Antitrust - Do Allegations of Abuse in Standard Setting Organizations Violate the Antitrust Laws? It Depends.
Two recent decisions – one by the Federal Trade Commission, the other by a
In the Matter of Rambus, Inc. (FTC, Aug. 2. 2006)
On August 2, 2006, the Federal Trade Commission (“FTC”) ruled that a company’s misleading conduct in connection with the adoption of a standard by an SSO was exclusionary conduct in violation of the Sherman Act. This case, In the Matter of Rambus, Inc. (Docket No. 9302), concerned three generations of computer memory standards promulgated by the Joint Electron Device Engineering Council (“JEDEC”). JEDEC, an SSO within the Electronic Industries Association, is the industry group responsible for semiconductor engineering standardization.
Rambus, Inc. (“Rambus”), the subject of the FTC’s investigation, was founded in 1990 to develop and to license computer memory devices. Rambus does not directly manufacture these devices. Instead, it earns income through the licensing of its various computer memory-device patents. Rambus has been very involved in developing faster technologies for Dynamic Random Access Memory (“DRAM”), a component of a typical personal computer’s infrastructure. In early 1990, Rambus filed a patent application for a series of technologies comprising Rambus DRAM, or RDRAM. This application would eventually cover a series of innovations and technologies relevant to four distinct DRAM-related technology markets.
During the course of the 1990’s, JEDEC developed and issued three generations of DRAM standards. Rambus, as a member of JEDEC, participated in the development of these standards. JEDEC eventually adopted standards that called for the use of technologies in four DRAM-related markets for which Rambus either held a patent or was in the process of securing a patent.
Rambus, however, never disclosed the existence of these patents to JEDEC or its membership. According to the FTC, Rambus used its role as a member of JEDEC to gain information about new proposed standards and then “amend its patent applications to ensure that subsequently-issued patents would cover the ultimate standard.” After JEDEC issued the relevant standards, Rambus began a series of patent infringement suits against semiconductor manufacturers following those standards.
In its August 2, 2006 ruling, the FTC found that Rambus’ conduct constituted unlawful monopolization under Section 5 of the FTC Act. In reaching this conclusion, the FTC also found that Rambus’ actions were “exclusionary conduct” in violation of Section 2 of the Sherman Act.
The FTC considered it to be key to this ruling that Rambus made misleading statements and actions in the context of JEDEC’s standard setting practice. JEDEC’s members – while still competitors – also operated under an assumption that other members would act cooperatively at least in the context of the standard setting process. JEDEC guidelines require its membership to reveal the existence of any patents or patent applications that would affect existing or proposed JEDEC standards. Additionally, before approval of any standard, JEDEC members holding patents incorporated into that standard must agree to license those technologies on reasonable and nondiscriminatory terms.
The FTC did not issue a final order setting out remedies for Rambus’ actions. Instead, it ordered supplemental briefing on this issue by the parties, a process that is continuing.
Broadcom Corp. v. Qualcomm Inc. (D.N.J. August 31, 2006)
Several weeks after the FTC’s decision, the United States District Court for the District of New Jersey dismissed a lawsuit that sought to make arguments like those of the FTC in Rambus. That case involved Broadcom Corporation (“Broadcom”) and Qualcomm Incorporated (“Qualcomm”), two companies involved in the wireless communications industry. Broadcom manufacturers semiconductors used in wireless handsets and Qualcomm both manufactures and licenses technology related to wireless handsets.
Various cell phone providers use different technologies to connect their customers to their cellular systems. The cellular industry therefore works with several SSOs to implement standards that will ensure cell phones from different providers (using different technologies) can interface with each other.
Cell phone providers and manufactures are currently in the process of developing a third generation of cell phone technologies. Both Broadcom and Qualcomm have developed chips that operate cell phones using one of these technologies: Wideband Code Division Multiple Access (“WCDMA”). Broadcom’s chips operate using technologies for which Qualcomm holds the patent.
