23 June 2011
For decades, courts have dealt with issues concerning standard setting under US antitrust law.However, the competition concerns raised in standard setting continue to be real and evolving. As antitrust agencies around the world develop their own views about how to analyze standard-setting activities, it is useful to consider the US experience, which has the longest history in this area. This article will examine those issues and consider new standard-setting challenges likely to arise in the near term.
What Is Standard Setting?
Standard setting is the process of creating uniformity in the production of interchangeable products. It typically occurs when competi-tors meet and agree to adopt one technology as their industry platform. This allows companies to invest in products that utilize the adopted technology and offers consumers greater choices to mix and match products among various competitors.
Because antitrust law is built on competition, however, an agreement to forestall competition among technologies may seem proble-matic. As the Supreme Court noted in Allied Tube & Conduit Corp. v. Indian Head, Inc., an “[a]greement on a product standard is…implicitly an agreement not to manufacture, distribute, or purchase certain types of products.” Indeed, this idea led some courts early on to apply a per se analysis in standard-setting cases.
Standard setting is generally considered procompetitive, however, when it permits the creation of new products and enables efficien-cies to be achieved through interoperability and otherwise. Some procompetitive justifications include: setting safety standards; lo-wering costs of production; providing information to assist consumers in evaluating competing products; enhancing reputation within certain industries or professions through, for example, the establishment of ethical codes; deterring undesirable conduct that is not otherwise unlawful; and providing a speedier and more flexible means of regulation than government regulation.
Thus, courts today have made clear that the rule of reason is the appropriate method of analysis for standard-setting cases, and the per se rule is applied only when the standard setting is part of a scheme that itself is a per se violation.
The Anticompetitive Concerns Associated With Standard Setting
At the same time, standard setting can still be anticompetitive under certain circumstances. As the Supreme Court has noted, standard setting is “rife with opportunities for anticompetitive activity.” We consider some of these potential concerns below.
THE SELECTION OF A STANDARD AS AN EXCLUSIONARY ACT
Standard setting, by its nature, requires the selection of one particular method or technology to the exclusion of others. As a result, the adoption of a standard may lead to the failure of certain firms that utilize a different standard. Generally speaking, the failure to adopt a particular technology is not inherently anticompetitive. Courts that have considered this point have held that unless the adoption of a particular technology (and the exclusion of another technology) was unreasonable, the standard-setting process will not be actionable.
If a standard is adopted through improper means, however, there may be grounds for an action under the antitrust laws. Focusing on the process or procedure employed in setting, enforcing or interpreting a standard is appropriate because it avoids the problems inherent in asking a finder of fact to determine whether the standard itself is reasonable. As the Fifth Circuit explained in Consolidated Metal Products, Inc. v. American Petroleum Institute, “[n]either anticompetitive animus nor the other elements of a section 1 claim can be inferred solely from the incorrectness of a single business decision by a standard setting trade association. The ‘reasonableness’ of a restraint is judged by its general effect on the market, not by the circumstances of a particular application. An individual business decision that is negligent or based on insufficient facts or illogical conclusions is not a sound basis for antitrust liability.”
To illustrate, in Allied Tube, defendant steel conduit manufacturers opposed an attempt by a vinyl conduit manufacturer to have its product approved under relevant safety codes. In defeating the proposal, the steel manufacturers packed the association with 230 persons to vote against including vinyl conduit in the standard.
Similarly, Hydrolevel Corp. v. The American Society of Mechanical Engineers, Inc., involved competing technologies for safety cut-off probes for boilers. McDonnel & Miller, Inc., the dominant supplier of cut-off probes, used the standard-setting organization to spread damaging information to the market about plaintiff’s competing cut-off probe, which utilized a different technology.
McDonnel had employees in key decision-making positions within the association. Those same employees secured an opinion from the association that plaintiff’s cut-off probe did not meet the association’s standards. McDonnel then used that opinion in the market to disparage plaintiff’s product. Finding a violation of Section 1, the Second Circuit held that “[g]iven the effect and intent of the [association’s opinion letter] and its subsequent misuse by [McDonnel], the restraint was surely unreasonable; it intentionally misinterpreted the Code so as to prevent [plaintiff] from selling its product.”
Furthermore, in DM Research, Inc. v. College of American Pathologists, the First Circuit required a showing that the standard-setting process was used “as a predatory device by some competitors to injure others.” The court stated that “normally there is a showing that the standard was deliberately distorted by competitors of the injured party, sometimes through lies, bribes, or of market foreclosure.”
