While Standard Setting Organizations (“SSOs”) and the technical standards they promulgate for various industries are essential to the operation of the competitive marketplace, they give rise to unique circumstances that can raise significant competitive concerns. SSOs are associations of industry participants who agree to adopt common standards to cover various (usually technically-oriented) aspects of their business. Although SSO agreements might on their face seem inconsistent with wide-open competition between different standards or formats (as with the historic battle between Betamax and VHS video recording standards), common standards can provide significant procompetitive benefits such as interoperability and increased connectivity.
Despite a number of pro-consumer justifications, the standard-setting process has the potential to pose significant anticompetitive concerns if abused by one or more SSO participants. For example, a patentee seeking approval of a standard in an SSO may misrepresent its willingness to license its patents on reasonable and nondiscriminatory terms. Then, once the standard covering the patented invention is adopted, the patentee may enforce those patent interests against or exact supracompetitive royalties from those competitors now committed to the standard.1
The anticompetitive implications of such a series of events are readily apparent: as a proximate result of the patentee’s manipulation of the standard-setting process, the patentee is anointed with enhanced market power beyond what it could wield in the absence of standardization. In turn, the enhanced market power illegitimately equips the patentee with far greater leverage than it would otherwise possess in an arm’s length patent negotiation. As a direct result of these deceptive actions, competition is restrained by substantially increased costs to implement the standard, in the form of unreasonable or discriminatory royalties, or litigation costs to defend against later patent infringement lawsuits. Particularly when patent rights are involved, this destructive ability to hold captive the entire product market subscribing to the standard is commonly called “patent hold-up” or “patent ambush.”2
Antitrust Causation For Anticompetitive Standard-Setting Activity
In a case originally filed by the FTC against Rambus, Rambus, a computer memory designer, was accused of anticompetitive conduct before the Joint Electron Devices Engineering Council (“JEDEC”), a computer memory standard-setting body.3 In that case, the FTC alleged that Rambus deceptively failed to disclose to JEDEC its patent interests in four technologies related to computer memory, which ultimately were adopted as part of the standard.4 Rambus’s patent interests related to these technologies included issued patents, pending patent applications and plans to amend patent applications.5
The Commission found that under JEDEC’s patent disclosure policy, participating members of JEDEC expected others to disclose patent interests relevant to the technology being standardized.6 The Commission ultimately held Rambus liable for unlawful monopolization, finding that “‘but for Rambus’s deceptive course of conduct, JEDEC either would have excluded Rambus’s patented technologies from the JEDEC DRAM standards, or would have demanded RAND assurances [that is, undertakings to license to all interested industry parties on “reasonable and nondiscriminatory” terms], with an opportunity for ex ante licensing negotiations.’”7 It is this quoted language that the United States Court of Appeals for the D.C. Circuit made the focal point of its arguably surprising decision to set aside the Commission’s determination.
On appeal, the D.C. Circuit reversed the Commission, finding that there was insufficient evidence to establish injury to the competitive process.8 In arriving at this conclusion, the court first assumed the Commission’s determination that one of two possibilities was equally likely in a reconstructed standard-setting environment free from Rambus’s alleged deceptive conduct: (1) Rambus’s technology would not have been selected or incorporated into the standard; or (2) JEDEC would have demanded RAND licensing assurances from Rambus.9
Focusing on the latter possibility, the court relied on Supreme Court precedent10 to hold that JEDEC’s lost opportunity to secure a RAND commitment from Rambus for its other members did not harm competition because “an otherwise lawful monopolist’s end-run around price constraints, even when deceptive or fraudulent, does not alone present harm to competition in the monopolized market.”11 Thus, the D.C. Circuit concluded that the FTC had failed to prove anticompetitive effect because an inability to secure RAND commitments was not a competitive injury redressable under the antitrust laws.
