In a landmark ruling, the Federal Trade Commission (FTC) recently held that it has the power to order compulsory licensing at Commission-determined maximum rates as a remedy for monopolization violations where one member of a standard-setting organization (SSO) intentionally concealed its intellectual property rights from the group and then attempted to enforce those rights after the body had incorporated its technology into the standard. In the Matter of Rambus, Inc., Docket No. 9302, Opinion of the Commission on Remedy (Feb. 5, 2007), available at http://www.ftc.gov/os/adjpro/d9302/index.htm. The opinion, authored by Chairman Deborah Majoras, strongly defended the FTC’s authority to order compulsory licensing at a royalty rate determined by the FTC based on the conditions that would have occurred but for the defendant’s deception (i.e., the ex ante bargaining position of the parties) – even if the result was a compulsory royalty-free license. The decision makes clear to participants in current and future standard-setting organizations that the FTC will vigorously enforce the antitrust laws against companies that intentionally conceal their intellectual property rights from the standard-setting body and will seek remedies that prevent them from continuing to benefit from their unlawful conduct.
On July 31, 2006, the FTC unanimously held that Rambus Inc. engaged in unlawful monopolization by actively concealing and withholding information regarding its relevant patents and patent applications that were highly material to the Joint Electron Devices Engineering Council (JEDEC) standard-setting process for synchronous dynamic random access memory chips (SDRAM). In the Matter of Rambus, Inc., Docket No. 9302, Opinion of the Commission (issued on August 2, 2006), available at http://www.ftc.gov/os/adjpro/d9302/index.htm. The FTC found that Rambus’s conduct constituted monopolization in violation of Section 2 of the Sherman Act and Section 5 of the FTC Act. See id. at 119. The FTC predicated its finding on a duty of good faith and used a deceptionbased standard to assess Rambus’s conduct, both of which are more common in Section 5 consumer protection cases than monopolization cases under Section 2. Significantly, the opinion struck a compromise position regarding the scope of Rambus’s misconduct. The FTC did not find liability with respect to the most recently adopted relevant standard, DDR2 SDRAM, which is projected to account for approximately 70 percent of the market in 2007. The FTC found that (1) JEDEC adopted this “follow-on” standard after Rambus’s conduct had been exposed (and Rambus had left the organization), and (2) there was insufficient evidence that the prior deception led to the adoption of Rambus’s technology in standards adopted after its departure. That is, the Commission concluded that there was insufficient evidence to demonstrate that the industry was “locked-in” to Rambus’ technology, despite the presence of high switching costs. The FTC was unable to determine the appropriate remedy for the violation it found based on the record before it and ordered the parties to provide supplemental briefs and oral argument on the appropriate remedy in this case.
The parties, along with several amici curiae, submitted substantial briefs on the breadth of the FTC’s remedial authority and the proper remedy on the basis of the record as interpreted by the FTC’s opinion on the liability issue. Rambus argued that (1) the FTC was empowered only to seek prohibitory “cease and desist” orders, (2) Rambus’s current royalty rates under the JEDEC standards were competitive and reasonable compared to its rates for other comparable licenses, and (3) the remedy should be limited to an order directing Rambus not to engage in deceptive conduct in future standard-setting. On the other hand, the FTC staff (and amici) argued that the FTC should impose a compulsory, royalty-free license on all of Rambus’s patents that had been incorporated into JEDEC standards because, had Rambus properly disclosed its patents, JEDEC would have either approved a standard that did not infringe those patents or required a royalty-free license. The amici also argued that the FTC should consider the deterrence aspect of its remedy – if Rambus received a windfall (or any positive return) for its misconduct, future SSO participants would have an incentive to engage in similar conduct.1
The FTC ultimately rebuffed both parties’ positions. It held that its remedial authority is not limited to a forward-looking injunction – rather, it “extends to restoring, to the extent possible, the competitive conditions that would have been present absent Rambus’s unlawful conduct.” Op. at 6. It added that it has “wide latitude for judgment” on the proper remedy as long as it bears a “reasonable relationship to the unlawful practices that the Commission has found.” Id. The opinion also affirmed the FTC’s power to order royalty-free compulsory licenses where appropriate. However, the FTC declined to impose such a remedy in this case despite (1) documents showing JEDEC was “reluctant” to approve patented technologies and (2) statements from multiple JEDEC members that they likely would have selected alternatives had they known of Rambus’s patent applications. The FTC was not persuaded that this evidence sufficiently proved JEDEC would have refused to implement Rambus’s technology if Rambus had disclosed its patents or, in the alternative, that Rambus (or a company with substitutable technology) would have been willing to offer a royalty-free license in order to get its technology into the standard.
