throbber
Case: 19-16122, 09/25/2020, ID: 11836941, DktEntry: 256, Page 1 of 83
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`
`
`No. 19-16122
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`
`IN THE UNITED STATES COURT OF APPEALS
`FOR THE NINTH CIRCUIT
`–––––––––––––––––––––––––––––––––––––––––––––
`FEDERAL TRADE COMMISSION,
`Plaintiff-Appellee,
`v.
`QUALCOMM INCORPORATED,
`Defendant-Appellant.
`–––––––––––––––––––––––––––––––––––––––––––––
`On Appeal from the United States District Court
`for the Northern District of California
`No. 5:17-cv-00220-LHK
`Hon. Lucy H. Koh
`–––––––––––––––––––––––––––––––––––––––––––––
`PETITION OF THE FEDERAL TRADE
`COMMISSION FOR REHEARING EN BANC
`–––––––––––––––––––––––––––––––––––––––––––––
`ELIZABETH TUCCI
`Deputy General Counsel
`MICHELE ARINGTON
`Assistant General Counsel
`BRIAN H. FLETCHER
`Special Counsel
`
`FEDERAL TRADE COMMISSION
`600 Pennsylvania Avenue, N.W.
`Washington, D.C. 20580
`(202) 326-3157
`bfletcher@ftc.gov
`
`
`Of Counsel:
`IAN R. CONNER
`Director
`DANIEL FRANCIS
`Deputy Director
`JOSEPH BAKER
`GEOFFREY GREEN
`RAJESH JAMES
`HEATHER JOHNSON
`MARK WOODWARD
`Bureau of Competition
`FEDERAL TRADE COMMISSION
`
`
`
`
`
`
`
`
`

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`
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`TABLE OF CONTENTS
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`
`TABLE OF CONTENTS ............................................................................................ i 
`
`Page
`
`TABLE OF AUTHORITIES .................................................................................... ii 
`
`INTRODUCTION AND RULE 35(b) statement ...................................................... 1 
`
`BACKGROUND ....................................................................................................... 4 
`
`I.  District Court Findings And Decision ................................................................. 4 
`
`II.  Panel Opinion ...................................................................................................... 7 
`
`ARGUMENT ............................................................................................................. 9 
`
`I.  The Panel Disregarded Precedent By Elevating Patent-Law Labels Over
`Economic Substance ............................................................................................ 9 
`
`II.  The Panel Disregarded Precedent By Holding That Facially “Neutral”
`Fees Cannot Violate The Antitrust Laws .......................................................... 12 
`
`III.  The Panel Disregarded Precedent By Holding That Harms To
`Qualcomm’s Customers Are “Beyond The Scope Of Antitrust Law”
`And Demanding A Showing Of “Direct” Harm To Competitors ..................... 16 
`
`CONCLUSION ........................................................................................................ 19 
`
`CERTIFICATE OF COMPLIANCE
`
`ADDENDUM A: PANEL DECISION
`
`CERTIFICATE OF SERVICE
`

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`i
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`
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`TABLE OF AUTHORITIES
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`Page
`
`
`Cases
`Am. Needle, Inc. v. Nat’l Football League,
`560 U.S. 183 (2010)......................................................................................... 9
`Apple Inc. v. Pepper,
`139 S. Ct. 1514 (2019) ................................................................. 2, 3, 9, 12, 16
`Blue Shield v. McCready,
`457 U.S. 465 (1982)....................................................................................... 16
`Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.,
`429 U.S. 477 (1977)................................................................................. 16-17
`Caldera, Inc. v. Microsoft Corp.,
`87 F. Supp. 2d 1244 (D. Utah 1999) ..................................................... 5, 8, 10
`California v. Am. Stores Co.,
`495 U.S. 271 (1990)....................................................................................... 18
`FTC v. Actavis, Inc.,
`570 U.S. 136 (2013)................................................................................... 2, 11
`FTC v. Affordable Media, LLC,
`179 F.3d 1228 (9th Cir. 1999) ....................................................................... 18
`Freeman v. San Diego Ass’n of Realtors,
`322 F.3d 1133 (9th Cir. 2003) ....................................................................... 14
`Lorain Journal Co. v. United States,
`342 U.S. 143 (1951)....................................................................................... 17
`Nat’l Elec. Contractors Ass’n v. Nat’l Constructors Ass’n,
`678 F.2d 492 (4th Cir. 1982) ................................................................... 11-12
`NYNEX Corp. v. Discon, Inc.,
