On July 31, 2006, a unanimous Federal Trade Commission (“Commission” or “FTC”) ruled that Rambus Inc.’s “acts of deception constituted exclusionary conduct under Section 2 of the Sherman Act, and that Rambus unlawfully monopolized the markets for four technologies” that were incorporated into the Dynamic Random Access Memory (“DRAM”) standards adopted by the Joint Electron Device Engineering Counsel (“JEDEC”) for the Synchronous DRAM (“SDRAM”) and the Double Data Rate SDRAM (“DDR-SDRAM”) in violation of Section 5 of the Federal Trade Commission Act (“FTC Act”). Liability Op. at 3. In its Liability Opinion, the Commission found, “Through a course of deceptive conduct, Rambus exploited its participation in JEDEC [an industry-wide standard-setting organization] to obtain patents that would cover technologies incorporated into now-ubiquitous JEDEC memory standards, without revealing its patent position to other JEDEC members. As a result, Rambus was able to distort the standard-setting process and engage in anticompetitive ‘hold up’ of the computer memory industry.” Id. at 3.
However, the Commission deferred the remedy issue and sought further briefing from the Complaint Counsel and Rambus on the appropriate remedy. Id. at 119-120. In their briefs and at oral argument, both the Complaint Counsel and Rambus agreed that the Commission was authorized to issue cease and desist orders prohibiting “future deceptive conduct by Rambus.” Remedy Op. at 2. The parties parted, however, on “whether the Commission may order broader relief, and, if broader relief is authorized, on the scope of an appropriate remedy on the basis of the record before [the Commission].” Id. at 2.
In effect, Rambus argued that the Commission has no authority to issue compulsory licensing and set the terms of such licenses. Id. at 6. On the other hand, the Complaint Counsel argued that the Commission should “order royalty-free compulsory licenses for Rambus’s pre-1996 patent portfolio for those firms practicing JEDEC’s standards.” Id. at 8. The Complaint Counsel argued, “this remedy – ‘far from being extreme – merely restores, six years later, the competitive conditions that should have prevailed’ had Rambus not engaged in deception[,]” and “that imposition of royalty-free compulsory licenses is well within the Commission’s broad discretion to restore competition and to deny Rambus the benefits of its illegal conduct.” Id. at 8. The Complaint Counsel contended that “enjoining enforcement of the relevant patents against JEDEC-compliant products [was] appropriate because, absent Rambus’s deception, JEDEC would have selected alternative technologies – including alternatives with inferior performance – in lieu of paying royalties, thus leaving Rambus with no claim to royalties.” Remedy Op. at 11-12.
The Majority Decision
On February 2, 2007, with two Commissioners partially dissenting, a divided Commission held that, although it had the power to order royalty-free licensing as a remedy when the evidence and circumstances justified it, Remedy Op. at 8-10, such a remedy was not justified in the circumstances of that case, id. at 12-16. The majority instead set maximum royalties that Rambus could collect going forward on JEDEC-compliant DRAM and non-DRAM products that comply with SDRAM and DDR-SDRAM standards. Remedy Op. at 27-29; Remedy Order at 2-3. Furthermore, the majority’s remedy did not reach DDR2-SDRAM standard.
In reaching its conclusion that royalty-free licensing was not warranted, the majority concluded,
We recognize that Rambus’s unlawful conduct makes it difficult to reconstruct the “but for” world, as is typically the case when a party has violated the antitrust laws. We conclude, however, that Complaint Counsel have not satisfied their burden of demonstrating that a royalty-free remedy is necessary to restore the competition that would have existed in the “but for” world– i.e., that absent Rambus’s deception, JEDEC would not have standardized Rambus technologies, thus leaving Rambus with no royalties.
Remedy Op. at 12. The majority further explained,
We have examined the record for the proof that the courts have found necessary to impose royalty-free licensing, but do not find it. Our liability opinion identified two realistic possibilities for what would have occurred had Rambus not engaged in deception of JEDEC members: either (i) JEDEC would have chosen alternative technologies, or (ii) JEDEC would have incorporated Rambus’s technologies into the standard but would have demanded, as a precondition of adopting Rambus’s technology, that Rambus agree to license the technology on RAND terms. [Footnote] There is evidence in the record to support both possibilities.
