Global Standards Collaboration Intellectual Property Rights Working Group

Antitrust-Related IP Issues in Standard Setting

Melanie Sabo, Assistant Director Anticompetitive Practices Division

Bureau of CompetitionFederal Trade CommissionWashington, D.C. 20580

July 16, 2008

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Caveat

The views expressed here are mine and do not necessarily reflect the views of the Federal Trade Commission, any Commissioner, or other FTC staff member.

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Communication Networks

Networks depend upon interconnection standards to offer consumer value

Antitrust has role when conduct impairs standards development and blocks benefits offered by standards

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Competition Issues in Standard Setting

Why is deception in standards-setting an antitrust concern?

If licensing fees are disclosed during selection, does that avoid deception?

Is failure to abide by licensing commitments an antitrust issue?

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Standards Enhance Competition

Create new products; stimulates innovation Establish communications networks

Allows interoperability

Sharpens competition Enables interchangeability Simplifies price comparison Increases consumer demand and attracts suppliers

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Harms of Patent Hold-Up

Holder of essential patents can block implementation or use of standard

Industry investment and consumer adoption make it prohibitively expensive to switch

Patentee has power to extract greater royalties than it could if patents and costs had been known prior to selection of its technology for standard

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Hold Up Possible Where Patents or Patent Cost Hidden

Deception about patents and their costs impairs selection process by blocking information needed for selection process

Rival technologies compete to become standard based upon performance and cost

Selection turns on SSO’s knowledge of each rivals’ performance and cost

Unfair advantage is gained by misleading SSO about patents and their costs

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SSOs Vulnerable to Deception

SSO participants less able to protect themselves against deception because they suspend rivalries to cooperate in good faith to develop an industry standard

Thus, standards development is vulnerable to deception about patents and their cost

SSO has no authority over patent holders after selection process

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Patent Deception as Antitrust Violation

Antitrust has a role when deception “disrupts the proper functioning of the price-setting mechanism of the market”

Commission has concluded that a patentee may violate antitrust laws when it misleads SSO about its patents; deception substantially contributes to its acquisition

of power to collect supra-competitive royalties; and it intentionally engaged in the deception

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Deception Depends Upon Circumstances

Whether patentee’s conduct, statements, and omissions are deception is fact specific

It is based upon impressions left with SSO members by patentee

Patentee’s conduct, statements and omissions are viewed within context of SSO procedures and practices, if any, regarding patents

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FTC Cases Against Patent Deception

In re Dell Computer Corporation121 F.T.C. 616 (F.T.C. 1996)

In re Rambus Inc140 F.T.C. 1138 (F.T.C. July 20, 2005)

In re Union Oil Company of California138 F.T.C. 1 (F.T.C. 2004)

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Patent Deception in Dell

Patentee “certified” that it had no IP on computer bus standard

SSO adopted standard with patentee’s technology

Commission concluded that patentee misled SSO and its failure to disclose was “not inadvertent”

Patentee settled with remedy blocking ability to collect royalties when patent used in standard

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Patent Deception in Unocal

Patentee offered its technology to California Air Resources Board (“CARB”) for gasoline formulation standard

Patentee claimed technology was “non-proprietary”

CARB adopted the technology for standard Patentee settled, agreeing to license its patented

technology royalty free for use in standard

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Patent Deception in Rambus

Patentee concealed essential IP for memory chip standard

SSO adopted standard using patentee’s technology

Commission found that patentee misled SSO Commission limited royalties to amount

patentee could collect “but for” the deception D.C. Circuit reversed Commission decision

(April 22, 2008)

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Take Away Points Regarding Deception and Antitrust

Patent holders may violate antitrust laws by misleading SSO about essential patents

Deception significantly contributes to acquisition of monopoly power

Patentee intentionally engaged in deception. Patentees participating in SSOs should:

be candid and cooperate in good faith follow the SSO’s practices and procedures

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Licensing Commitments Following Patent Disclosures

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Failure to Follow Specific Licensing Commitment

In recent N-Data matter, technology proponent offered its patented technology for use in wired LAN standard

Pursuant to SSO request for a licensing letter, patentee committed to $1,000/manufacturer royalty

Industry relied upon royalty commitment and adopted standard

Patent later sold to N-Data

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Commission Ruling in N-Data

Commission alleged that N-Data’s refusal to license for $1,000 was antitrust violation

N-Data knew about the licensing commitment Commission believed repudiation of

commitment harmed competition and consumers and was unlawful under FTC Act

N-Data settled; agreed to charge $1,000

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Next Steps in N-Data

Matter is now awaiting final Commission action

Public comments generally supportive that breach of a specific licensing commitment is antitrust violation

The SSO in N-Data, the IEEE, stated that it supports the settlement outcome

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Public Comment Questions in N-Data Are all commitment letters irrevocable?

