If The FTC Case Against Qualcomm Seems Like a Clown Show Right Now, It’s Because It Started That Way

By Patrick Moorhead - January 16, 2019

If you haven’t been following the FTC versus Qualcomm case and are in tech, you probably should. What’s likely at stake are future inventors’ rights to monetize their inventions, the U.S. government becoming an IP price fixer, U.S. 5G competitiveness and in related industries like self-driving cars and smart cities and potentially national security. If you’ve read my previous writings, I try not to be dramatic, but I truly believe this is what is at stake right now with the FTC versus Qualcomm case.

While I was considered a “key witness” in the spat between AMD, Intel, and regulatory bodies, I am not a lawyer, don’t pretend to be one (although my father and two brothers have law degrees), but rather a technology industry analyst who cares about the future of innovation. Part of my research is to better understand IP, its creation from research and development, its use, and conflicts between creators and users of IP.

For this blog, I thought it was important to highlight some things I thought were suspect and odd in the run-up to the FTC case versus Qualcomm which I believe hangs over any kind of verdict the FTC may render over the next month. 

FTC case a “midnight filing”

While the FTC versus Qualcomm case could have been green-lighted anytime during Obama’s eight-year tenure, the FTC decided to do it the very last week of the former president’s two terms right before the change in power to the Trump administration. In fact, on January 13, 2017, FTC Chairwoman Edith Ramirez announced her resignation and the FTC filed suit January 17, based on the recommendation of only two of five FTC commissioners. President Trump was inaugurated three days later on January 21st.  Was this an incredible coincidence to hold the vote with only three of five commissioners at the end of Obama’s term with a resigning chairwoman or was the timing coincident with when the votes could assure a case? It sure seems to me, given that with a new FTC crew was coming in, it would have been up to them. How many big decisions does a CEO of a company or any government leader make on the way out of the company or organization, except for things like pardons and commutations? It sure seems like this was snuck in, last minute before Trump came in and few were at the FTC.

FTC Commissioner Maureen Ohlhausen’s dissenting opinion

As I said above, only three of five commissioners were present for the FTC vote to sue Qualcomm as two were already on their way out of the administration. Even with only three still working, it wasn’t a unanimous vote. Two commissioners supported the action, while one dissented, Commissioner Maureen K. Ohlhausen (the Interim Chair). You can find her dissenting statement here on the FTC website.

Read it in its entirety, but here are my highlights:

  • “My practice is not to write dissenting statements when the Commission, against my vote, authorizes litigation.” She goes on to say, “On the rare occasion when I do write, it has been to avoid implying that I disagree with the complaint’s theory of liability.” Ohlhausen must have felt strongly about writing a dissenting opinion and disagreeing with the complaint, which she says she rarely does. 
  • “Rather than allege that Qualcomm charges above-FRAND royalties, the complaint dances around that essential element.” Ohlhausen’s opinion speaks for itself and had me at “dancing around”.
  • “But the complaint fails to allege that Qualcomm charges more than a reasonable royalty. That pleading failure is no accident; it speaks to the dearth of evidence in this case.” Ohlhausen is citing a lack of evidence in the case. According to the Merriam-Webster dictionary, “dearth” synonyms include “deficiency, deficit, drought, failure, famine, inadequacy, inadequateness, insufficiency, lack, lacuna, paucity, pinch, poverty, scantiness, scarceness, scarcity, shortage, undersupply, want.” 
  • “I have been presented with no robust economic evidence of exclusion and anticompetitive effects, either as to the complaint’s core “taxation” theory or to associated allegations like exclusive dealing.  What I have been presented with is simply a possibility theorem.” Similar to the citation above, Ohlhausen cites a lack of evidence.

So far, we have a “midnight filing” at the end of Obama’s term, three of five commissioners at the post, a resigning chairwoman, a non-unanimous decision with a very strong dissenting opinion. Hmm...

China’s Huawei a “star” U.S. FTC witness

While Bloomberg’s Ian King and Kartikay Mehrotra did a fine job with their story, “The U.S.’s Star Witness in the Qualcomm Antitrust Suit: China’s Huawei,” I thought it was good to point this out in the clown show context as it indicates to more of the odd nature of the FTC suit. On one hand, the Administration considers Qualcomm its “national treasure” related to 5G and Huawei, fair or not, a possible “threat to the U.S.” On the other hand, the FTC’s “biggest witness” was Huawei, and its villain, Qualcomm.

