Tuesday, August 11, 2020

The Ninth Circuit's Decision in FTC v. Qualcomm: A Brief Analysis

As I noted this morning, the Ninth Circuit has now issued its opinion in FTC v. Qualcomm, reversing the district court and vacating the injunction.  The opinion is by Judge Callahan, who clearly seemed to be persuaded by Qualcomm during the oral argument, joined by Judges Rawlinson and Murphy.  With the FTC itself divided 2-2 (Chairman Simon having recused himself), it looks like this will be the end of the road for this litigation.  I'm disappointed--I thought the FTC had a meritorious case, for reasons discussed here, here, and here, and I joined a brief supporting affirmance, see here--but so it goes.  Here are a few highlights from the opinion.

First, in light of its ruling on the antitrust issues, the court has vacated, as moot, Judge Koh's judgment that Qualcomm breached its contractual obligation, under the TIA and ATIS SSO policies, by not licensing rival chipmakers (opinion p.20).  So whether those policies (and other policies having similar wording) impose a license-to-all requirement, as Judge Koh found, or an access-to-all policy, as Qualcomm contended, is legally an open issue.  (For my recent thoughts on license-to-all versus access-to-all, see here.  This is becoming an extremely important issue in the 5G/connected cars sphere.)

Second, it's pretty clear that the panel has bought into the SEP owner/DOJ/George Mason Law School view of antitrust economics and of the antitrust/SEP interface.  The opinion cites with favor the Supreme Court's 5-4 decision in American Express several times, which I suppose you could say is nothing odd, since it's a Supreme Court decision; but it is an opinion that (in my view, and in the views of several leading antitrust commentators including Herb Hovenkamp and Fiona Scott Morton, see pp. 31-32 of this paper) takes a decidedly, in some ways shockingly, narrow view of the scope of antitrust.  There is also a reference to Qualcomm as "disruptive" (p.51)--inevitable, I suppose, given the author's frequent use of that term during oral argument--and the opinion is rife with quotes from commentators such as Josh Wright, Judges Paul Michel and Douglas Ginsburg, and Geoff Manne.  Part IV of the opinion sums up the panel's take:  that while "[a]nticompetitive behavior is illegal under federal antitrust law," "[h]ypercompetitive behavior is not."  Qualcomm isn't liable simply because it "acted with sharp elbows" (p.55).  Let me add, I'm not saying this is wrong, just that it kind of shows where the panel is coming from in approaching the issues here.

On the substance, the court begins by attacking what has always seemed to me to be the most vulnerable part of Judge Koh's analysis, namely that Qualcomm had (and breached) an antitrust duty to deal under Aspen Skiing (pp. 31-36).  In my view (and in the FTC's view), that holding wasn't crucial to the FTC's theory, or to the judgment; so again, I suppose, the fact that this is what the panel highlights shows you where they're coming from in approaching the issues in this case.  (I will note, however, in this regard, that Herb Hovenkamp has an interesting take on why the rationale behind Aspen actually would support Judge Koh's finding of an antitrust duty to deal--because evasion of "a FRAND requirement by licensing selectively only to noncompetitors threatens to undermine the entire competitive purpose of the [SSO] joint venture," see here at p.138.)

The panel also doesn't buy what I thought was a strong argument for the FTC--namely, that the "no license-no chips" policy in effect enabled Qualcomm to maintain its monopoly in the CDMA and LTE modem chip markets, by being able to manipulate the two components of the all-in price charged to OEMs in such a way as to discourage them from buying chips from Qualcomm's rivals.  I'm not sure whether the court simply disagrees on whether the evidence supported this theory (see p.47, citing 411 F. Supp. 3d at 800; but compare amicus brief p.15 n.8), or (with all due respect) just doesn't get how such a policy could have this impact.  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.

The court also disagrees with Judge Koh's conclusion that Qualcomm's royalty rates were unreasonable, noting that in support of this conclusion she cited Federal Circuit case law on the SSPPU/entire market value rule debate, which the panel concludes is equivocal on the point (and more designed for jury trials) (see pp. 42-44).  As I recall, however, this was hardly the only evidence that Judge Koh cited that Qualcomm was charging supra-FRAND royalties.  Of course, none of that is relevant anyway if merely charging a high price is not an antitrust violation (which it isn't, in the U.S.), though again if looked at as part of the mechanism by which Qualcomm was able to manipulate the all-in price to discourage competition in the chip markets, it is.

Finally, the court shows a bit of sympathy for the FTC's de facto exclusive dealing argument (p.53 & n.24), before concluding nonetheless that the evidence didn't show that the agreements at issue foreclosed competition (p.54) or justify an injunction going forward (p.55).     

Well, as I said, I'm disappointed in the result; I think it's wrong on the economics, and ultimately sets a bad precedent by making it easier for incumbents to fend off nascent or potential competition.  It was certainly a hard-fought battle on all sides.  On now to other fronts in the SEP wars.

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And in other news, this just in via Law360:  ED Texas jury awards PanOptis $506 million in 4G patent suit against Apple.

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