`525 U.S. 128 (1998)....................................................................................... 17
`Pac. Bell Tel. Co. v. linkLine Commc’ns, Inc.,
`555 U.S. 438 (2009)....................................................................................... 12
`
`ii
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`Premier Elec. Constr. Co. v. Nat’l Elec. Contractors Ass’n,
`814 F.2d 358 (7th Cir. 1987) ................................................................... 11, 14
`Reiter v. Sonotone Corp.,
`442 U.S. 330 (1979)....................................................................................... 16
`United Mine Workers of Am. v. Pennington,
`381 U.S. 657 (1965)....................................................................................... 13
`United Shoe Mach. Corp. v. United States,
`258 U.S. 451 (1922)..................................................................... 3, 5, 8, 10, 14
`United States v. Concentrated Phosphate Exp. Ass’n,
`393 U.S. 199 (1968)......................................................................................... 9
`United States v. Masonite Corp.,
`316 U.S. 265 (1942)....................................................................................... 11
`United States v. Microsoft Corp.,
`253 F.3d 34 (D.C. Cir. 2001) (en banc) .......................................... 3-4, 17, 18
`United States v. Microsoft Corp.,
`56 F.3d 1448, 1452 (D.C. Cir. 1995) ............................................................... 5
`United States v. United Shoe Mach. Co.,
`234 F. 127 (E.D. Mo. 1916), aff’d, 258 U.S. 451 (1922) .............................. 14
`Statutes
`15 U.S.C. §§ 1, 2 ........................................................................................................ 4
`Other Authorities
`Esther D’Amico, US v. EU Approach to Monopolies Debated in
`Senate Hearing, PARR, Dec. 20, 2018 ............................................................ 1
`Timothy B. Lee, Appeals Court Ruling for Qualcomm “a Victory of
`Theory over Facts,” ARS TECHNICA, Aug. 14, 2020,
`https://tinyurl.com/y3kyce9d ........................................................................... 4
`Ben Remaly, FTC Chair Simons Not Recused from Next Qualcomm
`Steps, GLOBAL COMPETITION REV., Aug. 14, 2020,
`https://tinyurl.com/y6t6rnlo ............................................................................. 3
`
`iii
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`Ben Remaly, Ninth Circuit Provides Qualcomm Resounding Reversal,
`GLOBAL COMPETITION REV., Aug. 12, 2020,
`https://tinyurl.com/yxp476l9 ........................................................................... 4
`
`
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`INTRODUCTION AND RULE 35(b) STATEMENT
`This case has widely been recognized as “enormously important” to the
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`future of antitrust law.1 The practical stakes are just as high: The panel’s decision
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`blesses the continued stifling of competition in multi-billion-dollar markets for
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`cellular-communications chips on which much of the digital economy depends.
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`After an 11-day trial, Judge Koh found that Qualcomm has “strangled
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`competition” in those markets for more than a decade, maintaining its undisputed
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`monopoly by driving out most rival chipmakers and “hobbl[ling]” the few that
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`remain. 1ER207, 216.
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`The linchpin of Qualcomm’s scheme is a classic exclusionary practice:
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`Qualcomm uses its chip monopoly to force cellphone makers (called “OEMs” in
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`this litigation) to pay up to $20 per phone to Qualcomm when they buy chips from
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`rival manufacturers. Qualcomm calls those payments “patent royalties.” But Judge
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`Koh found that Qualcomm extracts them not through its patents, but by threatening
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`to cut off OEMs’ supply of chips if they refuse to pay. Judge Koh thus found that
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`Qualcomm’s so-called royalties are principally and in substance an “artificial
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`surcharge” equivalent to a naked tax on its rivals’ chip sales, not payments for
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`patent rights. 1ER46, 184.
