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 ruling was handed down by the U.S. Circuit Court of Appeals for the 3rd Circuit, in one of the multiple, ongoing suits between Qualcomm Incorporated and Broadcom Corporation, involving the vast and lucrative market for next generation wireless telephones and related services. The litigation history to date is complex, so for current purposes I'll focus only on the central contention and related holdings that are of interest to the standards process, rather than on how the ruling fits into the past and future fortunes of the parties to the litigation.

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: 
[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 specific holding on antitrust law reads as follows:

We 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.

The big picture



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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Comments (9)

  1. Thank You!
    Thank you for your work in decoding the standards "process" for us.
    Thank you for your work in writing the "friend of the court" brief for this matter – It Really Mattered!
    Thank you for you serious, professional, understated style, e.g.:
         The ruling may also have relevance to the regrettable conduct witnessed in the recent OOXML vote.
      …is not only heart warming, but a good laugh too!  "May?"  He says "May?"!!

    Again, thank you for proving that individual acts of sanity can and will prevail over corporate acts of greed.

  2. What will happen is after OOXML is adopted, everyone else will be accused of violating 245 or so patents (like they claim Linux does) – but Microsoft won’t say what they are, or what specifically violates them. Then unless you get a license from Microsoft which will preclude GPL, they will announce the dark shadow over your implementation at every other press conference. In the above case, I assume there were specific claims asserted, not a FUD campaign by Qualcomm saying everything else was gray or black market.

  3. Andy, it’s a Good Thing that standards "shenanigans" can potentially lead to antitrust liability, but that still leaves the question of standing to pursue antitrust enforcement.  As we’ve seen, that often means that Administration policy can moot the whole issue; in most cases the existence of intermediaries such as OEMs leave private parties with no right of private action.

    That would leave competitors as the only possible plaintiffs, and again we’ve seen that a determined monopolist can treat damages in such cases as a normal cost of doing business, considered against the value of monopoly rents.

    In the context of DIS-29500, we should consider that the monopoly may be enforced de jure thanks to requirements that business with the Government be transacted using file formats supported by the monopoly vendor.  Consider the number of courts which require electronic submissions in WordPerfect format, for instance — and then apply that to all Governmental transactions.

    • Those are very acute comments.  For the benefit of those that aren’t as legally savvy, "standing" means that you are someone who can show that they were directly affected by the conduct in question in a way that’s legally recognized – so not just anyone can sue someone who did a bad thing just because its a "bad thing."  It’s not as crazy as it sounds, because the courts are already filled with too much litigation, so it doesn’t make sense for them to open their doors to just anyone who thinks that someone else is doing something that ought to be stopped.

      And as you also rightly point out, a change of administration in Washington can make the Federal Trade Commission and the Department of Justice blow hotter or colder on antitrust enforcement.

      But private parties can complain to the regulators (FTC and DOJ), although again they’re more likely to listen to someone that’s been directly damaged.  If they are convinced that intervention is needed, they can, and often will, do so on their own initiative (as they did in the case of Rambus’s gaming of the JEDEC standards process).  That means that they do all the work, and assume all of the expenses.

      I’m quite impressed with the folks at the regulatory agencies in Washington these days.  I’ve met with many of them over the years, and am in contact with them right now with a client that has a well-justified beef with some standard setting game playing that’s been going on (no connection to anything I’ve ever written about).  The folks at the FTC and the DOJ have been sharp, receptive and genuinely interested in what’s going on, how it affects the marketplace, and whether intervention is needed.  All in all, quite reassuring.

        –  Andy


    • ‘ ‘ Andy, it’s a Good Thing that standards "shenanigans" can potentially lead to
       antitrust liability, but that still leaves the question of standing to pursue antitrust
       enforcement.  As we’ve seen, that often means that Administration policy can
       moot the whole issue; in most cases the existence of intermediaries such as
       OEMs leave private parties with no right of private action.

