In a sweeping decision, Judge Lucy Koh has ruled last week that Qualcomm violated the antitrust laws in licensing its 4G digital communications technology in smartphones. “Invent a better mousetrap, and you'll be rewarded” has long been the motto driving the U.S. innovation economy—from lightbulbs to airplanes to smartphones. Everyone benefits. This is in doubt now.
The Federal Trade Commission filed its lawsuit against Qualcomm at the close of the Obama Administration in early 2017. The agency accused Qualcomm of violating the antitrust laws by charging too much in its license agreements for smartphone manufacturers to use its patented 4G technology. Judge Koh presided over the trial in January 2019.
In the trial, the FTC justified its lawsuit with academic theories that predicted stifled innovation, reduced competition, and higher prices for consumers of smartphones from Qualcomm’s royalty rates. Apple testified for the FTC. It was recently revealed that Apple prompted this and other legal cases in what appears to be a deliberate scheme to lower its manufacturing costs through bad faith arguments to courts and regulators. Huawei also testified for the FTC. This was several weeks after the arrest of a Huawei executive for theft of U.S. intellectual property. Judge Koh still bought all of the FTC’s allegations hook, line, and sinker.
Smartphones have existed for a little over a decade, and no one has been harmed in making, purchasing, or using them. Billions of people around the globe now own smartphones. More people today own smartphones than have access clean water and indoor plumbing.
Innovation is rampant, and competition has flourished. Companies like Samsung and Huawei are now among the world’s largest smartphone manufacturers, despite releasing their first smartphones years after Apple’s release of the iPhone. In addition to ever-increasing communication speeds and many new apps and services, smartphones now have high-quality cameras, are controlled by voice commands, and are linked with smartwatches. The imminent deployment of 5G, invented by Qualcomm, will lead to even more amazing new services and new companies entering the smartphone industry.
This explosive growth in smartphones, apps, and services has all occurred with quality-controlled reductions in prices, the fastest drop in prices compared to any other U.S. industry.
By every possible evidence-based measure, everyone is benefiting immensely from the mobile revolution born of Qualcomm’s innovations in digital telecommunications tech. We all carry portable, interconnected supercomputers in our pockets and call them “phones.”
Judge Koh believed otherwise. In accepting the FTC’s allegations, she ordered sweeping restrictions to Qualcomm’s business practices. This will hamper its ability to invest millions in inventing telecommunications technologies, like 4G and 5G. She also ordered ongoing FTC regulatory review of Qualcomm’s business practices for seven years. With government bureaucrats overseeing the company’s day-to-day business decisions, it will be threatened with stagnation. This is a recipe for commercial failure, especially in the most fast-paced, innovative sector of the U.S. economy. Innovators and consumers both will lose.
Judge Koh’s far-reaching antitrust penalties are also surprising given the DOJ’s unprecedented request to participate in the case several weeks ago. The DOJ was concerned that overreaching antitrust penalties would undermine incentives for U.S. innovation and threaten national security interests. In addition to testifying for the FTC, Huawei is racing against Qualcomm to deploy next-generation 5G networks. The U.S. government has identified 5G as a national security concern relative to China. Judge Koh ignored both the DOJ’s request and these concerns.
The FTC’s lawsuit was not evidence-based government action. One of its own expert witnesses, a renowned academic economist, could not identify a single example of reduced R&D spending caused by Qualcomm’s licensing rates for 4G. In her wholesale agreement with the FTC, Judge Koh’s ruling this week was not evidence-based judicial decision-making.
Judge Koh’s decision has single-handedly reset the terms of U.S. innovation policy unleashed from evidence and the protection of the rights of innovators and consumers. Her theory-driven decision and far-reaching antitrust penalties will have ill effects beyond Qualcomm and the smartphone industry. Inventors will heed the lesson about what befalls the person who invents a better mousetrap, and antitrust enforcers and judges can freely decide if one is charging too much for the fruits of one’s inventive labors. Everyone loses, except Huawei, which will proceed unimpeded by the Chinese government in developing 5G and other next-generation technologies.
Read in RealClear Markets