Qualcomm Wins On Appeal

An appeals court reverses an FTC antitrust action brought at the end of the Obama Administration against a U.S. chip manufacturing giant that will likely play a major role in 5G.

A United States appeals court overturned an antitrust decision the Federal Trade Commission (FTC) won against chip manufacturer Qualcomm in mid-2019 with possible ramifications in the 5G market as the company is one of the leading producers of technology that will likely be vital in the next generation of wireless communications.. At present, the FTC is considering whether it will appeal the decision, but it lacks the support of the other agency charged with enforcing federal antitrust and anti-competitive laws.

This decision comes at a time when many in both parties in Washington are pressing the FTC and United States (U.S.) Department of Justice (DOJ) to enforce U.S. antitrust and competition laws, particularly in the technology sector which is perceived as being dominated by a handful of huge firms. So, whether the FTC appeals will be informed by the political dimension as the Commission will surely receive inquiries and pressure to proceed and will need to explain why they did not if that course is chosen.

The United States (U.S.) Court Of Appeals for The Ninth Circuit (Ninth Circuit) reversed a U.S. District Court’s decision that Qualcomm’s licensing practices violated the Sherman Antitrust Act. Specifically, the lower court held these practices “have strangled competition in the Code Division Multiple Access (CDMA) and premium Long-Term Evolution (LTE) modem chip markets for years, and harmed rivals, original equipment manufacturers (OEMs), and end consumers in the process.” Consequently, the court found “an unreasonable restraint of trade under § 1 of the Sherman Act and exclusionary conduct under § 2 of the Sherman Act….and that Qualcomm is liable under the FTC Act, as “unfair methods of competition” under the FTC Act include “violations of the Sherman Act.”

However, the Ninth Circuit disagreed, overturned the district court and summarized its decision:

• [We] began by examining the district court’s conclusion that Qualcomm had an antitrust duty to license its standard essential patents (SEPs) to its direct competitors in the modern chip markets pursuant to the exception outlined in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). [We] held that none of the required elements for the Aspen Skiing exception were present, and the district court erred in holding that Qualcomm was under an antitrust duty to license rival chip manufacturers. [We] held that Qualcomm’s OEM-level licensing policy, however novel, was not an anticompetitive violation of the Sherman Act.
• [We] rejected the FTC’s contention that even though Qualcomm was not subject to an antitrust duty to deal under Aspen Skiing, Qualcomm nevertheless engaged in anticompetitive conduct in violation of § 2 of the Sherman Act. [We] held that the FTC did not satisfactorily explain how Qualcomm’s alleged breach of its contractual commitment itself impaired the opportunities of rivals. Because the FTC did not meet its initial burden under the rule of reason framework, [We were] less critical of Qualcomm’s procompetitive justifications for its OEM-level licensing policy—which, in any case, appeared to be reasonable and consistent with current industry practice. [We] concluded that to the extent Qualcomm breached any of its fair, reasonable, and nondiscriminatory (FRAND) commitments, the remedy for such a breach was in contract or tort law.

The Ninth Circuit noted that it stayed the district court’s decision pending the outcome of the appeal and remarked “we  characterized  the  district court’s order and injunction as either “a trailblazing application of the antitrust laws” or “an improper excursion beyond the outer limits of the Sherman Act.” The Ninth Circuit ultimately held “the district court went beyond the scope of the Sherman Act.” The Ninth Circuit explained

Anticompetitive behavior is illegal under federal antitrust law. Hypercompetitive behavior is not. Qualcomm has exercised market dominance in the 3G and 4G cellular modem chip markets for many years, and its business practices have played a powerful and disruptive role in those markets, as well as in the broader cellular services and technology markets. The company has asserted its economic muscle “with vigor, imagination, devotion, and ingenuity.” Topco Assocs., 405 U.S. at 610. It has also “acted with sharp elbows—as businesses often do.” Tension Envelope Corp. Our job is not to condone or punish Qualcomm for its success, but rather to assess whether the FTC has met its burden under the rule of reason to show that Qualcomm’s practices have crossed the line to “conduct which unfairly tends to destroy competition itself.” Spectrum Sports, 506 U.S. at 458. We conclude that the FTC has not met its burden.

The decision represents an obvious setback for the FTC, an agency trying to more actively enforce antitrust law. At the very end of the Obama Administration in January 2017, the FTC had claimed “that Qualcomm has harmed competition in two markets for baseband processors, also called modem chips, through a set of interrelated Qualcomm practices.” The FTC “filed a complaint in federal district court charging Qualcomm Inc. with using anticompetitive tactics to maintain its monopoly in the supply of a key semiconductor device used in cell phones and other consumer products” according to its press release. The FTC alleged “that Qualcomm has used its dominant position as a supplier of certain baseband processors to impose onerous and anticompetitive supply and licensing terms on cell phone manufacturers and to weaken competitors.”

One of the three sitting FTC Commissioners filed a dissent in which she argued

I  face  an  extraordinary  situation:  an  enforcement  action  based  on  a  flawed  legal  theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide. These extreme circumstances compel me to voice my objections.

The DOJ took the extraordinary step of arguing against its sister agency before the Ninth Circuit in support of barring the district court’s injunction against Qualcomm:

The district court’s ruling threatens competition, innovation, and national security. Its liability determination misapplied Supreme Court precedent, and its remedy is unprecedented. Immediate implementation of the remedy could put our nation’s security at risk, potentially undermining U.S. leadership in 5G technology and standard-setting, which is vital to military readiness and other critical national interests.

According to one media outlet, this was the first instance the DOJ had filed a brief arguing against the FTC in an antitrust case.

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