Global Standards Collaboration Intellectual Property Rights Working Group

1. 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. 20580 July 16, 2008

2. 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. Caveat

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

4. 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? Competition Issues in Standard Setting

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

6. 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 Harms of Patent Hold-Up

7. 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 Hold Up Possible Where Patents or Patent Cost Hidden

8. 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 SSOs Vulnerable to Deception

9. 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 Patent Deception as Antitrust Violation

10. 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 Deception Depends Upon Circumstances

11. In re Dell Computer Corporation 121 F.T.C. 616 (F.T.C. 1996) In re Rambus Inc 140 F.T.C. 1138 (F.T.C. July 20, 2005) In re Union Oil Company of California 138 F.T.C. 1 (F.T.C. 2004) FTC Cases Against Patent Deception

12. 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 Patent Deception in Dell

13. 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 Patent Deception in Unocal

14. 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) Patent Deception in Rambus

15. 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 Take Away Points Regarding Deception and Antitrust

16. Licensing Commitments Following Patent Disclosures

17. 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 Failure to Follow Specific Licensing Commitment

18. 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 Commission Ruling in N-Data

19. 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 Next Steps in N-Data

20. 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 Public Comment Questions in N-Data

21. 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 Learning Patentee’s Licensing Intentions Prior to Selection

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

23. 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 Commitments to Specific Rates

24. 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 DOJ Business Review Letters

25. RAND Commitments and Antitrust

26. 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 Commitments to License on RAND Terms

27. Commission has not addressed whether refusal to fulfill RAND commitment violates antitrust law Federal Courts of Appeals decisions are mixed 3rd 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) Is Failure to Comply with RAND Commitment an Antitrust Case?

28. In Broadcom v. Qualcomm, patentee offered technology for 3rd 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 Failure to Follow RAND Commitment Is § 2 Violation: Broadcom v. Qualcomm

29. 3rd 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 Broadcom v. Qualcomm: 3rd Circuit Ruling

30. 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 Failure to Fulfill Rand Commitment May Not Be § 2 Violation: Rambus

31. 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 Rambus: D.C. Circuit Ruling

32. 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) Rambus: FTC Requests en banc Review