As to the first possibility, the Commission explained, “it is true that if JEDEC had chosen to include other, non-Rambus technologies, its members would have paid no royalties to Rambus. But that does not mean that incorporating those technologies rather than the Rambus technologies would have been costless.” Id. at 12-13. Because Rambus’s cost-benefit analysis “was faulty” and “Complaint Counsel did not provide a cost-benefit comparison of the available technologies,” the majority concluded that it did “not know what the costs might have been.” Id. at 13.
The Complaint Counsel argued that this “evidentiary gap” could be closed because “Rambus would not have issued the commitment to license on RAND [Reasonable and Non-Discriminatory] terms required by JEDEC and EIA regulations,” pointing “to evidence that show[ed] that Rambus did not want to license technology on RAND terms and that it even made statements that offering RAND terms was contrary to its business model.” Remedy Op. at 13. Rejecting this contention, the majority explained, “An unwillingness to comport with JEDEC policy while pursuing a hold-up strategy is not necessarily indicative of how Rambus would have acted after disclosure, when hold up no longer was attainable.” Id.
As to the second possibility, the Commission acknowledged that “the evidence show[ed], and in the liability opinion the Commission found, that JEDEC was reluctant to incorporate patented technologies.” Id. at 15. However, the Commission concluded that, while JEDEC minutes indicated a “reluctance” to adopt patented technologies, those minutes did not “state that the committee will not standardize a patented technology, and the basic JEDEC and EIA documents repeatedly spell out procedures under which patented technologies may be accepted.” Id. (emphasis in original). The Commission also identified from the record “several occasions in which JEDEC incorporated patented technologies into some standards after securing agreement from the patent holder that the technologies would be licensed on RAND, or specific-royalty, terms.” Id. at 15-16. Finally, the majority also discounted as ambiguous, “albeit sincere,” testimony by several JEDEC members that they would have opposed inclusion of Rambus’s technologies, and opted for alternatives had they been aware of Rambus’s patent position. Id. at 16.
At bottom, according to the majority “while there [was] some evidence that support[ed] the possibility that JEDEC would have chosen alternative technologies, Complaint Counsel [had] not met the burden of demonstrating that restoring the competition that would have existed in the ‘but for’ world requires that Rambus license its technology with no compensation.” Id. at 16.
Commissioner Rosch’s Partial Dissent
While agreeing with the majority’s conclusion that the Commission had the authority to order broad relief beyond forward-looking injunctive relief, including compulsory, royalty-free licensing, Commissioner Rosch disagreed with the majority’s conclusion that above-zero royalties were appropriate under the facts of that case. Statement of Commissioner J. Thomas Rosch, Concurring in Part and Dissenting in Part ("Rosch Stmt."), at 1.
Commissioner Rosch also agreed that “there must be ‘special proof’ of the need for” a royalty-free compulsory licensing remedy, and that “Complaint Counsel bears the burden of proving what the ‘but for world’ would have looked like.” Id. at 2. However, absent any precedent on the particular quantum of required proof, he noted “that where the relief sought is necessary ‘to eradicate all the consequences of the act, … any plausible doubts should be resolved against the monopolist.” Rosch Stmt. (citing Areeda & Hovenkamp, Antitrust Law ¶653(f), at 104 (2002)).
Here, he argued, “there is strong evidence in the record that if JEDEC had been aware of the potential scope of Rambus’s patent portfolio, it would have adopted standards that would have avoided Rambus’s patents.” Id. at 4 (emphasis added). He explained, “JEDEC’s rules, the expectations of its membership, and the market’s concerns with costs generally and the cost of Rambus’s technologies in particular all strongly support a finding that a fully informed JEDEC would have adopted standards that did not read on Rambus’s patents.” Id.
According to Commissioner Rosch, “The record also demonstrate[d] that JEDEC’s membership was particularly concerned with incorporating technologies into JEDEC’s standards that could potentially read on Rambus’s patents,” as demonstrated by, among other things, “the reaction of the marketplace to Rambus’s proprietary DRAM standard – RDRAM.” Id. at 5. As an example, he explained, “Rambus failed in its efforts to position RDRAM as the de facto market standard, at least in part, because the DRAM manufacturers’ concerns about cost led them to adopt standards that they believed were not proprietary.” Id.
