price when the OEM buys chips from Qualcomm and not from a rival.

4.  Further, Qualcomm's imposition of de facto exclusivity requirements on OEMs and on Apple puts competitors at an obvious disadvantage, particularly given the high costs of entry into the chipset market (and thus the need for some prospect of a significant customer base to make that investment worthwhile).  Judge Koh appears to provide a substantial evidentiary basis for her conclusion that Qualcomm's conduct contributed to the inability of Intel and other potential rivals to gain a foothold in the chipset market during the time period in question.

Judge Koh also concludes that, in view of her summary judgment ruling from last fall, Qualcomm's FRAND commitment required it to license its competitors, and thus amounted to an antitrust duty to deal.  Under Judge Koh's analysis of the Aspen Skiing case, Qualcomm's breach of this antitrust duty itself amounted to a violation of Sherman Act section 2 (see pp. 134-31).   

5.  By these means, Judge Koh concludes, Qualcomm was able to foreclose potential rivals and maintain its monopolies in the CDMA and premium LTE modem chip markets.  This diminished competition resulted in the OEMs (and, ultimately, consumers) paying higher prices and having fewer alternatives from which to choose.

Some portions of the opinion, in isolation, might be read as resting on the premise that Qualcomm's breaches of its FRAND commitments (e.g., charging above-FRAND royalties), standing alone, caused competitive harm and thus violated the antitrust laws (see, e.g., p.183).  In my view, this would be a more tenuous claim under U.S. antitrust law, which generally doesn't make it illegal for a monopolist merely to charge a monopoly price.  Nevertheless, I think there is enough in the opinion to support the conclusion that Qualcomm's circumvention of its FRAND commitments enabled it to distort competition in the chip markets and thus to maintain its monopoly power (which is a standard sort of antitrust offense under U.S. law).  The harm is then measured by the higher prices consumers pay and, possibly, by the loss of whatever the foreclosed rivals would have contributed to longer-term innovation in the chip markets.  On the latter harm, see, e.g., pp. 124, 196-98; Judge Koh would appear implicitly to reject arguments that penalizing Qualcomm will have a negative impact on innovation.

6.  As for remedy, Judge Koh asserts that "Qualcomm’s anticompetitive conduct is ongoing," in that it "continues to refuse to provide patent exhaustion, refuse to sell modem chips to an OEM until the OEM signs a license, and engage in chip supply threats and cutoffs" (p.218).  The resulting injunction has five provisions (pp. 227-33):
 (1) Qualcomm must not condition the supply of modem chips on a customer’s patent license status and Qualcomm must negotiate or renegotiate license terms with customers in good faith under conditions free from the threat of lack of access to or discriminatory provision of modem chip supply or associated technical support or access to software.
(2) Qualcomm must make exhaustive SEP licenses available to modem-chip suppliers on fair, reasonable, and non-discriminatory (“FRAND”) terms and to submit, as necessary, to arbitral or judicial dispute resolution to determine such terms.
(3) Qualcomm may not enter express or de facto exclusive dealing agreements for the supply of modem chips.
(4) Qualcomm may not interfere with the ability of any customer to communicate with a government agency about a potential law enforcement or regulatory matter.
(5) In order to ensure Qualcomm’s compliance with the above remedies, the Court orders Qualcomm to submit to compliance and monitoring procedures for a period of seven  (7) years. Specifically, Qualcomm shall report to the FTC on an annual basis Qualcomm’s compliance with the above remedies ordered by the Court.
Judge Koh thus rejects the DOJ's suggestion from a few weeks back that there should be some further briefing or hearing on remedies (pp. 226-27).  

No comments:

Post a Comment