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A Victory for Dynamic Competition

The Ninth Circuit handed the Federal Trade Commission its head in its unanimous reversal of the FTC’s “antitrust adventurism” against wireless technology innovator Qualcomm. This ruling not only corrects the district court’s multiple errors that threatened to disrupt fundamental antitrust and intellectual property principles, it puts down a bright marker for property rights and the rule of law.

The appeals court decision in FTC v. Qualcomm strikes a victory for dynamic competition. This kind of competition comes from the exercise of one’s patent exclusivity.

This may sound counterintuitive because antitrust promotes competition judged by consumer welfare. The court quotes former FTC Commissioner Joshua Wright: “Because innovation involves new products and business practices, courts[’] and economists’ initial understanding of these practices will skew initial likelihoods that innovation is anticompetitive and the proper subject of antitrust scrutiny.”

But the period of IP exclusivity gives its owner the runway to create a new market. That initially solo-market dynamism sparks competition, both direct competitors who learn from the dynamic invention and implementers who come up with new applications for the foundational technology.

R&D companies invest heavily in science and engineering and, once identified, on product and market development for their viable invention. Qualcomm has done this, including for third-generation, fourth-generation and now fifth-generation wireless connectivity.

The Ninth Circuit carefully examined the company’s crucial role as innovator and the dominant market share in CDMA and LTE (3G and 4G, respectively) of its patents, several of which are essential to implementing universal industry standards. As the circuit panel explained, certain Qualcomm patents relate to “the way cellular devices communicate with the 3G and 4G cellular networks—while others relate to other cellular and noncellular applications and technologies, such as multimedia, cameras, location detecting, user interfaces, and more.” Standard-essential patents especially are highly valuable.

In Qualcomm’s case, the appellate court found its high-value patents prompted hypercompetitive behavior — which the FTC and district court mistook for anticompetitive.

It was downhill from there for the misguided FTC and the district judge from “efficient infringement’s” hometown. Overlooking how dynamic competition and IP exclusivity work in milestone innovation, they ignored that SEP commitments are contractual, not antitrust, matters. They missed the fact that patent portfolio licensing and modem chip sales are two separate things; Qualcomm engages in both while its competitors are in one or the other market.

The Ninth Circuit’s de novo analysis clarified critical facts and law for the FTC, the Silicon Valley court and the antipatent cadre: cell phone makers are Qualcomm’s customers, not its competitors — the company doesn’t have a “duty to deal,” sell its modem chips to rival modem chip firms — basing royalty rates on the price of the end product, a “no license-no chips” practice that’s chip supplier neutral and no longer agreeing to obsolete terms are all permissible under antitrust law, rightly construed, because such conduct is actually procompetitive. The appellate court even cited how dynamic competition in Qualcomm’s experience led to its slipping from sole source to reducing its rates and seeing market share slide as the market matured.

Those such as Qualcomm who invent and innovate plow new ground, relying on property rights in their inventions, their IP exclusivity and their freedom to be enterprising. Thanks to the Ninth Circuit, inventors, implementers and consumers alike will continue to benefit from property rights-based dynamic competition.

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