Global Standards Collaboration Intellectual Property Rights Working Group Antitrust-Related IP Issues in Standard Setting Melanie Sabo, Assistant Director Anticompetitive Practices Division Bureau of Competition Federal Trade Commission Washington, D.C July 16, 2008

2 Caveat  The views expressed here are mine and do not necessarily reflect the views of the Federal Trade Commission, any Commissioner, or other FTC staff member.

3 Communication Networks  Networks depend upon interconnection standards to offer consumer value  Antitrust has role when conduct impairs standards development and blocks benefits offered by standards

4 Competition Issues in Standard Setting  Why is deception in standards-setting an antitrust concern?  If licensing fees are disclosed during selection, does that avoid deception?  Is failure to abide by licensing commitments an antitrust issue?

5 Standards Enhance Competition  Create new products; stimulates innovation  Establish communications networks  Allows interoperability  Sharpens competition  Enables interchangeability  Simplifies price comparison  Increases consumer demand and attracts suppliers

6 Harms of Patent Hold-Up  Holder of essential patents can block implementation or use of standard  Industry investment and consumer adoption make it prohibitively expensive to switch  Patentee has power to extract greater royalties than it could if patents and costs had been known prior to selection of its technology for standard

7 Hold Up Possible Where Patents or Patent Cost Hidden  Deception about patents and their costs impairs selection process by blocking information needed for selection process  Rival technologies compete to become standard based upon performance and cost  Selection turns on SSO’s knowledge of each rivals’ performance and cost  Unfair advantage is gained by misleading SSO about patents and their costs

8 SSOs Vulnerable to Deception  SSO participants less able to protect themselves against deception because they suspend rivalries to cooperate in good faith to develop an industry standard  Thus, standards development is vulnerable to deception about patents and their cost  SSO has no authority over patent holders after selection process

9 Patent Deception as Antitrust Violation  Antitrust has a role when deception “disrupts the proper functioning of the price-setting mechanism of the market”  Commission has concluded that a patentee may violate antitrust laws when  it misleads SSO about its patents;  deception substantially contributes to its acquisition of power to collect supra-competitive royalties; and  it intentionally engaged in the deception

10 Deception Depends Upon Circumstances  Whether patentee’s conduct, statements, and omissions are deception is fact specific  It is based upon impressions left with SSO members by patentee  Patentee’s conduct, statements and omissions are viewed within context of SSO procedures and practices, if any, regarding patents

11 FTC Cases Against Patent Deception  In re Dell Computer Corporation 121 F.T.C. 616 (F.T.C. 1996)  In re Rambus Inc 140 F.T.C (F.T.C. July 20, 2005)  In re Union Oil Company of California 138 F.T.C. 1 (F.T.C. 2004)

12 Patent Deception in Dell  Patentee “certified” that it had no IP on computer bus standard  SSO adopted standard with patentee’s technology  Commission concluded that patentee misled SSO and its failure to disclose was “not inadvertent”  Patentee settled with remedy blocking ability to collect royalties when patent used in standard

13 Patent Deception in Unocal  Patentee offered its technology to California Air Resources Board (“CARB”) for gasoline formulation standard  Patentee claimed technology was “non- proprietary”  CARB adopted the technology for standard  Patentee settled, agreeing to license its patented technology royalty free for use in standard

14 Patent Deception in Rambus  Patentee concealed essential IP for memory chip standard  SSO adopted standard using patentee’s technology  Commission found that patentee misled SSO  Commission limited royalties to amount patentee could collect “but for” the deception  D.C. Circuit reversed Commission decision (April 22, 2008)

15 Take Away Points Regarding Deception and Antitrust  Patent holders may violate antitrust laws by misleading SSO about essential patents  Deception significantly contributes to acquisition of monopoly power  Patentee intentionally engaged in deception.  Patentees participating in SSOs should:  be candid and cooperate in good faith  follow the SSO’s practices and procedures

16 Licensing Commitments Following Patent Disclosures

17 Failure to Follow Specific Licensing Commitment  In recent N-Data matter, technology proponent offered its patented technology for use in wired LAN standard  Pursuant to SSO request for a licensing letter, patentee committed to $1,000/manufacturer royalty  Industry relied upon royalty commitment and adopted standard  Patent later sold to N-Data

18 Commission Ruling in N-Data  Commission alleged that N-Data’s refusal to license for $1,000 was antitrust violation  N-Data knew about the licensing commitment  Commission believed repudiation of commitment harmed competition and consumers and was unlawful under FTC Act  N-Data settled; agreed to charge $1,000