      That would leave competitors as the only possible plaintiffs, and again we’ve
       seen that a determined monopolist can treat damages in such cases as a
       normal cost of doing business, considered against the value of monopoly rents. ‘ ‘

       So, let’s assume for the moment that Microsoft manages to push through MS-XML as an ISO standard, without significant changes in the Intellectual Property [IP] issues that currently plague it.  And let’s also assume that they’re found to be guilty of antitrust issues on this "standard" because of it.  Would that mean that the ISO "standard" could be rescinded?  It seems unlikely, and I’m sure Microsoft would argue that "any IP problems can be solved just as soon as it’s become a standard."  I’d bet that they would argue as strongly about <the lie that> IP issues will be solved as they have about voting "yes with comments" means the comments will be reviewed.  They would know it’s a lie, yet would be willing to do so just to get the standard through. Those unfamiliar with the process, such as those who recently change from O to P status, might not know the difference.

      • On the standing issue,  I suspect you have in mind decisions in some cases brought against Microsoft that were based on state law. If I recall correctly, somewhere around a third of the states still adhere to a rule  of contract law that folks have to sue the entity that sold them the product rather than its manufacturer.

        As I recall, the original case that established the principle was handed down around 1900 or so and involved a consumer who tried to sue an auto manufacturing company to recover damages for sale of a defective auto. Perhaps Andy will remember the name of the case. As I recall it involved a Buick. The consumer was told he should have instead sued the car dealer who sold the auto.  It’s a rule that is deservedly (in my opinion) being abandoned by more and more  states. But it applies only in particular states to cases brought under state law rather than federal law.

        Federal antitrust law standing is a whole different ball of wax and there is no such barrier.  If you have suffered the type of injury contemplated ("cognizable injury") by the federal Sherman Act, for example, you will generally have standing to bring a legal action alleging its violation. Standing in federal antitrust cases is governed by <a href="">15 U.S.C. 15,</a> which provides in part:

        (a) Amount of recovery; prejudgment interest

        Except as provided in subsection (b) of this section, any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor in any district court of the United States in the district in which the defendant resides or is found or has an agent, without respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney’s fee.

        The injury requirement basically boils down in most cases to whether you have suffered financial loss.  E.g., if you have paid too much for a product because a monopoly has maintained artificially high prices through anti-competive conduct, you have standing. However, the mere fact that a company has a monopoly is insufficient grounds. The injury must flow from anti-competitive conduct, not mere competitive conduct. Moreover, you need not show actual harm and can get by with threatened harm if you are not seeking damages but only an injunction. 

        Some states are even more liberal with antitrust standing than federal law. For example,  parts of the California antitrust statutes involving some types of deceptive trade practices grant standing to "any person" whether injured or not.  Big Biz has tried to abolish that standing rule legislatively, but so far have had no luck.

        Many of the satellite antitrust cases that flowed from the U.S. v. Microsoft decision were brought as class actions on behalf of Windows users. If I recall correctly, there were well over a hundred of them and all of those that Microsoft could not get rid of on procedural grounds it settled before trial, usually well before trial. </p>

        I kept a fairly close eye on those cases’ dockets using PACER and what seemed to trigger most settlements was a motion brought by the plaintiffs for a ruling on what parts of Judge Jackson’s original findings of fact were still established in light of the court of appeals ruling that reversed part of his decision on legal rather than factual grounds. The key bit of law there is a portion of the Clayton Act that says once a judge has entered a judgment in a Sherman Act case, the facts found may be used to establish a prima facie case against the same defendant in subsequent cases brought by other parties. <a href="">15 U.S.C. 16.</a>

        Almost without doubt, Microsoft’s reason for settling those cases was that it wisely did not wish to risk having a definitive ruling on which district court findings of fact survived the appeals court decision.   Those findings were lengthy and damning; moreover, there were strong arguments that nearly all had survived.

        Bear in mind that what I have said is way over-generalized. Findlaw is normally about 2 years behind on the U.S. Code, and I am aware of sections of the federal antitrust laws other than those cited above have changed and the amendments are not reflected on Findlaw. E.g., the criminal penalties of the Sherman Act have bumped from a 3-year maximum prison term to a 10-year maximum. I have not attempted to determine whether the sections I cited have changed as well. Moreover, I have retired and am no longer licensed to practice law, so I am only exercising my right of free speech. This is my personal opinion — not legal advice.

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