Yesterday (Friday, January 4), the hugely important FTC v. Qualcomm antitrust trial kicked off in the federal courthouse in San Jose (Northern District of California). I live-tweeted from the Ceremonial Courtroom. With MLex's Mike Swift and Joshua Sisco, I agreed on the #ftcqcom hashtag, and I recommend following that one, too (in the "Latest" mode), but unfortunately some spam bots have already identified it as a popular hashtag.
The trial will be held on nine more days--always Monday, Tuesday and Friday, except for the 21st (MLK Day). There is, however, a potential risk: the federal courts will run out of funding on January 11, so unless the government shutdown ends or some bridge funding is arranged, there is a risk (though Judge Lucy H. Koh continues to believe everything will continue as planned) of an interruption after the end of next week.
I'm spending most of my time preparing the launch of my second app, but I can schedule everything so as to allow me to watch the most important smartphone-related trial to date. After reporting on Judge Koh's Apple v. Samsung cases for more than seven years, and on her pretrial work on FTC v. Qualcomm, it was great to see her in action. Her unrelenting focus on rules and facts, her natural but unpretentious authority, her experience with these types of issues, her knowledge of this industry, her hard work, and her multitasking capability all showed yesterday. As for multitasking, Mike Swift summarized it perfectly:
Interesting to watch Judge Koh during this live testimony at #ftcqcom trial. She has her yellow highlighter out and busily marking up docs and taking notes as she listens to @Qualcomm exec Wise testify, while also ruling on objections and motions to admit exhibits.
— Mike Swift (@Swiftstories) January 4, 2019
How highly respected she is in the judicial community already became clear about two years ago when a multidistrict litigation panel had to decide on whether to consolidate FTC v. Qualcomm (and the related consumer actions) with Apple v. Qualcomm, and mentioned in the decision to keep the FTC and consumer cases in San Jose that Judge Koh appeared to be in a perfect position to handle those matters.
So much was said during the six hours in court yesterday that it will take more than one post to explain. This one here is about the general strategic landscape, but a number of interesting facts are still worth discussing in a follow-up post later today or tomorrow.
Initially, the parties got 30 minutes each for an opening statement. The opening statements were simply what I expected based on the final pretrial briefs and the proposed findings of fact and conclusions of law. For the FTC, Jennifer Milici outlined the four key issues surrounding Qualcomm's conduct that the FTC is tackling (let's not forget that some other aspects are at issue in Apple v. Qualcomm in San Diego, where a trial will start on April 15), which are interrelated as she also explained:
the "no license-no chips" policy;
incentive payments (for a brief explanation, those incentives effectively reduce patent licensing fees in exchange for doing Qualcomm some strategically-relevant favors);
the refusal to license rival chipset makers (note that Judge Koh's summary judgment in this context was based on contractual obligations, while the focus at this trial is now on an antitrust duty to deal); and
past exclusive arrangements with Apple.
In her opening statement, Mrs. Milici already forewarned the court against attempts by Qualcomm witnesses to "explain away" some of the issues. This is part of what I mean by control over the center of the chessboard in the headline of this article. Unlike an actual chess match (where the parties alternatingly make moves), there'll be limited back and forth. The plaintiff's chance to make the opening moves has its advantages for the FTC, but beyond just making its own points, the FTC must pre-empt the way Qualcomm will then counter its assertions and representations.
Qualcomm already claimed, to a varying extent, in all of its filings (from its motion to dismiss and answer to the complaint to the final pretrial brief) that the accused practices are above board and, particularly, justified by legitimate business considerations. And with a view to the rule of reason, Qualcomm argues it's all ultimately beneficial to competition and innovation, arguing that prices are coming down and competition is thriving. We heard the same again from Qualcomm's lead counsel in this case, Keker van Nest & Peters's Bob van Nest, in his opening statement.
This blog previously mentioned Mr. van Nest on numerous occasions because of his representation of Google against Oracle in the Android-Java copyright case. He won two trials (in the first one, copyrightability was the key issue; in the second one, fair use, where he achieved a hung jury in the first trial and was actually just one jury vote away from winning), but the Federal Circuit--fortunately, from my perspective as a software developer and trivia content author--reversed the district court twice. In those trials, Mr. van Nest showed the jury a physical filing cabinet to explain an abstract technical-legal concept, a communication strategy that many of his fellow litigators still admire. So he's undoubtedly extremely good at making his points in a very easy-to-understand and compelling form. Having seen him in real life now, I can imagine that the Oracle v. Google jurors probably found him very trustworthy and likable (attributes that Qualcomm needs badly). But I really wonder whether he'd have shouldered the burden of representing Qualcomm in this FTC case (no matter how high-profile a matter it is and how good and longstanding his relationship with Qualcomm may be) if he had fully known and understood at the time that this is a mission to defend the indefensible at least for the largest part.
Mr. van Nest said the Qualcomm side was looking forward to all the evidence being presented now. With nine more trial days to come, it's too early to be sure, but based on all the information that surfaced over the last two years, in light of Judge Koh's various pretrial decisions, and after the first round of testimony yesterday, this is going to be an uphill battle for Qualcomm unless there are some silver bullets that one wouldn't expect.