`
`
`1 E.g., Esther D’Amico, US v. EU Approach to Monopolies Debated in Senate
`Hearing, PARR, Dec. 20, 2018 (quoting Professor William Kovacic).
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`
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`

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`The panel did not overturn any of Judge Koh’s factual findings. It also
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`acknowledged that a monopolist acts anticompetitively if it requires customers to
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`pay a tax when they buy from its rivals, a proposition so economically and legally
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`uncontroversial that even Qualcomm embraced it. OP45-46. Yet the panel still
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`held, as a matter of law, that Judge Koh’s findings do not establish “a cogent
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`theory of anticompetitive harm.” OP41. That decision warrants rehearing en banc
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`because it conflicts with Supreme Court precedent on three questions of
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`exceptional importance to the Nation’s antitrust laws.
`
`First, the panel held that Qualcomm’s surcharge is shielded from antitrust
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`scrutiny because Qualcomm labels it a “patent royalty.” Any claim predicated on
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`those payments, the panel declared, “sounds in patent law, not antitrust law,”
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`OP49—despite Judge Koh’s undisturbed finding that the payments principally
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`reflect Qualcomm’s chip monopoly, not its patents. That holding flouts the
`
`Supreme Court’s instruction that courts must apply the antitrust laws based on
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`economic substance, not formal labels. E.g., Apple Inc. v. Pepper, 139 S. Ct. 1514,
`
`1523 (2019). It also contradicts the Court’s repeated holdings that patent-related
`
`agreements are not exempt from antitrust scrutiny. See FTC v. Actavis, Inc., 570
`
`U.S. 136, 147-51 (2013).
`
`Second, the panel held that a facially “neutral” fee—that is, one that
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`customers must pay to a monopolist whether they buy from the monopolist or its
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`2
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`rivals—“by definition” cannot harm competition. OP49-50. But the Supreme Court
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`has long held otherwise. See, e.g., United Shoe Mach. Corp. v. United States, 258
`
`U.S. 451, 456-58 (1922). With good reason: Even a facially neutral surcharge
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`imposed by a monopolist inflicts an unequal and exclusionary burden on rivals. A
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`rational monopolist will divide the monopoly price it would otherwise charge
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`between nominal chip price and surcharge; rivals simply bear the surcharge.
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`Third, the panel dismissed as irrelevant Judge Koh’s extensive findings
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`about harm to “Qualcomm’s customers” because such harm is purportedly “outside
`
`the relevant antitrust markets.” OP49. That notion pervaded the panel’s analysis.
`
`E.g., OP30-31, 41, 44. But it is profoundly mistaken—indeed, backward. The
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`“central concern of antitrust” is “protecting consumers from monopoly prices.”
`
`Apple, 139 S. Ct. at 1525.
`
`The panel’s errors have attracted scathing criticism. Leading antitrust
`
`scholars have described the panel’s decision as “baffl[ing],”2 contrary to the D.C.
`
`Circuit’s landmark en banc decision in United States v. Microsoft Corp., 253 F.3d
`
`
`2 Ben Remaly, FTC Chair Simons Not Recused from Next Qualcomm Steps,
`GLOBAL COMPETITION REV., Aug. 14, 2020, https://tinyurl.com/y6t6rnlo (quoting
`Professor Kovacic).
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`
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`3
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`

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`34 (D.C. Cir. 2001), and “exactly the opposite of antitrust law.”3 The panel opinion
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`tears the fabric of antitrust law; rehearing en banc is necessary to correct the harm.
`
`I.
`
`BACKGROUND
`DISTRICT COURT FINDINGS AND DECISION
`Qualcomm makes modem chips and sells them to cellphone OEMs like
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`Apple and Samsung. It has long had monopolies in the markets for two key types
`
`of chips: “CDMA” chips, which OEMs need to make phones that work on
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`networks like Verizon’s, and “premium LTE” chips, which OEMs need to make
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`any high-end phone. OP12; 1ER25-42. After hearing testimony from nearly 50
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`witnesses and reviewing more than 250 exhibits, Judge Koh issued a 233-page
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`decision finding that Qualcomm has preserved those monopolies through
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`anticompetitive practices that violate Sections 1 and 2 of the Sherman Act, 15
`
`U.S.C. §§ 1-2. 1ER2-234.
