“’The [district court’s] remedy—aside from putting the nation’s security at risk and potentially undermining U.S. leadership in 5G technology and standard-setting—transforms the role of antitrust courts from adjudicators to central planners, a role for which the Trinko Court expressly stated they are ill suited.’”
Judge Douglas Ginsburg of the U.S. Court of Appeals for the D.C. Circuit, Professor Joshua Wright, and attorney Lindsey Edwards of Wilson Sonsini Goodrich & Rosati, have condemned the decision in FTC v. Qualcomm Inc. (N.D. Cal. May 21, 2019) in the George Mason University Law & Economics Research Paper Series. In their paper, “Section 2 Mangled: FTC v. Qualcomm on the Duty to Deal, Price Squeezes, and Exclusive Dealing,” the authors characterize the decision as being a part of “the misguided trend of using antitrust law to intervene in contract disputes between sophisticated parties negotiating over intellectual property rights.”
“Three Glaring Errors” in FTC v. Qualcomm Decision
According to the authors, “three glaring errors” are apparent in the district court FTC v. Qualcomm decision. First, the court inappropriately expanded the exception to the rule permitting refusals to deal well beyond the outer boundary of Section 2 of the Sherman Antitrust Act, as established in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). It did this by allowing the exception to be applied to a contract negotiated with Qualcomm over 20 years prior, even with evidence that the change in dealing was implemented to increase short-term profits. The authors argue that this conflicts with Verizon Communications Inc. v. Law Offices of Curtis V. Trinko LLP, 540 U.S. 398 (2004), and that now beneficial business partnerships with competitors will be impossible to maintain due to the consequences of innocent and procompetitive business conduct. The second error in the district court opinion is the acceptance of a price squeeze theory in conflict with Supreme Court precedent set by Pacific Bell Telephone Co. v. linkLine Communications, Inc. 555 U.S. 438. The FTC convinced the court that the price squeeze was a tax in order to evade the Supreme Court ban on price squeeze claims and punish Qualcomm for monetizing its intellectual property. The authors argue that this opinion may destroy the predictability afforded by linkLine and pull antitrust away from economic analysis. The third error in the opinion, according to the authors, is the district court’s determination that Qualcomm’s exclusive partnership with Apple violates the Sherman Antitrust Act, which outlaws monopolistic business practices, even though the FTC could not provide evidence of substantial foreclosure of the market by Qualcomm.
To the authors’ first point, the Supreme Court has reiterated that a firm does not have a duty to deal with its rivals as recently as 2004 in Trinko. The Court found that, where a company may have a natural monopoly by providing a product or service that renders them unique to customers, forcing them to share the source of their advantage may lessen the incentive for the monopolist and/or rival to invest, undermining the purpose of antitrust law. Exceptions do exist where both the market and consumers are adversely affected due to a company’s conduct, however. In Aspen Skiing Co. v. Aspen Highlands Skiing Corp., the Supreme Court held that the defendant (Ski Co.), made a decision that changed the pattern of distribution that had originated and persisted in a competitive market for several years, even where skiers preferred access to plaintiff Aspen Highlands’ mountain in addition to the defendant’s, and were thus negatively affected in addition to the plaintiff. It also found evidence that Ski Co. was willing to turn away daily ticket sales to skiers wanting to redeem the vouchers good for mountains owned by both Ski Co. and Aspen Highlands to push its smaller competitor Aspen Highlands out of the market. This “profit sacrifice test” has been used continuously by courts to isolate monopolizing conduct that has no efficiency justification.
The bounds of this precedent were considered in MetroNet Services Corp. v. Qwest Corp., 383 F.3d 1124 (2004) where the Ninth Circuit found similar conduct to pass the profit sacrifice test due to differing circumstances where three factors were not met: 1) unilateral termination of a profitable course of dealing; 2) evidence of refusal to engage in dealings even where compensation would be at the retail price, suggesting a calculation that future monopolized prices would be higher; and 3) refusal to provide a product to competitors that it sold at retail to other customers.
