Federal Trade Commission v. Qualcomm Inc.

Analysis Group was retained on behalf of Qualcomm, the defendant in an antitrust suit brought by the Federal Trade Commission (FTC). The FTC alleged that Qualcomm abused its dominant position in two modem chip markets by refusing to license its standard essential patents (SEPs) in wireless technology to rival chip manufacturers. The FTC also claimed that the royalty rates Qualcomm charged mobile phone manufacturers  to license its SEPs were “supra-FRAND” – that is, so elevated that they were no longer fair, reasonable, and nondiscriminatory. According to the FTC, competition in the modem chip industry was harmed because Qualcomm’s allegedly supra-FRAND royalties imposed a “surcharge” on competitors’ modem chips. In addition, the agency alleged that certain of Qualcomm’s agreements with Apple prevented other modem chip suppliers from selling to Apple, thus foreclosing their ability to learn from Apple and limiting their effectiveness as competitors. The FTC claimed that, in combination, the alleged conduct caused certain modem chip suppliers to exit the industry, that innovation was suppressed, and that consumers paid higher prices for smartphones and other mobile devices.

An Analysis Group team, led by Managing Principal Adam Decter, Principal Mark Lewis, Vice President Peter Finch, and Consultant Jeremy Smith, supported academic affiliate Edward Snyder, who filed an expert report and testified at both deposition and trial. Professor Snyder used an industrial organization framework to analyze factors relevant to success in the modem chip industry, including the factors that led to Qualcomm’s sustained success and its rivals’ less successful outcomes. He concluded that the factors he identified fully explain outcomes in the modem chip industry, and thus that the conduct alleged by the FTC could not have caused those outcomes. He also opined that the industry’s strong performance – measured, for example, by significant increases in transmission speeds, falling prices, and rising consumer surplus – was inconsistent with the FTC’s allegations. (Analysis Group affiliates Oliver Hart, Christopher Knittel, and Jeffrey Prince provided consulting support and filed expert reports in a related lawsuit where Apple made similar allegations.)

A judge in the US District Court for the Northern District of California found in favor of the FTC. Subsequently, however, a panel of the US Court of Appeals for the Ninth Circuit unanimously reversed the district court, holding that neither Qualcomm’s licensing practices nor its royalty rates violated US antitrust laws. “Anticompetitive behavior is illegal under federal antitrust law,” the panel wrote. “Hypercompetitive behavior is not.… 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.’ … We conclude that the FTC has not met its burden.”