`
`Judge Koh found that Qualcomm excluded its competitors primarily by
`
`using its monopoly to require OEMs to pay an “artificial surcharge” on all chips,
`
`including chips bought from Qualcomm’s rivals. 1ER184-85. That is a long-
`
`
`3 Ben Remaly, Ninth Circuit Provides Qualcomm Resounding Reversal, GLOBAL
`COMPETITION REV., Aug. 12, 2020, https://tinyurl.com/yxp476l9 (quoting
`Professors A. Douglas Melamed and Mark Lemley); see Timothy B. Lee, Appeals
`Court Ruling for Qualcomm “a Victory of Theory over Facts,” ARS TECHNICA,
`Aug. 14, 2020, https://tinyurl.com/y3kyce9d (quoting other criticism from antitrust
`scholars).
`
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`4
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`recognized anticompetitive practice. Nearly a century ago, the Supreme Court held
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`that a monopolist unlawfully excluded competition when it conditioned leases of
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`its shoemaking machines on customers’ agreement to pay “royalties” on all shoes,
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`including those made on rivals’ machines. United Shoe, 258 U.S. at 456-58. More
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`recently, the D.C. Circuit approved a DOJ consent decree that barred Microsoft
`
`from conditioning access to its operating system on computer OEMs’ agreement to
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`pay royalties on every computer sold, including computers that used only a rival’s
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`operating system. United States v. Microsoft Corp., 56 F.3d 1448, 1452, 1462
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`(D.C. Cir. 1995); see Caldera, Inc. v. Microsoft Corp., 87 F. Supp. 2d 1244, 1249-
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`50 (D. Utah 1999) (sustaining a private challenge to the same practice).
`
`Judge Koh found that Qualcomm reprised the same scheme through its “no-
`
`license, no-chips” policy. Under that policy, Qualcomm will not sell chips to an
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`OEM unless the OEM signs a separate agreement that requires it to pay Qualcomm
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`up to $20 on every phone sold, including phones that use rivals’ chips rather than
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`Qualcomm’s. 1ER45; see 1ER8-9. The prospect of losing access to Qualcomm’s
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`chips is an “existential threat” to OEMs’ businesses, so they must pay what
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`Qualcomm demands. 1ER76; see 1ER33-34, 40-42, 178-83.
`
`Qualcomm calls those fees “patent royalties.” But Judge Koh found that
`
`unlike true patent royalties—which are based on patent rights and remedies—
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`Qualcomm’s “royalties” are “set by its monopoly chip market share rather than the
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`5
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`value of its patents.” 1ER158. The evidence supporting that factual finding was
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`overwhelming. To take just a few examples:
`
` In contemporaneous documents, Qualcomm itself “repeatedly admitted
`that Qualcomm’s monopoly chip market share—not the value of
`Qualcomm’s patents—sustains Qualcomm’s royalty rates.” 1ER158. For
`example, a senior Qualcomm executive stressed: “Where we have low
`chip share we are seeing challenges with compliance and maintaining the
`royalty rate … SO IT’S CRITICAL THAT WE MAINTAIN HIGH
`MODEM SHARE TO SUSTAIN LICENSING.” 1ER161.
`
` Unlike other patent holders, Qualcomm refuses to provide OEMs with
`even rudimentary information about its patents, relying instead on chip-
`supply threats. 1ER162-63.
`
` Those same threats preclude OEMs from litigating or arbitrating
`“Qualcomm’s royalty rates” or “whether Qualcomm’s patents are valid
`or infringed.” 1ER178-79. These patent- and contract-law mechanisms
`ordinarily align negotiated royalties with patent value, but Qualcomm’s
`threats render them a “functional nonstarter.” 1ER180-82.
`
` Qualcomm’s royalties exceed those charged to OEMs by holders of
`comparable patent portfolios to a “staggering” extent. 1ER176-77; see
`6ER1341-42 (listing actual royalties, which are sealed).
