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Judge Koh Is No 5G Wiz
Judge Lucy Koh of the Northern District of California gave the Federal Trade Commission an enormous victory this past week in its antitrust lawsuit against Qualcomm. Her conclusion was that “Qualcomm’s licensing practices have strangled competition” in key markets to the detriment of rivals, original equipment manufacturers (OEMs), and consumers.
Her solution was a stern edict that at a minimum forces Qualcomm to abandon its “no-license, no chip” policy in three key ways. First, as that label suggests, Qualcomm may no longer sell its chips only to parties who have already obtained a license—perfectly proper under patent law—to use chips that contain Qualcomm’s patented technology. Second, Qualcomm must renegotiate all of its contracts worldwide to make sure that it only charges “fair and reasonable rates” for all of its technology and chipsets, including now required sales to its direct competitors in the 5G market. Third, the order prohibits Qualcomm from entering into “any express or de facto exclusive dealing relationships” with its customers. As the Wall Street Journal wrote, Judge Koh’s “Qualcomm coup” effectively “kneecaps” the major American player in the 5G market.
I have worked as a legal advisor and consultant for Qualcomm for many years, and have always been stunned by the huge number of antitrust attacks that are raised against the company solely because it is an industry leader in both the United States and world markets. Treating this issue as a basic matter of patent law, a “pioneer patent”—that is, one that goes to a company that made a major advance in patented technology—has always received the broadest interpretation, and, through that protection, the largest financial rewards. The social judgment here is clear: consumers are far better off paying high royalties for a new product that they desperately want than they are paying no royalties on a product that they cannot obtain.
Judge Koh turns this sensible policy on its head by finding that Qualcomm has imposed barriers to entry in the form of its early and powerful innovations. She laments “that industries that require ‘onerous front-end investments that might deter competition from all but the hardiest and most financially secure investors are characterized by structural entry barriers.”
No. From the standpoint of antitrust law, it is best to think of a barrier to entry as some formal legal obstacle—a regulation, tax, or permit—that is imposed on a subsequent entrant that the initial entrant did not face. To treat the high cost of developing a rival technology “from scratch” as a barrier to entry means that the initial entrant is now forced by law to provide subsidies to its late-coming rivals. This introduces a regime of cross-subsidies that distorts the investment decisions of both early and subsequent players. The point is especially relevant here because Judge Koh makes excuses for Intel, whose then-Chief Strategy Officer, Aicha Evans, complained that Qualcomm had a two decades head start on Intel, which forced Intel to invest “lots of money, billions of dollars, and an army of engineers” to generate a premium LTE modem chip business from scratch.
The point here has an even deeper irony because of the troubled competition between Intel and Qualcomm for Apple’s huge iPhone business. One of the inexcusable features of Judge Koh’s decision is that she writes that nothing that happened after January 17, 2017 bears on whether she should issue an injunction, or the terms on which it should be issued. That January date matters because this law suit was the last critical action of the Obama-controlled FTC, which filed this lawsuit in parallel with a similar lawsuit that Apple brought in its separate litigation against Qualcomm.
The history is more complicated, because it shows how exclusive dealing arrangements can come and go. Until 2016, Qualcomm was the exclusive supplier of chips to Apple. But at that time it acquired some chips from outside sources. In July 2018, Apple then announced that it would include no Qualcomm chips in its new lines debuting that fall, which resulted in the full-scale litigation war between the two companies. But Apple’s deal with Intel became unglued when its chips did not meet Apple’s quality standard. Thus the Apple/Qualcomm litigation unexpectedly settled on April 16, 2019 when Apple entered a comprehensive settlement with Qualcomm, whereby it agreed, in addition to large cash payments, to the kind of exclusive agreement that Judge Koh wrongly assumes stifles competition. Within hours, Intel exited the 5G modem phone market.
It is a fundamental tenet of antitrust law that the disappointed fortunes of one single competitor do not establish an antitrust violation by its successful rival. The entire system of competition necessarily requires weak and outmoded companies to be weeded out—think Blackberry and Texas Instruments. So Judge Koh makes a serious mistake when she attributes the exit of other companies to supposedly illicit contracting practices, when in all likelihood their failures stemmed from their inability to keep up with the pace of innovation of the industry leaders. Ironically, Judge Koh duly recounts the supposed travails of MediaTek, an aggressive Taiwanese competitor in the 5G market, whose successes, as Judge Koh noted, resulted in lower Qualcomm prices, just as standard economic theory predicts. Indeed, speaking generally, before it becomes remotely possible to make out any claim of illegal monopolization, it is necessary to control for quality differentials that could explain persistent price variations in the chipset market.
Judge Koh’s understanding of the situation is indeed still worse than this because she does not have any clear account of what counts as the supposed antitrust violation under either the Sherman Act of 1890 or the Federal Trade Commission Act of 1914. The paradigmatic antitrust violation is combination or collusion by rival sellers in order to restrain output and raise prices. The social loss in such a situation does not consist in the transfer of wealth from consumers to producers. Monopolization losses result from the inability to complete socially beneficial trades at prices above the competitive price point, but below the monopoly price. There were no charges of collusion against Qualcomm, so Judge Koh had to find some unilateral practices of Qualcomm that resulted in the permanent elevation of prices above the competitive level.