Depends upon the SSO members’ expectations Must SSO have a policy on revocability?

SSO free to follow whatever policy it wishes Do licensing commitments encumber patent

in the hands of a transferee? Yes

Is licensing agreement form attached to FTC order the required licensing form? No

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Learning Patentee’s Licensing Intentions Prior to Selection

SSOs often take steps to confirm cost of patents upon disclosure

Knowledge of costs enable industry to take steps to avoid patent holdup

SSOs may condition use of patented technology on patentee licensing commitment

If patentee declines, it can withdraw its patented technology from consideration

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Types of Licensing Commitments

Commit to license for specific royalty amount Commit to license royalty free Commit to license on reasonable and non-

discriminatory terms (“RAND”)

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Commitments to Specific Rates

If SSO elects, it can invite patentees to disclose licensing terms before selection of technology standard

Antitrust enforcement authorities have approved such ex ante disclosure of rates

Disclosure enhances competition by facilitating performance/cost comparisons

Patentee ex ante disclosure of rates does not create substantial risk of price fixing

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DOJ Business Review Letters

DOJ approved two different SSO approaches to ex ante disclosure of licensing terms

VITA (2006): SSO required holders of essential patents to disclose maximum royalty rates and most restrictive non-royalty terms

IEEE (2007): SSO allowed members voluntarily to state most restrictive terms

Both SSO procedures encourage competition Actual price fixing remains unlawful

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RAND Commitments and Antitrust

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Commitments to License on RAND Terms

SSOs may invite patentees to commit to “reasonable and non-discriminatory terms”

A RAND commitment is indicator of cost of technology

RAND signals that patentee will license technology at capped “reasonable” rate

Patentee may abuse monopoly power when it charges more than cap

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Is Failure to Comply with RAND Commitment an Antitrust Case?

Commission has not addressed whether refusal to fulfill RAND commitment violates antitrust law

Federal Courts of Appeals decisions are mixed 3rd Circuit found false RAND commitment a § 2

violation (Broadcom v. Qualcom) D.C. Circuit appears to say that § 2 violated only

if commitment led to elimination of rival (Rambus)

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Failure to Follow RAND Commitment Is § 2 Violation: Broadcom v. Qualcomm

In Broadcom v. Qualcomm, patentee offered technology for 3rd generation cell standard

Patentee committed to RAND licensing SSO allegedly relied on licensing commitment Patentee was also downstream chip supplier Rival chip maker alleged patentee breached

RAND commitment by charging a discriminatory higher total royalty rate where users purchased chips from rival chip makers

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Broadcom v. Qualcomm: 3rd Circuit Ruling

3rd Circuit recognized § 2 cause of action where patentee knowingly misrepresents its intention to license technology on RAND terms to acquire monopoly power

Plaintiff must show patentee made a false promise

Plaintiff must show patentee’s licensing regime breached licensing commitment

Case currently in pre-trial discovery

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Failure to Fulfill Rand Commitment May Not Be § 2 Violation: Rambus

Rambus concerned computer memory chip standard Commission found patentee misled SSO about its IP Commission believed patentee would have made

RAND commitment if IP had been disclosed Commission also found SSO would have used

patentee’s technology with RAND commitment Commission found patentee had been charged a supra-

RAND rate and limited patentee to RAND royalty going forward

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Rambus: D.C. Circuit Ruling

D.C. Circuit reversed the Commission Concluded charging more than RAND royalty

is not § 2 violation where SSO would have selected same technology

Rambus decision may mean patentee’s failure to fulfill RAND would not be § 2 violation unless rival was eliminated by misleading commitment to RAND licensing

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Rambus: FTC Requests en banc Review

FTC has requested en banc review FTC believes that patentee’s patent deception

harms competition and violates § 2 Key Arguments

Panel’s standard of proof contrary to the standard in the Microsoft case

Panel misapplies Supreme Court decision on pricing by lawful monopolist (NYNEX v. Discon)