Wednesday, August 12, 2020

A few further thoughts about FTC v. Qualcomm

1.  I've seen some speculation today whether the FTC could file a petition for rehearing en banc, or even a cert. petition.  In my comments yesterday, I was assuming that the answer was no, absent authorization from the Commission itself, which is deadlocked 2-2.  But maybe I'm wrong; maybe appellate counsel could do that on its own initiative.  I would be interested in hearing from someone who knows more about this topic.

2.  I've also seen commentary taking the court to task for two points in particular, one of which I alluded to yesterday, the other not.  The one I didn't is the court's statement at p.28 "If, in reviewing an alleged Sherman Act violation, a court finds that the conduct in question is not anticompetitive under § 1, the court need not separately analyze conduct under § 2."  To the extent this conflates the standards for liability under §§ 1 and 2, that's obviously wrong, though I think in context all the court meant is that if the plaintiff fails to prove any anticompetitive effect, as it apparently believes was the case here, it's going to fail under either provision.  Still and all, that statement does seem contrary to statements made by other courts.  See, e.g., United States v. Microsoft Corp., 253 F.3d 34, 70-71 (D.C. Cir. 2001):
On appeal Microsoft argues that “courts have applied the same standard to alleged exclusive dealing agreements under both Section 1 and Section 2,” Appellant's Opening Br. at 109, and it argues that the District Court's holding of no liability under § 1 necessarily precludes holding it liable under § 2. The District Court appears to have based its holding with respect to § 1 upon a “total exclusion test” rather than the 40% standard drawn from the caselaw. Even assuming the holding is correct, however, we nonetheless reject Microsoft's contention.
The basic prudential concerns relevant to §§ 1 and 2 are admittedly the same: exclusive contracts are commonplace—particularly in the field of distribution—in our competitive, market economy, and imposing upon a firm with market power the risk of an antitrust suit every time it enters into such a contract, no matter how small the effect, would create an unacceptable and unjustified burden upon any such firm. At the same time, however, we agree with plaintiffs that a monopolist's use of exclusive contracts, in certain circumstances, may give rise to a § 2 violation even though the contracts foreclose less than the roughly 40% or 50% share usually required in order to establish a § 1 violation. See generally Dennis W. Carlton, A General Analysis of Exclusionary Conduct and Refusal to Deal—Why Aspen and Kodak Are Misguided, 68 Antitrust L.J. 659 (2001) (explaining various scenarios under which exclusive dealing, particularly by a dominant firm, may raise legitimate concerns about harm to competition).
In this case, plaintiffs allege that, by closing to rivals a substantial percentage of the available opportunities for browser distribution, Microsoft managed to preserve its monopoly in the market for operating systems. The IAPs constitute one of the two major channels by which browsers can be distributed. Findings of Fact ¶ 242. Microsoft has exclusive deals with “fourteen of the top fifteen access providers in North America[, which] account for a large majority of all Internet access subscriptions in this part of the world.” Id. ¶ 308. By ensuring that the “majority” of all IAP subscribers are offered IE either as the default browser or as the only browser, Microsoft's deals with the IAPs clearly have a significant effect in preserving its monopoly; they help keep usage of Navigator below the critical level necessary for Navigator or any other rival to pose a real threat to Microsoft's monopoly. See, e.g., id. ¶ 143 (Microsoft sought to “divert enough browser usage from Navigator to neutralize it as a platform.”); see also Carlton, at 670.
Plaintiffs having demonstrated a harm to competition, the burden falls upon Microsoft to defend its exclusive dealing contracts with IAPs by providing a procompetitive justification for them. Significantly, Microsoft's only explanation for its exclusive dealing is that it wants to keep developers focused upon its APIs—which is to say, it wants to preserve its power in the operating system market. 02/26/01 Ct. Appeals Tr. at 45–47. That is not an unlawful end, but neither is it a procompetitive justification for the specific means here in question, namely exclusive dealing contracts with IAPs. Accordingly, we affirm the District Court's decision holding that Microsoft's exclusive contracts with IAPs are exclusionary devices, in violation of § 2 of the Sherman Act.
3.  The other principal error, which I alluded to yesterday, is the court's apparent failure to perceive that conditions imposed on the OEMs (no license, no chips; de facto exclusive dealing; incentives not to challenge Qualcomm's patents; etc.) harm not just the OEMs, but would distort the markets for CDMA and LTE modem chips, by excluding potential competition in those markets.   As I stated, "Throughout the opinion the court talks about how Judge Koh focused on the harm to OEMs and not so much on harm to the markets for CDMA and LTE modem chips (see, e.g., pp. 30-31, 36, 41, 44), but as I understood the FTC's case the theory was that the policies imposed on OEMs had the intended effect of distorting competition in those chip markets." 

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