Commissioner Rosch also discounted evidence upon which Rambus and the majority relied that indicated JEDEC’s willingness at times to adopt patented technologies into its standards after it received RAND assurances. In that regard, he argued,
[I]n all but one instance (Mosaid, whose patents were not essential to the standard), the evidence shows that the holders of those patents were, unlike Rambus, manufacturers, and that JEDEC viewed manufacturers differently from non-manufacturers, believing that the former had incentives to cross-license their technology for de minimis or no royalties. [footnote] Thus, it does not follow that because JEDEC was willing to adopt the technologies of those manufacturer patent holders it would have been willing to do so in Rambus’s case.
Id. at 5-6 (emphasis in original).
Commissioner Rosch also rejected the majority’s treatment of testimony in the record from JEDEC members indicating that they would have adopted alternatives if they were aware of Rambus’ patent position:
[I]n the context of mergers the Commission has embraced unimpeached customer testimony as powerful evidence of the “but for world.” [footnote] Where, as here, customer testimony is not only given under oath but is supported by the actions of the customers before the controversy has arisen, and is otherwise unimpeached, there is no reason not to credit it. Although it is also said that the testimony of JEDEC’s members is contrary to their agreement “to incorporate patented technologies into the SSO’s standard in several instances,” that is not supported by the record respecting the actions of JEDEC’s members where Rambus or companies like Rambus that were pure inventors (as contrasted with manufacturers) were involved.
Id. at 6.
He disagreed that, had Rambus disclosed its patent position, JEDEC may have adopted Rambus’s technologies and would have been able to obtain RAND assurances from Rambus. He argued, “the record shows that Rambus was strongly opposed to RAND terms because they were contrary to its business model. [Footnote] There is also evidence that on at least two occasions, Rambus made it clear that it would not commit to RAND terms in the standard setting context.” Rosch Stmt. at 7. He stated, other than the testimony of Rambus’s expert, “Rambus’s counsel could not cite the testimony of a single percipient witness, nor a single document in the record, to support its position that Rambus would have offered a RAND commitment. [Footnote]” Id. at 8.
Commissioner Rosch also disagreed that the Complaint Counsel had the burden of coming forth with its own cost-benefit analysis, as the majority seemed to have required. In this regard, he argued, “Insofar as that is considered to undercut Complaint Counsel’s challenge to Rambus’s position that it would have been compensated for the ‘incremental value’ of its technology in the ‘but for’ world, the contention fundamentally misconceives of the way that a fact is proved at trial.” Id. at 10. Failing the presence of any direct evidence here, he explained, the “‘but for world’ must of necessity be proved by circumstantial evidence,” one form of which is after-the-fact cost-benefit analysis, as Rambus attempted to present. Id. According to Rosch, “Complaint Counsel were not obligated to submit the same kind of circumstantial evidence,” particularly where they offered other circumstantial evidence: “evidence of the contemporaneous views and actions of JEDEC and its members vis-a-vis patented technologies and of Rambus’s antipathy toward a RAND commitment – in order to prove the ultimate fact regarding what would have happened in the ‘but for world.’” Id.
Commissioner Rosch concluded, “Ultimately, . . . licensing on terms above zero would enable Rambus to obtain royalties it would not have obtained in the ‘but for world.’ That would enable Rambus to continue to reap the fruits of its ongoing violation of Section 2.” Id. at 14. Nonetheless, as with the majority, he also would not have ordered a remedy that would reach the DDR2-SDRAM standard. Id.
Commissioner Pamela Jones Harbour’s Partial Dissent
As with Commissioner Rosch, Commissioner Harbour also “strongly agree[d] that the Commission’s remedial authority in Section 2 cases extends beyond narrowly constrained cease-and-desist orders and includes the ability to order compulsory, royalty-free licensing.” Remedy Statement of Commissioner Pamela Jones Harbour, Concurring in Part and Dissenting in Part ("Harbour Stmt."), at 1. Also along with Commissioner Rosch, she dissented from the majority’s above-zero royalty determination. Id. Finally, with one notable exception, she joined Commissioner Rosch’s dissenting statement. Id.
Unlike Commissioner Rosch, she would have ordered compulsory, royalty-free licensing not only with respect to the SDRAM and DDR-SDRAM standards, but also with regard to the DDR2-SDRAM standard. Harbour Stmt. at 1. She explained,
When the Commission fashions a remedy, it should strive to restore, as completely as possible, the competitive environment that would have existed in the “but for” world. [Footnote] In this case, the Commission can and should impose a remedy that would apply to technologies included in all JEDEC standards that were developed, or in development, at the time Rambus began enforcing its patents. This test would yield a remedy covering DDR2 (but not DDR3 or successive generations). [¶] This formulation would reflect an appropriate use of fencing-in relief – consistent not only with existing jurisprudence regarding the scope of the Commission’s remedial authority, but also with burden-of-proof requirements during the remedy phase.
