• D.C. Circuit Reverses FTC Ruling in Patent Hold-Up Case
  • May 15, 2008
  • Law Firm: Pepper Hamilton LLP - Office
  • In a much-anticipated decision, the U.S. Court of Appeals for the District of Columbia Circuit reversed a decision by the Federal Trade Commission, which had found that Rambus, Inc., unlawfully monopolized the markets for four microchip technologies by failing to disclose certain intellectual property rights to a standard-setting organization (SSO) considering the technologies. In finding that Rambus’ failure to disclose did not by itself constitute an antitrust violation, the court reaffirmed that “[d]eceptive conduct – like any other kind – must have an anticompetitive effect in order to form the basis of a monopolization claim.” Rambus Inc. v. FTC, No. 07-1086 (D.C. Cir. Apr. 22, 2008), available at http://pacer.cadc.uscourts.gov/docs/common/opinions/200804/07-1086-1112217.pdf.

    Case Summary

    Rambus develops computer memory technologies, patents them and then licenses them to manufacturers in exchange for royalty payments. From 1992 through 1996, Rambus belonged to what is now known as the JEDEC (Joint Electron Device Engineering Council) Solid State Technology Association, a trade organization that sets industry standards for microprocessing. JEDEC required its members to disclose any patents or patent applications relevant to technologies under consideration for standardization and to license standardized technologies on reasonable and nondiscriminatory (RAND) terms.

    While a JEDEC member participating in a committee tasked with developing standards for advanced dynamic random access memory (DRAM), Rambus failed to disclose that it was working on patents for four DRAM technologies. JEDEC chose to incorporate those technologies into its standards. When the industry began to adopt Rambus’ DRAM technology, Rambus informed major DRAM manufacturers that it held patents over the technologies and demanded license and royalty payments in exchange for the technologies’ continued use, a practice known as “patent hold-up.”

    On August 2, 2006, the FTC held Rambus’ hold-up illegal and anticompetitive. Finding that Rambus intentionally misled JEDEC members about intellectual property “highly material” to the standard-setting process, the Commission concluded that if Rambus had disclosed its intellectual property, JEDEC would have either excluded Rambus’ technologies from the standard or demanded RAND assurances. Although the Commission did not conclude which scenario was more likely, it nevertheless decided that Rambus’ “deception” of JEDEC significantly contributed to Rambus’ acquisition of monopoly power in the relevant markets for the four technologies at issue.

    The Decision on Appeal

    After unsuccessfully moving for reconsideration of the Commission’s ruling, Rambus petitioned the D.C. Circuit. On appeal, Rambus argued that even if its failure to disclose certain intellectual property resulted in JEDEC not demanding a RAND commitment from Rambus, that result does not implicate the antitrust laws. Rambus further argued that because the Commission expressly left open the question of whether JEDEC would have excluded Rambus’ technologies from the standard had Rambus fully disclosed, JEDEC’s not securing a RAND commitment may have been the only consequence of Rambus’ deception and, thus, the government failed to prove anticompetitive effect. The D.C. Circuit agreed.

    In overturning the Commission’s ruling, the D.C. Circuit relied on the conventional antitrust consideration that the government bears “the burden of proving the anticompetitive effect of the monopolist’s conduct,” and found that the government failed to prove any harm to competition. As an initial matter, the court assumed (but did not decide) that if a more complete disclosure by Rambus would have caused JEDEC to adopt another competing standard, Rambus’ failure to make that disclosure harmed competition and could support an antitrust claim. However, the court recognized that the Commission found the government’s evidence insufficient to establish JEDEC would have standardized other technologies had Rambus fully disclosed. Accordingly, the court determined that for the government’s antitrust claim to survive, it had to be convinced that JEDEC’s inability to secure a RAND commitment from Rambus harmed competition.

    Relying on NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998), the D.C. Circuit recognized that “an otherwise lawful monopolist’s use of deception to obtain higher prices normally has no particular tendency to exclude rivals and thus to diminish competition.” The court further noted that such conduct tends to have the opposite effect as high prices and constrained output attract competitors. Accordingly, the court held that even if Rambus’ deception allowed it to charge higher prices than it otherwise could have under JEDEC’s rules, Rambus’ conduct did not violate the antitrust laws because it did not adversely affect competition from alternative technologies. The court stated that the “loss of the opportunity to seek favorable licensing terms is not as such an antitrust harm.”

    Before the Commission’s ruling, the government dropped its claim against Rambus alleging other unfair methods of competition in violation of Section 5(a) of the FTC Act. Yet noting the possibility of further proceedings on remand, the D.C. Circuit put on record its “serious concerns” about the strength of the evidence relied on by the FTC to find that Rambus violated JEDEC’s patent disclosure policies.

    Beyond Rambus

    While it remains to be seen whether the FTC will continue its pursuit of Rambus on remand, for now the D.C. Circuit’s opinion leaves Rambus’ conduct unrestrained by the federal antitrust laws.

    Importantly, however, the court’s decision rests squarely on the well-established principle that unfair or deceptive business conduct is not punishable under the antitrust laws absent an effect on competition in the relevant market. In Rambus, the government simply failed to prove such effect. As such, Rambus does not give companies carte blanche to lobby SSOs for adoption of patented technologies without fully disclosing their rights to such technologies. The court’s decision strongly suggests that the failure of a participant to disclose relevant intellectual property rights to an industry SSO considering patented technology would constitute a Section 2 violation if the evidence showed that the SSO would have adopted a different standard had full disclosure been made.

    In addition, the FTC’s attention undoubtedly is focused on patent hold-up, which it characterized earlier this year as a “particularly pernicious problem” in In re Negotiated Data Solutions LLC, FTC File No. 0510094 (Jan. 23, 2008), available at http://www.ftc.gov/os/caselist/0510094/080122statement.pdf. In its efforts to address this problem, the FTC has brought claims under the antitrust and consumer protection provisions of the FTC Act, the latter of which does not require the same showing of anticompetitive effect addressed by the court in Rambus. Many states also have “baby FTC Acts,” which provide private remedies to address conduct that violates Section 5 of the FTC Act but not the antitrust laws.

    To best protect the company’s intellectual property rights and avoid investigation or litigation, patent holders should continue to approach industry standard-setting with caution and to consult experienced antitrust counsel before and while engaging in such activity.