United States: Lessons For Intellectual Property Owners

A recent decision of the Federal Trade Commission ("FTC") demonstrates the "tightrope" that patent and other intellectual property (IP) owners must walk to maximize the value of their IP without violating antitrust and other trade regulation laws.

In a unanimous opinion issued August 1, 2006, the FTC held that Rambus, Inc., a leading developer of computer memory technologies, had engaged in exclusionary conduct rising to the level of illegal monopolization. The conduct of Rambus that the FTC found unlawful included exploiting its participation in a standard setting organization ("SSO"), the Joint Electron Device Engineering Counsel ("JEDEC"). In the Matter of Rambus Incorporated, FTC Docket No. 9302. The FTC found that Rambus deceived JEDEC by working with JEDEC to set industry standards for dynamic random access memory ("DRAM") semiconductor chips but failing to disclose the existence of its own patents and patent applications that involved the specific technologies that were ultimately adopted in the standards. Rambus actively misled JEDEC’s members to believe that Rambus would not seek patents covering the JEDEC standards — even as Rambus surreptitiously amended its pending patent applications to cover the ultimate standard. Only after the standards were approved did Rambus reveal its patents — through infringement lawsuits against its fellow JEDEC members that practiced the standard. The Commission found that Rambus’ conduct violated Section 5 of the FTC Act and contributed to the acquisition of monopoly power in several markets. It sought further briefing on the issue of appropriate sanctions.

The Rambus decision dramatically illustrates the interplay between antitrust and IP principles in the standard setting context. As the Commission pointed out, patents and antitrust law — far from being in conflict — are both aimed at encouraging innovation that benefits consumers. Nor do patents necessarily create market power. The collaborative standard setting process, however, presents unique opportunities for abuse.

Standard setting occurs across many diverse industries but is particularly important when intellectual property rights are involved. It can be (and normally is) procompetitive and beneficial to consumers by increasing interoperability among different firms’ products. Interoperability makes products more valuable to consumers and increases market acceptance of new products. A good current example of collaborative standard setting is the HD-DVD market, in which two technologies are now competing to become the industry standard. Before the advent of DVDs, the VHS-VCR standard for videotapes defeated the Beta format and enabled video stores to invest exclusively in VHS tapes — thereby lowering prices and increasing product quality.

The benefits of standard-setting extend to not only those who participate in the standard-setting organizations, but also to other companies that can use the standards to streamline their products. In the context of group standard-setting, as was the case in Rambus, standards may encourage vigorous competition to improve the product, since each participating competitor may want to gain an advantage over others.

But standard-setting also displaces the competitive process, creating the potential for collusion, for exclusionary conduct, and — as the Commission found present here — for manipulation of the standard-setting process to bring about the unknowing adoption of a single participant’s technologies as the standard. In this case, the FTC found that Rambus purposely withheld material information from JEDEC regarding Rambus’ patent position. Such conduct by Rambus was in direct contradiction to JEDEC members’ commitment to avoid the incorporation of patented technologies into its published standards. In doing so, Rambus’ actions prevented JEDEC’s members from being able to make informed decisions about which technologies to adopt. The net effect was Rambus’ acquisition of monopoly power in four markets. In essence, Rambus subverted the standard-setting process by using it as a means to increase its own market power.

The Commission has yet to determine a remedy for Rambus’ violations, and has sought additional briefing and argument on appropriate remedies (but not on liability). The remedies may include "reasonable royalty rates for JEDEC-compliant products affected by Rambus’ exclusionary conduct" as well as injunctive relief.

The decision suggests several important lessons for intellectual property owners that participate in joint standard-setting organizations. First and foremost, IP owners need to undertake their own due diligence to determine other members’ patent ownership rather than relying solely on the organization’s rules of good faith voluntary disclosures of existing and pending patents and other voluntary policies designed to prevent anticompetitive holdup. Second, IP owners participating in standard-setting that are submitting applications to the U.S. Patent and Trademark Office should have legal counsel carefully review the organization’s disclosure rules and guidelines relating to disclosure of relevant patents. Last but not least, no participant should attempt to subvert the process to exclude others or to seek a market advantage for its own intellectual property. The Commission’s decision strongly suggests not only that standard- setting activities will continue to receive careful antitrust scrutiny but that, in the standard-setting context, intellectual property ownership will not be a defense to anticompetitive conduct by a participant.

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