Let the Chips Fall Where They May: The 9th Circuit Gives Free Rein to Qualcomm’s MonopolyAugust 13, 2020
Some of my favorite movie moments are “reinforcement” scenes. Just when it appears the heroes are doomed, the music swells and unexpected allies arrive to save the day. You can probably picture the scenes: the resurrected Avengers arriving via portals in Avengers: Endgame or Gandalf and the Rohirrim’s grand entrance at Helm’s Deep. Many internet advocates see antitrust law this way: as a fearless knight whose climactic arrival will restore the proper balance of competition and cleanse the land of the competitive ills infesting technology markets. Tuesday’s terrible, horrible, no good, very bad, 9th Circuit ruling in FTC v. Qualcomm should put this savior notion to bed. It’s more apparent than ever that this newly construed, myopic antitrust law is simply not enough. The opinion completely throws out the excellent district court opinion and will allow Qualcomm free rein to continue its anticompetitive practices.
For those unfamiliar with the litigation, or Qualcomm generally, here’s a quick primer. Even if you’ve never heard of Qualcomm, chances are the chips the company manufactures are what make your smartphone work. Along with being a chip manufacturer, Qualcomm also has a lot of patents for its chips that it licenses out to smartphone manufacturers — Apple, Samsung, and so on. Qualcomm’s patents are so integral to the cell phone networks (3G, 4G, and now 5G) that they have become part of the standards that all phone manufacturers must use. Standards are needed in that we want phones from different manufacturers to be able to talk to each other on the same networks, and we want phones to work across the world.
However, there’s a competitive rub. Patent law has given Qualcomm a government-backed monopoly in that all phone manufacturers must license from Qualcomm if they want to make a phone at all. This would be patently unfair if Qualcomm, knowing that every manufacturer must pay for a license, could then charge whatever the company wants. That’s why, as a condition of becoming the standard, Qualcomm committed to licensing its patents on fair, reasonable, and non-discriminatory (FRAND) terms. In theory, this should mean that Qualcomm should offer low, reasonable royalty rates to all comers. The case is all about how the company really doesn’t. They benefit massively from having their patents included in a standard — patents that might be worthless had the standards body picked some other technology or method — but then don’t uphold their end of the bargain.
Qualcomm has set exorbitant royalty rates for its patents and only licenses its patents to manufacturers — not its chipmaker rivals. One could term this selective refusal to deal “discrimination,” the exact thing Qualcomm promised not to do. FRAND commitments generally preclude a patent owner from refusing to license to another company for competitive reasons. Qualcomm’s royalty rates are also incredibly high and only sold to manufacturers via “portfolios” that bundle essential and non-essential patent licenses together. Qualcomm’s “no license, no chips” policy, along with agreements with rivals to only sell to Qualcomm-licensed manufacturers, gives Qualcomm unprecedented control over the chip market. Qualcomm uses this control to a competitively devastating effect. The end result is that Qualcomm has ensured a market where all manufacturers must pay Qualcomm royalties, and where the company can undercut rivals with its high royalty fees, it does.
The opinion’s take on antitrust law is disheartening. Despite detailed cataloging of the many deceptive and anticompetitive behaviors of Qualcomm, the court finds no antitrust liability whatsoever. Like so many courts prior, the 9th Circuit finds minor quibbles with the overly narrow duty-to-deal doctrine jurisprudence (Aspen Skiing and its progeny) and removes that vector of liability. If there was ever a time to invoke the doctrine, it would be when a company had made a legal bargain to license to all comers — exactly what Qualcomm had done with its FRAND commitments. The court continues the trend of duty-to-deal cases since Trinko: if the fact pattern isn’t identical to Aspen Ski, then there’s no duty to deal.
The district court’s persuasive arguments of Sherman Act § 2 violations are similarly swept away. Here is where perhaps the most ludicrous part of the opinion comes into play. The court argues that there is no antitrust harm in the “relevant market” because Qualcomm’s anticompetitive actions are directed at its customers — phone manufacturers — and not directly at its rivals.If this argument is taken to its logical conclusion, antitrust law crumbles. A company can perpetuate the whole host of anticompetitive actions that antitrust law is there to prevent as long as it doesn’t directly attack its competitors. No matter if those actions result in higher prices, lower product quality, and fewer choices for consumers. It requires the smallest of logical leaps to see how coercing a product’s customers to only buy from you (paying exorbitant royalties in the process) would negatively impact your competitors. One need not even imagine as this is exactly what happened in the chip market as would-be competitors flocked to the exits (including Texas Instruments, Broadcom, and NVIDIA, to name a few) while there has been little meaningful entry to loosen Qualcomm’s chip monopolies.
The opinion is full of language attempting to cabin antitrust law into a smaller and smaller box. The adage that antitrust protects competition rather than individual competitors has now morphed into antitrust law only protecting against direct adversarial actions that harm competitors. The opinion keeps antitrust out of what the court terms “patent and contract disputes.” Finally, the opinion cites literature that finds antitrust wholly ill-suited to fast-moving and innovation-heavy technological markets. This erosion of antitrust law leaves little left to actually protect competition in technology markets.
The somewhat odd case background also illustrates the political fallibility and languid nature of antitrust law. Originally filed during the sunset of the Obama administration, the case suffered from a deadlocked Federal Trade Commission after Chairman Simons recused himself. The Department of Justice even publicly supported Qualcomm, further muddying the enforcement waters. After the initial filing of the case, Qualcomm was able to reach a settlement with perhaps the largest private complainant, Apple, further weakening the case for other complainants. Meanwhile, a preliminary injunction from the appeals court meant that Qualcomm’s anticompetitive practices were allowed to continue while the case was being decided. Not coincidentally, Intel, the company Apple was relying on to counterbalance Qualcomm and its greatest 5G competitor, bowed out. It appears that Qualcomm might control the next generation of cellular standards with the same stranglehold it has over this one.
The takeaway here echoes so much of the platform competition work that we do: Antitrust jurisprudence is increasingly anti-enforcement, and even when the law is appropriately applied, it just isn’t enough. If we want to really rein in abusive practices in these markets, we need regulatory solutions coupled with antitrust enforcement. In this case, perhaps stronger oversight and regulation of standard-setting organizations would be in order. A regulator could peel back the opaque process of standard setting, answer the question of just how “essential” some of Qualcomm’s patents are, and perhaps even enforce stronger patent price controls.
Reality isn’t a movie. There is no wizard-led cavalry charge or resurrected Spiderman to swoop in and save the competitive day. A new digital regulator isn’t that exciting, but it can be effective. Whether its Qualcomm dominating chips, Facebook dominating social networks, or Google dominating online search, a new digital regulator focused on platforms can not only protect competition, but also promote it. The result could be more options and cheaper products for consumers — not quite superhero fodder, but worth fighting for all the same.
About Alex Petros
Alex is a Policy Counsel at Public Knowledge, where he focuses on digital platform competition issues. Prior to joining Public Knowledge, Alex worked for Senator Amy Klobuchar, Senator Richard Blumenthal, the House Committee on Oversight and Reform, and Senator Joe Donnelly. Alex received his J.D., cum laude, from Georgetown University Law Center and his B.A. from Yale College in Economics and Political Science with distinction. He was born and raised in Lexington, KY and enjoys Kentucky basketball, trivia, fantasy football, and romantic comedies.