Technically Legal

Recently, Congress and the FCC have been looking into exclusive deals between handset manufacturers (like Apple, Palm, and Motorola) and carriers (Verizon, Sprint, AT&T). The focus of the inquiry is whether they are anti-competitive, and whether they should be banned. The FCC is in a unique position to stop this practice because they are not bound by the same, narrow, requirements of antitrust law.

The FCC

The Federal Communications Commission is allowed to regulate wired and wireless communication and equipment necessarily associated with those. The regulations they pass have to be in the “public interest, convenience and necessity.” If the FCC were to conduct hearings and find that it would be in the “public interest, convenience and necessity,” it could ban the practice of exclusive licenses.

If the FCC were to make a rule like this, it would be subject to what is called a notice and comment period. The FCC would publish the proposed rule, and anyone could write in and make suggestions, or ask for explanations. The FCC would then respond to the comments and publish a final rule.

The final rule would almost certainly be challenged in court. The court would look at whether or not the regulation was within the power of the FCC (probably yes), and whether or not banning these exclusive license agreements was actually in the “public interest, convenience and necessity.” It is possible that without these exclusive licenses development costs would be higher, or they would be borne entirely by the developer, reducing innovation in the handset market. It would be hard to prove this one way or the other. So the FCC would likely get the benefit of the doubt unless the challenger could present some hard evidence.

Even with these limitations, the FCC has a better chance of stopping exclusive agreements than the the Federal Trade Commission, Department of Justice, or Private Parties.

FTC, DOJ and Private Suits

If the FCC doesn’t stop these exclusive agreements, the Department of Justice (and their Antitrust Division), the Federal Trade Commission (and their Antitrust Division), or private parties could try to stop these exclusive arrangements too.

While the Sherman Antitrust Act says that “Every contract, combination . . . or conspiracy, in restraint of trade . . . is declared to be illegal.” It doesn’t really mean that. From very early on the Supreme Court has taken this to mean that only unreasonable restraints on trade are illegal.

The DOJ and the FTC each have their own guidelines to apply when going after alleged antitrust violations. In the end, though, it comes down to whether or not a court thinks that the contract is an illegal restraint on trade.

Antitrust law is really to complicated to go into any detail here. Suffice it to say, there would be a lengthy court battle about a number of antitrust theories. Chief among the arguments would what the relevant market was (all cellphones or just smart phones), how much of the market the handset maker had, and whether the exclusive deal had an adverse effect on competition.

It is notoriously hard to guess how courts will rule on these issues, making it very difficult to predict an outcome. The cases would also be very specific from phone to phone. So the outcome would not be as even as it would be if the FCC or Congress acted to stop these exclusive agreements.

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