But disseminating false or misleading statements may not be enough to establish the “improper means” necessary for a Section 1 violation. For example, in Schachar v. American Academy of Ophthalmology, Inc., the defendant association issued a statement describing a medical procedure as “experimental.” Finding that the conduct in question was not an unreasonable restraint of trade, the court stated that “[i]f such statements should be false or misleading or incomplete or just plain mistaken, the remedy is not antitrust litigation but more speech—the marketplace of ideas.”
In addition to showing improper means, the Section 1 plaintiff must prove that “but for” the defendant’s conduct, the standard-setting organization (SSO) would not have taken the complained of action—whether that action involves adoption of a standard, denial of a standard or rejection of plaintiff’s product under a standard. The Heary Brothers court stated that proving causation requires “deconstructing the decision-making process,” and that the fact finder must conclude that the alleged restraint was “imposed because of the improper lobbying efforts of Defendant.”
THE PATENT HOLD-UP
A second general category of antitrust issues that may arise in standard setting is the patent hold-up problem. This occurs when par-ticipants in a standard-setting process agree on a standard that, unbeknownst to the majority of the members, is actually subject to intellectual property claim. Once the industry has locked itself into the standard, the patent holder surfaces and demands supracompetitive royalties. Had the standard-setting participants known of the intellectual property claim, the standard could have been designed around the patent, or the patent holder would have been required to negotiate rates at a competitive level. The US Federal Trade Commission (FTC or Commission) has been particularly concerned about this issue; it has litigated two cases and entered into two consent decrees that laid the groundwork for much of the analysis in this area.
Similar to the court in Heary Brothers, the DC Circuit in Rambus v. FTC held that to be anticompetitive, deceptive conduct asso-ciated with the hold-up—like any other kind—must harm competition. There, the Commission ruled that Rambus’s failure to disclose to members of the SSO the patent interests it held in proposed standard violated Section 5 of the Federal Trade Commission Act and Section 2 of the Sherman Act. The DC Circuit, however, overturned the FTC’s decision because the FTC failed to show that “but for” Rambus’s deception, an alternative technology would have been selected by the SSO.
By contrast, in In re Dell Computer Co., the FTC alleged that Dell had misrepresented to the Video Electronics Standards Associa-tion that a proposed design standard did not infringe on any patents that Dell possessed. After VESA adopted the standard, Dell in-formed certain members that the new design violated Dell’s intellectual property rights. The FTC challenged Dell’s attempt to en-force its patent rights, claiming that its deception constituted a misappropriation of market power and violated Section 5 of the FTC Act and Section 2 of the Sherman Act. Dell ultimately entered into a consent decree with the FTC whereby Dell agreed not to en-force its patent against anyone utilizing the VESA standard.
Likewise, in In re Union Oil Company of California, the California Air Resources Board claimed that Unocal engaged in anticompetitive conduct by making misrepresentations to the CARB and to competing gasoline refiners that it lacked, or would not assert, patent rights concerning proposed gasoline and emission standards. CARB claimed that Unocal did in fact assert its patents over the adopted gasoline standards, which entitled it to millions of dollars in royalties that were likely to be passed on to consumers. An administrative law judge dismissed the complaint, concluding that the FTC lacked jurisdiction over a patent law case and that Unocal’s conduct was protected by the Noerr-Pennington doctrine, which protects private entities from antitrust liability for attempts to influence the government. The relevant standard was established by CARB, a government agency. The Commission reversed, finding that (i) the fraud exception to the Noerr-Pennington doctrine applied to communications between Unocal and CARB and (ii) even if those communications were protected, Unocal’s deceptive statements to industry groups “would be actionable if they caused substantial competitive harm from their ‘own force in the marketplace.’” Unocal also entered into a consent decree under which it agreed not to enforce its patent.
Moreover, in In re Negotiated Data Solutions, LLC, the FTC claimed that N-Data violated Section 5 of the FTC Act because the company sought to break a licensing commitment that its predecessor-in-interest, National Semiconductor, made to the Institute of Electrical and Electronic Engineers. The IEEE adopted a standard that included National’s patent-pending technology based on its commitment to make licenses on the new technology available to any licensee on a nondiscriminatory basis for a one-time fee of $1,000. Once N-Data acquired the patent, it demanded sharply higher royalties on a per-unit basis.
The Commission found that there was reason to believe that N-Data violated the Act. It noted that N-Data’s conduct was anti-competitive because its higher licensing fees would likely raise costs to use the standard, reduce the output of products using the N-Data technology, and reduce the incentive for firms to participate in IEEE and in other standard-setting activities.