19 Next Steps in N-Data  Matter is now awaiting final Commission action  Public comments generally supportive that breach of a specific licensing commitment is antitrust violation  The SSO in N-Data, the IEEE, stated that it supports the settlement outcome

20 Public Comment Questions in N-Data  Are all commitment letters irrevocable?  Depends upon the SSO members’ expectations  Must SSO have a policy on revocability?  SSO free to follow whatever policy it wishes  Do licensing commitments encumber patent in the hands of a transferee?  Yes  Is licensing agreement form attached to FTC order the required licensing form?  No

21 Learning Patentee’s Licensing Intentions Prior to Selection  SSOs often take steps to confirm cost of patents upon disclosure  Knowledge of costs enable industry to take steps to avoid patent holdup  SSOs may condition use of patented technology on patentee licensing commitment  If patentee declines, it can withdraw its patented technology from consideration

22 Types of Licensing Commitments  Commit to license for specific royalty amount  Commit to license royalty free  Commit to license on reasonable and non- discriminatory terms (“RAND”)

23 Commitments to Specific Rates  If SSO elects, it can invite patentees to disclose licensing terms before selection of technology standard  Antitrust enforcement authorities have approved such ex ante disclosure of rates  Disclosure enhances competition by facilitating performance/cost comparisons  Patentee ex ante disclosure of rates does not create substantial risk of price fixing

24 DOJ Business Review Letters  DOJ approved two different SSO approaches to ex ante disclosure of licensing terms  VITA (2006): SSO required holders of essential patents to disclose maximum royalty rates and most restrictive non-royalty terms  IEEE (2007): SSO allowed members voluntarily to state most restrictive terms  Both SSO procedures encourage competition  Actual price fixing remains unlawful

25 RAND Commitments and Antitrust

26 Commitments to License on RAND Terms  SSOs may invite patentees to commit to “reasonable and non-discriminatory terms”  A RAND commitment is indicator of cost of technology  RAND signals that patentee will license technology at capped “reasonable” rate  Patentee may abuse monopoly power when it charges more than cap

27 Is Failure to Comply with RAND Commitment an Antitrust Case?  Commission has not addressed whether refusal to fulfill RAND commitment violates antitrust law  Federal Courts of Appeals decisions are mixed  3 rd Circuit found false RAND commitment a § 2 violation (Broadcom v. Qualcom)  D.C. Circuit appears to say that § 2 violated only if commitment led to elimination of rival (Rambus)

28 Failure to Follow RAND Commitment Is § 2 Violation: Broadcom v. Qualcomm  In Broadcom v. Qualcomm, patentee offered technology for 3 rd generation cell standard  Patentee committed to RAND licensing  SSO allegedly relied on licensing commitment  Patentee was also downstream chip supplier  Rival chip maker alleged patentee breached RAND commitment by charging a discriminatory higher total royalty rate where users purchased chips from rival chip makers

29 Broadcom v. Qualcomm: 3 rd Circuit Ruling  3 rd Circuit recognized § 2 cause of action where patentee knowingly misrepresents its intention to license technology on RAND terms to acquire monopoly power  Plaintiff must show patentee made a false promise  Plaintiff must show patentee’s licensing regime breached licensing commitment  Case currently in pre-trial discovery

30 Failure to Fulfill Rand Commitment May Not Be § 2 Violation: Rambus  Rambus concerned computer memory chip standard  Commission found patentee misled SSO about its IP  Commission believed patentee would have made RAND commitment if IP had been disclosed  Commission also found SSO would have used patentee’s technology with RAND commitment  Commission found patentee had been charged a supra- RAND rate and limited patentee to RAND royalty going forward

31 Rambus: D.C. Circuit Ruling  D.C. Circuit reversed the Commission  Concluded charging more than RAND royalty is not § 2 violation where SSO would have selected same technology  Rambus decision may mean patentee’s failure to fulfill RAND would not be § 2 violation unless rival was eliminated by misleading commitment to RAND licensing

32 Rambus: FTC Requests en banc Review  FTC has requested en banc review  FTC believes that patentee’s patent deception harms competition and violates § 2  Key Arguments  Panel’s standard of proof contrary to the standard in the Microsoft case  Panel misapplies Supreme Court decision on pricing by lawful monopolist (NYNEX v. Discon)