Instead, the FTC imposed maximum royalty rates that were greater than zero but less than Rambus’s current rates. In doing so, the FTC attempted to determine the rate that most likely would have resulted from negotiations between the parties before JEDEC adopted Rambus’s technology (i.e., when the industry had not yet invested in Rambus’s technology and JEDEC had more bargaining power). To find the appropriate rate, it looked to Rambus’s royalty rates for similar technologies and then made downward adjustments to reflect the differences in the perceived greater market value of Rambus’s intellectual property rights in those other technologies and the declining value of the technology at issue over time. Pursuant to this analysis, the opinion established maximum rates of less than one percent, depending on the technology and other factors, for a three-year period. To “lend temporal and rate certainty” and to reflect the diminishing value of the technology over time, the maximum allowable royalty rate drops to zero after three years. Op. at 24.
FTC staff argued that the remedy should be applied to the DDR2 SDRAM standard, even though the FTC’s initial decision did not find liability with respect to that technology, because (1) it bore a reasonable relation to Rambus’s anticompetitive conduct, and (2) it was necessary to cure the “hang-over of the long-existing pattern of [anticompetitive conduct]” (i.e., it was necessary to restore competitive conditions). In the Matter of Rambus, Inc., Docket No. 9302, Brief of Counsel Supporting the Complaint On the Issue of Remedy (Sept. 29, 2006) at 18, available at http://www.ftc.gov/os/adjpro/d9302/060929ccrevisedremedybrief.pdf (quoting FTC v. National Lead, 352 U.S. 419, 425 (1957)). The FTC affirmed that it has the power to extend a compulsory license – including a royalty-free license – to standards created after the misconduct is uncovered if there is a sufficient causal link between the alleged misconduct and the development of the new standard. Nevertheless, the FTC decided not to apply the remedy to DDR2 SDRAM in this case because there was no finding of a causal link sufficient to show that DDR2 was within the scope of the “competition lost because of Rambus’s deceptive conduct.” Op. at 30.
Two commissioners filed separate opinions concurring in part and dissenting in part. Commissioner Rosch argued that the FTC should have awarded royalty-free licenses for users of the JEDEC standards. According to Rosch, the record adequately supported the FTC staff’s argument that JEDEC would not have incorporated Rambus’s technologies but for Rambus’s deception. Therefore, Rosch argued, since Rambus would not have been able to collect any royalties from users of the standards but for its anticompetitive conduct, the proper royalty rate is zero.
Commissioner Harbour went a step further, arguing that a royalty-free license should also have been imposed on Rambus’s technologies included in the DDR2 SDRAM standard (on which the FTC did not find Rambus liable for monopolization) because (1) DDR2 was based on standards that were corrupted by Rambus’s anticompetitive conduct and it would have been difficult to switch out Rambus’s technology at that late date, and (2) DDR2 was already in development when Rambus began enforcing its patents.
Even though it escaped a royalty-free license remedy and all liability with respect to DDR2 – the most commercially important standard going forward – Rambus has announced that it intends to appeal the FTC’s ruling to the U.S. Court of Appeals. On appeal, the court will rely on the FTC’s findings of fact unless it finds they were not supported by “substantial evidence,” but its legal determinations will be considered de novo. On February 16, 2007, Rambus filed a motion with the FTC for a stay of its order pending Rambus’s appeal. Rambus simultaneously filed a petition for reconsideration of the order, asking that certain provisions be clarified or modified prior to appeal. The Rambus opinion offers guidance for future conduct in the standard setting process. It signals the FTC’s belief that it has broad powers to remedy the effects of anticompetitive conduct by a participant in a standard-setting organization, and highlights its intent to pursue all possible remedies against such conduct. However, despite the FTC’s broad assertion of its remedial power, the Rambus remedy ruling ultimately reached a compromise between the positions taken by Rambus and the FTC staff. By striking that compromise and declining to require royalty-free licensing in this case, the FTC may have established a high standard in subsequent cases for proving that a royalty-free license would have resulted but for the defendant’s alleged misconduct. In the future, complaint counsel may need to demonstrate that the SSO had a strictly enforced policy prohibiting the adoption of any patented technology and that there were viable substitutes that would have been incorporated into the standard royalty-free but for the defendant’s misconduct. Historically, it has been fairly unusual for an antitrust agency (or even a court, for that matter) to order compulsory licensing at a “reasonable” rate – and the majority opinion admits that it is “difficult to reconstruct the ‘but for’ world” and that the FTC does “not relish imposing a compulsory licensing remedy.” Op. at 12, 17. Nevertheless, this case may make such remedies more common in future FTC cases involving deceptive misconduct by an SSO participant. Private litigation may provide some additional relief through treble damages based on the economic effect of the defendant’s misconduct. Private plaintiffs may also pursue their case under an equitable estoppel theory, which, if successful, would preclude Rambus from enforcing its patents (including with respect to DDR2 compliant products) against them.