United States: The Antitrust Risks Associated With Manipulating The Standard-Setting Process

In many technology-related markets, an industry standard will emerge to provide a common framework or format to ensure interoperability among related products and to foster the development of ancillary or peripheral devices. Some standards will develop as a result of open market competition. In other cases, however, standards are created from voluntary consensus or by government prescription.

Both voluntary consensus standards and government prescribed standards can be pro-competitive. They can ensure interoperability, connectivity and product safety. Indeed, many argue that industry standards are essential to the functioning of a modern economy. But they also can arouse significant antitrust concerns. A number of recent cases have considered allegations that participants have manipulated the standard-setting process in order to create a structure where they had patent coverage over certain aspects of the standard. In such cases serious anticompetitive effects, such as market foreclosure, higher prices, reduced innovation and the unlawful creation of a dominant market position, can result.

Trying to balance these pro- and anticompetitive tendencies, lawmakers have attempted to carve out a specific antitrust immunity for standard-setting organizations (SSOs). However, a number of recent court decisions also have provided important guidance on the antitrust risks arising from "strategic" participation in SSOs. Reviewing these cases should help companies to better understand the ground rules for participating in the standard- setting process.

An SSO is a group composed of participants from a single market or a set of related markets, which meets in order to promulgate technical standards. There are three basic types of standards: de facto, government/legal and private/consensus.

A de facto standard arises spontaneously, either because consumers recognize the standard’s superiority over competing systems or because the technology enjoys a "first mover" advantage. Because de facto standards do not involve affirmative collective determination, they typically are not subject to manipulation and hence are not within the scope of this article.

A government-sponsored standard may be issued directly by a government entity or may result from a governmentsponsored SSO. A government-sponsored SSO is convened by a local, national, or international body to create a legally binding standard. In the United States, most government-sponsored SSOs are ad hoc. In Europe, most SSOs operate under the authority of the European Standards Organization Directive.¹

Private or consensus standards are created by market participants trying to choose from among competing technologies to develop a consensus standard— private, voluntary, but essential for market participation. Because private standards are created by SSOs and typically involve coordination among competitors, they raise the greatest potential for antitrust violations.

Until recently the United States government’s approach to manipulation of the standard-setting power was best reflected by its 1996 complaint against Dell. In the early 1990s, Dell participated in the Video Electronics Standards Association, a private SSO that had begun to employ basic IP disclosure and licensing rules. Dell participated in a number of meetings at which certain VESA standards were proposed and evaluated, including a standard for the "VESA Large bus."

At the same time that the Dell representative attended the VESA meetings, Dell implemented a change in business strategy, which include building a patent portfolio. One of these early patents contained a claim, which covered certain aspects of the standard. VESA adopted the standard, and Dell threatened to initiate infringement proceedings against a variety of companies for infringing its VL bus patent.

A number of companies receiving these letters complained to the U.S. Federal Trade Commission (FTC), which initiated an investigation. The FTC claimed that (1) Dell signed a "ballot" confirming that the proposed standard did not read on any Dell intellectual property, (2) VESA may have revised the standard to design around the Dell patents, and (3) Dell misled VESA with respect to its patent holdings. The FTC argued that this conduct, taken as a whole, constituted a "method of unfair competition in or affecting commerce" under Section 5 of the FTC Act. Dell settled the matter by consent decree, so the allegations were not litigated.

The FTC’s complaint was widely criticized for failing to address certain key elements of a typical violation. For example, there was scant attention to market definition, market share or competitive effects. In dissent, Commissioner Azcuenaga argued that the consent decree "introduced a new element of uncertainty into this area of the law." In the end, Dell left open a number of critical questions on how these cases should be analyzed.

An opportunity to resolve and clarify these issues presented itself in 2000, in the form of a private lawsuit filed by Rambus Inc., a company specializing in chip design, development and licensing. Rambus participated for a short while in the Joint Electron Device Engineering Council (JEDEC), a private SSO. During its brief involvement in JEDEC, Rambus did not disclose any of its pending patent applications, nor did it advocate any particular standard. After JEDEC issued DRAM computer memory standards that read on Rambus patents, Rambus sued Infineon Technologies A.G. for patent infringement. Rambus lost at trial—a Virginia jury found actual fraud and thus declined to enforce the Rambus patent portfolio—but won on appeal to the United States Court of Appeals for the Federal Circuit. Rambus, Inc. v. Infineon Techs. AG.,^{2, 3} The Federal Circuit concluded that JEDEC’s disclosure standards were far too unclear, and that Rambus was therefore under no obligation to disclose its pending applications. In addition, the Federal Circuit threw out Infineon’s fraud allegations. That case is now scheduled for retrial.