`
`Judge Koh thus concluded that the “royalty” extracted by Qualcomm
`
`conceals a substantial “artificial surcharge” on rivals’ chips. 1ER46, 184. In effect,
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`rather than demand that OEMs pay a naked surcharge of x to maintain access to its
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`chips, Qualcomm instead conditions OEMs’ chip access on their acceptance of a
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`patent license, for which OEMs would otherwise pay a royalty of y, and labels the
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`entire amount that OEMs pay (x + y) a “patent royalty.” Judge Koh found that the
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`concealed surcharge accounts for the vast majority of Qualcomm’s royalties, which
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`6
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`often equal or exceed the price an OEM would pay for a rival chip. 1ER176-77,
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`183; see, e.g., 5SER1100.
`
`Judge Koh further found that Qualcomm’s surcharge distorts competition. It
`
`raises rivals’ effective prices, “prevent[ing] rivals from underbidding Qualcomm”
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`and suppressing demand for rivals’ chips. 1ER186. As a result, “[r]ivals see lower
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`sales volumes and lower margins,” and “competition decreases.” Id.
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`Finally, Judge Koh entered an injunction because “Qualcomm’s unlawful
`
`practices continue unabated.” 1ER221. She also specifically found that
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`“Qualcomm is likely to replicate its market dominance during the transition to 5G,
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`the next generation of modem chips.” 1ER222. Judge Koh’s injunction did not
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`regulate Qualcomm’s chip prices or patent royalties; Qualcomm remained free,
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`among other things, to sell chips at prices reflecting the value of any patents
`
`exhausted by their sale. The injunction simply prohibited Qualcomm from
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`conditioning sales of Qualcomm’s chips on OEMs’ acceptance of a license
`
`requiring payments on rivals’ chips. 1ER228-30.
`
`II.
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`PANEL OPINION
`A panel of this Court reversed. OP1-56. It acknowledged the deference due
`
`to Judge Koh’s findings and did not overturn any of those findings as clearly
`
`erroneous. OP31. In fact, the panel scarcely referred to Judge Koh’s findings at all.
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`Instead, it held that those findings do not establish “a cogent theory of
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`7
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`

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`anticompetitive harm.” OP41. To reach that result, the panel adopted three novel
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`propositions of law.
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`First, the panel held that any antitrust challenge based on a monopolist’s
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`coercive levy of a fee labeled a patent royalty “sounds in patent law, not antitrust
`
`law.” OP49; see OP43-44. The panel did not overturn Judge Koh’s finding that
`
`Qualcomm’s “royalty” is set by its chip monopoly, not its patents.4 But the panel
`
`appeared to conclude that Qualcomm’s use of the patent-royalty label precluded
`
`inquiry into the economic substance of the fee. On that basis alone, the panel
`
`distinguished this case from cases like United Shoe and Caldera: The panel
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`acknowledged that a monopolist cannot impose a “naked tax” on its rivals’ sales,
`
`but held that Qualcomm’s surcharge is not such a tax because it is labeled a patent
`
`royalty. OP45-46.
`
`Second, the panel held that Qualcomm’s surcharge cannot harm competition
`
`because it is formally “chip-neutral”: i.e., charged to an OEM whether the OEM
`
`uses a rival’s chip or Qualcomm’s. OP50-51. The panel did not engage with Judge
`
`
`4 The panel took issue with two paragraphs of Judge Koh’s 27-page analysis of
`Qualcomm’s royalties. Compare 1ER173-74, with 1ER158-84. The panel
`construed those paragraphs as assuming that patent royalties must be expressed as
`a percentage of the price of the smallest salable patent-practicing unit, as opposed
`to a (lower) percentage of a commercial product’s sales price. OP42-43. But that
`has no bearing on Judge Koh’s amply supported factual finding that Qualcomm’s
`royalties are based on its chip monopoly, not its patents.
`
`
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`8
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`Koh’s findings about the surcharge’s actual, decidedly non-neutral effects on
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`competition. See 1ER184-87. Instead, it declared—as a matter of law—that a
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`facially neutral surcharge, “by definition,” cannot distort competition. OP49.