The authors found that the district court was incorrect in concluding that Qualcomm’s refusal to license its SEP to rival chipmakers satisfies all three of the factors relevant to antitrust duty to deal. Under the first factor, Qualcomm in voluntarily ceasing its licensing to rivals even though licensing was profitable, was not doing so to place a monopoly on the market. By concluding this the court relaxed the evidence required of “profit sacrifice” because there was no immediate harm to consumers to rely on as evidence. Therefore, the latency between Qualcomm’s refusal to deal after changing its business model and any anticompetitive effect undermines the requirements as outlined in Aspen Skiing. The authors also argue that the Trinko standard is not met, because Qualcomm was not simply trying to “increase short-term profits” but instead joined a more lucrative business venture with companies licensing at the device-level. It has also become the industry standard to license at the device-level opposed to chipmakers, and therefore it is very difficult to prove any malice. The authors contend that licensing to OEMs allowed Qualcomm to take advantage of its patent portfolio, ensuring that those practicing its inventions actually paid for them, and in doing so actually saw an increase in short-term profits, contrary to the defendant in Aspen Skiing. Broadening the exception to include Qualcomm where there is no duty to deal could set a dangerous precedent that rips away a company’s right to freely decide with whom to transact with, as outlined in Trinko.
The “Price Squeeze” Theory
To the second point, the authors urge that the adoption of the FTC’s “tax” theory of harm as an antitrust claim is absurd and is instead a masked “price-squeeze claim,” which was prohibited by the Supreme Court in linkLine. In this case, the Court held that without a duty to deal and predatory pricing, companies are free to price however they’d like regardless of rival profit margins, otherwise they would be subjected to a price-squeeze by competitors. The FTC’s argument supported that a cognizable antitrust claim against Qualcomm would have evidence of four factors: 1) higher royalty rates for Qualcomm; 2) reduced innovation by all chipmakers (including Qualcomm); 3) lower margins; and 4) lower output and/or higher prices. None of these factors are backed by evidence in the record or at large, as the industry has seen declining prices, increased output, increased innovation, and quality improvements. The FTC also could not prove that Qualcomm satisfied the Brooke Group test, in which a defendant’s prices are below its cost with the probability that it would be able to later recoup the losses. Therefore, this is a price-squeeze claim dressed up as a tax in order to evade Supreme Court precedent banning these claims, and the liability standard unfoundedly punished Qualcomm for capitalizing on its intellectual property.
Proving Violation of the Sherman Act
To the third and final point, the Supreme Court held in Tampa Electric Co. v. Nashville Co. 365 U.S. 320 (1961) that proof of substantial foreclosure on the market is essential to prevail on an exclusive dealing claim. The authors argue that the district court failed to establish that a substantial foreclosure on the market of at least 30% or 40% (as determined by multiple courts) had taken place, in response to Qualcomm’s exclusive dealings with Apple. No evidence was brought forth suggesting that other competitors were willing and able to provide Apple with the same specialty chips needed to produce iPhones and iPads, nor that others had invested resources in developing these chips as Qualcomm had. In fact, when Intel did finally invest heavily into the market, it drew Apple’s business away from its dealings with Qualcomm, suggesting that the market was not foreclosed from competitors.
Ultimately, the authors insist that the district court decision is fraught with legal and economic error. If affirmed on appeal, the Ninth Circuit will go against long-established Supreme Court precedents, including a company’s limited duty to deal, a ban on price squeezing claims, and an inappropriate blurring of the lines between antitrust law and contract law. This is a potentially dangerous outcome for the future of innovation. The abstract to the paper concludes:
The district court’s inappropriate extension of antitrust liability in three separate areas of well-settled antitrust doctrine is remarkable and threatens to upend important precedent that has successfully guided business conduct for years. Further, the remedy—aside from putting the nation’s security at risk and potentially undermining U.S. leadership in 5G technology and standard-setting—transforms the role of antitrust courts from adjudicators to central planners, a role for which the Trinko Court expressly stated they are ill suited. The decision invites plaintiffs to use the Sherman Act to reach conduct that has been generally shielded from antitrust liability. That invitation is ill advised and should be rejected by the Ninth Circuit, and if necessary, the Supreme Court.
Judge Ginsburg will be speaking on the Antitrust Panel of IPWatchdog’s upcoming Patent Master’s Symposium, “Standard Essential Patents,” which will be held September 10-11 in Arlington, Virginia.