It was widely hailed as a landmark ruling. It created powerful legal protections for the integrity of standard-setting processes. But not anymore.
On April 22, the D.C. Circuit Court reversed the FTC’s famous 2006 decision, In re Rambus Inc. The FTC had held that antitrust law protects standard-setting organizations against companies, that unscrupulously conceal patent rights in proposed industry standards.
Companies participating in a standard-setting process must disclose their patent interests in proposed standards or risk various legal remedies, including royalty-free compulsory licensing of the patents, the FTC said.
However, a three-judge panel of the D.C. Circuit unanimously ruled that the FTC had gone too far. The court established a controversial new test that made it much harder–some say almost impossible–to impose antitrust liability on a company for failing to disclose its patent interests in a proposed industry standard.
“The decision effectively removes antitrust protection … against monopolies acquired through the distortion of the standard-setting process,” says Kenneth Glazer, deputy director of the FTC’s Bureau of Competition. “The reasoning of the [D.C.] panel takes away the ability of the FTC and private parties to use the antitrust laws, especially Section 2 of the Sherman Act, to stop abuses.”
Rambus began in the early 1990s, when the Joint Electron Device Engineering Council (JEDEC) was developing industry standards for dynamic random access memory (DRAM) computer chips. Rambus officials participated in JEDEC’s standard-setting process but failed to disclose that the company held patents on some technologies, and planned to seek patents on others, that were part of the proposed standards.
Some years later, after the standards were adopted, Rambus warned the major manufacturers of DRAM computer chips that their standard-compliant chips violated Rambus’ patent rights. Rambus threatened to sue unless the manufacturers paid for licenses.
The FTC found that Rambus failed to reveal its patent interests to JEDEC in violation of JEDEC’s policies and that “but for Rambus’ deceptive course of conduct, JEDEC either would have excluded Rambus’ patented technologies from the JEDEC DRAM standards, or would have demanded RAND assurances [i.e., assurances that the patents would be licensed on a reasonable and nondiscriminatory basis].”
The FTC then concluded that Rambus’ deceptive conduct enabled it to unlawfully obtain a monopoly over certain DRAM standards, in violation of Section 2 of the Sherman Act.
On appeal, the D.C. Circuit held that deceptively withholding patent interests from a standard-setting organization (SSO) could violate antitrust law only if the SSO would have excluded the patented technologies from the standards had it known the truth. If the SSO would have adopted the standards anyway–although requiring the patents to be licensed on a reasonable and nondiscriminatory (RAND) basis–withholding information about the patent interests does not create antitrust liability.
Because it was unclear whether JEDEC would have excluded Rambus’ patented technologies or merely required RAND licensing, the court reversed the FTC’s finding that Rambus violated antitrust law.
The D.C. Circuit’s Rambus decision establishes a tough standard for antitrust liability. It’s hard to prove exactly what an SSO would have done years earlier if it had not been deceived.
“It is a difficult thing to prove [that an SSO would have chosen a different technology],” says Albert Marcellino, a partner at Woodcock Washburn. “You have to imagine what the working group was trying to accomplish, what other technologies were available and how much they would cost to implement.”
Jennifer Pratt, Ohio’s assistant attorney general, agrees. “Trying to prove something so speculative is very difficult,” she says, “[in part because] speculative evidence often gets excluded.”
The court imposed an unrealistic standard of proof, Glazer says. “There’s little chance that anyone could meet that standard. … The ruling [thus] goes a long way toward freeing companies from the obligation to disclose patents that they have or may be applying for.”
The FTC could try to get around Rambus by going after deceptive patentees on other grounds. For instance, in a recent consent decree, the FTC found that Negotiated Data Solutions (NDS) violated Section 5 of the FTC Act by increasing patent license fees in contravention of an agreement the patentee gave to an SSO. The agency found NDS’s price hike on a patented industry standard was an “unfair method of competition” and an “unfair act or practice”–regardless of whether antitrust law was violated. (See “Commission Control,” InsideCounsel, May 2008.)
Traditionally, however, the FTC has used Section 5 only if there also has been an antitrust violation, and the agency has received a lot of flak for its action in the NDS case. Several of the commissioners strongly dissented from the agency’s action, and the commission has yet to finalize the consent decree.
The Rambus ruling also has generated a lot of controversy. Many experts say the D.C. Circuit was wrong; antitrust law is violated when a patentee uses deception to avoid an SSO’s imposition of RAND licensing.
On first blush, this behavior certainly looks monopolistic. “By avoiding the RAND commitment, Rambus is free to charge whatever price it wants,” says Glazer. “In other words, it is free to exercise monopoly power.”
However, Section 2 of the Sherman Act is not about setting prices, it is about wrongfully obtaining market share, according to A. Douglas Melamed, a partner at Wilmer Cutler Pickering Hale and Dorr. Melamed represented Rambus in this case. “Section 2 of the Sherman Act is concerned with the [wrongful] exclusion of competitors, so you must prove that happened in order to find a violation,” he says.
This reasoning has been challenged, however. “The higher prices that result from the avoidance of RAND licensing produce downstream anticompetitive effects,” Marcellino says. “Plus, if there is no RAND requirement, licenses may be granted in discriminatory way. So it would be appropriate to find there is a violation of Section 2 [of the Sherman Act].”
The FTC has asked the D.C. Circuit to reconsider its ruling. The legal war over patents and standard-setting is far from over.