Standards have been widely recognized as valuable platforms for enabling important technology often developed by multiple parties to become rapidly commercialized. In particular, standards which enable different platforms or systems to work together have become crucial to modern communications because they allow complementary products from different manufacturers to work together. Such interoperability standards, including 4G1, Bluetooth2, and WiFi3, are pervasive in consumer products: One study identified 251 standards that could be implemented on a modern laptop computer.4 The Department of Justice has thus recognized that interoperability standards “promote efficient resource allocation and production which encourages innovation.”5
Patents that are essential to practice such standards are often a highly valuable asset for patent owners which may be sold, licensed or otherwise conveyed. However, transactions involving standard essential patents can also face antitrust scrutiny from the Department of Justice (“DOJ”) or the Federal Trade Commission (“FTC”), or from private parties.6 Antitrust law can impact both the acquisition of the patents, and the utility of the patents following the acquisition. This article addresses certain antitrust issues that that an acquiring party should consider before deciding to go forward with the transaction.
Acquisition of Standard Essential Patents
The DOJ has taken the position that “[c]ertain transfers of intellectual property rights are most appropriately analyzed by applying the principles and standards used to analyze mergers.”7 Such transactions can be assessed by the DOJ under Section 7 of the Clayton Act.8 Under Section 7 of the Clayton Act, “[n]o person engaged in commerce or any activity governing commerce shall acquire…the whole or any part of the stock…[or] the whole or any part of the assets of another person engaged also in commerce…[where] the effect of such acquisition may be substantially to lessen competition.”9
Recently, the DOJ has increased its scrutiny of transfers of standard essential patents under Section 7 of the Clayton Act. Three transactions in particular were investigated by the DOJ under this statute. The first transaction was Google’s proposed acquisition of Motorola Mobility, which owned approximately 17,000 issued patents and 6,800 applications. The second transaction was the purchase of Nortel’s portfolio in bankruptcy by Rockstar Bidco, a partnership that included, among others, RIM, Apple, and Microsoft. Nortel’s portfolio included approximately 6,000 patents and applications. Finally, the DOJ investigated the proposed acquisition of Novell’s patent portfolio from CPTN Holdings LLC.
The DOJ ultimately approved all three transactions. In doing so, the DOJ “investigated whether the patents acquisitions would change the incentives or abilities of the new owners to obtain higher royalties from their competitors, particularly by using the threat of injunction or exclusion order.”10 While the division’s comments and conclusions “do not bind the division in any future enforcement action,” its analysis is a good starting point when considering whether the DOJ is likely to challenge future transactions involving standard essential patents.11
Incentives for Anticompetitive Action
In analyzing the incentives of an acquiring firm to use standard essential patents in an anticompetitive manner, the DOJ focused on the acquiring firm’s position in the relevant market. The DOJ appears to take the position that market participants with low market share generally lack such incentives. For example, the DOJ stated that Microsoft and Research in Motion’s “low market shares in mobile platforms would likely make a strategy to harm rivals either through injunctions or supracompetitive royalties based on the acquired [standard essential patents] unprofitable” because “they are unlikely to be able to attract a sufficient number of new customers to their mobile platforms to compensate for the lost patent royalty revenues.”12 In contrast:
Apple’s and Google’s substantial share of mobile platforms makes it more likely that as the owners of additional SEPs they could hold up rivals, thus harming the competition and innovation. For example, Apple would likely benefit significantly through increased sales of its devices if it could exclude Android-based phones from the market or raise the costs of such phones through IP-licenses or patent litigation. Google could similarly benefit by raising the costs of, or excluding, Apple devices because of the revenues it derives from Android-based devices.13
However, with respect to Google, the DOJ also emphasized that the pertinent question is “whether the patent acquisitions would change the incentives of abilities of the new owners to obtain higher royalties of the owners.”14 The Department of Justice explained:
Motorola Mobility has had a long and aggressive history of seeking to capitalize on its intellectual property and has been engaged in extended disputes with Apple, Microsoft and others. As Google’s acquisition of Motorola Mobility is unlikely to materially alter that policy, the division concluded that transferring ownership of the patents would not substantially alter current market dynamics.15
Ability to Act in an Anticompetitive Manner
In analyzing the ability of an acquiring firm to obtain higher royalties from competitors, the DOJ has focused on commitments made by either the patent owner or the acquiring party.