That task is doubly difficult because Judge Koh concedes the practices challenged are not “collusive, coercive, predatory or exclusionary in character,” and thus she has to rely on some residual notion of antitrust “unfairness” that has no structure or content. And even then she has to negate any possible efficiency advantages of these practices, like the “no license, no chips” policy which Qualcomm has followed.
At this juncture, her opinion is an utter failure, for she ignores all the sensible reasons why a firm might want to impose a no-license, no chip policy. Just how, for example, is it sensible for a firm to have to first sell its products and then chase after its purchasers in separate suits for patent infringement that are costly to bring and could take years to complete? No buyer of chips wants to pay in advance for the deadweight cost of litigation that the no-license, no chips policy avoids.
Next, Judge Koh mangles Justice Scalia’s important decision in Verizon Communications v. Law Offices of Curtis V. Trinko (2004). Trinko stands for two critical propositions. The first is that contract breaches are not normally antitrust violations. Oftentimes, companies like Qualcomm contribute standard essential patents to set telecommunications standards. Normally these agreements require that the patentees license their product by common carrier rules, requiring that they charge only fair, reasonable and nondiscriminatory rates. Trinko makes it clear duties of this sort are enforced solely by remedies for breach of contract, and not under the antitrust statutes.
Second, Trinko stands for the proposition that, except in rare cases, the antitrust law does not require any firm to do business with its competitors. Justice Scalia wrote that “[w]e have been very cautious in recognizing such exceptions, because of the uncertain virtue of forced sharing and the difficulty of identifying and remedying anticompetitive conduct by a single firm.”
Nonetheless, in dealing with Trinko, Judge Koh threw that caution to the wind, ignored the strong presumption and imposed the comprehensive ratemaking remedy that Justice Scalia warned about. The only case pointing some duty to deal is Aspen Skiing Co. v. Aspen Highlands Skiing Co. (1985), which held, in a much-criticized decision, that it could constitute an antitrust violation for three ski resorts, which previously offered package deals with a fourth, to break off that arrangement. That case involved neither ratemaking nor a new forced association. Judge Koh never addressed this obvious distinction.
Indeed, the efficiency of Qualcomm’s refusal to deal with competitors was not unique. Other firms have long followed a similar practice. As Judge Koh noted: “Following Qualcomm’s lead, other SEP licensors like Nokia and Ericsson have concluded that licensing only OEMs is more lucrative, and structured their practices accordingly.” But she misses the obvious point that the practice may be more lucrative because it is more efficient for all firms regardless of their market power.
Finally, Judge Koh misunderstands the exclusive dealing provision whereby Qualcomm contracts to become the sole supplier of chips. Judge Koh sees some mysterious antitrust violation because Qualcomm offers key customers like Apple a rebate for high volume purchases. But at no point does she even consider the efficiency explanation that the rebates are needed to purchase that loyalty, and in so doing lower the effective rates. All in all, moreover, these rates are stunningly low, at about 3.3 percent of a cell phone price.
All in all, Judge Koh’s disastrous opinion in FTC v. Qualcomm stands for the startling proposition that it is possible to create an antitrust violation out of market success in an industry marked by high levels of innovation and lower prices. Fortunately, the case is subject to an appeal which should, one can only hope, result in the speedy demise of such a spectacularly misguided opinion.
© 2019 by the Board of Trustees of Leland Stanford Junior University
Published in Law, Technology
I have not read the opinion. And I am very reluctant to defend the intellectual property knowledge of federal judges because generally the only people on the planet with lesser IP knowledge are their clerks and, of course, law professors.
But, much existing jurisprudence on patent licensing/anti-trust is garbage and she may feel bound by it.
You are very right on one point. The main beneficiaries of this nuttiness are foreign companies. US IP rights are practically the only thing keeping many innovative US companies alive in a world where foreign governments strongly put their thumbs on the scales of justice to favor their own.
Its kinda sad that lawyers seem to be in charge of everything. They spend so much of their brain power on the tiniest sliver of human endeavors that they figuratively know nothing about everything else.
Technology is a very complex area of endeavor in its own light, but lawyers get involved and really throw some random roadblocks into the mix.
Qualcomm has a interest in its technologies being as widely accepted and used as possible – its in the communications component business the world needs device compatibility in order to work. They would fail if they started to follow a Sony BetaMax or HD-DVD model that would limit the compatibility of independently manufactured systems.
She is an Obama appointee, in case anyone was wondering.
Qualcomm spends a *lot* on legal. I assume nothing is over until they say it is over.
“Qualcomm, you didn’t build that!” she says.