Forget the perceived national security “risk” and just think about it competitively for a second. There are two companies on the planet who do the most pure research on 5G wireless technologies- Qualcomm and Huawei. Please do not confuse “research and “development,” they are different. Research takes place ten to fifteen years in advance of a technology used in the development of real products and is very expensive and speculative.  If Qualcomm is weakened by the FTC ruling, I believe it will spend less on research. Why would any company spend a ton on research if it can’t monetize it?

So who fills the wireless research gap if Qualcomm pulls back? I believe Huawei. Therefore, I believe Huawei’s testimony should be filtered under the knowledge that it gains the most from a weakened Qualcomm. Please note I am not implying Huawei isn’t providing its honest understanding of what it thinks happened, just that it gains the most with a weakened Qualcomm, and that it has a vested interest in spending less for Qualcomm IP.

While I don’t expect the White House, especially this administration, and the FTC to be in sync, their views sure seem off by a mile and should be noted.

Apple has “common interest agreement” with the FTC

As I read both the FTC case and the Apple lawsuit against Qualcomm two years ago, I thought they sure looked to be similar. Very similar. It doesmake sense that Apple helped initiate the FTC’s lawsuit as these matters always start as complaints from those who felt “injured” so I would expect some of the same charges. What I didn’t expect, was how much overlap there was in the complaints/constructs and how close in time they were filed, as if coordinated.

Both the FTC and Apple said within three days of each other that Qualcomm’s rates are not FRAND, used its leverage in chips to demand rates above FRAND, forced Apple into exclusivity agreement and Qualcomm’s behavior harmed competition.

As I said above, FTC chairwoman announced her resignation on January 13th, the FTC filed suit on the 17th, a “surprise” class action lawsuit was filed against Qualcomm on the 18th related to the FTC suit 24 hours afterward, and Apple filed its suit against Qualcomm on the 20th in San Jose (not Washington D.C), the same day President Trump was inaugurated.  All of this happened in one week, which is mind-blowing.

I suppose the FTC’s lawsuit provided air cover for Apple not to look like the big-company bully going after a much (8-10x) smaller supplier.  What I have come to understand is that the similarities in the FTC and Apple case against Qualcomm aren’t happenstance. Apple has with the FTC what is called a “common interest agreement” which means the two can share documents and discovery, and those communications between Apple and the FTC are not discoverable. I am told that common interest agreements are unusual but not unprecedented.

At its best, it looks like Apple and the FTC are working hand in hand with its common interest agreement. At worst, it could look like Apple is working with the FTC to do its dirty work and serve its commercial interests like weakened Android smartphone competitors,  doing it with taxpayers’ dollars, and with a much bigger hammer.

Wrapping up

If the FTC’s case against Qualcomm looks a bit like a clown show right now, I believe it’s because the case started out like one two years ago and the FTC has just carried it into the courtroom this week.  

From my vantage point, it looks like the outgoing FTC case was filed under questionable circumstances and timing, with a “midnight filing” right after a resigning chairwoman, under the nose of a new administration, with only three of five commissioners at the post, a non-unanimous decision with a very strong dissenting opinion from the interim chair.

The oblong tires on the clown car are an administration at odds with how it wants to treat the FTC’s “star witness”, Huawei, and a case that sure looks like on the outside, like Apple and the FTC were working a little bit too close together.  

One hundred percent of this is informed speculation but it does get me thinking about the process, merits and potential outcomes of the suit. The U.S. was once considered the lighthouse of inventors, innovation and IP protection, but with this clown show of a case going on, I have no idea anymore.

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Patrick founded the firm based on his real-world world technology experiences with the understanding of what he wasn’t getting from analysts and consultants. Ten years later, Patrick is ranked #1 among technology industry analysts in terms of “power” (ARInsights)  in “press citations” (Apollo Research). Moorhead is a contributor at Forbes and frequently appears on CNBC. He is a broad-based analyst covering a wide variety of topics including the cloud, enterprise SaaS, collaboration, client computing, and semiconductors. He has 30 years of experience including 15 years of executive experience at high tech companies (NCR, AT&T, Compaq, now HP, and AMD) leading strategy, product management, product marketing, and corporate marketing, including three industry board appointments.