Id. at 4 (emphasis in original). She argued that the Commission’s Liability Opinion did not rule out the possibility of DDR2 Lock-in. Instead, the Commission recognized that it “might have found lock-in with respect to DDR2 SDRAM if the record had demonstrated, for example, that backward compatibility concerns were a substantial determinative factor in JEDEC’s DDR2 SDRAM standard-setting decisions.” Id. (quoting Liability Op. at 114 n.621). “For purposes of establishing liability,” she explained, “the record was deemed insufficient to make such a finding.” Id.
According to Commissioner Harbour, the standard is different for purposes of determining the appropriate remedy, however. In that phase, “the Commission has three responsibilities: to stop the unlawful conduct; to prevent the unlawful conduct from recurring; and, importantly, to restore competition lost as a result of the unlawful conduct.” Id. at 5. In that endeavor, she argued, “The Commission may require relief that prohibits otherwise lawful conduct, if such relief is necessary to prevent ongoing harm to competition.” Id. In support, she quoted from the Supreme Court’s decision in FTC v. Ruberoid Co., 343 U.S. 470, 473 (1952), in which the Court held,
[T]he Commission is not limited to prohibiting the illegal practice in the precise form in which it is found to have existed in the past. If the Commission is to attain the objectives Congress envisioned, it cannot be required to confine its road block to the narrow lane the transgressor has traveled; it must be allowed effectively to close all roads to the prohibited goal, so that its order may not be by-passed with impunity.
Id. She explained, “The Court later gave a name to this concept: ‘those caught violating the [FTC] Act must expect some fencing in.’” Id. at 6.
Commissioner Harbour also relied upon the Supreme Court’s opinion in Jacob Siegel Co. v. FTC, 327 U.S. 608, 612 (1946) in which the Court described the Commission as “the expert body to determine what remedy is necessary to eliminate the unfair or deceptive trade practices which have been disclosed.” Id. at 5 (internal quotation marks omitted). She explained that “the Court further stated that the Commission ‘has wide latitude for judgment’ and ‘wide discretion in its choice of a remedy deemed adequate to cope with the unlawful practices in . . . trade and commerce.’” Harbour Stmt. at 5 (quoting Jacob Siegel, 327 U.S. at 613, 611). Accordingly, “the Court concluded that ‘the courts will not interfere except where the remedy selected has no reasonable relation to the unlawful practices found to exist.’” Id. (emphasis in original).
Commissioner Harbour then concluded, “In this case, extending the relief to the DDR2 SDRAM standard would be reasonably related to Rambus’s deceptive and exclusionary conduct” because “[i]n the ‘but for’ world, the SDRAM and DDR SDRAM standards would have been Rambus-free." Id. at 6. She explained, "Due to the path-dependent nature of JEDEC standard-setting, the inclusion of Rambus technologies in the first- and second-generation standards made it all but inevitable that Rambus technologies also would be included in DDR2. Rambus’s exclusionary conduct therefore facilitated the creation of Rambus’s DDR2 monopoly.” Id.
She also concluded that the burden of proof in the remedy phase is “less stringent than in the liability phase, and the evidence must be weighed accordingly. Finding a ‘reasonable relation’ to the unlawful practices requires less evidence than would be needed to establish the violation.” Id. at 7. Relying on United States v. E.I. DuPont de Nemours & Co., 366 U.S. 316, 334 (1961), she argued, “It is black-letter Supreme Court law that ‘once the Government has successfully borne the considerable burden of establishing a violation of law, all doubts as to the remedy are to be resolved in its favor.’” Id. at 8. Here, she placed particular emphasis on the fact that, although the Commission did not decide the issue in its Liability Opinion, Rambus’s asserted document destruction “should not be wholly ignored for remedy purposes” because it could have impeded the ability of the Complaint Counsel to come forward with relevant evidence. Id.
In conclusion, she believed that the majority’s remedial order did not comport with market realities, and further unjustly enriched Rambus: “the bottom-line result of the Commission’s remedy is this: Rambus will continue to reap financial benefits that are reasonably related to its successful subversion of JEDEC’s standards.” Id. at 10.