Given all the difficulties on the horizon with Huawei, you would think that having an American company being successful in this arena would be applauded. Personally, regardless of tariffs (and I can’t wait for the tariffs to end), I believe we need be as self reliant as possible with technology and particularly phones. The phone has such and impact on our lives, it holds sensitive data, financial data, and if not properly protected may be exploited by bad actors abroad. Qualcomm successfully developing these technologies and continuing to spend money on Research and Development is the model of how this country has succeeded since 1776. They created a great product, people loved it, they innovated, made a better product, drove down prices for consumers, and continued to invest in making their product better despite competition falling behind. I am not saying that we give them any special advantages outside of the law, but can we recognize that it is good to have an American company in this space?
Also, could they have held this case elsewhere? It seems to me everything coming out of that court is anti-liberty garbage. Judge Koh is a hack. She had a decision in mind and then reverse engineered to justify her decision. You would think there is a better place for a case like this to be heard than in Deadhead Country. She’s treating Intel like its the United States Postal Service and must be protected with our lives and our sacred honor. Their product was inferior. They did not invest enough to keep up with the market. They know this and that is why they left the space.
Welcome to Ricochet!
Richard,
I haven’t followed either the tech or the legal details as well as I should in this particular case. However, this kind of thing always makes me remember Judge Bork. Arlen Specter couldn’t stand Bork’s less than ideological view of antitrust. Because Bork insisted that one take a pragmatic view of each case on its merits I honestly think Specter voted against Bork for this reason. At the time I wasn’t quite sure myself about the issue. Having seen the ham-fisted destructive overreach of overzealous antitrust action in the last 30 years I realize just how prophetic Judge Bork was.
This Qualcomm coup sounds more like an ideological cheap shot. Especially when dealing with major tech that is changing rapidly, the pragmatic approach is the right approach.
Regards,
Jim
Not wondering exactly, but thanks for saving me the lookup.
So, this judge is in effect saying to require a license to use anything proprietary is illegal? Say goodby to innovation . . .
Reminds me of Judge Jackson and the Microsoft decision.
There is a strong libertarian argument made by Walter Block, an Austrian school economist, that no one should have patent protection in a free society.
But presumably pretty much unlimited freedom of contract. Correct?
Thus, if Qualcomm invented a brilliant new protocol, they could keep its details secret and condition customers’ use on an essentially perpetual NDA, noncompete, etc. And they could calculate the revenues based on any formula the customer would agree to.
Any licensed hardware would come with a no reverse engineering license.
Actually no.
If Qualcomm invented a new protocol they’d widely license it so that all manufactures could build devices to use it. The value of technology is not in its rarity but in its commonality.
The most common CPUs are made by ARM, they’re in almost everything from cell phones to cars and kitchen appliances, most (if not all) of the semiconductor foundries have a version that they make for several of these embedded markets. The CPU computer users are most familiar with are x86-64 instruction set chips made by Intel or AMD, these chips shared instruction sets make it easy for software vendors to produce software that will run on either system (mostly) without specialization. This common instruction set makes both chips more valuable and gives users a choice that doesnt inhibit their future software selections.
If you look back at the history of technological failures, starting with BetaMax, although it was technically superior to VHS, it lost the consumer market war because Sony refused to license the technology to allow other vendors to compete for market share. For the next format war, Blueray vs HD DVD, Sony went so far as to buy a movie studio to make sure its format was not starved of content.
License what?
Dave’s premise is we are talking about Block’s perfect libertarian world where there is no patent (or copyright presumably). With no patent, the only thing you have to license is the trade secret. That requires keeping the details secret.
I will echo @ctlaw and state that I did not read any of the legal decisions, nor do I know a thing about what QC has orhasn’t been up to with regards to its business dealings.
However any good patent writer knows to always put a loop hole in their structuring of the patent so that they can undo legal decisions like this. As nefarious as the activity would be, if QC had a really top notch patent writer, they would have a secondary product that is similar and perhaps almost technically identical to the first, but that would not be legally and patent-wise identical to the first patent’s product. Then QC could enter into the same contracts with the secondary product. They could continue doing that until the court heard a case based on the nefarious business practices regarding the secondary patent’s product, which could be years down the road.
Koh is the judge who held against Prager. Although I agree with the part of her decision that Prager did not adequately plead state action on his first amendment claim, I disagree with the part dismissing his Lanham Act claims. However, he could have done a much better job pleading them.
As I understand it, 5G is a method of offering up short wave microwave frequencies that will bombard the civilian population. Supposedly the reason for it coming into being is for the sake of self driving cars. Self driving cars will globally obliterate one quarter of a billion delivery jobs by 2025.
Those radar experts who were trained in the 1970’s were taught that one of the worst conditions, health wise, for humans to experience is to have both short waves and long waves entering their bodies at the same time. Since many cell towers will still be emitting long waves while the 5G comes into place, we will all be waiting to see what exactly does happen to a population used as guinea pigs.
The top officials in Belgium have gone on to state that their population will not become such test animals. Our military-industrial-surveillance complex would never allow any high ranking American official to take such prescient care of We The People.
Reaping the benefits of one’s work is one of the bases for capitalism, and it is freedom – the freedom to earn money from your efforts. Patents protect those efforts, although for a limited time, thus combining contribution to the greater good of society and personal wealth through invention.
Block must be a blockhead . . .