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`Finally, the panel dismissed Judge Koh’s findings that Qualcomm’s conduct
`
`harms its OEM customers, ultimately “resulting in higher prices to consumers.”
`
`OP30. The panel stated that “[t]hese harms, even if real, are not ‘anticompetitive’
`
`in the antitrust sense—at least not directly.” Id. And it intimated that the antitrust
`
`laws condemn only conduct that injures a monopolist’s competitors directly rather
`
`than through an impact on customers or suppliers. E.g., OP44, 48-49.5
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`I.
`
`ARGUMENT
`THE PANEL DISREGARDED PRECEDENT BY ELEVATING PATENT-LAW
`LABELS OVER ECONOMIC SUBSTANCE
`The Supreme Court has repeatedly instructed that the Sherman Act “is aimed
`
`at substance rather than form,” Am. Needle, Inc. v. Nat’l Football League, 560 U.S.
`
`183, 193 (2010), and that courts must look beyond labels to “the economic reality
`
`of the relevant transactions,” United States v. Concentrated Phosphate Exp. Ass’n,
`
`393 U.S. 199, 208 (1968); see, e.g., Apple, 139 S. Ct. at 1522-23.
`
`
`5 In a separate portion of the opinion, the panel reversed Judge Koh’s holding that
`Qualcomm’s refusal to license its patents to rival chipmakers violated Section 2 of
`the Sherman Act. OP31-40. The FTC does not seek rehearing on that aspect of the
`panel’s decision.
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`
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`9
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`Judge Koh faithfully applied that teaching. She found, as a factual matter,
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`that the bulk of Qualcomm’s so-called patent royalties are attributable not to its
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`patents, but to its chip monopoly. 1ER158. Critically, the issue is not that
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`Qualcomm’s royalties exceed the “intrinsic value” of its patents. OP43. High
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`patent royalties, by themselves, are not an antitrust concern. Instead, as Judge Koh
`
`recognized, the problem is that Qualcomm’s “royalties” conceal a chip-driven
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`surcharge that is the economic equivalent of the fees in United Shoe and Caldera.
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`1ER46, 158-62, 184-87. Just like those fees, the surcharge is extracted through
`
`monopoly power and penalizes purchases of competing products.
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`The panel acknowledged that a “naked tax” like the ones condemned in
`
`United Shoe and Caldera is anticompetitive. OP45 (discussing Caldera). It could
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`scarcely have done otherwise: Even Qualcomm acknowledged that such a tax is
`
`“blatantly exclusionary.” Reply 28; see Br. 66. But the panel declared that because
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`Qualcomm has concealed its surcharge in a “patent royalty,” the entire payment is
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`subject to challenge only “in patent law, not antitrust law.” OP44. On the panel’s
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`logic, a naked $10 surcharge on rivals’ chips is a clear antitrust violation, but the
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`same surcharge couched as an $11 “royalty” on patents worth $1 is exempt from
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`antitrust scrutiny.
`
`That reasoning ignores the fundamental principle that antitrust law is
`
`concerned with economic substance, not labels. It also contradicts the Supreme
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`10
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`Court’s specific instruction that the antitrust laws do not permit a patent holder,
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`“under the guise of his patent,” to “secure protection from competition which the
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`patent law unaided by restrictive agreements does not afford.” United States v.
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`Masonite Corp., 316 U.S. 265, 278-79 (1942). The Court has thus repeatedly held
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`that defendants cannot insulate anticompetitive practices from antitrust scrutiny
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`simply by hiding them in patent agreements. Id. at 280-81. In Actavis, for example,
`
`the Court rejected a rule of “antitrust immunity” for “patent settlement”
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`agreements and held instead that they must be scrutinized for anticompetitive
`
`effects based on their “substance.” 570 U.S. at 147, 158.
`
`Consistent with those precedents, other courts of appeals have refused to
`
`assume that a potentially anticompetitive payment is genuinely compensation for a
`
`product or service simply because a defendant has contrived to label it so. For
`
`example, the Fourth and Seventh Circuits condemned an agreement in which a
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`group of contractors obtained a commitment from a union to impose a fee on all
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`contractors, rejecting the defendants’ claim that the fee was merely compensation
`
`for bargaining and administrative services. See Premier Elec. Constr. Co. v. Nat’l
`
`Elec. Contractors Ass’n, 814 F.2d 358, 368-69 (7th Cir. 1987) (Easterbrook, J.)
