Appeals Court Rules that Deceptive Conduct in Standard Setting can Violate Antitrust Laws
While many of us have been preoccupied with the OOXML vote, the rest of the world has naturally been continuing to go about its business. One piece of business that took an interesting turn in the last few days is a ruling by a Federal Appellate Court in the United States that breaks new ground in protecting the integrity of the standard setting system. The ruling may also have relevance to the regrettable conduct witnessed in the recent OOXML vote.
What happened
The underlying facts at issue involved Qualcomm's participation in the creation of the Universal Mobile Telecommunications System (UTMS) standard, which was under development in the European Telecommunications Standards Institute, more commonly known as ETSI. Qualcomm volunteered technology owned by it for inclusion in the standard, and in return agreed that it would freely license any patent claims that it owned that would be infringed by implementing the standard. Specifically, Qualcomm made the traditional pledge to license its patent claims on "fair, reasonable and non-discriminatory" (or FRAND) terms.
After the standard was adopted and began to be implemented, Broadcom alleged that Qualcomm, which had a 90% market share of the type of chipsets that would implement the standard, sought to maintain its monopoly position by requiring other chipset vendors to pay unreasonably high royalties on Qualcomm's patents, thus putting them in an inferior competitive position. Such planting of a patent, followed by a demand for high fees after the marketplace had become "locked in," is referred to as "patent hold-up." That type of conduct was most famously practiced by Rambus, Incorporated in the early 1990s in JEDEC, at the time that JEDEC was engaged in developing SDRAM standards. The US Federal Trade commission ultimately convicted Rambus, and the court in the Qualcomm opinion relied heavily on the FTC's reasoning in its final judgment.
Broadcom alleged that Qualcomm had intended to engage in patent hold-up from the beginning of the UTMS development process, thus constituting a course of deceptive conduct intended to induce ETSI and its members to adopt a standard that would be sure to protect, and even advance, Qualcomm's monopoly position in the market niche in question. That course of conduct, Broadcom claimed, violated the antitrust laws, which severely restrict the ways in which a monopoly can be legally created.
What the court decided
A lower court found that standards by definition create monopolies, and that therefore the antitrust claims could not be sustained. Broadcom noted, among other facts, that not all standards infringe on patents – especially when those that create a standard know about troublesome patents in advance. In such a case, those patents can often be "designed around." The three circuit court judges agreed with Broadcom, and in so doing, created new case law, holding that deceptive conduct in standard setting can constitute a violation of the antitrust laws that relate to monopoly creation. Moreover, the court did not shrink from the question of determining what do, and do not, constitute "reasonable" terms in a FRAND commitment, which has been one of the most troublesome aspects of standard setting (see, for example, Microsoft, Adobe and the Murky World of RAND).
The Qualcomm court opinion includes much comforting language, of which the following are examples:
The specific holding on antitrust law reads as follows:[Recent decisions] reflect a growing awareness of the risks associated with deceptive conduct in the private standard setting process….To guard against anticompetitive patent hold-up, most SDOs require firms supplying essential technologies for inclusion in a prospective standard to commit to licensing their technologies on FRAND terms…A firm's FRAND commitment, therefore, is a factor – and an important factor – that the SDO will consider in evaluating the suitability of a given proprietary technology vis-à-vis competing technologies.
The big pictureWe hold 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 an SDO'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. This holding follows directly from established principles of antitrust law and represents the emerging view of enforcement authorities and commentators alike. Deception in a consensus-driven private standard-setting environment harms the competitive process by obscuring the costs of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder.
This ruling is significant for many reasons, as it adds a new weapon to the legal arsenal that can be used to protect standard setting - and one that carries great weight: antitrust violations can carry criminal penalties, as well as very stiff monetary penalties. The latter is particularly significant for private parties, because those penalties include recovery of attorneys' fees by private plaintiffs, as well as liability for "treble damages" – in other words, three times the actual damages suffered in the marketplace. Those penalties make it easier for aggrieved parties to bring a suit for redress, and provide a greater deterrent for bad conduct to begin with.
I mentioned at the beginning of this post that the Qualcomm decision could have relevance to the just-completed OOXML vote, and to the conduct yet to come in the ongoing ISO/IEC JTC1 process. I find that relevance in the strong language of this opinion recognizing the importance of standard setting, the reliance on good-faith conduct, and the dangers of deceptive conduct. Given Microsoft's clear, global, monopoly position in the office productivity software marketplace, its conduct appears ripe for the type of scrutiny utilized by the Qualcomm court.
I also see it in the fact that many of the comments that have been filed in connection with the OOXML vote have reportedly focused on concerns over whether extrinsic, but referenced, technology in the OOXML specification may lie outside the patent pledge made by Microsoft. I do not suggest that Microsoft is planning to withhold access to any patent claims that would be infringed by implementing this technology, but do point out that it would be well advised to publicly extend its pledge to all such technology, both in light of the Qualcomm decision, but also to quiet any concerns that not only JTC1 members, but software users in general may have in this regard.
I am very pleased with the Qualcomm decision, which is the latest in a string of decisions, as well as business advice letters and public statements by US trade regulators, that support the standard setting process. Together, they promise stronger support for the integrity of the standard setting process. That support becomes increasingly important as standards become more vital in our modern, networked world.
I was also pleased with this ruling because I helped write a "friend of the court" brief submitted to the Appellate Court on behalf of OASIS, PICMG and The Open Group; the co-authors, Michael Lindsay and Robert Skitol, represented IEEE and VITA, respectively. The brief is cited approvingly in the opinion, and to the extent that it helped the panel understand why reversing the lower court's decision was so important, I am happy to have played a small part in achieving that result.
Updated: For another review of this case, see Scott Fulton's nicely done piece at BetaNews. The complete decision in PDF form can be obtained here.
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