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With a single stroke, the Federal Trade Commission may have restored the value of the handshake and good-faith promise among high tech competitors, yet opened the doors to potential new litigation. The commission recently issued a landmark decision-for the first time holding a company liable for an antitrust violation because it used its patents to subvert the process relied on by thousands of companies to set industry standards for products. The most mundane items of daily life-from the size of the electric plug to the specifications for computer memory chips-are standardized through voluntary, nongovernment groups known as standard setting organizations (SSO). The engineers who meet to establish specifications for new products are encouraged to standardize, both to avoid competitive battles to the death and to satisfy consumer demands that products work together. Historically, lawyers have had limited roles in SSOs, producing broad agreements to share information that have been vague on future patent obligations. Then in the 1990s, Rambus Inc. tried to corner the memory chip market by securing key DRAM memory chip patents after it learned what the SSO group would choose as the industry standards. Trust among SSO participants evaporated. Reversal of fortune Following years of litigation that went in favor of Rambus, the Federal Trade Commission (FTC) issued a landmark decision last month that Rambus Inc., a semiconductor technology company, violated antitrust law by secretly securing patents on what it knew would become the industry standard for DRAM memory chips. Rambus, a Los Altos, Calif., memory chip developer, had used the patents to sue for infringement the very companies that adopted the standard. In the Matter of Rambus Inc. (FTC docket 9302). The FTC antitrust finding against Rambus was a reversal of fortunes for the standard setting organizations. What remains unclear in the wake of the FTC’s Rambus decision is what the standard setting organizations will do now with their newfound power. Two emerging trends would have some SSOs stick with vague promises that members will only seek “reasonable and nondiscriminatory” (RAND) licensing royalties to pay for patents covered in new standards, while others want to negotiate potential licensing fees upfront, before a standard is set, which is known as “ex ante” terms. “This decision was the first by the FTC imposing antitrust liability on a single company for its conduct in subverting a standard setting organization,” said Sean Royall, former deputy director of the FTC’s Bureau of Competition and lead attorney in the case against Rambus. Royall is a co-chairman of Gibson, Dunn & Crutcher’s antitrust practice and divides time between the Los Angeles firm’s Dallas and Washington offices. The members of the Joint Electron Device Engineering Council (JEDEC) “unknowingly helped create and then walked into an extremely expensive trap laid by Rambus,” wrote Andrew Updegrove, an attorney with Boston’s Gesmer Updegrove in urging the FTC to hold Rambus liable for antitrust violations. He represented a dozen SSOs in amicus papers. The role of SSOs is particularly critical in high tech fields where intellectual property rights are at stake. For JEDEC, it dictated a standard of design for millions of DRAM chips worth billions of dollars in royalties for anyone with design patents. The groups have no police power to enforce member conduct but have relied on good-faith member pledges or loose agreements to disclose potential patent claims prior to standard setting. Members may also be asked to promise to license patents on a reasonable and nondiscriminatory basis. Unresolved issues But the danger of participants in standards groups running afoul of antitrust law by discussing specific patent royalties or how the patent might be licensed creates skittishness about ex ante licensing negotiation. This is particularly important in some products covered by multiple patents, such as cellphones, that may have photo, video, recording and other capabilities that all may require patent royalty payments. “A lot of organizations seem reluctant to adopt clear standards regulating IP that covers the standard,” said Mark Lemley, a Stanford Law School professor and authority on standard-setting issues. “Some organizations have expressed worries that they might be liable for antitrust if they agree to royalty rates, although the FTC made clear last year that is not a big problem,” Lemley said. He said: If an organization requires members to agree to license for RAND terms, does that mean any future disputes will be over what is a reasonable price? “That is a contract fight,” Lemley said. “Or is that just an organizational rule and a patent owner still can sue for reasonable royalties? Does the patent owner decide the royalty or is it set by a court?” “Does the patent owner get to bring tools of patent infringement to bear and seek treble damages . . . and attorney fees? That is a much more powerful threat . . . rather than to sue for reasonable terms,” he said. These are substantial issues not yet addressed by appeals courts, Lemley said. Royall noted that “[c]ompanies that operate in good faith have nothing to fear. I don’t think SSOs need to fear that their routine activities suddenly are going to become subject to antitrust inquiries or government intervention. The Rambus case had extreme facts.” Douglas Melamed, an antitrust attorney in Wilmer Cutler Pickering Hale and Dorr’s Washington office who has represented Rambus and other high tech firms, said that “A lot of people were very surprised by the commission’s decision and saw it as far reaching.” He said standards bodies seem to be requiring members to commit to RAND disclosure. He doesn’t believe the Rambus decision affected that trend. “The whole area of antitrust in standard setting is an area of uncertainty in the law. It is just beginning to be sorted out by the courts and that will continue for a number of years,” he said. Whether standards groups will prefer more general promises to “be reasonable” under RAND terms, rather than more specific fixed terms under ex ante negotiation that hold antitrust risks, Royall could not predict. But he pointed out that the chairman of the FTC “has suggested ex ante discussion is not likely to be per se unlawful.” Push for ex ante Five big companies, Cisco Systems Inc., Sun Microsystems Inc., International Business Machines Corp., Apple Corp. and Hewlett Packard Co. have been pushing the U.S. Department of Justice to approve ex ante licensing, according to Updegrove. Gil Ohana, director of antitrust and competition for Cisco, said that his company, along with Sun and H-P, are strong proponents of ex ante licensing so members know upfront the licensing cost of a patent. “Our hope is that SSOs both improve the rules on patent and patent applications so it is clearer they have to be disclosed, but also on ex ante permission, to encourage or require it when intellectual property is disclosed,” he said. Current SSO rules bar disclosure of licensing terms beyond RAND, which hurts the process, he said. Ohana said there’s a growing consensus among standard-setting participants that “these rules should change to permit patentees to state the terms on which they will license their patents in detail before a standard is adopted.” He urged government antitrust enforcers to publicly reject the view that SSOs must limit disclosure of terms to RAND to protect themselves. He pointed to the recent New Jersey antitrust suit by Broadcom Corp. against Qualcomm Inc., two wireless communications companies. Qualcomm argued that it made a RAND commitment for patents in its standard setting group but that did not prevent it from charging what the market would bear for patents, he said. U.S. District Judge Mary L. Cooper threw out Broadcom’s federal antitrust claims but held that remaining state law unfair competition and breach of contract claims could be pursued in state court. Broadcom v. Qualcomm, No. C05-3350MLC (D.N.J.). “What this means in my view, if a company is relying on RAND commitment to indicate a patent will be available on favorable terms, that may not be right. You need to get something more explicit,” Ohana said. The Rambus decision means there may be a duty of good faith on the part of a patent holder, even if it strictly complies with an organization’s disclosure rules, he said. “There has already been an uptick in the assertion of defenses [to patent infringement claims] on this theory,” he said. Royall noted, “I would advise companies to be careful of what is expected of them in standards organizations. To the extent there are unwritten expectations, don’t participate in standard-setting activity unless you are prepared to do what is required.”

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