`
`(explaining that the group’s agreement worked “to increase its rivals’ costs of
`
`doing business, the better to eliminate a source of competition”); Nat’l Elec.
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`
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`11
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`Contractors Ass’n v. Nat’l Constructors Ass’n, 678 F.2d 492, 496-97 & 501 (4th
`
`Cir. 1982).
`
`In holding, as a matter of law, that any challenge to the surcharge concealed
`
`in Qualcomm’s patent royalties “sounds in patent law, not antitrust law,” OP49, the
`
`panel contradicted Supreme Court precedents and subverted the fundamental
`
`principles they reflect. It also “provided a roadmap” for monopolists to “thwart
`
`effective antitrust enforcement” by manipulating patent-law labels. Apple, 139
`
`S. Ct. at 1523.6
`
`II. THE PANEL DISREGARDED PRECEDENT BY HOLDING THAT
`FACIALLY “NEUTRAL” FEES CANNOT VIOLATE THE ANTITRUST
`LAWS
`The next critical error in the panel’s decision was mischaracterizing
`
`Qualcomm’s surcharge as “chip neutral,” OP50, and holding that, “by definition,”
`
`a facially “neutral” charge cannot distort competition, OP49.
`
`
`6 The panel’s form-over-substance approach led it to analogize to the “price-
`squeeze” claims discussed in Pacific Bell Telephone Co. v. linkLine
`Communications, Inc., 555 U.S. 438 (2009). See OP47. But a price-squeeze claim
`challenges an integrated monopolist’s unconditional sales and pricing in two
`related markets, alleging that competitors cannot profitably compete with the
`monopolist’s unconditional price in one of those markets. linkLine, 555 U.S. at
`449. The FTC’s claim here is entirely different: It challenges Qualcomm’s
`conditional sales in one (chip) market: selling chips only on condition that OEMs
`agree to pay surcharges to Qualcomm on all chip purchases. That practice is
`exclusionary for reasons economically unrelated to patents or any second market;
`its only connection to Qualcomm’s patents is misleading labeling. linkLine is not a
`license to exclude through creative misdirection.
`
`
`
`12
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`
`
`As an initial matter, the panel relied on an erroneous premise. The panel
`
`assumed that an OEM pays the same surcharge “whether an OEM buys
`
`Qualcomm’s chips or a rival’s chips.” OP50. But Judge Koh specifically found that
`
`the same Qualcomm license agreements that impose a surcharge on all chips often
`
`include rebates and other incentives that accrue only “on OEMs’ purchases of
`
`[Qualcomm] chips.” 1ER45. Those payments “lower [OEMs’] effective royalty
`
`rates”—and thus the surcharge—“on Qualcomm chips only.” 1ER52. And Judge
`
`Koh found, based on specific OEM testimony, that this facially discriminatory
`
`surcharge “contributed to [OEMs] shifting [their] modem chip purchases from
`
`[rivals] to [Qualcomm].” 1ER81. The panel did not explain why a facially
`
`discriminatory surcharge should be immune from antitrust scrutiny.
`
`More fundamentally, the sweeping immunity the panel conferred on facially
`
`neutral surcharges contradicts both precedent and sound economics. The Supreme
`
`Court has long recognized that facially neutral terms may prove “more costly to
`
`one set of [firms] than another,” United Mine Workers of Am. v. Pennington, 381
`
`U.S. 657, 665-66, 668 (1965), and that a monopolist can restrain competition and
`
`violate the antitrust laws through a facially neutral charge. That is exactly what
`
`United Shoe did when leasing its shoemaking machines: Rather than charging
`
`lessees .75¢ per shoe made on a United Shoe machine and imposing a “naked” fee
`
`of .50¢ every time they used a rival’s machine (which would have been overtly
`
`
`
`13
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`

`

`Case: 19-16122, 09/25/2020, ID: 11836941, DktEntry: 256, Page 19 of 83
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`
`
`discriminatory), it required lessees to pay a fee of .50¢ on all shoes (regardless of
`
`the machine used), and an additional .25¢ per shoe made using United Shoe
`
`machines. United States v. United Shoe Mach. Co., 234 F. 127, 134 (E.D. Mo.
