AAI Asks Antitrust Division to Reconsider Its Reversal on Standard-Essential Patents

In a letter to Assistant Attorney General Makan Delrahim, the American Antitrust Institute (AAI) asked the Antitrust Division to reconsider its withdrawal from its 2013 Joint Policy Statement with the Patent & Trademark Office (PTO) on Remedies for Standard Essential Patents (SEPs). The Policy Statement endorsed sensible limits on the International Trade Commission’s issuance of exclusion orders, which ban imports of products into the United States if the products infringe a U.S. patent. It cautioned against such orders when the alleged infringer’s products are compliant with industry standards and the patent holder has voluntarily committed to a standard-setting organization (SSO) to license the patent on reasonable and non-discriminatory (RAND) terms.

The AAI letter also objects to the Division’s heightened scrutiny of SSOs that clarify the meaning of RAND commitments in ways that supposedly favor product manufacturers but that are entirely consistent with patent law. It expresses alarm that the Division is now suggesting that such conduct might result in a Division investigation or enforcement action when the Division previously encouraged SSOs to clarify their patent policies and procedures to mitigate the risks of “patent holdup” and disputes over licensing terms.

“Patent holdup” is a serious anticompetitive problem that can harm consumers and innovation.  Once patented technology is incorporated into a standard during the standard-setting process, it can become prohibitively difficult for the industry to switch to a different technology (or to an altogether different standard). As the 2013 Joint Policy Statement explained, the resulting lock-in can confer market power on the owner of the patented technology.  And patent holdup occurs when the owner exploits this power by “asserting the patent to exclude a competitor from a market or obtain a higher price for its use than would have been possible before the standard was set, when alternative technologies could have been chosen.”

Patent holdup is a particular problem in information technology industries when manufacturers are locked into a standard and an exclusion order or injunction is based on a patent or patents that cover only a minor component of a complex multicomponent product, like a smartphone. In those circumstances patent holdup gives extraordinary leverage to a single patent holder to tax (and misappropriate) investments in innovation made by manufacturers or other patent holders.

The letter criticizes the Division’s unilateral about-face on the competitive problem of patent holdup through a series of speeches given by the Assistant Attorney General that treat patent holdup as a positive feature of the patent system. It calls for the Division to hold a public roundtable, workshop, or hearings with the FTC and a cross section of legal and economic academics, affected stakeholders, and former agency officials to address whether developments in economic theory, empirical studies, or other factors warrant a change in policy.

The letter makes the following additional points:

  • The Division’s new policy minimizing the risk and harm of patent holdup is inconsistent with the policies of both the Obama and Bush administrations, and it breaks with years of study by the Bush administration that culminated in a joint report by the Division and FTC issued in 2007.
  • The Division’s new policy is inconsistent with the position of the current FTC.
  • The Division’s new policy is inconsistent with patent law, which generally bars injunctions for infringement of RAND-encumbered patents.
  • The Division’s new policy is not justified by the risk of patent “holdout,” whereby manufacturers decline to take a license or pay too little for a license. Patent law already takes this risk into account by permitting injunctions when a putative licensee refuses to engage in good-faith negotiations. Moreover, manufacturers have other incentives to negotiate a license.
  • A “free market” bargain with respect to a patent license is not a bargain made under the shadow of an injunction, as the Division now suggests, but rather is one that approximates the hypothetical bargain that would have occurred before the patent holder’s technology was incorporated into a standard.
  • Heightened scrutiny of SSO patent policies is not warranted when the policies are consistent with prevailing patent law.
  • SSO clarification of RAND terms is generally procompetitive, particularly when changes apply prospectively and are designed to promote the widespread adoption of standards.
  • Due process is an important bulwark against anticompetitive conduct by SSOs, but the most important consideration is whether decisionmakers make an informed decision that reflects the best interests of the SSO as a whole in the widespread adoption of its standards.

Randy Stutz, rstutz@antitrustinstitute.org (202) 905-5420
Diana Moss, dmoss@antitrustinstitute.org (202) 828-1226