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In the process of setting industrywide standards, there are winners and losers, and the losers commonly seek relief under the antitrust laws. In a statement supporting the Standards Development Organization Advancement Act of 2004, signed into law last month, Sen. Patrick Leahy (D-Vt.) cited “an unavoidable tension between the antitrust laws that prohibit businesses from colluding and the development of technical standards, which require competitors to reach agreement on basic design elements.” The act purports to provide significant new antitrust protections for standards development organizations. The risk that participants in the standard-setting process may act to undermine competition are real. For example, in Allied Tube & Conduit Corp. v. Indian Head Inc., a jury found that the defendant engaged in anti-competitive practices by adopting a standard that excluded plastic pipe from the fire safety standards. In 1988, the Supreme Court found that the defendant had blatantly manipulated the voting process of the National Fire Protection Association by stacking the meeting with “volunteers” who voted for the standard supported by the defendant. Similarly, in American Society of Mechanical Engineers v. Hydrolevel Corp. (1982), the Supreme Court upheld a finding of treble damages against ASME because one of its agents applied the organization’s safety standards in an anti-competitive manner against one company under the direction of a competitor. At the same time, in passing the Standards Development Organization Advancement Act, Congress recognized the unique importance of a vibrant standard-setting process. In many ways, such voluntary, industrywide, joint behavior fills a largely unregulated, quasi-governmental role. As Rep. Bill Delahunt (D-Mass.) explained, standards development organizations play “an essential role in enhancing public safety, facilitating market access, and promoting trade and innovation.” If the process is not abused, it can have a decidedly pro-competitive impact. At the hearings on this legislation, there was virtually universal support for the value of adopting technical standards. James Karmol, vice president of the American National Standards Institute, testified that ANSI accredits nearly 300 standard-setting groups that have developed more than 11,000 national standards that “provide dimensions, ratings, terminology and symbols, test methods, interoperability criteria, and performance and safety requirements for everything from children’s toys to nuclear reactor vessels.” If these standards were not developed by such groups, the government would ultimately have to write them. As James Shannon, president of the National Fire Protection Association, testified: “What is unique about the United States standardization process is that these activities, so vital to our citizens, are conducted by private organizations, not governmental agencies, but with broad participation, acceptance, and support by public authorities. In fact, it has been federal policy since at least the Reagan administration . . . to require the use of voluntary consensus standards to the extent possible in all procurement and regulatory activities.” But private entities lack the protections granted to government initiatives. As these groups take on standardization functions that are traditionally the responsibility of government, Karmol testified, “it makes sense that they should have some of the exemptions from liability that the government has traditionally enjoyed, such as relief from potentially onerous antitrust liability.” PROTECTION WHERE PROPER The Standards Development Organization Advancement Act, signed into law by President George W. Bush on June 22, limits potential antitrust exposure for standard-setting activities by standard-setting organizations to actual, rather than treble, damages — if the organization provides proper notification of its activities to the Justice Department’s Antitrust Division and the Federal Trade Commission. The law states that certain standard-setting activities will be evaluated under the “rule of reason” (rather than being subjected to per se analysis). And the law provides attorney fees and costs, not just to the prevailing plaintiff (as already exists for private antitrust actions) but also to a standards development organization that is a substantially prevailing defendant in private antitrust litigation if the plaintiff’s claim or conduct is found to be frivolous, unreasonable, without foundation, or in bad faith. These protections are aimed primarily at limiting the incentive for companies aggrieved about the results of standard setting to challenge the organization itself. Absent the new law, such plaintiffs could sue for treble damages and cost shifting under the antitrust laws without any risk of having to pay the defendant’s fees. The new law provides this limited antitrust protection by extending the scope of the National Cooperative Research Act of 1984 — already extended to cover joint production activities by the National Cooperative Research and Production Act of 1993 — to cover certain standard-setting activities. As with the National Cooperative Research Act and its 1993 expansion, the Standards Development Organization Advancement Act limits the immunity provided by carefully expanding the act’s protections only to those entities defined as “standards development organizations.” They must have open processes and may not engage in certain blatantly anti-competitive behavior. In response to concerns that standard-setting entities may indeed act anti-competitively, proponents of the new law made two arguments. First, they pointed out that standards development organizations are nonprofit groups with no motive to violate the antitrust