`
`1916). Like Qualcomm’s surcharge, the .50¢ fee was “neutral,” but the Supreme
`
`Court saw through the facial neutrality and condemned the fee as exclusionary. See
`
`258 U.S. at 456-58. In so doing, the Court vindicated the core antitrust principle
`
`that defendants cannot transform unlawful conduct “into something innocuous just
`
`by changing the way they keep their books.” Freeman v. San Diego Ass’n of
`
`Realtors, 322 F.3d 1133, 1146 (9th Cir. 2003).
`
`Economics teaches the same lesson. As Judge Koh explained, a facially
`
`neutral fee paid to a monopolist affects the monopolist and its rivals in
`
`fundamentally different ways. On rivals’ sales, the fee operates as a tax, raising the
`
`cost of their products, reducing their sales and margins, and thus suppressing
`
`competition. 1ER185-86; see Premier, 814 F.2d at 368. On the monopolist’s sales,
`
`by contrast, the fee is simply a component of the monopolist’s effective price.
`
`Premier, 814 F.2d at 368. As such, a rational monopolist will manipulate its
`
`nominal price to ensure the fee does not increase its effective price beyond the
`
`profit-maximizing point.
`
`Suppose, for example, that a chip monopolist forced its customers to accept
`
`agreements that imposed a $10 fee only on their purchases of rivals’ chips and
`
`
`
`14
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`
`
`thereby enabled the monopolist to charge a profit-maximizing (monopoly) price of
`
`$25 for its own chips. Revising the agreements to make the $10 fee applicable to
`
`all chip purchases would make no economic difference: The monopolist would
`
`reduce its nominal chip price by $10 to ensure that the true price of its chips
`
`(inclusive of the $10 fee) remained $25. (Charging more would reduce its profits.)
`
`Both the apparent “reduction” in the monopolist’s price and the apparent
`
`“neutrality” of its fee would be illusory. Customers would still pay $25 for the
`
`monopolist’s chips, only now in the form of a $15 nominal chip price plus a $10
`
`fee. And the fee would still burden the monopolist’s rivals, while leaving the
`
`monopolist unaffected. See 1SER36-39 (testimony of FTC’s economic expert).
`
`Another way to see the anticompetitive effect of a “neutral” surcharge is to
`
`ask what would happen if it disappeared. If Qualcomm could no longer impose a
`
`surcharge on its rivals’ sales, but maintained the same real price (nominal price
`
`plus surcharge) on its own chips, OEMs would have a strong incentive to buy chips
`
`from Qualcomm’s (now cheaper) rivals. As Qualcomm itself recognized, it would
`
`then be forced to “lower its price … to meet the competition,” engaging in
`
`“garden-variety price competition that the law encourages.” Reply 43.
`
`A practice that allows a monopolist to insulate itself from such competition
`
`is anticompetitive. By holding otherwise—and by shielding, as a matter of law, any
`
`
`
`15
`
`

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`Case: 19-16122, 09/25/2020, ID: 11836941, DktEntry: 256, Page 21 of 83
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`
`
`facially neutral restraint—the panel again departed from precedent and provided a
`
`roadmap for subversion of the antitrust laws.
`
`III. THE PANEL DISREGARDED PRECEDENT BY HOLDING THAT HARMS
`TO QUALCOMM’S CUSTOMERS ARE “BEYOND THE SCOPE OF
`ANTITRUST LAW” AND DEMANDING A SHOWING OF “DIRECT”
`HARM TO COMPETITORS
`Finally, the panel seriously erred by dismissing Judge Koh’s findings about
`
`the harm to OEMs—including higher prices that are passed on to retail
`
`consumers—because OEMs “are Qualcomm’s customers, not its competitors.”
`
`OP30. The panel believed that such harm is not cognizable becau

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