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

The American Antitrust Institute (AAI) and Public Knowledge (PK) have filed an amicus brief supporting the Federal Trade Commission (FTC) in its monopolization case against Qualcomm, the dominant provider of modem chipsets used to power smartphone handsets.

The FTC alleged that Qualcomm violated Section 2 of Sherman Act by unlawfully maintaining its monopolies in two chipset markets through a multipronged scheme that raised rivals’ costs and denied OEMs and consumers the benefits of competition.

According to the complaint, Qualcomm implements a “No License No Chips” policy that conditions access to essential modem chips on the purchase of Qualcomm’s patent license.  The patent license requires OEMs to pay an elevated royalty on standard-essential patents (SEPs), which Qualcomm promised two standard-setting organizations (SSOs) it would license on fair, reasonable, and non-discriminatory (FRAND) terms.  At the same time, Qualcomm refused to license its SEPs to rival chip manufacturers, strategically breaching the non-discrimination prong of its FRAND commitment.   It also imposed an exclusive dealing arrangement on Apple, locking up the market’s most important customer.

After a ten-day bench trial in the Northern District of California, Judge Lucy Koh issued a 230-page opinion in favor of the FTC.  Judge Koh held that Qualcomm’s scheme allowed Qualcomm to unlawfully maintain its monopolies by collecting a portion of the revenue generated by its chipsets via a license to practice patents essential to industry standards.  The effect was to raise the all-in price to OEMs of doing business with Qualcomm’s rivals, because OEMs had to pay an artificially inflated royalty on sales of every handset practicing the standard, including handsets containing rivals’ chips.

On appeal, with the support of the Trump Administration’s Justice Department, Qualcomm challenges a variety of different facets of the district court’s holding, including its liability findings and issuance of injunctive relief.  But Qualcomm focuses heavily on the district court’s holding that the FTC adequately proved that Qualcomm’s scheme had an anticompetitive effect sufficient to establish monopolization.

The AAI-PK brief focuses on the proper standards for identifying and proving an anticompetitive effect in monopoly maintenance cases.  The brief emphasizes that, in a monopoly maintenance case, the relevant benchmark is a competitive price, not the pre-existing monopoly price, and the anticompetitive effect is not that prices rise or output falls but rather that pre-existing monopoly conditions persist.  Qualcomm’s arguments fail to account for this dynamic and would raise the government’s burden of proof beyond what is required by case law, sound economic reasoning, and common sense.

The brief also emphasizes that the district court credited ample direct and indirect evidence that is more than sufficient to support a finding of monopoly maintenance.  And it argues that Qualcomm’s conduct is properly evaluated under the rule of reason, not a heightened price-cost test tailored to predatory pricing claims.   Whereas the heightened test for predatory pricing is concerned with the risk of chilling conduct that benefits consumers, such as discounting, here the challenged conduct involves a tax on rivals’ sales, which only makes consumer products more expensive.  The risks associated with false positives in the predatory pricing domain are therefore absent.

The brief was written by AAI Vice President of Legal Advocacy Randy Stutz, with assistance from AAI Research Fellow Taryn Smith.