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Slide 1

Misleading and Deceptive Conduct under § 2

December 6, 2006

George S. Cary

Presented at DOJ/FTC Hearings on Single Firm Conduct

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Slide 2

Deception in Standard Setting –
Antitrust Implications of Violating
FRAND Licensing Commitments

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Slide 3

Basic Premises

  • Standard setting eliminates competition among alternative technologies - antitrust therefore has a stake in policing standard setting activity

  • When a proprietary technology is made essential to an industry standard, the owner of that technology gains exclusionary power beyond that of the patent itself

  • Assertion of non-disclosed patents after lock-in has been recognized as raising antitrust concerns

  • Violations of other rules designed to constrain exploitation of lock-in raise the same competitive concerns

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Slide 4

What is a FRAND Commitment?

  • The purpose of disclosure is to avoid hold-up

  • One way is to include patents in the standard only where the patent holder agrees to license on Fair, Reasonable, And Non Discriminatory terms

  • Obligation to disclose is ineffective if there is no recourse for violation of FRAND

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Slide 5

What Problems Is FRAND Designed to Address?

  • Before = options

  • After = no options

  • Lock-in + significant sunk investment in standard-specific resources = potential for monopoly rents
    • Rewards for innovation, not “lock-in”
    • “Fair and reasonable” reflects the competitive environment before lock-in

  • FRAND is also a commitment to a common enterprise
    • Mutual restraint: all patent owners agree to limit compensation to preserve efficiency of the standard

  • FRAND is designed to create competitive markets for standard-compliant products

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Slide 6

FRAND Is Enforceable Under the Antitrust Laws

  • The holder of a patent included in a standard gains monopoly power
    • The power to exclude from the standard
    • The power to control prices

  • Agreeing to FRAND terms to gain inclusion, and then avoiding the FRAND constraint after adoption of the standard, is willful acquisition of monopoly power - it is not “competition on the merits”
    • The monopoly is not based on superior product, business acumen or historical accident

  • Willful violation of a FRAND commitment is therefore monopolization in violation of the Sherman Act

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Slide 7

Antitrust Courts Are Competent to Enforce FRAND Commitments

  • Some have argued that FRAND should be enforceable only under contract or tort law

  • FRAND violations can be antitrust violations because of their effects on competition and consumers

  • The public should have recourse under the antitrust laws even where it may not have standing to pursue a contract or tort claim

  • Participants in the standard setting process may not have appropriate incentives to vindicate the public interest in competition

  • If a court is capable of determining whether conduct violates FRAND in a contract or tort case, it can also do so in an antitrust case

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Slide 8

Illustrations of FRAND Violations

  • Refusal to license
    • Outright refusals
    • Constructive refusals
    • Effects

  • Discriminating against competitors in standard-compliant markets
    • Extending monopoly from technology to product markets
    • Hold up potential
      • Analogy: evasion of rate regulation through vertical integration
    • Effects on future innovation/competition
    • Discrimination is well known to antitrust courts

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Slide 9

“Fair and Reasonable”

  • “Fair and Reasonable” royalty
    • Reflects the competitive environment beforelock-in
    • Avoids rendering the standard inefficient

  • Determining Fair and Reasonable royalty
    • Incremental value of technology relative to next best alternative
    • Possible adjustment to ensure overall royalty stack does not impede adoption of standard

  • Antitrust courts routinely compare the “but for” competitive market to the observed market with the restraint

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Slide 10

Proving “Fair and Reasonable” Royalties

  • Determining a “Fair and Reasonable” royalty is within the competence of courts and enforcement agencies
    • Consideration of alternatives in the standard setting process
    • Methods for calculating “reasonable royalties” in patent litigation
    • Industry benchmarks
    • Natural experiments
      • What rates are charged in a competitive environment?
    • Comparison to royalties charged for other standards
      • Royalties charged relative to contribution to standard
    • Comparison to royalty rate where there is no FRAND commitment

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