First, the DOJ will consider existing commitments made by the patent owner. For example, many standards bodies require that participants commit to licensing any of their intellectual property that is essential to the standard on “reasonable and non-discriminatory (“RAND”)16 terms. Some standards bodies do not require such a commitment, but do require that patent owners notify the standards body of any essential patents and permit the filing of letters of assurance.17 Such commitments can reduce the ability of the acquiring party to obtain higher royalties from competitors. While standards bodies have no obligation to implement ex ante licensing policies, for example, well-defined policy rules may minimize ambiguity and, in turn, anticompetitive conduct. As Former Assistant Attorney General Christine Varney explained, “clearer rules will allow for more informed participation and will enable participants to make more knowledgeable decisions regarding implementation of the standard.”18 Therefore, well-defined licensing policies may limit the ability of an acquirer to use the acquired patents in an anticompetitive manner and, therefore, may decrease the chances of the transaction being challenged by the DOJ.
For example, several of the Novell patents that Apple was seeking to acquire are important to Linux-based software. However, Novell was a member of the Open Invention Network, which requires its participating patent holders to offer a perpetual, royalty-free license for use in the “Linux-system.”19 The DOJ concluded that “the change in ownership would [not] permit Apple to avoid OIN commitments and seek royalties from Linux users.”20
The DOJ did not explain what factors it considered in determining that the change in ownership would not permit Apple to avoid the commitments made by Novell. However, a recent speech by Deputy Assistant Attorney General Renata Hesse shed some light on this issue.21 In the speech, Deputy Assistant Attorney General Hesse identified certain proposals for SSOs that would promote competition among implementers of a standard:
- Establish procedures that identify proposed technology that involves patents which the patent holder has not agreed to license on FRAND or RAND terms;
- Clarify that licensing commitments to the standards body are intended to bind subsequent purchasers of the patents;
- Permit licensees to license FRAND or RAND-encumbered essential patents on a cash-only basis while prohibiting mandatory cross-licensing of non-essential patents;
- Limiting the ability of patent holders who have made FRAND or RAND licensing commitment from obtaining injunctions against potential licensees;
- Lowering transaction costs for determining FRAND or RAND licensing terms; and
- Increasing certainty that disclosed patents are essential after the standard is set.22
The DOJ will also consider commitments made by the acquiring firm. Indeed, the DOJ may determine that licensing arrangements made by the acquiring firm decrease the potential anticompetitive effect of the transaction. For example, the DOJ noted that “Microsoft has cross-license agreements in place with the majority of its Android-based OEM competitors.”23 As such, Microsoft would be unable to obtain higher royalties from its competitors as a result of the acquisition because the royalty amount was determined before Microsoft acquired the patents at issue.
In the absence of commitments that cover the entire portfolio (whether RAND commitments or licensing commitments), analysis of commitments made with respect to each patent can be burdensome. Indeed, Google’s proposed acquisition of Motorola Mobility included over 23,000 patents and applications.
One option for responding to an investigation without analyzing each and every commitment can be for the acquiring firm to make a public statement that it will not seek an exclusion order with respect to the standard essential patents. The DOJ stated that “[i]f adhered to in practice, these positions could significantly reduce the possibility of a hold up or use of an injunction as a threat to inhibit or preclude innovation and competition.”24 In order to be effective, the commitments made in the public statement must be clear and unconditional. The DOJ placed less weight on Google’s public statement because it was limited to disputes involving future license revenues and was valid only if the counterparty forgoes certain defenses such as challenging the validity of the patent, pays the full disputed amount into escrow, and agrees to a reciprocal process involving injunctions.25
Utility of Acquired Standard Essential Patents
While the Department of Justice ultimately approved all three transactions, it noted that its “conclusion is limited to the transfer of ownership rights and not the exercise of those transferred rights.”26 The ability to acquire patents is an important first step, but becomes meaningless if the acquiring firm cannot use the patents for the purpose for which they were acquired.
