On April 22, 2008, the U.S. Court of Appeals for the D.C. Circuit overturned the Federal Trade Commission’s (the Commission’s) finding that Rambus, Inc. (Rambus) violated the antitrust laws by failing to fully disclose its patent interests in connection with the standardization of certain computer memory technology. In ruling in favor of Rambus, the court held that a lawful monopolist may engage in deceptive behavior without violating the antitrust laws so long as the deceptive behavior is not used to acquire or maintain monopoly power.
Because of the fact-specific nature of the court’s decision, in which the D.C. Circuit strongly criticized the Commission for failing to prove causation, firms with intellectual property that participate in standard-setting activities should continue to exercise caution. It is likely that this six-year litigation is not over and that the Commission will petition for rehearing by an en banc panel of the D.C. Circuit.
Background and Commission Decision
This case stems from a complaint brought by the Commission in 2002 regarding Rambus’ participation in the Joint Electron Device Engineering Council (JEDEC), a standards-setting organization (SSO) for semiconductor technology. The Commission alleged that Rambus, which participated in the development of JEDEC standards for memory technology, deceptively failed to disclose to JEDEC its patent interests in technologies that JEDEC incorporated into industry standards. After JEDEC adopted the standards, Rambus filed patent infringement claims against those implementing the standards. An Administrative Law Judge dismissed the complaint, finding that the Commission failed to demonstrate that Rambus had a clear duty to disclose its intellectual property or that JEDEC would have standardized other technology had it known of Rambus’ patent interests.
On appeal, the Commission found that Rambus’ conduct was exclusionary and that Rambus monopolized the markets for certain technologies incorporated into JEDEC standards in violation of Section 2 of the Sherman Act and Section 5 of the FTC Act. The Commission determined that even though JEDEC’s disclosure policies were “not a model of clarity,” members expected one another to disclose patents, patent applications and planned amendments to pending applications that related to the technologies being considered for standardization. The Commission then found that Rambus willfully and intentionally misled JEDEC members about its intellectual property information: “[b]ut for Rambus’s deceptive course of conduct, JEDEC either would have excluded Rambus’s patented technologies from the JEDEC DRAM standards or would have demanded RAND [i.e., assurances of ‘reasonable and non-discriminatory’ license fees], with an opportunity for ex ante licensing negotiations.” Once JEDEC adopted its standard, any potential negotiating power by JEDEC to license Rambus’ intellectual property disappeared. According to the Commission, Rambus’ deceptive behavior significantly contributed to its acquisition or maintenance of monopoly power.
In a separate remedial opinion, the Commission required Rambus to license its technology at “reasonable royalty rates” as this would have been one of the foreseeable outcomes had Rambus revealed its intellectual property before JEDEC adopted the standards. The Commission did not compel Rambus to license its technology royalty-free because it found insufficient evidence to demonstrate that JEDEC would have standardized non-proprietary technology had Rambus disclosed its intellectual property.
D.C. Circuit’s Decision
On appeal, a unanimous three-judge D.C. Circuit panel held that the Commission failed to show that Rambus’ conduct was exclusionary under a theory of monopolization. Deceptive conduct can constitute exclusionary conduct, but only if it helps a firm to obtain or maintain a monopoly. Here, according to the D.C. Circuit, Rambus’ allegedly deceptive conduct may have allowed it to obtain higher royalty rates, but it did not cause Rambus to obtain or maintain its monopoly.
The key to the decision was the Commission’s inability to conclusively prove two possible alternatives that JEDEC may have pursued if it had known of Rambus’ technology. The Commission contended JEDEC would have either licensed other non-proprietary technology or demanded RAND licensing terms. But, according to the D.C. Circuit, the Commission failed to demonstrate that JEDEC would have standardized non-proprietary technology had Rambus disclosed its patents. In fact, the D.C. Circuit opined that the Commission “left open the likelihood that JEDEC would have standardized Rambus’s technologies even if Rambus had disclosed its intellectual property.” Because the Commission could not show that JEDEC would not have standardized Rambus’ technology if Rambus had disclosed it, Rambus’ alleged deception did not exclude any rivals or lead to Rambus’ monopoly power.
The court based its conclusion on the Supreme Court of the United States’ decision in Nynex Corp. v. Discon, Inc. 525 U.S. 128 (1998). In Nynex, the plaintiff alleged that a telephone company with a lawful monopoly violated the antitrust laws by using a contractor who charged above-market prices and passing those prices on to customers in exchange for a rebate from the contractor. The court held that even though the telephone company’s deception caused consumers to pay higher prices, the consumer injury resulted from the telephone company’s exercise of market power as a lawful monopolist, rather than from harm to the competitive market. Id. at 136.
Following that logic, the D.C. Circuit found that even if Rambus’ conduct allowed it to demand higher royalties by avoiding RAND licensing terms, it did not injure competition because the higher royalties stemmed from Rambus’ lawful exercise of monopoly power rather than conduct that harmed competition from alternative technologies in the competitive market. The court stated, “an otherwise lawful monopolist’s use of deception simply to obtain high prices normally has no particular tendency to exclude rivals and thus to diminish competition.” If the Commission had proven that JEDEC would not have standardized Rambus’ technology absent the deception, then harm to competition from alternative technologies could have been shown because the deception would have helped Rambus obtain its monopoly.
The key takeaway from the D.C. Circuit’s opinion is that if a firm has a legally obtained monopoly by virtue of its intellectual property, its deceptive conduct is not actionable under the antitrust laws so long as the firm does not use the conduct to acquire or maintain that monopoly power.
The outcome of the Rambus case is highly fact-specific and therefore does not present a significant departure from prevailing antitrust standards applicable to participation in SSOs. The D.C. Circuit appears to hold the Commission to its burden to prove causation that the D.C. Circuit found lacking in the Commission’s case. The Commission failed to prove that JEDEC would have standardized an alternative technology but for Rambus’ alleged deception. Had the Commission so demonstrated, however, Rambus’ conduct likely would have been deemed anticompetitive. Engaging in deceptive conduct in the standard-setting process presents a risk of antitrust liability because the SSO could later argue (and potentially prove) that it would have standardized a different technology but for the patent holder’s deception.
Therefore, intellectual property holders should continue to keep the following points in mind when participating in SSOs:
- Firms should review and understand the SSO’s intellectual property disclosure policy, including whether disclosure rules apply to patent applications, pending patents and non-essential patents.
- If the disclosure policy is unclear, firms should be cautious about permitting employees to participate in standard-setting activities.
- Firms participating in SSOs should act in good faith and disclose relevant patents in accordance with the SSO’s disclosure rules.