FTC Displays Its Anti-Innovation Folly

Anchoring antitrust law in standard economic principles, as United States courts overwhelmingly did for the past four decades, largely prevented government officials from using antitrust law to restrain successful innovators.




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Basic economics helped explain antitrust law, provide useful tests for its application, and channel enforcement in ways that limited options for ill-advised efforts to keep innovators and market leaders from getting too far ahead of competitors. Unfortunately, there is always a constituency for putting common sense interpretations of law aside and a suitable economic theory to support that inclination.

A case in point is provided by the Federal Trade Commission, a century-old independent federal agency created to help enforce antitrust laws and protect consumers. The FTC is using its power to pursue Qualcomm, one of America’s most successful innovators, with more than 45,000 patents (and more than 100,000 pending).

Qualcomm’s ideas and products have helped power the telecommunications revolution — a revolution that has unleashed new ways of communicating, shopping, and sharing everything from basic products to advanced technical know-how to entertainment, on devices carried in nearly every pocket or purse. Qualcomm pioneered important parts of 3G, 4G, and 5G telecommunications technology, and its chips help power many wireless devices.

Qualcomm invented and received patents for technology incorporated into telecommunications standards adopted by standard-setting organizations (SSOs) — so-called standard-essential patents (SEPs). The FTC has sued Qualcomm, claiming that antitrust law requires Qualcomm to let its competitors use this technology to manufacture components that compete with Qualcomm’s.

FTC: Going After Qualcomm

The FTC also asserts that Qualcomm’s licensing practices excessively raise the price of its chips, placing a “tax” on users of its technology. The FTC’s pursuit of Qualcomm is ill-advised for both legal and practical reasons.

First, specifying what obligations come with contributing technology for use in telecommunications standards is principally a matter for contract law, not antitrust law. The question is what the rules of the relevant SSOs require. Qualcomm has undertaken to make the technology in its SEPs available to those who want to implement 3G and 4G technologies. It has widely licensed patented technology, which is why so many different products interact with one another, implementing the same standard’s features. The SSOs are best positioned to determine whether Qualcomm has complied with their rules.

Qualcomm — along with other telecommunications innovators, such as Nokia — argues that its obligation to make its SEP-protected technology available does not include licensing firms to make competing chips but instead requires licensing implementation of other, complementary uses of the technology. That would encourage investment in innovation without preventing diffusion of interactive products based on common technological criteria. That is why many innovators, manufacturers, legal scholars, and SSOs reject the FTC’s position.

Antitrust law does not eliminate contract law or obliterate patent law, which gives innovators monopolies over their innovations during the terms of — and according to the limited rights granted in — their patents.

As Commissioner Maureen Ohlhausen observed, dissenting from the FTC’s complaint against Qualcomm, the Commission’s position does not expressly charge Qualcomm either with below-cost pricing (an antitrust violation) or with pricing in excess of reasonable royalty rates (a possible contract violation).

Limiting Competition

She also notes the absence of evidence that Qualcomm’s royalty charges are out of line with industry norms or that firms are in fact excluded from competing through means that violate standard expositions of antitrust law, which requires more than allegations abased on abstract, highly malleable, new academic theories. The Commission’s tax metaphor cannot substitute for evidence based on accepted legal tests.

Moreover, as a practical matter, in trying to limit competition based on innovation, the FTC undermines an essential basis for economic success. If economic growth is the engine of prosperity, innovation is its essential fuel (accounting for between 50% and 85% of economic growth) and rewarding success rather than punishing it is the lubricant for that engine.

Government policies that are anchored in suspicion of success, that require long and costly litigation or similar government proceedings to permit firms to function — especially the most successful and dynamic firms — risk retarding growth of successful firms at the instance of less successful competitors.

The Future Of Antitrust

The essence of the FTC’s complaint against Qualcomm is that it is exploiting its patents, not that it is withholding that technology from the market. The FTC took that position on a number of occasions under President Obama, and its complaint against Qualcomm was initiated at the very end of that administration, just a few days before President Trump’s inauguration (followed by the appointment of new Commission members).

The FTC would do well to think again about the essence of this complaint and what it suggests for future antitrust enforcement. Limiting antitrust law to its traditional role of preventing conduct that clearly undermines competition and harms consumers, and letting patent law determine how innovations are rewarded and rights to them shaped, would promote economic progress.

Restraining government almost always is more desirable than restraining competition.

  • Cass is dean emeritus of Boston University School of Law, Distinguished Senior Fellow at the Center for the Study of the Administrative State, and co-author of “Laws of Creation: Property Rights in the World of Ideas” (Harvard University Press, 2013).

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