Under the Trump administration’s leadership, the Antitrust Division of the Department of Justice (DOJ) appears to be changing its enforcement approach toward intellectual property (IP) issues arising in the context of standard-setting organizations (SSOs).
In particular, statements made over the past year by Assistant Attorney General (AAG) Makan Delrahim signal a clear departure from prior agency policy regarding the role of antitrust law in addressing violations of fair, reasonable and non-discriminatory (FRAND) commitments made by standardessential patent (SEP) holders as part of the standard-setting process. While the DOJ and Federal Trade Commission (FTC) have historically taken the position that the antitrust laws may reach such violations, Delrahim has indicated that the DOJ under his watch will focus instead on potential antitrust violations by SEP licensees and on the potential for collusive behavior by SSOs and their participants.
SSOs are industry groups that establish compatibility standards, which enable interoperability of products made by different manufacturers. Such standards are a critical part of the digital technology sector in particular, where interconnectivity would not be possible without the widespread adoption of standardized technologies. Thus, antitrust agencies have long recognized that standard-setting supports growth and innovation, and is usually pro-competitive and efficiency-enhancing.
By its very nature, however, the standardsetting process also can reduce competition and create antitrust risk. The process typically involves groups of competitors who collectively choose between competing technologies to establish the basis of competition. The selected technology may lack effective substitutes precisely because the SSO chose to include it in the standard and it may be costly to switch to a different technology after the standard is set.
Standards often include patented technology and a patent that protects technology essential to a standard is referred to as an SEP. Once the industry is locked into a standard that lacks competitive alternatives, the SEP holder may have the power to extract higher royalties, or impose less favorable licensing terms, than it otherwise could have gained in a competitive market. Such costs may be passed down to consumers.
To ensure that any would-be SEP holder does not abuse its bargaining power, SSOs typically require intellectual property (IP) rights holders — in order to be considered for inclusion in a standard — to agree to make licenses to their patented technologies available to industry participants on FRAND terms. Such commitments are intended to strike a balance between, on the one hand, the interests of SEP owners to have the ‘winning’ technology and to be appropriately compensated and, on the other hand, the interests of SEP implementers to have effective access to the standard.
Antitrust enforcement in the standardsetting context in the United States has previously focused largely on interpreting and enforcing FRAND commitments. The FTC in particular has taken seven significant enforcement actions over the past two decades — across both Republican and Democratic administrations. Most recently, for example, the FTC filed a complaint against Qualcomm, Inc. in January 2017 alleging, in part, that Qualcomm refused to license its cellular SEPs, and otherwise extracted non-FRAND rates and license terms, in violation of Section 5 of the FTC Act. In a partial summary judgment a federal district court ruled, on November 6, 2018, that Qualcomm must make its SEPs available for licensing, including to its competitors. On May 21, 2019, the district court ruled that the FTC had demonstrated monopoly power in the market for certain modem chips. It further found that the licensing practices violate sections 1 and 2 of the Sherman Act and constitute an unfair method of competition under Section 5 of the FTC Act.
DOJ POLICY SHIFT
While the DOJ has not historically pursued antitrust enforcement action against FRAND violations, it had, prior to AAG Delrahim assuming the position of head of the Antitrust Division of the DOJ, articulated policy views consistent with the FTC’s enforcement efforts. Befitting his status as the first registered patent lawyer to head the Division, Delrahim has repeatedly spoken publicly to explain how the DOJ under his leadership will approach legal issues at the intersection of antitrust and IP.
In November 2017, Delrahim expressed concern that antitrust enforcers had strayed too far in the direction of accommodating the concerns of technology implementers over IP creators. Rather than focus on the patent ‘hold-up’ problem, in which an SEP holder threatens to delay licensing until its royalty demands are met, Delrahim said that the more serious impediment to innovation is the ‘hold-out’ problem, which arises where SEP implementers underinvest in the technology, or threaten not to take a license at all, until their royalty demands are met. Delrahim expressed skepticism about using antitrust law to address the holdup problem, noting that SSOs and their members are in the best position to police private licensing commitments through contractual and other common law or non-antitrust statutory remedies. Antitrust authorities should instead focus on the potential for collusive behavior by SSOs and their participants. Indeed, in 2018, the DOJ reportedly opened an investigation into potential collusion relating to a WiFi connectivity standard under development at the Institute of Electrical and Electronics Engineers SSO.
In March 2018, Delrahim outlined the DOJ’s ‘New Madison’ approach (so named after founding father James Madison’s views on the necessity for strong patent protection) to the antitrustIP nexus. Strongly favoring SEP holders, the New Madison approach lays out the following four principles:
1. Antitrust law should not play a role in enforcing FRAND commitments;
2. SSOs’ policies should not skew conditions in favor of SEP implementers;
3. SSOs should protect patent holders’ right to exclude; and
4. A unilateral and unconditional refusal to license a patent should be per se legal.
Delrahim’s new approach in effect provides technology implementers with no protection under the antitrust laws from abusive conduct by SEP licensees. The approach thus diverges from the DOJ’s past policies, and it also represents a departure from the enforcement policies of the FTC and many other antitrust agencies around the world. To this end, Delrahim explained in September 2018 that, under the New Madison approach, the DOJ also will be increasing its domestic and international advocacy efforts in order to ‘modernize’ global antitrust policy concerning IP. As further evidence of its new approach, in December 2018, the DOJ withdrew from the 2013 ‘Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary FRAND Commitments’ that it had jointly made with the U.S. Patent and Trademark Office. In January 2019, the DOJ also stated that it planned to file a ‘statement of interest’ in a private lawsuit in which one company (U-blox) accused another (InterDigital Inc.) of antitrust law violations from charging excessive royalties for SEPs.
At the FTC, a new slate of five Commissioners took office last year, including Joseph Simons, who in May 2018 was sworn in as Chairman. In September 2018, Simons expressed his agreement with Delrahim that breach of a FRAND commitment, and even a fraudulent promise to abide by a FRAND commitment, is not on its own an antitrust issue, although he recognized that both hold-up and hold-out can be problematic, and indicated the FTC would continue economically grounded and fact-based antitrust enforcement in the IP context. It remains to be seen whether Simons’ comments represent his personal views only or more broadly signal a change in enforcement policy at the FTC. As part of its ongoing Hearings on Competition and Consumer Protection in the 21st Century, the FTC in October 2018 held discussions concerning innovation and IP policy.
Both the Court of Justice of the European Union in Huawei v. ZTE and the European Commission (EC) in its Motorola Mobility and Samsung Electronics decisions recently affirmed that, in Europe, hold-up is fundamentally a competition problem and competition law is an appropriate tool to enforce FRAND commitments. They also clarified the limits, under European Union competition law, of the SEP holder’s right to seek an injunction against an implementer willing to enter into a license on FRAND terms.
In November 2017, the EC issued non-binding guidelines concerning SEPs, which, among other things, discuss general principles for FRAND. The guidelines encourage industry participants to develop best practices concerning FRAND licensing, and indicate the EC will monitor progress and take appropriate action, as necessary.
AAG Delrahim’s statements have garnered mixed reactions from both the SSOs and antitrust communities. While the New Madison approach appears to signal a significant shift at the DOJ, its application to antitrust enforcement of IP disputes remains to be seen. Similarly, it is unclear whether Chairman Simons’ remarks will translate into changing enforcement actions by the FTC.
It will be worth watching how both U.S. agencies (and the courts) navigate the intersection of antitrust and IP issues on a going-forward basis, and to what extent they stray from antitrust enforcers outside the United States.