Control over the center of the board is not the only way to win a chess match, but it hugely increases one's chances. The FTC has already seized the opportunity of being first to present its case-in-chief by presenting testimony and documents that can be described in one word: damning.
The FTC started with Lenovo's Ira Blumberg. Lenovo is a major player in its own right, but what lends it even greater significance and relevance in connection with FTC v. Qualcomm is that it acquired Motorola Mobility's wireless device business from Google a few years ago, so Mr. Blumberg also made reference to what he learned from his Motorola colleagues. Also, Mr. Blumberg pointed to his 20+ years of patent licensing experience, which besides Lenovo included such companies as Rambus and Intellectual Venture. He said Rambus and IV didn't have the kind of leverage Qualcomm had, simply because all they were able to threaten with was litigation, but not with a disruption of chipset supplies, which enables Qualcomm to extract patent royalties that Lenovo considered far too high.
According to Mr. Blumberg, he also learned of such threats from his Motorola colleagues.
All that Lenovo's Mr. Blumberg said was corroborated, and in some ways even reinforced, by Huawei's senior legal counsel Nanfen (Nancy) Yu. For cultural and linguistic reasons, her style was very different from, but actually perfectly complementary to, Mr. Blumberg's testimony. She, too, confirmed threats of disruption and highlighted the key issues in a credible way.
Huawei's Chinese rival ZTE appears to have faced similar issues based on a document that came up yesterday.
After only the first few hours of testimony, the FTC has already managed to underpin its position on the anticompetitive impact of the "no license-no chips" policy (supra-FRAND royalties), and Qualcomm's refusal to license rival chipset makers was always undisputed anyway. And Apple and some other key players have yet to be heard. Presumably they won't all sing from the same hymn sheet (Qualcomm claims some testimony will support its arguments), but it appears that the FTC has the mobile device industry largely on its side.
With Huawei testifying that they, too, had an exclusivity clause in a contract with Qualcomm, which would result in penalties in the form of an immediate increase in royalties if they were to buy baseband chips from a Qualcomm competitor, the FTC has also shown that what it criticizes about Qualcomm's past exclusive arrangements with Apple is a pattern.
The FTC's control of the center of the board furthermore involves that the credibility of Qualcomm's witnesses has already been diminished to a very significant extent. Of the three Qualcom witnesses heard, two appeared on video (as did Huawei and Lenovo): Dr. Paul Jacobs (the son of Qualcomm's founder and himself once the company's chairman) and Eric Reifschneider, a licensing executive. Qualcomm's finance exec David Wise was the first live witness to take the stand. Of the three Qualcomm witnesses, Dr. Jacobs fared best, which is probably attributable to a combination of him being very clever as well as the fact that the documents he was confronted with weren't as damning as some others.
Mr. Reifschneider was extremely evasive, and I doubt anyone in that courtroom really found it credible how he sought to avoid conceding anything. It's normal that people don't remember every little thing that happened in their professional lives over the course of many years, but the extent to which he denied recalling things was absurd. Mr. Wise came across as more cooperative, but the FTC scored two "gotcha" points against him:
Mr. Wise claimed that the Boston Consulting Group (BCG) had become involved only at the late stage of a project relating to a potential breakup of Qualcomm (separating the licensing business from the chipset business), but counsel for the FTC was able to show that BCG's involvement started reasonably early. There obviously is room for interpretation of what is "late" versus what is "early," but Mr. Wise's characterization of the stage of BCG's involvement as "late" seemed to be a stretch.
After insisting several times that his reference to "compliance" (by device makers) merely referred to whether device makers would fulfill their obligations under existing agreements, the FTC ultimately reached the point at which Mr. Wise was forced to admit that "compliance" also meant the possibility of someone simply refusing to take a license on Qualcomm's desired terms.
Control of the center has an offensive and a defensive aspect. In an offensive sense you want to be able to attack from a strategically desirable position. That is the case because the key issues the FTC is tackling have already been demonstrated to a pretty impressive extent. And in a defensive sense, the FTC has already put itself in a position from which it can counter Qualcomm's efforts to deny, explain away, or "not remember" key facts. While Qualcomm's lead counsel really looked and sounded like someone you'd buy a used car from any day of the week and appeared relaxed (he only got uptight in connection with the attorney-client privilege), Qualcomm's witnesses (though Dr. Jacobs to a far lesser degree than Mr. Reifschneider and Mr. Wise) behaved just the way someone would when he has something to hide. We still have nine days of trial ahead, so it's too early to call the game, but in a low-key, conservative way, the FTC has conquered strategically important territory after only a few hours, and if Qualcomm can't take control over the center away from the FTC, then it's going to be in serious trouble.
The fact that the FTC was fine with providing oral instead of written briefing to Judge Koh, who made it clear she doesn't want to be inundated after so many (and some extremely long) documents have already been filed in this case, while Mr. van Nest very much insisted on written briefing, suggests that Qualcomm has more reasons to focus on the record for an appeal than the FTC.
In my next post I'll talk about some of the tidbits I had already shared on Twitter (such as Qualcomm assuming that two thirds of its enterprise value are attributable to its patent licensing business) and Qualcomm's position on the legal standard for anticompetitive harm in light of last year's Ohio v. American Express decision by the Supreme Court.
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