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On June 19, the Federal Trade Commission issued a complaintagainst Rambus Inc., charging the company with deliberately deceivingan industrywide standard-setting organization by failing to discloseRambus’s intellectual property interest in the standards beingconsidered by the organization. The FTC claims that Rambus’participation in the standard-setting proceeding and subsequentenforcement of its related patent rights had the effect of injuringcompetition in markets related to the design and manufacture of a commonform of digital computer memory known as synchronous dynamic randomaccess memory (SDRAM). SUMMARY OF THE RAMBUS COMPLAINT The FTC’s complaint charges Rambus with participating in an industrystandard-setting organization, known as JEDEC, without disclosingRambus’s intellectual property position in the standards to theorganization or its members. The FTC alleges that this failure todisclose violated JEDEC’s rules, and that through this deception, Rambuswas able to secure and then enforce its patent rights against companiesthat manufactured SDRAM memory products in compliance with the JEDECstandards. Specifically, the FTC alleges that Rambus engaged in exclusionaryconduct by participating in JEDEC’s SDRAM standard-setting work forseveral years without ever disclosing the company’s efforts to developpatents over the technologies that were proposed for the SDRAM standard.The FTC alleges that Rambus’ very participation in the standard-settingprocedures, coupled with the company’s failure to make the disclosuresrequired by JEDEC’s rules of participation, had the effect of conveying”a materially false and misleading impression-namely, that JEDEC, byincorporating into its SDRAM standards technologies openly discussed andconsidered during Rambus’ tenure in the organization, was not at riskof adopting standards that Rambus could later claim to infringe upon itspatents.” The FTC alleges that this conduct caused or threatened to causesubstantial harm to competition and consumers by putting Rambus in aposition to enforce patent rights against manufacturers who compliedwith the JEDEC standards. The FTC reasons that, had Rambus disclosed itsintellectual property, the standard-setting body could have changed thecontent of its SDRAM standards. In the absence of that disclosure,though, JEDEC released a standard which, if followed, meantmanufacturers could not avoid Rambus’s patent rights. The FTC alsoargues that Rambus was able to negotiate a higher license royalty ratewith manufacturers for its patent rights than it would have, had therights been disclosed before the standard was adopted. The FTC also alleges that, in addition to higher royalty rates formanufacturers, Rambus’s conduct actually had or threatened to increaseprices of SDRAM chips and other products using SDRAM technology;decreased manufacturers’ incentives to develop SDRAM products; decreasedfirms’ incentives to participate in JEDEC and other standard-settingorganizations; and decreased reliance by firms on standard-settingorganizations. Based on this conduct, the FTC’s complaint charges Rambus withmonopolizing, attempting to monopolize, and competing unfairly in thesemarkets in violation of § 5 of the Federal Trade Commission Act.The complaint seeks a range of injunctive and other relief. The FTCCommissioners voted unanimously (5-0) in favor of the complaint. IMPLICATIONS United States This case joins several other recent actions in the United States, andin particular the FTC’s 1996 action In re Dell Computer Corp., thatcarefully scrutinized the conduct of firms that participate instandard-setting organizations. These cases raise several importantconsiderations for firms that participate in standard-settingorganizations: First, these cases suggest a firm should examine the standard-settingorganization’s disclosure rules carefully. Standard-setting bodies inthe technology sector tend to have specific disclosure policies, as wellas specific policies governing a participating firm’s failure todisclose relevant intellectual property. These rules — and sanctions — canhave significant consequences for participating firms. For example, somestandard-setting organizations require patent pooling for intellectualproperty relating to the organization’s final standards. These kinds ofarrangements may be more or less valuable to the participating firmsbased on the size of the firm and the relative strength and importanceof the intellectual property to the various participating members. Second, firms should consider the FTC’s developing policy regardingstandard-setting organizations. In both the Dell and the Rambus cases,the FTC’s claims were based in part on allegations that the defendantfirms had violated the standard-setting organization’s patent disclosurerules. However, on a June 18, 2002, teleconference program beforemembers of the American Bar Association, the Deputy Director of theFTC’s Bureau of Competition observed that antitrust actions based onmisconduct in standard-setting organizations need not be limited tocircumstances where a member violated a disclosure rule. [FOOTNOTE 1] Finally, participating firms should consider the basic elements ofmonopolization under § 2 of the Sherman Act and § 5 of theFTC Act, as they relate to the standard-setting organization. To bringthis type of