Infineon’s allegations at the 2001 trial attracted the FTC’s attention. The FTC’s complaint, filed in June 2002, asserted that Rambus, "through deliberate and intentional means," manipulated the JEDEC standard-setting process by concealing information on pending and issued patents. The complaint also argued that Rambus modified its pending patent applications to cover technological advances discussed at JEDEC meetings, all with the goal of ensuring that the eventual JEDEC DRAM standard would read on Rambus patents. However, on February 17, 2004, the FTC Administrative Law Judge (ALJ) dismissed the case, explaining in a mammoth 348-page decision that the FTC "failed to sustain its burden of establishing liability for the violations alleged." According to the ALJ, Rambus’s technology was superior to alternatives, and that when Intel adopted it, it became the de facto standard. Indeed, ALJ found that the FTC had failed to show any viable alternatives to the Rambus technology. Thus, the ALJ reasoned there was no exclusionary effect of Rambus’s assertion of patent rights: "The exclusion of inferior products from the market is not exclusionary in an economic sense."

This may not be the end of the matter. The FTC may appeal the ALJ’s decision, first to the Commissioner and then, perhaps, to the U.S. Court of Appeals for the District of Columbia Circuit. If the FTC manages to persuade the Court of Appeals to overturn the ALJ’s decision, there would be a split between the Federal and District of Columbia Circuits, and a likely appeal to the U.S. Supreme Court.

In addition, Rambus faces serious obstacles in Europe. On February 13, 2004, the European Patent Office revoked a key Rambus patent in response to an opposition by Infineon, Micron and Hynix Semiconductor—all targets of Rambus patent-infringement suits. The EC Commission also is investigating Rambus.

Rambus and Dell both occurred within the context of a private, voluntary SSO. However, in In re Unocal, the FTC challenged similar conduct that occurred during government-sponsored standardsetting proceedings.

Unocal participated in the California Air Resources Board (CARB), a government- sponsored SSO convened by the State of California to formulate a new regulation/standard for low-emission gasoline. Once the CARB Phase 2 standard was promulgated, Unocal sued its competitors for patent infringement. Unocal won its patent infringement suits (Union Oil Co. of California v. Atlantic Richfield Co.⁴) but then was sued by the FTC for violations of §5 of the FTC Act.

The FTC alleged that Unocal provided "materially false and misleading "information concerning its internal emissions research that led the State of California to adopt a particular low-emission gasoline standard; actively participated in CARB meetings and promoted a particular standard; but concealed the fact that it owned pending patents that covered the new standard. Indeed, the FTC claimed that Unocal affirmatively stated that it did not have any "proprietary interest" in the standard it was supporting—stating that the technology in question was "nonproprietary" and "in the public domain"— even while amending pending claims in order to "resemble" CARB’s emerging regulations.

In November 2003, an ALJ dismissed the FTC case because Unocal’s conduct was immune from antitrust scrutiny under the Noerr-Pennington doctrine. The Noerr- Pennington doctrine is derived from a series of U.S. Supreme Court cases that immunize efforts to influence the legislative process—even if the outcome would be wholly anticompetitive. The Noerr- Pennington doctrine has been extended to efforts to influence executive branch agencies and into the judicial process. Indeed, this protection is almost absolute regardless of the competitive intent or effect. Adding insult to injury, the decision also held that the FTC lacked the power to adjudicate the scope of Unocal’s patents.

The difference in result between Rambus/Dell and Unocal is largely attributable to the fact that VESA and JEDEC on one hand and CARB were different kinds of SSO, VESA and JEDEC were private SSOs—bodies created by a group of competitors to reach a consensual solution to a technical problem. By contrast, CARB was a government-created organization created to reach a legislative solution to a public policy problem (automobile pollution). Participation in CARB was akin to lobbying the government and therefore fell within the Noerr-Pennington exemption. By contrast, the Supreme Court has confirmed that participants in private SSOs "enjoy no Noerr immunity from antitrust liability." Allied Tube & Conduit Corp. v. Indian Head, Inc.⁵

As a government-sponsored SSO, CARB’s disclosure policies also differed from VESA’s/JEDEC’s in important respects. CARB had no policy requiring disclosure or nondiscriminatory licenses. This is because, ultimately, CARB was not concerned with competitive balance. CARB’s sole purpose was to identify the standard that best fit the regulatory goal set by the California legislature—the reduction of automobile pollution. If this standard placed a particular patentee in a dominant position, so be it.

