Tantra Analyst

FTC vs. Qualcomm: What do skeptical appeals panel, defiant defendants, and dwindling arguments mean?

The title best describes the current situation after the recent hearing in the more-than-yearlong saga between FTC and Qualcomm. On Feb 13th, 2020, a three-judge panel of the US Court of Appeals for the Ninth Circuit (Ninth Circuit) heard Qualcomm’s appeal to reverse the ruling of the US District Court of Northern California (lower court). During the hearing, the panel asked a lot of skeptical questions to FTC regarding its position, arguments, and precedents, probed Qualcomm’s stance, and almost snubbed the US Department of Justice (DoJ). Although the judges appeared confused in the beginning, they seemed to have gotten the main points toward the end. Based on the verbal and non-verbal communications of the judges, Qualcomm definitely had a more positive day than FTC.

<<Side note: If you would like to understand the history of the case, please refer to the article series “FTC vs. Qualcomm Antitrust Trial”>>

I was fortunate enough to be in the court to witness the hearing. The appeals panel consisted of three judges: Judge Callahan, Judge Rawlinson, and Judge Murphy III.  Being in front of them, I was able to observe lots of their non-verbal cues, such as subtle changes in mood and facial expressions, inaudible grunts, how keenly were they listening to whose arguments, etc., which many people watching online might have missed. 

With only about 50 minutes allocated to the hearing, both parties only focused on the main points. What caught my eye was that during Qualcomm’s arguments, judges were more in the listening mode and only prodding Qualcomm for clarifications. But during FTC’s time, they were more skeptical, often questioning and challenging FTC counsel’s assertions, and mostly in the “so what” mode. This is unlike other appeals cases, where usually appellants (Qualcomm in this case) face more scrutiny. 

<<Side note: Please refer to my articles here and here for more details on the arguments at play in the case>> 

Duty to deal 

FTC massively hurt their case by conceding that Judge Koh had erred in citing the Aspen Skiing case as the precedent for “Duty to Deal,” i.e. the ruling that Qualcomm has the duty to license its patents to competitors. Judge Callahan even went to the extent of saying that the house of cards, i.e. FTC’s case, starts to fall if the card of Aspen case is pulled out. Qualcomm obviously made a field day with it, quoting lower court’s argument that “Duty to Deal” was one leg of the three-legged stool, and with that gone, the case couldn’t stand (literally and figuratively). FTC’s alternate precedents of Caldera and United Shoe Company cases, or argument about Qualcomm breaching FRAND commitments to Standards Setting Organizations (SSOs) didn’t seem to impress the panel. So, I am positive that this ruling will be reversed.

 “No license no chips” policy

This argument confused the heck out of judges. Multiple times Judge Callahan asked and confirmed that Qualcomm was not accused of the “No chips No license” policy, which obviously is antitrust conduct. She even suggested that probably Judge Koh of the lower court was confused about that as well! In other words, she didn’t think “No License No Chips” was anti-competitive. There was a clear difference of opinion between FTC’s and Qualcomm’s counsels on how OEMs expressed their views on the policy. FTC said that many witnesses from smartphone OEMs had given testimonies about paying higher royalties because of the risk of not getting chips. On the other hand, Qualcomm said that there was only one witness, from one OEM, in a non-monopoly market. To my recollection attending those hearings, mostly OEM expressed that they felt such policy existed, but never showed any evidence of Qualcomm practicing it. So, obviously, the panel will have look at the actual testimonies to make their determination. There was no discussion on whether this policy itself was illegal or not. but using this policy for creating the alleged surcharge on competitors.

Surcharge on competitors

If no license no chips discussion was confusing, this torturous surcharge claim hypothesis knocked the wind out of judges! Judge Murphy even said that he was having a hard time keeping up with all these things! I don’t blame them. Most of FTC’s time was spent on making the judges understand what FTC calls a surcharge, how it affects competition in their view etc. As expected, the panel challenged this claim from multiple angles—precedence, market evidence, harm to competition not competitors, etc. and tried to poke holes in FTC’s position.

