Qualcomm Vs. The FTC Closing Arguments: Should Apple Be Charged with Abuse of Power?

I’m ex-law enforcement and I spent a considerable amount of time as an auditor. In both practices there is supposed to be some rigger to how conclusions are reached before a criminal or an executive behaving badly is brought up on charges. What struck me with the FTC closing arguments was that there was little or no visible framework for their conclusion that Qualcomm was a monopoly using illegal practices to damage competition. It looked like they formed a conclusion that Qualcomm was guilty, then did the investigation, and tried to throw out anything that indicated there was no crime. Kind of like a prosecutor, after bringing a man to trial for killing his wife, might throw his allegedly dead wife out of court because it would make the conviction much harder.

This is different in a civil case between companies because often you must build the case during discovery—because individuals don’t have the power of investigation prior to a charge being filed that law enforcement does. Now, once in a trial, I do understand that the prosecutor must win—as a loss will look bad on their record and harm their opportunities for reelection or advancement (depending on whether this is an elected office or not). But this suggests more rigger needs to be done prior to filing charges, not less—which is what I think goes to the heart of the problem with this FTC effort.

The FTC needed three legs on their litigation stool. They needed to show Qualcomm was a monopoly (not illegal but this is foundational to the next two), they had to prove that Qualcomm was misusing illegally that monopoly power, and they had to show harm to get to damages and remedies. If Qualcomm isn’t a monopoly then they have no case. If Qualcomm isn’t behaving badly, they have no case. If there are no damages the effort will likely be seen as a waste of time because any remedy will be incredibly weak or non-existent. The remedy is to mitigate and make up for damage; but if there aren’t any, what then is the remedy?

Why This Is Important

I’ve been covering antitrust activity since the 1980s, and as a compliance officer at IBM I also had to study prior major cases which included Standard Oil and RCA. I clearly had to understand the IBM case, had to come up to speed on the AT&T case and subsequent breakup, the Microsoft case (particularly when it ended up with the European Commission), and continue to follow in progress actions like Google and this one with Qualcomm.

For the settled cases it generally didn’t end well for either the company or the US. For instance, when Standard Oil was broken up power shifted from the US to Saudi Arabia and that region in general, and there is apparently a direct link between oil revenues and 9/11. For RCA, who really was massively dominant, the Consumer Electronics industry largely shifted to Japan. For IBM, the technology industry almost shifted to Japan, but two Japanese companies were caught stealing intellectual property from IBM which, I believe, massively offset this and the tech industry is still largely here (though most manufacturing has shifted to Asia).

The Microsoft case was interesting for several reasons. First, (and it was the DOJ rather than the FTC that time) Microsoft was found to be a monopoly and found to be acting badly, but the problem was that Netscape was a hot mess and the alleged damage was mostly self-inflicted. It is interesting to note that Microsoft so alienated the judge that he went off the rails and basically tried to give them the death penalty, which got him censured and removed from the case. (I really didn’t think that was wise, but it worked kind of like when you play Hearts and successfully get all the point cards). But the European Commission (EC) picked this up, focused on Microsoft, and eventually got Microsoft to open up their APIs which became foundational to the new Microsoft. The European Commission came up with a remedy that not only helped the market, but also arguably saved Microsoft—a US company—by forcing them to behave, not only in the world’s best interest, but in their own. I am still in awe of this and think it should be a template for enforcement.

If Qualcomm were killed like Standard Oil and RCA, which is certainly possible, next in line is Huawei the firm the US is actively tying to the Chinese government and sanctioning. Now, that has no bearing on guilt but if the FTC got this wrong and wrongfully crippled Qualcomm, the adverse impact on the US technology market and the country’s technology future would be significant. This makes it very important that the FTC get it right. It also would make it important to assure the remedy, like the EC remedy with Microsoft, assured Qualcomm’s future and didn’t prevent it.

The FTC Is More Than Wrong

What became clear in what was one of the most rambling disjointed closing arguments I have yet seen at this level is that the FTC formed their opinion that Qualcomm was guilty and then tried to build a case rather than the other way around. The way this should happen is the FTC does an investigation, becomes convinced that Qualcomm is guilty, and then used the investigation to file charges and then form the foundation for their case.

But that isn’t what they demonstrated. I think the closest term I can come up with is “throwing crap against the wall”. This is when you just toss out accusations and questionable evidence en masse and hope that something you say will convince the Judge you are right. I’ll give you an example that was particularly egregious. The FTC argued that Qualcomm was misusing monopoly power by daring to demand concessions every time Apple demanded concessions. In other words, Apple would come in and want something additional from Qualcomm and Qualcomm would want something in exchange. If it didn’t happen that way wouldn’t you argue that Apple had excessive power and was abusing it? (By the way Apple has a reputation for unilaterally changing contracts and, in this case, has withheld billions in owed revenues to Qualcomm unilaterally). So, from the FTC perspective, the fact that Qualcomm was able to push back on Apple suggested they had too much power. (My little past compliance officer self was running around in my head waving a huge red flag at that moment).

Another example was the FTC expert. He had a theory, that theory had outcomes tied to it, none of those outcomes were evident, yet he argued that anyone that disagreed with his theory or its application was an idiot even though he’d done no testing to see if it actually worked. Qualcomm even presented that a prior judge basically called this expert an idiot for doing something similar in the AT&T / Time Warner Merger case, which should have—but didn’t—give the FTC pause. He agreed with the FTC’s premature conclusion, thus he must be right. Their entire case basically pivoted on this expert theory so you’d think they might want to assure the thing was valid before taking it to trial.

(By the way, the term for this is Confirmation Bias which is a common problem when you form an opinion first and then do the work. Sadly, we are all hardwired for this to different degrees and this means that we tend to bias what we see and hear based on the position we’ve already taken. Spend some time with Flat Earthers and you’ll see this at work in spades (or your brain will pour out your years).

One other thing that really bothered me was that the FTC presented as if it was Qualcomm’s burden to prove their side of the case. In other words that they were guilty until proven innocent. The burden is always on the prosecutor, at least it is supposed to be.

Wrapping Up

One of the biggest concerns right now with the US government is that lobbyists control it. Apple and Intel both have strong lobbying arms and the lack of preparation and poor execution by the FTC made it appear they were being directed externally. The focus of the effort seemed to be mostly to get Apple an unreasonable discount on Qualcomm’s intellectual property. The FTC’s role isn’t to act as an agent for a large companies, but to protect the market.

We know that government agencies are strapped for cash and this case could be an unfortunate result. If true—and these are just observations at this point–that could have dire implications for the future of every successful US company going against a larger and vastly more powerful competitor.

In the end, the FTC seemed to be arguing that Qualcomm was abusing Apple for daring to ask for balance in negotiations, for setting their own prices, and for a practice designed to (ironically) reduce litigation. (Yes, they argued that because it worked and it did reduce litigation, Qualcomm was clearly at fault). Doesn’t it seem at least possible that Apple, which has 10 times Qualcomm’s valuation and likely has reserves in excess of Qualcomm’s valuation, is abusing its power instead?

Something to think about this week.