Judge Koh's Monopolization Mania: Her Novel Antitrust Assault Against Qualcomm Is an Abuse of Antitrust Theory

• Publication year: 2021

98 Nebraska L. Rev. 241. Judge Koh's Monopolization Mania: Her Novel Antitrust Assault Against Qualcomm Is an Abuse of Antitrust Theory

Judge Koh's Monopolization Mania: Her Novel Antitrust Assault Against Qualcomm Is an Abuse of Antitrust Theory

Richard A. Epstein(fn*)

TABLE OF CONTENTS

I. Introduction: A Blockbuster Decision .................. 242

II. The Typology of Antitrust Offenses .................... 247
A. Per Se Offenses ................................... 247
B. Rule of Reason Cases .............................. 247
C. Per Se Legality or "NoDuty" Rules ................ 250

III. FTC v. Qualcomm .................................... 250
A. The Complaint and the Ohlhausen Dissent ........ 250
B. The Monopolization Issue .......................... 253
C. Market Definition ................................. 256
D. Trinko and the Antitrust Duty to Deal ............. 257
E. Qualcomm's Pricing Policy-The Use of Constant Rates ............................................. 260
F. The FTC Valuation Dilemma ...................... 264
G. Qualcomm Efficiency Justifications ................ 266

IV. Conclusion ............................................ 270

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I. INTRODUCTION: A BLOCKBUSTER DECISION

On May 21, 2019, Judge Lucy Koh handed down her decision in Federal Trade Commission v. Qualcomm,(fn1) one of the most important-and devastatingly misguided-decisions in the annals of antitrust law. At stake in this litigation was the entire business model of Qualcomm, which has long been acknowledged as one of the leaders in 5G technology, where it contains an extensive portfolio of patents and pending patent applications, estimated to number about 140,000.(fn2) The gist of the Federal Trade Commission's (FTC) complaint was that Qualcomm, virtually from its inception, engaged in a set of unilateral monopolistic practices that allowed it to extract unreasonably high rates for the combination of its patented technologies and the chipsets that it supplies to original equipment manufacturers (OEMS), other than Qualcomm competitors. I shall examine the key allegations in the case, but it is critical at the outset to note the extensive nature of the injunctive relief that Judge Koh awarded on a worldwide basis.(fn3) She was relentless in her condemnation: "In combination, Qualcomm's licensing practices have strangled competition in the CDMA [codedivision multiple access] and premium LTE [longterm evolution] modern chip markets for years, and harmed rivals, OEMs, and end consumers in the process."(fn4) She concluded that, in light of the ongoing nature of the Qualcomm violations, it was necessary to enter a sweeping injunction against the continuation of Qualcomm practices.(fn5) The

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key elements of that relief were that Qualcomm had to (1) abandon its "no license, no chips policy" and offer all of its chips to both its competitors and OEMs on "exhaustive" licenses (those in which Qualcomm waives any effort to seek legal relief against any customer of its licensee) on fair, reasonable, and nondiscriminatory terms; (2) review the terms of each of its license agreements with all of its customers to see that they are issued on fair and reasonable terms; and (3) abstain from entering into "express or de facto exclusivedealing agreements" with its customers.(fn6)

Judge Koh's decision has received a rocky reception since its publication. On August 23, 2019, a unanimous panel of the Ninth Circuit granted a stay of the order pending its resolution on appeal.(fn7) That decision applied traditional principles in order to reach three central conclusions. First, the Ninth Circuit held that Qualcomm had raised "serious questions" on the merits of the decision below. Second, Qualcomm had demonstrated the likelihood of "irreparable harm" absent a stay, and third that the balance of equities pointed toward a stay. The brief per curiam decision took issue with the two central conclusions of the district court decision that Qualcomm (1) has an antitrust duty to license its SEPs to rival chip suppliers, and (2) engaged in anticompetitive conduct by using its royalty rates to effectively impose a surcharge on competitive chips.(fn8) On the first of these questions, the Ninth Circuit found that the duty to deal was far more limited than Judge Koh had concluded, so that in all but exceptional circumstances any firm is free to choose the parties to whom it wishes to sell and the prices on which those sales will take place. It also noted that the standard antitrust case law does not support the proposition that any party can engage in "monopoly leveraging" by the way in which it prices goods and services in two markets-in this instance, the market for chips and the independent market for Qualcomm technology that is sold separately from the chips. It also noted the unusual situation where the Department of Justice had filed its own brief to express its "stark disagreement" with the approach that the FTC had taken in this case.(fn9) I know of nothing in this case which would lead the Ninth Circuit to reverse field when the briefing is completed, and I now firmly expect that the decision of Judge Koh will be overturned on

