Anticompetitive antitrust

June 4, 2019 USIJ

Antitrust law should keep business competitors from collaborating to increase prices and depress supply, practices that hurt consumers and competition.

It should not help bigger businesses drive harder bargains with smaller ones, give firms ways to hamstring more successful rivals, undermine patent law or give judges and administrative officials tools flexible enough for them to make business dealings fit their own ideals of the “right” competitive landscape.

Regrettably, the Federal Trade Commission’s suit against Qualcomm — and the recent decision by a federal judge in California embracing the FTC’s approach — redraws rules of competition in ways that will have just those effects, harming innovation and the rule of law.

The case has roots in the long-running feud between and Apple and Qualcomm, an innovator in telecommunications technology that licenses patented technology and sells high-end modem chips to companies (like Apple) making telecommunications products, principally smartphones. Recently, Apple and Qualcomm patched up their differences, focusing on strategies for success in the coming 5G wave, but earlier used appeals to government agencies and courts to influence negotiations over what Apple pays to use Qualcomm’s technology.

The FTC, having jumped into this dispute, declined to move on. In litigation crafted during the Obama administration, the FTC said that Qualcomm’s business model “forces” other businesses to use its products, license its technology, and pay excessively high prices, specifically by insisting that companies pay royalties based on the overall cost of products using its technology and also license its patents if they want to use Qualcomm’s chips. These arguments (and the judge’s decision based on them) have serious flaws.

First, it’s hard to see Qualcomm dominating companies like Apple. Apple is valued at more than $800 billion, more than 10 times bigger than Qualcomm. Apple also reportedly receives an astounding three-fourths of all profits earned in the smartphone market worldwide (success built on Apple’s marketing, design, and branding genius plus technological contributions of other firms). Obviously, Apple is miscast as the little guy forced to accept whatever terms the bully sets. For “Game of Thrones” aficionados, it’s like accusing Tyrion Lannister of physically abusing The Mountain.

Second, consider the objection that Qualcomm unreasonably receives royalties calculated as a percentage of the sales price of products using its technology. Nothing in the FTC’s argument or in the judge’s decision explains why the law requires royalties to be calculated as a percentage of a different base.

Whether Qualcomm and its customers agree to base royalty payments on product sales prices or the number of playoff games it takes for the Golden State Warriors to get to the NBA finals should not matter. If a firm has a valuable patent, customers will pay what they think is reasonable to use it, but they will turn to other products and other technologies when the price is too high.

Critically, the base on which a royalty percentage is calculated is never determined separately from the percentage itself. If I rent my home to you and say I want you to pay a monthly fee based on the square footage of the house and yard combined, would you agree to the same percentage as if payment was based on the square footage of the house alone? Or one floor? Or one room? The answer is obvious, and so is the error of the FTC’s and judge’s objection to the base for Qualcomm’s royalties.

The fact that Qualcomm’s agreement with Apple capped the total amount of the royalty, topping out around $7.50 per $1,000 iPhone according to published reports, underscores the fact that companies act rationally in structuring their agreements on royalty payments, contrary to the assumptions underlying this litigation and decision.

Third, other facts cited by the FTC and the judge also contradict the argument that Qualcomm imposes its will to extract unreasonable royalties. For instance, the judge says that Qualcomm uses its monopoly on chips needed for optimal smartphone performance to “coerce” phone manufacturers into agreeing to pay patent royalties. But the decision then says that “Qualcomm has also used the ‘carrot’ of incentive funds, which reduce the price of Qualcomm’s chips” to “induce” agreement to its royalty terms. Why do that if it could coerce payment?

Finally, and most important, the softness of the arguments made and accepted against Qualcomm demonstrate the way that flexible antitrust undermines both competitive markets and the rule of law. The argument in essence is that Qualcomm violates the law when it charges too much or too little, when it decides not to sell its product or when it sweetens the pot to make a sale.

Under this approach, virtually anything a successful innovator does can constitute an antitrust violation. That is not a rule to guide market behavior. It ignores the way patents work. Further, this approach contradicts the notion of a rule of law based on clear rules and standards for judicial decisions. Letting the agency or judge decide what contract terms feel right invites forum-shopping — and is the antithesis of the rule of law.

The FTC will doubtless be emboldened by this victory to pursue other cases on similarly spongy charges. Those who care about maintaining a competitive, innovative economy and the rule of law, two pillars of a successful nation, should hope that other judges and other officials realize where this path leads.

• Ronald Cass is dean emeritus of Boston University School of Law, distinguished senior fellow at the Center for the Study of the Administrative State, and co-author of “Laws of Creation: Property Rights in the World of Ideas” (Harvard University Press, 2013).

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