AAI’s Proposal for a New Front in the Antitrust Agencies’ War against Patent Holdup

This article is part of FTC:WATCH Issue No. 835. Published on September 18, 2013.

Standard essential patents (“SEPs”), and abusive enforcement of them, are once again in the news. In June, Samsung obtained an exclusion order from the International Trade Commission (“ITC”) against Apple after the ITC found that some Apple products infringed on Samsung’s SEPs. This order prohibited the importation of older generations of iPhones and iPads. In August, however, the U.S. Trade Representative (“USTR”) vetoed the ITC order after a mandatory policy evaluation because Samsung had committed to license its SEPs on reasonable and non-discriminatory (“RAND”) terms. In other words, the USTR concluded that Samsung had agreed to accept reasonable royalties for use of the SEPs and, under the circumstances, effectively waived any right to seek exclusion orders or injunctions against willing licensees. Because of this decision, consumers will have continued access to smartphones and tablet computers at a wide range of price and quality levels.

While the USTR’s pro-consumer decision is commendable, the Department of Justice (“DOJ”) and Federal Trade Commission (“FTC”) must continue to be vigilant in addressing holdup conduct and should, in fact, expand their policy agenda in this area. So far, the antitrust agencies have brought enforcement actions against individual SEP owners – for example, Robert Bosch and Google/Motorola – and informally encouraged improvements in the standard setting process. Given the proliferation of thousands of technical standards in the modern economy, however, the current strategy of the antitrust agencies cannot adequately address the holdup problem. Enforcement actions seeking cease-and-desist orders can realistically remedy only a small fraction of all occurrences of holdup and create only a modest deterrent effect. The agencies must go further and compel standard setting organizations (“SSOs”) to adopt policies that reduce the likelihood of and harm from SEP holdup. The vague and ineffectual patent policies of most SSOs have enabled SEP owners to engage in holdup that harms the competitive process, distorts technological innovation, and ultimately injures consumers. The DOJ and FTC must complement their enforcement and competition advocacy agenda with direct antitrust pressure on SSOs.

The American Antitrust Institute (“AAI”) in late May petitioned the DOJ and FTC to issue joint enforcement guidelines on SSO patent policies. These guidelines would follow two Supreme Court decisions – American Society of Mechanical Engineers v. Hydrolevel Corp. and Allied Tube & Conduit Corp. v. Indian Head, Inc. – that recognize the legal responsibility of SSOs to prevent anticompetitive abuse of their processes. The Allied Tube decision noted that the “hope of procompetitive benefits [from standard setting activity] depends upon the existence of safeguards sufficient to prevent the standard-setting process from being biased by members with economic interests in restraining competition.” The Court in Hydrolevel stated that imposing antitrust liability on SSOs would compel them to strengthen their oversight of participants’ conduct and thus more effectively prevent anticompetitive behavior in collaborative standard setting.
Under established antitrust principles, an SSO can be liable under Sections 1 and 2 of the Sherman Act if its inadequate policies lead to patent holdup. An SSO is a body that brings together actual and potential competitors, often encompassing most or all of the leading firms in an industry. Because it is a vehicle for multi-firm cooperation, an SSO can be held liable under Section 1 if anticompetitive conduct arises under its watch. In addition, an SSO can be liable under Section 2 if, by not safeguarding its processes, it enables a participant to obtain monopoly power through deception or other predatory means. An SSO, for example, can fail to require patentees to commit to RAND (or other ex ante) licensing terms. This omission can permit a patent holder to engage in holdup and obtain monopoly power over the relevant standard. Under these circumstances, the SSO can be liable under Sections 1 and 2. If an SSO, however, adopts and enforces robust patent policies that clearly define the duties and obligations of participants and patent holdup still occurs, the SSO cannot be liable.

The AAI petition relies on the teachings of Hydrolevel and Allied Tube and calls for giving SSOs a strong incentive to strengthen their patent policies in ways that will more effectively avoid holdup outcomes. In the event of patent holdup, the petition proposes that SSOs should be granted a safe harbor from DOJ and FTC enforcement if they implement the following patent policies:
1. Mandatory disclosure of relevant patents as well as anticipated and pending patent applications, supported by good faith reasonable inquiry;
2. Royalty-free licensing of patents that are not disclosed in violation of disclosure obligations and consequently incorporated into a standard;
3. Commitment to license SEPs on RAND terms;
4. Express waiver of any right to seek an injunction or exclusion order for SEP infringement by a willing licensee;
5. Stipulation that licensing commitments run with the SEP;
6. Cash-only license option for individual SEPs; and
7. Efficient, cost-effective process to resolve disputes over RAND royalty and non-royalty terms.

Neither the DOJ nor the FTC has acknowledged the AAI petition yet. The agencies should recognize the need for a more comprehensive approach to SEP holdup along the lines that AAI has presented. To this end, AAI would welcome expressions of support for its petition in the weeks ahead.

– Sandeep Vaheesan is Special Counsel at the American Antitrust Institute
– See more at: http://www.ftcwatch.com/guest-commentary-aai-urges-remedies-to-deal-with-patent-holdup/#sthash.CdQ4tCPH.dpuf