This article was first published in CLI inBrief on 22 March 2011
This article compares the continuing development of the approaches of the US Department of Justice (DoJ), the Federal Trade Commission (FTC) and the European Commission (the Commission) concerning potential infringements of antitrust law arising either from patent ambush or from the failure of a patent licensor to comply with an undertaking to license standard-essential patents on (fair), reasonable and non-discriminatory ((F)RAND) terms. It follows a previous article on this topic ("Standardising technology: a further look at patent ambush and FRAND licensing undertakings") which appeared in CLI on 6 May 2008.
What are the potential infringements?
Patent ambush describes the situation where an essential patent holder participating in a standard-setting organisation (SSO) deliberately and strategically – and in breach of the SSO intellectual property rights (IPRs) policy – avoids disclosing a patent that is essential to technology underlying a standard being considered for adoption.
Although definitions in IPRs policies vary, a patent is generally considered "essential" if it is not technically possible to avoid infringing the patent in complying with the standard. Through the patent holder's concealment, the standard is adopted without the standardisation committee being aware of the essential patent. The patent holder avoids any IPRs policy commitment to license on (F)RAND terms and can then exploit any dominant position gained through the patent ambush by extracting "monopoly" rents and imposing other unreasonable licensing terms in the absence of effective competition.
If the SSO members had known of the essential patent, in the case where competing technologies existed, the SSO could have insisted on the patent holder agreeing to reasonable licensing terms (particularly royalties) before the standard was adopted or could otherwise have chosen an alternative technology.
A separate issue is the refusal by standard-essential patent holders to honour previous (F)RAND licensing undertakings given in accordance with SSO IPRs policies and on which basis a relevant standard was adopted.
The US perspective
Can patent ambush infringe competition law?
In February 2009, the US Supreme Court denied the FTC's petition for review of the DC Circuit Court of Appeals judgment of April 2008 overturning the FTC's opinion In the matter of Rambus Inc (Docket No 9302). The FTC had maintained that Rambus, a developer of technology for dynamic random access memory (DRAM), had infringed antitrust law through exclusionary and deceptive conduct in concealing essential pending patent applications during the adoption of a standard by the Joint Electron Device Engineering Council. More specifically, JEDEC had relied significantly on Rambus (mis)representations in adopting the standard, and Rambus's conduct had therefore resulted in unlawful monopolisation in violation of section 2 of the Sherman Act and unfair competition and deceptive practices under section 5 of the FTC Act.
Central to the FTC's argument was that, had Rambus disclosed its patents during the JEDEC standard-setting procedure, JEDEC would either:
- have chosen alternative, potentially non-patented technologies; or
- demanded RAND commitments from Rambus in ex ante negotiations concerning Rambus's technology.
The Court of Appeals, while recognising that such an argument "would [in principle] support a monopolisation claim", held that the FTC had, as a matter of evidence, failed to prove conclusively that JEDEC would have chosen alternative technology.
It also found that avoidance of the RAND commitment could not harm competition because, even if Rambus's conduct was deceitful in that it enabled a monopolist to charge higher prices than would have been possible following any such commitment, the harm to the competitive process (and thereby to consumers) required to constitute an infringement under the Sherman Act had not been demonstrated. On this point, the court relied on earlier jurisprudence that "an otherwise lawful monopolist's use of deception simply to obtain higher prices normally has no particular tendency to exclude rivals and thus to diminish competition".
In its petitions to both the Supreme Court and the Court of Appeals, the FTC countered that the Court of Appeals' requirement for conclusive evidence that alternative technologies would have been chosen "set the [causation] bar unrealistically high" given the "complex set of trade-offs" which standard-setting involves. It "would immunize such deception from antitrust liability in most circumstances [by] protect[ing] a corrupt SSO participant as a 'lawful monopolist' so long as there is some possibility that the SSO would have selected the relevant technology in the absence of deception".
It further noted that the court finding that avoidance of a (F)RAND licensing undertaking did not harm competition ignored the lock-in effect of standardisation, mistakenly "imagining that 'alternative technologies' somehow would arise to compete with the standardized technologies after the standards were implemented". The deception "was the very mechanism by which Rambus secured its monopoly", not merely the ex post exercise of market power by a lawful monopolist.
FRAND licensing undertakings and competition law
In Broadcom Corp v Qualcomm Inc 84 USPQ 2d (BNA) 1129 (3d Cir 2007), the US Court of Appeals for the Third Circuit found that: "(1) in a consensus-oriented private standard-setting environment, (2) a patent holder's intentionally false promise to license essential proprietary technology on (F)RAND terms, (3) coupled with an SSO's reliance on that promise when including the technology in a standard, and (4) the patent holder's subsequent breach of that promise, is actionable anticompetitive conduct".