Here are the notable questions and challenges. Judge Rawlinson asked “… what would be wrong with that (higher royalty fees), doesn’t the Supreme court say that patent holders have the right to price their patents, what would be anticompetitive about that?” and “..What case says that it is anti-competitive to move (cost) from chip to patent?” Judge Callahan asked, “Why did the OEMs say it’s unfair because they have to buy a license anyway?”; “..who is a Goliath here, Apple is more of a Goliath than Qualcomm”; “..your argument that Qualcomm’s licensing fees increase rival’s cost doesn’t make sense to me…” ; “There seems to be….. a conflation of profitable and anti-competitive (one means the other).”; “… weren’t there multiple competitors enter the …market successfully beginning around 2015, leading to a precipitous decline in Qualcomm’s market (share)? Judge Murphy III asked, “…why don’t we let OEMs exercise their right in patent law to file (cases for) predatory pricing, abuse of monopoly, etc. (instead of antitrust law)?” These were mere samples.

The panel was unconvinced and most likely will still be even after looking at the documents.

Chip volume incentives or royalty discount

This issue was not discussed as much as others but was used as a basis for other arguments. FTC claims that Qualcomm’s volume discount to Apple is exclusionary and anti-competitive. Qualcomm, during its rebuttal, argued that licensing and chipset are two separate contracts and it doesn’t make sense to combine them. Again, this is another issue where the judges will have to look at the documentation and decide.

Is the “Threat to national security” argument justified?

This is the first time that DoJ and FTC are on opposite sides of a case. Qualcomm ceded five minutes of their time to DoJ. DoJ’s major claim is that the lower court’s global and expansive remedy harms national security. Judge Murphy seemed hostile against DoJ and asked whether they have any market analysis or financial evidence to prove the claim. DoJ counsel, although startled by the question, came back with a reasonable explanation that the basis for the case was 3G and 4G, but applying the remedy to 5G will negatively affect the country’s standing in 5G. 5G being such a crucial technology for many aspects of the country, DoJ and other government departments (Department of Defense and Department of Energy) are convinced that implementing the ruling will harm the country.  FTC counsel was quick to capitalize on Judge Murphy’s assertion and discount the security concern as a simple abstraction without any supporting studies. 

I am not sure whether the panel will consider the security question seriously. 

What does all this mean?

You have to consider that the hearing is only one part, albeit an extremely important one, in resolving the case. The court will examine all the briefs, and case documentation before making a final decision. One could argue that the cues from the hearing may be overblown, for example, all those questions and challenges could just be the judges probing both parties to completely understand their stance and such. However, specific things such as difficulty in fully grasping the FTC’s argument, and understanding its point of view clearly indicate that the judges don’t believe those arguments and are not taking them at the face value. It also suggests that the FTC’s arguments are not as robust as the lower court thought they were. 

From Qualcomm’s perspective, after a clear win with the stay, this hearing turned out to be very positive. The FTC had a major initial setback because of the Aspen Skiing reversal, but at least made the panel understand its arguments. Whether the panel agrees with them or not is a separate matter. In my view, Judge Callahan and Judge Rawlinson seem to be aligned with Qualcomm’s arguments and Judge Murphy seems to be neutral or slightly aligned with FTC’s argument. Ultimately, as Judge Murphy III succinctly put it, “anticompetitive behavior is illegal… hyper-competitive behavior is not… this case asks us to draw the line between the two.” Meaning, the judges have to decide whether Qualcomm’s behavior is anticompetitive or hyper-competitive.

What’s next?

There is no fixed timing for the Ninth Circuit’s decision. The expectation is six to twelve months. The decision doesn’t have to be unanimous, meaning, only two of the three judges have to agree. 

In terms of outcome possibilities, the panel could completely knock down all the lower court’s rulings, or fully uphold them, or do anything in between. Meaning, it could agree to some parts of the ruling and reverse the others or make a determination on some and send the others back to the lower court to reconsider. No matter what the panel’s decision is, either party can request a full panel review, which involves all the 20+ judges at the Ninth Circuit, and further knock on the Supreme Court’s door. If Qualcomm loses, especially the claims that affect its licensing policy, I am sure it will go to the Supreme Court. On the other hand, if the FTC loses, it might ask for the full panel review and let it go after that. 

As it stands today, I think Qualcomm is in a pretty good situation and more likely to win than the FTC.

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