Considering Dell, Unocal and Rambus together, it becomes clear that SSOs create intellectual property-antitrust problems only in a narrow range of circumstances. The issue, as explained in the Rambus case, is not the exercise of intellectual property rights. Instead, the fundamental antitrust problem created by standard-setting organizations is attempted monopolization that extends beyond the mere exercise of patent rights—the manipulation of the standard-setting process to create an opportunity for patent ambush.

Under §2 of the Sherman Act, attempted monopolization is illegal if the plaintiff can show a specific intent to control prices or reduce competition predatory or anticompetitive conduct directed at this intent and coupled with a dangerous probability of success. Abuse of standardsetting bodies thus fits nicely into standard antitrust law. The FTC’s defeat in Rambus, however, may suggest an increasing judicial and administrative hostility toward efforts to hold SSO participants liable for antitrust violations or intellectual property misuse.

Fundamentally, the judge in the Rambus FTC case concluded that the FTC had failed to prove its claims of monopolization, attempted monopolization, and unfair methods of competition. The decision does not foreclose antitrust liability for manipulation of SSOs per se. However, the decision offers SSO participants wide latitude to pursue their own competitive interests in the standard-setting process. This clearly includes the modification of pending patent applications to cover contemplated standards.

Similarly, the ALJ concluded that maintaining the secrecy of pending intellectual property applications is permissible, and does not constitute misuse or unfair competition. "These conclusions apply in the standard-setting context as in any other. A company that is the member of a standard- setting body may benefit from not disclosing information regarding its pending patent applications or its intentions to file future patent applications regardless of what standards are developed…. These benefits have to do with maximizing the ability to operate competitively, not standardization."

The Rambus decision also casts substantial doubt on the continuing viability of Dell as an accurate statement of antitrust law. Because "[c]onsent decrees provide no precedential value," the Dell consent decree does not provide a reasonable basis for a finding of liability under §5 of the FTC Act, which prohibits unfair methods of competition. Importantly, the ALJ in Rambus distinguished the JEDEC patent policy from the policy at issue in Dell, noting that the JEDEC patent policy merely "encouraged the voluntary disclosure of patents essential to practice JEDEC standards."

The FTC ultimately concluded that Rambus’s conduct did not offend the antitrust laws but may have created private rights of action for breach of contract, fraud or equitable estoppel—issues, however, resolved in Rambus’s favor by the Federal Circuit in Rambus v. Infineon. The decision is a clear victory for Rambus, and has positive implications for intellectual property owners participating in SSOs. It also increases the likelihood that companies implementing consensual standards will be sued for patent infringement by fellow SSO participants.

In addition to the "patent ambush" problem highlighted by Dell, Unocal and Rambus, other concerns may derive from participation in SSOs. This section briefly addresses three antitrust-intellectual property issues that may arise through participation in SSOs: group boycotts, misuse of the SSOs trademarks and trade secret misappropriation by an SSO.

Group Boycotts

The Rambus decision shifts the balance of law concerning participation in SSOs decisively in favor of patentees and other intellectual property owners. The FTC long has held that deliberate exclusion of patented products from standards is a form of group boycott. Given the Rambus holding that "[r] efusing to include patented technology in industry standards may subject standard setting organizations to antitrust claims and denies consumers superior products," SSOs (and individual participants) seem increasingly susceptible to group boycott claims.

SSO Trademark Misuse

A trademark protects the association of a product with its source. Logically, a trademark could never be the subject of an industry standard. But a SSO might well develop a trademark intended to designate conformity of a product with some consensual standard. The trademark to "ISO 9000," for example, is used by the International Organization for Standardization to designate an international standard for quality management. In principle, such trademarks are owned by the SSO and are used at the SSO’s sufferance. But it is easy to imagine an outsider claiming the right to use the SSO’s trademarks in a non-misleading fashion and accusing the SSO of trademark misuse (a recognized antitrust violation) for wrongly withholding access to the name.

Trade Secret Theft by SSOs

A trade secret is a piece of information— a technology, a process, an idea—that derives value from its secrecy. For example, the formula for Coca-Cola is a closely guarded trade secret. In theory, a standard embodying a trade secret could be blocked by the trade secret’s owner, but only if the owner could prove that some SSO member misappropriated the secret. If the owner could prove misappropriation, it might well be able to recover against the entire membership of the SSO. The SSO is, in effect, a collusive enterprise; and it is not difficult to move from this simple fact to the conclusion that the SSO was a sham intended to shield an industry-wide antitrust conspiracy to misappropriate the owner’s intellectual property.

SSOs are critical components of modern commerce. But technical standards implicate intellectual property laws, and the manipulation of intellectual property rights often leads to antitrust scrutiny. The recent Rambus decision offers considerable leeway to intellectual property owners participating in standard-setting efforts. SSOs are on new ground, and participating companies should tread carefully.

Footnotes

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