FTC v. Qualcomm: What Really Is Going On

I’ve been watching antitrust cases actively since the 1980s. I had to study historical antitrust cases going back to Standard Oil and RCA, in order to ensure compliance with a related consent decree When I worked at IBM. Each of the other cases had one thing in common: Both of the companies being charged were massively and obviously monopolies.

There were many questions about whether they were behaving badly or really had an adverse impact on competition, but there generally was no doubt they had monopoly power.

The current FTC v. Qualcomm case is vastly different, in that the two companies that apparently have been screaming they were damaged are four times and 10 times larger than Qualcomm, and they have a history of anticompetitive behavior.

During the closing arguments, I had a ton of wtf moments, as the FTC brought forth incredibly stupid arguments. During the close, it felt as though the FTC attorney hadn’t really prepared, hadn’t organized her evidence into what I would have thought to be an obvious framework, and pretty much just called Qualcomm names with little to back up her claims.

This isn’t high school pre-law — this is federal court. The quality of work was more in line with what you might expect to see from an overworked and under-resourced public defender with too many cases.

The implication that the FTC effectively was working for Apple was particularly disturbing during a time when I, and others, are increasingly concerned that the U.S. government is being run by big companies through lobbyists.

I’ll share my thoughts about the troubling FTC vs. Qualcomm litigation and then close with my product of the week: an impressive update to my go-to home security camera solution, Arlo.

The FTC’s Murky Case Against Qualcomm

The FTC’s position was that Qualcomm, through use of its patent portfolio and licensing, restricted competition by abusing its power as a monopoly. This allegation should have led to a closing argument that clearly delineated three pillars of proof. When I was studying prelaw, I received training from a judge, and I’m still a fan of tight organization regarding how you present your legal arguments and evidence.

In this case, the FTC should have established three pillars of proof to show that Qualcomm was acting as a monopoly. If it wasn’t, then it didn’t have the power to commit the crime that was alleged. Second, the FTC should have established that Qualcomm was abusing its monopoly power. Without abuse, there was no crime. Third, the FTC should have shown that Qualcomm damaged the industry, because that is what drives the remedy. Any damage would have to be corrected.

There were no obvious pillars of evidence in the FTC’s argument. First, if Qualcomm was acting as a monopoly, then it must have dominated its market. However, the three largest players in the smartphone market — Samsung, Huawei and Apple — generally have not used Qualcomm modems or processors. Samsung and Huawei mostly have made their own, and Apple has bought them from Intel.

In fact, if you look at Qualcomm vs. either Intel or Apple, it is comparatively tiny, with just one-fourth the value of Intel and one-tenth the value of Apple. Granted, both companies have been having significant issues, but Qualcomm can’t be blamed for a massive lack of demand for Apple’s products, or for Intel’s inability to solidify a management team.

Intel’s issues pretty much start with its having a board that, for the most part, wouldn’t know the difference between a GPU and a CPU. Intel can’t seem to find a new CEO who is both qualified and dumb enough to take the job.

Second, the FTC needed to show not only that Qualcomm was a monopoly, but also that it abused its monopoly power. Given that I don’t think it came close to achieving its burden of proof on the question of Qualcomm being a monopoly, the abuse contention immediately became problematic. The FTC argued that Qualcomm illegally tied its patent portfolio to its modem sales, but it presented no evidence that Qualcomm ever cut modem supply to a buyer that didn’t have a patent license.

There was a legitimate reason to tie those two things together: Implementing one of Qualcomm’s modems did require the use of Qualcomm’s patents, and a license would have avoided litigation. I found it particularly troubling that the FTC argued that reducing litigation was an example of abuse of power. I’m guessing that was because the commission believed that normal companies — as in non-abusive monopolies — must spend millions on unnecessary litigation in order to operate. Maybe this had something to do with job security, but I sure didn’t get the connection.

Virtually all of the witnesses the FTC brought forward who said that Qualcomm forced their companies into signing a contract were countered by witnesses Qualcomm’s attorneys called — employees from the same companies who said those accounts were BS. Each FTC witness was impeached by a coworker, which really made the FTC’s case look fabricated.

Third, the issue of damages was telling. During the close, the example the FTC used was that every time Apple requested a concession from Qualcomm, Qualcomm wanted a concession in return. It was as if the FTC existed in some strange parallel universe where only the bigger company can make demands, and the smaller firm can say nothing but “yes sir, can I have another?”

It was obviously bullying behavior by Apple, and the FTC seemed to be saying that any company that could resist Apple’s bullying clearly was abusing its power. I seriously thought that the U.S. legal system was starting to look as though it was founded on concepts you’d more likely see in a third-world country, where the laws are whatever the powerful say they are.