Broadcom brought suit against Qualcomm alleging a number of state and federal claims (including claims under the Sherman and Clayton Acts). Specifically, Broadcom’s complaint alleges that Qualcomm sought to monopolize the market for WCDMA. The District Court summarized Broadcom’s antitrust allegations as falling into three categories: (1) Qualcomm’s refusal to license its WCDMA technology on fair and reasonable terms, (2) Qualcomm’s bundling of its sale of its chipsets with the licensing of its WCDMA patents, and (3) Qualcomm’s offer of discounts to buyers agreeing not to use chipsets manufactured by Qualcomm’s competitors.
Broadcom’s first set of allegations (concerning fair and reasonable licensing) are, at least facially, similar to those addressed in Rambus. WCDMA is being implemented under a SSO standard known as the Universal Mobile Telephone System (“UMTS”). That standard adopts several technologies for which Qualcomm holds exclusive patents. Broadcom asserts in its suit that the UMTS was only adopted after Qualcomm agreed to license its WCDMA technology on fair and reasonable terms.
On August 31, 2006, the District Court granted Qualcomm’s motion to dismiss Broadcom’s federal antitrust claims. In so doing, the Court found that Broadcom’s allegations of a failure to license under fair and reasonable terms could not support an antitrust violation for three main reasons. First, the Court found that Broadcom could not show that Qualcomm’s actions injured competition in the WCDMA market. The District Court based its analysis on the fact that a product standard is effectively an agreement to eliminate competition. Therefore there is no competition in a technology market subject to an industry standard.
Second, the District Court noted that all patent holders have a legal monopoly over their patented technology. Therefore the incorporation of Qualcomm’s patents into the UMTS standard could not make Qualcomm an unlawful monopolist. “To conclude otherwise,” the District Court feared, “would subject every firm with patents incorporated into an industry standard to antitrust liability.”
Finally, relying chiefly on Verizon Communications Incorporated v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004), the Court suggested that Broadcom’s allegations were a poor fit for antitrust laws, noting that “reviewing and supervising the terms upon which Qualcomm licenses its patents, and offers to sell its UTMS chipsets may be beyond the effective control of the Court under the antitrust laws.” Applying this reasoning, the Court was not convinced Broadcom’s allegations that Qualcomm treated it unfairly were sufficient to state an antitrust claim. These allegations only stated an injury to Broadcom, not to competition.
The Court did note the possibility that Qualcomm’s conduct might “give rise to liability based on another theory, such as breach of contract.” Rather than reach these state law theories, however, the Court elected to decline supplemental jurisdiction over the remaining state law claims. This ruling would afford Broadcom the right to pursue those claims in state court, if it chose not to appeal, or were unsuccessful in an appeal.
Conclusion
The main difference between the Rambus and Broadcom decisions is when the alleged anticompetitive behavior occurred. In Rambus, the FTC’s sharp focus was on the deceptive actions of Rambus during the actual standard setting process. In contrast, in Broadcom, the bulk of the alleged wrongdoing occurred after the standard had been set, with Qualcomm alleging a failure to license on fair and reasonable terms. (Broadcom alleged that Qualcomm had promised to license as a part of its participation in the SSO; but it did not allege that Qualcomm lied about a patent position or took advantage of information in the SSO to improve its position). Qualcomm asserted that it was willing to license and that Broadcom was attempting to obtain a better deal than others were willing to accept. Assuming the truth of its allegations, Broadcom arguably could be made whole by holding Qualcomm to its promise to license, whereas Rambus’ competitors would (arguably) have to undue the entire standard-setting process. The Court in Broadcom seemed reluctant to step into what appeared to be two competitors having a business dispute, noting at one point that “[i]t is not the judicial role to re-adjust the risks in high-stakes commercial dealings.”
An interesting secondary difference between the two decisions concerns facts versus law. The Rambus opinion did not extensively analyze the antitrust laws and seems to assume that the Sherman Act could (and should) serve as a remedy for Rambus’ misconduct. In fact, the legal analysis occupied only five pages of the FTC’s 120-page opinion. It was the factual instances of fraud during the setting of the standards that seems to drive the FTC’s decision. In contrast, the Court in Broadcom dismissed the antitrust claims at the motion to dismiss stage of the litigation. Its 47-page opinion was almost entirely focused on whether the federal antitrust laws provided a remedy for the alleged behavior.