The judgment relied heavily on the FTC's (now overturned) Rambus opinion. Whereas that case concerned an SSO being deprived of the opportunity to demand FRAND undertakings through patent ambush, Broadcom concerned an essential patent holder reneging on FRAND undertakings. The court in Broadcom nevertheless found the Rambus jurisprudence equally relevant on the basis that "deceptive FRAND commitments, no less than deceptive non-disclosure of IPRs...harms the competitive process by obscuring the costs of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder".
However, the Court of Appeals decision in Rambus casts doubt on this finding. The court attempted to distinguish Broadcom from the Rambus scenario on the basis that no promise had been relied on in Rambus. However, it also found (as with the FTC's argument concerning avoidance of a RAND commitment in Rambus) that Broadcom could not be relied on by the FTC because it involved a finding of violation of the Sherman Act "where a lawful monopolist's deceit has the effect of raising prices (without an effect on competitive structure)".
The EU perspective
Those who had hoped for a formal finding by the European Commission of an abuse of a dominant position through patent ambush or reneging on FRAND undertakings will have been disappointed.
Can patent ambush infringe competition law?
The European Commission previously gave its preliminary assessment, in its 2007 Rambus statement of objections following the 2006 FTC opinion, that claiming unreasonable royalties subsequent to patent ambush may constitute an abuse of a dominant position under (what is now) article 102 of the treaty on the functioning of the European Union. However, in June 2009, the Commission accepted commitments from Rambus to cap royalty rates on its chip technology in order to meet the competition law concerns outlined in the statement and dropped its investigation without any finding of liability.
The statement had indicated that an abuse may arise where, without the ambush, the accused would not have been able to charge the level of royalties in question. It is not clear, however, whether the Commission would – like the US courts – require conclusive evidence that alternative technologies would have been chosen by the SSO and, if so, what such evidence might consist of. The Commission's new December 2010 guidelines on horizontal co-operation agreements (the Guidelines), while recognising the potential for anticompetitive conduct by holders of standard-essential IPRs after the adoption of a standard, sheds no further light on this point.
The Guidelines do recognise, however, what the US courts in Rambus did not – namely, the importance of ex ante disclosure of the most restrictive licensing terms in enabling an SSO to take informed decisions on both technology and pricing considerations and how avoidance of this through patent ambush IPRs may lead to competitive harm through the industry being locked into a specific technology at unfair or unreasonable fees.
FRAND licensing undertakings and competition law
Similarly, there remains no Commission decision finding that reneging on a FRAND undertaking constitutes an abuse of a dominant position.
The Commission announced in November 2009 that it had closed formal proceedings – without finding of any violation – against Qualcomm, following a four-year investigation concerning alleged abuse of a dominant position through breach of FRAND commitments given by Qualcomm in connection with the licensing of WCDMA (part of 3G mobile phone) standard-essential patents. The Commission's decision not to pursue the case appears to have been due to a combination of the Commission's traditional hesitation in overturning commercial agreements between patent licensors and licensees, the withdrawal of the complaint by all the complainants and concerns about there being insufficient evidence to warrant issuing a statement of objections.
Nevertheless, the explanation in the Guidelines of anticompetitive conduct through "holding up users after adoption of the standard...by extracting excess rents by way of excessive royalty fees" appears to apply without distinction to a failure to adhere to an earlier FRAND commitment and patent ambush.
Conclusion
Both the US courts and the Commission appear to recognise in principle that:
- deceptive conduct by a holder of IPRs essential to a certain technology;
- which results in inclusion of that technology in a standard where alternative technologies would otherwise have been chosen; and
- the consequent abuse of market power gained only by that technology being included in the standard (through extraction of excessive royalties)
may constitute an infringement of competition law.
It remains unclear whether or not the Commission would apply as high a burden of proof as the US courts, requiring evidence that alternative technologies would definitely have been chosen. The FTC argued that such an evidential burden was "exceedingly difficult – if not impossible" to satisfy. However, this may not be the case where, for example, it can be demonstrated that a final choice between two technically equivalent technologies was made by the SSO on the basis of an apparent absence of intellectual property or a hollow (F)RAND undertaking by the IPRs holder. This points to the need for SSOs to have transparent standard adoption procedures, a point emphasised in the Commission's guidance and the absence of which appears to have been fatal to the FTC's case.
The key difference in approach between the US and the EU appears to be the US courts' position that competitive harm cannot arise from avoidance of a RAND commitment through deception. This sits at odds with the Commission's treatment of both deception and obtaining market power through lock-in as constituent elements of abuse of a dominant position. It also offends the basic principle (reflected in the commitments offered to the Commission in the Rambus decision) that standard-essential patent holders should not abuse their market power gained only through the inclusion of their technology in the relevant standard by deception. Finally, this would seem to create an inconsistent approach under US antitrust law towards different deceptive strategies in the SSO context, both of which may permit a patent holder to impose excessive royalty fees in circumstances where this would not have been possible in the absence of such strategy.
* Craig Simpson is an associate with Steptoe & Johnson LLP (Brussels)
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