The FTC’s Impeachable Expert

What I found particularly bizarre was the unique theory offered by the FTC’s lead expert, Carl Shapiro, a professor of economics at the University of California, Berkeley. Shapiro concluded that Qualcomm’s business model must be illegal, although his view appeared to have no connection to any facts. He offered no research or empirical evidence — just one guy’s ideas about how the world ought to work. More importantly, he made it clear that anyone who disagreed with him — including judges (and I’ll get to this in a moment) — was an idiot.

I’ve worked with folks like this in the past and I’m sure you have as well. They are so extremely narcissistic that they don’t accept anything from anyone but themselves. Now this legend in his own mind also was a pivotal expert in the AT&T Time Warner trial, and the judge in that trial went off on how poorly founded Shapiro’s testimony was, and how far from reality his fanciful theory was. Seriously, the judge went on and on with his observations that Shapiro’s comments were so poorly founded as to be less than worthless, before ruling in favor of the merger and against the DoJ.

The FTC attorneys’ choice to use this guy must come down to the fact they couldn’t find any other qualified expert who agreed with them, and hoped, which was pretty foolish, that Qualcomm’s attorneys wouldn’t find out about that prior case (Shapiro claimed under oath that he didn’t remember it. There is no way that is true, given how he went after the judge when it was brought up.)

Seriously, the guy was a narcissist. Anyone who went after him, like the judge in the AT&T/TM trial did, would be on his immortal mortal enemies list. Even for a normal person, if judge were to tear you or me a new bung hole like that judge did, we’d remember it till the end of days. Shapiro claimed he forgot it in a few months. I doubt any of us are that gullible — but apparently, the FTC was.

Does the FTC Now Work for Apple?

There is a lot of apparently illegal behavior going on in the government now. Just look at the impressive number of indictments coming out of the Mueller probe. Further, the amount of self-dealing in congress is frightening.

This case, in my mind, is like two bullies (Apple and Intel) that went to a smaller kid who is willing to fight back, and complaining that the smaller kid is a bully because he won’t pass over his lunch money.

Go back and look at what I said about Qualcomm pushing back on Apple’s demands. Now add the FTC’s argument that because Qualcomm wouldn’t accept Apple’s demand that every patent be arbitrated individually by a panel — we are talking thousands of patents — Qualcomm was at fault. This really was the FTC complaining that Qualcomm wouldn’t give up its lunch money to a bigger and vastly more powerful firm.

Now I’m not sure the FTC rank and file are on board with this, because its legal team seemed to be trying to throw this fight. The fact that they used the impeachable expert, gave one of their least-capable attorneys responsibility for the close (really, she performed like a first-year associate), and made no real attempt to organize their evidence in a hierarchy that would allow the judge to decide more easily in their favor, makes me think there is a rebellion in the FTC and that they want to lose this thing.

The Qualcomm close was far from the best I’ve seen — likely because the FTC was so disjointed that it forced a less-organized response — but it was massively better executed than what the FTC did. Compared to the FTC using one of its most junior folks, Qualcomm used one of its most senior, because the company thought the case was that important.

Now this may come down to the FTC being inept, but I saw some strong litigators on its team last Friday that should have done the close (both men, and I’ll get to that in a moment), but they weren’t used.

Two other reasons are concerning. One is that the FTC attorneys knew Judge Koh would rule in their favor regardless of their case, so they really didn’t have to do the work. The other is that they knew Judge Koh would pick a female attorney over a male attorney and subordinate the evidence and arguments to that choice.

The judge came across to me as capable and competent, but I haven’t done the research on her that the FTC likely has so I remain concerned. I’ve seen a lot of judges phone it in, but she wasn’t one of them. (I was actually pretty impressed.)

Wrapping Up

The FTC didn’t seem to come close to meeting its burden of proof that Qualcomm was a monopoly or even had monopoly power to abuse. It also fell short on proving bad behavior, and the damages appeared to have no foundation in fact. The term one of my old law professors used was “throwing crap against the wall,” and I am no more a fan of that strategy than he was.

The danger of the FTC getting this wrong is high, because Qualcomm is critical to the U.S. lead in the 5G rollout. If the government cripples Qualcomm, it basically hands the market off to the Chinese and Huawei. If Qualcomm is guilty, that is problematic, but if it was charged wrongfully, given that the U.S. is in a declared trade war with China, that is potentially treasonous.

There is also the growing concern that, thanks to budget cutting, our government is an offshoot of big business. The ever-wealthier tail is wagging the ever more poorly funded dog, and even the promise of a lucrative corporate gig has far more potential to corrupt than it ever has before. Thislittle piece, which details how lobbyists legally corrupt government, should give us all a bit more pause.

So, and to recap: The FTC didn’t organize its close in a way that would best present the evidence it had; most of the evidence was invalidated; its key expert was impeached; and the closing attorney was the weakest I’ve seen at the podium. It was as if the FTC wanted to make a statement or prove a point that had nothing to do with Qualcomm. I have an idea what that is — but it is too dangerous to share. If this is an elaborate sting, there is only one likely candidate.

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