May 17 2008

The DC Circuit restores some rationality to antitrust law re Standards Setting Organizations (SSO) in the Rambus case.

I truly enjoy it when a court catches an administrative agency expanding their scope to advocate a particular view of what economic or political life should entail, and then tells the agency that it cannot rewrite law to suit its own preferences.  That happened to the FTC in Rambus, Inc. v. FTC dealing with standards-setting.  In most cases, conduct by an individual firm in an SSO creates no antitrust issues even if the firm failed to disclosure patents or other potential proprietary rights related to the standard. The Rambus court reaffirmed this rule.

The Rambus case has been in and out of the FTC and the courts too many times to recount.  The basics are: Rambus had patents and patent applications related to a standard being developed by an SSO (JEDEC).  Rambus did not disclose that it was continuing to adjust its applications in a way that might cover the standard.  It left the SSO process before the standard was promulgated and, after the SSO created the standard, informed users that unless they agreed to licenses for its patents, they were infringing.


            So, what is the problem? Rambus is an innovator. It held valid patents on important technology essential to use the standard promulgated by JEDEC.   JEDEC promulgated the particular standard because it believed that the standard reflected an optimal technology for the particular application.  This enhanced the market value of the Rambus technology.  Rambus deserved to be compensated for use of its property by other companies.


            The problem, according to the FTC, was that Rambus' failure to disclose enabled it (1) to acquire a monopoly through standardization of its technology (rather than alternatives), or (2) to avoid limits on its licensing fees that the SSO might have imposed had it known of the proprietary rights. Notice the word “or”, the court did.


But the first of these was not proven and the second is not an antitrust violation.


Antitrust law only precludes actions that adversely affect the competitive process – not conduct that might harm particular competitors or increase the value of particular products or technologies.  If there had been actual fraud or breach of contract, then that is how the claims should have been brought; but these are not claims over which FTC typically has jurisdiction.


            So, we had FTC believing it important to require participants in an SSO to disclose and continue to disclose proprietary rights developments that might relate to a standard that an SSO might adopt.  Certainly, an SSO could adopt such a rule by contract or as part of its operating rules. The FTC was willing to use antitrust law to transform this into mandatory law.  Indeed, one court later did so relying on the now-abrogated FTC decision.  The Rambus court, however, properly slapped the agency for over-reaching.  Non-disclosure is not an antitrust issue unless there is an anti-competitive impact.  The fact that it may harm some competitors or increase the price of a product does not qualify.


            The Rambus decision is part of a broader debate about IP in technical standards setting.  One could say that the FTC believed (as a matter of antitrust law) that the existence of IP rights or potential IP places a burden on the owner to share or to avoid having those rights capture the standard.  The appellate court rejected that. Clearly, the mere fact that IP held by one company relates to a proposed standard is not a reason to penalize the owner or for the SSO to promulgate standards that avoid the IP but are less than optimal otherwise.  As I have written elsewhere, an SSO should not be used to replace competition, even if that competition will be between proprietary and non-proprietary technology. 


            Certainly, the potential presence of IP rights is relevant to an SSO process and its legality, but not always in the way some anti-rights adherents believe.  A rights owner might manipulate the process to its advantage and use the market power or monopoly it creates (if it does) to wrongfully exclude competition.  But that package of wrongful action, when it occurs, goes well beyond simply getting a standard that requires the IP for its use.  That is essentially what the Rambus court held.


            On the other hand, SSO’s involve group action, often controlled directly or indirectly by competitive companies or their employees, and permitted under antitrust law only so long as anti-competitive effects are not generated by the group.  Action by a group to exclude another competitor because it hold relevant IP rights may be an antitrust violation. 


            So the issues cut in both directions.


Internationally, SSO’s take many different approaches to the relationship between IP rights of participants and standards development – typically involving either a limited disclosure obligation or an obligation to license the right on reasonable and non-discriminatory bases (RAND terms).  But why would an absolute and continuing disclosure rule be a problem in an SSO?  If we think about one person with one patent and no others, disclosure as a legal norm might not be harmful.  But consider large companies with development work going on continuously in numerous venues continuously.  The cost of monitoring would be immense.  The liability risk (especially under an antitrust regime) would be ridiculous.  So, the response would be to not participate in at least some SSO projects.  That would deny the SSO the involvement of many of the best resources potentially available for standards development.


Rambus is part of a debate about what some call “open standards.”  This term has numerous different meanings, but fundamentally, some argue that it signifies standards not “infected” by proprietary rights or as to which such rights are waived.  This is just another manifestation of the rights – anti-rights debate that pervades most of modern IP law.  The better view is that a standard is “open” if it is developed in an open process without discrimination against any technology, including any technology covered by proprietary rights.

Written By:Jon On May 19, 2008 6:06 PM

FTC decision was purchased by Micron. Look how much money Simplot gives Hatch. Micron will purchase the pto next.

Written By:Mike Thompson On May 19, 2008 6:45 PM

Dear Attorney Nimmer,

You are absolutely correct! You nailed the issues in the Rambus case exactly.

But why isn't the patent bar outraged by the FTC's conduct in this case? And why aren't they applauding the CADC's decision here?

That aside, I would love to know your views on the future of this issue:

- Will the FTC appeal to the full DC Circuit or the Supreme Court? If the latter, will they grant review? If they grant review, what do you think the outcome will be?

I'm also troubled about the cases (like Ebay) that seem to preclude injunctions, like the one to be considered in Rambus v. Hynix in late June. Without injunction power (because Rambus is not a direct competitor of Hynix), and with infringement damages apparently "capped" at reasonable royalties by the courts -- what are companies like Rambus supposed to do? There is no incentive for others to honor Rambus' property rights. They may as well infringe and try to get away with it -- because the worst possible outcome is to pay what they would have paid if they hadn't infringed. No threat of injunction. No additional damages possible.


Michael Thompson

Written By:Dan Wilton On May 19, 2008 8:11 PM

Sometimes in a din there is a sound that stands out among all others. Sincere compliments to you on your article re: the DC Circuit / FTC v. Rambus case. It is indeed a standout in a cacophony of dilletante political reasoning. Unfortunately we must assume the world is full of tineared politicians and their political appointees who just can't seem to get their arms around a big picture or hear your brilliant sound.

Written By:Rocky On May 19, 2008 8:52 PM

Great article, looking at the facts of the law without the smoke screen in the way.

Written By:Joe Ragle On February 16, 2009 7:09 PM

Most excellent insight...wish more media could see these abuses of power/lack of good logic that these governmental agencies are so guilty of.....why?? It makes me think that their operations are trainted with wrongful influence thanks Joe

Written By:Nancy Smith On May 17, 2009 2:38 PM

Thank you Mr. Nimmer for a serious look at the FTC's behavior in the Rambus case and the CADC's response.

America's greatest product is our innovation. With no patent protection, why would companies bother to create? American innovation (like Rambus' - when they've done nothing illegal) needs to be protected from runaway agencies like the FTC. The FTC has spent untold taxpayer dollars on its witch hunt of Rambus, all after their own Chief ALJ completely exonerated Rambus. They've also forced Rambus to spend millions to protect itself.

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