In general, use of acquired patents for purely defensive purposes poses no antitrust concern. Offensive uses of the patent are more likely to raise antitrust concerns. Some courts have found that patent infringement litigation can be part of an anticompetitive scheme.27 However, the exact bounds of this rule are unclear.28
Offensive uses of standard essential patents have come under increased scrutiny in the last few years. For example, the FTC filed a complaint in 2008 charging Negotiated Data Solutions with violations of Section 5 of the Federal Trade Commission Act in connection with their use of certain patents.29 In the Complaint, the FTC alleged that the original owner of the patents had committed to license the patents for a flat fee if the relevant technology was adopted as part of the standard.30 Negotiated Data Solutions and a predecessor attempted to revoke this commitment and threatened or initiated legal action against several companies.31 The FTC stated that although breaching a commitment is not, by itself, sufficient to constitute an unfair practice, “[t]he standard-setting context in which National made its commitment is critical to the legal analysis.”32 Negotiated Data Solutions eventually settled with the FTC by agreeing to offer licenses under the terms of the original commitment.33
However, the Negotiated Data Solution case involved a clear case of breaching an explicit commitment made to a SSO. In the last few months, the FTC has been focusing on a slightly different issue: whether a party who has made a RAND commitment violates antitrust law by seeking an exclusion order or injunction.
In early 2013, the FTC issued a complaint against Google under Section 5 of the FTC Act because Google was seeking injunctions against willing licensees of standard essential patents encumbered by RAND obligations. According to the FTC, there is a tension between offering a RAND commitment and seeking injunctive relief.34
Google is seeking to settle the action by signing a Consent Order that bars it from seeking an exclusion order except where the potential licensee: (1) is outside the jurisdiction of U.S. courts; (2) has stated in writing or sworn testimony that it will not license the patent on any terms; (3) refuses to enter a license agreement on terms set by a Court of through binding arbitration; or (4) fails to assure Google that it is willing to accept a license on RAND terms.35
In dissent, Commissioner Olhausen cautioned against the consequences of the decision. Commissioner Olhausen noted that the FTC treated Apple as a willing licensee in spite of the fact that “Apple informed the [district] court…that it did not intend to be bound by any rate that the court determined.”36 Indeed, the Court found that Apple was trying to use the litigation to determine “a ceiling on the potential license rate that it could use for negotiating purposes.”37 Commissioner Olhausen also wrote that the FTC does not address “the possibility that companies who need to license SEPs can engage in opportunistic conduct by delaying paying a license fee to a SEP holder for many years or by colluding to pay the SEP holder a low rate”).38 The patent holder cannot reply by threatening an injunction, thereby decreasing the value of the patent.
Notwithstanding these concerns, FTC Chairman Jon Leibowitz promised that the “landmark enforcement action [against Google] will set a template for resolution of SEP licensing disputes across many industries.”39 Five days later, the DOJ and U.S. Patent and Trademark Office (“PTO”) weighed in on this issue.40 Despite “recogniz[ing] that the risk of a refusal to license … increases where the putative licensee believes its worst-case outcome after litigation is to pay the same amount it would have paid earlier for a license,” the report largely agrees that exclusion orders are not appropriate in the context of standard essential patents.41
The report by the DOJ and PTO (“Joint Report”) identifies certain circumstances in which an exclusion order may be appropriate, but these are largely the same as those outlined in the Consent Order issued by the FTC.42 Except where the potential licensee refuses to license the patent, refuses to be bound by a determination of RAND terms, or is outside the jurisdiction of U.S. courts, it is unclear when an exclusion order may be appropriate. Even in those certain circumstances, the line may not be clear. As noted by Commissioner Olhausen, Motorola and Google were prosecuted for antitrust violations even though a federal judge found that Apple “did not intend to be bound by any rate that the court determined.”43 Such confusion may make exclusion orders unavailable as a practical matter because a patent owner may not wish to risk antitrust liability if their analysis is incorrect.
For example, the Joint Report indicates that an exclusion order may be appropriate when there is a constructive refusal to negotiate, such as where the potential licensee “insist[s] on terms clearly outside the bounds of what could reasonable be considered to be FRAND terms.”44 However, there is no guidance of how to determine when a party’s position regarding reasonable terms is itself unreasonable, especially because some negotiation must be permitted.
Due to the proliferation of interoperability standards, standard essential patents are likely to be present in most patent portfolio acquisitions in many technology fields, including those which relate to consumer electronics. Prior to acquiring a patent portfolio which includes standard essential patents, an acquiring party should consider antitrust issues in connection with both the acquisition and later use of such patents.