A week ago today, the US Northern District Court of California’s Judge Koh issued its FTC ruling on a case against Qualcomm that I believe from the start could be considered a clown show. I think this case is important to the wireless industry, competition, and even national security and am taking a hard stance on this.
This all started with an FTC “midnight filing” in between U.S. administrations, and now we find ourselves with San Jose-headquartered Northern District of CA finding Qualcomm guilty of violating many sections of the Sherman Act, 15 U.S.C. I have already pulled apart the 10 most bizarre things about the FTC case, and now I’d like to talk about some of my observations on Judge Koh’s ruling.
As I read all 233 pages of the ruling, it felt like Koh simply reiterated what the FTC had claimed without presenting any factual evidence of harm, ignored many of the facts, and showed a disregard of how business negotiation actually works. Also, I was a bit surprised at what could be perceived as personal attacks on some of Qualcomm’s witnesses, too. Let’s dive in.
Main FTC witness, economist Carl Shapiro, not cited, but his rationale used
It’s not against the law to be a monopoly- there are many monopolies like Facebook and Google, but it is against the law to use monopolistic power to harm consumers or companies. The person who had the burden to show evidence of market harm for the FTC was economist, Carl Shapiro. In the trial, Shapiro theorized but presented no evidence that prices increased or that innovation was hampered. The ideas versus facts that prices didn’t decrease as much as they could have, or that innovation didn’t flourish as much as it might have, shouldn’t have been justification for an antitrust case, but that’s what the FTC and ultimately Judge Koh relied on.
Carl Shapiro, oddly enough, was never cited in Koh’s ruling. Who was? Huawei was cited 134 times. Net-net, I believe Judge Koh adopted FTC’s theory, made it her own, cited Ohio vs. American Express court rulings (138 S. Ct. at 2284), thereby limiting her and the court’s liability by not mentioning him.
Discounting Qualcomm witnesses testimony for bizarre reasons
Judge Koh discounted pretty much all of Qualcomm’s witnesses for various reasons. She concludes on page 18, “.. therefore, the Court largely discounts Qualcomm’s trial testimony prepared specifically for this litigation…” Why? You know, reasons like… talking too fast. Alternatively, being copied on an email. She also chose not to differentiate between doing and considering something. Moreover, by throwing out this valuable evidence, what other verdict was Koh going to come out with? It’s almost like Judge Koh, after embracing Carl Shapiro’s theory, had to come up with a reason to justify the ruling, because the FTC’s evidence and case were so weak. Let’s dive into some examples to illustrate why I’m baffled.
On page 17 of the ruling, Koh says, “ … some Qualcomm witnesses also lacked credibility in other ways. For example, Dr. Irwin Jacobs (Qualcomm Co-Founder), Steve Mollenkopf (Qualcomm CEO), and Dr. James Thompson (Qualcomm CTO) gave such long, fast, and practiced narratives on direct examination that Qualcomm’s counsel had to tell the witnesses to slow down.” I believe it’s odd to claim that experts who know their business and technology well are not credible, simply because they speak quickly or “too well”. None of Jacobs and Thompson’s testimony made it in, because, I suppose, they spoke too fast. Yes, this is THE Dr. Irwin Jacobs who received from President Bill Clinton, the National Medal of Technology and Innovation for his development of CDMA. Let me repeat- Koh struck testimony on CDMA from the guy who invented and commercialized it.
I believe one of the more bizarre dismissals of someone’s complete testimony was Qualcomm CEO, Steve Mollenkopf. No one disputes the fact that Qualcomm did not disrupt chip supply to Sony– even Sony. In emails, Qualcomm considered it but didn’t. So when Mollenkopf stated Qualcomm never “exercised the right to cut off-chip supply,” this was true. Yet all of Mollenkopf’s testimony was thrown out and as Koh says, “Steve Mollenkopf (Qualcomm CEO) testified that he was not aware that Qualcomm had ever cut off an OEM’s chip supply.” However, Qualcomm never did cut off commercial chip supply. You can find this on page 14. There is a giant difference between considering something and acting on it. When you don’t pay your electric bill, does anyone not expect it to get disconnected? Qualcomm never disconnected the power, and no one disputes that.
Qualcomm executive Fabian Gonnell’s entire testimony was tossed, too. He testified that Qualcomm does not cut off chip supply, which, as I said above, no one disputes. However, Gonnell was on one email thread with a Powerpoint attachment about threatening to withhold supply. The indictment is not even that he read it, acknowledged it, or did something with it, but that he received it. This made his statement, “Qualcomm does not cut off chip supply” not credible to Koh, and therefore his entire testimony was deemed not credible. You can find this on page 53. As I stare at my 12,000 unread emails, I guess I should hope that there’s nothing nefarious inside one of them. Derek Aberle’s and Alex Rogers’s testimony were also discredited for similar reasons as Gonnell’s.
So where do we go from here? Judge Koh’s 233-page ruling neatly reinforces the theme of the FTC’s entire case against Qualcomm, and that is, bizarre. If nothing else, I am consistent, and I still believe the case was initiated under questionable circumstances, is based on a flawed theory, isn’t substantiated with empirical evidence of harm, could paradoxically reduce competition, and may lead to serious national security issues. The next chapter in the clown show is a ruling that paraphrases the FTC theory without citing its star witness and key economist, Carl Shapiro, and discredits Qualcomm’s star witnesses for all the reasons I outline above. Did Qualcomm consider withholding chip supply? Yes. Did Qualcomm ever withhold chip supply? No. Even if Qualcomm had, it’s unclear that such action would have been an abuse of monopoly power, because 1) Qualcomm didn’t really have a market monopoly, 2) Carl Shapiro’s assumption of one-sided leverage is flawed… and 3) no real-world harm was ever proven… what a house of cards! When I add all this up, I really hope that this ruling will get overturned at the 9th Circuit Court of Appeals or SCOTUS.