laws. Second, in order to receive the full benefits of the new law, the organizations will have to comply with the openness and due process provisions contained in Office of Management and Budget Circular A-119. While individual competitors may still attempt to improperly influence a particular standard, an organization that complies with these principles is not likely to engage in antitrust violations. Proponents also justify the act’s protections by arguing that it has become common practice for the plaintiffs bar to name standard-setting entities as defendants when challenging the role of a competitor in developing a standard. The legislative record contains anecdotal, rather than empirical, evidence of this practice. Shannon of the National Fire Protection Association testified: “Because of the complexity of the antitrust laws and the continuing uncertainty of their potential application to [standard-setting groups], the prospect is that standards developers will continue to be named as pattern defendants in antitrust cases.” According to Shannon, his association has been named in “several” antitrust suits without being found liable, but has spent “hundreds of thousands of dollars” getting the cases dismissed. Karmol of ANSI testified that he did not believe that his group had ever been named in an antitrust suit. SERVING NOTICE As noted, to claim the benefits of the de-trebling provision, the standard-setting entity must submit notice of its planned activity to the FTC and the Antitrust Division within 90 days of either the passage of the new law or the initiation of a standard-setting activity, and must update that notice as members are added or dropped, or as significant facts change. The organization must submit documents “showing the nature and scope of the standards development activity.” One of the agencies — probably the Antitrust Division — will then publish a notice in the Federal Register, after providing a draft to the organization for review, that identifies the entity and describes its standards development activities in general terms. As with notices under the National Cooperative Research and Production Act, neither the FTC nor the Antitrust Division will necessarily review the submission substantively, nor will either of them have to “approve” it. However, either agency may seek additional information or initiate an investigation. Notice to the antitrust agencies is not required to make applicable the other two protections of the act: the application of rule-of-reason analysis and the ability to recover fees and costs. WITHIN LIMITATIONS Those engaged in the standard-setting process should keep in mind certain limitation of the Standards Development Organization Advancement Act. First, it does not apply to all the individuals and corporations that participate in standard-setting activities. Some argue that the volunteers on the technical committees and the companies that contribute data and expertise remain vulnerable to frivolous litigation. They contend that, as a result, the law will not produce the desired increase in pro-competitive, economically beneficial standard setting. Second, if standards development organizations are not diligent, they can lose the new protection. The act applies solely to organizations engaged in a standards development activity. The definition of “standards development activity” imports the requirements of openness, balance of interest, due process, an appeals process, and consensus (but not unanimity) from OMB Circular A-119′s definition of “voluntary consensus standard.” A plaintiff could still seek treble damages by claiming that an organization did not comply with these requirements and was therefore not engaged in a “standards development activity” and not protected by the statute. The emphasis on process, which has been an important component of rule-of-reason analysis, is now a positive requirement. Third, the definition of “standards development activity” also excludes certain anti-competitive activities: unreasonably exchanging cost and price information that is not necessary to develop a standard, entering agreements to allocate a market with a competitor, or price fixing. Because these exceptions essentially describe per se antitrust violations, the rule-of-reason protection is arguably tautological: The court cannot find a per se violation of antitrust laws unless the standards development organization has engaged in a per se violation of antitrust laws, in which case it is not entitled to protection under the act. At the same time, the statute’s guarantee that the rule of reason will be used to judge challenges to a standards development organization is largely redundant because that is already how standard-setting activities are ordinarily analyzed in the absence of per se illegal activity. By setting up the antitrust protections this way, Congress may have done nothing more than add another step to the antitrust plaintiff’s initial jurisdictional proof. Now the plaintiff must allege that the standard-setting organization does not meet the statutory requirements for being a “standards development organization” or that it engaged in per se illegal activities. If the plaintiff can prove that, everybody goes back to the treble-damages-plus-legal-fees-and-costs game. Daniel C. Schwartz is a partner and Frank M. Gorman is counsel in the D.C. office of Bryan Cave. Both are members of the firm’s antitrust/U.S. trade regulation client service group. Schwartz represented clients in obtaining passage of the National Cooperative Research Act in 1984. Until last year, Gorman served as legal counsel to the director of the FTC’s Bureau of Consumer Protection. The authors can be reached at [email protected] and [email protected], respectively.

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