K ENNETH W. S TARR 5404 P OINT W OOD C IRCLE W ACO, T EXAS 7 6710 December 11, 2018 The Honorable Makan Delrahim Assistant Attorney General Antitrust Division U.S. Department of Justice 950 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Dear Assistant Attorney General Delrahim, I write on behalf of my client, J. Gregory Sidak, Chairman of Criterion Economics LLC. As a matter of principle and without acceptance of any fee, and in friendship and admiration for his outstanding professional reputation, I represent Mr. Sidak in his individual capacity. Mr. Sidak testified as an expert economic witness for Qualcomm in a patent- infringement dispute with Apple before the International Trade Commission (ITC)— Investigation No. 337-TA-1065, Certain Mobile Electronic Devices and Radio Frequency and Processing Components Thereof. I explain in this letter why it is my opinion, consistent with the conclusions of the enclosed memorandum to the Antitrust Division that Mr. Sidak has written in consultation with me, that the administrative law judge (ALJ) in the 1065 Investigation reached findings that conflict with controlling American antitrust jurisprudence and consequently drive a wedge between the Antitrust Division and the ITC on how properly to use economic principles to diagnose monopoly power. Mr. Sidak correctly identifies what is at stake: will the ITC or the Antitrust Division set policy on monopoly and innovation? From my experience as Solicitor General and as a Circuit Judge on the U.S. Court of Appeals for the District of Columbia Circuit, I address in this letter, from the perspective of an appellate judge reviewing an agency’s action, what appear to me to be three reversible errors in the ALJ’s findings in the 1065 Investigation. Those errors concern (1) the incorrect inference of monopoly power from market share alone, (2) the incorrect view that Schumpeterian competition across successive generations of monopoly cannot deliver innovation and lower quality-adjusted prices, and (3) the incorrect finding that Mr. Sidak is biased and that he and his expert economic testimony lack credibility and should receive no evidentiary weight. Those reversible errors unjustifiably impugn Mr. Sidak’s professional reputation, which I describe in the Appendix to this letter. The Honorable Makan Delrahim Page 2 of 10 December 11, 2018 INFERRING MONOPOLY POWER FROM MARKET SHARE ALONE As Mr. Sidak’s memorandum explains, the ALJ in the 1065 Investigation found that the requested exclusion order would give Qualcomm a monopoly in the supply of baseband processor modems to smartphone manufacturers with respect to their sale of so-called “premium” smartphones in the United States (although this supposed “market” curiously excludes any Samsung smartphones sold in the United States that contain Samsung’s own baseband processor modems). In other words, the ALJ (implicitly) defined the relevant product market to be the supply of only a subset of baseband processor modems used in the manufacture of only a subset of the many smartphones sold. The ALJ then (explicitly) defined the relevant geographic market for that subset- of-a-subset of baseband processor modems to consist of only the United States, despite the undisputed fact that baseband processor modems are generally manufactured outside the United States and installed in smartphones that are also manufactured outside the United States. Those smartphones are then shipped throughout the world. It is long-established antitrust law that one cannot reliably infer monopoly power from a market share in isolation. In my opinion, no appellate court would conclude that American antitrust law supports the ALJ’s ruling that Mr. Sidak lacked credibility when he truthfully and correctly answered the hypothetical question put to him by saying that it is unreliable for one to purport to infer monopoly power solely from a firm’s market share, without considering demand and supply conditions. It is also my opinion that an appellate court would conclude that the ALJ’s ruling on Mr. Sidak’s credibility was arbitrary and capricious, unsupported by substantial evidence, and contrary to established antitrust jurisprudence. I agree with Mr. Sidak’s impression that the ALJ confirmed that he lacked enough understanding of antitrust law to recognize (during Mr. Sidak’s re-direct examination) that Mr. Sidak had answered the ALJ’s earlier hypothetical question in a completely truthful and correct manner. It would trouble an appellate court that the ALJ refused to allow Mr. Sidak to complete his truthful, correct, and highly relevant answer concerning supply substitution and geographic market definition; Mr. Sidak’s testimony on these issues would indeed have directly informed proper analysis of the requested exclusion order’s effect on U.S. consumers and its effect on competitive conditions in the United States. The ALJ’s reasoning that this portion of Mr. Sidak’s testimony was irrelevant to the