AAI Supports FTC in Qualcomm Case (FTC v. Qualcomm)

The American Antitrust Institute (AAI) filed an amicus brief in support of the FTC’s monopolization case against Qualcomm.  In a filing in the with federal district court in San Jose, California, the AAI agreed with the FTC that Qualcomm’s motion to dismiss the complaint should be denied.

The FTC’s complaint charges Qualcomm with using anticompetitive tactics to maintain its monopoly in the supply of certain critical types of baseband processors (or “chipsets”), a key semiconductor device that enables cell phones and other mobile devices to connect with cellular networks.

Specifically, the FTC alleges that Qualcomm used its dominance in chipsets to coerce cell phone manufactures (OEMs) like Apple and Samsung to pay excessive royalties to license Qualcomm’s cellular standard essential patents (SEPs), which in turn raises the costs of rival chipmakers.  Qualcomm also extracted exclusive dealing arrangements from Apple, which further solidified Qualcomm’s monopoly.

The complaint indicates that consumers are harmed by Qualcomm’s conduct in two ways.  They are harmed immediately because excessive royalties charged to OEMs are passed along to consumers who pay higher prices for cell phones or receive lower quality devices with fewer features, or both.  And consumers are harmed over the longer term because the foreclosure of rivals reinforces Qualcomm’s chipset monopoly, which allows it to charge supracompetitive “all in” prices for chipsets (chipsets plus royalties) and impairs innovation in mobile technologies.

The FTC asserts that Qualcomm’s conduct constitutes unlawful monopolization under § 2 of the Sherman Act and an unreasonable restraint of trade under § 1 of the Sherman Act.  And the FTC contends that, even if Qualcomm’s conduct does not violate the Sherman Act, it constitutes a “standalone” violation of § 5 of the FTC Act.

The complaint was controversial because it was issued by the FTC at the end of the Obama administration over a dissent by Commissioner Ohlhausen, who is now the acting chairman.  Qualcomm’s motion to dismiss reprises some of the objections raised by Commissioner Ohlhausen, including that: the complaint fails to allege that Qualcomm’s royalty demands for licensing its SEPs are not fair, reasonable, and non-discriminatory (FRAND); it fails to show that any excessive royalties foreclose Qualcomm’s rivals because cell phone manufacturers pay the same royalties whether they buy a Qualcomm or a rival chipset; and to the extent there is foreclosure, the complaint rests on a “price squeeze” theory which is barred by the Supreme Court’s ruling in Pacific Bell v. linkLine.

AAI’s amicus brief addresses each of these points and sets forth the appropriate legal standards for addressing the FTC’s monopolization and “standalone” § 5 claims.  The amicus brief makes the following points, among others:

• The fact that Qualcomm’s royalties increase (proportionally) with increases in the price of a smart phone due to features that have nothing to do with cellular connectivity (like longer battery life or greater data storage), while Qualcomm’s share of cellular patents declines, is prima facie evidence that its royalties are unreasonable.
• The complaint’s allegation that Qualcomm is able to obtain elevated royalties by threatening to withhold essential chip supplies if OEMs challenge Qualcomm’s royalty demands in court is well grounded.
• Raising rivals’ costs can be an effective exclusionary strategy even if the costs nominally apply across the board.
• linkLine does not bar the complaint even if Qualcomm’s conduct is characterized as a price squeeze, because Qualcomm’s voluntary FRAND commitments create an antitrust “duty to deal.”
• The government is not required to show “clear evidence” of anticompetitive effect in a monopoly maintenance case. It is enough that a defendant has engaged in anticompetitive conduct that reasonably appears capable of making a significant contribution to maintaining monopoly power.
• The requisite competitive harm for an unfair methods claim may be less than, or different from, the competitive harm required for a § 2 violation.  Section 5 addresses conduct that could lead to violations of the Sherman or Clayton Acts.  And it is available when the conduct of a monopolist harms competition or the competitive process without regard to its exclusion of rivals, such as when a patent holder breaches a licensing commitment designed to mitigate monopoly power in technology markets that is conferred by the standard-setting process, where the resultant harm is to competition in the markets that use the technology and to the standard-setting process itself.
• The antitrust laws play a critical role in policing FRAND evasions where harm to competition is evident in technology markets or product markets in which the technology is used.  That role is doubly important where, as the FTC alleges, a standard-setting participant has monopoly power in a product market and it uses that power to evade FRAND constraints and thereby hobble its rivals, entrench its monopoly, and harm millions of consumers.

AAI’s brief was written by AAI Vice President and General Counsel Richard Brunell with assistance from AAI Advisory Board member Eric Fastiff and the Lieff Cabraser firm, who acted as local counsel.  Assistance was also provided by AAI Associate General Counsel Randy Stutz and AAI Research Fellow Mark Angland.