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this appeal. The remainder of this article, written before the interim stay was granted offers my arguments in favor of that conclusion.

Indeed, the decree gave rise to a remarkable intergovernmental dispute as the Department of Justice (DOJ), which has concurrent jurisdiction over antitrust matters, took the unprecedented step of filing its own papers before Judge Koh and asked that she go easy on the remedy stage of the case in the event that she found antitrust violations.(fn10) The DOJ's filing provoked a fierce response from the FTC and its defenders, who branded the request as "untimely" and claimed that it "misconstrues applicable law and the record"(fn11) in what has to rank as one of the most profound public disagreements on antitrust policy between the FTC and DOJ.

Clearly the stakes in this decision are extraordinarily high both for its impact on Qualcomm and the 5G market, as well as for the future shape of antitrust law in the United States and across the globe. In light of the case's significance, it is important to review this decision in some detail, taking care to examine it using the proper conceptual framework for antitrust analysis. Antitrust law is a complex body of law that looks at a bewildering set of business practices, some benign and some not, in order to ferret out and stop various strategies of monopolization. The motivation for this approach is easy to spot.

The shift from a pure competitive regime to a monopoly regime always entails some element of social loss. The higher prices that are charged by the monopolist are not simply a distributional gambit, whereby the producer gains exactly the same amount of wealth that consumers lose. Why anyone should care about a zerosum transaction is hard to see. Indeed, these distributional consequences are hard to disentangle because antitrust litigation typically involves litigation between different entities, both public and private, which makes it especially difficult to know how any given decision influences the wealth of individuals who often have stakes in the multilayered entities on both sides of the dispute. To incur high administrative costs to rearrange the outcome of some zerosum game is always a form of social waste. Therefore, the reason why the antitrust law focuses on monopoly power is that the exercise leads in most cases to a negativesum game. The monopolist gains less than the consumers of that product

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or service lose. The higher price exceeds the reservation price of at least some consumers, so as some consumers drop out of the market, fewer gainful transactions are completed.

There is one important correlative of the above analysis: the disastrous social consequences of mistakenly finding an antitrust violation from the practice of procompetitive strategies by firms that have a competitive advantage based on superior technology, better marketing, more astute management, or any combination of the above. This pattern is evident in the FTC case against Qualcomm, which relies on a novel monopolization theory that has little precedent in earlier case law on the subject. When this Article was first prepared, Qualcomm was fighting a two front war. The first front was the FTC prosecution of the matter before Judge Koh. At the same time, a complicated second front started with a systematic attack by Apple, now settled, which had initiated its own antitrust litigation against Qualcomm as part of an ongoing dispute over the patent royalties that Apple owed Qualcomm.(fn12) Qualcomm also sued Apple for its misuse of Qualcomm trade secrets, which were alleged to have been shared improperly with Intel in order to allow Intel to build its own 5G chips to power the next generation of Apple smart devices.(fn13) That was a spirited battle of titans until the case was settled suddenly and dramatically in April 2019, when Apple and Qualcomm dropped all claims against eachother.(fn14)

The terms of the settlement called for all litigation to cease between the two companies. In addition, Apple renewed its license for a sixyear licensing agreement by which Apple will power its new line of iPhones with Qualcomm chips, reversing its 2016 decision to obtain chips exclusively from Intel.(fn15) It also appears that...