case, the FTC will look for examples of exclusionaryconduct, which may come in the form of false statements regarding afirm’s intellectual property position, intentional omissions of factwhere the firm has a duty to disclose information, or statements ofhalf-truth that create a false impression regarding a firm’s interest inthe proposed standards. The FTC will also look for hallmarks ofanticompetitive effects, including any substantial differentials betweenthe ex ante and ex post value of a license to the patents in question;the extent to which manufacturers are forced to rely on the firm’sintellectual property in order to comply with industry standards; andwhether the royalties charged by the accused firm would have beensustainable absent the alleged deception or failure to disclose. European Union From a European perspective, the Rambus case raises issues under thenational laws of EU Member States and under European Community (EC) law.As to national law, Rambus will need to enforce its patent rights innational courts and it is likely that its conduct would be grounds fornational courts to reject its infringement suits under national patentlaw. However the European Commission may also decide to intervene toprotect the Community interest (and avoid costly and protracted patentlitigation in national courts). First, Rambus’ conduct may be examined under the EC rules (underArticle 81 of the EC Treaty) which inter alia prohibit agreementsbetween undertakings which have as their effect the prevention,restriction or distortion of competition within the common market. Itappears, from the FTC’s Complaint, that the effect of the relevant JEDECstandards agreement (given that Rambus did not disclose essentialpatents) is to restrict competition on the worldwide SDRAM technologymarket. Under EC law, the existence of such a market would depend interalia on the substitutability of other technologies for the relevanttechnology. Assuming that such a market were held to exist, the European Commissioncould decide that the standards agreement(s) was void and unenforceableto the extent that it prevented e.g. SDRAM manufacturers, who were notlicensees of the technology covered by Rambus’ patents, frommanufacturing products which complied with the JEDEC standard. Thismight, if not by direct application of Article 81 then as part of aremedy, mean that SDRAM manufacturers could be in a position thatallowed them to manufacture products that de facto complied with theJEDEC standard as long as they obtained licenses to the other patentedtechnology covered by the standard (i.e., excluding the technologycovered by Rambus’ undisclosed patents). Furthermore, the EuropeanCommission could impose a substantial fine on Rambus for entering intothe standards agreement and Rambus would be exposed to the possibilityof civil suits for damages in respect of breach of Article 81 in thenational courts. Second, the European Commission may apply the rules againstanti-competitive conduct (under Article 82 of the EC Treaty) to thefacts of the case. In order for Article 82 to apply, the EuropeanCommission must be able to show that (a) Rambus holds a dominantposition on a relevant market within the Community; and (b) Rambus hasabused its dominant position on that market. It appears from the FTC’sComplaint that Rambus’ failure to disclose its patents to JEDEC hasplaced it in a position of economic strength which enables it to preventcompetition on the market for the licensing of technology required tocomply with the relevant JEDEC standard in respect of SDRAMs. As aresult, Rambus may have the power to behave to an appreciable extentindependently of its competitors (on the technology market), customers(on intermediate downstream markets) and ultimately of consumers (onretail consumer electronics markets). It therefore appears that Rambuscould be shown to hold a dominant position on a relevant SDRAMtechnology market within the meaning of Article 82. As to the question of abuse, if Rambus attempts to enforce its patentrights and thus to foreclose competition on the relevant technologymarket, there appear to be good arguments to suggest that this could becharacterized as an abuse ( see, e.g., the Magilland IMScases, whichinvolved challenges to the attempted enforcement of IP rights asattempts to foreclose competition in violation of Article 82). However,this matter is not free from doubt as it would constitute a widening ofthe category of “exceptional circumstances” in which the exercise of anIP right by the IP owner will be deemed to be abusive under EC law. Inthese circumstances, the European Commission may be able to imposesimilar remedies to those proposed by the FTC in its Complaint, such asan order preventing Rambus enforcing any of the relevant patents withinthe Community as well as being able to impose fines of up to 10 percentof Rambus’ annual turnover. ::::FOOTNOTE:::: FN1In introducing this subject, Deputy Director Susan Creightonstated that her comments represented her own views, and not the views ofthe FTC or any Commissioner. Josh Holian is a litigation associate in the San Francisco office of Latham & Watkins, www.lw.com. Omar Shah is an English Solicitor in the firm’s London office. He advises clients on EC and UK antitrust, merger control and communications regulation issues.

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