correct interpretation of section 337 clashes with the reasoning on supply substitution and geographic market definition found in American antitrust jurisprudence. In my opinion, an appellate court would not give Chevron deference to the ALJ’s novel interpretation of section 337. It is also my opinion that an appellate court would find K ENNETH W. S TARR The Honorable Makan Delrahim Page 3 of 10 December 11, 2018 that it was an abuse of discretion to refuse to permit Mr. Sidak to complete his answer on supply substitution and the worldwide scope of the relevant geographic market. SCHUMPETERIAN COMPETITION AND INNOVATION During Mr. Sidak’s cross examination, a staff lawyer from the ITC’s Office of Unfair Import Investigations asked: “Standard economic theory provides that monopolies reduce innovation and result in higher prices; correct?” Mr. Sidak answered: “I think it’s ambiguous whether monopolies increase or decrease innovation. There is the theory associated with Joseph Schumpeter about creative destruction, that it’s the lure of achieving a monopoly for a limited period of time that drives innovation and that competition basically takes the form of successive iterations of monopoly, where one firm displaces another, which displace[d] another.” The ALJ, however, embraced the static-competition view that “it is a staple doctrine of economic theory that monopolies reduce innovation and result in higher prices,” and that “the contradictory testimony” by Mr. Sidak, “that monopolies can actually increase innovation, should not be considered credible.’” The ALJ wrote that “this conclusion . is such an accepted truism that it would not be error to take notice of the validity of this theory.” I agree with Mr. Sidak that the ALJ’s conclusion conflicts with the D.C. Circuit’s decision in United States v. Microsoft, which acknowledged the importance of Schumpeterian competition and quoted Mr. Sidak’s own scholarship when it explained: “Rapid technological change leads to markets in which ‘firms compete through innovation for temporary market dominance, from which they may be displaced by the next wave of product advancements.’” In your own Telegraph Road speech delivered on December 7, 2018, your reiterated the salience of the very same passages from Microsoft. I also agree with Mr. Sidak that the ALJ’s dismissive findings about the consumer benefits from Schumpeterian competition conflict with the Supreme Court’s reasoning in Trinko that “[t]he opportunity to charge monopoly prices—at least for a short period—is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth.” (I note that, at the time of the Microsoft case, I collaborated with Judge Robert Bork in representation of parties adverse to Microsoft that argued that Microsoft, possessing a monopoly, had engaged in conduct falling short of the “business acumen” that antitrust applauds. Of course, Microsoft lost before the D.C. Circuit.) It is therefore my opinion that an appellate court would find the ALJ’s rulings on monopoly and innovation to be arbitrary and capricious, unsupported by substantial evidence, and contrary to established antitrust law. K ENNETH W. S TARR The Honorable Makan Delrahim Page 4 of 10 December 11, 2018 PRESUMING BIAS The ALJ found that Mr. Sidak’s professional fees to Qualcomm made him a biased expert economic witness: [T]he Record will show the amount of money paid to Mr. Sidak, before the current investigation, was approximately $1 million over several years and that the company he owns has invoiced between $3 million and $4 million for just this investigation alone. In my almost 39 years of practicing law, I have never seen or heard of anything even approaching this level of financial commitment by a witness to a party. From his financial relationship with Qualcomm bias may be presumed, and I find it would be an abuse of my discretion to give any material credibility to this witness or his findings. The ALJ never considered that Mr. Sidak and his staff at Criterion Economics devoted more than 9,000 hours to analyzing the many economic nuances in the 1065 Investigation. The ALJ never compared Criterion’s fees with those charged by economic consulting firms employing or supporting other expert economic witnesses of comparable reputation on matters of similar size, scope, complexity, urgency, and consequence (including the firms supporting Apple’s expert witnesses in the 1065 Investigation). In October 2017, when Qualcomm disclosed only Mr. Sidak and one other economist as possible witnesses on public-interest issues, Apple disclosed as many as twelve economic experts—including professors from Yale, Chicago, and Berkeley, one of whom is a Nobel laureate. The ALJ never considered that, when Mr. Sidak was retained, Qualcomm, Apple, Intel, the Federal Trade Commission, and other third parties were involved in a complex set of legal disputes concerning Qualcomm’s licensing of its patents, or its sale of baseband processor modems, or both.