Misleading And Deceptive Conduct Under Section 2

Slide 1

Misleading and Deceptive Conduct under § 2

December 6, 2006

George S. Cary

Presented at DOJ/FTC Hearings on Single Firm Conduct

© 2006 Cleary Gottlieb Steen & Hamilton LLP. All rights reserved.

Slide 2

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

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

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

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

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

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

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

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

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