The Qualcomm FTC Case Goes To Appeal: The Reasons Qualcomm Should Prevail

I’ve covered a lot of trials over the years, and it has been rare that I’ve seen a US regulatory agency misbehave as much as the FTC (Federal Trade Commission) has in this case. It started as a result of Apple allegedly fabricating evidence and then presenting to a reduced panel of outgoing commissioners during the Obama-Trump transition. The FTC’s key witness was discredited by the Department of Justice, and the FTC’s key theories were unsupported by evidence and based on unsubstantiated opinion. The judge even came across as biased in that she seemed to throw out anything that disagreed with her preset opinion that all big companies are bad and should be punished regardless of evidence, which seems hypocritical given Apple better met that definition with their actions.

Finally, the US Administration has identified Qualcomm as the pointy end of their 5G stick much like Huawei is the pointy end of China’s and has moved aggressively to point out alleged bad behavior by Huawei, it, therefore, seems unlikely they would let an enforcement organization—for any reason let alone an illicit one—cripple Qualcomm. Granted, judges don’t report to the administration which has been alienating judges of late, but even the language surrounding the granting of the stay suggests the appellate court agrees the district judge misacted.

Let’s talk about that this week.

The Importance Of 5G

While we talk about 5G, it is part of a package of technologies including Wi-Fi 6 and millimeter-wave that is slated to change the technology world. Up until now, wireless technologies haven’t been secure enough, fast enough, nor pervasive enough to do the tasks we now need them to do. These tasks include removing much of the complexity from manufacturing floors, assuring autonomous things (cars, robots, drones) can communicate with their peers and the cloud in a timely manner, we can go back to a more terminal-like desktop and return the complexity to a central resource (the cloud), and finally given the enhanced performance at the edge and around obstacles the result should remove a lot of the friction surrounding anything done on related wireless devices that have a significant impact on the productivity, effectiveness, timeliness, and reliability of anything using it.

It is potentially a game-changer and one of the foundations for whether the US or China will be the technology leader by the end of the decade. Current trends don’t favor the US making this critical to both national security and the US economy. This is a “bet the country” technology and the FTC have been on the wrong side of this from the beginning, and both the DOJ (Department of Justice) and DOD (Department of Defense) have been outspoken about their related concerns regarding the FTC’s position.

Even if you could trust the evidence and the expert the FTC brought forward—which you can’t—given the importance to the nation you’d think the FTC would back down. But given the fact the foundation is so flimsy, it makes no sense.

The Appeal Recalled The Case

If you recall the FTC case in the district court, they presented an unsubstantiated theory that excessive license pricing restricted research and development (R&D) and, thus, competitiveness. But this theory wasn’t backed up by evidence. In my experience, R&D, while important, rarely has a direct relationship to competitive behavior. You can acquire technology from partners, and with little R&D do very well. PC vendors and many smartphone vendors have taken—against revenues—relatively small R&D budgets, but they leverage R&D from Google, Microsoft, and Qualcomm to create very competitive products.

On the other hand—and I learned this when studying AT&T’s Bell Labs and IBM’s Watson Labs—you can spend massively but have issues bringing the technology to market. It often appears that smaller, focused budgets are just more effective than larger unfocused budgets, particularly over the short term, and technology moves so quickly, often long-term efforts end up on an eddy. Siemens researched ISDN advances extensively, and Ethernet bypassed IBM Token Ring and both technologies. Also, the licensing cost from a pervasive vendor like Qualcomm tends to spread across an ecosystem, so it gets built into the pricing. You could argue it results in a higher price to consumers if you take out the fact that if Qualcomm built their phones and didn’t license, which is their right, the resulting prices would likely be vastly higher because fewer vendors would amortize them.

While I am by no means an economics Ph.D., the math doesn’t work, and the DOJ disqualified the FTC’s expert during the trial.

Judicial Bias

Bias can drift into any decision, and judges are not immune. But Judge Koh appeared to take the position that a large company like Qualcomm was guilty until proven innocent. What continues to seem odd is that the complaint was filed by Apple, which is ten times larger than Qualcomm and has a history of abusing suppliers. This creates the appearance of impropriety at worst and bias at best. But we add to this the fact that Apple allegedly falsified the evidence when the FTC brought the case, the commissioners appearing to be acting in conflict with each other during an administration change, and the disqualification of the lead expert and it appears the judge made her decision before the trial began. And, in the appellate court’s brief attached to the stay blocking her ruling, the implication was that the court felt she overreached and abused her power, which is exceedingly rare before an appeal is heard. While most appeals fail, in this instance, the court felt strongly enough to stay a critical Judgement because they seemed to feel that this appeal would not. Now, the sitting judges on the case are different than the judges that granted the stay, so there is no certainty here, but judges by nature form an opinion based on what their predecessors do so the success of the appeal should remain likely.

Wrapping Up: The FTC Should Have Withdrawn

While the evidence out of the parallel San Diego trial that showcased that Apple manufactured the evidence they presented to the FTC wasn’t admissible at the FTC case—showing up too late in the process—the ethical thing for the FTC to do should have been to withdraw and rethink the case. If you look at a normal prosecution even if the defendant is put in jail, if it is determined that the evidence a jury relied on was false, generally the verdict is overturned, and ethical prosecutors (sadly not all are ethical) are part of that process putting doing what is right in front of their reputations.

The risk of not doing this given the national importance of Qualcomm appears self-evident, and I expect not only the verdict to be overturned but the FTC to be reprimanded by the court for not behaving ethically if only for the use of now known compromised evidence. The FTC didn’t manufacture the evidence, Apple did, and that shouldn’t be allowed without penalty. If you or I are held liable due to manufactured evidence, the entity manufacturing the evidence should be prosecuted, and the FTC’s failure to do that places a cloud over the organization’s behavior, not only in this case but in every case they subsequently will prosecute. Even if they had a case, given the importance of 5G and subsequent technologies, they should withdraw. Failing to do so will arguably reflect badly on the FTC.

The evidence suggests that Qualcomm will prevail and that if the FTC doesn’t step up, their reputation and credibility in court will be severely diminished once this process completes.