federal-regs

UPDATE, March 3: Apple sued Qualcomm in a U.K. court this week – continuing to leverage the FTC complaint in its global war against Qualcomm, according to Bloomberg. The move is unusual, according to Sophie Lawrance, a partner at London’s Bristows LLP, in that it is only Apple bringing all the global actions.

In Washington, D.C., cronyism takes many forms. There is the obvious handout from Congress – for example, a tax code that has ballooned to more than 74,000 pages. Then there’s what happens behind the scenes with an all-too powerful regulatory environment.

And no administration in history was friendlier to legislating via regulation than Barack Obama’s. In the closing months of his lame duck presidency, the Obama Administration issued more midnight regulations than any administration in history. While some had quantifiable costs – $44 billion worth, according to the American Action Forum – others were more costly to the American spirit of ingenuity and innovation.

That’s what the Federal Trade Commission (FTC) did when it succumbed to pressure from Apple, the most valuable and most profitable company in history, to sue Qualcomm for how it licenses its intellectual property. Qualcomm patents and technology power every smartphone on the planet, including iPhones. As a result, Apple pays a small percent of each phone’s price to Qualcomm which, according to analysts, amounts to about $15 for a $649 iPhone 7.

Apple found that too high a cost and, instead of trying to innovate a solution, has engaged in a global regulatory war against Qualcomm. This is all despite the fact that Apple’s iPhone profit margins are between 49 and 58 percent. Oh, and the company is expected to charge consumers $1,000 for its next iteration. Apparently, that generates enough largesse to fund a new campus estimated to cost more than $5 billion; meanwhile, Qualcomm spent $5.15 billion on R&D during 2016.

But despite that, the FTC thought it prudent to intervene on Apple’s behalf. The move was an “extraordinary situation” that caused current Acting Chair Maureen Ohlhausen to depart from a practice of not publicly dissenting from the Commission’s decision [emphasis added]:

I face an extraordinary situation: an enforcement action based on a flawed legal theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide.

That is a powerful dissent. Acting Chair Ohlhausen goes on to argue that there is a “dearth of evidence” to support any claim that Qualcomm was doing anything other than charging reasonable fees for a product.

So Apple put its government lobbyists to work, pushing through a midnight ruling in the closing days of the Obama Administration. It will help the company squeeze out a few extra points of margin – perhaps they need more funds to buy treadmills for their new 100,000 square-foot fitness center – while Americans will suffer the consequences via a less competitive business climate.