The Rambus decision may not be entirely consistent with the treatment of a similar case by the United States Court of Appeals for the Third Circuit.12 There, Broadcom claimed that Qualcomm misrepresented its commitment to provide fair, reasonable and nondiscriminatory (“FRAND”) licensing related to its proprietary technology in mobile wireless telephony covering wideband code division multiple access (“WCDMA”).13 Broadcom alleged that Qualcomm made the licensing commitments as part of the intellectual property rights policies of the European Telecommunications Institute (“ETSI”) and other SSOs to which Qualcomm was allegedly a signatory.14
Qualcomm’s proprietary WCDMA technology was essential to practicing the Universal Mobile Telecommunications Systems (“UTMS”) standard used in Global System for Mobility (“GSM”) cellular networks.15 Broadcom alleged that Qualcomm disregarded its FRAND licensing commitment; instead choosing to demand discriminatorily higher royalties from industry participants not using Qualcomm chipsets, including Broadcom.16
The Third Circuit reversed the district court’s dismissal of the Section 2 complaint, holding that “[d]eceptive FRAND commitments . . . may result in [anticompetitive] harm” because they “obscur[e] the costs of including proprietary technology in a standard and increas[e] the likelihood that patent rights will confer monopoly power on the patent holder.”17 Additionally, the court found that the complaint sufficiently alleged a Section 2 injury to competition, reasoning that “even if Qualcomm’s WCDMA was the only candidate for inclusion in the standard, it still would not have been selected by the relevant [SSOs] absent a FRAND commitment,” thereby eliminating the possibility that the inclusion of WCDMA in the standard was unavoidable.18 Thus, the Third Circuit’s decision seems significantly different in its reasoning than the decision reached by the D.C. Circuit, which found that the inability to secure FRAND licensing does not by itself amount to an injury to the competitive process.19
Implications For Future Standard-Setting Activity
The apparent split in decisions between the D.C. Circuit in Rambus Inc. v. Federal Trade Commission and the Third Circuit in Broadcom Corp. v. Qualcomm Inc. leaves open the question of the level of anticompetitive conduct in an SSO setting necessary to establish antitrust causation through injury to competitive process. Interestingly, the D.C. Circuit, which was responsible for establishing flexible standards for reviewing anticompetitive conduct in United States v. Microsoft Corp.,20 embraced a seemingly rigid “but-for” antitrust causation analysis in Rambus Inc. v. Federal Trade Commission in evaluating suspect conduct by a patentee in the SSO setting. In contrast, in 2001, the en banc D.C. Circuit in Microsoft adopted a flexible standard that would find conduct that “reasonably appear[s] capable of making a significant contribution to . . . maintaining monopoly power” sufficient to establish competitive injury for a Section 2 monopolization claim.21 The D.C. Circuit, however, arguably jettisoned this flexible antitrust causation standard that it called “edentulous”22 in Microsoft in favor of a fairly rigid “but-for” approach in Rambus.23
Given the uncertain landscape for antitrust causation, entities that wish to engage in standard-setting activity should have competent legal counsel review the intellectual property rights policies of respective SSOs and their associated membership agreements and undertakings to determine whether the entity may be exposed to future antitrust liability. This is especially important in cases in which the standard-setting activity involves the selection of one among many mutually-exclusive technologies as the de facto standard. As often is the case, participation in SSOs may involve employees who do not act in an executive or managerial capacity, or have high levels of awareness as to potential legal implications of such participation. Instead, these individuals are often scientists, engineers or experts in their field. In light of this fact, it is advisable that companies implement policies requiring employees who are typically disconnected from company decision-makers to report standard-setting activity affecting the entity’s business to the appropriate legal officers within the company so that the entity can evaluate its obligations under the SSO and assess its potential exposure to antitrust or other adverse legal liability.
While the courts work to resolve their somewhat-conflicting views of the level of activity required to establish antitrust causation, standard-setting participants should generally avoid activity that could be seen as even contributing to injuring the competitive process, and should regularly consult with counsel regarding any apparent policies associated with SSO activity or membership.