Let’s play Monopoly®! If a dominant manufacturer charges monopoly prices for its products, does it violate antitrust law? No. Of course not. Are you nuts?
What if it won its monopoly by deceiving a standard-setting organization (SSO) into adopting standards that embody inventions the monopolist secretly intended to patent? Um, er, probably.
But what if the SSO would’ve adopted the monopolist-favoring standards anyway but forced the Dominant Firm to charge low royalties for competitors to use its inventions? Nope.
So ruled the D.C. Circuit yesterday, holding that the Federal Trade Commission messed up when it answered the last question yes.
The rap on Rambus. In Rambus Inc. v. FTC, No. 07-1086 (D.C. Cir. Apr. 22, 2008), the Commission charged that memory chip maker Rambus failed to disclose — deceptively, the FTC alleged — that the company intended to add, to pending patent applications, claims that would cover technology it asked an SSO, the Joint Electron Device Engineering Council (JEDEC), to adopt as industry standards. The Commission concluded that Rambus‘s conduct violated section 2 of the Sherman Act and section 5(a) of the Federal Trade Commission Act.
Reversal of fortune. The unanimous panel held that Commissioners erred in resting their decision on an either-this-or-that finding of fact — only the this of which could sustain the monopolization charge:
[The FTC’s] factual conclusion was that Rambus’s alleged deception enabled it either to acquire a monopoly through the standardization of its patented technologies rather than possible alternatives, or to avoid limits on its patent licensing fees that the SSO would have imposed as part of its normal process of standardizing patented technologies. But the latter — deceit merely enabling a monopolist to charge higher prices than it otherwise could have charged — would not in itself constitute monopolization.
Rambus, slip op. at 4-5. The problem lay in the fact that the alternative that finding — that Rambus avoided caps on its licensing fees — didn’t inherently hurt the competitive position of other DRAM makers. Sure, Rambus got to extract fatter royalties as a result of fooling JEDEC. But charging a high price doesn’t always injure competion; in fact it usually helps competitors stay in the game. So said the court.
So what should the FTC have done? It ought to have squarely found — if it could, which the court doubted — that JEDEC would have refused to incorporate Rambus’s inventions into the standards for memory chips. That would’ve supported a conclusion that Rambus engaged in conduct tending to exclude competition — because, you see, rival chip makers wouldn’t have had to license Rambus’s inventions in order to meet industry standards and thus would not have suffered a potentially crippling competitive disadvantage vis-a-vis Rambus.
No harm (to competition), no foul. The decision points up the importance of showing in monopolization cases that the behavior in question exerted an exclusionary (anticompetitive) effect and not simply that the conduct made life harder for competitors. Proving that the monopolist used standards it fraudulently obtained to foreclose competition — either by refusing licenses for patents that read on the standards or charging exorbitant rates for them — would likely pass mustard. The same would apply if the dominant firm employed other sharp methods — bribery, for instance — to secure adoption of standards that competitors couldn’t use without infringing its patents.
The wisdom of juries. Curiously, the panel didn’t mention a defense verdict last month for Rambus in Hynix Semiconductor Inc. v. Rambus Inc., No. C 00-30905 RMW (N.D. Cal. Mar. 26, 2008). Rival chip-makers Hynix, Micron, and Nanya alleged the same deceptive conduct that the FTC did. But they failed to convince the jury, which refused to find:
"that Rambus acquired or maintained its monopoly power through anticompetitive conduct";
"that Rambus engaged in anticompetitive conduct";
"that Rambus ma[d]e important representations that it did not have any intellectual property pertaining to the work of JEDEC and intend[ed] or reasonably expect[ed] that the representations would be heard by or repeated to others including [rival chip makers Hynix, Micron, and Nanya]";
"that Rambus utter[ed] half-truths about its intellectual property coverage or potential coverage of products compliant with synchronous DRAM standards then being considered by JEDEC by disclosing some facts but failing to disclose other important facts, making the disclosure deceptive"; and
that "JEDEC members share[d] a clearly defined expectation that members would disclose relevant knowledge they had about patent applications or the intent to file patent applications on technology being considered for adoption as a JEDEC standard".
The court didn’t cite the jury, but it did express grave doubt that the FTC’s evidence supported its findings. The Commission will get a new chance to substantiate its allegations on remand.
Injury to competition. By Jove, Blawgletter thinks we’ve got it!