Finally, in Broadcom Corp. v. Qualcomm Inc., the plaintiff alleged that the defendant breached an agreement to abide by the SSO’s policies on enforcing patent rights by licensing its technology on non-FRAND (fair, reasonable and nondiscriminatory) terms, resulting in the monopolization of markets for cellular telephone technology and components. The Third Circuit reversed the grant of a motion to dismiss Sherman Act claims, holding that “(1) in a consensus-oriented private standard-setting environment, (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with [a standard-setting organization’s] reliance on that promise when including the technology in a standard, and (4) the patent holder’s subsequent breach of that promise, is actionable anticompetitive conduct.”
The antitrust agencies have generally recognized that avoidance of the patent hold-up is procompetitive, and have allowed parties to negotiate royalties on potential technologies collectively as part of the standard-setting process. As the agencies explained in their Intellectual Property report, “negotiating licensing terms during the standard-setting process may increase competition between technologies that are being considered for inclusion in a standard,” making application of the rule of reason appropriate. “[P]er se condemnation is not warranted for joint SSO activities that mitigate hold up and that take place before deciding which technology to include in a standard.” However, “[n]either Agency advocates that SSOs adopt any specific disclosure or licensing policy, and the Agencies do not suggest that any specific disclosure or licensing policy is required.”
As a result, the US Department of Justice (DOJ) has issued guidance on several occasions suggesting that the collective negotiation of licenses in advance of setting a standard is likely not actionable under the antitrust laws. As the DOJ explained in one letter:
The Department concluded that a policy that requires patent holders to disclose and commit to their most restrictive licensing terms would permit SDO [standards-development organization] members to make more informed decisions when setting a standard because they would be able to compare alternative technologies based on differences in cost in addition to technical merit.… Although the proposed IEEE-SA policy does not require patent holders to publicly commit to their most restrictive licensing terms during the standard-setting process, the ability to make such commitments could generate similar benefits as patent holders may compete to offer the most attractive combination of technology and licensing terms.
AGREEING TO MORE THAN WHAT IS REQUIRED
Standard setting can be unreasonably anticompetitive when participants agree to more than is necessary. For example, if participants agree to license nonessential technology as part of the standard-setting process, they risk a charge that they have unreasonably limited competition and innovation. Similarly, there will be per se, and perhaps even criminal, liability if standard-setting organizations are used as a pretext to cartelize downstream products. As the DOJ and FTC report explained, antitrust enforcers “will still condemn as per se illegal activities designed to reduce or eliminate competition among members of an SSO—such as bid rigging by members who otherwise would compete in licensing technologies for adoption by the SSO or naked price fixing on downstream products by members who otherwise would compete in selling downstream products compliant with the standard.”
For the most part, however, if the standard-setting discussions are fair and open and do not go beyond the standard-setting process, they generally will be found to be lawful.
What Is Next for Antitrust Enforcement in Standard Setting
The legal groundwork for SSOs is fairly well-established. Organizations generally understand that they must set rules so that their processes are fair, and so that competitors are not excluded. Similarly, SSOs are more wary about avoiding patent hold-ups. Despite the difficulty in proving patent hold-up cases, companies that participate in standard setting seek to avoid the animus and expense that comes with accusations of unfair nondisclosure of intellectual property. While there may be future cases involving SSOs, we believe that they will be fewer and will likely follow the cases that have come before.
We believe that there are likely two areas where standard setting may result in more antitrust concerns. The first involves the role of the government in standard setting. While this was explored in the Union Oil case described above, the case settled prior to a decision on the merits by the FTC. As the government encourages industry to work together in varied areas ranging from improving envi-ronmental compliance to cutting costs in health care, agencies will encourage more standard setting.
In this context, the government’s role in standard setting is still evolving. Government standards carry with them the force of law, and they cannot be changed voluntarily, lock-in or not. If the government is duped, through unfair acts or patent hold-up, the actions of the participants may be covered by the Noerr-Pennington doctrine. While the FTC has suggested that the Noerr-Pennington doctrine’s application will be limited in these contexts, we believe that there is more to be done.
Second, we believe that there will likely be more informal standard setting and break-offs from experienced SSOs. In standard setting, different stakeholders can participate and often have very different goals in mind. Upstream and downstream market participants may participate, for example, and each group may desire a standard that is advantageous to it. If the participants cannot agree, some may break off. It is in these informal settings—where participants may be less experienced in standard setting and less well-counseled—that the problems of unfairness and exclusion may arise. Company counsel should take extra care in advising clients about the risks in standard setting when the process is being undertaken outside the confines of an established organization.
Standard setting has been recognized as an antitrust concern for decades. The principles involved are important and likely to reoccur. Being mindful of the antitrust principles can reduce risks for companies while ensuring that the precompetitive benefits of standard setting are achieved.